<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2000
REGISTRATION NOS. 2-99715
811-4386
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 45 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 46 [X]
</TABLE>
VAN KAMPEN TAX FREE TRUST
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181-5555
(Address of Principal Executive Offices)
(630) 684-6000
(Registrant's Telephone Number)
A. THOMAS SMITH III
Executive Vice President, General Counsel and Secretary
Van Kampen Investments Inc.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
(Name and Address of Agent for Service)
Copies to:
WAYNE W. WHALEN, ESQ.
THOMAS A. HALE, ESQ.
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, IL 60606
(312) 407-0700
Approximate Date of Proposed Public Offering: As soon as practicable
following effectiveness of this Registration Statement.
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE: (CHECK APPROPRIATE
BOX)
[X] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (B)
[ ] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
IF APPROPRIATE CHECK THE FOLLOWING:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR
A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
TITLE OF SECURITIES BEING REGISTERED SHARES OF BENEFICIAL INTEREST, PAR
VALUE $0.01 PER SHARE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains seven Prospectuses and seven
Statements of Additional Information describing seven series of the Registrant
(the "Applicable Series"). The Registration Statement is organized as follows:
Facing Page
Prospectuses with respect to the Applicable Series, in the following order:
<TABLE>
<C> <S>
(i) Van Kampen Tax Free High Income Fund
(ii) Van Kampen Insured Tax Free Income Fund
(iii) Van Kampen California Insured Tax Free Fund
(iv) Van Kampen Municipal Income Fund
(v) Van Kampen Intermediate Term Municipal Income Fund
(vi) Van Kampen Florida Insured Tax Free Income Fund
(vii) Van Kampen New York Tax Free Income Fund
</TABLE>
Statements of Additional Information with respect to the Applicable Series,
in the following order:
<TABLE>
<C> <S>
(i) Van Kampen Tax Free High Income Fund
(ii) Van Kampen Insured Tax Free Income Fund
(iii) Van Kampen California Insured Tax Free Fund
(iv) Van Kampen Municipal Income Fund
(v) Van Kampen Intermediate Term Municipal Income Fund
(vi) Van Kampen Florida Insured Tax Free Income Fund
(vii) Van Kampen New York Tax Free Income Fund
</TABLE>
Part C Information
Exhibits
-------------------------
The Prospectus and Statement of Additional Information with respect to each
of Van Kampen Michigan Tax Free Income Fund, Van Kampen Missouri Tax Free Income
Fund and Van Kampen Ohio Tax Free Income Fund, three other series of the
Registrant, included in Post-Effective Amendment No. 31 to the Registration
Statement of the Registrant, are included herein by reference and no changes
thereto are affected hereby.
The Prospectus and Statement of Additional Information with respect to Van
Kampen California Municipal Income Fund, a series of the Registrant, included in
Post-Effective Amendment No. 44 to the Registration Statement of the Registrant,
is included herein by reference and no changes thereto are affected hereby.
<PAGE> 3
VAN KAMPEN
TAX FREE HIGH INCOME FUND
Van Kampen Tax Free High Income Fund is a mutual fund with the investment
objective to provide investors with a high level of current income exempt from
federal income tax primarily through investment in a diversified portfolio of
medium- and lower-grade municipal securities.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
This prospectus is dated JANUARY 28, 2000
[VAN KAMPEN FUNDS LOGO]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary............................... 3
Fees and Expenses of the Fund..................... 6
Investment Objective, Policies and Risks.......... 7
Investment Advisory Services...................... 15
Purchase of Shares................................ 16
Redemption of Shares.............................. 22
Distributions from the Fund....................... 24
Shareholder Services.............................. 24
Federal Income Taxation........................... 26
Financial Highlights.............................. 29
Appendix--Description of Securities Ratings....... A-1
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 5
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the investment objective to provide investors
with a high level of current income exempt from federal income tax primarily
through investment in a diversified portfolio of medium and lower grade
municipal securities.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing primarily in a portfolio of medium-
and lower-grade municipal securities that are rated at the time of purchase
between BBB and B- (inclusive) by Standard and Poor's ("S&P") or between Baa and
B3 (inclusive) by Moody's Investors Service, Inc. ("Moody's") or an equivalent
rating by another nationally recognized statistical rating organization
("NRSRO") and unrated municipal securities believed by the Fund's investment
adviser to be of comparable quality at the time of purchase. Securities rated BB
or below by S&P, Ba or below by Moody's or unrated securities of comparable
quality are commonly referred to as "junk bonds" and involve special risks as
compared to investments in higher grade securities (see sidebar for an
explanation of quality ratings).
The Fund's investment adviser buys and sells municipal securities with a view
towards seeking a high level of current income exempt from federal income taxes
and selects securities that it believes offers higher yields with reasonable
credit risks considered in relation to the investment policies of the Fund. In
selecting securities for investment, the Fund's investment adviser seeks to add
value and limit risk through careful security selection and by actively managing
the Fund's portfolio. Portfolio securities are typically sold when the Fund's
investment adviser's assessments materially change.
Under normal market conditions, the Fund may invest up to 20% of its total
assets in municipal securities that are subject to federal alternative minimum
tax. The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. The Fund may purchase or sell certain derivative instruments
(such as options, futures, options on futures, and interest rate swaps or other
interest rate-related transactions) for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. The Fund has no policy limiting the maturities of its
investments. To the extent the Fund invests in securities with longer
maturities, the Fund will be subject to greater market risk than a fund
investing solely in shorter term securities. Lower-grade securities may be more
volatile and decline more in price in response to negative issuer or general
economic news than higher-grade securities.
Market risk is often greater among certain types of debt securities, such as
zero-coupon bonds or pay-in-kind securities. As interest rates change, these
securities often fluctuate more in price than traditional debt securities and
may subject the Fund to greater market risk than a fund that does not own these
types of securities.
UNDERSTANDING
QUALITY RATINGS
Debt securities ratings are based on the issuer's ability to pay interest
and repay the principal. Debt securities with ratings above the line are
considered "investment grade," while those with ratings below the line are
regarded as "noninvestment grade." A detailed explanation of these and other
ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
Moody's S&P Meaning
- ------------------------------------------------------
<C> <S> <C>
Aaa
......................................................
AAA Highest quality
Aa AA High quality
......................................................
A A Above-average quality
......................................................
Baa BBB Average quality
......................................................
Ba BB Below-average quality
......................................................
B B Marginal quality
......................................................
Caa CCC Poor quality
......................................................
Ca CC Highly speculative
......................................................
C C Lowest quality
......................................................
-- D In default
......................................................
</TABLE>
3
<PAGE> 6
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest or principal. The Fund invests primarily in securities with medium-
and lower-grade credit quality. Therefore, the Fund is subject to a higher level
of credit risk than a fund that invests solely in investment-grade securities.
The credit quality of "noninvestment grade" securities is considered speculative
by recognized rating agencies with respect to the issuer's continuing ability to
pay interest and principal. Lower-grade securities may have less liquidity and a
higher incidence of default than investment in higher-grade securities. The Fund
may incur higher expenses to protect the Fund's interest in such securities. The
credit risks and market prices of lower-grade securities generally are more
sensitive to negative issuer developments, such as reduced revenues or increased
expenditures, or adverse economic conditions, such as a recession, than are the
prices of higher-grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest up to 20% of its total assets in municipal securities
subject to federal alternative minimum tax. In addition, there could be changes
in applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on municipal securities or otherwise adversely
affect the current federal or state tax status of municipal securities.
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases,
generally are issued by state and local governments or regional
governmental authorities to raise money for their daily operations or
special projects. The interest received from municipal securities
generally is exempt from federal income tax. In addition, the interest
may be exempt from certain state or local taxes when received from
issuers who are located in the investor's home state, municipality or
region. The interest from certain municipal securities is a preference
item subject to federal alternative minimum tax.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures, options on futures and interest
rate swaps or other interest rate-related transactions are examples of
derivatives. Derivative instruments involve risks different from direct
investment in underlying securities. These risks include imperfect correlation
between the value of the instruments and the underlying assets; risks of default
by the other party to certain transactions; risks that the transactions may
result in losses that partially or completely offset gains in portfolio
positions; risks that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek current income
- - Are in a high federal income tax bracket
4
<PAGE> 7
- - Are willing to take on the increased risks of investing in medium- and
lower-grade securities in exchange for potentially higher income
- - Wish to add to their personal investment portfolio a fund that invests
primarily in medium- and lower-grade municipal securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the ten calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
[GRAPH]
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
1990 3.23
1991 8.51
1992 0.08
1993 15.82
1994 -4.93
1995 15.52
1996 3.21
1997 9.05
1998 5.98
1999 -4.10
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the ten-year period shown in the bar chart, the highest quarterly return
was 6.09% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -5.60% (for the quarter ended March 31, 1994).
5
<PAGE> 8
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Lehman Brothers Municipal
Bond Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charges paid by investors. The index's
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing the securities represented by the index. Average
annual total returns are shown for the periods ended December 31, 1999 (the most
recently completed calendar year prior to the date of this prospectus). Remember
that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past
for the 10 Years
Periods Ended Past Past or Since
December 31, 1999 1 Year 5 Years Inception
- --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen Tax
Free High Income
Fund -- Class A
Shares -8.65% 4.71% 4.50%
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 6.89%
........................................................
Van Kampen Tax
Free High Income
Fund -- Class B
Shares -8.42% 4.68% 4.40%(1)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.40%(2)
........................................................
Van Kampen Tax
Free High Income
Fund -- Class C
Shares -5.70% 4.92% 3.90%(3)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.23%(4)
........................................................
</TABLE>
Inception dates: (1) 5/1/93, (2) 4/30/93, (3) 8/13/93, (4) 7/31/93.
* The Lehman Brothers Municipal Bond Index is a broad-based, statistical
composite of municipal bonds.
The current yield for the thirty-day period ended September 30, 1999 is 5.41%
for Class A Shares, 4.92% for Class B Shares and 4.91% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of offering 4.75%(1) None None
price)
...............................................................
Maximum deferred sales
charge (load)(as a
percentage of the lesser
of original purchase
price or redemption
proceeds) None(2) 4.00%(3) 1.00%(4)
...............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
None None None
...............................................................
Redemption fees None None None
...............................................................
Exchange fee None None None
...............................................................
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------
Management fees 0.47% 0.47% 0.47%
...............................................................
Distribution and/or
service
(12b-1) fees(5)
0.24% 1.00%(6) 1.00%(6)
...............................................................
Other expenses 0.25% 0.26% 0.26%
...............................................................
Total annual fund
operating expenses
0.96% 1.73% 1.73%
...............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 4.00% in the first year after purchase,
declining thereafter as follows:
Year 1-4.00%
Year 2-3.75%
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
See "Purchase of Shares -- Class B Shares."
6
<PAGE> 9
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(6) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $568 $766 $ 981 $1,597
............................................................
Class B Shares $576 $895 $1,089 $1,837*
............................................................
Class C Shares $276 $545 $ 939 $2,041
............................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $568 $766 $981 $1,597
............................................................
Class B Shares $176 $545 $939 $1,837*
............................................................
Class C Shares $176 $545 $939 $2,041
............................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax primarily through investment in a
diversified portfolio of medium- and lower-grade municipal securities. The
Fund's investment objective is a fundamental policy and may not be changed
without shareholder approval of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). There are risks inherent in all investments in securities;
accordingly there can be no assurance that the Fund will achieve its investment
objective.
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing primarily in medium- and
lower-grade municipal securities. Lower-grade securities are commonly referred
to as "junk bonds" and involve special risks as compared to investments in
higher-grade securities. The Fund does not purchase municipal securities that
are in default or rated in categories lower than B- by S&P or B3 by Moody's. For
a description of securities ratings, see the appendix to this prospectus. Under
normal market conditions, the Fund may invest up to 20% of the total assets in
municipal securities that are subject to alternative minimum tax. From time to
time, the Fund temporarily may invest up to 10% of its total assets in tax
exempt money market funds which are treated as investments in municipal
securities.
The Fund invests in a broad range of municipal securities represented by many
states, regions and economies. In selecting securities for investment, the
Fund's investment adviser allocates portfolio assets among various
municipalities and adjusts the Fund's exposure to each state or region based on
its perception of the most favorable markets and issuers. As s result, the
amount invested in municipal securities in a particular state or region will
vary in accordance with the Fund's investment adviser's assessments of the
relative income potential of such investments.
The Fund's investment adviser actively manages the Fund's portfolio and adjusts
the average maturity of portfolio investments based upon its expectations about
the direction of interest rates and other economic factors. The Fund's
investment adviser
7
<PAGE> 10
selects securities which it believes offer higher yields with reasonable credit
risk considered in relation to the investment policies of the Fund. In selecting
securities for investment, the Fund's investment adviser uses its research
capabilities to assess potential investments and considers a number of factors,
including general market and economic conditions and credit, interest rate and
prepayment risks. Portfolio securities are typically sold when the Fund's
investment adviser's assessments of any of these factors materially change. At
times, the market conditions in the municipal securities markets may be such
that the Fund's investment adviser may invest in higher-grade securities,
particularly when the difference in returns between quality classifications is
narrow or when the Fund's investment adviser expects interest rates to increase.
These investments may lessen the decline in the net asset value of the Fund but
also may affect the amount of current income since yields on higher-grade
securities are usually lower than yields on medium- or lower-grade securities.
As a result, the Fund will not necessarily invest in the highest yielding
municipal securities permitted by its investment policies if the Fund's
investment adviser determines that market risks or credit risks associated with
such investments would subject the Fund's portfolio to undue risk. The potential
for realization of capital gains or losses resulting from possible changes in
interest rates will not be a major consideration and frequency of portfolio
turnover generally will not be a limiting factor if the Fund's investment
adviser considers it advantageous to purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Under
normal market conditions, at least 80% of the Fund's net assets will be invested
in municipal securities. The policy stated in the foregoing sentence is a
fundamental policy of the Fund and may not be changed without shareholder
approval of a majority of the Fund's outstanding voting securities, as defined
in the 1940 Act. Under normal market conditions, the Fund may invest up to 20%
of its total assets in municipal securities that are subject to federal
alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, maturity of the obligation and rating of the issue.
The ratings of S&P and Moody's represent their opinions of the quality of the
municipal securities they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
8
<PAGE> 11
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Fund's Statement of Additional Information.
The Fund's Statement of Additional Information may be obtained by investors free
of charge as described on the back cover of this prospectus.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of nonpayment. 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 nonpayment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing nonpayment and a
potential decrease in the net asset value of the Fund. In addition, the Fund may
incur expenses to work out or restructure a distressed or defaulted security.
Securities below
9
<PAGE> 12
investment grade involve special risks compared to higher-grade securities. See
"Risks of Investing in Medium- and Lower-Grade Securities" below.
The Fund may invest up to 20% of its total assets in municipal securities that
are subject to federal alternative minimum tax. Accordingly, the Fund may not be
a suitable investment for investors who are already subject to the federal
alternative minimum tax or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve increased risk
to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
The Fund has no policy limiting its investments in municipal securities whose
issuers are located in the same state. However, it is not the present intention
of the Fund to invest more than 25% of the value of its total assets in issuers
located in the same state. If the Fund were to invest more than 25% of its total
assets in issuers located in the same state, it would be more susceptible to
adverse economic, business, or regulatory conditions in that state.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
RISKS OF INVESTING IN MEDIUM- AND LOWER-GRADE SECURITIES
Securities which are in the medium- and lower-grade categories generally offer
higher yields than are offered by higher-grade securities of similar maturities,
but they also generally involve greater risks, such as greater credit risk,
greater market risk and volatility, greater liquidity concerns and potentially
greater manager risk. Investors should carefully consider the risks of owning
shares of a portfolio which invests in medium- and lower-grade securities before
investing in the Fund.
Credit risk relates to the issuers's ability to make timely payment of interest
and principal when due. Medium- and lower-grade securities are considered more
susceptible to nonpayment of interest and principal or default than higher-grade
securities. Increases in interest rates or changes in the economy may
significantly affect the ability of issuers of medium- and lower-grade
securities to pay interest and to repay principal, to meet projected financial
goals or to obtain additional financing. In the event that an issuer of
securities held by the Fund experiences difficulties in the timely payment of
principal and interest and such issuer seeks to restructure the terms of its
borrowings, the Fund may incur additional expenses and may determine to invest
additional assets with respect to such issuer or the project or projects to
which the Fund's securities relate. Further, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of interest or the repayment of principal on its portfolio holdings
and the Fund may be unable to obtain full recovery on such amounts. To minimize
the risks involved in investing in medium- and lower-grade securities, the
10
<PAGE> 13
Fund does not purchase securities that are in default or rated in categories
lower than B- by S&P or B3 by Moody's.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the debt securities market and as a result of real or perceived
changes in credit risk. The value of the Fund's investments can be expected to
fluctuate over time. The value of debt securities generally varies inversely
with changes in prevailing interest rates. When interest rates decline, the
value of a portfolio invested in debt securities generally can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
debt securities generally can be expected to decline. Debt securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than debt securities with shorter maturities. While the Fund has no
policy limiting the maturities of the individual debt securities in which it may
invest, the Fund's investment adviser seeks to manage fluctuations in net asset
value resulting from changes in interest rates by actively managing the
portfolio maturity structure. Secondary market prices of medium- and lower-grade
securities generally are less sensitive to changes in interest rate and are more
sensitive to general adverse economic changes or specific developments with
respect to the particular issuers than are the secondary market prices of
higher-grade securities. A significant increase in interest rates or a general
economic downturn could severely disrupt the market for medium- and lower-grade
securities and adversely affect the market value of such securities. Such events
also could lead to a higher incidence of default by issuers of medium- and
lower-grade securities as compared with higher-grade securities. In addition,
changes in credit risks, interest rates, the credit markets or periods of
general economic uncertainty can be expected to result in increased volatility
in the market price of the medium- and lower-grade securities in the Fund and
thus in the net asset value of the Fund. Adverse publicity and investor
perceptions, whether or not based on rational analysis, may affect the value,
volatility and liquidity of medium- and lower-grade securities.
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for medium- and lower-grade securities may
be less liquid than the markets for higher-grade securities. Liquidity relates
to the ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the medium- and lower-grade securities in which the
Fund may invest, trading in such securities may be relatively inactive. Prices
of medium- and lower-grade securities may decline rapidly in the event a
significant number of holders decide to sell. Changes in expectations regarding
an individual issuer of medium- and lower-grade securities generally could
reduce market liquidity for such securities and make their sale by the Fund more
difficult, at least in the absence of price concessions. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. An economic downturn or an
increase in interest rates could severely disrupt the market for such securities
and adversely affect the value of outstanding securities or the ability of the
issuers to repay principal and interest. Further, the Fund may have more
difficulty selling such securities in a timely manner and at their stated value
than would be the case for securities for which an established retail market
does exist. Certain municipal securities in which the Fund may invest, such as
special obligation bonds, lease obligations, participation certificates and
variable rate instruments, may be particularly less liquid. Although the issuer
of some such securities may be obligated to redeem such securities at face
value, such redemption could result in losses to the Fund to the extent such
municipal securities were purchased by the Fund at a premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for medium- and lower-grade securities held in the Fund's
portfolio, the ability of the Fund's investment adviser to value the Fund's
securities becomes more difficult and the judgment of the Fund's investment
adviser may play a greater role in the valuation of the Fund's securities due to
the reduced availability of reliable objective data.
The Fund may invest in securities not producing immediate cash income, including
zero-coupon
11
<PAGE> 14
securities or pay-in-kind securities, when their effective yield over comparable
instruments producing cash income make these investments attractive. Prices on
non-cash-paying instruments may be more sensitive to changes in the issuer's
financial condition, fluctuation in interest rates and market demand/supply
imbalances than cash-paying securities with similar credit ratings, and thus may
be more speculative. In addition, the accrued interest income earned on such
instruments is included in investment company taxable income, thereby increasing
the required minimum distributions to shareholders without providing the
corresponding cash flow with which to pay such distributions. The Fund's
investment adviser will weigh these concerns against the expected total returns
from such instruments. See "Additional Information Regarding Certain Securities"
below.
Many medium- and lower-grade securities are not listed for trading on any
national securities exchange, and many issuers of medium- and lower-grade
securities choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. As a result, the Fund's
portfolio may consist of a higher portion of unlisted or unrated securities as
compared with an investment company that invests solely in higher-grade
securities. Unrated securities are usually not as attractive to as many buyers
as are rated securities, a factor which may make unrated securities less
marketable. These factors may have the effect of limiting the availability of
the securities for purchase by the Fund and may also limit the ability of the
Fund to sell such securities at their fair value either to meet redemption
requests or in response to changes in the economy or the financial markets.
Further, to the extent the Fund owns or may acquire illiquid or restricted
medium-and lower-grade securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. The amount of available
information about the financial condition of certain medium- and lower-grade
issuers may be less extensive than other issuers. In its analysis, the Fund's
investment adviser may consider the credit ratings of recognized rating
organizations in evaluating securities although the investment adviser does not
rely primarily on these ratings. Ratings evaluate only the safety of principal
and interest payments, not the market value risk. In addition, ratings are
general and not absolute standards of quality, and credit ratings are subject to
the risk that the creditworthiness of an issuer may change and the rating
agencies may fail to change such ratings in a timely fashion. A rating downgrade
does not require the Fund to dispose of a security. The Fund's investment
adviser continuously monitors the issuers of securities held in the Fund.
Because of the number of investment considerations involved in investing in
medium- and lower-grade securities, to the extent the Fund invests in such
securities, achievement of the Fund's investment objective may be more dependent
upon the Fund's investment adviser's credit analysis than is the case with
investing in higher-grade securities. New or proposed laws may have an impact on
the market for medium- and lower-grade securities. The Fund's investment adviser
is unable at this time to predict what effect, if any, legislation may have on
the market for medium- and lower-grade securities.
Special tax considerations are associated with investing in certain medium- and
lower-grade securities, such as zero-coupon or pay-in-kind securities. The Fund
accrues income on these securities prior to the receipt of cash payments. The
Fund must distribute substantially all of its income to its shareholders to
qualify for pass-through treatment under federal income tax law and may,
therefore, have to dispose of its portfolio securities to satisfy distribution
requirements.
The table below sets forth the percentage of the Fund's assets during the fiscal
year ended September 30, 1999 invested in the various ratings categories (based
on the higher of Moody's or S&P) and unrated securities determined by the Fund's
investment adviser to be of comparable quality. The percentages are based on the
dollar-weighted average of credit ratings of all municipal securities held by
the
12
<PAGE> 15
Fund during the fiscal year computed on a monthly basis.
<TABLE>
<CAPTION>
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 28.69% 0%
.........................................................................
AA/Aa 5.18% 0%
.........................................................................
A/A 5.62% 0.91%
.........................................................................
BBB/Baa 16.77% 4.33%
.........................................................................
BB/Ba 2.59% 25.35%
.........................................................................
B/B 0% 8.94%
.........................................................................
CCC/Caa 0% 0.35%
.........................................................................
CC/Ca 0% 0%
.........................................................................
C/C 0% 0%
.........................................................................
D 0% 1.27%
.........................................................................
Percentage of
Rated and
Unrated
Securities 58.85% 41.15%
.........................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those listed above.
ADDITIONAL INFORMATION
REGARDING CERTAIN SECURITIES
The Fund may invest in certain securities not producing immediate cash income,
such as zero coupon and payment-in-kind securities, when the Fund's investment
adviser believes the effective yield on such securities over comparable
instruments paying cash income makes these investments attractive. Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest. They are issued and traded at a discount from
their face amounts or par value, which discount varies depending on the time
remaining until cash payments begin, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. Because such securities
do not entitle the holder to any periodic payments of interest prior to
maturity, this prevents any reinvestment of interest payments at prevailing
interest rates if prevailing interest rates rise. On the other hand, because
there are no periodic interest payments to be reinvested prior to maturity,
"zero-coupon" securities eliminate the reinvestment risk and may lock in a
favorable rate of return to maturity if interest rates drop.
Payment-in-kind securities are securities that pay interest through the issuance
of additional securities. Prices on non-cash-paying instruments may be more
sensitive to changes in the issuer's financial condition, fluctuations in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative than are
securities that pay interest periodically in cash.
The amount of non-cash interest income earned on zero-coupon securities and
payment-in-kind securities is included, for federal income tax purposes, in the
Fund's calculation of income that is required to be distributed to shareholders
for the Fund to maintain its desired federal income tax status (even though such
non-cash paying securities do not provide the Fund with the cash flow with which
to pay such distributions). Accordingly, the Fund may be required to borrow or
to liquidate portfolio securities at a time that it otherwise would not have
done so in order to make such distributions. The Fund's investment adviser will
weigh these concerns against the expected total returns from such instruments.
DERIVATIVE INSTRUMENTS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that the use of these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and other interest rate indices and other financial instruments,
purchase and sell financial futures contracts and options on futures and enter
into various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of securities for investment purposes, to manage the
13
<PAGE> 16
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. Any or all of these investment techniques may be
used at any time and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Fund to utilize these Strategic Transactions successfully will depend on the
investment adviser's ability to predict pertinent market movements, which cannot
be assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default by the other party to the transaction, illiquidity of the
derivative instrument and, to the extent the investment adviser's view as to
certain market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale of
portfolio securities at inopportune times or for prices other than at current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the risk management or hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and their risks are described more fully in the Fund's Statement of
Additional Information. Income earned or deemed to be earned by the Fund from
its Strategic Transactions, if any, generally will be taxable income of the
Fund.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on securities in connection with such transactions prior to
the date the Fund actually takes delivery of such securities. These transactions
are subject to market risk as the value or yield of a security at delivery may
be more or less than the purchase price or the yield generally available on
securities when delivery occurs. In addition, the Fund is subject to
counterparty risk because it relies on the buyer or seller, as the case may be,
to consummate the transaction, and failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring these
securities, but the Fund may sell these securities prior to settlement if it is
deemed advisable. No specific limitation exists as to the percentage of the
Fund's assets which may be used to acquire securities on a "when-issued" or
"delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by
14
<PAGE> 17
the Fund is contained in the Fund's Statement of Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities, or yield
differentials, or for other reasons. The Fund's portfolio turnover is shown
under the heading "Financial Highlights." The portfolio turnover rate may vary
from year to year. A high portfolio turnover rate (100% or more) increases a
fund's transactions costs (including brokerage commissions or dealer costs) and
a high portfolio turnover rate may result in the realization of more short-term
capital gains than if a fund had a lower portfolio turnover rate. Increases in a
fund's transaction costs would adversely impact the fund's performance. The
turnover rate will not be a limiting factor, however, if the Fund's investment
adviser considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may invest on a temporary basis a portion or all
of its assets in high-quality, short-term municipal obligations. If such
high-quality, short-term municipal securities are not available or, in the
Fund's investment adviser's judgment, do not afford sufficient protection
against adverse market conditions, the Fund may invest in taxable obligations.
Such taxable obligations may include securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, other investment grade quality
debt securities, prime commercial paper, certificates of deposit, bankers'
acceptances and other obligations of domestic banks having total assets of at
least $500 million, and repurchase agreements. In taking such a defensive
position, the Fund would not be pursuing and may not achieve its investment
objective.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $90 billion under management or supervision as of
December 31, 1999. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily net assets of
the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- ------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.50%
......................................................
Over $500 million 0.45%
......................................................
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.47% of the
Fund's average daily net assets for the Fund's fiscal year ended September 30,
1999.
The Fund's average daily 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.
Under the Advisory Agreement the Adviser furnishes offices, necessary facilities
and equipment and provides administrative services to the Fund. The Fund pays
all charges and expenses of its day-to-day operations, including service fees,
distribution fees, custodial fees, legal and independent accountant fees, the
costs of reports and proxies to shareholders, compensation of trustees of the
Trust (other than those who are affiliated persons of the Adviser, Distributor
or Van Kampen Investments) and all other ordinary business expenses not
specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's
15
<PAGE> 18
expenses by reducing the fees payable to them or by reducing other expenses of
the Fund in accordance with such limitations as the Adviser or Distributor may
establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the Adviser,
has been primarily responsible for the day-to-day management of the Fund's
portfolio since April 1989. Mr. Johnson has been employed by the Adviser since
April 1989.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments must be at least $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) each class of shares
has exclusive voting rights with respect to approvals of the Rule 12b-1
distribution plan and service plan (each as described below) under which its
distribution fee and/or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales, charges, where applicable). The net asset values per
share of the Class A Shares, Class B Shares and Class C Shares are generally
expected to be substantially the same. In certain circumstances, however, the
per share net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B Shares and Class C Shares and
the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays or any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Funds's Board of Trustees reserves the right to
calculate the net asset value per share and adjust the offering price based
thereon more frequently than once daily if deemed desirable. Net asset value per
share for each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities for which market quotations are not readily available or other assets
are valued at their fair value as determined in good faith by the Adviser in
accordance with procedures established by the Board of Trustees of the Fund.
Short-term investments with remaining maturities of 60 days or less are valued
at cost plus accrued interest (amortized cost) which approximates market value.
16
<PAGE> 19
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. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class and the maintenance of the shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
such class of shares. To assist investors in comparing classes of shares, the
tables under the heading "Fees and Expenses of the Fund" provide a summary of
sales charges and expenses and an example of the sales charges and expenses of
the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
17
<PAGE> 20
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed
on an amount equal to the lesser of the then current market value or the
cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and Service Plan, the Fund may spend a total of up
to 0.25% per year of the Fund's average daily net assets with respect to the
Class A Shares of the Fund. From such amount, under the Service Plan, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within six years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class B Shares of the
Fund.
18
<PAGE> 21
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan Class B Shares received on such shares, automatically convert to Class A
Shares eight years after the end of the calendar month in which the shares were
purchased. Class B Shares purchased before June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, automatically convert
to Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C Shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar month in which
such shares were purchased. Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. The conversion schedule applicable to a share of the Fund acquired
through the exchange privilege from another Van Kampen fund participating in the
exchange program is determined by reference to the Van Kampen fund from which
such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by
involuntary liquidation by the Fund of a shareholder's account as described
under the heading "Redemption of Shares." Subject to certain limitations, a
shareholder who has redeemed Class C Shares of the Fund may reinvest in Class C
Shares at net asset value with credit for any contingent deferred sales charge
if the reinvestment is made within 180 days after the redemption. For a more
complete description of contingent deferred sales charge waivers, please refer
to the Fund's Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an
19
<PAGE> 22
investor will pay the lowest applicable sales charge. Quantity discounts may be
modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
also includes purchases of shares of the Participating Funds over a 13-month
period based on the total amount of intended purchases plus the value of all
shares of the Participating Funds previously purchased and still owned. An
investor may elect to compute the 13-month period starting up to 90 days before
the date of execution of a Letter of Intent. Each investment made during the
period receives the reduced sales charge applicable to the total amount of the
investment goal. The initial purchase must be for an amount equal to at least 5%
of the minimum total purchase amount of the level selected. If trades not
initially made under a Letter of Intent subsequently qualify for a lower sales
charge through the 90-day backdating provisions, an adjustment will be made at
the expiration of the Letter of Intent to give effect to the lower sales charge.
Such adjustment in sales charge will be used to purchase additional shares for
the shareholder with the applicable sales charge. The Fund initially will escrow
shares totaling 5% of the dollar amount of the Letter of Intent to be held by
Investor Services in the name of the shareholder. In the event the Letter of
Intent goal is not achieved within the specified period, the investor must pay
the difference between the sales charge applicable to the purchases made and the
reduced sales charges previously paid. Such payments may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit investment trust distributions will be 1.00% of the
offering price (1.01% of net asset value). Of this amount, the Distributor will
pay to the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the terms and conditions that apply to the program,
should contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit
20
<PAGE> 23
a single bulk order and make payment with a single remittance for all
investments in the Fund during each distribution period by all investors who
choose to invest in the Fund through the program and (2) provide Investor
Services with appropriate backup data for each investor participating in the
program in a computerized format fully compatible with Investor Services'
processing system.
In order to obtain these special benefits, all dividends and other distributions
by the Fund must be reinvested in additional shares and there cannot be any
systematic withdrawal program. There will be no minimum for reinvestments from
unit investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
DeanWitter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by nonprofit organizations
defined under Section 501(c)(3) of the Code and assets held by an employer
or trustee in connection with an eligible deferred compensation plan under
Section 457 of the Code. Such plans will qualify for purchases at net asset
value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (1) the
total plan assets are at least $1 million or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have received
proposals from the Distributor prior to January 1, 2000 based on net asset
value purchase privileges previously in effect will be qualified to purchase
shares of the Participating Funds at net asset value. Section 403(b) and
similar accounts for which Van Kampen Trust Company serves as custodian will
not be eligible for net asset value purchases based on the aggregate
investment made by the plan or
21
<PAGE> 24
the number of eligible employees, except under certain uniform criteria
established by the Distributor from time to time. For purchases on February
1, 1997 and thereafter, a commission will be paid as follows: 1.00% on sales
to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million, plus 0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy holders
of an insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers
who initiate and are responsible for such sales to each individual as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million and
0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian/trustee of a
retirement plan account may involve additional fees charged by the dealer or
custodian/trustee.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the request and any other necessary documents in
proper form as described below. Such payment may be postponed or the right of
redemption suspended as provided by the rules of the SEC. Such payment may,
under certain circumstances, be paid wholly or in part by a distribution-in-kind
of portfolio securities which may result in brokerage costs and a gain or loss
for federal income tax purposes when such securities are sold. If the shares to
be redeemed have been recently purchased by check, Investor Services may delay
the payment of redemption proceeds until it confirms the purchase check has
cleared, which may take up to 15 days. A taxable gain or loss will be recognized
by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares to be redeemed, the Fund name and class
designation of such shares and
22
<PAGE> 25
the shareholder's account number. The redemption request must be signed by all
persons in whose names the shares are registered. Signatures must conform
exactly to the account registration. If the proceeds of the redemption exceed
$50,000, or if the proceeds are not to be paid to the record owner at the record
address, or if the record address has changed within the previous 30 days,
signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by and registered to
a corporation, partnership, trust, fiduciary, or other legal entity, a copy of
the corporate resolution or other legal documentation appointing the authorized
signer and certified within the prior 120 days must accompany the redemption
request. Retirement plan distribution requests should be sent to the
custodian/trustee to be forwarded to Investor Services. Contact the
custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the application form
accompanying the prospectus. For accounts that are not established with
telephone redemption privileges, a shareholder may call the Fund at (800)
341-2911 to request that a copy of the Telephone Redemption Authorization form
be sent to the shareholder for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. Shares may also be redeemed by
phone through FundInfo(R) (automated phone system) to the shareholder's bank
account of record 24 hours a day, seven days a week at (800) 847-2424. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedure previously described.
Requests received by Investor Services prior to 4:00 p.m., New York time, will
be processed at the next determined net asset value per share. These privileges
are available for most accounts other than retirement accounts or accounts with
shares represented by certificates. If an account has multiple owners, Investor
Services may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. If a redemption
is requested
23
<PAGE> 26
through FundInfo(R) transactions are sent to the predesignated bank account of
record only. Proceeds from redemptions payable by wire transfer are expected to
be wired on the next business day following the date of redemption. The Fund
reserves the right at any time to terminate, limit or otherwise modify this
redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare daily and distribute monthly all,
or substantially all of its net investment income, as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends and/or capital gains be paid in cash, be
reinvested in the Fund at net asset value, or be invested in another Van Kampen
fund at net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may appoint
Investor Services as agent by completing the Authorization for Redemption by
Check form and the appropriate section of the application and returning the form
and the application to Investor Services. Once the form is properly completed,
signed and
24
<PAGE> 27
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company (the "Bank") will be sent to the Class A shareholder. These checks may
be made payable by the Class A shareholder to the order of any person in any
amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A Share account by Investor Services at the next determined
net asset value per share. Check writing redemptions represent the sale of Class
A Shares. Any gain or loss realized on the redemption of shares is a taxable
event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or by the Bank. Retirement plans and accounts that are subject to backup
withholding are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from any authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services, by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
telephone exchange privileges unless the shareholder indicates otherwise by
checking the applicable box on the application form accompanying the prospectus.
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain dividend (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from
25
<PAGE> 28
the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund and other
Participating Funds may restrict exchanges by shareholders engaged in excessive
trading by limiting or disallowing the exchange privilege to such shareholders.
For further information on these restrictions see the Fund's Statement of
Additional Information. The Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
FEDERAL INCOME TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
26
<PAGE> 29
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its income (consisting generally
of tax-exempt interest, taxable income and net short-term capital gains) will
constitute tax-exempt interest, a significant portion of the Fund's income may
consist of investment company taxable income. Distributions of investment
company taxable income (generally, taxable income and net short-term capital
gain) 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 gain (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Fund have been held by such shareholders. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held as a capital
asset, the gain or loss will be a capital gain or loss. Any recognized capital
gains may be taxed at different rates depending on how long the shareholder held
such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income and at least
90% of its net tax-exempt interest, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on such undistributed amounts.
The federal income tax discussion set forth above is for general information
only. The exemption of interest income for federal income tax purposes may not
result in similar exemptions under the laws of a particular state or local
taxing authority. Income distributions may be taxable to shareholders under
state or local law as dividend income even though a portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes. The Fund will report
annually to its shareholders the percentage and source, on a state-by-state
basis, of interest income earned on municipal securities received by the Fund
during the preceding calendar year. Dividends and distributions paid by the Fund
27
<PAGE> 30
from sources other than tax-exempt interest are generally subject to taxation at
the state and local levels. Prospective investors should consult their own tax
advisers regarding the specific federal tax consequences of purchasing, holding,
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
28
<PAGE> 31
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
Nine Months
Year Ended Ended
September 30, September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
the Period........... $15.076 $14.845 $14.474 $14.984 $13.848 $15.629
------- ------- ------- ------- ------- -------
Net Investment
Income............ .807 .643 .895 .963 1.024 .956
Net Realized and
Unrealized
Gain/Loss......... (1.164) .217 .376 (.513) 1.072 (1.717)
------- ------- ------- ------- ------- -------
Total from
Investment
Operations.......... (.357) .860 1.271 .450 2.096 (.761)
Less Distributions
from and in Excess
of Net
Investment Income... .810 .629 .900 .960 .960 1.020
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $13.909 $15.076 $14.845 $14.474 $14.984 $13.848
======= ======= ======= ======= ======= =======
Total Return (a)..... 2.51% 6.00%* 9.05% 3.21% 15.52% (4.93%)
Net Assets at End of
the Period (In
millions)........... $745.2 $771.4 $706.3 $671.9 $665.8 $603.0
Ratio of Expenses to
Average Net Assets
(b)................. .96% .92% .94% .99% .95% .87%
Ratio of Net
Investment Income to
Average Net Assets
(b)................. 5.46% 5.66% 6.09% 6.60% 7.05% 6.48%
Portfolio Turnover... 77% 66%* 63% 59% 59% 101%
<CAPTION>
Class B Shares Class B Shares
Nine Months
Year Ended Ended
September 30, September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
the Period........... $15.071 $14.844 $14.474 $14.983 $13.850 $15.621
------- ------- ------- ------- ------- -------
Net Investment
Income............ .686 .545 .774 .843 .908 .841
Net Realized and
Unrealized
Gain/Loss......... (1.156) .229 .384 (.506) 1.071 (1.718)
------- ------- ------- ------- ------- -------
Total from
Investment
Operations.......... (.470) .774 1.158 .337 1.979 (.877)
Less Distributions
from and in Excess
of Net
Investment Income... .697 .547 .788 .846 .846 .894
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $13.904 $15.071 $14.844 $14.474 $14.983 $13.850
======= ======= ======= ======= ======= =======
Total Return (a)..... (3.25%) 5.35%* 8.23% 2.40% 14.62% (5.69%)
Net Assets at End of
the Period (In
millions)........... $282.5 $279.6 $229.6 $173.8 $137.9 $112.4
Ratio of Expenses to
Average Net Assets
(b)................. 1.73% 1.68% 1.71% 1.75% 1.70% 1.64%
Ratio of Net
Investment Income to
Average Net Assets
(b)................. 4.70% 4.90% 5.30% 5.84% 6.25% 5.70%
Portfolio Turnover... 77% 66%* 63% 59% 59% 101%
<CAPTION>
Class C Shares
Nine Months
Year Ended Ended
September 30, September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
the Period........... $15.069 $14.842 $14.474 $14.987 $13.846 $15.610
------- ------- ------- ------- ------- -------
Net Investment
Income............ .686 .549 .778 .851 .910 .824
Net Realized and
Unrealized
Gain/Loss......... (1.154) .225 .378 (.518) 1.077 (1.694)
------- ------- ------- ------- ------- -------
Total from
Investment
Operations.......... (.468) .774 1.156 .333 1.987 (.870)
Less Distributions
from and in Excess
of Net
Investment Income... .697 .547 .788 .846 .846 .894
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $13.904 $15.069 $14.842 $14.474 $14.987 $13.846
======= ======= ======= ======= ======= =======
Total Return (a)..... (3.25%) 5.35%* 8.23% 2.33% 14.70% (5.62%)
Net Assets at End of
the Period (In
millions)........... $61.5 $63.2 $38.6 $18.8 $9.5 $7.6
Ratio of Expenses to
Average Net Assets
(b)................. 1.73% 1.68% 1.71% 1.75% 1.69% 1.64%
Ratio of Net
Investment Income to
Average Net Assets
(b)................. 4.69% 4.90% 5.24% 5.84% 6.19% 5.71%
Portfolio Turnover... 77% 66%* 63% 59% 59% 101%
</TABLE>
* Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1995 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to the
Adviser's reimbursement of certain expenses was less than 0.01%.
29
<PAGE> 32
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P corporate or municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial 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 obligor 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; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT -- INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
A- 1
<PAGE> 33
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.
r: This symbol highlights derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples include: obligations linked or
indexed to equities, currencies, or commodities; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong or strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse Financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the due date, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
A commercial paper 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 to
S&P by the issuer or obtained 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.
A- 2
<PAGE> 34
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols for the
put option (for example, "AAA/A-1+"). With short-term demand debt, S&P's note
rating symbols are used with the commercial paper rating symbols (for example,
"SP-1+/A-1+").
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
LONG-TERM DEBT
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 market 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 through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
A- 3
<PAGE> 35
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.
- -- 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.
A- 4
<PAGE> 36
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson Paul G. Yovovich
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Dennis J. McDonnell*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
Edward C. Wood III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
Stephen L. Boyd*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer & Treasurer
Curtis W. Morell*
Vice President & Chief Accounting Officer
Tanya M. Loden*
Controller
* "Interested Persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time
Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN TAX FREE HIGH INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Tax Free High Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Tax Free High Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 37
VAN KAMPEN
TAX FREE HIGH INCOME FUND
PROSPECTUS
JANUARY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]), or by writing
the Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act
File No. is 811-4386.
TFHI PRO 1/00
<PAGE> 38
VAN KAMPEN
INSURED TAX FREE
INCOME FUND
Van Kampen Insured Tax Free Income Fund is a
mutual fund with the investment objective to
provide investors with a high level of current
income exempt from federal income tax, with
liquidity and safety of principal, primarily
through investment in a diversified portfolio
of insured municipal securities.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulator, and
neither the SEC nor any state regulator has
passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary
is a criminal offense.
This prospectus is dated JANUARY 28, 2000.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 39
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 6
Investment Objective, Policies and Risks........... 7
Investment Advisory Services....................... 12
Purchase of Shares................................. 13
Redemption of Shares............................... 19
Distributions from the Fund........................ 21
Shareholder Services............................... 21
Federal Income Taxation............................ 23
Financial Highlights............................... 26
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 40
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the investment objective to provide investors
with a high level of current income exempt from federal income tax, with
liquidity and safety of principal, primarily through investment in a diversified
portfolio of insured municipal securities.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing substantially all of the Fund's
assets in a portfolio of municipal securities that are insured at the time of
purchase as to timely payment of principal and interest by a top-rated private
insurance company.
The Fund buys and sells municipal securities with a view towards seeking a high
level of current income exempt from federal income taxes and selects securities
which the Fund's investment adviser believes entail reasonable credit risk when
considered in relation to the investment policies of the Fund. In selecting
securities for investment, the Fund's investment adviser uses its research
capabilities to identify and monitor attractive investment opportunities and to
seek to protect the Fund's portfolio from early payment by issuers of such
securities. In conducting its research and analysis, the Fund's investment
adviser considers a number of factors, including general market and economic
conditions, and credit, interest rate and prepayment risks. Portfolio securities
are typically sold when the Fund's investment adviser's assessment of any of
these factors materially changes. Although the Fund invests in insured municipal
securities, insurance does not protect the Fund from market fluctuations in the
value of an insured security, but only guarantees timely payment of principal
and interest of such investments.
Under normal market conditions, the Fund may invest up to 20% of its net assets
in municipal securities that are subject to federal alternative minimum tax.
Under normal market conditions, up to 10% of the Fund's total assets may be
invested in tax-exempt money market funds which are not insured. The Fund may
purchase or sell securities on a when-issued or delayed delivery basis. The Fund
may purchase or sell certain derivative instruments (such as options, futures,
options on futures, and interest rate swaps or other interest rate-related
transactions) for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market value of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. The Fund has no policy limiting the maturities of its
investments. To the extent that the Fund invests in securities with longer
maturities, the Fund will be subject to greater market risk than a fund
investing solely in shorter-term securities.
Generally, the Fund's municipal securities are insured as to timely payment of
principal and interest by a top-rated private insurance company. This insurance
does not, however, guarantee that the prices of these securities will remain
stable during interest rate changes.
Market risk is often greater among certain types of debt securities, such as
zero-coupon bonds. As interest rates change, these securities often fluctuate
more in price than traditional debt securities and may subject the Fund to
greater market risk than a fund that does not own these types of securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Credit risk should be low for the Fund because it
invests substantially all of its assets in insured municipal securities.
3
<PAGE> 41
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investor's home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
MUNICIPAL SECURITIES RISK. The Fund invests substantially all of its assets in
insured municipal securities. The yields of municipal securities, or of insured
municipal securities, may move differently and adversely compared to the yields
of the overall debt securities markets. While the interest received from
municipal securities generally is exempt from federal income tax, the Fund may
invest up to 20% of its net assets in municipal securities subject to federal
alternative minimum tax. In addition, there could be changes in applicable tax
laws or tax treatments that reduce or eliminate the current federal income tax
exemption on municipal securities or otherwise adversely affect the current
federal or state tax status of municipal securities.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures, options on futures, and
interest rate swaps or other interest rate-related transactions are examples of
derivatives. Derivative instruments involve risks different from those
accompanying a direct investment in the underlying securities. These risks may
include: imperfect correlation between the value of the instruments and the
underlying assets; risks of default by the other party to certain transactions;
risks that the transactions may result in losses that partially or completely
offset gains in portfolio positions; risks that the transactions may not be
liquid; and manager risk.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek current income
- - Are in a high federal income tax bracket
- - Wish to add to their investment portfolio a fund that invests substantially
all of its assets in insured municipal securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
4
<PAGE> 42
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the ten calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
BAR GRAPH
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1990 7.07
'1991 10.62
'1992 9.51
'1993 12.32
'1994 -6.31
'1995 17.49
'1996 3.64
'1997 8.19
'1998 5.65
'1999 -5.03
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the ten-year period shown in the bar chart, the highest quarterly return
was 7.35% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -6.08% (for the quarter ended March 31, 1994).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Lehman Brothers Municipal
Bond Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charges paid by investors. The index's
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing the securities represented by the index. Average
annual total returns are shown for the periods ended December 31, 1999 (the most
recently completed calendar year prior to the date of this prospectus). Remember
that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past
for the 10 Years
Periods Ended Past Past or Since
December 31, 1999 1 Year 5 Years Inception
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen
Insured Tax Free
Income Fund--
Class A Shares -9.53% 4.71% 5.56%
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 6.89%
.......................................................
Van Kampen
Insured Tax Free
Income Fund--
Class B Shares -9.39% 4.69% 3.44%(1)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.40%(1)
.......................................................
Van Kampen
Insured Tax Free
Income Fund--
Class C Shares -6.73% 4.92% 3.09%(2)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.23%(2)
.......................................................
</TABLE>
Inception dates: (1) 5/3/93, (2) 8/13/93.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
statistical composite of municipal bonds.
The current yield for the thirty-day period ended September 30, 1999 is 4.41%
for Class A Shares, 3.85% for Class B Shares and 3.83% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
5
<PAGE> 43
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of offering 4.75%(1) None None
price)
...............................................................
Maximum deferred sales
charge (load) (as a
percentage of the lesser
of original purchase
price or redemption
proceeds) None(2) 4.00%(3) 1.00%(4)
...............................................................
Maximum sales charge
(load) imposed on
reinvested dividends None None None
...............................................................
Redemption fees None None None
...............................................................
Exchange fee None None None
...............................................................
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------
Management fees 0.50% 0.50% 0.50%
...............................................................
Distribution and/or
service (12b-1) fees(5)
0.24% 1.00%(6) 1.00%(6)
...............................................................
Other expenses 0.16% 0.16% 0.16%
...............................................................
Interest expenses 0.02% 0.02% 0.02%
...............................................................
Total annual fund
operating expenses
0.92% 1.68% 1.68%
...............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares--Class A
Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares--Class A Shares."
(3) The maximum deferred sales charge is 4.00% in the first year after purchase,
declining thereafter as follows:
Year 1-4.00%
Year 2-3.75%
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
See "Purchase of Shares--Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares--Class C Shares."
(5) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(6) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ------ ------
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $564 $754 $ 960 $1,553
......................................................................
Class B Shares $571 $880 $1,063 $1,785*
......................................................................
Class C Shares $271 $530 $ 913 $1,987
......................................................................
</TABLE>
6
<PAGE> 44
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $564 $754 $ 960 $1,553
......................................................................
Class B Shares $171 $530 $ 913 $1,785*
......................................................................
Class C Shares $171 $530 $ 913 $1,987
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax, with liquidity and safety of
principal, primarily through investment in a diversified portfolio of insured
municipal securities. The Fund's investment objective is a fundamental policy
and may not be changed without shareholder approval of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). There are risks inherent in all investments in
securities; accordingly there can be no assurance that the Fund will achieve its
investment objective.
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing substantially all of the Fund's
assets in a portfolio of municipal securities that are insured at the time of
purchase as to timely payment of principal and interest by an entity whose
claims-paying ability is rated AAA by Standard and Poor's ("S&P") or Aaa by
Moody's Investors Service, Inc. ("Moody's") or an equivalent rating by another
nationally recognized statistical rating organization ("NRSRO").
The Fund's investment adviser actively manages the Fund's portfolio and adjusts
the average maturity of portfolio investments based upon its expectations about
the direction of interest rates and other economic factors. In selecting
securities for investment, the Fund's investment adviser uses its research
capabilities to identify and monitor attractive investment opportunities and to
seek to protect the Fund's portfolio from early payment by issuers of such
securities. In conducting its research and analysis, the Fund's investment
adviser considers a number of factors, including general market and economic
conditions and credit, interest rate and prepayment risks. Portfolio securities
are typically sold when the Fund's investment adviser's assessment of any of
these factors materially changes. Although the Fund invests in insured municipal
securities, insurance does not protect the Fund from market fluctuations in the
value of an insured security, but only guarantees timely payment of principal
and interest of such investments.
The Fund's investment adviser buys and sells securities for the Fund's portfolio
with a view towards seeking a high level of current income exempt from federal
income tax and selects securities that it believes entail reasonable credit risk
when considered in relation to the investment policies of the Fund. As a result,
the Fund will not necessarily invest in the highest yielding municipal
securities permitted by its investment policies if the Fund's investment adviser
determines that market risks or credit risks associated with such investments
would subject the Fund's portfolio to undue risk. The potential for realization
of capital gains or losses resulting from possible changes in interest rates
will not be a major consideration, and frequency of portfolio turnover generally
will not be a limiting factor if the Fund's investment adviser considers it
advantageous to purchase or sell securities.
Under normal market conditions, the Fund may invest up to 20% of its net assets
in municipal securities that are subject to alternative minimum tax. From time
to time, the Fund temporarily may invest up to 10% of its total assets in tax
exempt money market funds, which are not insured, and such instruments will be
treated as investments in municipal securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Under
normal market conditions, at least 80% of the Fund's total assets will be
invested in municipal securities. The policy stated in the foregoing sentence is
a fundamental policy of the Fund and may not be changed without shareholder
approval of a majority
7
<PAGE> 45
of the Fund's outstanding voting securities, as defined in the 1940 Act. Under
normal market conditions, the Fund may invest up to 20% of its net assets in
municipal securities that are subject to federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, maturity of the obligation and rating of the issue.
The ratings of S&P and Moody's represent their opinions of the quality of the
municipal securities they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
8
<PAGE> 46
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Fund's Statement of Additional Information.
The Statement of Additional Information can be obtained by investors free of
charge as described on the back cover of this prospectus.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Although the Fund invests substantially all of its total assets in municipal
securities that are insured at the time of purchase as to timely payment of
principal and interest, municipal securities, like other debt obligations, are
subject to the credit risk of nonpayment. 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 nonpayment would result in a reduction of income to the Fund, and could
result in a reduction in the value of the municipal securities experiencing
nonpayment and a potential decrease in the net asset value of the Fund. In
addition, the Fund may incur expenses to work out or restructure a distressed or
defaulted security.
The Fund may invest up to 20% of its net assets in municipal securities that are
subject to federal alternative minimum tax. Accordingly, the Fund may not be a
suitable investment for investors who are already subject to the federal
alternative minimum tax, or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve an increased
risk to the Fund should
9
<PAGE> 47
any of such issuers or any such related projects or facilities experience
financial difficulties.
The Fund has no policy limiting its investments in municipal securities whose
issuers are located in the same state. However, it is not the present intention
of the Fund to invest more than 25% of the value of its total assets in issuers
located in the same state. If the Fund were to invest more than 25% of its total
assets in issuers located in the same state, the Fund would be more susceptible
to adverse economic, business, or regulatory conditions in that state.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
INSURED MUNICIPAL SECURITIES
The Fund invests substantially all of its assets in a portfolio of municipal
securities that are insured at the time of investment as to timely payment of
principal and interest by a top-rated private insurance company. Such insurance
could be provided as: Original Issue Insurance, Secondary Market Insurance or
Portfolio Insurance. Original Issue Insurance is purchased with respect to a
particular issue of municipal securities by the issuer thereof or a third party
in conjunction with the original issue of such municipal securities. Secondary
Market Insurance is purchased by the Fund or a third party subsequent to the
time of original issuance of a municipal security. Both Original Issue Insurance
and Secondary Market Insurance remain in effect as long as the municipal
securities covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such municipal
securities. Portfolio Insurance may be purchased by the Fund with respect to
municipal securities which the Fund intends to purchase or already owns and
would generally terminate when the municipal security is sold by the Fund or
redeemed. There is no limitation on the percentage of the Fund's assets that may
be invested in municipal securities insured by any type of insurance or by any
given insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio Insurance
generally do not insure payment on an accelerated basis, the payment of any
redemption premium or the market value of the Fund's portfolio securities. Such
insurance also does not insure against nonpayment of principal or interest on
municipal securities resulting from the insolvency, negligence or any other act
or omission of the trustee or other paying agent for such obligations.
The Fund invests in municipal securities insured by insurers whose claims-paying
ability is rated AAA by S&P, Aaa by Moody's or the equivalent by another NRSRO
at the time of the Fund's investment. A subsequent downgrade by S&P, Moody's or
another NRSRO of an insurer's claims-paying ability may result in increased
credit risk of the municipal securities insured by such insurer and may result
in a downgrade of the rating assigned to the municipal securities insured by
such insurer. The securities could experience a decrease in market price as a
result of such a downgrade. In the event the ratings assigned to such municipal
securities decline to below investment grade, such municipal securities would
probably become less liquid or even illiquid. There can be no assurance that an
insurer will be able to honor its obligations with respect to municipal
securities in the Fund's portfolio. For more information on insurance and a
description of S&P's and Moody's claims-paying ability ratings of insurers, see
the Statement of Additional Information.
DERIVATIVE INSTRUMENTS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and other interest rate indices and other financial instruments,
purchase and sell financial futures contracts and options on futures and enter
into various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's
10
<PAGE> 48
portfolio resulting from securities markets fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used at
any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the investment
adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default by the other party to the transaction, the illiquidity of the
derivative instrument and, to the extent that the investment adviser's view as
to certain market movements is incorrect, the risk that the use of such
Strategic Transactions could result in losses greater than if the Strategic
Transactions had not been used. Use of put and call options may result in losses
to the Fund, force the sale of portfolio securities at inopportune times or for
prices other than at current market values, limit the amount of appreciation the
Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the risk
management or hedging instrument may be greater than gains in the value of the
Fund's position. In addition, futures and options markets may not be liquid in
all circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may invest in zero-coupon securities which are debt securities that do
not entitle the holder to either periodic payment of interest prior to maturity
or a specified date when the securities begin paying current interest.
Zero-coupon securities are issued and traded at a discount from their face
amounts or par value. The discount varies depending on the time remaining until
cash payments begin, prevailing interest rates, liquidity of the security and
the perceived credit quality of the issuer. Because such securities do not
entitle the holder to any periodic payments of interest prior to maturity, this
prevents any reinvestment of interest payments at prevailing interest rates if
prevailing interest rates rise. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, zero-coupon securities may
eliminate the reinvestment risk and could lock in a favorable rate of return to
maturity if interest rates drop.
The Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on securities in connection with such transactions prior to
the date the Fund actually takes delivery of such securities. These transactions
are subject to market risk as the value or yield of a security at delivery may
be more or less than the purchase price or the yield generally available on
securities when delivery occurs. In addition, the Fund is subject to
counterparty risk because it relies on the buyer or seller, as the case may be,
to consummate the transaction, and failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. The Fund will only
11
<PAGE> 49
make commitments to purchase such securities with the intention of actually
acquiring these securities, but the Fund may sell these securities prior to
settlement if it is deemed advisable. No specific limitation exists as to the
percentage of the Fund's assets which may be used to acquire securities on a
"when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities or yield
differentials or for other reasons. The Fund's portfolio turnover is shown under
the heading "Financial Highlights." The portfolio turnover rate may vary from
year to year. A high portfolio turnover rate (100% or more) increases a fund's
transactions costs, (including brokerage commissions or dealer costs), and a
high portfolio turnover rate may result in the realization of more short-term
capital gains than if a fund had a lower portfolio turnover rate. Increases in a
fund's transaction costs would adversely impact the fund's performance. The
turnover rate will not be a limiting factor, however, if the Fund's investment
adviser considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may invest on a temporary basis a portion or all
of its assets in high-quality, short-term municipal obligations. If such
municipal securities are not available or, in the judgment of the Fund's
investment adviser, do not afford sufficient protection against adverse market
conditions, the Fund may invest in taxable obligations. Such taxable obligations
may include securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities, other investment grade quality debt securities, prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. In taking such a defensive position the Fund would not be
pursuing and may not achieve its investment objective.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $90 billion under management or supervision as of
December 31, 1999. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly
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<PAGE> 50
fee computed based upon an annual rate applied to the average daily net assets
of the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- ------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.525%
......................................................
Next $500 million 0.500%
......................................................
Next $500 million 0.475%
......................................................
Over $1,500 million 0.450%
......................................................
</TABLE>
The Fund's average daily 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.
Applying this fee schedule, the effective advisory fee rate was 0.50% of the
Fund's average daily net assets for the Fund's fiscal year ended September 30,
1999.
Under the Advisory Agreement, the Adviser furnishes offices, necessary
facilities and equipment and provides administrative services to the Fund. The
Fund also pays all charges and expenses of its day-to-day operations, including
service fees, distribution fees, custodial fees, legal and independent
accountant fees, the costs of reports and proxies to shareholders, compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments) and all other ordinary business
expenses not specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Joseph A. Piraro, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since May 1992.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments must be at least $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and service plan (each as described below) under
which its distribution fee and/or service fee is paid, (iii) each class of
shares has different exchange privileges, (iv) certain classes of shares are
subject to a conversion feature and (v) certain classes of shares have different
shareholder service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the
13
<PAGE> 51
daily expense accruals of the higher distribution fees and transfer agency costs
applicable to the Class B Shares and Class C Shares and the differential in the
dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays or any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund's Board of Trustees reserves the right to
calculate the net asset value per share and adjust the offering price based
thereon more frequently than once daily if deemed desirable. Net asset value per
share for each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities for which market quotations are not readily available and other
assets are valued at their fair value as determined in good faith by the Adviser
in accordance with procedures established by the Board of Trustees of the Fund.
Short-term investments with remaining maturities of 60 days or less are valued
at cost plus interest earned (amortized cost) which approximates market value.
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. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders and the maintenance of such shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
such class of shares. To assist investors in comparing classes of shares, the
tables under the heading "Fees and Expenses of the Fund" provide a summary of
sales charges and expenses and an example of the sales charges and expenses of
the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of
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<PAGE> 52
business are priced based on the date of the next computed net asset value per
share provided they are received by Investor Services prior to Investor
Services' close of business on such date. It is the responsibility of authorized
dealers to transmit orders received by them to Investor Services so they will be
received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and Service Plan, the Fund may spend up to a total
of 0.25% per year of the Fund's average daily net assets with respect to the
Class A Shares of the Fund. From such amount, under the Service Plan, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within six years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
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<PAGE> 53
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class B Shares of the
Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan Class B Shares received on such shares, automatically convert to Class A
Shares eight years after the end of the calendar month in which the shares were
purchased. Class B Shares purchased before June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, automatically convert
to Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C Shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar month in which
such shares were purchased. Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. The conversion schedule applicable to a share of the Fund acquired
through the exchange privilege from another Van Kampen fund participating in the
exchange program is determined by reference to the Van Kampen fund from which
such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by
involuntary liquidation by the Fund of a shareholder's account as described
under the heading "Redemption
16
<PAGE> 54
of Shares." Subject to certain limitations, a shareholder who has redeemed Class
C Shares of the Fund may reinvest in Class C Shares at net asset value with
credit for any contingent deferred sales charge if the reinvestment is made
within 180 days after the redemption. For a more complete description of
contingent deferred sales charge waivers, please refer to the Fund's Statement
of Additional Information or contact your authorized dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a " company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds over a 13-month period
based on the total amount of intended purchases plus the value of all shares of
the Participating Funds previously purchased and still owned. An investor may
elect to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
The initial purchase must be for an amount equal to at least 5% of the minimum
total purchase amount of the level selected. If trades not initially made under
a Letter of Intent subsequently qualify for a lower sales charge through the
90-day backdating provisions, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower sales charge. Such adjustment
in sales charge will be used to purchase additional shares for the shareholder
with the applicable sales charge. The Fund initially will escrow shares totaling
5% of the dollar amount of the Letter of Intent to be held by Investor Services
in the name of the shareholder. In the event the Letter of Intent goal is not
achieved within the specified period, the investor must pay the difference
between the sales charge applicable to the purchases made and the reduced sales
charges previously paid. Such payments may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform
17
<PAGE> 55
criteria relating to cost savings by the Fund and the Distributor. The total
sales charge for all other investments made from unit investment trust
distributions will be 1.00% of the offering price (1.01% of net asset value). Of
this amount, the Distributor will pay to the authorized dealer, if any, through
which such participation in the qualifying program was initiated 0.50% of the
offering price as a dealer concession or agency commission. Persons desiring
more information with respect to this program, including the terms and
conditions that apply to the program, should contact their authorized dealer or
the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
In order to obtain these special benefits, all dividends and other distributions
by the Fund must be reinvested in additional shares and there can not be any
systematic withdrawal program. There will be no minimum for reinvestments from
unit investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
(2) Current or retired directors, officers and em-ployees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by nonprofit organizations
defined under Section 501(c)(3) of the Code and assets held by
18
<PAGE> 56
an employer or trustee in connection with an eligible deferred compensation
plan under Section 457 of the Code. Such plans will qualify for purchases at
net asset value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (1) the
total plan assets are at least $1 million or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have received
proposals from the Distributor prior to January 1, 2000 based on net asset
value purchase privileges previously in effect will be qualified to purchase
shares of the Participating Funds at net asset value. Section 403(b) and
similar accounts for which Van Kampen Trust Company serves as custodian will
not be eligible for net asset value purchases based on the aggregate
investment made by the plan or the number of eligible employees, except
under certain uniform criteria established by the Distributor from time to
time. For purchases on February 1, 1997 and thereafter, a commission will be
paid as follows: 1.00% on sales to $2 million, plus 0.80% on the next $1
million, plus 0.50% on the next $47 million, plus 0.25% on the excess over
$50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy holders
of an insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers
who initiate and are responsible for such sales to each individual as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million and
0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian/trustee of a
retirement plan account may involve additional fees charged by the dealer or
custodian/trustee.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the redemption request and any other necessary
documents in proper form as described below. Such
19
<PAGE> 57
payment may be postponed or the right of redemption suspended as provided by the
rules of the SEC. Such payment may, under certain circumstances, be paid wholly
or in part by a distribution-in-kind of portfolio securities which may result in
brokerage costs and a gain or loss for federal income tax purposes when such
securities are sold. If the shares to be redeemed have been recently purchased
by check, Investor Services may delay the payment of redemption proceeds until
it confirms the purchase check has cleared, which may take up to 15 days. A
taxable gain or loss will be recognized by the shareholder upon redemption of
shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares to be redeemed, the Fund name and class
designation of such shares and the shareholder's account number. The redemption
request must be signed by all persons in whose names the shares are registered.
Signatures must conform exactly to the account registration. If the proceeds of
the redemption exceed $50,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the record address has changed within
the previous 30 days, signature(s) must be guaranteed by one of the following: a
bank or trust company; a broker-dealer; a credit union; a national securities
exchange, registered securities association or clearing agency; a savings and
loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by a corporation,
partnership, trust, fiduciary, executor or administrator, or other legal entity
and the name and title of the individual(s) authorizing such redemption is not
shown in the account registration, a copy of the corporate resolution or other
legal documentation appointing the authorized signer and certified within the
prior 120 days must accompany the redemption request. Retirement plan
distribution requests should be sent to the custodian/trustee to be forwarded to
Investor Services. Contact the custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the application form
accompanying the prospectus. For accounts that are not established with
telephone redemption privileges, a shareholder may call the Fund at (800)
341-2911 to request that a copy of the Telephone Redemption Authorization form
be sent to the shareholder for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. Shares may also be redeemed by
phone through FundInfo(R) (automated phone system) to the shareholder's bank
account of record 24 hours a day, seven days a week at (800) 847-2424. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine.
20
<PAGE> 58
Telephone redemptions may not be available if the shareholder cannot reach
Investor Services by telephone, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
other redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for most
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. If a redemption
is requested through FundInfo(R), transactions are sent to the pre-designated
bank account of record only. Proceeds from redemptions payable by wire transfer
are expected to be wired on the next business day following the date of
redemption. The Fund reserves the right at any time to terminate, limit or
otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare daily and distribute monthly all,
or substantially all, of its net investment income as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting
21
<PAGE> 59
dividends and capital gain dividends in shares of the Fund. Such shares are
acquired at net asset value per share (without sales charge) on the applicable
payable date of the dividend or capital gain dividend distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 341-2911 ((800) 421-2833
for the hearing impaired) or by writing to Investor Services. The investor may,
on the initial application or prior to any declaration, instruct that dividends
and/or capital gains be paid in cash be reinvested in the Fund at net asset
value, or be invested in another Van Kampen fund at net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may appoint
Investor Services as agent by completing the Authorization for Redemption by
Check form and the appropriate section of the application and returning the form
and the application to Investor Services. Once the form is properly completed,
signed and returned to the agent, a supply of checks drawn on State Street Bank
and Trust Company (the "Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A Share account by Investor Services at the next determined
net asset value per share. Check writing redemptions represent the sale of Class
A Shares. Any gain or loss realized on the redemption of shares is a taxable
event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or by the Bank. Retirement plans and accounts that are subject to backup
withholding are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from an authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
22
<PAGE> 60
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684 through FundInfo(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
telephone exchange privileges unless the shareholder indicates otherwise by
checking the applicable box on the application form accompanying the prospectus.
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain dividend options (except
dividend diversification) and authorized dealer of record as the account from
which shares are exchanged, unless otherwise specified by the shareholder. In
order to establish a systematic withdrawal plan for the new account or reinvest
dividends from the new account into another fund, however, an exchanging
shareholder must submit a specific request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
and other Participating Funds may restrict exchanges by shareholders engaged in
excessive trading by limiting or disallowing the exchange privileges to such
shareholders. For further information on these restrictions see the Statement of
Additional Information. The Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
FEDERAL INCOME
TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax
23
<PAGE> 61
purposes. Exempt-interest dividends are included in determining what portion, if
any, of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its income (consisting generally
of tax-exempt interest, taxable income and net short-term capital gains) will
constitute tax-exempt interest, a significant portion of the Fund's income may
consist of investment company taxable income. Distributions of investment
company taxable income (generally taxable income and net short-term capital
gain) are taxable to shareholders as ordinary income to the extent of the Fund's
earnings and profits, whether paid in cash or reinvested in additional shares.
Distributions of the Fund's net capital gains (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Fund have been held by such shareholders. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt-interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held as a capital
asset, the gain or loss will be a capital gain or loss. Any recognized capital
gains may be taxed at different rates depending on how long the shareholder held
such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct
24
<PAGE> 62
taxpayer identification number (in the case of individuals, their social
security number) and certain required certifications or who are otherwise
subject to backup withholding.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income and at least
90% of its net tax-exempt interest, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only. The
exemption of interest income for federal income tax purposes may not result in
similar exemptions under the laws of a particular state or local taxing
authority. Income distributions may be taxable to shareholders under state or
local law as dividend income even though a portion of such distributions may be
derived from interest on tax-exempt obligations which, if realized directly,
would be exempt from such income taxes. The Fund will report annually to its
shareholders the percentage and source, on a state-by-state basis, of interest
income earned on municipal securities received by the Fund during the preceding
calendar year. Dividends and distributions paid by the Fund from sources other
than tax-exempt interest are generally subject to taxation at the state and
local levels. Prospective investors should consult their own tax advisers
regarding the specific federal tax consequences of purchasing, holding, and
disposing of shares, as well as the effects of state, local and foreign tax law
and any proposed tax law changes.
25
<PAGE> 63
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
Nine Months
Year Ended Ended
September 30, September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $19.956 $19.631 $19.238 $19.549 $17.572 $19.857
------- ------- -------- -------- -------- --------
Net Investment Income...................................... .914 .710 .974 .980 1.021 1.051
Net Realized and Unrealized Gain/Loss...................... (1.641) .371 .551 (.304) 1.982 (2.280)
------- ------- -------- -------- -------- --------
Total from Investment Operations............................ (.727) 1.081 1.525 .676 3.003 (1.229)
------- ------- -------- -------- -------- --------
Less:
Distributions from and in Excess of Net Investment
Income................................................... .914 .720 .971 .987 1.026 1.056
Distributions from Net Realized Gain....................... .234 .036 .161 -0- -0- -0-
------- ------- -------- -------- -------- --------
Total Distributions......................................... 1.148 .756 1.132 .987 1.026 1.056
------- ------- -------- -------- -------- --------
Net Asset Value, End of the Period.......................... $18.081 $19.956 $19.631 $19.238 $19.549 $17.572
======= ======= ======== ======== ======== ========
Total Return (a)............................................ (3.80%) 5.61%* 8.19% 3.65% 17.49% (6.31%)
Net Assets at End of the Period (In millions)............... $1,178.3 $1,353.9 $1,283.5 $1,283.7 $1,365.4 $1,110.2
Ratio of Expenses to Average Net Assets (b)................. .92% .90% .92% .95% .88% .88%
Ratio of Net Investment Income to Average Net Assets (b).... 4.77% 4.85% 5.07% 5.11% 5.44% 5.70%
Portfolio Turnover.......................................... 92% 62%* 82% 92% 70% 48%
<CAPTION>
Class B Shares
Nine Months
Year Ended Ended
September 3 September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $19.957 $19.634 $19.240 $19.549 $17.563 $19.824
------- ------- ------- ------- ------- -------
Net Investment Income...................................... .769 .598 .826 .832 .890 .899
Net Realized and Unrealized Gain/Loss...................... (1.643) .370 .551 (.304) 1.978 (2.276)
------- ------- ------- ------- ------- -------
Total from Investment Operations............................ (.874) .968 1.377 .528 2.868 (1.377)
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment
Income................................................... .765 .609 .822 .837 .882 .884
Distributions from Net Realized Gain....................... .036 .161 -0- -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions......................................... .999 .645 .983 .837 .882 .884
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $18.084 $19.957 $19.634 $19.240 $19.549 $17.563
======= ======= ======= ======= ======= =======
Total Return (a)............................................ (4.60%) 5.07%* 7.36% 2.83% 16.67% (7.03%)
Net Assets at End of the Period (In millions)............... $56.8 $71.9 $70.1 $71.6 $75.3 $30.0
Ratio of Expenses to Average Net Assets (b)................. 1.68% 1.66% 1.69% 1.74% 1.67% 1.71%
Ratio of Net Investment Income to Average Net Assets (b).... 3.99% 4.08% 4.29% 4.38% 4.69% 4.88%
Portfolio Turnover.......................................... 92% 62%* 82% 92% 70% 48%
<CAPTION>
Class C Shares
Nine Months
Year Ended Ended
September 3 September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $19.952 $19.630 $19.239 $19.548 $17.568 $19.823
------- ------- ------- ------- ------- -------
Net Investment Income...................................... .763 .594 .822 .830 .883 .908
Net Realized and Unrealized Gain/Loss...................... (1.636) .373 .552 (.302) 1.979 (2.279)
------- ------- ------- ------- ------- -------
Total from Investment Operations............................ (.873) .967 1.374 .528 2.862 (1.371)
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment
Income................................................... .765 .609 .822 .837 .882 .884
Distributions from Net Realized Gain....................... .234 .036 .161 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions......................................... .999 .645 .983 .837 .882 .884
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $18.080 $19.952 $19.630 $19.239 $19.548 $17.568
======= ======= ======= ======= ======= =======
Total Return (a)............................................ (4.55%) 5.02%* 7.36% 2.83% 16.60% (6.98%)
Net Assets at End of the Period (In millions)............... $8.3 $6.8 $5.6 $4.9 $5.1 $3.5
Ratio of Expenses to Average Net Assets (b)................. 1.68% 1.66% 1.69% 1.74% 1.67% 1.70%
Ratio of Net Investment Income to Average Net Assets (b).... 3.99% 4.06% 4.29% 4.37% 4.68% 4.89%
Portfolio Turnover.......................................... 92% 62%* 82% 92% 70% 48%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to the
Adviser's reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
26
<PAGE> 64
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson Paul G. Yovovich
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Dennis J. McDonnell*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
Edward C. Wood III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
Stephen L. Boyd*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer & Treasurer
Curtis W. Morell*
Vice President & Chief Accounting Officer
Tanya M. Loden*
Controller
* "Interested Persons" of the Fund, as defined in the Investment Company Act of
1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN INSURED TAX FREE INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Insured Tax Free Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Insured Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 65
VAN KAMPEN
INSURED TAX FREE
INCOME FUND
PROSPECTUS
JANUARY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]) or by writing the
Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act
File No. is 811-4386.
TFIN PRO 1/00
<PAGE> 66
[VAN KAMPEN FUNDS LOGO]
VAN KAMPEN
CALIFORNIA INSURED
TAX FREE FUND
Van Kampen California Insured Tax Free Fund is a mutual fund with the investment
objective to provide only California investors with a high level of current
income exempt from federal and California income taxes, with liquidity and
safety of principal, primarily through investment in a diversified portfolio of
insured California municipal securities. The Fund is designed for investors who
are residents of California for tax purposes.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
This prospectus is dated JANUARY 28, 2000.
<PAGE> 67
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 6
Investment Objective, Policies and Risks........... 7
Investment Advisory Services....................... 13
Purchase of Shares................................. 14
Redemption of Shares............................... 20
Distributions from the Fund........................ 22
Shareholder Services............................... 22
California Taxation................................ 24
Federal Income Taxation............................ 25
Financial Highlights............................... 27
</TABLE>
<PAGE> 68
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the investment objective to provide only
California investors with a high level of current income exempt from federal and
California income taxes, with liquidity and safety of principal, primarily
through investment in a diversified portfolio of insured California municipal
securities.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing substantially all of the Fund's
total assets in a portfolio of California municipal securities that are insured
at the time of purchase as to timely payment of principal and interest by a top-
rated private insurance company. The Fund is designed for investors who are
residents of California for tax purposes.
The Fund buys and sells California municipal securities with a view towards
seeking a high level of current income exempt from federal and California income
taxes and selects securities which the Fund's investment adviser believes entail
reasonable credit risk considered in relation to the investment policies of the
Fund. In selecting securities for investment, the Fund's investment adviser uses
its research capabilities to identify and monitor attractive investment
opportunities and to seek to protect the Fund's portfolio from early payment by
issuers of such securities. In conducting its research and analysis, the Fund's
investment adviser considers a number of factors, including general market and
economic conditions and credit, interest rate and prepayment risks. Portfolio
securities are typically sold when the Fund's investment adviser's assessment of
any of these factors materially change. Although the Fund invests in insured
municipal securities, insurance does not protect the Fund from market
fluctuations in the value of an insured security, but only guarantees timely
payment of principal and interest of such investments.
Under normal market conditions, the Fund may invest up to 20% of its assets in
municipal securities that are subject to federal alternative minimum tax. The
Fund may purchase or sell securities on a when-issued or delayed delivery basis.
The Fund may purchase or sell certain derivative instruments (such as options,
futures, options on futures, and interest rate swaps or other interest rate
related transactions) for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. The Fund has no policy limiting the maturities of its
investments. To the extent that the Fund invests in securities with longer
maturities, the Fund will be subject to greater market risk than a fund
investing solely in shorter-term securities.
Generally, the Fund's municipal securities are insured as to timely payment of
principal and interest by a top-rated private insurance company. This insurance
does not, however, guarantee that the prices of these securities will remain
stable during interest rate changes.
Market risk is often greater among certain types of debt securities, such as
zero-coupon bonds. As interest rates change, these securities often fluctuate
more in price than traditional debt securities and may
-
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investor's home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
3
<PAGE> 69
subject the Fund to greater market risk than a fund that does not own these
types of securities
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Credit risk should be low for the Fund because it
invests substantially all of its assets in insured municipal securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests substantially all of its assets in
insured municipal securities. The yields of municipal securities, or of insured
municipal securities, may move differently and adversely compared to the yields
of the overall debt securities markets. While the interest received from
municipal securities generally is exempt from federal income tax, the Fund may
invest up to 20% of its net assets in municipal securities subject to federal
alternative minimum tax. In addition, there could be changes in applicable tax
laws or tax treatments that reduce or eliminate the current federal income tax
exemption on municipal securities or otherwise adversely affect the current
federal or state tax status of municipal securities.
STATE-SPECIFIC RISKS. Because the Fund invests substantially all of its total
assets in a portfolio of California municipal securities, the Fund is more
susceptible to political, economic, regulatory or other factors affecting
issuers of California municipal securities than a fund that does not limit its
investments to such issuers.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures, options on futures, and
interest rate swaps or other interest rate-related transactions are examples of
derivatives. Derivative instruments involve risks different from direct
investment in underlying securities. These risks include imperfect correlation
between the value of the instruments and the underlying assets; risks of default
by the other party to certain transactions; risks that the transactions may
result in losses that partially or completely offset gains in portfolio
positions; risks that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek current income
- - Are in a high federal income tax bracket
- - Are subject to California income tax
- - Wish to add to their investment portfolio a fund that invests substantially
all of its assets in insured California municipal securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
4
<PAGE> 70
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the ten calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
BAR GRAPH
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1990 7.44
'1991 9.98
'1992 10.08
'1993 14.60
'1994 -8.75
'1995 18.28
'1996 4.20
'1997 8.93
'1998 6.33
'1999 -5.09
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the ten-year period shown in the bar chart, the highest quarterly return
was 7.63% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -7.62% (for the quarter ended March 31, 1994).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Lehman Brothers Municipal
Bond Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charges paid by investors. The index's
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing the securities represented by the index. Average
annual total returns are shown for the periods ended December 31, 1999 (the most
recently completed calendar year prior to the date of this prospectus). Remember
that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
Average Annual Past 10
Total Returns for Years
the Periods Ended Past Past or Since
December 31, 1999 1 Year 5 Years Inception
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen California
Insured Tax Free Fund
--
Class A Shares -8.16% 5.56% 5.96%
Lehman Brothers
Municipal Bond Index -2.06% 6.91% 6.89%
............................................................
Van Kampen California
Insured Tax Free Fund
--
Class B Shares -8.52% 5.45% 3.76% (1)
Lehman Brothers
Municipal Bond Index -2.06% 6.91% 5.40% (1)
............................................................
Van Kampen California
Insured Tax Free Fund
--
Class C Shares -6.72% 5.45% 3.15% (2)
Lehman Brothers
Municipal Bond Index -2.06% 6.91% 6.85% (2)
............................................................
</TABLE>
Inception dates: (1) 5/1/93, (2) 8/13/93.
* The Lehman Brothers Municipal Bond Index is a broad based, statistical
composite of municipal bonds.
The current yield for the thirty-day period ended September 30, 1999 is 4.56%
for Class A Shares, 3.95% for Class B Shares and 3.99% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
5
<PAGE> 71
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ----------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 3.25%(1) None None
..........................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) 3.00%(3) 1.00%(4)
..........................................................
Maximum sales charge
(load) imposed on
reinvested dividends None None None
..........................................................
Redemption fees None None None
..........................................................
Exchange fee None None None
..........................................................
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees 0.47% 0.47% 0.47%
...............................................................
Distribution and/or
service (12b-1) 0.24% 1.00%(6) 1.00%(6)
Fees(5)
...............................................................
Other expenses 0.21% 0.21% 0.22%
...............................................................
Total annual fund
operating expenses 0.92% 1.68% 1.69%
...............................................................
</TABLE>
(1) Reduced for purchases of $25,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 3.00% in the first and second year
after purchase, declining thereafter as follows:
Year 1-3.00%
Year 2-2.50%
Year 3-2.00%
Year 4-1.00%
After-None
See "Purchase of Shares -- Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(6) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $416 $609 $818 $1,420
.....................................................................
Class B Shares $471 $730 $913 $1,599*
.....................................................................
Class C Shares $272 $533 $918 $1,998
.....................................................................
</TABLE>
6
<PAGE> 72
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $416 $609 $818 $1,420
.....................................................................
Class B Shares $171 $530 $913 $1,599*
.....................................................................
Class C Shares $172 $533 $918 $1,998
.....................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVE,
POLICIES AND RISKS
The Fund's investment objective is to provide only California investors with a
high level of current income exempt from federal and California income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured California municipal securities. The Fund's
investment objective is a fundamental policy and may not be changed without
shareholder approval of a majority of the Fund's outstanding voting securities,
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
There are risks inherent in all investments in securities; accordingly, there
can be no assurance that the Fund will achieve its investment objective.
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing substantially all of the Fund's
total assets in California municipal securities that are insured at the time of
purchase as to timely payment of principal and interest by an entity whose
claims-paying ability is rated AAA by Standard and Poor's ("S&P") or Aaa by
Moody's Investors Service, Inc. ("Moody's") or an equivalent rating by another
nationally recognized statistical rating organization ("NRSRO"). The Fund is
designed for investors who are residents of California for tax purposes.
The Fund's investment adviser actively manages the Fund's portfolio and adjusts
the average maturity of portfolio investments based upon its expectations about
the direction of interest rates and other economic factors. In selecting
securities for investment, the Fund's investment adviser uses its research
capabilities to identify and monitor attractive investment opportunities and to
seek to protect the Fund's portfolio from early payment by issuers of such
securities. In conducting its research and analysis, the Fund's investment
adviser considers a number of factors, including general market and economic
conditions and credit, interest rate and prepayment risks. Portfolio securities
are typically sold when the Fund's investment advisers's assessment of any of
these factors materially change. Although the Fund invests in insured municipal
securities, insurance does not protect the Fund from market fluctuations in the
value of an insured security, but only guarantees timely payment of principal
and interest of such investments.
The Fund's investment adviser buys and sells securities for the Fund's portfolio
with a view towards seeking a high level of current income exempt from federal
and California income taxes and selects securities that it believes entail
reasonable credit risk considered in relation to the investment policies of the
Fund. As a result, the Fund will not necessarily invest in the highest yielding
California municipal securities permitted by its investment policies if the
Fund's investment adviser determines that market risks or credit risks
associated with such investments would subject the Fund's portfolio to undue
risk. The potential for realization of capital gains or losses resulting from
possible changes in interest rates will not be a major consideration and
frequency of portfolio turnover generally will not be a limiting factor if the
Fund's investment adviser considers it advantageous to purchase or sell
securities.
Under normal market conditions, the Fund may invest up to 20% of its net assets
in municipal securities that are subject to alternative minimum tax. From time
to time, the Fund temporarily may invest up to 10% of its total assets in tax
exempt money market funds, which are not insured, and such instruments will be
treated as investments in municipal securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Under
normal market conditions, at least 80% of
7
<PAGE> 73
the Fund's total assets will be invested in municipal securities. The policy
stated in the foregoing sentence is a fundamental policy of the Fund and may not
be changed without shareholder approval of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act. Under normal market conditions,
the Fund may invest up to 20% of its net assets in municipal securities that are
subject to federal alternative minimum tax.
California municipal securities are municipal securities, the interest on which,
in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of purchase, exempt from federal and California
income taxes. Distributions to corporations subject to the California franchise
tax will be included in such corporations' gross income for purposes of
determining the California franchise tax. In addition, corporations subject to
the California corporate income tax may, in certain circumstances, be subject to
such taxes with respect to distributions from the Fund. Accordingly, an
investment in shares of the Fund may not be appropriate for corporations subject
to either tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, maturity of the obligation and rating of the issue.
The ratings of S&P and Moody's represent their opinions of the quality of the
municipal securities they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate
8
<PAGE> 74
changes, or the interest rate may be a market rate that is adjusted at specified
intervals. The adjustment formula maintains the value of the variable rate
demand note at approximately the par value of such note at the adjustment date.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Custodial receipts are underwritten by securities dealers or
banks and evidence ownership of future interest payments, principal payments or
both on certain municipal securities. Participation certificates are obligations
issued by state or local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. Other than as set forth above, there is no limitation with respect to
the amount of the Fund's assets that may be invested in the foregoing types of
municipal securities. Certain of the municipal securities in which the Fund may
invest represent relatively recent innovations in the municipal securities
markets and the markets for such securities may be less developed than the
market for conventional fixed rate municipal securities. A more detailed
description of the types of municipal securities in which the Fund may invest is
included in the Fund's Statement of Additional Information. The Statement of
Additional Information can be obtained by investors free of charge as described
on the back cover of this prospectus.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Although the Fund invests substantially all of its total assets in municipal
securities that are insured at the time of purchase as to timely payment of
principal and interest, municipal securities, like other debt obligations, are
subject to the credit risk of nonpayment. 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 nonpayment would result in a reduction of income to the Fund, and could
result in a reduction in the value of the municipal securities experiencing
nonpayment and a potential decrease in the net asset value of the Fund. In
addition, the Fund may incur expenses to work out or restructure a distressed or
defaulted security.
The Fund may invest up to 20% of its net assets in municipal securities that are
subject to federal alternative minimum tax. Accordingly, the Fund may not be a
suitable investment for investors who are already subject to the federal
alternative minimum tax or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having
9
<PAGE> 75
similar characteristics. The issuers may be located in the same geographic area
or may pay their interest obligations from revenue of similar projects, such as
hospitals, airports, utility systems and housing finance agencies. This may make
the Fund's investments more susceptible to similar economic, political or
regulatory occurrences. As the similarity in issuers increases, the potential
for fluctuation in the Fund's net asset value also increases. The Fund may
invest more than 25% of its total assets in a segment of the municipal
securities market with similar characteristics if the Fund's investment adviser
determines that the yields available from obligations in a particular segment
justify the additional risks of a larger investment in such segment. The Fund
may not, however, invest more than 25% of its total assets in industrial
development revenue bonds issued for companies in the same industry. Sizeable
investments in such obligations could involve an increased risk to the Fund
should any of such issuers or any such related projects or facilities experience
financial difficulties.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
INSURED MUNICIPAL SECURITIES
The Fund invests substantially all of its total assets in a portfolio of
municipal securities that are insured at the time of investment as to timely
payment of principal and interest by a top-rated private insurance company. Such
insurance could be provided as: Original Issue Insurance, Secondary Market
Insurance or Portfolio Insurance. Original Issue Insurance is purchased with
respect to a particular issue of municipal securities by the issuer thereof or a
third party in conjunction with the original issue of such municipal securities.
Secondary Market Insurance is purchased by the Fund or a third party subsequent
to the time of original issuance of a municipal security. Both Original Issue
Insurance and Secondary Market Insurance remain in effect as long as the
municipal securities covered thereby remain outstanding and the insurer remains
in business, regardless of whether the Fund ultimately disposes of such
municipal securities. Portfolio Insurance may be purchased by the Fund with
respect to municipal securities which the Fund intends to purchase or already
owns and would generally terminate when the municipal security is sold by the
Fund or redeemed. There is no limitation on the percentage of the Fund's assets
that may be invested in municipal securities insured by any type of insurance or
by any given insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio Insurance
generally do not insure payment on an accelerated basis, the payment of any
redemption premium or the market value of the Fund's portfolio securities. Such
insurance also does not insure against nonpayment of principal or interest on
municipal securities resulting from the insolvency, negligence or any other act
or omission of the trustee or other paying agent for such obligations.
The Fund invests in municipal securities insured by insurers whose claims-paying
ability is rated AAA by S&P, Aaa by Moody's or the equivalent by another NRSRO
at the time of the Fund's investment. A subsequent downgrade by S&P, Moody's or
another NRSRO of an insurer's claims-paying ability may result in increased
credit risk of the municipal securities insured by such insurer and may result
in a downgrade of the rating assigned to the municipal securities insured by
such insurer. The securities could experience a decrease in market price as a
result of such a downgrade. In the event the ratings assigned to such municipal
securities decline to below investment grade, such municipal securities would
probably become less liquid or even illiquid. There can be no assurance that an
insurer will be able to honor its obligations with respect to municipal
securities in the Fund's portfolio. For more information on insurance and a
description of S&P's and Moody's claims-paying ability ratings of insurers, see
the Statement of Additional Information.
SPECIAL CONSIDERATIONS REGARDING
CALIFORNIA MUNICIPAL SECURITIES
The Fund invests substantially all of its total assets in a portfolio of
California municipal securities, which are municipal securities the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal and California
income taxes. Because the Fund invests substantially all of its total assets in
California municipal securities, the Fund is more susceptible to political,
economic, regulatory or
10
<PAGE> 76
other factors affecting issuers of California municipal securities than a fund
which does not limit its investments to such issuers. These risks include
possible legislative, state constitutional or regulatory amendments that may
affect the ability of state and local governments or regional governmental
authorities to raise money to pay principal and interest on their municipal
securities. Economic, fiscal and budgetary conditions throughout the state may
also influence the Fund's performance.
The following information is a summary of a more detailed description of certain
factors affecting California municipal securities which is contained in the
Statement of Additional Information. Investors should obtain a copy of the
Statement of Additional Information for the more detailed discussion of such
factors. Such information is derived from certain official statements of the
State of California published in connection with the issuance of specific
California municipal securities, as well as from other publicly available
documents. Such information has not been independently verified by the Fund and
may not apply to all California municipal securities acquired by the Fund. The
Fund assumes no responsibility for the completeness or accuracy of such
information.
California state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of
California and the nation as a whole. With respect to an investment in the Fund,
through popular initiative and legislative activity, the ability of the State of
California and its local governments to raise money through property taxes and
to increase spending has been the subject of considerable debate and change in
recent years. Various State Constitutional amendments, for example, have been
adopted which have the effect of limiting property tax and spending increases,
while legislation has sometimes added to these limitations and has at other
times sought to reduce their impact. To date, these Constitutional, legislative
and budget developments do not appear to have severely decreased the ability of
the State and local governments to pay principal and interest on their
obligations. It can be expected that similar types of State legislation or
Constitutional proposals will continue to be introduced. The impact of future
developments in these areas is unclear.
Although revenue obligations of the State of California or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of the portfolio of the Fund or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.
The value of California municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.
There can be no assurance that there will not be a decline in economic
conditions or that particular California municipal securities in the portfolio
of the Fund will not be adversely affected by any such changes.
More detailed information concerning California municipal securities and the
State of California is included in the Statement of Additional Information.
DERIVATIVE INSTRUMENTS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and other interest rate indices and other financial instruments,
purchase and sell financial futures contracts and options on futures and enter
into various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of 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
-
11
<PAGE> 77
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the investment adviser's
ability to predict pertinent market movements, which cannot be assured. The Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions have risks associated with them including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default by the other party to the transaction, illiquidity of the
derivative instrument and, to the extent the investment adviser's view as to
certain market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale of
portfolio securities at inopportune times or for prices other than at current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the risk management or hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and their risks are described more fully in the Fund's Statement of
Additional Information. Income earned or deemed to be earned by the Fund from
its Strategic Transactions, if any, generally will be taxable income of the
Fund.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may invest in zero-coupon securities which are debt securities that do
not entitle the holder to any periodic payment of interest prior to maturity or
a specified date when the securities begin paying current interest. They are
issued and traded at a discount from their face amounts or par value, which
discount varies depending on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the perceived credit
quality of the issuer. Because such securities do not entitle the holder to any
periodic payments of interest prior to maturity, this prevents any reinvestment
of interest payments at prevailing interest rates if prevailing interest rates
rise. On the other hand, because there are no periodic interest payments to be
reinvested prior to maturity, "zero-coupon" securities eliminate the
reinvestment risk and may lock in a favorable rate of return to maturity if
interest rates drop. The amount of non-cash interest income earned on
zero-coupon securities is included, for federal income tax purposes, in the
Fund's calculation of income that is required to be distributed to shareholders
for the Fund to maintain its desired federal income tax status (even though such
non-cash paying securities do not provide the Fund with the cash flow with which
to pay such distributions). Accordingly, the Fund may be required to borrow or
to liquidate portfolio securities at a time that it otherwise would not have
done so in order to make such distributions. The Fund's investment adviser will
weigh these concerns against the expected total returns from such instruments.
The Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on securities in connection with such transactions prior to
the date the Fund actually takes delivery of such securities. These transactions
are subject to market risk as the value or yield of a security at delivery may
be more or less than the purchase price or the yield generally available on
securities when delivery occurs. In addition, the Fund is subject to
counterparty risk because it relies on the
-
12
<PAGE> 78
buyer or seller, as the case may be, to consummate the transaction, and failure
by the other party to complete the transaction may result in the Fund missing
the opportunity of obtaining a price or yield considered to be advantageous. The
Fund will only make commitments to purchase such securities with the intention
of actually acquiring these securities, but the Fund may sell these securities
prior to settlement if it is deemed advisable. No specific limitation exists as
to the percentage of the Fund's assets which may be used to acquire securities
on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities or yield
differentials or for other reasons. The Fund's portfolio turnover is shown under
the heading "Financial Highlights." The portfolio turnover rate may vary from
year to year. A high portfolio turnover rate (100% or more) increases a fund's
transactions costs (including brokerage commissions or dealer costs) and a high
portfolio turnover rate may result in the realization of more short-term capital
gains than if a fund had a lower portfolio turnover rate. Increases in a fund's
transaction costs would adversely impact the fund's performance. The turnover
rate will not be a limiting factor, however, if the Fund's investment adviser
considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may invest on a temporary basis a portion or all
of its assets in high-quality, short-term California municipal obligations. If
such municipal obligations are not available or, in the investment adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in high-quality municipal securities of issuers other than
issuers of California municipal securities. Furthermore, if such high-quality
securities are not available or, in the investment adviser's judgment, do not
afford sufficient protection against adverse market conditions, the Fund may
invest in taxable obligations. Such taxable obligations may include in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, other investment grade quality income securities, prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. In taking such a defensive position, the Fund would not
be pursuing and may not achieve its investment objective.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $90 billion under management or supervision as of
December 31, 1999. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly
-
13
<PAGE> 79
fee computed based upon an annual rate applied to the average daily net assets
of the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C> <C> <C>
First $100 million 0.500%
.....................................................
Next $150 million 0.450%
.....................................................
Next $250 million 0.425%
.....................................................
Over $500 million 0.400%
.....................................................
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.48% of the
Fund's average daily net assets for the Fund's fiscal year ended September 30,
1999.
The Fund's average daily 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.
Under the Advisory Agreement, the Adviser furnishes offices, necessary
facilities and equipment and provides administrative services to the Fund. The
Fund pays all charges and expenses of its day-to-day operations, including
service fees, distribution fees, custodial fees, legal and independent
accountant fees, the costs of reports and proxies to shareholders, compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments) and all other ordinary business
expenses not specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Joseph A. Piraro, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since May 1992.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments must be at least $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and service plan (each as described below) under
which its distribution fee and/or service fee is paid, (iii) each class of
shares has different exchange privileges, (iv) certain classes of shares are
subject to a conversion feature and (v) certain classes of shares have different
shareholder service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes
14
<PAGE> 80
of shares may differ from one another, reflecting the daily expense accruals of
the higher distribution fees and transfer agency costs applicable to the Class B
Shares and Class C Shares and the differential in the dividends that may be paid
on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays or any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund's Board of Trustees reserves the right to
calculate the net asset value per share and adjust the offering price based
thereon more frequently than once daily if deemed desirable. Net asset value per
share for each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities for which market quotations are not readily available and other
assets are valued at their fair value as determined in good faith by the Adviser
in accordance with procedures established by the Board of Trustees of the Fund.
Short-term investments with remaining maturities of 60 days or less are valued
at cost plus interest earned (amortized cost) which approximates market value.
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. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class and the maintenance of the shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
such class of shares. To assist investors in comparing classes of shares, the
tables under the heading "Fees and Expenses of the Fund" provide a summary of
sales charges and expenses and an example of the sales charges and expenses of
the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business
15
<PAGE> 81
on such date. Orders received by authorized dealers or transmitted to Investor
Services after its close of business are priced based on the date of the next
computed net asset value per share provided they are received by Investor
Services prior to Investor Services' close of business on such date. It is the
responsibility of authorized dealers to transmit orders received by them to
Investor Services so they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 3.25% of the offering price (or 3.36% of the net amount
invested), reduced on investments of $25,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of Net
Size of Offering Amount
Investment Price Invested
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $25,000 3.25% 3.36%
...........................................................
$25,000 but less than
$250,000 2.75% 2.83%
...........................................................
$250,000 but less than
$500,000 1.75% 1.78%
...........................................................
$500,000 but less than
$1,000,000 1.50% 1.52%
...........................................................
$1,000,000 or more * *
...........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and Service Plan, the Fund may spend up to a total
of 0.25% per year of the Fund's average daily net assets with respect to the
Class A Shares of the Fund. From such amount, under the Service Plan, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within four years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 3.00%
................................................
Second 2.50%
................................................
Third 2.00%
................................................
Fourth 1.00%
................................................
Fifth and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from
16
<PAGE> 82
the time of payment for the purchase of Class B Shares until the time of
redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class B Shares of the
Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan Class B Shares received on such shares, automatically convert to Class A
Shares eight years after the end of the calendar month in which the shares were
purchased. Class B Shares purchased before June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, automatically convert
to Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar month in which
such shares were purchased. Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. The conversion schedule applicable to a share of the Fund acquired
through the exchange privilege from another Van Kampen fund is determined by
reference to the Van Kampen fund participating in the exchange program from
which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by
involuntary liquidation by the Fund of
17
<PAGE> 83
a shareholder's account as described under the heading "Redemption of Shares."
Subject to certain limitations, a shareholder who has redeemed Class C Shares of
the Fund may reinvest in Class C Shares at net asset value with credit for any
contingent deferred sales charge if the reinvestment is made within 180 days
after the redemption. For a more complete description of contingent deferred
sales charge waivers, please refer to the Fund's Statement of Additional
Information or contact your authorized dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds over a 13-month period
based on the total amount of intended purchases plus the value of all shares of
the Participating Funds previously purchased and still owned. An investor may
elect to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
The initial purchase must be for an amount equal to at least 5% of the minimum
total purchase amount of the level selected. If trades not initially made under
a Letter of Intent subsequently qualify for a lower sales charge through the
90-day backdating provisions, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower sales charge. Such adjustment
in sales charge will be used to purchase additional shares for the shareholder
with the applicable sales charge. The Fund initially will escrow shares totaling
5% of the dollar amount of the Letter of Intent to be held by Investor Services
in the name of the shareholder. In the event the Letter of Intent goal is not
achieved within the specified period, the investor must pay the difference
between the sales charge applicable to the purchases made and the reduced sales
charges previously paid. Such payments may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund, at net asset value per share and
18
<PAGE> 84
with no minimum initial or subsequent investment requirement, if the
administrator of an investor's unit investment trust program meets certain
uniform criteria relating to cost savings by the Fund and the Distributor. The
total sales charge for all other investments made from unit investment trust
distributions will be 1.00% of the offering price (1.01% of net asset value). Of
this amount, the Distributor will pay to the authorized dealer, if any, through
which such participation in the qualifying program was initiated 0.50% of the
offering price as a dealer concession or agency commission. Persons desiring
more information with respect to this program, including the terms and
conditions that apply to the program, should contact their authorized dealer or
the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
In order to obtain these special benefits, all dividends and other distributions
by the Fund must be reinvested in additional shares and there cannot be any
systematic withdrawal program. There will be no minimum for reinvestments from
unit investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families
and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21
years of age when purchasing for any accounts they beneficially own, or, in
the case of any such financial institution, when purchasing for retirement
plans for such institution's employees; provided that such purchases are
otherwise permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor
and which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code"), or custodial accounts held by a bank created
pursuant to
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<PAGE> 85
Section 403(b) of the Code and sponsored by nonprofit organizations defined
under Section 501(c)(3) of the Code and assets held by an employer or
trustee in connection with an eligible deferred compensation plan under
Section 457 of the Code. Such plans will qualify for purchases at net asset
value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (1) the
total plan assets are at least $1 million or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have received
proposals from the Distributor prior to January 1, 2000 based on net asset
value purchase privileges previously in effect will be qualified to
purchase shares of the Participating Funds at net asset value. Section
403(b) and similar accounts for which Van Kampen Trust Company serves as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. For purchases on February 1, 1997 and thereafter, a
commission will be paid as follows: 1.00% on sales to $2 million, plus
0.80% on the next $1 million, plus 0.50% on the next $47 million, plus
0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased
in each group's participants account in connection with this privilege will
be subject to a contingent deferred sales charge of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian/trustee of a
retirement plan account may involve additional fees charged by the dealer or
custodian/trustee.
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<PAGE> 86
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the request and any other necessary documents in
proper form as described below. Such payment may be postponed or the right of
redemption suspended as provided by the rules of the SEC. Such payment may,
under certain circumstances, be paid wholly or in part by a distribution-in-kind
of portfolio securities which may result in brokerage costs and a gain or loss
for federal income tax purposes when such securities are sold. If the shares to
be redeemed have been recently purchased by check, Investor Services may delay
the payment of redemption proceeds until it confirms the purchase check has
cleared, which may take up to 15 days. A taxable gain or loss will be recognized
by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares to be redeemed, the Fund name and class
designation of such shares and the shareholder's account number. The redemption
request must be signed by all persons in whose names the shares are registered.
Signatures must conform exactly to the account registration. If the proceeds of
the redemption exceed $50,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the record address has changed within
the previous 30 days, signature(s) must be guaranteed by one of the following: a
bank or trust company; a broker-dealer; a credit union; a national securities
exchange, registered securities association or clearing agency; a savings and
loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by a corporation,
partnership, trust, fiduciary, executor or administrator, or other legal entity,
and the name and title of the individual(s) authorizing such redemption is not
shown in the account registration, a copy of the corporate resolution or other
legal documentation appointing the authorized signer and certified within the
prior 120 days must accompany the redemption request. Retirement plan
distribution requests should be sent to the custodian/trustee to be forwarded to
Investor Services. Contact the custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the application form
accompanying the prospectus. For accounts that are not established with
telephone redemption privileges, a shareholder may call the Fund at (800)
341-2911 to request that a copy of the Telephone Redemption Authorization form
be sent to the shareholder for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. Shares may also be redeemed by
phone through FundInfo(R) (automated phone system) to the shareholders' bank
account of record 24 hours a day, seven days a week at (800) 847-2424. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
21
<PAGE> 87
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedure previously described.
Requests received by Investor Services prior to 4:00 p.m., New York time, will
be processed at the next determined net asset value per share. These privileges
are available for most accounts other than retirement accounts or accounts with
shares represented by certificates. If an account has multiple owners, Investor
Services may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. If a redemption
is requested through FundInfo(R), transactions are sent to the pre-designated
bank account of record only. Proceeds from redemptions payable by wire transfer
are expected to be wired on the next business day following the date of
redemption. The Fund reserves the right at any time to terminate, limit or
otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS
FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare daily and distribute monthly all,
or substantially all, of its net investment income as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting
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<PAGE> 88
dividends and capital gain dividends in shares of the Fund. Such shares are
acquired at net asset value per share (without sales charge) on the applicable
payable date of the dividend or capital gain dividend. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 341-2911 ((800) 421-2833 for the hearing
impaired) or by writing to Investor Services. The investor may, on the initial
application or prior to any declaration, instruct that dividends and/or capital
gains be paid in cash be reinvested in the Fund at net asset value, or be
reinvested in another Van Kampen fund at net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may appoint
Investor Services as agent by completing the Authorization for Redemption by
Check form and the appropriate section of the application and returning the form
and the application to Investor Services. Once the form is properly completed,
signed and returned to the agent, a supply of checks drawn on State Street Bank
and Trust Company (the "Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A Share account by Investor Services at the next determined
net asset value per share. Check writing redemptions represent the sale of Class
A Shares. Any gain or loss realized on the redemption of shares is a taxable
event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or by the Bank. Retirement plans and accounts that are subject to backup
withholding are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from an authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
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<PAGE> 89
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
telephone exchange privileges unless the shareholder indicates otherwise by
checking the applicable box on the application form accompanying the prospectus.
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain dividend options (except
dividend diversification) and authorized dealer of record as the account from
which shares are exchanged, unless otherwise specified by the shareholder. In
order to establish a systematic withdrawal plan for the new account or reinvest
dividends from the new account into another fund, however, an exchanging
shareholder must submit a specific request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
and other Participating Funds may restrict exchanges by shareholders engaged in
excessive trading by limiting or disallowing the exchange privileges to such
shareholders. For further information on these restrictions see the Statement of
Additional Information. The Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
CALIFORNIA TAXATION
Under existing California income tax law, if at the close of each quarter of the
Fund's taxable year at least 50% of the value of its total assets consists of
obligations that, when held by individuals, pay interest that is exempt from tax
under California law, shareholders of the Fund who are subject to the
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<PAGE> 90
California personal income tax will not be subject to such tax on distributions
with respect to their shares of the Fund to the extent that such distributions
are attributable to such tax-exempt interest from such obligations (less
expenses applicable thereto). If such distributions are received by a
corporation subject to the California franchise tax, however, the distributions
will be includable in its gross income for purposes of determining its
California franchise tax. Corporations subject to the California corporate
income tax may be subject to such taxes with respect to distributions from the
Fund. Under California personal property tax law, securities owned by the Fund
and any interest thereon are exempt from such personal property tax.
Generally, any proceeds paid to the Fund under an insurance policy which
represent matured interest on defaulted obligations should be exempt from
California personal income tax if, and to the same extent that, such interest
would have been exempt if paid by the issuer of such defaulted obligations.
California tax laws substantially incorporate those provisions of the Code
governing the treatment of regulated investment companies.
The state tax discussion set forth above is for general information only.
Prospective investors should consult their own tax advisers regarding the
specific state tax consequences of holding and disposing of shares, as well as
the effects of federal, local and foreign tax law and any proposed tax law
changes.
FEDERAL INCOME TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its income (consisting generally
of tax-exempt interest, taxable income and net short-term capital gains) will
constitute tax-exempt interest, a significant portion of the Fund's income may
consist of investment company taxable income. Distributions of investment
company taxable income (generally taxable income and net short-term capital
gain) are taxable to shareholders as ordinary income to the extent of the Fund's
earnings and profits, whether paid in cash or reinvested in additional shares.
Distributions of the Fund's net capital gains (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Fund have been held by such shareholders. Distributions
in
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<PAGE> 91
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt-interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held as a capital
asset, the gain or loss will be a capital gain or loss. Any recognized capital
gains may be taxed at different rates depending on how long the shareholder held
such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income and at least
90% of its net tax-exempt interest, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on the undistributed amounts.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
Year Ended Nine Months
September 30, Ended
1999 September 30, Year Ended December 31,
A 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $18.768 $18.294 $17.605 $17.736 $15.802 $18.286
------- ------- ------- ------- ------- -------
Net Investment
Income............ .824 .638 .880 .857 .884 .912
Net Realized and
Unrealized
Gain/Loss......... (1.447) .498 .658 (.145) 1.938 (2.484)
------- ------- ------- ------- ------- -------
Total from Investment
Operations.......... (.623) 1.136 1.538 .712 2.822 (1.572)
------- ------- ------- ------- ------- -------
Less Distributions
from and in Excess
of Net Investment
Income.............. .869 .662 .849 .843 .888 .912
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $17.276 $18.768 $18.294 $17.605 $17.736 $15.802
======= ======= ======= ======= ======= =======
Total Return* (a)..... (3.44%) 6.38%** 8.93% 4.20% 18.28% (8.75%)
Net Assets at End of
the Period (In
millions)........... $162.0 $151.0 $140.7 $142.5 $147.6 $130.3
Ratio of Expenses to
Average Net
Assets*............. .92% .88% .96% 1.02% .89% .78%
Ratio of Net
Investment Income to
Average Net
Assets*............. 4.52% 4.66% 4.96% 4.94% 5.23% 5.46%
Portfolio Turnover.... 44% 21%** 46% 35% 42% 56%
* If certain expenses had not been reimbursed by the Adviser, total return would have been
lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net
Assets.............. N/A N/A N/A 1.03% 1.05% 1.08%
Ratio of Net
Investment Income to
Average Net
Assets.............. N/A N/A N/A 4.94% 5.07% 5.16%
<CAPTION>
Class B Shares
Year Ended Nine Months
September 30, Ended
1999 September 30, Year Ended December 31,
B 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $18.758 $18.289 $17.603 $17.736 $15.805 $18.266
------- ------- ------- ------- ------- -------
Net Investment
Income............ .684 .526 .741 .720 .766 .785
Net Realized and
Unrealized
Gain/Loss......... (1.447) .506 .662 (.142) 1.926 (2.482)
------- ------- ------- ------- ------- -------
Total from Investment
Operations.......... (.763) 1.032 1.403 .578 2.692 (1.697)
------- ------- ------- ------- ------- -------
Less Distributions
from and in Excess
of Net Investment
Income.............. .735 .563 .717 .711 .761 .764
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $17.260 $18.758 $18.289 $17.603 $17.736 $15.805
======= ======= ======= ======= ======= =======
Total Return* (a)..... (4.20%) 5.76%** 8.19% 3.35% 17.33% (9.39%)
Net Assets at End of
the Period (In
millions)........... $45.3 $40.1 $31.0 $28.6 $24.6 $17.1
Ratio of Expenses to
Average Net
Assets*............. 1.68% 1.64% 1.72% 1.79% 1.61% 1.52%
Ratio of Net
Investment Income to
Average Net
Assets*............. 3.76% 3.89% 4.18% 4.17% 4.51% 4.71%
Portfolio Turnover.... 44% 21%** 46% 35% 42% 56%
* If certain expenses
lower and the ratios
Ratio of Expenses to
Average Net
Assets.............. N/A N/A N/A 1.79% 1.77% 1.82%
Ratio of Net
Investment Income to
Average Net
Assets.............. N/A N/A N/A 4.16% 4.35% 4.41%
<CAPTION>
Class C Shares
Year Ended Nine Months
September 30, Ended
1999 September 30, Year Ended December 31,
C 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $18.754 $18.286 $17.602 $17.736 $15.798 $18.257
------- ------- ------- ------- ------- -------
Net Investment
Income............ .694 .529 .727 .722 .758 .773
Net Realized and
Unrealized
Gain/Loss......... (1.457) .502 .674 (.145) 1.941 (2.468)
------- ------- ------- ------- ------- -------
Total from Investment
Operations.......... (.763) 1.031 1.401 .577 2.699 (1.695)
------- ------- ------- ------- ------- -------
Less Distributions
from and in Excess
of Net Investment
Income.............. .735 .563 .717 .711 .761 .764
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $17.256 $18.754 $18.286 $17.602 $17.736 $15.798
======= ======= ======= ======= ======= =======
Total Return* (a)..... (4.15%) 5.70** 8.19% 3.35% 17.40% (9.40%)
Net Assets at End of
the Period (In
millions)........... $7.4 $4.8 $3.8 $2.2 $1.8 $2.8
Ratio of Expenses to
Average Net
Assets*............. 1.69% 1.63% 1.71% 1.79% 1.60% 1.51%
Ratio of Net
Investment Income to
Average Net
Assets*............. 3.75% 3.87% 4.15% 4.16% 4.50% 4.71%
Portfolio Turnover.... 44% 21%** 46% 35% 42% 56%
* If certain expenses
lower and the ratios
Ratio of Expenses to
Average Net
Assets.............. N/A N/A N/A 1.80% 1.75% 1.82%
Ratio of Net
Investment Income to
Average Net
Assets.............. N/A N/A N/A 4.16% 4.34% 4.39%
</TABLE>
** Non-Annualized.
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = Not Applicable
27
<PAGE> 93
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson Paul G. Yovovich
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Dennis J. McDonnell*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
Edward C. Wood III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
Stephen L. Boyd*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer & Treasurer
Curtis W. Morell*
Vice President & Chief Accounting Officer
Tanya M. Loden*
Controller
* "Interested Persons" of the Fund, as defined in the Investment Company Act of
1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen California Insured Tax Free Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen California Insured Tax Free Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 94
VAN KAMPEN
CALIFORNIA INSURED
TAX FREE FUND
PROSPECTUS
JANUARY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address (public info @ sec.gov) or by writing
the Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act
File No. is 811-4386. CAI PRO 1/00
<PAGE> 95
VAN KAMPEN
MUNICIPAL INCOME FUND
Van Kampen Municipal Income Fund is a mutual fund with the investment objective
to provide investors with a high level of current income exempt from federal
income tax, consistent with preservation of capital. The Fund's investment
adviser seeks to achieve the Fund's investment objective by investing primarily
in a portfolio of investment-grade municipal securities.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
This prospectus is dated JANUARY 28, 2000.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 96
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary............................... 3
Fees and Expenses of the Fund..................... 6
Investment Objective, Policies and Risks.......... 7
Investment Advisory Services...................... 15
Purchase of Shares................................ 16
Redemption of Shares.............................. 22
Distributions from the Fund....................... 24
Shareholder Services.............................. 24
Federal Income Taxation........................... 26
Financial Highlights.............................. 29
Appendix -- Description of Securities Ratings..... A-1
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 97
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the investment objective to provide investors
with a high level of current income exempt from federal income tax, consistent
with preservation of capital.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing at least 80% of the Fund's total
assets in a portfolio of municipal securities rated investment grade at the time
of purchase or unrated municipal securities believed by the Fund's investment
adviser to be of comparable quality at the time of purchase. Investment grade
securities are securities rated BBB or higher by Standard and Poor's ("S&P") or
Baa or higher by Moody's Investors Service, Inc. ("Moody's") or an equivalent
rating by another nationally recognized statistical rating organization
("NRSRO") or comparably rated short term securities.
Under normal market conditions, up to 20% of the Fund's total assets may consist
of municipal securities rated below investment grade (but not rated lower than
B- by S&P or B3 by Moody's) or unrated municipal securities believed by the
Fund's investment adviser to be of comparable quality at the time of purchase.
Securities rated BB or below by S&P, Ba or below by Moody's or unrated
securities of comparable quality are commonly referred to as "junk bonds" and
involve special risks as compared to investments in higher-grade securities (see
sidebar for an explanation of quality ratings).
The Fund invests in a broad range of municipal securities represented by many
localities, states, regions and economies. In selecting securities for
investment, the Fund's investment adviser uses a balanced credit strategy that
emphasizes investment-grade municipal securities in combination with municipal
securities below investment-grade. The Fund's investment adviser believes that
such an investment strategy allows the Fund to pursue an enhanced yield
providing for higher income while maintaining an investment-grade quality
average portfolio for capital preservation. Portfolio securities are typically
sold when the Fund's investment adviser's assessments of such securities
materially change.
The Fund may invest a substantial portion of its assets in municipal securities
that are subject to federal alternative minimum tax. The Fund may purchase or
sell securities on a when-issued or delayed delivery basis. The Fund may
purchase or sell certain derivative instruments (such as options, futures,
options on futures, and interest rate swaps or other interest rate related
transactions) for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. The Fund has no policy limiting the maturities of its
investments. To the extent the Fund invests in securities with longer
maturities, the Fund will be subject to greater market risk than a fund
investing solely in shorter term securities. Lower-grade securities may be more
volatile and decline more in price in response to negative issuer or general
economic news than higher-grade securities.
Market risk is often greater among certain types of debt securities, such as
zero-coupon bonds or pay-in-kind securities. As interest rates change, these
securities often fluctuate more in price than traditional debt securities and
may subject the Fund to greater market risk than a fund that does not own these
types of securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
3
<PAGE> 98
UNDERSTANDING
QUALITY RATINGS
Debt securities ratings are based on the issuer's ability to pay interest
and repay the principal. Debt securities with ratings above the line are
considered "investment grade," while those with ratings below the line
are regarded as "noninvestment grade." A detailed explanation of these
and other ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
Moody's S&P Meaning
----------------------------------------------------
<C> <S> <C>
Aaa AAA Highest quality
....................................................
Aa AA High quality
....................................................
A A Above-average quality
....................................................
Baa BBB Average quality
----------------------------------------------------
Ba BB Below-average quality
....................................................
B B Marginal quality
....................................................
Caa CCC Poor quality
....................................................
Ca CC Highly speculative
....................................................
C C Lowest quality
....................................................
-- D In default
....................................................
</TABLE>
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Under normal market conditions, the Fund invests at
least 80% of its total assets in investment-grade securities and the Fund may
invest up to 20% of its total assets in securities with below investment-grade
credit quality. Therefore, the Fund is subject to a higher level of credit risk
than a fund that buys only investment-grade securities. The credit quality of
"noninvestment grade" securities is considered speculative by recognized rating
agencies with respect to the issuer's continuing ability to pay interest and
principal. Lower-grade securities may have less liquidity and a higher
incidence of default than higher-grade securities. The Fund may incur higher
expenditures to protect the Fund's interests in such securities. The credit
risks and market prices of lower-grade securities generally are more sensitive
to negative issuer developments, such as reduced revenues or increased
expenditures, or adverse economic conditions, such as a recession, than are
higher-grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest a substantial portion of its total assets in municipal
securities subject to federal alternative minimum tax. The Fund may not be a
suitable investment for investors who are already subject to the federal
alternative minimum tax or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund. In addition, there could
be changes in applicable tax laws or tax treatments that reduce or eliminate the
current federal income tax exemption on municipal securities or otherwise
adversely affect the current federal or state tax status of municipal
securities.
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investor's home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options,
4
<PAGE> 99
futures, options on futures, and interest rate swaps or other interest
rate-related transactions are examples of derivatives. Derivative instruments
involve risks different from direct investment in underlying securities. These
risks include imperfect correlation between the value of the instruments and the
underlying assets; risks of default by the other party to certain transactions;
risks that the transactions may result in losses that partially or completely
offset gains in portfolio positions; risks that the transactions may not be
liquid; and manager risk.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek current income
- - Are in a high federal income tax bracket
- - Wish to add to their personal investment portfolios a fund that invests
primarily in investment-grade municipal securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the nine calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
BAR GRAPH
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
1991 13.98
1992 9.69
1993 12.00
1994 -6.37
1995 15.61
1996 4.07
1997 9.14
1998 5.16
1999 -5.42
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the nine-year period shown in the bar chart, the highest quarterly return
was 7.04% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -6.86% (for the quarter ended March 31, 1994).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Lehman Brothers Municipal
Bond Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charges paid by investors. The index's
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing the securities represented by the index. Average
annual total returns are shown for the periods ended December 31, 1999 (the most
recently completed calendar year prior to the date of this prospectus). Remember
that the past performance of the Fund is not indicative of its future
performance.
5
<PAGE> 100
<TABLE>
<CAPTION>
Average Annual
Total Returns Past
for the 10 Years
Periods Ended Past Past or Since
December 31, 1999 1 Year 5 Years Inception
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen
Municipal Income
Fund -- Class A
Shares -9.89% 4.46% 5.64%(1)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 6.85%(1)
.......................................................
Van Kampen
Municipal Income
Fund -- Class B
Shares -9.65% 4.46% 4.07%(2)**
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.92%(2)
.......................................................
Van Kampen
Municipal Income
Fund -- Class C
Shares -6.92% 4.69% 2.96%(3)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.23%(3)
.......................................................
</TABLE>
Inception dates: (1) 8/1/90, (2) 8/24/92, (3) 8/13/93.
* The Lehman Brothers Municipal Bond Index is a broad-based, statistical
composite of municipal bonds.
** The "Since Inception" performance for Class B Shares reflects the
conversion of such shares into Class A Shares six years after purchase.
Class B Shares purchased on or after June 1, 1996 will convert to Class A
Shares eight years after purchase. See "Purchase of Shares".
The current yield for the thirty-day period ended September 30, 1999 is 4.94%
for Class A Shares, 4.41% for Class B Shares and 4.43% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of offering 4.75%(1) None None
price)
...............................................................
Maximum deferred sales
charge (load)(as a
percentage of the lesser
of original purchase
price or redemption
proceeds) None(2) 4.00%(3) 1.00%(4)
...............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
None None None
...............................................................
Redemption fees None None None
...............................................................
Exchange fee None None None
...............................................................
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------
Management fees 0.48% 0.48% 0.48%
...............................................................
Distribution and/or
service
(12b-1) fees(5)
0.24% 1.00%(6) 1.00%(6)
...............................................................
Other expenses 0.16% 0.15% 0.15%
...............................................................
Interest expenses 0.17% 0.17% 0.17%
...............................................................
Total annual fund
operating expenses
1.05% 1.80% 1.80%
...............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
6
<PAGE> 101
(3) The maximum deferred sales charge is 4.00% in the first year after purchase,
declining thereafter as follows:
Year 1-4.00%
Year 2-3.75%
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
See "Purchase of Shares -- Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(6) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $577 $793 $1,027 $1,697
............................................................
Class B Shares $583 $916 $1,125 $1,919*
............................................................
Class C Shares $283 $566 $ 975 $2,116
............................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $577 $793 $1,027 $1,697
............................................................
Class B Shares $183 $566 $ 975 $1,919*
............................................................
Class C Shares $183 $566 $ 975 $2,116
............................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVE,
POLICIES AND RISKS
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Fund's investment objective is a fundamental policy and may not be
changed without shareholder approval of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). There are risks inherent in all investments in securities;
accordingly there can be no assurance that the Fund will achieve its investment
objective.
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing at least 80% of the Fund's total
assets in investment-grade municipal securities. Under normal market conditions,
the Fund may invest up to 20% of its total assets in municipal securities below
investment-grade. Lower-grade securities are commonly referred to as "junk
bonds" and involve special risks as compared to investments in higher-grade
securities. The Fund does not purchase municipal securities that are in default
or rated in categories lower than B- by S&P or B3 by Moody's. For a description
of security's ratings, see the appendix to this prospectus. The Fund may invest
a substantial portion of its total assets in municipal securities that are
subject to the alternative minimum tax. Accordingly, the Fund may not be a
suitable investment for investors who are already subject to the federal
alternative minimum tax or could become subject to the federal alternative
minimum tax as a result of an investment in the Fund. From time to time, the
Fund temporarily may invest up to 10% of its total assets in tax-exempt money
market funds which are treated as investments in municipal securities.
The Fund's investment adviser actively manages the Fund's portfolio and adjusts
the average maturity and quality of portfolio investments based upon its
expectations about the direction of interest rates and other economic factors.
The Fund buys and sells municipal securities with a view towards seeking a high
level of current income consistent with preservation of capital. In selecting
securities for investment, the Fund's investment adviser seeks those securities
that it believes entail reasonable credit risk
7
<PAGE> 102
considered in relation to the Fund's investment policies.
The Fund invests in a broad range of municipal securities represented by many
states, regions and economies. In selecting securities for investment, the
Fund's investment adviser allocates portfolio assets among various
municipalities and adjusts the Fund's exposure to each state or region based on
its perception of the most favorable markets and issuers. As a result, the
amount invested in municipal securities in a particular state or region will
vary in accordance with the Fund's investment adviser's assessment of the
relative income potential of such investments.
The Fund's investment adviser uses a balanced credit strategy that emphasizes
municipal securities rated investment grade in combination with higher-
yielding, lower-grade municipal securities. The Fund's investment adviser
believes that such an investment strategy allows the Fund to pursue an enhanced
yield providing for higher income while maintaining an investment-grade quality
average portfolio for capital preservation. The Fund's investment adviser
conducts a credit analysis for each security considered for investment to
evaluate its attractiveness relative to the level of risk it presents. Portfolio
securities are typically sold when the Fund's investment adviser's assessments
materially change.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Under
normal market conditions, at least 80% of the Fund's total assets will be
invested in municipal securities. The policy stated in the foregoing sentence is
a fundamental policy of the Fund and may not be changed without shareholder
approval of a majority of the Fund's outstanding voting securities, as defined
in the 1940 Act. The Fund may invest a substantial portion of its assets in
municipal securities that are subject to the federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
8
<PAGE> 103
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Fund's Statement of Additional Information.
The Fund's Statement of Additional Information may be obtained by investors free
of charge as described on the back cover of this prospectus.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of non-payment. The ability of issuers of municipal securities to make
timely payments of interest and principal may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing non-payment and
a potential decrease in the net asset value of the Fund. In addition, the Fund
may incur expenses to work out or restructure a distressed or defaulted
security. Securities below investment-grade involve special risks compared to
higher-grade securities. See "Risks of Investing in Lower-Grade Securities"
below.
9
<PAGE> 104
The Fund may invest a substantial portion of its total assets in municipal
securities that are subject to federal alternative minimum tax. The Fund may not
be a suitable investment for investors who are already subject to the federal
alternative minimum tax or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve increased risk
to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
The Fund has no policy limiting its investments in municipal securities whose
issuers are located in the same state. However, it is not the present intention
of the Fund to invest more than 25% of the value of its total assets in issuers
located in the same state. If the Fund were to invest more than 25% of its total
assets in issuers located in the same state, it would be more susceptible to
adverse economic, business, or regulatory conditions in that state.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
RISKS OF INVESTING IN LOWER-GRADE SECURITIES
Securities which are in the lower-grade categories generally offer higher yields
than are offered by higher-grade securities of similar maturities, but they also
generally involve greater risks, such as greater credit risk, greater market
risk and volatility, greater liquidity concerns and potentially greater manager
risk. Investors should carefully consider the risks of owning shares of a
portfolio which invests in lower-grade securities before investing in the Fund.
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Lower-grade securities are considered more susceptible
to nonpayment of interest and principal or default than higher-grade securities.
Increases in interest rates or changes in the economy may significantly affect
the ability of issuers of lower-grade securities to pay interest and to repay
principal, to meet projected financial goals or to obtain additional financing.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal and interest and such issuer
seeks to restructure the terms of its borrowings, the Fund may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Fund's securities relate.
Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings and the Fund may be unable to
obtain full recovery on such amounts. To minimize the risks involved in
investing in lower-grade securities, the Fund does not purchase securities that
are in default or rated in categories lower than B- by S&P or B3 by Moody's.
10
<PAGE> 105
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the debt securities market and as a result of real or perceived
changes in credit risk. The value of the Fund's investments can be expected to
fluctuate over time. The value of debt securities generally varies inversely
with changes in prevailing interest rates. When interest rates decline, the
value of a portfolio invested in debt securities generally can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
debt securities generally can be expected to decline. Debt securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than debt securities with shorter maturities. While the Fund has no
policy limiting the maturities of the individual debt securities in which it may
invest, the Fund's investment adviser seeks to manage fluctuations in net asset
value resulting from changes in interest rates by actively managing the
portfolio maturity structure. Secondary market prices of lower-grade securities
generally are less sensitive to changes in interest rate and are more sensitive
to general adverse economic changes or specific developments with respect to the
particular issuers than are the secondary market prices of higher-grade
securities. A significant increase in interest rates or a general economic
downturn could severely disrupt the market for lower-grade securities and
adversely affect the market value of such securities. Such events also could
lead to a higher incidence of default by issuers of lower-grade securities as
compared with higher-grade securities. In addition, changes in credit risks,
interest rates, the credit markets or periods of general economic uncertainty
can be expected to result in increased volatility in the market price of the
lower-grade securities in the Fund and thus in the net asset value of the Fund.
Adverse publicity and investor perceptions, whether or not based on rational
analysis, may affect the value, volatility and liquidity of lower-grade
securities.
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for lower-grade securities may be less
liquid than the markets for higher-grade securities. Liquidity relates to the
ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the lower-grade securities in which the Fund may
invest, trading in such securities may be relatively inactive. Prices of
lower-grade securities may decline rapidly in the event a significant number of
holders decide to sell. Changes in expectations regarding an individual issuer
of lower-grade securities generally could reduce market liquidity for such
securities and make their sale by the Fund more difficult, at least in the
absence of price concessions. The effects of adverse publicity and investor
perceptions may be more pronounced for securities for which no established
retail market exists as compared with the effects on securities for which such a
market does exist. An economic downturn or an increase in interest rates could
severely disrupt the market for such securities and adversely affect the value
of outstanding securities or the ability of the issuers to repay principal and
interest. Further, the Fund may have more difficulty selling such securities in
a timely manner and at their stated value than would be the case for securities
for which an established retail market does exist. Certain municipal securities
in which the Fund may invest, such as special obligation bonds, lease
obligations, participation certificates and variable rate instruments, may be
particularly less liquid. Although the issuer of some such securities may be
obligated to redeem such securities at face value, such redemption could result
in losses to the Fund to the extent such municipal securities were purchased by
the Fund at a premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for lower-grade securities held in the Fund's portfolio, the
ability of the Fund's investment adviser to value the Fund's securities becomes
more difficult and the judgment of the Fund's investment adviser may play a
greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data.
The Fund may invest in securities not producing immediate cash income, including
zero-coupon securities or pay-in-kind securities, when their effective yield
over comparable instruments producing cash income make these investments
attractive. Prices on non-cash-paying instruments may be more sensitive to
changes in the issuer's financial condition, fluctuation in interest rates and
market demand/supply imbalances than cash-paying securi-
11
<PAGE> 106
ties with similar credit ratings, and thus may be more speculative. In addition,
the accrued interest income earned on such instruments is included in investment
company taxable income, thereby increasing the required minimum distributions to
shareholders without providing the corresponding cash flow with which to pay
such distributions. The Fund's investment adviser will weigh these concerns
against the expected total returns from such instruments. See "Additional
Information Regarding Certain Securities" below.
Many lower-grade securities are not listed for trading on any national
securities exchange, and many issuers of lower-grade securities choose not to
have a rating assigned to their obligations by any nationally recognized
statistical rating organization. As a result, the Fund's portfolio may consist
of a higher portion of unlisted or unrated securities as compared with an
investment company that invests solely in higher-grade securities. Unrated
securities are usually not as attractive to as many buyers as are rated
securities, a factor which may make unrated securities less marketable. These
factors may have the effect of limiting the availability of the securities for
purchase by the Fund and may also limit the ability of the Fund to sell such
securities at their fair value either to meet redemption requests or in response
to changes in the economy or the financial markets. Further, to the extent the
Fund owns or may acquire illiquid or restricted lower-grade securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. The amount of available
information about the financial condition of certain lower-grade issuers may be
less extensive than other issuers. In its analysis, the Fund's investment
adviser may consider the credit ratings of recognized rating organizations in
evaluating securities although the investment adviser does not rely primarily on
these ratings. Ratings evaluate only the safety of principal and interest
payments, not the market value risk. In addition, ratings are general and not
absolute standards of quality, and credit ratings are subject to the risk that
the creditworthiness of an issuer may change and the rating agencies may fail to
change such ratings in a timely fashion. A rating downgrade does not require the
Fund to dispose of a security. The Fund's investment adviser continuously
monitors the issuers of securities held in the Fund. Because of the number of
investment considerations involved in investing in lower-grade securities, to
the extent the Fund invests in such securities, achievement of the Fund's
investment objective may be more dependent upon the Fund's investment adviser's
credit analysis than is the case with investing in higher-grade securities.
New or proposed laws may have an impact on the market for lower-grade
securities. The Fund's investment adviser is unable at this time to predict what
effect, if any, legislation may have on the market for lower-grade securities.
Special tax considerations are associated with investing in certain lower-grade
securities, such as zero-coupon or pay-in-kind securities. The Fund accrues
income on these securities prior to the receipt of cash payments. The Fund must
distribute substantially all of its income to its shareholders to qualify for
pass-through treatment under federal income tax law and may, therefore, have to
dispose of its portfolio securities to satisfy distribution requirements.
The table below sets forth the percentage of the Fund's assets during the fiscal
year ended September 30, 1999 invested in the various ratings categories (based
on the higher of the Moody's or S&P ratings) and unrated securities determined
by the Fund's investment adviser to be of comparable quality. The percentages
are based on the dollar-weighted average of credit ratings of all
12
<PAGE> 107
municipal securities held by the Fund during the fiscal year, computed on a
monthly basis.
<TABLE>
<CAPTION>
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 47.27% 2.17%
.......................................................................
AA/Aa 6.50% 0.37%
.......................................................................
A/A 10.53% 0.00%
.......................................................................
BBB/Baa 12.34% 7.92%
.......................................................................
BB/Ba 1.00% 5.73%
.......................................................................
B/B 0.00% 5.41%
.......................................................................
CCC/Caa 0.00% 0.54%
.......................................................................
CC/Ca 0.00% 0.00%
.......................................................................
C/C 0.00% 0.22%
.......................................................................
D 0.00% 0.00%
.......................................................................
Percentage of
Rated and
Unrated
Securities 77.64% 22.36%
.......................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those listed above.
ADDITIONAL INFORMATION REGARDING CERTAIN SECURITIES
The Fund may invest in certain securities not producing immediate cash income,
such as zero coupon and payment-in-kind securities. Zero-coupon securities are
debt securities that do not entitle the holder to any periodic payment of
interest prior to maturity or a specified date when the securities begin paying
current interest. They are issued and traded at a discount from their face
amounts or par value, which discount varies depending on the time remaining
until cash payments begin, prevailing interest rates, liquidity of the security
and the perceived credit quality of the issuer. Because such securities do not
entitle the holder to any periodic payments of interest prior to maturity, this
prevents any reinvestment of interest payments at prevailing interest rates if
prevailing interest rates rise. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, "zero-coupon" securities
eliminate the reinvestment risk and may lock in a favorable rate of return to
maturity if interest rates drop.
Payment-in-kind securities are debt securities that pay interest through the
issuance of additional securities. Prices on such non-cash-paying instruments
may be more sensitive to changes in the issuer's financial condition,
fluctuations in interest rates and market demand/supply imbalances than
cash-paying securities with similar credit ratings, and thus may be more
speculative than are securities that pay interest periodically in cash.
The amount of non-cash interest income earned on zero-coupon securities and
payment-in-kind securities is included, for federal income tax purposes, in the
Fund's calculation of income that is required to be distributed to shareholders
for the Fund to maintain its desired federal income tax status (even though such
non-cash paying securities do not provide the Fund with the cash flow with which
to pay such distributions). Accordingly, the Fund may be required to borrow or
to liquidate portfolio securities at a time that it otherwise would not have
done so in order to make such distributions. The Fund's investment adviser will
weigh these concerns against the expected total returns from such instruments.
DERIVATIVE INSTRUMENTS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that the use of these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and other interest rate indices and other financial instruments,
purchase and sell financial futures contracts and options on futures and enter
into various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of 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
13
<PAGE> 108
a temporary substitute for purchasing or selling particular securities. Any or
all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the investment adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions have risks associated with them including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default by the other party to the transaction, illiquidity of the
derivative instrument and, to the extent the investment adviser's view as to
certain market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale of
portfolio securities at inopportune times or for prices other than at current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the risk management or hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and their risks are described more fully in the Fund's Statement of
Additional Information. Income earned or deemed to be earned by the Fund from
its Strategic Transactions, if any, generally will be taxable income of the
Fund.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on securities in connection with such transactions prior to
the date the Fund actually takes delivery of such securities. These transactions
are subject to market risk as the value or yield of a security at delivery may
be more or less than the purchase price or the yield generally available on
securities when delivery occurs. In addition, the Fund is subject to
counterparty risk because it relies on the buyer or seller, as the case may be,
to consummate the transaction, and failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring these
securities, but the Fund may sell these securities prior to settlement if it is
deemed advisable. No specific limitation exists as to the percentage of the
Fund's assets which may be used to acquire securities on a "when-issued" or
"delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
14
<PAGE> 109
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities, or yield
differentials, or for other reasons. The Fund's portfolio turnover is shown
under the heading "Financial Highlights." The portfolio turnover rate may vary
from year to year. A high portfolio turnover rate (100% or more) increases a
fund's transactions costs (including brokerage commissions or dealer costs) and
a high portfolio turnover rate may result in the realization of more short-term
capital gains than if a fund had a lower portfolio turnover rate. Increases in a
fund's transaction costs would adversely impact the fund's performance. The
turnover rate will not be a limiting factor, however, if the Fund's investment
adviser considers portfolio changes appropriate.
TEMPORARY DEFENSE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may invest on a temporary basis a portion or all
of its assets in high-quality, short-term municipal obligations. If such
municipal securities are not available or, in the Fund's investment adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in taxable obligations. Such taxable obligations may include
in securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, other investment grade quality income securities, prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. In taking such a defensive position, the Fund would not
be pursuing and may not achieve its investment objective.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $90 billion under management or supervision as of
December 31, 1999. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily net assets of
the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- ------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.50%
......................................................
Over $500 million 0.45%
......................................................
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.48% of the
Fund's average daily net assets for the Fund's fiscal year ended September 30,
1999.
The Fund's average daily 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.
Under the Advisory Agreement, the Adviser furnishes offices, necessary
facilities and equipment and provides administrative services to the Fund. The
Fund pays all charges and expenses of its day-to-day operations, including
service fees, distribution fees, custodial fees, legal and independent
accountant fees, the costs of reports and proxies to shareholders, compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments) and all
15
<PAGE> 110
other ordinary business expenses not specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Timothy D. Haney, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since January 2000. Mr. Haney has been employed by the Adviser since August
1988.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments must be at least $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) each class of shares
has exclusive voting rights with respect to approvals of the Rule 12b-1
distribution plan and service plan (each as described below) under which its
distribution fee and/or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B Shares and Class C Shares and
the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays or any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund's Board of Trustees reserves the right to
calculate the net asset value per share and adjust the offering price based
thereon more frequently than once daily if deemed desirable. Net asset value per
share for each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities for which market quotations are not readily available and other
assets are valued at their fair value as determined in good faith by the Adviser
in
16
<PAGE> 111
accordance with procedures established by the Board of Trustees of the Fund.
Short-term investments with remaining maturities of 60 days or less are valued
at cost plus interest earned (amortized cost) which approximates market value.
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 o each class
of its shares. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders and the maintenance of such shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
such class of shares. To assist investors in comparing classes of shares, the
tables under the heading "Fees and Expenses of the Fund" provide a summary of
sales charges and expenses and an example of the sales charges and expenses of
the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
17
<PAGE> 112
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed
on an amount equal to the lesser of the then current market value or the
cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and Service Plan, the Fund may spend up to a total
of 0.25% per year of the Fund's average daily net assets with respect to the
Class A Shares of the Fund. From such amount, under the Service Plan, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within six years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for purchase of Class B Shares
until the time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average
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<PAGE> 113
daily net assets with respect to the Class B Shares of the Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan Class B Shares received on such shares, automatically convert to Class A
Shares eight years after the end of the calendar month in which the shares were
purchased. Class B Shares purchased before June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, automatically convert
to Class A Shares six years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C Shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar month in which
such shares were purchased. Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. The conversion schedule applicable to a share of the Fund acquired
through the exchange privilege from another Van Kampen fund participating on the
exchange program is determined by reference to the Van Kampen fund from which
such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by
involuntary liquidation by the Fund of a shareholder's account as described
under the heading "Redemption of Shares." Subject to certain limitations, a
shareholder who has redeemed Class C Shares of the Fund may reinvest in Class C
Shares at net asset value with credit for any contingent deferred sales charge
if reinvestment is made within 180 days after the redemption. For a more
complete description of contingent deferred sales charge waivers, please refer
to the Fund's Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to
19
<PAGE> 114
pay reduced or no sales charges. Investors, or their authorized dealers, must
notify the Fund at the time of the purchase order whenever a quantity discount
is applicable to purchases. Upon such notification, an investor will pay the
lowest applicable sales charge. Quantity discounts may be modified or terminated
at any time. For more information about quantity discounts, investors should
contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds over a 13-month period
based on the total amount of intended purchases plus the value of all shares of
the Participating Funds previously purchased and still owned. An investor may
elect to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
The initial purchase must be for an amount equal to at least 5% of the minimum
total purchase amount of the level selected. If trades not initially made under
a Letter of Intent subsequently qualify for a lower sales charge through the
90-day backdating provisions, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower sales charge. Such adjustment
in sales charge will be used to purchase additional shares for the shareholder
with the applicable sales charge. The Fund initially will escrow shares totaling
5% of the dollar amount of the Letter of Intent to be held by Investor Services
in the name of the shareholder. In the event the Letter of Intent goal is not
achieved within the specified period, the investor must pay the difference
between the sales charge applicable to the purchases made and the reduced sales
charges previously paid. Such payments may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit investment trust distributions will be 1.00% of the
offering price (1.01% of net asset value). Of this amount, the Distributor will
pay to the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the terms and conditions that apply to the program,
should contact their authorized dealer or the Distributor.
20
<PAGE> 115
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
In order to obtain these special benefits, all dividends and other distributions
by the Fund must be reinvested in additional shares and there cannot be any
systematic withdrawal program. There will be no minimum for reinvestments from
unit investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by nonprofit organizations
defined under Section 501(c)(3) of the Code and assets held by an employer
or trustee in connection with an eligible deferred compensation plan under
Section 457 of the Code. Such plans will qualify for purchases at net asset
value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (1) the
total plan assets are at least $1 million or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have received
proposals from the Distributor prior to January 1, 2000 based on net asset
value purchase privileges previously in effect will be qualified to purchase
shares of the Participating Funds at net asset value.
21
<PAGE> 116
Section 403(b) and similar accounts for which Van Kampen Trust Company
serves as custodian will not be eligible for net asset value purchases based
on the aggregate investment made by the plan or the number of eligible
employees, except under certain uniform criteria established by the
Distributor from time to time. For purchases on February 1, 1997 and
thereafter, a commission will be paid as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million, plus 0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy holders
of an insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers
who initiate and are responsible for such sales to each individual as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million and
0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian/trustee of a
retirement plan account may involve additional fees charged by the dealer or
custodian/trustee.
Except as specified below under "Telephone Redemption Requests" payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the request and any other necessary documents in
proper form as described below. Such payment may be postponed or the right of
redemption suspended as provided by the rules of the SEC. Such payment may,
under certain circumstances, be paid wholly or in part by a distribution-in-kind
of portfolio securities which may result in brokerage costs and a gain or loss
for federal income tax purposes when such securities are sold. If the shares to
be redeemed have been recently purchased by check, Investor Services may delay
the payment of redemption proceeds until it confirms the purchase check has
cleared, which may take up to 15 days. A taxable gain or loss will be recognized
by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in
22
<PAGE> 117
proper form sent directly to Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256. The request for redemption should indicate the
number of shares to be redeemed, the Fund name and class designation of such
shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by and registered to
a corporation, partnership, trust, fiduciary, or other legal entity, a copy of
the corporate resolution or other legal documentation appointing the authorized
signer and certified within the prior 120 days must accompany the redemption
request. Retirement plan distribution requests should be sent to the
custodian/trustee to be forwarded to Investor Services. Contact the
custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the application form
accompanying the prospectus. For accounts that are not established with
telephone redemption privileges, a shareholder may call the Fund at (800)
341-2911 to request that a copy of the Telephone Redemption Authorization form
be sent to the shareholder for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. Shares may also be redeemed by
phone through FundInfo(R) (automated phone system) to the shareholder's bank
account of record 24 hours a day, seven days a week at (800) 847-2424. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedure previously described.
Requests received by Investor Services prior to 4:00 p.m., New York time, will
be processed at the next determined net asset value per share. These privileges
are available for most accounts other than retirement accounts or accounts with
shares represented by certificates. If an account has multiple owners, Investor
Services may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily
23
<PAGE> 118
if the proceeds are to be paid by wire. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account or
wired directly to their predesignated bank account. This privilege is not
available if the address of record has been changed within 30 days prior to a
telephone redemption request. If a redemption is requested through FundInfo(R)
transactions are sent to the predesignated bank account of record only. Proceeds
from redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare daily and distribute monthly all,
or substantially all, of its net investment income as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend.
Unless the shareholder instructs otherwise, the reinvestment plan is automatic.
This instruction may be made by telephone by calling (800) 341-2911 ((800)
421-2833 for the hearing impaired) or by writing to Investor Services. The
investor may, on the initial application or prior to any declaration, instruct
that dividends and/or capital gains be paid in cash, be reinvested in the Fund
at net asset value, or be invested in another Van Kampen fund at net asset
value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have
24
<PAGE> 119
not been issued and which are not in escrow may appoint Investor Services as
agent by completing the Authorization for Redemption by Check form and the
appropriate section of the application and returning the form and the
application to Investor Services. Once the form is properly completed, signed
and returned to the agent, a supply of checks drawn on State Street Bank and
Trust Company (the "Bank") will be sent to the Class A shareholder. These checks
may be made payable by the Class A shareholder to the order of any person in any
amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A Share account by Investor Services at the next determined
net asset value per share. Check writing redemptions represent the sale of Class
A Shares. Any gain or loss realized on the redemption of shares is a taxable
event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or by the Bank. Retirement plans and accounts that are subject to backup
withholding are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from any authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services, by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
telephone exchange privileges unless the shareholder indicates otherwise by
checking the applicable box on the application form accompanying the prospectus.
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it
25
<PAGE> 120
reasonably believes to be genuine. If the exchanging shareholder does not have
an account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain dividend
options (except dividend diversification) and authorized dealer of record as the
account from which shares are exchanged, unless otherwise specified by the
shareholder. In order to establish a systematic withdrawal plan for the new
account or reinvest dividends from the new account into another fund, however,
an exchanging shareholder must submit a specific request. The Fund reserves the
right to reject any order to acquire its shares through exchange. In addition,
the Fund and other Participating Funds may restrict exchanges by shareholders
engaged in excessive trading by limiting or disallowing the exchange privilege
to such shareholders. For further information on these restrictions, see the
Fund's Statement of Additional Information. The Fund may modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
FEDERAL INCOME TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
26
<PAGE> 121
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its income (consisting generally
of tax-exempt interest, taxable income and net short-term capital gains) will
constitute tax-exempt interest, a significant portion of the Fund's income may
consist of investment company taxable income. Distributions of investment
company taxable income (generally taxable income and net short-term capital
gain) 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 gain (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Fund have been held by such shareholders. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held as a capital
asset, the gain or loss will be a capital gain or loss. Any recognized capital
gains may be taxed at different rates depending on how long the shareholder held
such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income and at least
90% of its net tax-exempt interest, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on the undistributed amounts.
27
<PAGE> 122
The federal income tax discussion set forth above is for general information
only. The exemption of interest income for federal income tax purposes may not
result in similar exemptions under the laws of a particular state or local
taxing authority. Income distributions may be taxable to shareholders under
state or local law as dividend income even though a portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes. The Fund will report
annually to its shareholders the percentage and source, on a state-by-state
basis, of interest income earned on municipal securities received by the Fund
during the preceding calendar year. Dividends and distributions paid by the Fund
from sources other than tax-exempt interest are generally subject to taxation at
the state and local levels. Prospective investors should consult their own tax
advisers regarding the specific federal tax consequences of purchasing, holding,
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
28
<PAGE> 123
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
Nine Months
Year Ended Ended
September 30, September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................. $15.991 $15.767 $15.267 $15.549 $14.261 $16.164
------- ------- ------- ------- ------- -------
Net Investment
Income.............. .819 .664 .852 .898 .874 .886
Net Realized and
Unrealized
Gain/Loss........... (1.461) .195 .500 (.298) 1.296 (1.907)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............ (.642) .859 1.352 .600 2.170 (1.021)
Less Distributions from
Net Investment
Income................ .846 .635 .852 .882 .882 .882
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............ $14.503 $15.991 $15.767 $15.267 $15.549 $14.261
======= ======= ======= ======= ======= =======
Total Return(a)........ (4.25%) 5.62%* 9.14% 4.07% 15.61% (6.37%)
Net Assets at End of
the Period (In
millions)............. $777.5 $788.7 $766.2 $792.3 $839.7 $495.8
Ratio of Operating
Expenses to Average
Net Assets(b)......... .88% .84% .89% .94% .99% .99%
Ratio of Interest
Expense to Average Net
Assets................ .17% .03% N/A N/A N/A N/A
Ratio of Net Investment
Income to Average Net
Assets(b)............. 5.34% 5.63% 5.54% 5.93% 5.86% 5.93%
Portfolio Turnover..... 116% 89%* 104% 73% 61% 75%
<CAPTION>
Class B Shares
Nine Months
Year ended Ended
September 30, September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................. $15.982 $15.764 $15.267 $15.549 $14.261 $16.139
------- ------- ------- ------- ------- -------
Net Investment
Income.............. .713 .572 .734 .783 .762 .780
Net Realized and
Unrealized
Gain/Loss........... (1.473) .195 .501 (.297) 1.294 (1.890)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............ (.760) .767 1.235 .486 2.056 (1.110)
Less Distributions from
Net Investment
Income................ .732 .549 .738 .768 .768 .768
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............ $14.490 $15.982 $15.764 $15.267 $15.549 $14.261
======= ======= ======= ======= ======= =======
Total Return(a)........ (4.95%) 5.05%* 8.27% 3.29% 14.74% (6.96%)
Net Assets at End of
the Period (In
millions)............. $106.6 $197.9 $211.2 $211.0 $216.6 $158.7
Ratio of Operating
Expenses to Average
Net Assets(b)......... 1.63% 1.62% 1.65% 1.70% 1.73% 1.70%
Ratio of Interest
Expense to Average Net
Assets................ .17% .03% N/A N/A N/A N/A
Ratio of Net Investment
Income to Average Net
Assets(b)............. 4.57% 4.85% 4.78% 5.17% 5.09% 5.22%
Portfolio Turnover..... 116% 89%* 104% 73% 61% 75%
<CAPTION>
Class C Shares
Nine Months
Year Ended Ended
September 30, September 30, Year Ended December 31,
1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................. $15.964 $15.747 $15.254 $15.545 $14.262 $16.141
------- ------- ------- ------- ------- -------
Net Investment
Income.............. .699 .570 .730 .782 .771 .783
Net Realized and
Unrealized
Gain/Loss........... (1.455) .196 .501 (.305) 1.280 (1.894)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............ (.756) .766 1.231 .477 2.051 (1.111)
Less Distributions from
Net Investment
Income................ .732 .549 .738 .768 .768 .768
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............ $14.476 $15.964 $15.747 $15.254 $15.545 $14.262
======= ======= ======= ======= ======= =======
Total Return(a)........ (4.90%) 4.99%* 8.34% 3.16% 14.74% (6.97%)
Net Assets at End of
the Period (In
millions)............. $17.5 $15.5 $15.3 $12.9 $11.2 $3.9
Ratio of Operating
Expenses to Average
Net Assets(b)......... 1.63% 1.62% 1.66% 1.70% 1.72% 1.74%
Ratio of Interest
Expense to Average Net
Assets................ .17% .03% N/A N/A N/A N/A
Ratio of Net Investment
Income to Average Net
Assets(b)............. 4.55% 4.86% 4.75% 5.17% 5.24% 5.19%
Portfolio Turnover..... 116% 89%* 104% 73% 61% 75%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to the
Adviser's reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
N/A= Not Applicable
29
<PAGE> 124
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
A- 1
<PAGE> 125
C: Debt rated "C" is currently highly vulnerable to nonpayment. 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.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong or strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse Financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the due date, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
A commercial paper 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 to
S&P by the issuer or obtained from other sources it considers reliable. S&P does
not perform an audit in connection with
A- 2
<PAGE> 126
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.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols for the
put option (for example, 'AAA/A-1+'). With short-term demand debt, S&P's note
rating symbols are used with the commercial paper rating symbols (for example,
'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as 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 through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Absence of Rating: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
A- 3
<PAGE> 127
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date date to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as MIG 1 or
VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's assigns a MIG
or VMIG rating, all categories define an investment grade situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability for
repayment of short-term debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics:
- -- Leading market positions in well established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- -- Well established access to a ranges of financial markets and assured sources
of alternative liquidity.
A- 4
<PAGE> 128
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.
A- 5
<PAGE> 129
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson Paul G. Yovovich
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Dennis J. McDonnell*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
Edward C. Wood, III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
Stephen L. Boyd*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer & Treasurer
Curtis W. Morell*
Vice President & Chief Accounting Officer
Tanya M. Loden*
Controller
* "Interested Persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time
Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN MUNICIPAL INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Municipal Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Municipal Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 130
VAN KAMPEN
MUNICIPAL INCOME FUND
PROSPECTUS
JANUARY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]) or by writing the
Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act File No. is 811-4386. MIF PRO 1/00
<PAGE> 131
VAN KAMPEN
INTERMEDIATE TERM MUNICIPAL INCOME FUND
Van Kampen Intermediate Term Municipal Income Fund is a mutual fund with the
investment objective to provide investors with a high level of current income
exempt from federal income tax, consistent with preservation of capital. The
Fund's investment adviser seeks to achieve the Fund's investment objective by
investing primarily in a portfolio of municipal securities that are rated
investment-grade at the time of purchase, and by seeking to maintain a
dollar-weighted average portfolio life of three to ten years.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
This prospectus is dated JANUARY 28, 2000.
<PAGE> 132
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary............................... 3
Fees and Expenses of the Fund..................... 6
Investment Objective, Policies and Risks.......... 7
Investment Advisory Services...................... 15
Purchase of Shares................................ 16
Redemption of Shares.............................. 22
Distributions from the Fund....................... 24
Shareholder Services.............................. 24
Federal Income Taxation........................... 27
Financial Highlights.............................. 29
Appendix--Description of Securities Ratings....... A-1
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 133
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the investment objective to provide investors
with a high level of current income exempt from federal income tax, consistent
with preservation of capital.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing at least 65% of the Fund's total
assets in a portfolio of municipal securities that are rated investment-grade at
the time of purchase. Investment grade securities are securities rated BBB or
higher by Standard and Poor's ("S&P") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO"). Under normal market
conditions, the Fund's investment adviser seeks to maintain a dollar-weighted
average portfolio life of three to ten years. To enhance yield and to add
diversification, the Fund may invest the remaining 35% of its total assets in
municipal securities rated below investment grade and unrated municipal
securities determined by the Fund's investment adviser to be of comparable
quality at the time of purchase. Securities rated BB or below by S&P, Ba or
below by Moody's or unrated securities of comparable quality are commonly
referred to as "junk bonds" and involve special risks as compared to investments
in higher-grade securities (see sidebar for an explanation of quality ratings).
The Fund buys and sells municipal securities with a view towards seeking a high
level of tax-exempt income consistent with preservation of capital. In selecting
securities for investment, the Fund's investment adviser seeks to add value and
limit risk through careful security selection and by actively managing the
Fund's portfolio. Portfolio securities are typically sold when the Fund's
investment adviser's assessments materially change.
The Fund may invest a substantial portion of its assets in municipal securities
that are subject to federal alternative minimum tax. The Fund may purchase or
sell securities on a when-issued or delayed delivery basis. The Fund may
purchase or sell certain derivative instruments (such as options, futures,
options on futures, and interest rate swaps or other interest rate-related
transactions) for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. Although the Fund may invest in securities of any maturity,
the Fund seeks to maintain a dollar-weighted average portfolio life of three to
ten years. This means that the Fund will be subject to greater market risk that
a fund investing solely in shorter-term securities but less market risk than a
fund investing solely in longer-term securities. Lower-grade securities may be
more volatile and decline more in price in response to negative issuer or
general economic news than higher-grade securities.
Market risk is often greater among certain types of debt securities, such as
zero-coupon bonds or pay-in-
UNDERSTANDING
QUALITY RATINGS
Debt securities ratings are based on the issuer's ability to pay interest
and repay the principal. Debt securities with ratings above the line are
considered "investment grade," while those with ratings below the line are
regarded as "noninvestment grade." A detailed explanation of these and other
ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
Moody's S&P Meaning
- ------------------------------------------------------
<C> <S> <C>
Aaa AAA Highest quality
......................................................
Aa AA High quality
......................................................
A A Above-average quality
Baa BBB Average quality
......................................................
Ba BB Below-average quality
......................................................
B B Marginal quality
......................................................
Caa CCC Poor quality
......................................................
Ca CC Highly speculative
......................................................
C C Lowest quality
......................................................
-- D In default
......................................................
</TABLE>
3
<PAGE> 134
kind securities. As interest rates change, these securities often fluctuate more
in price than traditional debt securities and may subject the Fund to greater
market risk than a fund that does not own these types of securities
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. The Fund invests at least 65% of its total assets in
investment-grade securities and the Fund may invest up to 35% of its total
assets in securities with below investment-grade credit quality. Therefore, the
Fund is subject to a higher level of credit risk than a fund that invests solely
in investment grade securities. The credit quality of "noninvestment grade"
securities is considered speculative by recognized rating agencies with respect
to the issuer's continuing ability to pay interest and principal. Lower-grade
securities may have less liquidity and a higher incidence of default than
higher-grade securities. The Fund may incur higher expenses to protect the
Fund's interest in such securities. The credit risks and market prices of
lower-grade securities generally are more sensitive to negative issuer
developments, such as reduced revenues or increased expenditures, or adverse
economic conditions, such as a recession, than are the prices of higher grade
securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest a substantial portion of its total assets in municipal
securities subject to federal alternative minimum tax. The Fund may not be a
suitable investment for investors who are already subject to the federal
alternative minimum tax or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund. In addition, there could
be changes in applicable tax laws or tax treatments that reduce or eliminate the
current federal income tax exemption on municipal securities or otherwise
adversely affect the current federal or state tax status of municipal
securities.
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investor's home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures, options on futures and interest
rate swaps or other interest rate-related transactions are examples of
derivatives. Derivative instruments involve risks different from direct
investment in underlying securities. These risks include imperfect correlation
between the value of the instruments and the underlying assets; risks of default
by the other party to certain transactions; risks that the transactions may
result in losses that partially or completely offset gains in portfolio
positions; risks that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment tech-
4
<PAGE> 135
niques, and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek current income
- - Are in a high federal income tax bracket
- - Wish to add to their personal investment portfolio a fund that invests
primarily in municipal securities and seeks to maintain an average portfolio
life of intermediate term
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the six calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
BAR CHART
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
1994 -3.32
1995 15.31
1996 4.27
1997 8.08
1998 5.98
1999 -1.56
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the six-year period shown in the bar chart, the highest quarterly return
was 6.43% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -4.02% (for the quarter ended March 31, 1994).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Lehman Brothers Municipal
Bond Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charges paid by investors. The index's
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing the securities represented by the index. Average
annual total returns are shown for the periods ended December 31, 1999 (the most
recently completed calendar year prior to the date of this prospectus). Remember
that the past performance of the Fund is not indicative of its future
performance.
5
<PAGE> 136
<TABLE>
<CAPTION>
Average Annual
Total Returns
for the
Periods Ended Past Past Since
December 31, 1999 1 Year 5 Years Inception
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen
Intermediate Term
Municipal Income
Fund -- Class A
Shares -4.77% 5.58% 4.84%(1)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.38%(1)
.......................................................
Van Kampen
Intermediate Term
Municipal Income
Fund -- Class B
Shares -5.10% 5.51% 4.60%(1)**
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.38%(1)
.......................................................
Van Kampen
Intermediate Term
Municipal Income
Fund -- Class C
Shares -3.23% 5.53% 3.73%(2)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 4.87%(3)
.......................................................
</TABLE>
Inception dates: (1) 5/28/93, (2) 10/19/93, (3) 10/31/93.
* The Lehman Brothers Municipal Bond Index is a broad-based, statistical
composite of municipal bonds.
** The "Since Inception" performance for Class B Shares reflects the conversion
of such shares into Class A Shares six years after purchase. Class B Shares
purchased on or after June 1, 1996 will convert to Class A Shares eight years
after purchase. See "Purchase of Shares."
The current yield for the thirty-day period ended September 30, 1999 is 3.51%
for Class A Shares, 2.85% for Class B Shares and 2.90% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of offering 3.25%(1) None None
price)
...............................................................
Maximum deferred sales
charge (load) (as a
percentage of the lesser
of original purchase
price or redemption
proceeds) None(2) 3.00%(3) 1.00%(4)
...............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
None None None
...............................................................
Redemption fees None None None
...............................................................
Exchange fee None None None
...............................................................
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
- ---------------------------------------------------------------
Management fees 0.50% 0.50% 0.50%
...............................................................
Distribution and/or
service (12b-1) fees(5)
0.25% 1.00%(6) 1.00%(6)
...............................................................
Other expenses 0.53% 0.47% 0.52%
...............................................................
Total annual fund
operating expenses
1.28% 1.97% 2.02%
...............................................................
</TABLE>
(1) Reduced for purchases of $25,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 3.00% in the first year after purchase,
declining thereafter as follows:
Year 1-3.00%
Year 2-2.50%
Year 3-2.00%
Year 4-1.00%
After-None
See "Purchase of Shares -- Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
6
<PAGE> 137
(5) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(6) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $451 $717 $1,003 $1,816
......................................................................
Class B Shares $500 $819 $1,064 $1,947*
......................................................................
Class C Shares $305 $635 $1,090 $2,353
......................................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $451 $717 $1,003 $1,816
......................................................................
Class B Shares $200 $619 $1,064 $1,947*
......................................................................
Class C Shares $205 $635 $1,090 $2,353
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVE,
POLICIES AND RISKS
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Fund's investment objective is a fundamental policy and may not be
changed without shareholder approval of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). There are risks inherent in all investments in securities;
accordingly there can be no assurance that the Fund will achieve its investment
objective.
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing at least 65% of the Fund's total
assets in investment-grade municipal securities. Under normal market conditions,
the Fund may invest the remaining 35% of its total assets in below
investment-grade municipal securities. Lower-grade securities are commonly
referred to as "junk bonds" and involve special risks as compared to investments
in higher-grade securities. With respect to such investments, the Fund has not
established any limit on the percentage of its portfolio that may be invested in
securities in any one rating category. For a description of securities ratings,
see the appendix to this prospectus. The Fund may invest a substantial portion
of its assets in municipal securities that are subject to alternative minimum
tax. Accordingly, the Fund may not be a suitable investment for investors who
are already subject to the federal alternative minimum tax or could become
subject to the federal alternative minimum tax as a result of an investment in
the Fund. From time to time, the Fund temporarily may invest up to 10% of its
total assets in tax exempt money market funds which are treated as investments
in municipal securities.
The Fund's investment adviser actively manages the Fund's portfolio and adjusts
the average maturity and quality of portfolio investments based upon its
expectations about the direction of interest rates and other economic factors.
In pursuing its investment objective, the Fund may invest in securities of any
maturity, but seeks to maintain a dollar-weighted average portfolio life of
three to ten years. Generally, a portfolio of municipal securities having an
intermediate dollar-weighted average life tends to
7
<PAGE> 138
produce a higher level of income than a portfolio of municipal securities having
a shorter dollar-weighted average life and has less net asset value volatility
than a portfolio of municipal securities having a longer dollar-weighted average
life, although such differences cannot be assured. In addition, market prices of
municipal securities with intermediate lives generally fluctuate more in
response to changes in interest rates than do market prices of municipal
securities with shorter lives but generally fluctuate less than market prices of
municipal securities with longer lives. Based on the foregoing, the Fund's
investment adviser believes that under current market conditions the yield and
price characteristics of a municipal securities portfolio with a dollar-weighted
average portfolio life of three to ten years generally offer an attractive
balance between income and interest rate risk. In certain market conditions,
however, such a portfolio may be less attractive because of differences in yield
between municipal securities of different maturities due to supply and demand
forces, monetary and tax policies and investor expectations. In the event of
sustained market conditions that make it less desirable to maintain a
dollar-weighted average portfolio life of three to ten years, the Board of
Trustees of the Fund, in consultation with the Fund's investment adviser, may
change the investment policy of the Fund with respect to the dollar-weighted
average life of the portfolio.
The Fund's investment adviser buys and sells securities for the Fund's portfolio
with a view towards seeking a high level of current income exempt from federal
income tax and selects securities which it believes entail reasonable credit
risk considered in relation to the investment policies of the Fund. As a result,
the Fund will not necessarily invest in the highest yielding municipal
securities permitted by its investment policies if the Fund's investment adviser
determines that market risks or credit risks associated with such investments
would subject the Fund's portfolio to undue risk. In selecting securities for
investment, the Fund's investment adviser seeks to add value and limit risk
through careful security selection and by actively managing the Fund's
portfolio. The Fund's investment adviser conducts a credit analysis for each
security considered for investment to evaluate its attractiveness relative to
the level of risk it presents. Portfolio securities are typically sold when the
Fund's investment adviser's assessments materially change. The potential for
realization of capital gains or losses resulting from possible changes in
interest rates will not be a major consideration and frequency of portfolio
turnover generally will not be a limiting factor if the Fund's investment
adviser considers it advantageous to purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Under
normal market conditions, at least 80% of the Fund's net assets will be invested
in municipal securities. The policy stated in the foregoing sentence is a
fundamental policy of the Fund and may not be changed without shareholder
approval of a majority of the Fund's outstanding voting securities, as defined
in the 1940 Act. The Fund may invest a substantial portion of its assets in
municipal securities that are subject to the federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation"
8
<PAGE> 139
securities are secured by the issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. "Revenue" securities are
usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Fund's Statement of Additional Information.
The Fund's Statement of Additional Information may be obtained by investors free
of charge as described on the back cover of this prospectus.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. Under normal
market conditions, the Fund's investment adviser seeks to maintain a
dollar-weighted average portfolio life of three to ten years. The Fund has no
limitation as to the expected life or started maturity of individual municipal
securities in which it may invest. As previously discussed, the Fund may adjust
the average life of the Fund's portfolio from time to time depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed income
municipal
9
<PAGE> 140
securities, the net asset value of the Fund can be expected to change as general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. The prices of longer
term municipal securities generally are more volatile with respect to changes in
interest rates than the prices of shorter term municipal securities. Volatility
may be greater during periods of general economic uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of nonpayment. 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 nonpayment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing nonpayment and a
potential decrease in the net asset value of the Fund. In addition, the Fund may
incur expenses to work out or restructure a distressed or defaulted security.
Securities below investment-grade involve special risks as compared to
higher-grade securities. See "Risks of Investing in Lower-Grade Securities"
below.
The Fund may invest a substantial portion of its total assets in municipal
securities that are subject to federal alternative minimum tax. The Fund may not
be a suitable investment for investors who are already subject to the federal
alternative minimum tax or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve increased risk
to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
The Fund has no policy limiting its investments in municipal securities whose
issuers are located in the same state. However, it is not the present intention
of the Fund to invest more than 25% of the value of its total assets in issuers
located in the same state. If the Fund were to invest more than 25% of its total
assets in issuers located in the same state, it would be more susceptible to
adverse economic, business, or regulatory conditions in that state.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
RISKS OF INVESTING IN LOWER-GRADE SECURITIES
Securities which are in the lower-grade categories generally offer higher yields
than are offered by higher-grade securities of similar maturities, but they also
generally involve greater risks, such as greater credit risk, greater market
risk and volatility, greater liquidity concerns and potentially greater manager
risk. Investors should carefully consider the risks of owning shares of a
portfolio which invests in lower-grade securities before investing in the Fund.
10
<PAGE> 141
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Lower-grade securities are considered more susceptible
to nonpayment of interest and principal or default than higher-grade securities.
Increases in interest rates or changes in the economy may significantly affect
the ability of issuers of lower-grade securities to pay interest and to repay
principal, to meet projected financial goals or to obtain additional financing.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal and interest and such issuer
seeks to restructure the terms of its borrowings, the Fund may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Fund's securities relate.
Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings and the Fund may be unable to
obtain full recovery on such amounts.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the debt securities market and as a result of real or perceived
changes in credit risk. The value of the Fund's investments can be expected to
fluctuate over time. The value of debt securities generally varies inversely
with changes in prevailing interest rates. When interest rates decline, the
value of a portfolio invested in debt securities generally can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
debt securities generally can be expected to decline. Debt securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than debt securities with shorter maturities.
While the Fund has no policy limiting the maturities of the individual debt
securities in which it may invest, the Fund's investment adviser seeks to manage
fluctuations in net asset value resulting from changes in interest rates by
actively managing the portfolio maturity structure and seeking to maintain a
dollar-weighted average portfolio life of three to ten years. Secondary market
prices of lower-grade income securities generally are less sensitive to changes
in interest rate and are more sensitive to general adverse economic changes or
specific developments with respect to the particular issuers than are the
secondary market prices of higher-grade income securities. A significant
increase in interest rates or a general economic downturn could severely disrupt
the market for lower-grade securities and adversely affect the market value of
such securities. Such events also could lead to a higher incidence of default by
issuers of lower-grade securities as compared with higher-grade securities. In
addition, changes in credit risks, interest rates, the credit markets or periods
of general economic uncertainty can be expected to result in increased
volatility in the market price of the lower-grade securities in the Fund and
thus in the net asset value of the Fund. Adverse publicity and investor
perceptions, whether or not based on rational analysis, may affect the value,
volatility and liquidity of lower-grade securities.
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for lower-grade securities may be less
liquid than the markets for higher-grade securities. Liquidity relates to the
ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the lower-grade securities in which the Fund may
invest, trading in such securities may be relatively inactive. Prices of
lower-grade securities may decline rapidly in the event a significant number of
holders decide to sell. Changes in expectations regarding an individual issuer
of lower-grade securities generally could reduce market liquidity for such
securities and make their sale by the Fund more difficult, at least in the
absence of price concessions. The effects of adverse publicity and investor
perceptions may be more pronounced for securities for which no established
retail market exists as compared with the effects on securities for which such a
market does exist. An economic downturn or an increase in interest rates could
severely disrupt the market for such securities and adversely affect the value
of outstanding securities or the ability of the issuers to repay principal and
interest. Further, the Fund may have more difficulty selling such securities in
a timely manner and at their stated value than would be the case for securities
for which an established retail market does exist. Certain municipal securities
in which the Fund may invest, such as special obligation bonds, lease
obligations, participation certificates and variable rate instruments, may be
particularly less liquid. Although the issuer of some such securities may be
obligated to redeem such securities at face value, such redemption
11
<PAGE> 142
could result in losses to the Fund to the extent such municipal securities were
purchased by the Fund at a premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for lower-grade securities held in the Fund's portfolio, the
ability of the Fund's investment adviser to value the Fund's securities becomes
more difficult and the judgment of the Fund's investment adviser may play a
greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data.
The Fund may invest in securities not producing immediate cash income, including
zero-coupon securities or pay-in-kind securities, when their effective yield
over comparable instruments producing cash income make these investments
attractive. Prices on non-cash-paying instruments may be more sensitive to
changes in the issuer's financial condition, fluctuation in interest rates and
market demand/supply imbalances than cash-paying securities with similar credit
ratings, and thus may be more speculative. In addition, the accrued interest
income earned on such instruments is included in investment company taxable
income, thereby increasing the required minimum distributions to shareholders
without providing the corresponding cash flow with which to pay such
distributions. The Fund's investment adviser will weigh these concerns against
the expected total returns from such instruments. See "Additional Information
Regarding Certain Securities" below.
The Fund's investments may include securities with the lowest-grade assigned by
recognized rating organizations and unrated securities of comparable quality.
Securities assigned the lowest grade ratings include those of issuers that are
in default or are in bankruptcy or reorganization. Securities of such issuers
are regarded by the rating agencies as having extremely poor prospects of ever
attaining any real investment standing and are usually available at deep
discounts from the face values of the instruments. A security purchased at a
deep discount may currently pay a very high effective yield. In addition, if the
financial condition of the issuer improves, the underlying value of the security
may increase, resulting in capital appreciation. If the issuer defaults on its
obligations or remains in default, or if the plan of reorganization does not
provide sufficient payments for debtholders, the deep discount securities may
stop generating income and lose value or become worthless. The Fund's investment
adviser will balance the benefits of deep discount securities with their risks.
While a diversified portfolio may reduce the overall impact of a deep discount
security that is in default or loses its value, the risk cannot be eliminated.
Many lower-grade securities are not listed for trading on any national
securities exchange, and many issuers of lower-grade securities choose not to
have a rating assigned to their obligations by any nationally recognized
statistical rating organization. As a result, the Fund's portfolio may consist
of a higher portion of unlisted or unrated securities as compared with an
investment company that invests solely in higher-grade securities. Unrated
securities are usually not as attractive to as many buyers as are rated
securities, a factor which may make unrated securities less marketable. These
factors may have the effect of limiting the availability of the securities for
purchase by the Fund and may also limit the ability of the Fund to sell such
securities at their fair value either to meet redemption requests or in response
to changes in the economy or the financial markets. Further, to the extent the
Fund owns or may acquire illiquid or restricted lower-grade securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. The amount of available
information about the financial condition of certain lower-grade issuers may be
less extensive than other issuers. In its analysis, the Fund's investment
adviser may consider the credit ratings of recognized rating organizations in
evaluating securities although the investment adviser does not rely primarily on
these ratings. Ratings evaluate only the safety of principal and interest
payments, not the market value risk. In addition, ratings are general and not
absolute standards of quality, and credit ratings are subject to the risk that
the creditworthiness of an issuer may change and the rating agencies may fail to
change such ratings in a timely fashion. A rating downgrade does not require the
Fund to dispose of a security. The Fund's investment adviser continuously
monitors the issuers of securities held in the Fund. Because of the number of
investment considerations involved in investing in lower-grade securities, to
the extent the Fund invests in such securities, achievement of the
12
<PAGE> 143
Fund's investment objective may be more dependent upon the Fund's investment
adviser's credit analysis than is the case with investing in higher-grade
securities.
New or proposed laws may have an impact on the market for lower-grade
securities. The Fund's investment adviser is unable at this time to predict what
effect, if any, legislation may have on the market for lower-grade securities.
Special tax considerations are associated with investing in certain lower-grade
securities, such as zero-coupon or pay-in-kind securities. The Fund accrues
income on these securities prior to the receipt of cash payments. The Fund must
distribute substantially all of its income to its shareholders to qualify for
pass-through treatment under federal income tax law and may, therefore, have to
dispose of its portfolio securities to satisfy distribution requirements.
The table below sets forth the percentages of the Fund's assets during the
fiscal year ended September 30, 1999 invested in the various ratings categories
(based on the higher of the Moody's or S&P ratings) and unrated securities
determined by the Fund's investment adviser to be of comparable quality. The
percentages are based on the dollar-weighted average of credit ratings of all
municipal securities held by the Fund during the fiscal year computed on a
monthly basis.
<TABLE>
<CAPTION>
Unrated
Securities of
Rated Securities Comparable Quality
Rating (as a Percentage of (as a Percentage of
Category Portfolio Value) Portfolio Value)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 41.35% 0.94%
..........................................................................
AA/Aa 3.67% 0%
..........................................................................
A/A 7.20% 0%
..........................................................................
BBB/Baa 19.98% 8.75%
..........................................................................
BB/Ba 1.18% 12.29%
..........................................................................
B/B 0% 4.57%
..........................................................................
CCC/Caa 0.07% 0%
..........................................................................
CC/Ca 0% 0%
..........................................................................
C/C 0% 0%
..........................................................................
D 0% 0%
..........................................................................
Percentage of Rated and
Unrated Securities 73.45% 26.55%
..........................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those listed above.
ADDITIONAL INFORMATION REGARDING CERTAIN SECURITIES
The Fund may invest in certain securities not producing immediate cash income,
such as zero coupon and payment-in-kind securities. Zero-coupon securities are
debt securities that do not entitle the holder to any periodic payment of
interest prior to maturity or a specified date when the securities begin paying
current interest. They are issued and traded at a discount from their face
amounts or par value, which discount varies depending on the time remaining
until cash payments begin, prevailing interest rates, liquidity of the security
and the perceived credit quality of the issuer. Because such securities do not
entitle the holder to any periodic payments of interest prior to maturity, this
prevents any reinvestment of interest payments at prevailing interest rates if
prevailing interest rates rise. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, "zero-coupon" securities
eliminate the reinvestment risk and may lock in a favorable rate of return to
maturity if interest rates drop.
Payment-in-kind securities are debt securities that pay interest through the
issuance of additional securities. Prices on such non-cash-paying instruments
may be more sensitive to changes in the issuer's financial condition,
fluctuations in interest rates and market demand/supply imbalances than
cash-paying securities with similar credit ratings, and thus may be more
speculative than are securities that pay interest periodically in cash.
The amount of non-cash interest income earned on zero-coupon securities and
payment-in-kind securities is included, for federal income tax purposes, in the
Fund's calculation of income that is required to be distributed to shareholders
for the Fund to maintain its desired federal income tax status (even though such
non-cash paying securities do not provide the Fund with the cash flow with which
to pay such distributions). Accordingly, the Fund may be required to borrow or
to liquidate portfolio securities at a time that it otherwise would not have
done so in order to make such distributions. The Fund's investment adviser will
weigh these concerns against the expected total returns from such instruments.
13
<PAGE> 144
DERIVATIVE INSTRUMENTS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that the use of these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and other interest rate indices and other financial instruments,
purchase and sell financial futures contracts and options on futures and enter
into various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of securities for investment purposes, to manage the effective maturity
or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used at
any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the investment
adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default by the other party to the transaction, illiquidity of the
derivative instrument, and, to the extent the investment adviser's view as to
certain market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale of
portfolio securities at inopportune times or for prices other than at current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the risk management or hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and their risks are described more fully in the Fund's Statement of
Additional Information. Income earned or deemed to be earned by the Fund from
its Strategic Transactions, if any, generally will be taxable income of the
Fund.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on securities in connection with such transactions prior to
the date the Fund actually takes delivery of such securities. These transactions
are subject to market risk as the value or yield of a security at delivery may
be more or less than the purchase price or the yield generally available on
securities when delivery occurs. In addition, the Fund is subject to
counterparty risk because it relies on the buyer or seller, as the case may be,
to consummate the transaction, and failure by the other party to complete the
transaction may result in the Fund
14
<PAGE> 145
missing the opportunity of obtaining a price or yield considered to be
advantageous. The Fund will only make commitments to purchase such securities
with the intention of actually acquiring these securities, but the Fund may sell
these securities prior to settlement if it is deemed advisable. No specific
limitation exists as to the percentage of the Fund's assets which may be used to
acquire securities on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities, or yield
differentials, or for other reasons. The Fund's portfolio turnover is shown
under the heading "Financial Highlights." The portfolio turnover rate may vary
from year to year. A high portfolio turnover rate (100% or more) increases a
fund's transactions costs (including brokerage commissions or dealer costs) and
a high portfolio turnover rate may result in the realization of more short-term
capital gains than if a fund had a lower portfolio turnover rate. Increases in a
fund's transaction costs would adversely impact the fund's performance. The
turnover rate will not be a limiting factor, however, if the Fund's investment
adviser considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may invest on a temporary basis a portion or all
of its assets in high-quality, short-term municipal obligations. If such
high-quality, short-term securities are not available or, in the Fund's
investment adviser's judgment, do not afford sufficient protection against
adverse market conditions, the Fund may invest in taxable obligations. Such
taxable obligations may include in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, other investment grade quality
income securities, prime commercial paper, certificates of deposit, bankers'
acceptances and other obligations of domestic banks having total assets of at
least $500 million, and repurchase agreements. In taking such a defensive
position, the Fund would not be pursuing and may not achieve its investment
objective.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp"). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $90 billion under management or supervision as of
December 31, 1999. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly
15
<PAGE> 146
fee computed based upon an annual rate applied to the average daily net assets
of the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.50%
.....................................................
Over $500 million 0.45%
.....................................................
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.50% of the
Fund's average daily net assets for the Fund's fiscal year ended September 30,
1999.
The Fund's average daily 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.
Under the Advisory Agreement the Adviser furnishes offices, necessary facilities
and equipment and provides administrative services to the Fund. The Fund pays
all charges and expenses of its day-to-day operations, including service fees,
distribution fees, custodial fees, legal and independent accountant fees, the
costs of reports and proxies to shareholders, compensation of trustees of the
Trust (other than those who are affiliated persons of the Adviser, Distributor
or Van Kampen Investments) and all other ordinary business expenses not
specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Timothy D. Haney, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since January 1997. Mr. Haney has been employed by the Adviser since August
1988.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments must be at least $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and service plan (each as described below) under
which its distribution fee and/or service fee is paid, (iii) each class of
shares has different exchange privileges, (iv) certain classes of shares are
subject to a conversion feature and (v) certain classes of shares have different
shareholder service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B
16
<PAGE> 147
Shares and Class C Shares and the differential in the dividends that may be paid
on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays or any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund's Board of Trustees reserves the right to
calculate the net asset value per share and adjust the offering price based
thereon more frequently than once daily if deemed desirable. Net asset value per
share for each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities for which market quotations are not readily available and other
assets are valued at their fair value as determined in good faith by the Adviser
in accordance with procedures established by the Board of Trustees of the Fund.
Short-term investments with remaining maturities of 60 days or less are valued
at cost plus accrued interest (amortized cost) which approximates market value.
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. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders and the maintenance of such shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
such class of shares. To assist investors in comparing classes of shares, the
tables under the heading "Fees and Expenses of the Fund" provide a summary of
sales charges and expenses and an example of the sales charges and expenses of
the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next
17
<PAGE> 148
computed net asset value per share provided they are received by Investor
Services prior to Investor Services' close of business on such date. It is the
responsibility of authorized dealers to transmit orders received by them to
Investor Services so they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 3.25% of the offering price (or 3.36% of the net amount
invested), reduced on investments of $25,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $25,000 3.25% 3.36%
..........................................................
$25,000 but less than
$250,000 2.75% 2.83%
..........................................................
$250,000 but less than
$500,000 1.75% 1.78%
..........................................................
$500,000 but less than
$1,000,000 1.50% 1.52%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed
on an amount equal to the lesser of the then current market value or the
cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends on capital gain dividends.
Under the Distribution Plan and Service Plan, the Fund may spend up to a total
of 0.25% per year of the Fund's average daily net assets with respect to the
Class A Shares of the Fund. From such amount, under the Service Plan, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within four years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 3.00%
................................................
Second 2.50%
................................................
Third 2.00%
................................................
Fourth 1.00%
................................................
Fifth and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for each purchase of Class B Shares
until the time of redemption of such shares.
18
<PAGE> 149
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class B Shares of the
Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge including any appreciation of such shares followed by shares held the
longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan Class B Shares received on such shares, automatically convert to Class A
Shares eight years after the end of the calendar month in which the shares were
purchased. Class B Shares purchased before June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, automatically convert
to Class A Shares six years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C Shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar month in which
such shares were purchased. Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. The conversion schedule applicable to a share of the Fund acquired
through the exchange privilege from another Van Kampen fund participating in the
exchange program is determined by reference to the Van Kampen fund from which
such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by
involuntary liquidation by the Fund of a shareholder's
19
<PAGE> 150
account as described under the heading "Redemption of Shares." Subject to
certain limitations, a shareholder who has redeemed Class C Shares of the Fund
may reinvest in Class C Shares at net asset value with credit for any contingent
deferred sales charge if reinvestment is made within 180 days after the
redemption. For a more complete description of contingent deferred sales charge
waivers, please refer to the Fund's Statement of Additional Information or
contact your authorized dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
also includes purchases of shares of the Participating Funds over a 13-month
period based on the total amount of intended purchases plus the value of all
shares of the Participating Funds previously purchased and still owned. An
investor may elect to compute the 13-month period starting up to 90 days before
the date of execution of a Letter of Intent. Each investment made during the
period receives the reduced sales charge applicable to the total amount of the
investment goal. The initial purchase must be for an amount equal to at least 5%
of the minimum total purchase amount of the level selected. If trades not
initially made under a Letter of Intent subsequently qualify for a lower sales
charge through the 90-day backdating provisions, an adjustment will be made at
the expiration of the Letter of Intent to give effect to the lower sales charge.
Such adjustment in sales charge will be used to purchase additional shares for
the shareholder with the applicable sales charge. The Fund initially will escrow
shares totaling 5% of the dollar amount of the Letter of Intent to be held by
Investor Services in the name of the shareholder. In the event the Letter of
Intent goal is not achieved within the specified period, the investor must pay
the difference between the sales charge applicable to the purchases made and the
reduced sales charges previously paid. Such payments may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and
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with no minimum initial or subsequent investment requirement, if the
administrator of an investor's unit investment trust program meets certain
uniform criteria relating to cost savings by the Fund and the Distributor. The
total sales charge for all other investments made from unit investment trust
distributions will be 1.00% of the offering price (1.01% of net asset value). Of
this amount, the Distributor will pay to the authorized dealer, if any, through
which such participation in the qualifying program was initiated 0.50% of the
offering price as a dealer concession or agency commission. Persons desiring
more information with respect to this program, including the terms and
conditions that apply to the program thereof, should contact their authorized
dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
In order to obtain these special benefits, all dividends and other distributions
by the Fund must be reinvested in additional shares and there cannot be any
systematic withdrawal program. There will be no minimum for reinvestments from
unit investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
1. Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
2. Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
3. Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
4. Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over a
12-month period.
5. Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
6. Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
7. Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
8. Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by non-profit organizations
defined under Section 501(c)(3) of the Code and assets held by an employer or
trustee in connection with an eligible
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deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds after
January 1, 2000, that (1) the total plan assets are at least $1 million or
(2) such shares are purchased by an employer sponsored plan with more than
100 eligible employees. Such plans that have been established with a
Participating Fund or have received proposals from the Distributor prior to
January 1, 2000 based on net asset value purchase privileges previously in
effect will be qualified to purchase shares of the Participating Funds at net
asset value. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves as custodian will not be eligible for net asset value
purchases based on the aggregate investment made by the plan or the number of
eligible employees, except under certain uniform criteria established by the
Distributor from time to time. For purchases on February 1, 1997 and
thereafter, a commission will be paid as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million, plus 0.25% on the excess over $50 million.
9. Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement or
authorization, on behalf of the group, for purchase of shares of the Fund and
Participating Funds, (iv) has a membership that the authorized dealer can
certify as to the group's members and (v) satisfies other uniform criteria
established by the Distributor for the purpose of realizing economies of
scale in distributing such shares. A qualified group does not include one
whose sole organizational nexus, for example, is that its participants are
credit card holders of the same institution, policy holders of an insurance
company, customers of a bank or broker-dealer, clients of an investment
adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers who
initiate and are responsible for such sales to each individual as follows:
1.00% on sales to $2 million, plus 0.80% on the next $1 million and 0.50% on
the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian/trustee of a
retirement plan account may involve additional fees charged by the dealer or
custodian/trustee.
Except as specified below under "Telephone Redemption Requests" payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the request and any other necessary documents in
proper form as described below. Such payment may be postponed or the right of
redemption suspended as provided by the rules of the SEC. Such payment may,
under certain circumstances, be paid wholly or in part by
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a distribution-in-kind of portfolio securities which may result in brokerage
costs and a gain or loss for federal income tax purposes when such securities
are sold. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the payment of redemption proceeds until it confirms
the purchase check has cleared, which may take up to 15 days. A taxable gain or
loss will be recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares to be redeemed, the Fund name and class
designation of such shares and the shareholder's account number. The redemption
request must be signed by all persons in whose names the shares are registered.
Signatures must conform exactly to the account registration. If the proceeds of
the redemption exceed $50,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the record address has changed within
the previous 30 days, signature(s) must be guaranteed by one of the following: a
bank or trust company; a broker-dealer; a credit union; a national securities
exchange, registered securities association or clearing agency; a savings and
loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by and registered to
a corporation, partnership, trust, fiduciary, or other legal entity, a copy of
the corporate resolution or other legal documentation appointing the authorized
signer and certified within the prior 120 days must accompany the redemption
request. Retirement plan distribution requests should be sent to the
custodian/trustee to be forwarded to Investor Services. Contact the
custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the application form
accompanying the prospectus. For accounts that are not established with
telephone redemption privileges, a shareholder may call the Fund at (800)
341-2911 to request that a copy of the Telephone Redemption Authorization form
be sent to the shareholder for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. Shares may also be redeemed by
phone through FundInfo(R) (automated phone system) to the shareholder's bank
account of record 24 hours a day, seven days a week at (800) 847-2424. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedure previously described.
Requests received by Investor Services
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prior to 4:00 p.m., New York time, will be processed at the next determined net
asset value per share. These privileges are available for most accounts other
than retirement accounts or accounts with shares represented by certificates. If
an account has multiple owners, Investor Services may rely on the instructions
of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. If a redemption
is requested through FundInfo(R) transactions are sent to the predesignated bank
account of record only. Proceeds from redemptions payable by wire transfer are
expected to be wired on the next business day following the date of redemption.
The Fund reserves the right at any time to terminate, limit or otherwise modify
this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare daily and distribute monthly all,
or substantially all, of its net investment income, as dividends to
shareholders. Dividends are automatically applied to purchase additional shares
of the Fund at the next determined net asset value unless the shareholder
instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
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REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends and/or capital gains be paid in cash, be
reinvested in the Fund at net asset value, or be invested in another Van Kampen
fund at net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may appoint
Investor Services as agent by completing the Authorization for Redemption by
Check form and the appropriate section of the application and returning the form
and the application to Investor Services. Once the form is properly completed,
signed and returned to the agent, a supply of checks drawn on State Street Bank
and Trust Company (the "Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A Share account by Investor Services at the next determined
net asset value per share. Check writing redemptions represent the sale of Class
A Shares. Any gain or loss realized on the redemption of shares is a taxable
event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or by the Bank. Retirement plans and accounts that are subject to backup
withholding are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange.
A prospectus of any of the Participating Funds may be obtained from any
authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or
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loss for federal income tax purposes. If the shares sold have been held for less
than 91 days, the sales charge paid on such shares is carried over and included
in the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services, by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
telephone exchange privileges unless the shareholder indicates otherwise by
checking the applicable box on the application form accompanying the prospectus.
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain dividend options (except
dividend diversification) and authorized dealer of record as the account from
which shares are exchanged, unless otherwise specified by the shareholder. In
order to establish a systematic withdrawal plan for the new account or reinvest
dividends from the new account into another fund, however, an exchanging
shareholder must submit a specific request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
and other Participating Funds may restrict exchanges by shareholders engaged in
excessive trading by limiting or disallowing the exchange privilege to such
shareholders. For further information on these restrictions see the Fund's
Statement of Additional Information. The Fund may modify, restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
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FEDERAL INCOME TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its income (consisting generally
of tax-exempt interest, taxable income and net short-term capital gains) will
constitute tax-exempt interest, a significant portion of the Fund's income may
consist of investment company taxable income. Distributions of investment
company taxable income (generally taxable income and net short-term capital
gain) 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 gain (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Fund have been held by such shareholders. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and
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the amount received. If the shares are held as a capital asset, the gain or loss
will be a capital gain or loss. Any recognized capital gains may be taxed at
different rates depending on how long the shareholder held such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income and at least
90% of net tax-exempt interest, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on the undistributed amounts.
The federal income tax discussion set forth above is for general information
only. The exemption of interest income for federal income tax purposes may not
result in similar exemptions under the laws of a particular state or local
taxing authority. Income distributions may be taxable to shareholders under
state or local law as dividend income even though a portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes. The Fund will report
annually to its shareholders the percentage and source, on a state-by-state
basis, of interest income earned on municipal securities received by the Fund
during the preceding calendar year. Dividends and distributions paid by the Fund
from sources other than tax-exempt interest are generally subject to taxation at
the state and local levels. Prospective investors should consult their own tax
advisers regarding the specific federal tax consequences of purchasing, holding,
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
28
<PAGE> 159
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, --------------------
1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................... $10.728 $10.536 $10.213 $10.264 $ 9.330 $10.145
------- ------- ------- ------- ------- -------
Net Investment Income................... .471 .358 .480 .455 .508 .489
Net Realized and Unrealized Gain/Loss... (.475) .199 .317 (.032) .900 (.815)
------- ------- ------- ------- ------- -------
Total from Investment Operations......... (.004) .557 .797 .423 1.408 (.326)
Less Distributions from and in excess of
Net Investment Income................... .504 305 .474 .474 .474 .489
Net Asset Value, End of the Period....... $10.220 $10.728 $10.536 $10.213 $10.264 $ 9.330
======= ======= ======= ======= ======= =======
Total Return*(a)......................... (0.10%) 5.36%** 8.08% 4.27% 15.31% (3.32%)
Net Assets at End of the Period (In
millions)............................... $ 29.5 $ 20.6 $ 12.9 $ 12.5 $ 15.6 $ 15.7
Ratio of Expenses to Average Net
Assets*................................. 1.28% 1.30% 1.52% 1.56% 1.00% .67%
Ratio of Net Investment Income to Average
Net Assets*............................. 4.49% 4.61% 4.67% 4.45% 5.10% 5.07%
Portfolio Turnover....................... 65% 15%** 37% 45% 75% 274%
*If certain expenses had not been reimbursed by the Adviser, Total Return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets.................................. N/A N/A 1.67% 1.74% 1.61% 1.75%
Ratio of Net Investment Income to Average
Net Assets.............................. N/A N/A 4.52% 4.27% 4.49% 3.99%
<CAPTION>
Class B Shares
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, --------------------
1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................... $10.714 $10.526 $10.209 $10.263 $ 9.319 $10.137
------- ------- ------- ------- ------- -------
Net Investment Income................... .392 .308 .402 .375 .430 .417
Net Realized and Unrealized Gain/Loss... (.475) .191 .317 (.027) .916 (.818)
------- ------- ------- ------- ------- -------
Total from Investment Operations......... (.083) .499 .719 .348 1.346 .401
Less Distributions from and in excess of
Net Investment Income................... .428 .311 .402 .402 .402 .417
Net Asset Value, End of the Period....... $10.203 $10.714 $10.526 $10.209 $10.263 $ 9.319
======= ======= ======= ======= ======= =======
Total Return*(a)......................... (0.81%) 4.74%** 7.23% 3.54% 14.62% (4.04%)
Net Assets at End of the Period (In
millions)............................... $ 10.4 $ 15.2 $ 16.4 $ 16.4 $ 17.5 $ 17.7
Ratio of Expenses to Average Net
Assets*................................. 1.97% 2.06% 2.28% 2.32% 1.75% 1.43%
Ratio of Net Investment Income to Average
Net Assets*............................. 3.80% 3.90% 3.91% 3.69% 4.33% 4.30%
Portfolio Turnover....................... 65% 15%** 37% 45% 75% 274%
*If certain expenses had not been reimbur
would have been as follows:
Ratio of Expenses to Average Net
Assets.................................. N/A N/A 2.42% 2.50% 2.36% 2.50%
Ratio of Net Investment Income to Average
Net Assets.............................. N/A N/A 3.77% 3.51% 3.72% 3.24%
<CAPTION>
Class C Shares
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, --------------------
1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................... $10.712 $10.525 $10.206 $10.260 $ 9.314 $10.134
------- ------- ------- ------- ------- -------
Net Investment Income................... .399 .308 .402 .374 .430 .419
Net Realized and Unrealized Gain/Loss... (.481) .190 .319 (.026) .918 (.822)
------- ------- ------- ------- ------- -------
Total from Investment Operations......... (.082) .498 .721 .348 1.348 (.403)
Less Distributions from and in excess of
Net Investment Income................... .428 .311 .402 .402 .402 .417
Net Asset Value, End of the Period....... $10.202 $10.712 $10.525 $10.206 $10.260 $ 9,314
======= ======= ======= ======= ======= =======
Total Return*(a)......................... (0.81%) 4.74%** 7.23% 3.54% 14.74% (4.04%)
Net Assets at End of the Period (In
millions)............................... $ 5.6 $ 3.3 $ 3.1 $ 5.8 $ 4.9 $ 4.7
Ratio of Expenses to Average Net
Assets*................................. 2.02% 2.06% 2.29% 2.32% 1.74% 1.43%
Ratio of Net Investment Income to Average
Net Assets*............................. 3.75% 3.89% 3.88% 3.70% 4.36% 4.34%
Portfolio Turnover....................... 65% 15%** 37% 45% 75% 274%
*If certain expenses had not been reimbur
would have been as follows:
Ratio of Expenses to Average Net
Assets.................................. N/A N/A 2.43% 2.50% 2.34% 2.46%
Ratio of Net Investment Income to Average
Net Assets.............................. N/A N/A 3.74% 3.52% 3.75% 3.31%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
maximum sales charge or contingent deferred sales charge.
N/A - Not Applicable
29
<PAGE> 160
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P corporate or municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial 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 obligor 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; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT -- INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
A- 1
<PAGE> 161
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.
r: This symbol highlights derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples include: obligations linked or
indexed to equities, currencies, or commodities; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong or strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse Financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the due date, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
A commercial paper 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 to
S&P by the issuer or obtained 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
A- 2
<PAGE> 162
unavailability of, such information, or based on other circumstances.
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+').
LONG-TERM DEBT
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market 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 through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
A- 3
<PAGE> 163
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date date to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as MIG 1 or
VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's assigns a MIG
or VMIG rating, all categories define an investment grade situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability for
repayment of short-term debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics:
- -Leading market positions in well established industries.
- -High rates of return on funds employed.
- -Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- -Broad margins in earnings coverage of fixed financial charges and high internal
cash generation.
- -Well established access to a ranges of financial markets and assured sources of
alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
A- 4
<PAGE> 164
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.
A- 5
<PAGE> 165
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson Paul G. Yovovich
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Dennis J. McDonnell*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
Edward C. Wood, III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
Stephen L. Boyd*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer & Treasurer
Curtis W. Morell*
Vice President & Chief Accounting Officer
Tanya M. Loden*
Controller
* "Interested Persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time
Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Intermediate Term Municipal Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Intermediate Term Municipal Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 166
VAN KAMPEN
INTERMEDIATE TERM
MUNICIPAL INCOME FUND
PROSPECTUS
JANUARY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]) or by writing the
Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act
File No. is 811-4386.
INF PRO 1/00
<PAGE> 167
VAN KAMPEN
FLORIDA INSURED TAX FREE INCOME FUND
Van Kampen Florida Insured Tax Free Income Fund is a mutual fund with the
investment objective to provide investors with a high level of current income
exempt from federal income tax and Florida intangible personal property taxes,
consistent with preservation of capital. The Fund is designed for investors who
are residents of Florida for tax purposes. The Fund's investment adviser seeks
to achieve the Fund's investment objective by investing primarily in a portfolio
of Florida municipal securities that are insured at the time of purchase as to
timely payment of principal and interest by a top-rated private insurance
company.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
This prospectus is dated JANUARY 28, 2000.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 168
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 6
Investment Objective, Policies and Risks........... 7
Investment Advisory Services....................... 13
Purchase of Shares................................. 14
Redemption of Shares............................... 21
Distributions from the Fund........................ 22
Shareholder Services............................... 23
Florida Taxation................................... 25
Federal Income Taxation............................ 26
Financial Highlights............................... 28
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 169
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the investment objective to provide investors
with a high level of current income exempt from federal income tax and Florida
intangible personal property taxes, consistent with preservation of capital.
INVESTMENT STRATEGIES
The Fund's investment adviser seeks to achieve the Fund's investment objective
by investing primarily in a portfolio of Florida municipal securities that are
insured at the time of purchase as to timely payment of principal and interest
by a top-rated private insurance company. The Fund is designed for investors who
are residents of Florida for tax purposes.
The Fund buys and sells Florida municipal securities with a view towards seeking
a high level of current income exempt from federal income taxes and Florida
intangible personal property taxes and selects securities which the Fund's
investment adviser believes entail reasonable credit risk considered in relation
to the investment policies of the Fund. In selecting securities for investment,
the Fund's investment adviser uses its research capabilities to identify and
monitor attractive investment opportunities and to seek to protect the Fund's
portfolio from early payment by issuers of such securities. In conducting its
research and analysis, the Fund's investment adviser considers a number of
factors, including general market and economic conditions and credit, interest
rate and prepayment risks. Portfolio securities are typically sold when the
Fund's investment adviser's assessment of any of these factors materially
change. Although the Fund invests in insured municipal securities, insurance
does not protect the Fund from market fluctuations in the value of an insured
security, but only guarantees timely payment of principal and interest of such
investments.
Under normal market conditions, the Fund invests at least 80% of its total
assets in insured Florida municipal securities. Under normal market conditions,
the Fund may invest up to 20% of its total assets in uninsured Florida municipal
securities rated "investment grade" at the time of purchase by a nationally
recognized statistical rating organization. Under normal market conditions, the
Fund may invest up to 20% of its total assets in municipal securities that are
subject to federal alternative minimum tax. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis. The Fund may purchase or
sell certain derivative instruments (such as options, futures, options on
futures, and interest rate swaps or other interest rate-related transactions)
for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. The Fund has no policy limiting the maturities of its
investments. To the extent that the Fund invests in securities with longer
maturities, the Fund will be subject to greater market risk than a fund
investing solely in shorter-term securities.
Generally, the Fund's municipal securities are insured as to timely payment of
principal and interest by a top-rated private insurance company. This insurance
does not, however, guarantee that the prices of these securities will remain
stable during interest rate changes.
Market risk is often greater among certain types of debt securities, such as
zero-coupon bonds. As interest rates change, these securities often fluctuate
more in price than traditional debt securities and may subject the Fund to
greater market risk than a fund that does not own these types of securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Credit risk should be low for the Fund because it
invests primarily in insured municipal securities.
3
<PAGE> 170
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
UNDERSTANDING MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investor's home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in insured municipal
securities. The yields of municipal securities, or of insured municipal
securities, may move differently and adversely compared to the yields of the
overall debt securities markets. While the interest received from municipal
securities generally is exempt from federal income tax, the Fund may invest up
to 20% of its total assets in municipal securities subject to federal
alternative minimum tax. In addition, there could be changes in applicable tax
laws or tax treatments that reduce or eliminate the current federal income tax
exemption on municipal securities or otherwise adversely affect the current
federal or state tax status of municipal securities.
NON-DIVERSIFICATION RISKS. The Fund is classified as a "non-diversified" fund,
which means the Fund may invest a greater portion of its assets in a more
limited number of issuers than a "diversified" fund. As a result, the Fund may
be subject to greater risk than a diversified fund because changes in the
financial condition or market assessment of a single issuer may cause greater
fluctuations in the value of the Fund's shares.
STATE-SPECIFIC RISKS. Because the Fund invests primarily in a portfolio of
Florida municipal securities, the Fund is more susceptible to political,
economic, regulatory or other factors affecting issuers of Florida municipal
securities than a fund that does not limit its investments to such issuers.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures, options on futures and interest
rate swaps or other interest rate-related transactions are examples of
derivatives. Derivative instruments involve risks different from direct
investment in underlying securities. These risks include imperfect correlation
between the value of the instruments and the underlying assets; risks of default
by the other party to certain transactions; risks that the transactions may
result in losses that partially or completely offset gains in portfolio
positions; risks that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek current income
- - Are in a high federal income tax bracket
- - Are subject to Florida intangible personal property tax
- - Wish to add to their personal investment portfolio a Fund that invests
primarily in insured Florida municipal securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
4
<PAGE> 171
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the five calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
BAR GRAPH
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
1995 16.29
1996 4.37
1997 8.72
1998 6.61
1999 -5.06
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the five-year period shown in the bar chart, the highest quarterly return
was 6.75% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -2.37% (for the quarter ended March 31, 1996).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Lehman Brothers Municipal
Bond Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charge paid by investors. The index's
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing the securities represented by the index. Average
annual total returns are shown for the periods ended December 31, 1999 (the most
recently completed calendar year prior to the date of this prospectus). Remember
that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns
for the
Periods Ended Past Past Since
December 31, 1999 1 Year 5 Years Inception
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Van Kampen Florida
Insured Tax Free
Income Fund --
Class A Shares -9.58% 4.93% 4.26%(1)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.86%(1)
.........................................................
Van Kampen Florida
Insured Tax Free
Income Fund --
Class B Shares -9.38% 4.94% 4.27%(1)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.86%(1)
.........................................................
Van Kampen Florida
Insured Tax Free
Income Fund --
Class C Shares -6.61% 5.22% 4.45%(1)
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.86%(1)
.........................................................
</TABLE>
Inception date: (1) 7/29/94.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
statistical composite of municipal bonds.
The current yield for the thirty-day period ended September 30, 1999 is 5.12%
for Class A Shares, 4.62% for Class B Shares and 4.61% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
5
<PAGE> 172
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- --------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 4.75%(1) None None
..............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) 4.00%(3) 1.00%(4)
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends None None None
..............................................................
Redemption fees None None None
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------
Management fees(5) 0.50% 0.50% 0.50%
..............................................................
Distribution and/or
service (12b-1) 0.25% 1.00%(7) 1.00%(7)
fees(6)
..............................................................
Other expenses(5) 0.35% 0.36% 0.37%
..............................................................
Total annual fund
operating expenses(5) 1.10% 1.86% 1.87%
..............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares--Class A
Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares--Class A Shares."
(3) The maximum deferred sales charge is 4.00% in the first year after purchase,
declining thereafter as follows:
Year 1-4.00%
Year 2-3.75%
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
See "Purchase of Shares -- Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) The Fund's investment adviser is currently waiving or reimbursing all or a
portion of the Fund's management fees and other expenses such that actual
total annual fund operating expenses for the fiscal year ended September 30,
1999 were 0.37%, 1.13% and 1.14% for Class A Shares, Class B Shares and
Class C Shares, respectively.
(6) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(7) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $582 $808 $1,052 $1,752
......................................................................
Class B Shares $589 $935 $1,156 $1,981*
......................................................................
Class C Shares $290 $588 $1,011 $2,190
......................................................................
</TABLE>
6
<PAGE> 173
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $582 $808 $1,052 $1,752
......................................................................
Class B Shares $189 $585 $1,006 $1,981*
......................................................................
Class C Shares $190 $588 $1,011 $2,190
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVE,
POLICIES AND RISKS
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax and Florida intangible personal
property taxes, consistent with preservation of capital. The Fund's investment
objective is a fundamental policy and may not be changed without shareholder
approval of a majority of the Fund's outstanding voting securities, as defined
in the Investment Company Act of 1940, as amended (the "1940 Act"). There are
risks inherent in all investments in securities; accordingly, there can be no
assurance that the Fund will achieve its investment objective.
The Fund's investment adviser seeks to achieve the Fund's investment objective
by investing primarily in a portfolio of Florida municipal securities that are
insured at the time of purchase as to timely payment of principal and interest
by an entity whose claims-paying ability is rated AAA by Standard and Poor's
("S&P"), or Aaa by Moody's Investors Service, Inc. ("Moody's") or an equivalent
rating by another nationally recognized statistical rating organization
("NRSRO"). The Fund is designed for investors who are residents of Florida for
tax purposes.
The Fund's investment adviser actively manages the Fund's portfolio and adjusts
the average maturity of portfolio investments based upon its expectations about
the direction of interest rates and other economic factors. In selecting
securities for investment, the Fund's investment adviser uses its research
capabilities to identify and monitor attractive investment opportunities and to
seek to protect the Fund's portfolio from early payment by issuers of such
securities. In conducting its research and analysis, the Fund's investment
adviser considers a number of factors, including general market and economic
conditions, and credit, interest rate and prepayment risks. Portfolio securities
are typically sold when the Fund's investment adviser's assessment of any of
these factors materially change. Although the Fund invests in insured municipal
securities, insurance does not protect the Fund from market fluctuations in the
value of an insured security, but only guarantees timely payment of principal
and interest of such investments.
The Fund's investment adviser buys and sells securities for the Fund's portfolio
with a view towards seeking a high level of current income exempt from federal
income tax and Florida intangible personal property taxes and selects securities
that the Fund's investment adviser believes entail reasonable credit risk
considered in relation to the investment policies of the Fund. As a result, the
Fund will not necessarily invest in the highest yielding Florida municipal
securities permitted by its investment policies if the Fund's investment adviser
determines that market risks or credit risks associated with such investments
would subject the Fund's portfolio to undue risk. The potential for realization
of capital gains or losses resulting from possible changes in interest rates
will not be a major consideration and frequency of portfolio turnover generally
will not be a limiting factor if the Fund's investment adviser considers it
advantageous to purchase or sell securities.
Under normal market conditions, the Fund invests at least 80% of its total
assets in insured Florida municipal securities. Under normal market conditions,
the Fund may invest up to 20% of its total assets in uninsured Florida municipal
securities rated investment grade at the time of investment. Investment grade
securities are securities rated BBB or higher by S&P, Baa or higher by Moody's
or an equivalent rating by another NRSRO and comparably rated short term
securities. Under normal market conditions, the Fund may invest up to 20% of its
total assets in municipal securities that are subject to the alternative minimum
tax. From time to time, the Fund temporarily may invest up to 10% of its total
assets in tax exempt money market funds and such instruments will be treated as
investments in municipal securities.
7
<PAGE> 174
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Florida
municipal securities are municipal securities the interest on which, in the
opinion of bond counsel or other counsel to the issuers of such securities, is,
at the time of issuance, exempt from Florida intangible personal property taxes.
Under normal market conditions, at least 80% of the Fund's total assets will be
invested in Florida municipal securities. The policy stated in the foregoing
sentence is a fundamental policy of the Fund and may not be changed without
shareholder approval of a majority of the Fund's outstanding voting securities,
as defined in the 1940 Act. Under normal market conditions, the Fund may invest
up to 20% of its total municipal securities that are subject to federal
alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, maturity of the obligation and rating of the issue.
The ratings of S&P and Moody's represent their opinions of the quality of the
municipal securities they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 20% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate
8
<PAGE> 175
that is adjusted at specified intervals. The adjustment formula maintains the
value of the variable rate demand note at approximately the par value of such
note at the adjustment date. Municipal leases are obligations issued by state
and local governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Fund's Statement of Additional Information.
The Statement of Additional Information can be obtained by investors free of
charge as described on the back cover of this prospectus.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of the municipal securities in which it may
invest. The Fund's investment adviser may adjust the average maturity of the
Fund's portfolio from time to time depending on the investment advisor's
assessment of the relative yields available on different maturities and the
investment adviser's expectations of future changes in interest rates. The Fund
may invest in shorter term municipal securities when it believes market
conditions warrant such investments.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Although the Fund invests primarily in municipal securities that are insured at
the time of purchase as to timely payment of principal and interest, municipal
securities, like other debt obligations, are subject to the credit risk of
nonpayment. 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 nonpayment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing nonpayment and a
potential decrease in the net asset value of the Fund. In addition, the Fund may
incur expenses to work out or restructure a distressed or defaulted security.
The Fund may invest up to 20% of its total assets in municipal securities that
are subject to federal alternative minimum tax. Accordingly, the Fund may not be
a suitable investment for investors who are already subject to the federal
alternative minimum tax or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may
9
<PAGE> 176
invest in municipal securities issued by entities having similar
characteristics. The issuers may be located in the same geographic area or may
pay their interest obligations from revenue of similar projects, such as
hospitals, airports, utility systems and housing finance agencies. This may make
the Fund's investments more susceptible to similar economic, political or
regulatory occurrences. As the similarity in issuers increases, the potential
for fluctuation in the Fund's net asset value also increases. The Fund may
invest more than 25% of its total assets in a segment of the municipal
securities market with similar characteristics if the Fund's investment adviser
determines that the yields available from obligations in a particular segment
justify the additional risks of a larger investment in such segment. The Fund
may not, however, invest more than 25% of its total assets in industrial
development revenue bonds issued for companies in the same industry. Sizeable
investments in such obligations could involve increased risk to the Fund should
any of such issuers or any such related projects or facilities experience
financial difficulties.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
INSURED MUNICIPAL SECURITIES
The Fund invests primarily in a portfolio of municipal securities that are
insured at the time of investment as to timely payment of principal and interest
by a top-rated private insurance company. Such insurance could be provided as:
Original Issue Insurance, Secondary Market Insurance or Portfolio Insurance.
Original Issue Insurance is purchased with respect to a particular issue of
municipal securities by the issuer thereof or a third party in conjunction with
the original issue of such municipal securities. Secondary Market Insurance is
purchased by the Fund or a third party subsequent to the time of original
issuance of a municipal security. Both Original Issue Insurance and Secondary
Market Insurance remain in effect as long as the municipal securities covered
thereby remain outstanding and the insurer remains in business, regardless of
whether the Fund ultimately disposes of such municipal securities. Portfolio
Insurance may be purchased by the Fund with respect to municipal securities
which the Fund intends to purchase or already owns and would generally terminate
when the municipal security is sold by the Fund or redeemed. There is no
limitation on the percentage of the Fund's assets that may be invested in
municipal securities insured by any type of insurance or by any given insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio Insurance
generally do not insure payment on an accelerated basis, the payment of any
redemption premium or the market value of the Fund's portfolio securities. Such
insurance also does not insure against nonpayment of principal or interest on
municipal securities resulting from the insolvency, negligence or any other act
or omission of the trustee or other paying agent for such obligations.
The Fund invests in municipal securities insured by insurers whose claims-paying
ability is rated AAA by S&P, Aaa by Moody's or the equivalent by another NRSRO
at the time of the Fund's investment. A subsequent downgrade by S&P, Moody's or
another NRSRO of an insurer's claims-paying ability may result in increased
credit risk of the municipal securities insured by such insurer and may result
in a downgrade of the rating assigned to the municipal securities insured by
such insurer. The securities could experience a decrease in market price as a
result of such a downgrade. In the event the ratings assigned to such municipal
securities decline to below investment grade, such municipal securities would
probably become less liquid or even illiquid. There can be no assurance that an
insurer will be able to honor its obligations with respect to municipal
securities in the Fund's portfolio. For more information on insurance and a
description of S&P's and Moody's claims-paying ability ratings of insurers, see
the Statement of Additional Information.
SPECIAL CONSIDERATIONS REGARDING
FLORIDA MUNICIPAL SECURITIES
The Fund invests primarily in a portfolio of Florida municipal securities, which
are municipal securities the interest on which, in the opinion of bond counsel
or other counsel to the issuers of such securities, is, at the time of issuance,
exempt from Florida intangible personal property taxes. Because the Fund invests
primarily in a portfolio of Florida municipal securities, the Fund is more
susceptible to political, economic, regulatory or other factors affecting
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<PAGE> 177
issuers of Florida municipal securities than a fund which does not limit its
investments to such issuers. These risks include possible legislative, state
constitutional or regulatory amendments that may affect the ability of state and
local governments or regional governmental authorities to raise money to pay
principal and interest on their municipal securities. Economic, fiscal and
budgetary conditions throughout the state may also influence the Fund's
performance.
The following information is a summary of a more detailed description of certain
factors affecting Florida municipal securities which is contained in the
Statement of Additional Information. Investors should obtain a copy of the
Statement of Additional Information for the more detailed discussion of such
factors. Such information is derived from certain official statements of the
State of Florida published in connection with the issuance of specific Florida
municipal securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all Florida municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.
Florida state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of Florida
and the nation as a whole.
Florida's economic outlook is projected generally to reflect the national
economic outlook and is expected to experience steady if unspectacular growth
over the next couple of years. Historically, Florida's unemployment rate has
generally tracked below that of the nation; however, beginning with the
recession in the early 1990's, the trend reversed. Since 1995, the state's
unemployment rate has again been below or about the same as the nation's. The
unemployment rate for Florida in 1999 was 4.0% while the national rate in 1999
was 4.2%. Florida's unemployment rate is expected to be 4.3% for fiscal year
1999-00 and 4.5% for fiscal year 2000-01. For the State's fiscal year ended June
30, 1999, receipts from the sales and use tax, the greatest single source of tax
revenue to the State of Florida, were $13,918 million, an increase of 7.3% from
fiscal year 1997-98.
Tourism is one of Florida's most important industries. Approximately 48.7
million people visited the State in 1998. By the end of fiscal year 1999-00,
51.2 million domestic and international tourists are estimated to have visited
the state. In 2000-01, tourist arrivals should approximate 52.6 million.
County and municipal governments in Florida depend primarily upon ad valorem
property taxes, sales, motor fuel and other local excise taxes and miscellaneous
revenue sources, including revenues from utilities services. Florida school
districts derive substantially all of their revenues from local property taxes.
The overall level of revenue from these sources is in part dependent upon the
local, state and national economies. Local government obligations held by the
Fund may constitute general obligations or may be special obligations payable
solely from one or more specified revenue sources. The ability of the local
governments to repay their obligations on a timely basis will be dependent upon
the continued strength of the revenues pledged and of the overall fiscal status
of the local government.
Voters at the general election in November 1994 approved an amendment to the
Constitution of the State of Florida limiting future state revenues. It is
unclear what effect, if any, such amendment would have on state or local
government debt obligations.
The value of Florida municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.
There can be no assurance that there will not be a decline in economic
conditions or that particular Florida municipal securities in the portfolio of
the Fund will not be adversely affected by any such changes.
More detailed information concerning Florida municipal securities and the State
of Florida is included in the Statement of Additional Information.
DERIVATIVE INSTRUMENTS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter
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<PAGE> 178
put and call options on securities, financial futures, fixed-income and other
interest rate indices and other financial instruments, purchase and sell
financial futures contracts and options on futures and enter into various
interest rate transactions such as swaps, caps, floors or collars. Collectively,
all of the above are referred to as "Strategic Transactions." Strategic
Transactions may be used to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Fund's portfolio, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Any
or all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the investment adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions have risks associated with them including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default by the other party to the transaction, illiquidity of the
derivative instrument and, to the extent the investment adviser's view as to
certain market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale of
portfolio securities at inopportune times or for prices other than at current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the risk management or hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and their risks are described more fully in the Fund's Statement of
Additional Information. Income earned or deemed to be earned by the Fund from
its Strategic Transactions, if any, generally will be taxable income of the
Fund.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may investment in zero-coupon securities which are debt securities that
do not entitle the holder to any periodic payment of interest prior to maturity
or a specified date when the securities begin paying current interest. They are
issued and traded at a discount from their face amounts or par value, which
discount varies depending on the time remaining until cash payments begin,
prevailing interest rates, liquidity of the security and the perceived credit
quality of the issuer. Because such securities do not entitle the holder to any
periodic payments of interest prior to maturity, this prevents any reinvestment
of interest payments at prevailing interest rates if prevailing interest rates
rise. On the other hand, because there are no periodic interest payments to be
reinvested prior to maturity, "zero-coupon" securities eliminate the
reinvestment risk and may lock in a favorable rate of return to maturity if
interest rates drop. The amount of non-cash interest income earned on
zero-coupon securities is included, for federal income tax purposes, in the
Fund's calculation of income that is required to be distributed to shareholders
for the Fund to maintain its desired federal income tax status (even though such
non-cash paying securities do not provide the Fund with the cash flow with which
to pay such distributions). Accordingly, the Fund may be required to borrow or
to liquidate portfolio securities at a time that it otherwise would not have
done so in
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<PAGE> 179
order to make such distributions. The Fund's investment adviser will weigh these
concerns against the expected total returns from such instruments.
The Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on securities in connection with such transactions prior to
the date the Fund actually takes delivery of such securities. These transactions
are subject to market risk as the value or yield of a security at delivery may
be more or less than the purchase price or the yield generally available on
securities when delivery occurs. In addition, the Fund is subject to
counterparty risk because it relies on the buyer or seller, as the case may be,
to consummate the transaction, and failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring these
securities, but the Fund may sell these securities prior to settlement if it is
deemed advisable. No specific limitation exists as to the percentage of the
Fund's assets which may be used to acquire securities on a "when-issued" or
"delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities, or yield
differentials, or for other reasons. The Fund's portfolio turnover is shown
under the heading "Financial Highlights". The portfolio turnover rate may be
expected to vary from year to year. A high portfolio turnover rate (100% or
more) increases a fund's transactions costs, (including brokerage commissions or
dealer costs) and a high portfolio turnover rate may result in the realization
of more short-term capital gains than if a fund had a lower portfolio turnover
rate. Increases in a fund's transaction costs would adversely impact the fund's
performance. The turnover rate will not be a limiting factor, however, if the
Fund's investment adviser considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may invest on a temporary basis a portion or all
of its assets in high-quality, short-term Florida municipal obligations. If such
municipal obligations are not available or, in the investment adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in high-quality, municipal securities of issuers other than
issuers of Florida municipal securities. Furthermore, if such high-quality
securities are not available or, in the investment adviser's judgment, do not
afford sufficient protection against adverse market conditions, the Fund may
invest in taxable obligations. Such taxable obligations may include in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, other investment grade quality income securities, prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. In taking such a defensive position, the Fund would not
be pursuing and may not achieve its investment objective.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
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<PAGE> 180
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $90 billion under management or supervision as of
December 31, 1999. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily net assets of
the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- ------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.50%
......................................................
Over $500 million 0.45%
......................................................
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.50% of the
Fund's average daily net assets for the Fund's fiscal year ended September 30,
1999.
The Fund's average daily 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.
Under the Advisory Agreement, the Adviser furnishes offices, necessary
facilities and equipment and provides administrative services to the Fund. The
Fund also pays all charges and expenses of its day-to-day operations including
service fees, distribution fees, custodial fees, legal and independent
accountant fees, the costs of reports and proxies to shareholders, compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, the Distributor or Van Kampen Investments) and all other ordinary
business expenses not specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Thomas M. Byron, a Vice President of the Adviser, has been
primarily responsible for the day-to-day management of the Fund's portfolio
since January 1997. Prior to January 1997, Mr. Byron was manager of the
Adviser's Unit Investment Trust Purchasing Desk. He assumed buying
responsibilities for all national tax-free and taxable unit trusts for the
Adviser since April 1994. Prior to April 1994, Mr. Byron was responsible for
buying the state unit investment trusts for the Adviser. Mr. Byron has been
employed by the Adviser since 1981.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments must be at least $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
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<PAGE> 181
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and service plan (each as described below) under
which its distribution fee and/or service fee is paid, (iii) each class of
shares has different exchange privileges, (iv) certain classes of shares are
subject to a conversion feature and (v) certain classes of shares have different
shareholder service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charge, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B Shares and Class C Shares and
the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern standard time Monday through Friday, except
on customary business holidays or on any day on which no purchase or redemption
orders are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund's Board of Trustees reserves the right to
calculate the net asset value per share and adjust the offering price based
thereon more frequently than once daily if deemed desirable. Net asset value per
share for each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities for which current market quotations are not readily available and
other assets are valued at their fair value as determined in good faith by the
Adviser in accordance with procedures established by the Fund's Board of
Trustees. Short-term investments with remaining maturities of 60 days or less
are valued at cost plus interest earned (amortized cost) which approximates
market values.
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. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders and the maintenance of such shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the Rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
such class of shares. To assist investors in comparing classes of shares, the
tables under the heading "Fees and Expenses of the Fund" provide a summary of
sales charges and expenses and an example of the sales charges and expenses of
the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and
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<PAGE> 182
"brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and Service Plan, the Fund may spend up to a total
of 0.25% per year of the Fund's average daily net assets with respect to the
Class A Shares of the Fund. From such amount, under the Service Plan, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
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<PAGE> 183
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within six years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge as a
Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by of shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class B Shares of the
Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan Class B Shares received on such shares, automatically convert to Class A
Shares eight years after the end of the calendar month in which the shares were
purchased. Class B Shares purchased before June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, automatically convert
to Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C Shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar
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<PAGE> 184
month in which such shares were purchased. Such conversion will be on the basis
of the relative net asset values per share, without the imposition of any sales
load, fee or other charge. The conversion schedule applicable to a share of the
Fund acquired through the exchange privilege from another Van Kampen fund
participating in the exchange program is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by
involuntary liquidation by the Fund of a shareholder's account as described
under the heading "Redemption of Shares." Subject to certain limitations, a
shareholder who has redeemed Class C Shares of the Fund may reinvest in Class C
Shares at net asset value with credit for any contingent deferred sales charge
if the reinvestment is made within 180 days after the redemption. For a more
complete description of contingent deferred sales charge waivers, please refer
to the Fund's Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds over a 13-month period
based on the total amount of intended purchases plus the value of all shares of
the Participating Funds previously purchased
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and still owned. An investor may elect to compute the 13-month period starting
up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. The initial purchase must be for an
amount equal to at least 5% of the minimum total purchase amount of the level
selected. If trades not initially made under a Letter of Intent subsequently
qualify for a lower sales charge through the 90-day backdating provisions, an
adjustment will be made at the expiration of the Letter of Intent to give effect
to the lower sales charge. Such adjustment in sales charge will be used to
purchase additional shares for the shareholder with the applicable sales charge.
The Fund initially will escrow shares totaling 5% of the dollar amount of the
Letter of Intent to be held by Investor Services in the name of the shareholder.
In the event the Letter of Intent goal is not achieved within the specified
period, the investor must pay the difference between the sales charge applicable
to the purchases made and the reduced sales charges previously paid. Such
payments may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit investment trust distributions will be 1.00% of the
offering price (1.01% of net asset value). Of this amount, the Distributor will
pay to the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the terms and conditions that apply to the program,
should contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
In order to obtain these special benefits, all dividends and other distributions
by the Fund must be reinvested in additional shares and there can not be any
systematic withdrawal program. There will be no minimum for reinvestments from
unit investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees;
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provided that such purchases are otherwise permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by nonprofit organizations
defined under Section 501(c)(3) of the Code and assets held by an employer
or trustee in connection with an eligible deferred compensation plan under
Section 457 of the Code. Such plans will qualify for purchases at net asset
value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (1) the
total plan assets are at least $1 million or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have received
proposals from the Distributor prior to January 1, 2000 based on net asset
value purchase privileges previously in effect will be qualified to purchase
shares of the Participating Funds at net asset value. Section 403(b) and
similar accounts for which Van Kampen Trust Company serves as custodian will
not be eligible for net asset value purchases based on the aggregate
investment made by the plan or the number of eligible employees, except
under certain uniform criteria established by the Distributor from time to
time. For purchases on February 1, 1997 and thereafter, a commission will be
paid as follows: 1.00% on sales to $2 million, plus 0.80% on the next $1
million, plus 0.50% on the next $47 million, plus 0.25% on the excess over
$50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy holders
of an insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers
who initiate and are responsible for such sales to each individual as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million and
0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described
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above or directly with Investor Services by the investment adviser, trust
company or bank trust department, provided that Investor Services receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer may charge a transaction
fee for placing an order to purchase shares pursuant to this provision or for
placing a redemption order with respect to such shares. Authorized dealers will
be paid a service fee as described above on purchases made under options (3)
through (9) above. The Fund may terminate, or amend the terms of, offering
shares of the Fund at net asset value to such groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian/trustee of a
retirement plan account may involve additional fees charged by the dealer or
custodian/trustee.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the request and any other necessary documents in
proper form as described below. Such payment may be postponed or the right of
redemption suspended as provided by the rules of the SEC. Such payment may,
under certain circumstances, be paid wholly or in part by a distribution-in-kind
of portfolio securities which may result in a brokerage costs and a gain or loss
for federal income tax purposes when such securities are sold. If the shares to
be redeemed have been recently purchased by check, Investor Services may delay
the payment of redemption proceeds until it confirms the purchase check has
cleared, which may take up to 15 days. A taxable gain or loss will be recognized
by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares to be redeemed, the Fund name and class
designation of such shares and the shareholder's account number. The redemption
request must be signed by all persons in whose names the shares are registered.
Signatures must conform exactly to the account registration. If the proceeds of
the redemption exceed $50,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the record address has changed within
the previous 30 days, signature(s) must be guaranteed by one of the following: a
bank or trust company; a broker-dealer; a credit union; a national securities
exchange, registered securities association or clearing agency; a savings and
loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by a corporation,
partnership, trust, fiduciary, executor or administrator, or other legal entity,
and the name and title of the individual(s) authorizing such redemption is not
shown in the account registration, a copy of the corporate resolution or other
legal documentation appointing the authorized signer and certified within the
prior 120 days must accompany the redemption request. Retirement plan
distribution requests should be sent to the IRA custodian/trustee to be
forwarded to Investor Services. Contact the IRA custodian/trustee for further
information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer.
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The redemption price for such shares is the net asset value per share next
calculated after an order in proper form is received by an authorized dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of authorized dealers to
transmit redemption requests received by them to the Distributor so they will be
received prior to such time. Redemptions completed through an authorized dealer
may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the application form
accompanying the prospectus. For accounts that are not established with
telephone redemption privileges, a shareholder may call the Fund at (800)
341-2911 to request that a copy of the Telephone Redemption Authorization form
be sent to the shareholder for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. Shares may also be redeemed by
phone through FundInfo(R) (automated phone system) to the shareholder's bank
account of record 24 hours a day, seven days a week at (800) 847-2424. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedure previously described.
Requests received by Investor Services prior to 4:00 p.m., New York time, will
be processed at the next determined net asset value per share. These privileges
are available for most accounts other than retirement accounts or accounts with
shares represented by certificates. If an account has multiple owners, Investor
Services may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. If a redemption
is requested through FundInfo(R), transactions are sent to the predesignated
bank account of record only. Proceeds from redemptions payable by wire transfer
are expected to be wired on the next business day following the date of
redemption. The Fund reserves the right at any time to terminate, limit or
otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare
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daily and distribute monthly all, or substantially all, of its net investment
income as dividends to shareholders. Dividends are automatically applied to
purchase additional shares of the Fund at the next determined net asset value
unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend.
Unless the shareholder instructs otherwise, the reinvestment plan is automatic.
This instruction may be made by telephone by calling (800) 341-2911 ((800)
421-2833 for the hearing impaired) or by writing to Investor Services. The
investor may, on the initial application or prior to any declaration, instruct
that dividends and/or capital gains be paid in cash, be reinvested in the Fund
at net asset value, or be invested in another Van Kampen Fund at net asset
value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may appoint
Investor Services as agent by completing the Authorization for Redemption by
Check form and the appropriate section of the application and returning the form
and the application to Investor Services. Once the form is properly completed,
signed and returned to the agent, a supply of checks drawn on State Street Bank
and Trust Company (the "Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A Share account by Investor Services at the next determined
net asset value per share. Check writing redemptions represent the sale of Class
A Shares. Any gain or loss realized on the redemption of shares is a taxable
event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire Share account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the Fund or by the Bank. Retirement plans and accounts that are subject to
backup withholding are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for
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shares of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from any authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
telephone exchange privileges unless the shareholder indicates otherwise by
checking the applicable box on the application form accompanying the prospectus.
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain dividend options (except
dividend diversification) and authorized dealer of record as the account from
which shares are exchanged, unless otherwise specified by the shareholder. In
order to establish a systematic withdrawal plan for the new account or reinvest
dividends from the new account into another fund, however, an exchanging
shareholder must submit a specific request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
and other Participating Funds may restrict exchanges by shareholders engaged in
excessive trading by limiting or disallowing the exchange privileges to such
shareholders. For further information on these restrictions, see the Statement
of Additional Information. The Fund may modify, restrict or terminate the
exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the
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<PAGE> 191
shareholder is purchasing will also normally be purchased at the net asset value
per share, plus any applicable sales charge, next determined on the date of
receipt. Exchange requests received on a business day after the time shares of
the funds involved in the request are priced will be processed on the next
business day in the manner described herein.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
FLORIDA TAXATION
The following Florida tax discussion is based on the advice of Squire, Sanders &
Dempsey L.L.P., special counsel to the Fund for Florida tax matters.
Under existing Florida law, shares of the Fund will not be subject to the
Florida intangible personal property tax for any year if, on the last business
day of the previous calendar year, at least 90% of the net asset value of the
Fund's portfolio consisted of (1) notes, bonds and other obligations issued by
the State of Florida or its municipalities, counties, and other taxing
districts, or by the United States Government and its agencies, or by the
governments of Puerto Rico, Guam or the U.S. Virgin Islands, or (2) other
intangible personal property exempt from the Florida intangible personal
property tax. (FOR THIS PURPOSE, OBLIGATIONS ISSUED BY A NONPROFIT CORPORATION
FORMED UNDER THE GENERAL NONPROFIT CORPORATION LAW OF A STATE ARE NOT EXEMPT
FROM THE FLORIDA INTANGIBLE PERSONAL PROPERTY TAX EVEN IF THEY ARE CONSIDERED
FOR FEDERAL INCOME TAX PURPOSES TO BE OBLIGATIONS ISSUED "ON BEHALF OF" A
GOVERNMENTAL UNIT THE INTEREST ON WHICH IS EXEMPT FROM FEDERAL INCOME TAX.)
Shares of the Fund will generally be subject to the Florida intangible personal
property tax for any year if, on the last business day of the previous calendar
year, less than 90% of the net asset value of the Fund's portfolio is invested
in assets that are exempt from the Florida intangible property tax.
The State of Florida and its political subdivisions do not impose income taxes
on individuals, and therefore individual shareholders of the Fund will not be
subject to a Florida income tax on distributions from the Fund or on gain from
the sale or other disposition of shares of the Fund.
Corporations (and certain other entities treated as corporations under the
Florida Income Tax Code) that are subject to the Florida income tax will be
taxable on distributions from the Fund and on gain from the sale or other
disposition of shares of the Fund to the extent such income or gain is allocated
or apportioned to Florida. Accordingly, investment in shares of the Fund may not
be appropriate for such corporations.
The transfer of shares of the Fund will not be subject to the Florida
documentary stamp tax. Shares of the Fund will be included in assets subject to
Florida estate tax.
Under current Florida tax law, the Florida intangible personal property tax rate
is $1.50 per $1,000 of taxable intangible property. Shareholders subject to
taxation in a state other than Florida may realize a lower after-tax rate of
return than Florida shareholders if the dividends distributed by the Fund are
not exempt from taxation in such other state.
The state tax discussion set forth above is for general information only.
Prospective investors should consult their own tax advisers regarding the
specific state tax consequences of holding and disposing of shares, as well as
the effects of federal, local and foreign tax law and any proposed tax law
changes.
25
<PAGE> 192
FEDERAL INCOME TAXATION
The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom (Illinois).
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its income (consisting generally
of tax-exempt interest, taxable income and net short-term capital gains) will
constitute tax-exempt interest, a significant portion of the Fund's income may
consist of investment company taxable income. Distributions of investment
company taxable income (generally, taxable income and net short-term capital
gain) 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 gain (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Fund have been held by such shareholders. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
26
<PAGE> 193
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held as a capital
asset, the gain or loss will be a capital gain or loss. Any recognized capital
gains may be taxed at different rates depending on how long the shareholder held
such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income and at least
90% of its net tax-exempt interest, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on such undistributed amounts.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding, and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
27
<PAGE> 194
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
NINE MONTHS OPERATIONS)
YEAR ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................... $15.921 $15.550 $15.060 $15.203 $13.796 $14.300
------- ------- ------- ------- ------- -------
Net Investment Income................ .778 .564 .766 .784 .789 .291
Net Realized and Unrealized
Gain/Loss.......................... (1.353) .388 .508 (.153) 1.416 (.507)
------- ------- ------- ------- ------- -------
Total from Investment Operations...... (.575) .952 1.274 .631 2.205 (.216)
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of
Net Investment Income.............. .770 .581 .774 .774 .798 .288
Distributions from Net Realized
Gain............................... -0- -0- .010 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions................... .770 .581 .784 .774 .798 .288
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.... $14.576 $15.921 $15.550 $15.060 $15.203 $13.796
======= ======= ======= ======= ======= =======
Total Return*(a)...................... (3.74%) 6.26%** 8.72% 4.37% 16.29% (1.47%)**
Net Assets at End of the Period (In
millions)(b)......................... $39.8 $27.1 $29.3 $22.2 $16.2 $9.0
Ratio of Expenses to Average Net
Assets*.............................. .37% .60% .59% .28% .44% .49%
Ratio of Net Investment Income to
Average Net Assets*.................. 4.98% 4.85% 5.05% 5.31% 5.33% 5.13%
Portfolio Turnover.................... 101% 50%** 48% 73% 41% 19%**
* If certain expenses had not been
assumed by the Adviser, total return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets............................... 1.10% 1.30% 1.29% 1.47% 1.70% 1.99%
Ratio of Net Investment Income to
Average Net Assets................... 4.25% 4.15% 4.35% 4.13% 4.07% 3.64%
<CAPTION>
CLASS B SHARES
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
NINE MONTHS OPERATIONS)
YEAR ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................... $15.925 $15.554 $15.064 $15.201 $13.792 $14.300
------- ------- ------- ------- ------- -------
Net Investment Income................ .658 .478 .650 .677 .685 .251
Net Realized and Unrealized
Gain/Loss.......................... (1.350) .388 .510 (.154) 1.415 (.509)
------- ------- ------- ------- ------- -------
Total from Investment Operations...... (.692) .866 1.160 .523 2.100 (.258)
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of
Net Investment Income.............. .656 .495 .660 .660 .691 .250
Distributions from Net Realized
Gain............................... -0- -0- .010 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions................... .656 .495 .670 .660 .691 .250
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.... $14.577 $15.925 $15.554 $15.064 $15.201 $13.792
======= ======= ======= ======= ======= =======
Total Return*(a)...................... (4.51%) 5.74%** 7.91% 3.58% 15.53% (1.81%)**
Net Assets at End of the Period (In
millions)(b)......................... $29.0 $23.6 $22.5 $18.9 $16.9 $10.9
Ratio of Expenses to Average Net
Assets*.............................. 1.13% 1.35% 1.33% 1.03% 1.12% 1.26%
Ratio of Net Investment Income to
Average Net Assets*.................. 4.23% 4.09% 4.30% 4.56% 4.66% 4.31%
Portfolio Turnover.................... 101% 50%** 48% 73% 41% 19%**
* If certain expenses had not been
assumed by the Adviser, total return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets............................... 1.86% 2.05% 2.03% 2.22% 2.38% 2.75%
Ratio of Net Investment Income to
Average Net Assets................... 3.50% 3.39% 3.60% 3.38% 3.40% 2.81%
<CAPTION>
CLASS C SHARES
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
NINE MONTHS OPERATIONS)
YEAR ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................... $15.941 $15.581 $15.081 $15.213 $13.786 $14.300
-------- -------- -------- ------- ------- -------
Net Investment Income................ .662 .483 .666 .668 .690 .249
Net Realized and Unrealized
Gain/Loss.......................... (1.355) .372 .504 (.140) 1.428 (.513)
-------- -------- -------- ------- ------- -------
Total from Investment Operations...... (.693) .855 1.170 .528 2.118 (.264)
-------- -------- -------- ------- ------- -------
Less:
Distributions from and in Excess of
Net Investment Income.............. .656 .495 .660 .660 .691 .250
Distributions from Net Realized
Gain............................... -0- -0- .010 -0- -0- -0-
-------- -------- -------- ------- ------- -------
Total Distributions................... .656 .495 .670 .660 .691 .250
-------- -------- -------- ------- ------- -------
Net Asset Value, End of the Period.... $14.592 $15.941 $15.581 $15.081 $15.213 $13.786
======== ======== ======== ======= ======= =======
Total Return*(a)...................... (4.51%) 5.60%** 7.97% 3.65% 15.61% (1.81%)**
Net Assets at End of the Period (In
millions)(b)......................... $3,106.7 $1,622.4 $1,195.1 $849.2 $461.8 $11.4
Ratio of Expenses to Average Net
Assets*.............................. 1.14% 1.32% 1.37% 1.03% 1.13% 1.26%
Ratio of Net Investment Income to
Average Net Assets*.................. 4.28% 4.08% 4.38% 4.56% 4.51% 4.28%
Portfolio Turnover.................... 101% 50%** 48% 73% 41% 19%**
* If certain expenses had not been
assumed by the Adviser, total return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets............................... 1.87% 2.03% 2.06% 2.22% 2.39% 2.74%
Ratio of Net Investment Income to
Average Net Assets................... 3.55% 3.38% 3.68% 3.38% 3.25% 2.87%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) Class A and Class B Net Assets are stated in millions. Class C Net Assets
are stated in thousands.
28
<PAGE> 195
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson Paul G. Yovovich
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Dennis J. McDonnell*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
Edward C. Wood III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
Stephen L. Boyd*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer & Treasurer
Curtis W. Morell*
Vice President & Chief Accounting Officer
Tanya M. Loden*
Controller
* "Interested Persons" of the Fund, as defined in the Investment Company Act of
1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN FLORIDA INSURED TAX FREE
INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Florida Insured Tax Free Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Florida Insured Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601-5212
<PAGE> 196
VAN KAMPEN
FLORIDA INSURED TAX FREE INCOME FUND
PROSPECTUS
JANUARY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]) or by writing the
Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act
File No. is 811-4386.
FLI PRO 1/00
<PAGE> 197
VAN KAMPEN
NEW YORK TAX FREE
INCOME FUND
Van Kampen New York Tax Free Income Fund is a
mutual fund with the 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 investment
adviser seeks to achieve the Fund's investment
objective by investing primarily in a
portfolio of New York municipal securities
that are rated investment-grade at the time of
purchase.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulator, and
neither the SEC nor any state regulator has
passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary
is a criminal offense.
This prospectus is dated JANUARY 28, 2000.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 198
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary............................... 3
Fees and Expenses of the Fund..................... 6
Investment Objective, Policies and Risks.......... 7
Investment Advisory Services...................... 15
Purchase of Shares................................ 16
Redemption of Shares.............................. 23
Distributions from the Fund....................... 24
Shareholder Services.............................. 25
New York Taxation................................. 27
Federal Income Taxation........................... 27
Financial Highlights.............................. 29
Appendix--Description of Securities Ratings....... A-1
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 199
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the 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.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing at least 80% of the Fund's total
assets in a portfolio of New York municipal securities that are rated
investment-grade at the time of purchase. Investment grade securities are
securities rated BBB or higher by Standard and Poor's ("S&P") or Baa or higher
by Moody's Investors Service, Inc. ("Moody's") or an equivalent rating by
another nationally recognized statistical rating organization ("NRSRO"). The
Fund is designed for investors who are residents of New York for tax purposes.
Under normal market conditions, the Fund may invest up to 20% of its total
assets in New York municipal securities rated below investment grade (but not
rated lower than B- by S&P or B3 by Moody's) or unrated New York municipal
securities believed by the Fund's investment adviser to be of comparable
quality. Securities rated BB or below by S&P, Ba or below by Moody's or unrated
securities of comparable quality are commonly referred to as "junk bonds" and
involve special risks as compared to investments in higher-grade securities (see
sidebar for an explanation of quality ratings).
The Fund buys and sells municipal securities with a view towards seeking a high
level of current income exempt from federal, New York state and New York city
income taxes and selects securities which the Fund's investment adviser believes
entail reasonable credit risk considered in relation to the investment policies
of the Fund. In selecting securities for investment, the Fund's investment
adviser uses a credit strategy that emphasizes investment-grade New York
municipal securities in combination with below investment grade New York
municipal securities. The Fund's investment adviser believes that such an
investment strategy allows the Fund to pursue an enhanced yield providing for
higher income while maintaining an investment-grade quality average portfolio
for capital preservation. Portfolio securities are typically sold when the
Fund's investment adviser's assessment of any of these factors materially
changes.
Under normal market conditions, the Fund may invest up to 20% of its total
assets in municipal securities that are subject to federal alternative minimum
tax. The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. The Fund may purchase or sell certain derivative instruments
(such as options, futures, options on futures, and interest rate swaps or other
interest rate related transactions) for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. The Fund has no policy limiting the maturities of its
investments. To the extent the Fund invests in securities with longer
maturities, the Fund will be subject to greater market risk than a fund that
invests
3
<PAGE> 200
UNDERSTANDING
QUALITY RATINGS
Debt securities ratings are based on the issuer's ability to pay interest
and repay the principal. Debt securities with ratings above the line are
considered "investment grade," while those with ratings below the line are
regarded as "noninvestment grade." A detailed explanation of these and other
ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
Moody's S&P Meaning
- ------------------------------------------------------
<C> <S> <C>
Aaa
......................................................
AAA Highest quality
Aa AA High quality
......................................................
A A Above-average quality
......................................................
Baa BBB Average quality
- ------------------------------------------------------
Ba BB Below-average quality
......................................................
B B Marginal quality
......................................................
Caa CCC Poor quality
......................................................
Ca CC Highly speculative
......................................................
C C Lowest quality
......................................................
-- D In default
......................................................
</TABLE>
solely in shorter term securities. Lower-grade securities may be more volatile
and decline more in price in response to negative issuer or general economic
news than higher-grade securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Under normal market conditions, the Fund invests at
least 80% of its total assets in investment-grade securities and the Fund may
invest up to 20% of its total assets in securities with below investment-grade
credit quality. Therefore, the Fund is subject to a higher level of credit risk
than a fund that buys only investment-grade securities. The credit quality of
"noninvestment grade" securities is considered speculative by recognized rating
agencies with respect to the issuer's continuing ability to pay interest and
principal. Lower-grade securities may have less liquidity and a higher incident
of default than higher-grade securities. The Fund may incur higher expenditures
to protect the Fund's interests in such securities. The credit risks and market
prices of lower-grade securities are generally more sensitive to negative issuer
developments, such as a decline in revenues or increase in expenditures, or
adverse economic conditions, such as a recession, than are the prices of
higher-grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
4
<PAGE> 201
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investor's home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest up to 20% of its total assets in municipal securities
subject to federal alternative minimum tax. In addition, there could be changes
in applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on municipal securities or otherwise adversely
affect the current federal or state tax status of municipal securities.
NON-DIVERSIFICATION RISKS. The Fund is classified as a "non-diversified" fund,
which means the Fund may invest a greater portion of its assets in a more
limited number of issuers than a "diversified" fund. As a result, the Fund may
be subject to greater risk than a diversified fund because changes in the
financial condition or market assessment of a single issuer may cause greater
fluctuations in the value of the Fund's shares.
STATE-SPECIFIC RISKS. Because the Fund invests primarily in a portfolio of New
York municipal securities, the Fund is more susceptible to political, economic,
regulatory or other factors affecting the City and State of New York than a fund
that does not limit its investments to such issuers.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures, options on futures and interest
rate swaps or other interest rate-related transactions are examples of
derivatives. Derivative instruments involve risks different from direct
investment in underlying securities. These risks include imperfect correlation
between the value of the instruments and the underlying assets; risks of default
by the other party to certain transactions; risks that the transactions may
result in losses that partially or completely offset gains in portfolio
positions; risks that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek current income
- - Are in a high federal income tax bracket
- - Are subject to New York State or New York City income taxes
- - Wish to add to their personal investment portfolio a fund that invests
primarily in investment-grade New York municipal securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
5
<PAGE> 202
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the five calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
1995 17.33
- ---- -----
<S> <C>
1996 5.14
1997 10.92
1998 7.50
1999 -4.89
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the five-year period shown in the bar chart, the highest quarterly return
was 7.67% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -2.08% (for the quarter ended March 31, 1996).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Lehman Brothers Municipal
Bond Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charges paid by investors. The index's
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing the securities represented by the index. Average
annual total returns are shown for the periods, ended December 31, 1999 (the
most recently completed calendar year prior to the date of this prospectus).
Remember that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past
for the 10 Years
Periods Ended Past Past or Since
December 31, 1999 1 Year 5 Years Inception(1)
- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen New
York Tax Free
Income Fund --
Class A Shares -9.42% 5.90% 4.86%
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.86%
..........................................................
Van Kampen New
York Tax Free
Income Fund --
Class B Shares -9.13% 5.94% 4.90%
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.86%
..........................................................
Van Kampen New
York Tax Free
Income Fund --
Class C Shares -6.41% 6.17% 5.05%
Lehman Brothers
Municipal Bond
Index -2.06% 6.91% 5.86%
..........................................................
</TABLE>
Inception date: (1) 7/29/94.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
statistical composite of municipal bonds.
The current yield for the thirty-day period ended September 30, 1999 is 5.20%
for Class A Shares, 4.71% for Class B Shares and 4.70% for Class C Shares.
6
<PAGE> 203
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of offering 4.75%(2) None None
price)
...............................................................
Maximum deferred sales
charge (load)(as a
percentage of the lesser
of original purchase
price or redemption
proceeds) None(3) 4.00%(4) 1.00%(5)
...............................................................
Maximum sales charge
(load) imposed on
reinvested dividends None None None
...............................................................
Redemption fees None None None
...............................................................
Exchange fee None None None
...............................................................
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------
Management fees(1) 0.60% 0.60% 0.60%
...............................................................
Distribution and/or
service
(12b-1) fees(6)
0.25% 1.00%(7) 1.00%(7)
...............................................................
Other expenses(1) 0.38% 0.38% 0.38%
...............................................................
Total annual fund
operating expenses(1)
1.23% 1.98% 1.98%
...............................................................
</TABLE>
(1) The fund's investment adviser is currently waiving or reimbursing all or a
portion of the Fund's management fees and other expenses such that actual
total annual fund operating expenses for the fiscal year ended September 30,
1999 were 0.33%, 1.08% and 1.08% for Class A Shares, Class B Shares and
Class C Shares, respectively.
(2) Reduced for purchases of $100,000 and over. See "Purchase of Shares--Class A
Shares."
(3) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares--Class A Shares."
(4) The maximum deferred sales charge is 4.00% in the first year after purchase,
declining thereafter as follows:
Year 1-4.00%
Year 2-3.75%
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
See "Purchase of Shares--Class B Shares."
(5) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares--Class C Shares."
(6) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(7) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $594 $847 $1,119 $1,893
......................................................................
Class B Shares $601 $971 $1,218 $2,113*
......................................................................
Class C Shares $301 $621 $1,068 $2,306
......................................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $594 $847 $1,119 $1,893
......................................................................
Class B Shares $201 $621 $1,068 $2,113*
......................................................................
Class C Shares $201 $621 $1,068 $2,306
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
7
<PAGE> 204
INVESTMENT OBJECTIVE,
POLICIES AND RISKS
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's investment objective
is a fundamental policy and may not be changed without shareholder approval of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). There are risks
inherent in all investments in securities; accordingly there can be no assurance
that the Fund will achieve its investment objective.
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing at least 80% of the Fund's total
assets in investment-grade New York municipal securities. The Fund is designed
for investors who are residents of New York for tax purposes. Under normal
market conditions, the Fund may invest up to 20% of its total assets in
below-investment grade New York municipal securities. Lower-grade securities are
commonly referred to as "junk bonds" and involve special risks as compared to
investments in higher-grade securities. The Fund does not purchase municipal
securities that are in default or rated in categories lower than B- by S&P or B3
by Moody's. For a description of securities ratings, see the appendix to this
prospectus. Under normal market conditions, the Fund may invest up to 20% of its
total assets in municipal securities that are subject to alternative minimum
tax. From time to time, the Fund temporarily may invest up to 10% of its total
assets in tax exempt money market funds and such instruments will be treated as
investments in municipal securities.
The Fund's investment adviser uses an investment strategy that emphasizes
investment-grade New York municipal securities in combination with below
investment-grade New York municipal securities. The Fund's investment adviser
believes that such an investment strategy allows the Fund to pursue an enhanced
yield providing for higher income while maintaining an investment-grade quality
average portfolio for capital preservation.
The Fund's investment adviser actively manages the Fund's portfolio and adjusts
the average maturity and quality of portfolio investments based upon its
expectations about the direction of interest rates and other economic factors.
The Fund buys and sells municipal securities with a view towards seeking a high
level of current income consistent with preservation of capital. The Fund's
investment adviser seeks to identify those securities that it believes entail
reasonable credit risk considered in relation to the Fund's investment policies.
In selecting securities for investment, the Fund's investment adviser uses its
extensive research capabilities to assess potential investments and considers a
number of factors, including general market and economic conditions and interest
rate, credit and prepayment risks. Each security considered for investment is
subjected to an in-depth credit analysis to evaluate the level of risk it
presents. Portfolio securities are typically sold when the Fund's investment
adviser's assessment of any of these factors materially changes.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. New
York municipal securities are municipal securities the interest on which, in the
opinion of bond counsel or other counsel to the issuers of such securities, is,
at the time of issuance, exempt from New York State and New York City individual
income tax. Under normal market conditions, at least 80% of the Fund's total
assets will be invested in New York municipal securities. The policy stated in
the foregoing sentence is a fundamental policy of the Fund and may not be
changed without shareholder approval of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act. Under normal market conditions,
the Fund may invest up to 20% of its total assets in municipal securities that
are subject to federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obliga-
8
<PAGE> 205
tions, obtaining funds for general operating expenses and obtaining funds to
lend to other public institutions and facilities. Certain types of municipal
securities are issued to obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 20% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more
9
<PAGE> 206
detailed description of the types of municipal securities in which the Fund may
invest is included in the Fund's Statement of Additional Information. The Fund's
Statement of Additional Information may be obtained by investors free of charge
as described on the back cover of this prospectus.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time-to-time depending on its assessment of the relative yields
available on securities. The Fund will, however, invest in shorter term
municipal securities when it believes market conditions warrant such
investments.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of nonpayment. 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 nonpayment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing nonpayment and a
potential decrease in the net asset value of the Fund. In addition, the Fund may
incur expenses to work out or restructure a distressed or defaulted security.
Securities below investment-grade involve special risks compared to higher-grade
securities. See "Risk of Investing in Lower-Grade Securities" below.
The Fund may invest up to 20% of its total assets in municipal securities that
are subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who could become subject to the federal alternative minimum tax
as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve increased risk
to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find
10
<PAGE> 207
it more difficult to sell such securities at a time when the Fund's investment
adviser believes it is advisable to do so.
RISKS OF INVESTING IN LOWER-GRADE SECURITIES
Securities which are in the lower-grade categories generally offer higher yields
than are offered by higher-grade securities of similar maturities, but they also
generally involve greater risks, such as greater credit risk, greater market
risk and volatility, greater liquidity concerns and potentially greater manager
risk. Investors should carefully consider the risks of owning shares of a
portfolio which invests in lower-grade securities before investing in the Fund.
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Lower-grade securities are considered more susceptible
to nonpayment of interest and principal or default than higher-grade securities.
Increases in interest rates or changes in the economy may significantly affect
the ability of issuers of lower-grade securities to pay interest and to repay
principal, to meet projected financial goals or to obtain additional financing.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal and interest and such issuer
seeks to restructure the terms of its borrowings, the Fund may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Fund's securities relate.
Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings and the Fund may by unable to
obtain full recovery on such amounts. To minimize the risks involved in
investing in lower-grade securities the Fund does not purchase securities that
are in default or rated in categories lower than B- by S&P or B3 by Moody's.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the debt securities market and as a result of real or perceived
changes in credit risk. The value of the Fund's investments can be expected to
fluctuate over time. The value of debt securities generally varies inversely
with changes in prevailing interest rates. When interest rates decline, the
value of a portfolio invested in debt securities generally can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
debt securities generally can be expected to decline. Debt securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than debt securities with shorter maturities. While the Fund has no
policy limiting the maturities of the individual debt securities in which it may
invest, the Fund's investment adviser seeks to manage fluctuations in net asset
value resulting from changes in interest rates by actively managing the
portfolio maturity structure. Secondary market prices of lower-grade securities
generally are less sensitive to changes in interest rate and are more sensitive
to general adverse economic changes or specific developments with respect to the
particular issuers than are the secondary market prices of higher-grade
securities. A significant increase in interest rates or a general economic
downturn could severely disrupt the market for lower-grade securities and
adversely affect the market value of such securities. Such events also could
lead to a higher incidence of default by issuers of lower-grade securities as
compared with higher-grade securities. In addition, changes in credit risks,
interest rates, the credit markets or periods of general economic uncertainty
can be expected to result in increased volatility in the market price of the
lower-grade securities in the Fund and thus in the net asset value of the Fund.
Adverse publicity and investor perceptions, whether or nor based on rational
analysis, may affect the value, volatility and liquidity of lower-grade
securities.
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for lower-grade securities may be less
liquid than the markets for higher-grade securities. Liquidity relates to the
ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the lower-grade securities in which the Fund may
invest, trading in such securities may be relatively inactive. Prices of
lower-grade securities may decline rapidly in the event a significant number of
holders decide to sell. Changes in expectations regarding an individual issuer
of lower-grade securities generally could reduce market liquidity for such
securities and make their sale by the Fund more difficult, at least in the
absence of price concessions. The effects of adverse publicity and investor
perceptions may be more
11
<PAGE> 208
pronounced for securities for which no established retail market exists as
compared with the effects on securities for which such a market does exist. An
economic downturn or an increase in interest rates could severely disrupt the
market for such securities and adversely affect the value of outstanding
securities or the ability of the issuers to repay principal and interest.
Further, the Fund may have more difficulty selling such securities in a timely
manner and at their stated value than would be the case for securities for which
an established retail market does exist. Certain municipal securities in which
the Fund may invest, such as special obligation bonds, lease obligations,
participation certificates and variable rate instruments, may be particularly
less liquid. Although the issuer of some such securities may be obligated to
redeem such securities at face value, such redemption could result in losses to
the Fund to the extent such municipal securities were purchased by the Fund at a
premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for lower-grade securities held in the Fund's portfolio, the
ability of the Fund's investment adviser to value the Fund's securities becomes
more difficult and the judgment of the Fund's investment adviser may play a
greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data.
Many lower-grade securities are not listed for trading on any national
securities exchange, and many issuers of lower-grade securities choose not to
have a rating assigned to their obligations by any nationally recognized
statistical rating organization. As a result, the Fund's portfolio may consist
of a higher portion of unlisted or unrated securities as compared with an
investment company that invests solely in higher-grade securities. Unrated
securities are usually not as attractive to as many buyers as are rated
securities, a factor which may make unrated securities less marketable. These
factors may have the effect of limiting the availability of the securities for
purchase by the Fund and may also limit the ability of the Fund to sell such
securities at their fair value either to meet redemption requests or in response
to changes in the economy or the financial markets. Further, to the extent the
Fund owns or may acquire illiquid or restricted lower-grade securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. The amount of available
information about the financial condition of certain lower-grade issuers may be
less extensive than other issuers. In its analysis, the Fund's investment
adviser may consider the credit ratings of recognized rating organizations in
evaluating securities although the investment adviser does not rely primarily on
these ratings. Ratings evaluate only the safety of principal and interest
payments, not the market value risk. In addition, ratings are general and not
absolute standards of quality, and credit ratings are subject to the risk that
the creditworthiness of an issuer may change and the rating agencies may fail to
change such ratings in a timely fashion. A rating downgrade does not require the
Fund to dispose of a security. The Fund's investment adviser continuously
monitors the issuers of securities held in the Fund. Because of the number of
investment considerations involved in investing in lower-grade securities, to
the extent the Fund invests in such securities, achievement of the Fund's
investment objective may be more dependent upon the Fund's investment adviser's
credit analysis than is the case with investing in higher-grade securities.
New or proposed laws may have an impact on the market for lower-grade
securities. The Fund's investment adviser is unable at this time to predict what
effect, if any, legislation may have on the market for lower-grade securities.
The table below sets forth the percentages of the Fund's assets during the
fiscal year ended September 30, 1999 invested in the various ratings categories
(based on the higher of the Moody's or S&P ratings) and unrated securities
determined by the Fund's investment adviser to be of comparable quality. The
percentages are based on the dollar-weighted average of credit ratings of all
municipal securities held by the Fund during the fiscal year computed on a
monthly basis.
12
<PAGE> 209
<TABLE>
<CAPTION>
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 30.3% 0%
.......................................................................
AA/Aa 4.6% 0%
.......................................................................
A/A 11.6% 0%
.......................................................................
BBB/Baa 37.4% 2.3%
.......................................................................
BB/Ba 0% 7.2%
.......................................................................
B/B 0% 6.6%
.......................................................................
CCC/Caa 0% 0%
.......................................................................
CC/Ca 0% 0%
.......................................................................
C/C 0% 0%
.......................................................................
D 0% 0%
.......................................................................
Percentage of
Rated and
Unrated
Securities 83.9% 16.1%
.......................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those listed above.
SPECIAL CONSIDERATIONS REGARDING
NEW YORK MUNICIPAL SECURITIES
The Fund invests substantially all of its assets in a portfolio of New York
municipal securities, which are municipal securities the interest on which, in
the opinion of bond counsel or other counsel to the issuers of such securities,
is, at the time of issuance, exempt from New York State and New York City
individual income taxes. Because the Fund invests substantially all of its
assets in a portfolio of New York municipal securities, the Fund is more
susceptible to political, economic, regulatory or other factors affecting
issuers of New York municipal securities than a fund which does not limit its
investments to such issuers. These risks include possible legislative, state
constitutional or regulatory amendments that may affect the ability of state and
local governments or regional governmental authorities to raise money to pay
principal and interest on their municipal securities. Economic, fiscal and
budgetary conditions throughout the state may also influence the Fund's
performance.
The following information is a summary of a more detailed description of certain
factors affecting New York municipal securities which is contained in the
Statement of Additional Information. Investors should obtain a copy of the
Statement of Additional Information for the more detailed discussion of such
factors. Such information is derived from certain official statements of the
State of New York published in connection with the issuance of specific New York
municipal securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all New York municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.
Investors should be aware of certain factors that might affect the financial
condition of the issuers of New York municipal securities. The State of New York
has historically been one of the wealthiest states in the nation. For decades,
however, the economy of the State of New York has grown more slowly than that of
the nation as a whole, and the result has been a gradual erosion of the State's
relative economic affluence. New York City, for example, has faced greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in New York City.
The State of New York has for many years had a very high state and local tax
burden. The burden of state and local taxation, in combination with the many
other causes of regional economic dislocations, has contributed to the decisions
of some businesses and individuals to relocate outside, or not locate within,
the State of New York.
There can be no assurance that the State of New York and its political
subdivisions will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain programs at
current levels. To address any potential budgetary imbalance, the State of New
York and such subdivisions may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
Although revenue obligations of the State of New York or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic
13
<PAGE> 210
difficulties and the resulting impact on State and local government finances
will not adversely affect the market value of the portfolio of the Fund or the
ability of the respective obligors to make timely payments of principal and
interest on such obligations.
More detailed information concerning New York municipal securities and the State
of New York is included in the Fund's Statement of Additional Information.
DERIVATIVE INSTRUMENTS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that the use of these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and other interest rate indices and other financial instruments,
purchase and sell financial futures contracts and options on futures and enter
into various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of securities for investment purposes, to manage the effective maturity
or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used at
any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the investment
adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default by the other party to the transaction, illiquidity of the
derivative instrument, and, to the extent the investment adviser's view as to
certain market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale of
portfolio securities at inopportune times or for prices other than at current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the risk management or hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and their risks are described more fully in the Fund's Statement of
Additional Information. Income earned or deemed to be earned by the Fund from
its Strategic Transactions, if any, generally will be taxable income of the
Fund.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time
14
<PAGE> 211
the Fund enters into the commitment. No income accrues to the Fund on securities
in connection with such transactions prior to the date the Fund actually takes
delivery of such securities. These transactions are subject to market risk as
the value or yield of a security at delivery may be more or less than the
purchase price or the yield generally available on securities when delivery
occurs. In addition, the Fund is subject to counterparty risk because it relies
on the buyer or seller, as the case may be, to consummate the transaction, and
failure by the other party to complete the transaction may result in the Fund
missing the opportunity of obtaining a price or yield considered to be
advantageous. The Fund will only make commitments to purchase such securities
with the intention of actually acquiring these securities, but the Fund may sell
these securities prior to settlement if it is deemed advisable. No specific
limitation exists as to the percentage of the Fund's assets which may be used to
acquire securities on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities, or yield
differentials, or for other reasons. The Fund's portfolio turnover is shown
under the heading "Financial Highlights." The portfolio turnover rate may vary
from year to year. A high portfolio turnover rate (100% or more) increases a
fund's transactions costs (including brokerage commissions or dealer costs) and
a high portfolio turnover rate may result in the realization of more short-term
capital gains than if a fund had a lower portfolio turnover rate. Increases in a
fund's transaction costs would adversely impact the fund's performance. The
turnover rate will not be a limiting factor, however, if the Fund's investment
adviser considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may invest on a temporary basis a portion or all
of its assets in high-quality, short-term New York municipal obligations. If
such municipal obligations are not available or, in the Fund's investment
adviser's judgment, do not afford sufficient protection against adverse market
conditions, the Fund may invest in high-quality municipal securities of issuers
other than issuers of New York municipal securities. Furthermore, if such
high-quality securities are not available or, in the Fund's investment adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in taxable obligations. Such taxable obligations may include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, other investment grade quality income securities, prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million and
repurchase agreements. In taking such a defensive position, the Fund would not
be pursuing and may not achieve its investment objective.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $90 billion under management or supervision as of
December 31, 1999. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
15
<PAGE> 212
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily net assets of
the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- ------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.60%
......................................................
Over $500 million 0.50%
......................................................
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.60% of the
Fund's average daily net assets for the Fund's fiscal year ended September 30,
1999.
The Fund's average daily 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.
Under the Advisory Agreement, the Adviser furnishes offices, necessary
facilities and equipment and provides administrative services to the Fund. The
Fund pays all charges and expenses of its day to day operations, including
service fees, distribution fees, custodial fees, legal and independent
accounting fees, the costs of reports and proxies to shareholders, compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments) and all other ordinary business
expenses not specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the Adviser,
supervises the Adviser's municipal securities practice and coordinates the
Adviser's investment policy regarding such securities. Mr. Johnson has been
employed by the Adviser since April 1989. Dennis S. Pietrzak, a Vice President
of the Adviser, has been primarily responsible for the day-to-day management of
the Fund's portfolio since August 1995. Mr. Pietrzak has been employed by the
Adviser since August, 1995. Prior to joining the Adviser, Mr. Pietrzak was
employed by Merrill Lynch where he was in charge of municipal underwriting and
trading for 20 years in Merrill Lynch's Midwest region.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments must be at least $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
16
<PAGE> 213
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) each class of shares
has exclusive voting rights with respect to approvals of the Rule 12b-1
distribution plan and service plan (each as described below) under which its
distribution fee and/or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B Shares and Class C Shares and
the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays or any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund's Board of Trustees reserves the right to
calculate the net asset value per share and adjust the offering price based
thereon more frequently than once daily if deemed desirable. Net asset value per
share for each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Short-term investments with remaining maturities of 60 days or less are valued
at cost plus accrued interest (amortized cost) which approximates market value.
Securities for which market quotations are not readily available and other
assets are valued at their fair value as determined in good faith by the Adviser
in accordance with procedures established by the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the 1940 Act. The Fund
also has adopted a service plan (the "Service Plan") with respect to each class
of its shares. Under the Distribution Plan and the Service Plan the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders and the maintenance of such shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
such class of shares. To assist investors in comparing classes of shares, the
tables under the heading "Fees and Expenses of the Fund" provide a summary of
sales charges and expenses and an example of the sales charges and expenses of
the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
17
<PAGE> 214
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and Service Plan, the Fund may spend up to a total
of 0.25% per year of the Fund's average daily net assets with respect to the
Class A Shares of the Fund. From such amount, under the Service Plan, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
18
<PAGE> 215
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within six years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class B Shares of the
Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan Class B Shares received on such shares, automatically convert to Class A
Shares eight years after the end of the calendar month in which the shares were
purchased. Class B Shares purchased before June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, automatically convert
to Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C Shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar
19
<PAGE> 216
month in which such shares were purchased. Such conversion will be on the basis
of the relative net asset values per share, without the imposition of any sales
load, fee or other charge. The conversion schedule applicable to a share of the
Fund acquired through the exchange privilege from another Van Kampen fund
participating in the exchange program is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by
involuntary liquidation by the Fund of a shareholder's account as described
under the heading "Redemption of Shares." Subject to certain limitations, a
shareholder who has redeemed Class C Shares of the Fund may reinvest in Class C
Shares at net asset value with credit for any contingent deferred sales charge
if reinvestment is made within 180 days after the redemption. For a more
complete description of contingent deferred sales charge waivers, please refer
to the Fund's Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds over a 13-month period
based on the total amount of intended purchases plus the value of all shares of
the Participating Funds previously purchased and still owned. An investor may
elect to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each
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investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. The initial purchase must be for an
amount equal to at least 5% of the minimum total purchase amount of the level
selected. If trades not initially made under a Letter of Intent subsequently
qualify for a lower sales charge through the 90-day backdating provisions, an
adjustment will be made at the expiration of the Letter of Intent to give effect
to the lower sales charge. Such adjustment in sales charge will be used to
purchase additional shares for the shareholder with the applicable sales charge.
The Fund initially will escrow shares totaling 5% of the dollar amount of the
Letter of Intent to be held by Investor Services in the name of the shareholder.
In the event the Letter of Intent goal is not achieved within the specified
period, the investor must pay the difference between the sales charge applicable
to the purchases made and the reduced sales charges previously paid. Such
payments may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit investment trust distributions will be 1.00% of the
offering price (1.01% of net asset value). Of this amount, the Distributor will
pay to the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the terms and conditions that apply to the program,
should contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
In order to obtain these special benefits, all dividends and other distributions
by the Fund must be reinvested in additional shares and there cannot be any
systematic withdrawal program. There will be no minimum for reinvestments from
unit investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
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(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by nonprofit organizations
defined under Section 501(c)(3) of the Code and assets held by an employer
or trustee in connection with an eligible deferred compensation plan under
Section 457 of the Code. Such plans will qualify for purchases at net asset
value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (1) the
total plan assets are at least $1 million or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have received
proposals from the Distributor prior to January 1, 2000 based on net asset
value purchase privileges previously in effect will be qualified to purchase
shares of the Participating Funds at net asset value. Section 403(b) and
similar accounts for which Van Kampen Trust Company serves as custodian will
not be eligible for net asset value purchases based on the aggregate
investment made by the plan or the number of eligible employees, except
under certain uniform criteria established by the Distributor from time to
time. For purchases on February 1, 1997 and thereafter, a commission will be
paid as follows: 1.00% on sales to $2 million, plus 0.80% on the next $1
million, plus 0.50% on the next $47 million, plus 0.25% on the excess over
$50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy holders
of an insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers
who initiate and are responsible for such sales to each individual as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million and
0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust
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department, provided that Investor Services receives federal funds for the
purchase by the close of business on the next business day following acceptance
of the order. An authorized dealer may charge a transaction fee for placing an
order to purchase shares pursuant to this provision or for placing a redemption
order with respect to such shares. Authorized dealers will be paid a service fee
as described above on purchases made under options (3) through (9) above. The
Fund may terminate, or amend the terms of, offering shares of the Fund at net
asset value to such groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian/trustee of a
retirement plan account may involve additional fees charged by the dealer or
custodian/trustee.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the request and any other necessary documents in
proper form as described below. Such payment may be postponed or the right of
redemption suspended as provided by the rules of the SEC. Such payment may,
under certain circumstances, be paid wholly or in part by a distribution-in-kind
of portfolio securities which may result in brokerage costs and a gain or loss
for federal income tax purposes when such securities are sold. If the shares to
be redeemed have been recently purchased by check, Investor Services may delay
the payment of redemption proceeds until it confirms the purchase check has
cleared, which may take up to 15 days. A taxable gain or loss will be recognized
by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares to be redeemed, the Fund name and class
designation of such shares and the shareholder's account number. The redemption
request must be signed by all persons in whose names the shares are registered.
Signatures must conform exactly to the account registration. If the proceeds of
the redemption exceed $50,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the record address has changed within
the previous 30 days, signature(s) must be guaranteed by one of the following: a
bank or trust company; a broker-dealer; a credit union; a national securities
exchange, registered securities association or clearing agency; a savings and
loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by and registered to
a corporation, partnership, trust, fiduciary, or other legal entity, a copy of
the corporate resolution or other legal documentation appointing the authorized
signer and certified within the prior 120 days must accompany the redemption
request. Retirement Plan distribution requests should be sent to the
custodian/trustee to be forwarded to Investor Services. Contact the
custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of
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authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the application form
accompanying the prospectus. For accounts that are not established with
telephone redemption privileges, a shareholder may call the Fund at (800)
341-2911 to request that a copy of the Telephone Redemption Authorization form
be sent to the shareholder for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. Shares may also be redeemed by
phone through FundInfo(R) (automated phone system) to the shareholder's bank
account of record 24 hours a day, seven days a week at (800) 847-2424. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedure previously described.
Requests received by Investor Services prior to 4:00 p.m., New York time, will
be processed at the next determined net asset value per share. These privileges
are available for most accounts other than retirement accounts or accounts with
shares represented by certificates. If an account has multiple owners, Investor
Services may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. If a redemption
is requested through FundInfo(R) transactions are sent to the pre-designated
bank account of record only. Proceeds from redemptions payable by wire transfer
are expected to be wired on the next business day following the date of
redemption. The Fund reserves the right at any time to terminate, limit or
otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare daily and distribute monthly all,
or substantially all of its net investment income, as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
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The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends and/or capital gains be paid in cash, be
reinvested in the Fund at net asset value, or be invested in another Van Kampen
fund at net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may appoint
Investor Services as agent by completing the Authorization for Redemption by
Check form and the appropriate section of the application and returning the form
and the application to Investor Services. Once the form is properly completed,
signed and returned to the agent, a supply of checks drawn on State Street Bank
and Trust Company (the "Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the share
holder's Class A Share account by Investor Services at the next determined net
asset value per share. Check writing redemptions represent the sale of Class A
Shares. Any gain or loss realized on the redemption of shares is a taxable
event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or by the Bank. Retirement plans and accounts that are subject to backup
withholding are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A
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prospectus of any of the Participating Funds may be obtained from any authorized
dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684, through Fund Info(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
telephone exchange privileges unless the shareholder indicates otherwise by
checking the applicable box on the application form accompanying the prospectus.
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain dividend options (except
dividend diversification) and authorized dealer of record as the account from
which shares are exchanged, unless otherwise specified by the shareholder. In
order to establish a systematic withdrawal plan for the new account or reinvest
dividends from the new account into another fund, however, an exchanging
shareholder must submit a specific request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
and other Participating Funds may restrict exchanges by shareholders engaged in
excessive trading by limiting or disallowing the exchange privilege to such
shareholders. For further information on these restrictions see the Fund's
Statement of Additional Information. The Fund may modify, restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
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INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
NEW YORK
TAXATION
The discussion under this heading applies only to shareholders of the Fund that
are residents of New York for New York tax purposes. Individual shareholders
will not be subject to New York State or New York City income tax on
distributions attributable to interest on New York municipal securities.
Individual shareholders will be subject to New York State or New York City
income tax on distributions attributable to other income of the Fund (including
net capital gain), and gain on the sale of shares of the Fund. Corporations
should note that all or a part of any distribution from the Fund, and gain on
the sale of shares of the Fund, may be subject to the New York State corporate
franchise tax and the New York City general corporation tax.
Under currently applicable New York State law, the highest marginal New York
State income tax rate imposed on individuals for taxable years beginning after
1996 is 6.85%. The highest marginal New York City income tax rate currently
imposed on individuals is 3.83%. In addition, individual taxpayers with New York
adjusted gross income in excess of $100,000 must pay a supplemental tax to
recognize the benefit of graduated tax rates. Shareholders subject to taxation
in a state other than New York will realize a lower after-tax rate of return if
distributions from the Fund are not exempt from taxation in such other state.
FEDERAL INCOME
TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives
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an exempt-interest dividend with respect to any shares and such shares are held
for six months or less, any loss on the sale or exchange of the shares will be
disallowed to the extent of the amount of such exempt-interest dividend.
While the Fund expects that a major portion of its income (consisting generally
of tax-exempt interest, taxable income and net short-term capital gains) will
constitute tax-exempt interest, a significant portion of the Fund's income may
consist of investment company taxable income. Distributions of investment
company taxable income (generally, taxable income and net short-term capital
gain) 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 gain (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Fund have been held by such shareholders. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held as a capital
asset, the gain or loss will be a capital gain or loss. Any recognized capital
gains may be taxed at different rates depending on how long the shareholder held
such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income and at least
90% of its net tax-exempt interest, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on the undistributed amounts.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding, and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
28
<PAGE> 225
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
July 29, 1994
(Commencement
of Investment
Nine Months Operations)
Year Ended Ended to
September 30, September 30, Year Ended December 31, December 31,
1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $16.223 $15.734 $14.992 $15.048 $13.579 $14.300
------- ------- ------- ------- ------- -------
Net Investment Income............. .794 .596 .786 .816 .821 .302
Net Realized and Unrealized
Gain/Loss....................... (1.198) .509 .795 (.074) 1.476 (.722)
------- ------- ------- ------- ------- -------
Total from Investment Operations... (.404) 1.105 1.581 .742 2.297 (.420)
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of
Net Investment Income............. .792 .599 .798 .798 .828 .301
Distributions from Net Realized
Gain.............................. .088 .017 .041 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions................ .880 .616 .839 .798 .828 .301
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $14.939 $16.223 $15.734 $14.992 $15.048 $13.579
======= ======= ======= ======= ======= =======
Total Return*(a)................... (2.61%) 7.11%** 10.92% 5.14% 17.33% (2.93%)**
Net Assets at End of the Period (In
millions)......................... $36.6 $25.0 $18.0 $7.7 $5.4 $2.9
Ratio of Expenses to Average Net
Assets*........................... .33% .39% .64% .31% .21% .26%
Ratio of Net Investment Income to
Average Net Assets*............... 5.03% 5.01% 5.16% 5.56% 5.63% 5.27%
Portfolio Turnover................. 67% 53%** 60% 126% 51% 68%**
* If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets............................ 1.23% 1.43% 1.47% 1.82% 2.10% 2.73%
Ratio of Net Investment Income to
Average
Net Assets........................ 4.13% 3.97% 4.33% 4.04% 3.74% 2.81%
<CAPTION>
Class B Shares Class B Shares
July 29, 1994
(Commencement
of Investment
Nine Months Operations)
Year Ended Ended to
September 30, September 30, Year Ended December 31, December 31,
1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $16.208 $15.727 $14.992 $15.046 $13.578 $14.300
------- ------- ------- ------- ------- -------
Net Investment Income............. .679 .509 .684 .704 .713 .263
Net Realized and Unrealized
Gain/Loss....................... (1.200) .507 .782 (.068) 1.476 (.722)
------- ------- ------- ------- ------- -------
Total from Investment Operations... (.521) 1.016 1.466 .636 2.189 (.459)
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of
Net Investment Income............. .684 .518 .690 .690 .721 .263
Distributions from Net Realized
Gain.............................. .088 .017 .041 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions................ .772 .535 .731 .690 .721 .263
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $14.915 $16.208 $15.727 $14.992 $15.046 $13.578
======= ======= ======= ======= ======= =======
Total Return*(a)................... (3.34%) 6.58%** 10.07% 4.37% 16.47% (3.20%)**
Net Assets at End of the Period (In
millions)......................... $28.2 $19.0 $13.1 $10.1 $9.7 $8.1
Ratio of Expenses to Average Net
Assets*........................... 1.08% 1.14% 1.36% 1.07% .93% .96%
Ratio of Net Investment Income to
Average Net Assets*............... 4.27% 4.26% 4.49% 4.79% 4.93% 4.58%
Portfolio Turnover................. 67% 53%** 60% 126% 51% 68%**
* If certain expenses had not been
follows:
Ratio of Expenses to Average Net
Assets............................ 1.98% 2.19% 2.18% 2.60% 2.82% 3.42%
Ratio of Net Investment Income to
Average
Net Assets........................ 3.37% 3.21% 3.67% 3.26% 3.04% 2.12%
<CAPTION>
Class C Shares Class C Shares
July 29, 1994
(Commencement
of Investment
Nine Months Operations)
Year Ended Ended to
September 30, September 30, Year Ended December 31, December 31,
1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $16.204 $15.726 $14.992 $15.041 $13.579 $14.300
------- ------- ------- ------- ------- -------
Net Investment Income............. .682 .515 .676 .701 .711 .267
Net Realized and Unrealized
Gain/Loss....................... (1.196) .498 .789 (.060) 1.472 (.725)
------- ------- ------- ------- ------- -------
Total from Investment Operations... (.514) 1.013 1.465 .641 2.183 (.458)
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of
Net Investment Income............. .684 .518 .690 .690 .721 .263
Distributions from Net Realized
Gain.............................. .088 .017 .041 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions................ .772 .535 .731 .690 .721 .263
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $14.918 $16.204 $15.726 $14.992 $15.041 $13.579
======= ======= ======= ======= ======= =======
Total Return*(a)................... (3.28%) 6.51%** 10.07% 4.44% 16.39% (3.20%)**
Net Assets at End of the Period (In
millions)......................... $5.1 $3.1 $1.0 $.4 $.4 $.2
Ratio of Expenses to Average Net
Assets*........................... 1.08% 1.14% 1.41% 1.08% .98% .96%
Ratio of Net Investment Income to
Average Net Assets*............... 4.28% 4.22% 4.37% 4.78% 4.81% 4.58%
Portfolio Turnover................. 67% 53%** 60% 126% 51% 68% **
* If certain expenses had not been
follows:
Ratio of Expenses to Average Net
Assets............................ 1.98% 2.18% 2.23% 2.61% 2.86% 3.42%
Ratio of Net Investment Income to
Average
Net Assets........................ 3.38% 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.
29
<PAGE> 226
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P corporate or municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial 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 obligor 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; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT -- INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
A- 1
<PAGE> 227
C: Debt rated "C" is currently highly vulnerable to nonpayment. 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.
r: This symbol highlights derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns as a result of non credit risks. Examples include: obligations linked or
indexed to equities, currencies, or commodities; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong or strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse Financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the due date, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
A commercial paper 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 to
S&P by the issuer or obtained from other sources it considers reliable. S&P does
not perform an audit in connection with any
A- 2
<PAGE> 228
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.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols for the
put option (for example, 'AAA/A-1+'). With short-term demand debt, S&P's note
rating symbols are used with the commercial paper rating symbols (for example,
'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
LONG-TERM DEBT
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 market 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 through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
A- 3
<PAGE> 229
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date date to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as MIG 1 or
VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's assigns a MIG
or VMIG rating, all categories define an investment grade situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability for
repayment of short-term debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics:
- -- Leading market positions in well established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- -- Well established access to a ranges of financial markets and assured sources
of alternative liquidity.
A- 4
<PAGE> 230
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.
A- 5
<PAGE> 231
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson Paul G. Yovovich
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Dennis J. McDonnell*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
Edward C. Wood III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
Stephen L. Boyd*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer & Treasurer
Curtis W. Morell*
Vice President & Chief Accounting Officer
Tanya M. Loden*
Controller
* "Interested Persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time
Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen New York Tax Free Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen New York Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 232
VAN KAMPEN
NEW YORK TAX FREE INCOME FUND
PROSPECTUS
JANUARY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling
(800)341-2911 from 7:00 a.m. to 7:00 p.m.,
Central time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800)421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address (public [email protected]) or by writing
the Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act File No. is 811-4386. NYTF PRO 1/00
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STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN TAX FREE HIGH INCOME FUND
Van Kampen Tax Free High Income Fund (the "Fund") is a mutual fund with the
investment objective to provide investors with a high level of current income
exempt from federal income tax primarily through investment in a diversified
portfolio of medium- and lower-grade municipal securities.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust,
an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
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PAGE
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General Information......................................... B-2
Investment Objective, Policies and Risks.................... B-3
Strategic Transactions...................................... B-6
Investment Restrictions..................................... B-12
Trustees and Officers....................................... B-13
Investment Advisory Agreement............................... B-22
Other Agreements............................................ B-22
Distribution and Service.................................... B-23
Transfer Agent.............................................. B-26
Portfolio Transactions and Brokerage Allocation............. B-26
Shareholder Services........................................ B-27
Redemption of Shares........................................ B-30
Contingent Deferred Sales Charge-Class A.................... B-30
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-30
Taxation.................................................... B-32
Fund Performance............................................ B-35
Other Information........................................... B-38
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-36
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THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 2000.
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GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen
Merritt Tax Free Trust as a Massachusetts business trust (the "Massachusetts
Trust"). The Massachusetts Trust was reorganized into the Trust under the name
Van Kampen American Capital Tax Free Trust on July 31, 1995. The Trust was
created for the purpose of facilitating the Massachusetts Trust reorganization
into a Delaware business trust. On July 14, 1998, the Trust adopted its current
name.
The Fund was originally organized in 1985 as a Maryland corporation under
the name Van Kampen Merritt Tax Free High Income Fund Inc. and was reorganized
in 1987 under the name Van Kampen Merritt Tax Free High Income Fund as a
sub-trust of the Massachusetts Trust. The Fund was reorganized as a series of
the Trust under the name Van Kampen American Capital Tax Free High Income Fund
on July 31, 1995. On July 14, 1998, the Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. ("Morgan Stanley Dean Witter"). 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 and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment 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.
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The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less 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 December 31, 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:
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AMOUNT OF
NAME AND ADDRESS OWNERSHIP AT CLASS PERCENTAGE
OF HOLDER DECEMBER 31, 1999 OF SHARES OWNERSHIP
- ----------------------------------------------------------- ----------------- --------- ----------
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Edward Jones & Co.......................................... 9,786,209 A 19.13%
Attn: Mutual Fund Shareholder Accounting.................. 1,106,423 B 5.68%
201 Progress Pkwy......................................... 316,813 C 7.29%
Maryland Hts., MO 63043-3009
MLPF&S For the Sole Benefit of its Customers............... 1,600,700 B 8.22%
Attn: Fund Administration 97FU8
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
MLPF&S For the Sole Benefit of its Customers............... 745,452 C 17.15%
Attn: Fund Administration 97FY0
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
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INVESTMENT OBJECTIVE, POLICIES AND RISKS
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.
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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. The Fund may invest in shorter term municipal securities
when yields are greater than yields available on longer term municipal
securities, for temporary defensive purposes or when redemption requests are
expected. The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special obligation" securities, which include
"industrial revenue bonds." General obligation securities are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation securities are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source, such as from the user of the facility being financed. The Fund
may also invest in "moral obligation" bonds which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment but
not a legal obligation of the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
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The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal or interest when due, the Fund may be subject to delays, expenses and
risks that are greater than those that would have been involved if the Fund had
purchased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the 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.
"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
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municipal securities obtained pursuant to such transactions. Because the Fund
relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year.
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 for which market quotations are not readily available
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 typically 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, as amended from time to
time.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various Strategic Transactions
(as defined in the Prospectus) to earn income, facilitate portfolio management
and mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Adviser seeks
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to use such transactions to further the Fund's investment objective, no
assurance can be given that the use of these transactions will achieve this
result.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set
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by negotiation of the parties. The Fund will only enter into OTC options that
have a buy-back provision permitting the Fund to require the Counterparty to
close the option at a formula price within seven days. The Fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of 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
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<PAGE> 241
options on securities except that an option on a futures contract gives the
purchaser the right in return for the premium paid to assume a position in a
futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
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<PAGE> 242
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate cash and
liquid securities with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid securities at least
equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash and
liquid securities sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities which correlate with the index or to segregate cash
and liquid securities equal to the excess of the index value over the exercise
price on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash and liquid
securities equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out cash and liquid securities equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of cash and liquid securities equal to the full value of the option.
OTC options settling
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<PAGE> 243
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.
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INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder 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 at the meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitation on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. The Fund may
not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the U.S. government or by its agencies or instrumentalities), if as a
result more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or if as a result
the Fund would hold more than 10% of the outstanding voting securities of
any single issuer, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, the Fund
may from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market; however, the Fund will not invest
more than 25% of its assets in industrial development bonds in a single
industry; and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge or hypothecate any assets except in connection with a borrowing and
in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
"when issued" and "delayed delivery" transactions.
4. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging
transactions in accordance with the requirements of the SEC and the CFTC.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in their respective portfolios.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
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<PAGE> 245
10. Invest in equity interests in oil, gas or other mineral exploration of
development programs.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent the options and futures and index
contracts in which such Funds may invest for hedging and risk management
purposes are considered to be commodities or commodities contracts.
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. Trustee/Director of each of the
1632 Morning Mountain Road funds in the Fund Complex. Co-founder, and prior to
Raleigh, NC 27614 August 1996, Chairman, Chief Executive Officer and
Date of Birth: 07/14/32 President, MDT Corporation (now known as
Age: 67 Getinge/Castle, Inc., a subsidiary of Getinge
Industrier AB), a company which develops,
manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
Age: 61 January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in
233 South Wacker Drive the Fund Complex. Prior to 1997, Partner, Ray &
Suite 7000 Berndtson, Inc., an executive recruiting and
Chicago, IL 60606 management consulting firm. Formerly, Executive Vice
Date of Birth: 06/03/48 President of ABN AMRO, N.A., a Dutch bank holding
Age: 51 company. Prior to 1992, 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.
</TABLE>
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<PAGE> 246
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created
Washington, D.C. 20016 to deepen understanding, promote collaboration and
Date of Birth: 02/29/52 stimulate exchanges of practical experience between
Age: 47 Americans and Europeans. Trustee/Director of each of
the funds in the Fund Complex. Formerly, advisor to
the Dennis Trading Group Inc., a managed futures and
option company that invests money for individuals and
institutions. Prior to 1992, President and Chief
Executive Officer, Director and Member of the
Investment Committee of the Joyce Foundation, a
private foundation.
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since April 1997
New York, NY 10048 and Chief Executive Officer since June 1998 of Morgan
Date of Birth: 08/13/53 Stanley Dean Witter Advisors Inc. and Morgan Stanley
Age: 46 Dean Witter Services Company Inc. Chairman, Chief
Executive Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998. Chairman and
Chief Executive Officer since June 1998, and Director
since January 1998, of Morgan Stanley Dean Witter
Trust FSB. Director of various Morgan Stanley Dean
Witter subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index Series
since May 1999. Trustee/Director of each of the funds
in the Fund Complex, and Vice President of other
investment companies advised by the Advisers and their
affiliates. Previously Chief Strategic Officer of
Morgan Stanley Dean Witter Advisors Inc. and Morgan
Stanley Dean Witter Services Company Inc. and
Executive Vice President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice President
of the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series May 1997-April 1999, and
Executive Vice President of Dean Witter, Discover &
Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company and
Winter Park, FL 32789 registered investment adviser in the State of Florida.
Date of Birth: 02/13/36 President and owner, Nelson Ivest Brokerage Services
Age: 63 Inc., a member of the National Association of
Securities Dealers, Inc. and Securities Investors
Protection Corp. Trustee/Director of each of the funds
in the Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor,
Oakbrook Terrace, IL 60181-5555 Van Kampen Advisors Inc. and Van Kampen Management
Date of Birth: 02/02/46 Inc. Director and officer of certain other
Age: 53 subsidiaries of Van Kampen Investments.
Trustee/Director and President of each of the funds in
the Fund Complex. Trustee, President and Chairman of
the Board of other investment companies advised by the
Advisers and their affiliates, and Chief Executive
Officer of Van Kampen Exchange Fund. Prior to May
1998, Executive Vice President and Director of
Marketing at Morgan Stanley Dean Witter and Director
of Dean Witter Discover & Co. and Dean Witter Realty.
Prior to 1996, Director of Dean Witter Reynolds Inc.
</TABLE>
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<PAGE> 247
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Age: 55 Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the Fund
Complex. Prior to 1998, Director of Stone Smurfit
Container Corp., a paper manufacturing company. From
May 1996 through February 1997 he was President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company,
and from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Age: 75 Dynalysis of Princeton, a firm engaged in 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,
333 West Wacker Drive Meagher & Flom (Illinois), legal counsel to the funds
Chicago, IL 60606 in the Fund Complex, and other investment companies
Date of Birth: 08/22/39 advised by the Advisers or Van Kampen Management Inc.
Age: 60 Trustee/Director of each of the funds in the Fund
Complex, and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or
Van Kampen Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Age: 58 Marshall Fund of the United States, Trustee of
Colorado College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/Director
of each of the funds in the Fund Complex. Prior to
1993, Executive Director of the Commission on
Behavioral and Social Sciences and Education at the
National Academy of Sciences/National Research
Council. From 1980 through 1989, Partner of Coopers &
Lybrand.
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network
233 South Wacker Drive system solutions, COMARCO, Inc., a wireless
Suite 9700 communications products company and APAC Customer
Chicago, IL 60606 Services, Inc., a provider of outsourced customer
Date of Birth: 10/29/53 contact services. Trustee/Director of each of the
Age: 46 funds in the Fund Complex. Prior to May 1996,
President of Advance Ross Corporation, an
international transaction services and pollution
control equipment manufacturing company.
</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. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-15
<PAGE> 248
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood 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.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and
Age: 57 Van Kampen Management Inc. Executive Vice President and
Chief Investment Officer of each of the funds in the Fund
Complex, since 1998. Chief Investment Officer, Executive
Vice President and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or Van
Kampen Management Inc. ("Management Inc."), since the
inception of funds advised by Advisory Corp. and
Management Inc. and since 1998 for funds advised by Asset
Management. Director of Global Decisions Group LLC, a
financial research firm, and its affiliates MCM Asia
Pacific and MCM Europe. Prior to 1998, President, Chief
Operating Officer and a Director of the Advisers, Van
Kampen American Capital Management, Inc.; Director of Van
Kampen American Capital, Inc.; and President, Chief
Executive Officer and Trustee of each of the funds advised
by Advisory Corp. Prior to July 1998, Director and
Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996,
Chief Executive Officer and Director of MCM Group, Inc.
and McCarthy, Crisanti & Maffei, Inc., a financial
research firm, and Chairman of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to December 1991,
Senior Vice President of Van Kampen Merritt Inc.
</TABLE>
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<PAGE> 249
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van
Vice President and Secretary Kampen Advisors Inc., Van Kampen Management Inc., the
Age: 43 Distributor, American Capital Contractual Services, Inc.,
Van Kampen Exchange Corp., Van Kampen Recordkeeping
Services Inc., Investor Services, Van Kampen Insurance
Agency of Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal Legal
Officer and Secretary of other investment companies
advised by the Advisers or their affiliates. Vice
President and Secretary of each of the funds in the Fund
Complex. Prior to January 1999, Vice President and
Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission,
Division of Investment Management, Office of Chief
Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen
Age: 44 Management Inc. and Van Kampen Investor Services Inc., and
serves as a Director or Officer of certain other
subsidiaries of Van Kampen Investments. Vice President of
each of the funds in the Fund Complex and certain other
investment companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President and
Senior Planning Officer for Individual Asset Management of
Morgan Stanley Dean Witter and its predecessor since 1994.
From 1990-1994, First Vice President and Assistant
Controller in Dean Witter's Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice
Vice President President of each of the funds in the Fund Complex and
Age: 43 certain other investment companies advised by the Advisers
or their affiliates. Prior to September 1996, Director of
McCarthy, Crisanti & Maffei, Inc, a financial research
company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
Age: 59 companies advised by the Advisers or their affiliates.
Prior to October 1998, Vice President and Senior Portfolio
Manager with AIM Capital Management, Inc. Prior to
February 1998, Senior Vice President of Van Kampen
American Capital Asset Management, Inc., Van Kampen
American Capital Investment Advisory Corp. and Van Kampen
American Capital Management, Inc.
</TABLE>
B-17
<PAGE> 250
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
Age: 44 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.
Age: 53
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.
Age: 44 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
Age: 40 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 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 provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The 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 on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex 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
B-18
<PAGE> 251
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) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan............ $15,220 $40,303 $60,000 $126,000
Jerry D. Choate(1)........... 6,754 0 60,000 88,700
Linda Hutton Heagy........... 15,220 5,045 60,000 126,000
R. Craig Kennedy............. 15,220 3,571 60,000 125,600
Jack E. Nelson............... 15,220 21,664 60,000 126,000
Phillip B. Rooney............ 13,820 7,787 60,000 113,400
Fernando Sisto............... 15,220 72,060 60,000 126,000
Wayne W. Whalen.............. 15,220 15,189 60,000 126,000
Suzanne H. Woolsey(1)........ 6,754 0 60,000 88,700
Paul G. Yovovich(1).......... 14,020 2,845 60,000 126,000
</TABLE>
- ---------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Yovovich became a member of the Board of Trustees for the Fund
and other funds in the Fund Complex on October 22, 1998 and therefore does
not have a full fiscal year of information to report. Mr. Choate and Ms.
Woolsey became members of the Board of Trustees for the Fund and other funds
in the Fund Complex on May 26, 1999 and therefore do not have a full year of
information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal year ended September 30, 1999.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The detail of cumulative
deferred compensation (including interest) owed to the Trustees, including
former 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 accrued by the operating investment companies in the Fund Complex
for each of the Trustees for the funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
B-19
<PAGE> 252
(4) For each Trustee, this is the sum of the estimated maximum annual benefits
payable by the funds 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 funds in the Fund Complex as of December 31, 1999 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, 1999. The deferred compensation earns a
rate of return determined by reference to the return on the shares of the
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those investment
companies selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The Advisers and their affiliates also
serve as investment adviser for other investment companies; however, with
the exception of Mr. Whalen, the Non-Affiliated Trustees were not trustees
of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
As of December 31, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-20
<PAGE> 253
TABLE A
1999 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund....... 9/30 $ 3,322 $1,483 $ 3,322 $ 3,322 $ 3,322 $ 3,122 $ 3,322 $ 3,322
Tax Free High Income Fund......... 9/30 2,998 1,366 2,998 2,998 2,998 2,798 2,998 2,998
California Insured Tax Free
Fund............................ 9/30 1,692 745 1,692 1,692 1,692 1,492 1,692 1,692
Municipal Income Fund............. 9/30 2,781 1,241 2,781 2,781 2,781 2,581 2,781 2,781
Intermediate Term Municipal Income
Fund............................ 9/30 1,460 631 1,460 1,460 1,460 1,260 1,460 1,460
Florida Insured Tax Free Income
Fund............................ 9/30 1,488 646 1,488 1,488 1,488 1,288 1,488 1,488
New York Tax Free Income Fund..... 9/30 1,479 642 1,479 1,479 1,479 1,279 1,479 1,479
------- ------ ------- ------- ------- ------- ------- -------
Trust Total..................... $15,220 $6,754 $15,220 $15,220 $15,220 $13,820 $15,220 $15,220
======= ====== ======= ======= ======= ======= ======= =======
<CAPTION>
TRUSTEE
------------------
FUND NAME WOOLSEY YOVOVICH
--------- ------- --------
<S> <C> <C>
Insured Tax Free Income Fund....... $1,483 $ 3,122
Tax Free High Income Fund......... 1,366 2,798
California Insured Tax Free
Fund............................ 745 1,492
Municipal Income Fund............. 1,241 2,581
Intermediate Term Municipal Income
Fund............................ 631 1,260
Florida Insured Tax Free Income
Fund............................ 646 1,288
New York Tax Free Income Fund..... 642 1,479
------ -------
Trust Total..................... $6,754 $14,020
====== =======
</TABLE>
TABLE B
1999 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ---------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund.......................... 9/30 $ 3,322 $ 819 $ 3,322 $1,661 $ 3,322 $ 3,122 $1,661 $ 3,322 $ 2,373
Tax Free High Income Fund.... 9/30 2,998 769 2,998 1,499 2,998 2,798 1,499 2,998 2,165
California Insured Tax Free
Fund....................... 9/30 1,692 471 1,692 846 1,692 1,492 846 1,692 1,216
Municipal Income Fund........ 9/30 2,781 707 2,781 1,391 2,781 2,581 1,391 2,781 1,991
Intermediate Term Municipal
Income Fund................ 9/30 1,460 415 1,460 730 1,460 1,260 730 1,460 1,045
Florida Insured Tax Free
Income Fund................ 9/30 1,488 423 1,488 744 1,488 1,288 744 1,488 1,069
New York Tax Free Income
Fund....................... 9/30 1,479 422 1,479 740 1,479 1,279 740 1,479 1,060
------- ------ ------- ------ ------- ------- ------ ------- -------
Trust Total................ $15,220 $4,026 $15,220 $7,611 $15,220 $13,820 $7,611 $15,220 $10,919
======= ====== ======= ====== ======= ======= ====== ======= =======
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL ---------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... 9/30 $12,061 $ 829 $13,428 $ 19,013 $ 28,191 $ 8,367 $ 6,888
Tax Free High Income Fund..... 9/30 11,230 778 12,661 18,570 27,209 7,518 4,640
California Insured Tax Free
Fund........................ 9/30 8,666 475 10,273 17,213 24,168 4,910 3,391
Municipal Income Fund......... 9/30 12,068 715 14,058 23,404 33,528 7,594 12,202
Intermediate Term Municipal
Income Fund................. 9/30 8,217 418 9,855 16,976 23,638 4,454 3,172
Florida Insured Tax Free
Income Fund................. 9/30 8,268 426 9,902 10,914 18,313 4,505 3,197
New York Tax Free Income
Fund........................ 9/30 4,537 425 3,611 5,706 8,667 3,632 1,967
------- ------ ------- -------- -------- ------- -------
Trust Total............... $65,047 $4,066 $73,788 $111,796 $163,714 $40,980 $35,457
======= ====== ======= ======== ======== ======= =======
<CAPTION>
TRUSTEES FORMER TRUSTEES
------------------- ----------------------------------------------
FUND NAME WHALEN YOVOVICH CARUSO GAUGHAN MILLER REES ROBINSON
--------- ------ -------- ------ ------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... $ 23,050 $ 2,479 $1,296 $1,064 $10,487 $ 0 $ 17,113
Tax Free High Income Fund..... 22,228 2,257 0 1,064 10,487 0 17,113
California Insured Tax Free
Fund........................ 19,692 1,260 0 1,064 10,487 0 17,113
Municipal Income Fund......... 27,189 2,076 2,778 1,306 14,169 7,077 22,359
Intermediate Term Municipal
Income Fund................. 19,249 1,080 0 1,064 10,487 0 17,113
Florida Insured Tax Free
Income Fund................. 15,409 1,105 0 496 6,656 0 12,280
New York Tax Free Income
Fund........................ 7,188 1,096 0 158 2,682 0 4,783
-------- ------- ------ ------ ------- ------ --------
Trust Total............... $134,005 $11,353 $4,074 $6,216 $65,455 $7,077 $107,874
======== ======= ====== ====== ======= ====== ========
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY YOVOVICH
- --------- -------- ------ ----- ------- ------ ------ ----- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 1995 1999 1995 1993 1984 1997 1995 1984 1999 1998
Tax Free High Income Fund.......... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
California Insured Tax Free Fund... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
Municipal Income Fund.............. 1995 1999 1995 1993 1990 1997 1995 1990 1999 1998
Intermediate Term Municipal Income
Fund............................. 1995 1999 1995 1993 1993 1997 1995 1993 1999 1998
Florida Insured Tax Free Income
Fund............................. 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
New York Tax Free Income Fund...... 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
</TABLE>
B-21
<PAGE> 254
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
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the cost of its day-to-day operations, including the compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), the charges and expenses of
legal counsel and independent accountants, distribution fees, service fees,
custodian fees, the costs of providing 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.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in any jurisdiction where the Fund's shares are qualified for offer
and 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 fiscal 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 a 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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, the Adviser
received approximately $5,384,500, $3,672,538 and $4,318,581, 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 supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. 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 costs based proportionally on their respective net assets
per fund.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Advisory Corp.
received approximately $273,800, $208,400 and $166,000, 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
B-22
<PAGE> 255
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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Van Kampen
Investments received approximately $32,000, $14,400 and $22,700, 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 a vote of a majority of the Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Year Ended September 30, 1999........................ $2,482,600 $273,100
Fiscal Period Ended September 30, 1998...................... $2,721,240 $288,491
Fiscal Year Ended December 31, 1997......................... $2,853,738 $312,163
</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 the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed on a percentage of the dollar value of such
shares
B-23
<PAGE> 256
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 contingent 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 or other
Van Kampen funds. 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.
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 the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
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For shares sold prior to July 1, 1987, (the "Implementation Date"), the
financial intermediary was not eligible to receive compensation pursuant to such
Distribution and Service Agreement or Selling Agreement. To the extent that
there remain outstanding shares of the Fund that were purchased prior to the
Implementation Date, the percentage of the total average daily net asset value
of a class of shares that may be utilized pursuant to the Distribution and
Service Agreement will be less than the maximum percentage amount permissible
with respect to such class of shares under the Distribution and Service
Agreement.
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary 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 financial intermediary would result in any material adverse consequences
to the Fund.
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 or 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, 1999, there were $8,516,124 and $43,408 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 3.01% and 0.07% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plans 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 contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended September 30, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $1,862,603 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 Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $2,944,482 or 1.00% of the Class B
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<PAGE> 258
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $2,215,524 for commissions and
transaction fees paid to financial intermediaries in respect of sales of Class B
Shares of the Fund and $728,958 for fees paid to financial intermediaries for
servicing Class B shareholders and administering the Class B Share Plans. For
the fiscal year ended September 30, 1999, the Fund's aggregate expenses paid
under the Plans for Class C Shares were $687,758 or 1.00% of the Class C Shares'
average daily net assets. Such expenses were paid to reimburse the Distributor
for the following payments: $401,341 for commissions and transaction fees paid
to financial intermediaries in respect of sales of Class C Shares of the Fund
and $286,417 for fees paid to financial intermediaries for servicing Class C
shareholders and administering the Class C Share Plans.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas
City, MO 64121-8256. 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 purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund
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<PAGE> 259
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 & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("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 require 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 year ended September 30, 1999...................... -- -- --
Fiscal period September 30, 1998.......................... $234,816 -- --
Fiscal year December 31, 1997............................. -- -- --
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions........... 0% 0%
Value of brokerage transactions with affiliate to total
transactions........................................... 0% 0%
</TABLE>
During the fiscal year ended September 30, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
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."
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<PAGE> 260
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds (as defined in the prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends 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
gain dividends and systematic purchases or redemptions. Additional shares may be
purchased at any time 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, 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
the fee for replacing the lost certificate equal to no more than 1.50% 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 Money Purchase and Profit Sharing
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
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds 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 redemption proceeds 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 or by calling (800) 341-2911/(800) 421-2833
for the hearing impaired.
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, 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 capital gain dividends 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
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<PAGE> 261
accounts are retirement accounts, they must both be for the same class and of
the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual. If a qualified, pre-existing account does
not exist, the shareholder must establish a new account subject to minimum
investment and other requirements of the fund into which distributions would be
invested. Distributions are invested into the selected fund at its net asset
value per share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder 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 payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for monthly, quarterly,
semiannual 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 systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawals plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions 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 upon 30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made during a rolling 365-day period. If
exchange privileges are suspended, subsequent exchange requests for redemption
out of that Fund during the stated period will not be processed. Exchange
privileges will be restored when the account history shows fewer than eight
exchanges in the rolling 365-day period.
This policy does not apply to money market funds, systematic exchange plans
or employee-sponsored retirement plans.
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 contingent deferred sales
charge 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 made 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
B-29
<PAGE> 262
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 New York Stock Exchange
(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) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines 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 and a gain or loss for federal income tax purposes upon
the sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC -- Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholder's account not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). 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 Internal Revenue Code of 1986, as
amended (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.
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<PAGE> 263
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 CDSC-Class B and C 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), the financial hardship of the
employee pursuant to United States Treasury Regulations Section 401(k)-1(d)(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 THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal 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 sent to the designated payee of record. 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 systematic withdrawal plan. The
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal 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 systematic withdrawal plan and the ability to offer the
systematic withdrawal 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 value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class B
and C upon such involuntary redemption.
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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 OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund 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 investment company taxable income (including taxable income and
net short-term capital gain, but not net capital gain, which is the excess of
net long-term capital gain over net short-term capital loss), and at least 90%
of its net tax-exempt interest, and meets certain other requirements, it will
not be required to pay federal income taxes on any income it distributes 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 gain
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts
B-32
<PAGE> 265
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 TO SHAREHOLDERS
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
B-33
<PAGE> 266
While the Fund expects that a major portion of its income will constitute
tax-exempt interest, a significant portion may consist of investment company
taxable income (generally, taxable income and net short-term capital gain).
Distributions of the Fund's 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 gain as 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. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction. 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) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers investing in this Fund is (i) the
same as the maximum ordinary income tax rate for capital assets
B-34
<PAGE> 267
held for one year or less or (ii) 20% for capital assets held for more than one
year. 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.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder the amount
of dividends paid to such shareholder and the amount, if any, of tax withheld
with respect to such dividends.
GENERAL
The federal, income tax discussion set forth above is for general
information only. Prospective investors and shareholders should consult their
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge 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 capital gain dividends
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
B-35
<PAGE> 268
the value of the investment as of the end of the period by the amount of the
initial investment and expressing the result as a percentage. Non-standardized
total return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge 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. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares 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 sector holdings and largest holdings and other Fund
information, 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 whether shareholders purchased their fund shares
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 may also be marketed on the
internet.
B-36
<PAGE> 269
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking or rating 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
at 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 Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
September 30, 1999 was -7.12%, (ii) the five-year period ended September 30,
1999 was 4.78% and (iii) the ten-year period ended September 30, 1999 was 4.93%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1999 was 5.41%. The Fund's current distribution rate with
respect to the Class A Shares for the month ending September 30, 1999 was 5.51%.
The Fund's taxable equivalent distribution rate with respect to the Class A
Shares for the month ending September 30, 1999 was 8.61%.
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, 1999 was 159.93%.
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, 1999 was 172.84%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -6.94%, (ii) the five-year period ended
September 30, 1999 was 4.73% and (iii) the approximately six-year, five month
period from May 1, 1993 (the commencement of distribution for Class B Shares of
the Fund) through September 30, 1999 was 4.87%.
B-37
<PAGE> 270
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1999 was 4.92%. The Fund's current distribution rate with
respect to the Class B Shares for the month ending September 30, 1999 was 4.96%.
The Fund's taxable equivalent distribution rate with respect to the Class B
Shares for the month ending September 30, 1999 was 7.75%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
its inception to September 30, 1999 was 35.68%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
its inception to September 30, 1999 was 35.68%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -4.18%, (ii) the five-year period ended
September 30, 1999 was 4.98% and (iii) the approximately six-year, one month
period from August 13, 1993 (the commencement of distribution for Class C shares
of the Fund) through September 30, 1999 was 4.37%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1999 was 4.91%. The Fund's current distribution rate with
respect to the Class C Shares for the month ending September 30, 1999 was 4.96%.
The Fund's taxable equivalent distribution rate with respect to the Class C
Shares for the month ending September 30, 1999 was 7.75%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
its inception to September 30, 1999 was 29.97%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
its inception to September 30, 1999 was 29.97%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
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. The Custodian also provides
accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS
KPMG LLP, 303 East Wacker Drive, Chicago, Illinois 60601, the independent
accountants for the Fund, performs an annual audit of the Fund's financial
statements.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-38
<PAGE> 271
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Tax Free High Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Tax Free High Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1999, the related statement of operations for
the year then ended, the statement of changes in net assets for the year then
ended, for the nine-month period ended September 30, 1998, and for the year
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, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Tax Free High Income Fund as of September 30, 1999, the results of its
operations for the year then ended, the changes in its net assets for the year
then ended, for the nine-month period ended September 30, 1998, and for the year
ended December 31, 1997, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG LLP SIG
Chicago, Illinois
November 9, 1999
F-1
<PAGE> 272
PORTFOLIO OF INVESTMENTS
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 103.1%
ALABAMA 1.0%
$ 1,500 Mobile, AL Indl Dev Brd Pollution
Ctl Rev Intl Paper Co Proj Rfdg..... 4.750% 04/01/10 $ 1,373,535
240 Mobile, AL Indl Dev Brd Solid Waste
Disp Rev Mobile Energy Svcs Co Proj
Rfdg................................ 6.950 01/01/20 83,180
2,150 Valley, AL Spl Care Fac Fin Auth Rev
Lanier Mem Hosp Ser A............... 5.650 11/01/22 1,942,396
1,395 Valley, AL Spl Care Fac Fin Auth Rev
Lanier Mem Hosp Ser A............... 5.600 11/01/16 1,279,968
1,000 West Jefferson Cnty, AL Amusement &
Pub Park Auth (Prerefunded @
12/01/06) (b)....................... 7.500 12/01/08 1,132,090
2,000 West Jefferson Cnty, AL Amusement &
Pub Park Auth....................... 6.375 02/01/29 1,666,940
3,000 West Jefferson Cnty, AL Amusement &
Pub Park Auth (Prerefunded @
12/01/06) (b)....................... 8.000 12/01/26 3,628,110
--------------
11,106,219
--------------
ALASKA 0.4%
2,000 Juneau, AK City & Borough
Nonrecourse Rev..................... 6.875 12/01/25 1,957,020
2,250 Seward, AK Rev AK Sealife Cent
Proj................................ 7.650 10/01/16 2,305,328
--------------
4,262,348
--------------
ARIZONA 2.0%
6,169 Chandler, AZ Indl Dev Auth Rev
Chandler Finl Cent Proj Ser 1986 (c)
(g)................................. 9.875 12/01/16 5,243,773
4,000 Maricopa Cnty, AZ Indl Dev Auth
Multi-Family Hsg Rev................ 6.625 07/01/33 3,816,080
2,605 Maricopa Cnty, AZ Indl Dev Auth Sr
Living
Fac Rev............................. 7.750 04/01/15 2,661,972
2,700 Maricopa Cnty, AZ Uni Sch Dist No 41
Gilbert Rfdg (FGIC Insd)............ * 01/01/08 1,780,380
1,500 Peoria, AZ Indl Dev Auth Rev Sierra
Winds Life Ser A Rfdg............... 6.500 08/15/31 1,425,660
2,420 Pima Cnty, AZ Indl Dev Auth Sr
Living Facs Catilina Vlg Ser A
Rev................................. 6.500 07/01/29 2,224,077
2,160 Pima Cnty, AZ Indl Dev Auth
Multi-Family Rev.................... 6.625 10/01/28 2,082,024
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 273
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ARIZONA (CONTINUED)
$ 305 Pinal Cnty, AZ Sch Dist No 8 Mammoth
Ser A............................... 11.000% 07/01/00 $ 320,695
1,900 Red Hawk Canyon Cmnty Facs Dist No 2
AZ Dist Assmt Rev................... 6.500 12/01/12 1,802,473
1,000 Tuscon, AZ Indl Dev Auth Rev Clarion
Santa Rita Hotel Ser A Rfdg......... 6.375 12/01/16 939,890
--------------
22,297,024
--------------
CALIFORNIA 7.6%
2,000 Abag Fin Auth For Nonprofit Corps CA
Ctfs Partn.......................... 6.375 11/15/28 1,902,320
4,330 California Edl Fac Auth Rev Cap
Apprec Univ (AMBAC Insd)............ * 10/01/23 1,071,155
1,310 California Edl Fac Auth Rev Univ of
La Verne............................ 6.375 04/01/13 1,344,741
1,000 Capistrano, CA Uni Sch Dist Cmnty
Fac Dist Spl Tax (Prerefunded @
09/01/07) (b)....................... 7.100 09/01/21 1,175,420
1,470 Colton, CA Pub Fin Auth Rev Elec Sys
Impts (Prerefunded @ 10/01/03)
(b)................................. 7.500 10/01/20 1,643,916
5,000 Contra Costa, CA Home Mtg Fin Auth
Home Mtg Rev (MBIA Insd)............ * 09/01/17 1,807,350
2,500 Corona, CA Ctfs Partn Vista Hosp Sys
Inc Ser C........................... 8.375 07/01/11 2,382,475
2,000 Culver City, CA Redev Fin Auth Rev
Tax Alloc Rfdg (AMBAC Insd) (b)..... 5.500 11/01/14 2,048,400
3,465 Escondido, CA Jt Pwrs Fin Auth Lease
Rev CA Cent for the Arts (AMBAC
Insd)............................... * 09/01/15 1,324,219
3,480 Escondido, CA Jt Pwrs Fin Auth Lease
Rev CA Cent for the Arts (AMBAC
Insd)............................... * 09/01/18 1,076,225
6,000 Foothill/Eastern Trans Corridor Agy
CA
Toll Rd Rev (MBIA Insd)............. * 01/15/18 2,036,640
22,985 Foothill/Eastern Trans Corridor Agy
CA
Toll Rd Rev......................... * 01/15/24 5,016,706
4,000 Foothill/Eastern Trans Corridor Agy
CA
Toll Rd Rev......................... * 01/15/26 2,137,000
3,000 Foothill/Eastern Trans Corridor Agy
CA
Toll Rd Rev......................... * 01/15/27 1,594,530
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 274
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$15,000 Foothill/Eastern Trans Corridor Agy
CA Toll Rd Rev...................... * 01/15/30 $ 2,228,250
42,460 Foothill/Eastern Trans Corridor Agy
CA Toll Rd Rev...................... * 01/15/31 5,904,912
35,000 Foothill/Eastern Trans Corridor Agy
CA Toll Rd Rev...................... * 01/15/37 3,298,400
15,000 Foothill/Eastern Trans Corridor Agy
CA Toll Rd Rev...................... * 01/15/38 1,326,300
2,705 Healdsburg, CA Ctfs Partn Nuestro
Hospital Inc........................ 6.375% 11/01/28 2,458,737
980 Indio, CA Pub Fin Auth Rev Tax
Increment........................... 6.500 08/15/27 986,135
1,990 Lake Elsinore, CA Pub Fin Auth Loc
Agy Rev............................. 7.100 09/01/20 2,064,068
1,500 Millbrae, CA Residential Fac Rev
Magnolia of Millbrae Proj Ser A..... 7.375 09/01/27 1,540,020
2,350 Riverside Cnty, CA Air Force Vlg
West Inc Ser A Rfdg (Prerefunded @
06/15/02) (b)....................... 8.125 06/15/20 2,630,919
5,500 Riverside Cnty, CA Asset Leasing
Corp Leasehold Rev (MBIA Insd)...... * 06/01/22 1,460,690
8,255 Riverside Cnty, CA Asset Leasing
Corp Leasehold Rev (MBIA Insd)...... * 06/01/26 1,721,580
4,000 Sacramento, CA City Fin Auth Rev Sr
Convention Ctr Hotel Ser A.......... 6.250 01/01/30 3,813,600
2,000 San Diego Cnty, CA Ctfs Partn (AMBAC
Insd) (b)........................... 5.500 08/15/10 2,083,220
1,900 San Diego Cnty, CA Ctfs Partn (AMBAC
Insd)............................... 5.500 08/15/11 1,963,859
7,625 San Francisco, CA City & Cnty Redev
Agy Lease Rev Gains (Crossover Rfdg
@ 07/01/04) (h)..................... 0/8.500 07/01/14 6,963,989
3,300 San Francisco, CA City & Cnty Redev
Fin Auth Tax Alloc Rev.............. 5.250 08/01/21 3,066,954
31,000 San Joaquin Hills CA Trans
Corridor Agy Toll Rd Rev
(MBIA Insd)......................... * 01/15/36 3,621,110
2,000 San Jose, CA Multi-family Hsg Rev
Helzer Courts Apts Ser A 144A (f)... 6.400 12/01/41 1,899,700
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 275
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 1,000 San Luis Obispo, CA Ctfs Partn Vista
Hosp
Sys Inc............................. 8.375% 07/01/29 $ 932,090
9,635 San Ramon Valley, CA Uni Sch Dist
Ser A (FGIC Insd)................... * 07/01/18 3,312,706
1,500 Simi Valley, CA Cmnty Dev Agy Coml
Sycamore Plaza II Rfdg.............. 6.000 09/01/12 1,530,510
2,000 Ventura, CA Port Dist Ctfs Partn.... 6.375 08/01/28 1,901,400
--------------
83,270,246
--------------
COLORADO 4.6%
400 Arapahoe Cnty, CO Centennial Downs
Metro Dist Aranum-Butler, OH LSD
(e)................................. 6.000 12/01/34 360,353
650 Arapahoe Cnty, CO Centennial Downs
Metro Dist Ltd Tax Bond Ser 1993
Rfdg................................ 8.090 12/01/34 657,737
61 Arapohoe Cnty, CO Centennial Downs
Metro Dist Cash Payment
Deficiency.......................... 8.090 12/01/34 61,132
986 Bowles Metro Dist CO (Prerefunded @
12/01/05)........................... 7.750 12/01/15 1,135,379
2,000 Colorado Hlth Fac Auth Rev Baptist
Home Assn Ser A..................... 6.375 08/15/24 1,970,400
1,590 Colorado Hlth Fac Auth Rev Christian
Living Campus Proj.................. 6.850 01/01/15 1,636,380
1,060 Colorado Hlth Fac Auth Rev Christian
Living Campus Proj.................. 7.050 01/01/19 1,101,361
6,200 Colorado Hlth Fac Auth Rev Christian
Living Campus Proj (b).............. 9.000 01/01/25 7,002,032
2,205 Denver, CO City & Cnty Arpt Rev Ser
A (b)............................... 8.875 11/15/12 2,409,337
795 Denver, CO City & Cnty Arpt Rev Ser
A (Prerefunded @ 11/15/01).......... 8.875 11/15/12 884,040
2,500 Denver, CO City & Cnty Arpt Rev Ser
D (b)............................... 7.750 11/15/13 2,969,200
1,030 Eagle Riverview Affordable Housing
Corp Multi-family Rev............... 6.300 07/01/29 993,723
671 East River Regl Santn Dist CO Var
Rfdg
(Var Rate Cpn)...................... 4.000 12/01/08 677,641
5,715 Greeley, CO Multi-Family Rev Hsg Mtg
Creek Stone (FHA Gtd)............... 6.050 07/01/37 5,770,779
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 276
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COLORADO (CONTINUED)
$ 4,163 Himalaya Wtr & Santn Dist Adams
Cnty, CO Genl Oblig Ltd Tax Rfdg
Bond Ser
1995 (d)............................ 9.500% 12/01/24 $ 3,330,268
2,125 Lafayette, CO Indl Dev Rev Rocky Mtn
Instr Proj A........................ 7.000 10/01/18 1,997,075
870 Lafayette, CO Indl Dev Rev Rocky Mtn
Instr Proj Ser A.................... 6.750 10/01/14 862,405
1,960 Northern Metro Dist CO Adams Cnty
Rfdg................................ 6.500 12/01/16 2,011,823
4,572 Skyland Metro Dist CO Gunnison Cnty
Rfdg
(Var Rate Cpn) (g).................. 4.000 12/01/08 3,271,437
13,868 Tower Metro Dist Adams Cnty, CO Gen
Oblig Ltd Tax Rfdg Bond Ser 1995
(d)................................. 9.500 02/01/24 11,094,445
--------------
50,196,947
--------------
CONNECTICUT 1.4%
3,740 Connecticut St Hlth & Edl Fac Auth
Rev Nursing Home Pgm AHF/Windsor
Proj (Prerefunded @ 11/01/04) (b)... 7.125 11/01/24 4,231,848
2,980 Mashantucket Western Pequot Tribe CT
Spl Rev Ser A, 144A (Prerefunded @
09/01/07) (f)....................... 6.400 09/01/11 3,324,935
3,020 Mashantucket Western Pequot Tribe CT
Spl Rev Ser B, 144A (f)............. 6.400 09/01/11 3,157,440
5,000 Stamford, CT Hsg Auth Multi-Family
Rev Fairfield Apts Proj Rfdg........ 4.750 12/01/28 4,722,050
--------------
15,436,273
--------------
DELAWARE 0.2%
2,225 Wilmington, DE Multi-Family Rent Rev
Hsg Electra Arms Sr Assoc Proj...... 6.250 06/01/28 2,055,500
--------------
DISTRICT OF COLUMBIA 0.5%
1,000 District of Columbia Rev Methodist
Home Issue.......................... 6.000 01/01/29 912,970
1,615 District of Columbia A-1 Rfdg (MBIA
Insd) (b)........................... 6.500 06/01/10 1,777,469
85 District of Columbia A-1 Rfdg (MBIA
Insd)............................... 6.500 06/01/10 94,952
2,000 District of Columbia Ser E (FSA
Insd) (b)........................... 6.000 06/01/11 2,121,880
--------------
4,907,271
--------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 277
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA 8.2%
$28,000 Dade Cnty, FL Gtd Entitlement Rev
Cap Apprec Ser A Rfdg (MBIA Insd)
(b)................................. * 02/01/18 $ 9,379,440
4,585 Escambia Cnty, FL Rev ICF/MR
Pensacola Care Dev Cent............. 10.250% 07/01/11 4,584,083
1,935 Escambia Cnty, FL Rev ICF/MR
Pensacola Care Dev Cent Ser A....... 10.250 07/01/11 1,934,613
1,115 Fishhawk Cmnty, FL Dev Dist Spl
Assmt Rev........................... 7.625 05/01/18 1,161,128
3,000 Florida Hsg Fin Corp Rev Hsg Beacon
Hill Apts Ser C..................... 6.610 07/01/38 2,870,940
4,000 Florida Hsg Fin Corp Rev Hsg Cypress
Trace Apts Ser G.................... 6.600 07/01/38 3,840,640
3,000 Florida Hsg Fin Corp Rev Hsg
Westbrook Apts Ser U1............... 6.450 01/01/39 2,783,460
4,000 Florida Hsg Fin Corp Rev Hsg
Westchase Apts Ser B................ 6.610 07/01/38 3,840,800
4,445 Florida St Brd of Edl Cap Outlay Pub
Edl Ser A Rfdg (FGIC Insd).......... 4.500 06/01/23 3,629,431
1,000 Heritage Harbor Cmnty Dev Dist Spl
Assmt Ser A......................... 6.700 05/01/19 981,240
1,300 Heritage Harbor Cmnty Dev Dist FL
Rev Rectl........................... 7.750 05/01/19 1,258,634
4,845 Hillsborough Cnty, FL Edl Fac Univ
Tampa Proj Rfdg..................... 5.750 04/01/18 4,713,361
960 Lake Saint Charles, FL Cmnty Dev
Dist Spl Assmt Rev.................. 7.875 05/01/17 995,866
3,000 Leon Cnty, FL Edl Facs Auth Rev
Southgate Residence Hall Ser A
Rfdg................................ 6.750 09/01/28 2,949,240
3,000 Martin Cnty, FL Indl Dev Auth Indl
Dev Rev Indiantown Cogeneration Proj
Ser A Rfdg.......................... 7.875 12/15/25 3,111,480
5,500 Miramar, FL Wastewtr Impt Assmt Rev
(FGIC Insd) (b)..................... 6.750 10/01/25 6,090,260
1,185 North Springs, FL Impt Dist Spl
Assmt Rev........................... 6.250 05/01/05 1,178,980
2,280 Northern Palm Beach Cnty Impt Dist
FL Wtr Ctl & Impt Unit Dev 5A
Rfdg................................ 6.000 08/01/10 2,203,232
1,500 Orange Cnty, FL Hlth Fac Auth Rev
First Mtg Orlando Lutheran Tower.... 8.750 07/01/26 1,671,915
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 278
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$ 1,300 Orange Cnty, FL Hlth Fac Auth Rev
First Mtg Orlando Lutheran Twr
Rfdg................................ 8.625% 07/01/20 $ 1,455,896
2,000 Orange Cnty, FL Hlth Facs Auth
Westminster Cmnty Care (a).......... 6.600 04/01/24 2,000,000
7,000 Orlando, FL Util Comm Wtr & Elec Rev
Reg Linked Savrs & Ribs............. 5.600 10/06/17 6,952,960
2,395 Pinellas Cnty, FL Edl Fac Auth Rev
College Harbor Proj Ser A........... 8.250 12/01/21 2,499,877
6,000 Sarasota Cnty, FL Hlth Fac Auth Hlth
Fac Sunnyside Prty (b).............. 6.700 07/01/25 5,625,900
16,065 Sun N Lake of Sebring, FL Impt Dist
Spl Assmt Ser A (d) (g)............. 10.000 12/15/11 6,426,000
835 Tampa Palms, FL Open Space & Transn
Cmnty Dev Dist Rev Cap Impt Area 7
Proj................................ 8.500 05/01/17 894,661
1,695 Volusia Cnty, FL Indl Dev Auth
Bishops Glen Proj Rfdg.............. 7.500 11/01/16 1,902,061
2,000 Volusia Cnty, FL Indl Dev Auth
Bishops Glen Proj Rfdg.............. 7.625 11/01/26 2,355,860
--------------
89,291,958
--------------
GEORGIA 5.3%
2,000 Americus Sumter Cnty, GA Hospital
Auth Rev Rfdg South GA Methodist Ser
A................................... 6.375 05/15/29 1,882,380
19,000 Atlanta, GA Urban Residential Fin
Auth Multi-Family Hsg Ser A
Renaissance on Peachtree Apts Proj
Ser 85.............................. 8.500 04/01/26 21,042,310
1,000 Atlanta, GA Urban Residential Fin
Auth Multi-Family Rev Proj Ser A.... 6.750 07/01/30 966,000
1,500 Forsyth Cnty, GA Hosp Auth Rev GA
Baptist Hlthcare Sys Proj........... 6.250 10/01/18 1,387,200
1,500 Forsyth Cnty, GA Hosp Auth Rev GA
Baptist Hlthcare Sys Proj........... 6.375 10/01/28 1,372,200
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 279
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GEORGIA (CONTINUED)
$ 4,000 Fulton Cnty, GA Hsg Auth
Multi-Family
Hsg Rev............................. 6.500% 02/01/28 $ 3,859,320
2,000 Fulton Cnty GA Residential Care Sr
Lien Rha Asstd Living A............. 7.000 07/01/29 1,892,580
30,050 Georgia Loc Govt Ctfs Partn Grantor
Trust Ser A (MBIA Insd) (b)......... 4.750 06/01/28 25,391,048
--------------
57,793,038
--------------
HAWAII 0.9%
3,000 Hawaii St Ser C (FSA Insd).......... 5.750 09/01/14 3,052,950
3,500 Hawaii St Ser C (FSA Insd).......... 5.875 09/01/16 3,565,940
2,360 Hawaii St Dept of Trans Spl Fac
Continental Airls Inc. (a).......... 5.625 11/15/27 2,072,717
3,000 Honolulu, HI Cty and Cnty Wastewtr
Sys Rev (FGIC Insd)................. * 07/01/14 1,296,180
--------------
9,987,787
--------------
IDAHO 1.2%
8,000 Idaho Hlth Fac Auth Rev IHC Hosp Inc
Rfdg (Inverse Fltg) (b)............. 6.650 02/15/21 8,891,360
4,300 Owyhee Cnty, ID Indl Dev Corp Indl
Dev Rev Envirosafe Svcs of ID
Inc................................. 8.250 11/01/02 4,413,821
--------------
13,305,181
--------------
ILLINOIS 12.4%
1,000 Bolingbrook IL Cap Apprec Ser B
(MBIA Insd)......................... * 01/01/34 122,450
2,500 Bolingbrook, IL Cap Apprec Ser B
(MBIA Insd)......................... * 01/01/29 417,125
1,850 Bridgeview, IL Tax Increment Rev
Rfdg................................ 9.000 01/01/11 2,063,546
25,800 Chicago, IL Brd Ed Cap Apprec Sch
Reform Ser B-1 (FGIC Insd).......... * 12/01/22 6,471,414
15,000 Chicago, IL Brd Ed Cap Apprec Sch
Reform Ser B-1 (FGIC Insd).......... * 12/01/26 2,929,800
36,500 Chicago, IL Brd Ed Cap Apprec Sch
Reform Ser B-1 (FGIC Insd).......... * 12/01/30 5,592,165
1,100 Chicago, IL Proj Ser A Rfdg (FGIC
Insd)............................... 5.125 01/01/29 969,991
3,000 Chicago, IL Proj Ser A Rfdg (FGIC
Insd)............................... 5.375 01/01/34 2,750,730
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 280
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 3,000 Chicago, IL Lakefront Millenium Pkg
Fac (MBIA Insd)..................... * 01/01/25 $ 2,007,000
7,560 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev (b)............................. 6.450% 05/01/18 7,730,554
3,000 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev American Airls Inc Proj Ser A
(b)................................. 7.875 11/01/25 3,140,880
22,930 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev United Airls Inc Proj Ser 84A
(b)................................. 8.850 05/01/18 24,473,189
2,565 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev United Airls Inc Ser B (b)...... 8.950 05/01/18 2,738,881
3,650 Chicago, IL Rev Chatham Ridge
Tax Increment....................... 10.250 01/01/07 3,745,739
1,000 Chicago, IL Tax Increment........... 7.250 01/01/14 1,040,680
10,000 Chicago, IL Wastewtr Trans Rev Cap
Apprec Ser A Rfdg (MBIA Insd)....... * 01/01/22 2,654,500
300 Crestwood, IL Tax Increment Rev Bank
Qualified Rfdg...................... 6.000 12/01/99 300,798
1,285 Du Page Cnty, IL Cmnty High Sch Dist
No 099 Downers Grove (FSA Insd)..... * 12/01/11 656,931
1,500 Godfrey, IL Rev United Methodist Vlg
Ser A............................... 5.875 11/15/29 1,328,250
2,000 Hoopeston, IL Hospital Cap Impt Rev
Rfdg Hoopeston Comnty Mem Hosp...... 6.550 11/15/29 1,915,140
2,000 Huntley, IL Increment Alloc Rev
Huntley Redev Proj Ser A............ 8.500 12/01/15 2,243,920
2,629 Huntley, IL Spl Svc Area No 10 Spl
Tax Series A........................ 6.500 03/01/29 2,524,208
280 Huntley, IL Spl Svc Area No 10 Spl
Tax
Ser A............................... 6.250 03/01/09 274,050
1,000 Huntley, IL Spl Svc Area No 7 Spl
Tax................................. 6.300 03/01/28 932,070
1,405 Illinois Dev Fin Auth Rev Cmnty Fac
Clinic Altgeld Proj................. 8.000 11/15/16 1,496,985
6,995 Illinois Dev Fin Auth Rev Mercy Hsg
Corp Proj Rfdg (Prerefunded @
08/01/04) (b)....................... 7.000 08/01/24 7,711,288
1,000 Illinois Edl Fac Auth Rev Peace Mem
Ministries Proj..................... 7.500 08/15/26 1,049,010
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 281
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 3,000 Illinois Hlth Fac Auth Rev Fairview
Oblig Group Ser A Rfdg.............. 7.400% 08/15/23 $ 3,185,820
4,355 Illinois Hlth Fac Auth Rev Glenoaks
Med Cent Ser D (b).................. 9.500 11/15/15 4,717,728
1,000 Illinois Hlth Fac Auth Rev Lifelink
Corp Oblig Group Ser B (Prerefunded
@ 02/15/05) (b)..................... 8.000 02/15/25 1,154,800
4,800 Illinois Hlth Fac Auth Rev Midwest
Physician Group Ltd Proj
(Prerefunded @ 11/15/04) (b)........ 8.100 11/15/14 5,621,712
2,000 Illinois Hlth Facs Auth Rev......... 7.500 01/01/11 1,995,460
1,440 Illinois Hlth Facs Auth Rev Silver
Cross Hosp & Med Rfdg............... 5.500 08/15/19 1,321,776
4,175 Illinois Hlth Facs Auth Rev Silver
Cross Hosp & Med Rfdg............... 5.500 08/15/25 3,671,579
4,575 Illinois Hlth Facs Auth Rev West
Suburban Hosp Ser A Rfdg............ 5.750 07/01/20 4,206,072
8,790 Lake Cnty, IL Cmnty Unit Sch Dist No
60 Ser B (FSA Insd)................. * 12/01/18 2,856,750
895 Mill Creek Wtr Reclamation Dist IL
Sewage Rev.......................... 8.000 03/01/10 978,512
540 Mill Creek Wtr Reclamation Dist IL
Wtrwks Rev.......................... 8.000 03/01/10 590,387
1,500 Palatine, IL Tax Increment Rev
Rand/Dundee Cent Proj (Prerefunded @
01/01/07) (b)....................... 7.750 01/01/17 1,725,930
1,800 Peoria, IL Spl Tax Weaver Ridge Spl
Svc Area............................ 8.050 02/01/17 1,920,834
2,095 Regional Tran Auth IL Ser B (AMBAC
Insd) (b)........................... 8.000 06/01/17 2,652,857
11,000 Robbins, IL Res Recovery Rev........ 8.375 10/15/16 5,912,500
1,705 St Charles, IL Spl Svc Area No 21... 6.625 03/01/28 1,592,777
1,000 Sterling, IL Rev Hoosier Care Proj
Ser A............................... 7.125 06/01/34 961,600
470 Will Cnty, IL Forest Presv Dist Ser
B
(FGIC Insd)......................... * 12/01/13 212,247
--------------
134,560,635
--------------
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 282
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
INDIANA 1.4%
$ 825 Crawfordsville, IN Redev Comm Redev
Dist Tax Increment Rev.............. 7.000% 02/01/12 $ 819,184
2,000 East Chicago, IN Exempt Fac Inland
Steel Co Proj No 14................. 6.700 11/01/12 1,914,020
2,000 Indiana Hlth Fac Fin Auth Rev
Hoosier Care Proj Ser A............. 7.125 06/01/34 1,923,200
3,000 Indiana Hlth Fac Fin Auth Rev Metro
Hlth &
IN Inc Proj......................... 6.400 12/01/33 2,706,480
990 Indiana Hlth Fac Fin Auth Rev Metro
Hlth
IN Inc Proj......................... 6.300 12/01/23 902,167
4,000 Indiana St Dev Fin Auth Pollutn Ctl
Rev Inland Steel Co Proj No 13 Rfdg
(b)................................. 7.250 11/01/11 4,019,360
3,190 Kokomo, IN Sch Bldg Corp First Mtg
(AMBAC Insd)........................ 4.125 07/15/17 2,541,090
1,000 South Bend, IN Econ Dev Rev Ser A... 6.250 11/15/29 918,960
--------------
15,744,461
--------------
IOWA 0.1%
1,500 Cedar Rapids, IA Rev First Mtg
Cottage Grove....................... 5.875 07/01/28 1,360,515
--------------
KANSAS 0.3%
540 Kansas City, KS Crawford Cnty
Leavenworth Single Family Mtg Rev
(AMBAC Insd) (b).................... * 04/01/16 84,450
1,000 Lawrence, KS Coml Dev Rev Holiday
Inn
Sr Ser A............................ 8.000 07/01/16 1,063,460
1,000 Manhattan, KS Coml Dev Rev Holiday
Inn Sr Ser A Rfdg................... 8.000 07/01/16 1,063,460
1,435 Missouri Str Hsg Dev Comm Mtg Hsg
Pioneer City Ctr Homes (a).......... 7.200 09/01/30 1,434,871
--------------
3,646,241
--------------
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 283
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
KENTUCKY 0.4%
$ 2,300 Jefferson Cnty, KY Hosp Rev (MBIA
Insd) (Inverse Fltg)................ 8.900% 10/09/08 $ 2,567,375
900 Jefferson Cnty, KY Hosp Rev
(Prerefunded @ 10/29/02) (MBIA Insd)
(Inverse Fltg) (a).................. 8.930 10/09/08 1,023,750
1,000 Kenton Cnty, KY Airport Brd Spl Facs
Rev Mesaba Aviation Inc Proj Ser
A................................... 6.700 07/01/29 984,410
--------------
4,575,535
--------------
LOUISIANA 1.3%
5,755 Jefferson, LA Sales Tax Dist Spcl
Sales Tax Rev (FSA Insd)............ * 12/01/14 2,457,097
4,000 Louisiana Hsg Fin Agy Rev
Multi-Family Hsg Plantation Ser A... 7.125 01/01/28 3,837,880
1,000 Louisiana Pub Facs Auth Rev
Progressive
Hlthcare............................ 6.375 10/01/20 924,540
1,000 Louisiana Pub Facs Auth Rev
Progressive
Hlthcare............................ 6.375 10/01/28 900,140
3,918 Louisiana St Univ Agric & Mech
College
Univ Rev............................ 5.750 10/30/18 3,586,858
1,000 Port New Orleans, LA Indl Dev Rev
Continental Grain Co Proj Rfdg...... 7.500 07/01/13 1,023,350
1,435 Webster Parish, LA Pollutn Ctl Rev
Intl Paper Co Proj Ser B Rfdg....... 5.200 03/01/13 1,348,398
--------------
14,078,263
--------------
MAINE 0.1%
25 Maine Hlth & Higher Edl Facs Auth
Rev Ser B (FSA Insd)................ 7.000 07/01/24 28,056
1,225 Maine Hlth & Higher Edl Facs Auth
Rev Ser B (Prerefunded @ 07/01/04)
(FSA Insd).......................... 7.000 07/01/24 1,374,732
--------------
1,402,788
--------------
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 284
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MARYLAND 1.1%
$ 2,000 Baltimore Cnty, MD Pollutn Ctl Rev
Bethlehem Steel Corp Proj Ser B
Rfdg................................ 7.500% 06/01/15 $ 2,115,980
1,500 Frederick Cnty, MD Spl Olbig Urbana
Cmnty Dev Auth...................... 6.625 07/01/25 1,446,930
1,260 Maryland St Econ Dev Corp Rev Air
Cargo
BWI LLC Proj........................ 6.500 07/01/24 1,252,931
1,015 Maryland St Econ Dev Corp Rev Air
Cargo
BWI LLC Proj........................ 6.250 07/01/07 1,007,885
3,000 Montgomery Cnty, MD Econ Dev
Editorial Projs In Edl Ser A........ 6.400 09/01/28 2,729,040
3,000 Prince Georges Cnty, MD Spl Oblig
Spl Assmt Woodview Ser A............ 8.000 07/01/26 3,301,920
--------------
11,854,686
--------------
MASSACHUSETTS 3.3%
4,000 Massachusetts St Dev Fin Agy New
England Center For Children (b)..... 6.000 11/01/19 3,726,360
2,000 Massachusetts St Dev Fin Agy Rev
Hlthcare Facility Alliance Ser A.... 7.100 07/01/32 1,987,100
2,000 Massachusetts St Dev Fin Agy Rev
Hillcrest
Ed Cent Inc......................... 6.375 07/01/29 1,926,340
7,000 Massachusetts St Hlth & Edl Fac Auth
Rev New England Med Cent Hosp Ser G
(Embedded Swap) (MBIA Insd) (b)
(h)................................. 3.1/5.0 07/01/13 6,537,650
2,099 Massachusetts St Hsg Fin Agy Hsg Rev
Insd Rental Ser A Rfdg (AMBAC
Insd)............................... 6.650 07/01/19 2,201,814
780 Massachusetts St Indl Fin Agy First
Mtg Pilgrim Inc Proj................ 6.500 10/01/15 730,720
2,965 Massachusetts St Indl Fin Agy Rev
Grtr Lynn Mental Hlth............... 6.375 06/01/18 2,771,712
1,270 Massachusetts St Indl Fin Agy Rev
Grtr Lynn Mental Hlth............... 6.200 06/01/08 1,224,648
4,000 Massachusetts St Indl Fin Agy Rev
Cent For Autism (Prerefunded @
11/01/00)........................... 9.500 11/01/17 4,306,240
575 Massachusetts St Indl Fin Agy Rev
Dimmock Cmnty Hlth Cent............. 8.000 12/01/06 621,679
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 285
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MASSACHUSETTS (CONTINUED)
$ 1,085 Massachusetts St Indl Fin Agy Rev
Dimmock Cmnty Hlth Cent............. 8.375% 12/01/13 $ 1,220,527
675 Massachusetts St Indl Fin Agy Rev
Dimmock Cmnty Hlth Cent............. 8.500 12/01/20 762,419
6,100 Massachusetts St Indl Fin Agy Rev
Swr Fac Res Ctl Composting.......... 9.250 06/01/10 6,243,045
2,000 Massachusetts St Indl Fin Agy
Trustees Deerfield Academy.......... 6.750 10/01/28 1,841,220
--------------
36,101,474
--------------
MICHIGAN 2.7%
2,000 Battle Creek, MI Downtown Dev Auth
Tax Increment Rev (Prerefunded @
05/01/04) (b)....................... 7.600 05/01/16 2,275,940
5,000 Detroit, MI City Sch Dist Ser B
(FGIC Insd)......................... 4.750 05/01/28 4,165,150
1,000 Detroit, MI Loc Dev Fin Auth Ser
C................................... 6.850 05/01/21 994,240
3,100 Detroit, MI Sewage Disposal Rev
(FGIC Insd)......................... 7.560 07/01/23 2,956,625
1,250 Detroit, MI Swg Disp Rev Ser A (MBIA
Insd)............................... 5.000 07/01/27 1,099,500
2,390 Meridian, MI Econ Dev Corp Ltd Oblig
Rev First Mtg Burcham Hills Ser A... 7.500 07/01/13 2,486,652
3,430 Meridian, MI Econ Dev Corp Ltd Oblig
Rev First Mtg Burcham Hills Ser A... 7.750 07/01/19 3,612,887
4,250 Michigan St Hosp Fin Auth Rev
Detroit Med Cent Oblig Ser A........ 5.250 08/15/28 3,407,862
3,000 Michigan St Hosp Fin Auth Rev
Detroit Med Cent Oblig Ser A........ 5.250 08/15/23 2,445,390
8,560 Michigan St Strategic Fd Ltd Oblig
Rev Great Lakes Pulp & Fiber Proj
(e)................................. 8.000 12/01/27 5,611,939
560 Saint Clair Cnty, MI Econ Dev Corp
Kmart Proj.......................... 9.500 02/01/06 564,794
--------------
29,620,979
--------------
</TABLE>
See Notes to Financial Statements
F-15
<PAGE> 286
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MINNESOTA 0.7%
$ 1,000 Cambridge, MN Hsg & Hlthcare Fac Rev
Grandview West Pf Ser A............. 6.000% 10/01/28 $ 920,510
2,000 Cambridge, MN Hsg & Hlthcare Fac Rev
Grandview West Proj Ser B........... 6.000 10/01/33 1,808,360
1,425 Columbia Heights, MN Multi-Family
Crest View Corp Proj................ 6.000 03/01/33 1,330,052
500 Dakota Cnty, MN Hsg & Redev......... 6.000 11/01/09 484,190
2,500 Dakota Cnty, MN Hsg & Redev......... 6.250 05/01/29 2,358,850
825 Little Canada, MN Fac Rev Hsg Alt
Dev Co Proj Ser A................... 6.100 12/01/17 804,598
--------------
7,706,560
--------------
MISSOURI 1.2%
615 Ferguson, MO Tax Increment Rev
Crossings at Halls Ferry Proj....... 7.250 04/01/07 609,932
3,095 Ferguson, MO Tax Increment Rev
Crossings at Halls Ferry Proj....... 7.625 04/01/17 3,059,717
675 Ferguson, MO Tax Increment Rev
Crossings at Halls Ferry Proj....... 7.625 04/01/18 667,103
930 Jefferson Cnty, MO Indl Dev Auth
Indl Rev Cedars Hlthcare Cent Proj
Ser A Rfdg.......................... 8.250 12/01/15 997,527
5,000 Saline Cnty, MO Indl Dev Auth Hlth
Facs Rev............................ 6.500 12/01/28 4,563,700
1,000 Sikeston, MO Elec Rev Rfdg (MBIA
Insd) (b)........................... 6.000 06/01/15 1,059,000
2,000 Valley Park, MO Indl Dev Auth Sr Hsg
Rev Cape Albeon Proj................ 6.150 12/01/33 1,857,900
--------------
12,814,879
--------------
NEBRASKA 0.3%
1,500 Nebraska Invt Fin Auth Single Family
Mtg Rev (Inverse Fltg) (GNMA
Collateralized) (b)................. 9.508 10/17/23 1,620,000
1,300 Nebraska Invt Fin Auth Single Family
Mtg Rev (Inverse Fltg) (GNMA
Collateralized) (b)................. 10.415 09/10/30 1,391,000
--------------
3,011,000
--------------
</TABLE>
See Notes to Financial Statements
F-16
<PAGE> 287
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEVADA 0.4%
$ 2,760 Clark Cnty, NV Trans Ser A (FGIC
Insd)............................... 4.500% 12/01/17 $ 2,314,922
1,945 Reno, NV Redev Agy Tax Alloc
Downtown Redev Proj Ser E Rfdg
(Prerefunded @ 09/01/03)............ 5.600 09/01/09 2,036,065
--------------
4,350,987
--------------
NEW HAMPSHIRE 1.1%
2,000 New Hampshire Higher Edl & Hlth Fac
Auth Rev Havenwood-Heritage
Heights............................. 7.350 01/01/18 2,108,280
2,000 New Hampshire Higher Edl & Hlth Fac
Auth Rev Havenwood-Heritage
Heights............................. 7.450 01/01/25 2,101,360
4,000 New Hampshire Higher Edl & Hlth Fac
Auth Rev Hosp Catholic Med Cent Rfdg
(b)................................. 8.250 07/01/13 4,086,920
3,340 New Hampshire Higher Edl & Hlth Fac
Auth Rev Vly Regl Hosp.............. 7.350 04/01/23 3,343,574
--------------
11,640,134
--------------
NEW JERSEY 3.0%
2,240 Camden Cnty, NJ Impt Auth Lease Rev
Dockside Refrig..................... 8.400 04/01/24 2,429,213
2,000 New Jersey Econ Dev Auth Assisted
Living Rev.......................... 6.750 08/01/30 1,872,500
1,000 New Jersey Econ Dev Auth Econ Dev
Rev................................. 6.375 04/01/18 1,005,320
1,820 New Jersey Econ Dev Auth Rev Kullman
Assoc Proj Ser A.................... 6.125 06/01/18 1,701,354
2,000 New Jersey Econ Dev Auth Rev Sr
Living
Facs Esplandade..................... 7.000 06/01/39 1,907,460
500 New Jersey Econ Dev Auth Rev Sr Mtg
Arbor Glen Ser A Rfdg............... 6.000 05/15/28 460,685
6,255 New Jersey Econ Dev Auth Rev First
Mtg Gross Rev Oakridge Manor Proj
Rfdg................................ 9.500 11/01/14 6,363,024
1,000 New Jersey Econ Dev Auth Rev First
Mtg Winchester Gardens Ser A........ 8.500 11/01/16 1,107,890
1,500 New Jersey Econ Dev Auth Rev First
Mtg Winchester Gardens Ser A........ 8.625 11/01/25 1,667,760
3,000 New Jersey Econ Dev Auth Rev Sr Mtg
Arbor Glen Proj Ser A (Prerefunded @
05/15/06) (b)....................... 8.750 05/15/26 3,707,310
</TABLE>
See Notes to Financial Statements
F-17
<PAGE> 288
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW JERSEY (CONTINUED)
$ 3,000 New Jersey Econ Dev Auth Spl Fac Rev
Continental Airls Inc............... 6.400% 09/15/23 $ 2,983,170
1,650 New Jersey Hlthcare Fac Fin Auth Rev
Raritan Bay Med Cent Issue Rfdg..... 7.250 07/01/14 1,649,736
1,275 New Jersey St Edl Fac Auth Rev
Felician College of Lodi Ser D...... 7.375 11/01/22 1,340,318
4,000 New Jersey St Trans Trust Fund Auth
Trans Sys Ser A (a)................. 5.750 06/15/16 4,105,800
--------------
32,301,540
--------------
NEW MEXICO 1.3%
2,230 Albuquerque, NM Retirement Fac Rev
La Vida Liena Proj Ser A Rfdg
(Prerefunded @ 02/01/03) (b)........ 8.850 02/01/23 2,551,232
4,000 Albuquerque, NM Retirement Fac Rev
La Vida Liena Proj Ser B Rfdg....... 6.600 12/15/28 3,690,120
2,160 Bernalillo Cnty, NM Multi-Family Hsg
Brentwood Gardens Apt B1............ 6.600 10/15/28 2,063,491
3,600 Farmington, NM Pollutn Ctl Rev Pub
Svc Co San Juan Proj D Rfdg (b)..... 6.375 04/01/22 3,653,748
2,500 New Mexico St Hosp Equip Ln Memorial
Med Cent Inc........................ 5.500 06/01/28 2,293,050
--------------
14,251,641
--------------
NEW YORK 5.8%
1,000 Bethlehem, NY Indl Dev Agy Sr Hsg
Rev Van Allen Proj Ser A............ 6.875 06/01/39 956,200
2,400 Brookhaven, NY Indl Dev Agy Sr
Residential Hsg Rev................. 6.375 12/01/37 2,217,576
795 Clifton Springs, NY Hosp & Clinic
Ser B
Rfdg & Impt......................... 7.000 01/01/05 802,052
1,750 Huntington, NY Hsg Auth Sr Hsg Fac
Rev Gurwin Jewish Sr Residences Ser
A................................... 6.000 05/01/39 1,625,960
1,500 Islip, NY Cmnty Dev Agy Cmnty Dev
Rev NY Institute of Technology
Rfdg................................ 7.500 03/01/26 1,593,675
1,000 Monroe Cnty, NY Indl Dev Agy Rev
Indl Dev Empire Sports Proj Ser A... 6.250 03/01/28 932,210
</TABLE>
See Notes to Financial Statements
F-18
<PAGE> 289
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 2,000 New York City Indl Dev Agy Field
Hotel Assoc Lp JFK Rfdg............. 6.000% 11/01/28 $ 1,891,360
3,000 New York City Indl Dev Agy Civic Fac
Rev USTA Natl Tennis Cent Proj (FSA
Insd) (b)........................... 6.250 11/15/06 3,259,560
1,500 New York City Indl Dev Agy Civic Fac
Rev USTA Natl Tennis Cent Proj (FSA
Insd) (b)........................... 6.375 11/15/07 1,641,840
2,000 New York City Indl Dev Agy Civic Fac
Rev USTA Natl Tennis Cent Proj (FSA
Insd) (b)........................... 6.500 11/15/09 2,200,400
5,000 New York City Ser A (b)............. 7.000 08/01/07 5,606,000
3,000 New York City Ser D Rfdg (b)........ 8.000 02/01/05 3,438,570
10,330 New York City Subser A1 (Embedded
Swap)............................... 5.720 08/01/12 10,379,687
6,120 New York City Tran Auth Ser A....... 5.625 01/01/13 6,216,329
5,000 New York St Dorm Auth Rev City Univ
Ser F (b)........................... 5.500 07/01/12 4,938,700
3,000 New York St Energy Resh & Dev Auth
Gas Fac Rev (MBIA Insd) (Inverse
Fltg)............................... 7.690 07/08/26 2,767,500
2,500 New York St Energy Resh & Dev Auth
Gas Fac Rev (Inverse Fltg).......... 7.889 04/01/20 2,784,375
1,000 New York St Energy Resh & Dev Auth
St Svc Contract Rev Western NY
Nuclear Svc Cent Ser B.............. 5.500 04/01/01 1,017,210
750 New York St Energy Resh & Dev Auth
St Svc Contract Rev Western NY
Nuclear Svc Cent Ser B.............. 5.250 04/01/02 764,152
5,000 New York St Thruway Auth Genl Rev
Ser E Rfdg.......................... 5.000 01/01/25 4,427,400
1,500 New York St Thruway Auth Hwy & Brdg
Tran Fund Ser A (Prerefunded @
04/01/04) (b)....................... 6.000 04/01/14 1,615,335
2,000 Saratoga Cnty, NY Indl Dev Agy Sr
Hsg Rev............................. 6.875 06/01/39 1,909,900
--------------
62,985,991
--------------
NORTH CAROLINA 0.7%
7,130 Eastern Band Cherokee Indians NC Spl
Oblig Rev Carolina Mirror Co Proj... 10.250 09/01/09 7,130,000
--------------
</TABLE>
See Notes to Financial Statements
F-19
<PAGE> 290
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NORTH DAKOTA 0.2%
$ 1,000 Grand Forks, ND Sr Hsg Rev 4000 Vly
Square Proj......................... 6.250% 12/01/34 $ 936,790
1,000 Grand Forks, ND Sr Hsg Rev 4000 Vly
Square Proj......................... 6.375 12/01/34 973,260
--------------
1,910,050
--------------
OHIO 2.6%
1,500 Akron Bath Copley, OH St Twp Hosp
Dist Rev Summa Hosp................. 5.375 11/15/24 1,314,060
3,750 Cleveland, OH Arpt Spl Rev
Continental Airls Inc Proj.......... 5.375 09/15/27 3,228,675
2,250 Cleveland, OH Arpt Spl Rev
Continental Airls Inc Rfdg (a)...... 5.700 12/01/19 2,071,553
1,500 Cuyahoga Cnty, OH Multi-Family Rev
Hsg Park Lane Apts Proj Ser A....... 8.250 07/01/28 1,545,000
2,760 Dayton, OH Spl Facs Rev Afco Cargo
Day LLC Proj........................ 6.300 04/01/22 2,648,054
2,000 East Liverpool, OH Hosp Rev East
Liverpool City Hosp Ser A
(Prerefunded @ 10/01/01) (b)........ 8.125 10/01/11 2,187,600
1,500 Hamilton Cnty, OH Sales Tax Hamilton
Cnty Football Proj Ser A (MBIA
Insd)............................... 4.750 12/01/27 1,249,140
2,000 Madison Cnty, OH Hosp Impt Rev
Madison Cnty Hosp Proj Rfdg......... 6.400 08/01/28 1,844,960
2,500 Ohio St Solid Waste Rev CSC Ltd
Proj................................ 8.500 08/01/22 2,501,150
3,700 Ohio St Solid Waste Rev Republic
Engineered Steels Proj.............. 8.250 10/01/14 3,745,510
1,000 Ohio St Solid Waste Rev Republic
Engineered Steels Proj.............. 9.000 06/01/21 1,053,690
4,490 Reynoldsburg, OH Hlthcare Fac Rev
Wesley Ridge Proj (GNMA
Collateralized)..................... 6.150 10/20/38 4,561,211
--------------
27,950,603
--------------
</TABLE>
See Notes to Financial Statements
F-20
<PAGE> 291
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OKLAHOMA 0.2%
$11,030 McAlester, OK Pub Wks Auth Util Sys
Rev (FSA Insd)...................... * 02/01/30 $ 1,686,156
1,000 Oklahoma Cnty, OK Fin Auth Epworth
Villa Proj Ser A Rfdg............... 7.000% 04/01/25 988,870
--------------
2,675,026
--------------
OREGON 1.0%
1,000 Clackamas Cnty, OR Hosp Fac Auth Rev
Sr Living Fac Marys Woods Ser A..... 6.375 05/15/20 976,940
1,245 Clatsop Care Cent Hlth Dist OR Rev
Sr Hsg.............................. 6.000 08/01/14 1,169,391
2,145 Clatsop Care Cent Hlth Dist OR Rev
Sr Hsg.............................. 6.875 08/01/28 1,981,680
4,000 Oregon St Hlth Hsg Edl & Cultural
Facs Auth........................... 7.250 06/01/28 3,891,400
3,000 Salem Keizer, OR Sch Dist No 24J.... 5.000 06/01/13 2,894,670
--------------
10,914,081
--------------
PENNSYLVANIA 8.2%
1,000 Allegheny Cnty, PA Indl Dev Auth
Lease Rev........................... 6.625 09/01/24 986,730
6,000 Beaver Cnty, PA Indl Dev Auth
Pollutn Ctl Rev Collateral Toledo
Edison Co Proj Ser A
Rfdg (b)............................ 7.750 05/01/20 6,626,640
1,000 Berks Cnty, PA Muni Auth Rev
Phoebe Berks Vlg Inc Proj Rfdg
(Prerefunded @ 05/15/06) (b)........ 7.700 05/15/22 1,181,690
1,900 Bucks Cnty, PA Indl Dev Auth Rev
First Mtg Hlthcare Fac Chandler..... 6.200 05/01/19 1,775,911
4,000 Cambria Cnty, PA Indl Dev Auth
Pollutn Ctl Rev Bethlehem Steel Corp
Proj Rfdg........................... 7.500 09/01/15 4,199,360
1,500 Cliff House Ctf Trust Var Sts
Variable Ctfs Partn Ser A........... 6.625 06/01/27 1,500,000
2,000 Cumberland Cnty, PA Indl Dev Auth
Rev First Mtg Woods Cedar Run Ser A
Rfdg................................ 6.500 11/01/28 1,799,080
3,000 Dauphin Cnty, PA Genl Auth Rev
Office & Pkg Riverfront Office...... 6.000 01/01/25 2,809,470
5,000 Dauphin Cnty, PA Genl Auth Rev Hotel
& Conf Cent Hyatt Regency........... 6.200 01/01/29 4,668,400
</TABLE>
See Notes to Financial Statements
F-21
<PAGE> 292
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 1,500 Delaware Cnty, PA Auth First Mtg Rev
Riddle Vlg Proj..................... 7.000% 06/01/21 $ 1,516,470
2,890 Erie, PA Sch Dist Cap Apprec Rfdg
(FSA Insd).......................... * 09/01/21 794,779
1,000 Grove City, PA Area Hosp Auth Hlth
Fac Rev............................. 6.625 08/15/29 926,240
3,500 Harrisburg, PA Auth Wtr Rev (Inverse
Fltg) (FGIC Insd)................... 7.580 06/18/15 3,605,000
1,000 Lancaster Cnty, PA Hosp Auth Rev
Hlth Cent Saint Anne's Home......... 6.625 04/01/28 950,430
2,000 Lehigh Cnty, PA Genl Purp Auth Rev
Kidspeace Oblig Group............... 6.000 11/01/23 1,858,600
1,000 Lehigh Cnty, PA Indl Dev Auth Hlth
Fac Rev Lifepath Inc Proj........... 6.300 06/01/28 885,300
2,000 McKean Cnty, PA Hosp Auth Hosp Rev
Bradford Hosp Proj (Crossover Rfdg @
10/01/00)........................... 8.875 10/01/20 2,131,380
2,000 Montgomery Cnty, PA Higher Ed &
Hlth Auth Rev....................... 6.750 07/01/29 1,885,280
7,100 Montgomery Cnty, PA Indl Dev Auth
Rev First Mtg The Meadowood Corp
Proj Ser A (Prerefunded @ 12/01/00)
(b)................................. 10.000 12/01/19 7,715,144
500 Montgomery Cnty, PA Indl Dev Auth
Rev First Mtg The Meadowood Corp
Rfdg................................ 7.000 12/01/10 511,780
2,500 Montgomery Cnty, PA Indl Dev Auth
Rev First Mtg The Meadowood Corp
Rfdg................................ 7.250 12/01/15 2,581,925
6,000 Montgomery Cnty, PA Indl Dev Auth
Rev First Mtg The Meadowood Corp
Rfdg................................ 7.400 12/01/20 6,203,040
985 Montgomery Cnty, PA Indl Dev Auth
Rev Wordsworth Academy.............. 7.750 09/01/24 1,042,534
3,000 Pennsylvania Econ Dev Fin Auth Res
Recovery Rev Colver Proj Ser D
(b)................................. 7.050 12/01/10 3,232,800
5,000 Pennsylvania St Higher Edl
Assistance Agy Student Ln Rev Rfdg
(Inverse Fltg) (AMBAC Insd)......... 9.267 09/01/26 5,818,750
1,000 Pennsylvania St Higher Edl Fac Auth
College & Univ Rev (a).............. 4.500 07/15/21 822,550
</TABLE>
See Notes to Financial Statements
F-22
<PAGE> 293
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 5,000 Philadelphia, PA Auth For Indl Dev
Rev Long-Term Care Maplewood........ 8.000% 01/01/24 $ 5,338,000
2,500 Pittsburgh & Allegheny Cnty, PA Pub
Auditorium Auth Regl Asset Dist
Sales Tax Rev (AMBAC Insd).......... 5.000 02/01/24 2,215,500
13,000 Pittsburgh & Allegheny Cnty, PA
Public Auditorium Auth Excise Tax
Rev
(AMBAC Insd)........................ 4.500 02/01/29 10,315,240
1,500 Scranton Lackawanna, PA Hlth &
Welfare Auth Rev Rfdg............... 7.250 01/15/17 1,551,975
2,000 Scranton Lackawanna, PA Hlth &
Welfare Auth Rev Rfdg............... 7.350 01/15/22 2,082,940
--------------
89,532,938
--------------
RHODE ISLAND 0.2%
1,955 Providence, RI Redev Agy Ctfs Partn
Ser A............................... 8.000 09/01/24 2,073,688
--------------
SOUTH CAROLINA 1.0%
115 Charleston Cnty, SC Ctfs Partn Ser B
(MBIA Insd) (b)..................... 7.000 06/01/19 126,364
2,385 Charleston Cnty, SC Ctfs Partn Ser B
(Prerefunded @ 06/01/04) (MBIA Insd)
(b)................................. 7.000 06/01/19 2,675,040
3,500 Charleston Cnty, SC Indl Rev Zeigler
Coal Hldgs Rfdg..................... 6.950 08/10/28 3,407,915
1,000 Oconee Cnty, SC Indl Rev Bond
Johnson Ctl Inc Ser 84 (Var Rate
Cpn)................................ 6.485 06/15/04 1,000,000
4,000 South Carolina St Hsg Fin & Dev Auth
Multi-Family Rev.................... 6.750 05/01/28 3,896,040
--------------
11,105,359
--------------
SOUTH DAKOTA 0.2%
805 Keystone, SD Econ Dev Rev Wtr
Quality Mgmt Corp Ser A............. 5.500 12/15/08 776,487
1,810 Keystone, SD Econ Dev Rev Wtr
Quality Mgmt Corp Ser A............. 6.000 12/15/18 1,699,065
--------------
2,475,552
--------------
</TABLE>
See Notes to Financial Statements
F-23
<PAGE> 294
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TENNESSEE 1.5%
$ 3,000 SCA Tax Exempt Trust Multi-Family
Mtg Memphis Hlth Edl Rev Bond
Receipt Ser A6 (FSA Insd) (b)....... 7.350% 01/01/30 $ 3,239,970
2,000 Springfield, TN Hlth & Edl Fac Brd
Hosp Rev Jesse Holman Jones Hosp
Proj (Prerefunded @ 04/01/06) (b)... 8.250 04/01/12 2,353,180
6,180 Sullivan Cnty, TN Hlth Edl & Hsg
Facs Board Rev...................... 8.410 11/01/19 6,906,706
1,160 Trenton, TN Hlth & Edl Facs Brd Rev
Rha/ Trenton Mr Inc Proj Ser B
(d)................................. 10.000 11/01/20 150,800
3,195 Trenton, TN Hlth & Edl Facs Brd Rev
Rha/ Trenton Mr Inc Proj Ser A...... 10.000 11/01/19 3,563,160
--------------
16,213,816
--------------
TEXAS 11.0%
1,000 Abia Dev Corp TX Arpt Facs Rev
Austin Belly Port Dev LLC Proj Ser
A................................... 6.250 10/01/08 970,070
2,000 Abia Dev Corp TX Arpt Facs Rev
Austin Belly Port Dev LLC Proj Ser
A................................... 6.500 10/01/23 1,899,180
1,500 Abilene, TX Hlth Facs Dev Sears
Methodist Retirement Ser A.......... 5.875 11/15/18 1,393,440
2,000 Amarillo, TX Hlth Fac Corp Hosp Rev
High Plains Baptist Hosp (Inverse
Fltg)
(FSA Insd) (b)...................... 9.149 01/01/22 2,245,000
1,000 Atlanta, TX Hosp Auth Hosp Fac
Rev................................. 6.700 08/01/19 967,960
2,035 Atlanta, TX Hosp Auth Hosp Fac
Rev................................. 6.750 08/01/29 1,959,094
1,000 Austin, TX Bergstorm Landhost Entmt
Sr Ser A............................ 6.750 04/01/27 956,890
2,000 Bell Cnty, TX Indl Dev Corp Solid
Waste Disposal Rev.................. 7.600 12/01/17 1,903,200
1,000 Bexar Cnty, TX Hlth Fac Dev Corp Rev
Rfdg Baptist Hlth Sys Ser A (MBIA
Insd) (b)........................... 6.000 11/15/12 1,055,340
2,370 Bexar Cnty, TX Hlth Fac Dev Corp Rev
Rfdg Baptist Hlth Sys Ser A (MBIA
Insd)............................... 6.000 11/15/13 2,491,107
1,000 Brazos River Auth TX Rev Houston
Lighting & Power Co Proj Rfdg (AMBAC
Insd)............................... 5.050 11/01/18 910,080
</TABLE>
See Notes to Financial Statements
F-24
<PAGE> 295
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$ 5,000 Brazos River Auth TX Rev Houston
Inds Inc Proj Ser D Rfdg (MBIA Insd)
(b)................................. 4.900% 10/01/15 $ 4,559,200
665 Dallas Cnty, TX Flood Ctl Dist No 1
Rfdg................................ * 08/01/00 624,894
1,165 Dallas Cnty, TX Flood Ctl Dist No 1
Rfdg................................ * 08/01/01 1,015,344
335 Dallas Cnty, TX Flood Ctl Dist No 1
Rfdg................................ * 08/01/02 270,904
1,825 Dallas Cnty, TX Flood Ctl Dist No 1
Rfdg................................ * 08/01/11 720,364
775 Dallas Cnty, TX Flood Ctl Dist No 1
Rfdg................................ 8.750 08/01/11 777,209
2,670 Dallas Cnty, TX Flood Ctl Dist No 1
Rfdg................................ 8.750 08/01/12 2,677,503
6,000 Dallas Cnty, TX Util & Reclamation
Dist Ser B Rfdg (AMBAC Insd) (a).... 5.875 02/15/29 5,961,780
2,500 Garland, TX Indl Dev Auth Rev Bond
Ashland Oil Proj Ser 84 Rfdg (Var
Rate Cpn)........................... 8.920 04/01/04 2,502,950
1,635 Garland, TX Indpt Sch Dist.......... 4.000 02/15/15 1,317,319
3,275 Grapevine Colleyville Indpt Sch Dist
Tx Formerly Grapevine Tx Indpt Sch
District To 1979.................... * 08/15/14 1,413,359
5,000 Houston, TX Arpt Sys Rev Spl Fac
Continental Ser C................... 5.700 07/15/29 4,457,600
2,500 Houston, TX Arpt Sys Rev Spl Fac
Continental Airl Term Impt Ser B
(b)................................. 6.125 07/15/27 2,370,650
5,665 Houston, TX Wtr & Sewer Sys Rev
Capital Apprec Jr Lien Ser A (FSA
Insd)............................... * 12/01/23 1,357,561
880 Laredo, TX Ctfs Oblig Ser B (MBIA
Insd)............................... 4.500 02/15/17 739,966
2,655 Leander, TX Indpt Sch Dist Cap
Apprec Rfdg......................... * 08/15/18 877,876
4,820 Leander, TX Indpt Sch Dist Cap
Apprec Rfdg......................... * 08/15/21 1,315,282
3,990 Leander, TX Indpt Sch Dist Rfdg..... 4.750 08/15/12 3,728,495
17,760 Lower Co River Auth TX Rev Ser A
Rfdg (a)............................ 5.875 05/15/14 18,210,216
7,500 Lower Co River Auth TX Rev Ser A
Rfdg (a)............................ 5.875 05/15/15 7,653,900
1,500 Lubbock, TX Hlth Facs Dev Corp Rev
First Mtg Carillon Proj A........... 6.500 07/01/19 1,409,505
2,500 Matagorda Cnty, TX Navigation Dist
No 1 Houston Lighting Pwr Co Rfdg
(AMBAC Insd)........................ 5.125 11/01/28 2,214,950
3,355 Meadow Parc Dev Inc TX Multi-Family
Rev Hsg Meadow Parc Apts Proj....... 6.500 12/01/30 3,179,466
</TABLE>
See Notes to Financial Statements
F-25
<PAGE> 296
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$ 1,000 Nacogdoches, TX Indl Dev Auth Inc
Pollutn Ctl Rev..................... 5.300% 12/01/11 $ 972,760
1,180 Pottsboro, TX Indpt Sch Dist Cap
Apprec Rfdg......................... * 08/15/17 413,732
1,175 Pottsboro, TX Indpt Sch Dist Cap
Apprec Rfdg......................... * 08/15/20 339,974
1,175 Pottsboro, TX Indpt Sch Dist Cap
Apprec Rfdg......................... * 08/15/23 281,459
6,000 Rockwall, TX Indpt Sch Dist Cap
Apprec Rfdg......................... * 08/15/18 1,955,040
6,020 San Antonio, Tx Indpt Sch
Dist Rfdg (a)....................... 5.500 08/15/18 5,891,654
2,410 Texas Gen Svcs Comm Partn
Interests........................... 7.250 08/15/11 2,461,067
8,000 Texas St Dept Hsg & Cmnty Affairs
Home Mtg Rev (GNMA Collateralized)
(Inverse Fltg)...................... 6.900 07/02/24 8,513,120
2,985 Texas St Higher Edl Coordinating Brd
College Student Ln.................. * 10/01/25 2,999,835
2,000 Texas St Tpk Auth Dallas North
Thruway Rev Addison Arpt Toll Tunnel
Proj (FGIC Insd) (Prerefunded @
01/01/05) (b)....................... 6.750 01/01/15 2,228,460
2,000 Texas St Tpk Auth Dallas North
Thruway Rev Addison Arpt Toll Tunnel
Proj (FGIC Insd) (Prerefunded @
01/01/05) (b)....................... 6.600 01/01/23 2,214,600
5,000 West Side Calhoun Cnty, TX Navig
Dist Solid Waste Disp Union Carbide
Chem &
Plastics (b)........................ 8.200 03/15/21 5,284,350
--------------
119,663,705
--------------
UTAH 1.0%
1,000 Hildale, UT Elec Rev Gas Turbine
Elec
Fac Proj............................ 7.800 09/01/15 950,340
1,165 Hildale, UT Elec Rev Gas Turbine
Elec
Fac Proj............................ 8.000 09/01/20 1,103,476
1,000 Hildale, UT Elec Rev Gas Turbine
Elec
Fac Proj............................ 7.800 09/01/25 942,030
4,000 Intermountain Pwr Agy UT Pwr Supply
Rev Ser B Rfdg (MBIA Insd) (b)...... 5.750 07/01/19 3,983,240
</TABLE>
See Notes to Financial Statements
F-26
<PAGE> 297
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UTAH (CONTINUED)
$ 240 Saint George, UT Indl Dev Rev Kmart
Corp Ser 1984A...................... 10.750% 10/15/08 $ 245,808
2,500 Tooele Cnty, UT Pollutn Ctl Rev Rfdg
Laidlaw Environmental Ser A......... 7.550 07/01/27 2,641,550
1,175 Utah St Hsg Fin Agy Single Family
Mtg Mezz A1 (AMBAC Insd) (b)........ 6.100 07/01/13 1,190,052
--------------
11,056,496
--------------
VERMONT 0.3%
1,000 Vermont Edl & Hlth Bldgs Fin Agy
Rev................................. 6.000 12/15/09 960,840
1,000 Vermont Edl & Hlth Bldgs Fin Agy
Rev................................. 6.125 12/15/14 949,660
1,015 Vermont Edl & Hlth Bldgs Fin Agy
Rev................................. 6.250 04/01/29 943,108
--------------
2,853,608
--------------
VIRGINIA 1.5%
5,000 Alexandria, VA Redev & Hsg Auth 3001
Park Cent Apts Ser A Rfdg........... 6.375 04/01/34 4,715,450
1,000 Dulles Town Cent Cmnty Dev Auth
Dulles Town Cent Proj............... 6.250 03/01/26 974,100
2,650 Fairfax Cnty, VA Park Auth Park Fac
Rev................................. 6.625 07/15/20 2,751,336
1,000 Greensville Cnty, VA Indl Dev
Wheeling Steel Proj Ser A........... 7.000 04/01/14 950,330
5,000 Peninsula Ports Auth VA Rev Port Fac
Zeigler Coal Rfdg................... 6.900 05/02/22 4,895,000
1,500 Pittsylvania Cnty, VA Indl Dev Auth
Rev Exempt Fac Ser A................ 7.450 01/01/09 1,594,050
--------------
15,880,266
--------------
WASHINGTON 0.7%
3,500 Spokane Cnty, WA Indl Dev Corp Solid
Waste Disp Rev...................... 7.600 03/01/27 3,691,380
2,000 Tacoma, WA Hsg Auth Rev Hsg
Wedgewood Homes Proj................ 6.000 04/01/28 1,862,700
5,500 Washington St Pub Pwr Supply Comp
Int Ser C Rfdg (MBIA Insd).......... * 07/01/17 1,952,335
--------------
7,506,415
--------------
</TABLE>
See Notes to Financial Statements
F-27
<PAGE> 298
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WISCONSIN 1.7%
$ 800 Baldwin, WI Hosp Rev Mtg Ser A...... 6.125% 12/01/18 $ 752,712
2,590 Baldwin, WI Hosp Rev Mtg Ser A...... 6.375 12/01/28 2,412,222
1,000 Oconto Falls, WI Cmnty Dev Oconto
Falls Tissue Inc Proj............... 7.750 12/01/22 1,023,620
3,970 Wisconsin St Hlth & Edl Fac Auth Rev
Chippewa Vly Hosp Ser F Rfdg (b).... 9.500 11/15/12 4,306,339
2,070 Wisconsin St Hlth & Edl Fac Auth Rev
Eau Claire Manor (d)................ 9.625 06/01/13 1,985,482
1,115 Wisconsin St Hlth & Edl Fac Auth Rev
Spl Term Middleton Glen Inc Proj.... 5.750 10/01/18 1,018,831
2,485 Wisconsin St Hlth & Edl Fac Auth Rev
Spl Term Middleton Glen Inc Proj.... 5.750 10/01/28 2,222,410
1,200 Wisconsin St Hlth & Edl Facs Auth
Rev Spl Term Middleton Glen Inc
Proj................................ 5.900 10/01/28 1,096,392
3,000 Wisconsin St Hlth & Edl Milwaukee
Catholic Home Proj.................. 7.500 07/01/26 3,149,820
--------------
17,967,828
--------------
PUERTO RICO 0.9%
1,391 Centro de Recaudaciones de Ingresos
Muni Ctfs Partn PR.................. 6.850 10/17/03 1,415,849
10,000 Puerto Rico Comwlth Hwy & Tran Auth
Tran Rev Ser A...................... 4.750 07/01/38 8,248,300
--------------
9,664,149
--------------
</TABLE>
See Notes to Financial Statements
F-28
<PAGE> 299
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TOTAL LONG-TERM INVESTMENTS 103.1%
(Cost $1,136,289,323)............................................. $1,122,491,681
SHORT-TERM INVESTMENTS 0.2%
(Cost $3,178,571)................................................. 2,186,786
--------------
TOTAL INVESTMENTS 103.3%
(Cost $1,139,467,894)............................................. 1,124,678,467
LIABILITIES IN EXCESS OF OTHER ASSETS (3.3%)....................... (35,420,521)
--------------
NET ASSETS 100.0%.................................................. $1,089,257,946
==============
</TABLE>
* Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments, open option and open futures transactions.
(c) Interest is accruing less than the stated coupon.
(d) Non-Income producing security.
(e) Currently is a payment-in-kind security which will convert to a cash paying
security with a higher coupon at a predetermined date.
(f) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(g) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
(h) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
AMBAC--AMBAC Indemnity Corporation
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
GNMA--Government National Mortgage Association
See Notes to Financial Statements
F-29
<PAGE> 300
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $1,139,467,894)..................... $1,124,678,467
Receivables:
Interest.................................................. 21,837,970
Investments Sold.......................................... 10,573,684
Fund Shares Sold.......................................... 1,362,471
Other....................................................... 61,559
--------------
Total Assets.......................................... 1,158,514,151
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 56,343,428
Bank Borrowings........................................... 5,866,970
Fund Shares Repurchased................................... 2,600,836
Income Distributions...................................... 2,437,596
Distributor and Affiliates................................ 842,560
Investment Advisory Fee................................... 428,652
Variation Margin on Futures............................... 90,404
Accrued Expenses............................................ 445,555
Trustees' Deferred Compensation and Retirement Plans........ 192,392
Options at Market Value (Net premiums received of
$15,486).................................................. 7,812
--------------
Total Liabilities..................................... 69,256,205
--------------
NET ASSETS.................................................. $1,089,257,946
==============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $1,217,073,102
Accumulated Distributions in Excess of Net Investment
Income.................................................... (9,871,263)
Net Unrealized Depreciation................................. (13,964,340)
Accumulated Net Realized Loss............................... (103,979,553)
--------------
NET ASSETS.................................................. $1,089,257,946
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $745,232,686 and 53,578,756 shares of
beneficial interest issued and outstanding)........... $ 13.91
Maximum sales charge (4.75%* of offering price)......... .69
--------------
Maximum offering price to public........................ $ 14.60
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $282,513,282 and 20,318,857 shares of
beneficial interest issued and outstanding)........... $ 13.90
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $61,511,978 and 4,424,055 shares of
beneficial interest issued and outstanding)........... $ 13.90
==============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
F-30
<PAGE> 301
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 73,249,612
------------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,853,240, $2,940,698 and $687,347,
respectively)............................................. 5,481,285
Investment Advisory Fee..................................... 5,384,470
Shareholder Services........................................ 811,277
Legal....................................................... 374,025
Custody..................................................... 99,759
Trustees' Fees and Related Expenses......................... 50,182
Other....................................................... 918,034
------------
Total Operating Expenses................................ 13,119,032
Less Credit Earned on Overnight Cash Balances........... 30,267
------------
Net Operating Expenses.................................. 13,088,765
Interest Expense........................................ 654,836
------------
NET INVESTMENT INCOME....................................... $ 59,506,011
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments (Including reorganization and restructuring
costs of $50,195)....................................... $ (9,086,136)
Options................................................... 408,941
Futures................................................... 296,003
------------
Net Realized Loss........................................... (8,381,192)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 68,326,173
------------
End of the Period:
Investments............................................. (14,789,427)
Options................................................. 7,674
Futures................................................. 817,413
------------
(13,964,340)
------------
Net Unrealized Depreciation During the Period............... (82,290,513)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(90,671,705)
============
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $(31,165,694)
============
</TABLE>
See Notes to Financial Statements
F-31
<PAGE> 302
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1999, the Nine Months Ended
September 30, 1998 and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................ $ 59,506,011 $ 42,155,106 $ 53,336,303
Net Realized Gain/Loss............... (8,381,192) (861,253) 391,354
Net Unrealized
Appreciation/Depreciation During
the Period......................... (82,290,513) 17,628,426 24,022,309
-------------- -------------- -------------
Change in Net Assets from
Operations......................... (31,165,694) 58,922,279 77,749,966
-------------- -------------- -------------
Distributions from Net Investment
Income............................. (59,506,011) (42,128,701) (53,336,303)
Distributions in Excess of Net
Investment Income.................. (851,426) -0- (664,960)
-------------- -------------- -------------
Total Distributions from and in
Excess of Net Investment Income*... (60,357,437) (42,128,701) (54,001,263)
-------------- -------------- -------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES.............. (91,523,131) 16,793,578 23,748,703
-------------- -------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............ 277,570,061 205,313,493 198,765,477
Net Asset Value of Shares Issued
Through Dividend Reinvestment...... 28,001,367 18,455,824 23,168,036
Cost of Shares Repurchased........... (238,997,282) (100,827,970) (135,758,091)
-------------- -------------- -------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS....................... 66,574,146 122,941,347 86,175,422
-------------- -------------- -------------
TOTAL INCREASE/DECREASE IN NET
ASSETS............................. (24,948,985) 139,734,925 109,924,125
NET ASSETS:
Beginning of the Period.............. 1,114,206,931 974,472,006 864,547,881
-------------- -------------- -------------
End of the Period (Including
accumulated distributions in excess
of net investment income of
$9,871,263, $9,019,837 and
$9,046,242, respectively).......... $1,089,257,946 $1,114,206,931 $ 974,472,006
============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
*Distributions by Class
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares..................... $(43,068,954) $(30,895,725) $(41,926,549)
Class B Shares..................... (14,016,298) (9,369,462) (10,667,625)
Class C Shares..................... (3,272,185) (1,863,514) (1,407,089)
------------ ------------ ------------
$(60,357,437) $(42,128,701) $(54,001,263)
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-32
<PAGE> 303
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -------------------------------------
Class A Shares 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................... $15.076 $14.845 $14.474 $14.984 $13.848 $15.629
------- ------- ------- ------- ------- -------
Net Investment
Income............... .807 .643 .895 .963 1.024 .956
Net Realized and
Unrealized
Gain/Loss............ (1.164) .217 .376 (.513) 1.072 (1.717)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............. (.357) .860 1.271 .450 2.096 (.761)
Less Distributions from
and in Excess of Net
Investment Income...... .810 .629 .900 .960 .960 1.020
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............. $13.909 $15.076 $14.845 $14.474 $14.984 $13.848
======= ======= ======= ======= ======= =======
Total Return (a)......... (2.51%) 6.00%* 9.05% 3.21% 15.52% (4.93%)
Net Assets at End of the
Period (In millions)... $ 745.2 $ 771.4 $ 706.3 $ 671.9 $ 665.8 $ 603.0
Ratio of Expenses to
Average Net Assets
(b).................... .96% .92% .94% .99% .95% .87%
Ratio of Net Investment
Income to Average Net
Assets (b)............. 5.46% 5.66% 6.09% 6.60% 7.05% 6.48%
Portfolio Turnover....... 77% 66%* 63% 59% 59% 101%
</TABLE>
* Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1995 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-33
<PAGE> 304
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -------------------------------------
Class B Shares 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................... $15.071 $14.844 $14.474 $14.983 $13.850 $15.621
------- ------- ------- ------- ------- -------
Net Investment Income.... .686 .545 .774 .843 .908 .841
Net Realized and
Unrealized Gain/Loss... (1.156) .229 .384 (.506) 1.071 (1.718)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............. (.470) .774 1.158 .337 1.979 (.877)
Less Distributions from
and in Excess of Net
Investment Income...... .697 .547 .788 .846 .846 .894
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............. $13.904 $15.071 $14.844 $14.474 $14.983 $13.850
======= ======= ======= ======= ======= =======
Total Return (a)......... (3.25%) 5.35%* 8.23% 2.40% 14.62% (5.69%)
Net Assets at End of the
Period (In millions)... $ 282.5 $ 279.6 $ 229.6 $ 173.8 $ 137.9 $ 112.4
Ratio of Expenses to
Average Net
Assets (b)............. 1.73% 1.68% 1.71% 1.75% 1.70% 1.64%
Ratio of Net Investment
Income to Average Net
Assets (b)............. 4.70% 4.90% 5.30% 5.84% 6.25% 5.70%
Portfolio Turnover....... 77% 66%* 63% 59% 59% 101%
</TABLE>
* Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1995 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-34
<PAGE> 305
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -------------------------------------
Class C Shares 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................... $15.069 $14.842 $14.474 $14.987 $13.846 $15.610
------- ------- ------- ------- ------- -------
Net Investment Income.... .686 .549 .778 .851 .910 .824
Net Realized and
Unrealized Gain/Loss... (1.154) .225 .378 (.518) 1.077 (1.694)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............. (.468) .774 1.156 .333 1.987 (.870)
Less Distributions from
and in Excess of Net
Investment Income...... .697 .547 .788 .846 .846 .894
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............. $13.904 $15.069 $14.842 $14.474 $14.987 $13.846
======= ======= ======= ======= ======= =======
Total Return (a)......... (3.25%) 5.35%* 8.23% 2.33% 14.70% (5.62%)
Net Assets at End of the
Period (In millions)... $ 61.5 $ 63.2 $ 38.6 $ 18.8 $ 9.5 $ 7.6
Ratio of Expenses to
Average Net
Assets (b)............. 1.73% 1.68% 1.71% 1.75% 1.69% 1.64%
Ratio of Net Investment
Income to Average Net
Assets (b)............. 4.69% 4.90% 5.24% 5.84% 6.19% 5.71%
Portfolio Turnover....... 77% 66%* 63% 59% 59% 101%
</TABLE>
* Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1995 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-35
<PAGE> 306
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Tax Free High Income Fund (the "Fund") is organized as a series of
the Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income taxes primarily
through investment in a diversified portfolio of medium and lower grade
municipal securities. The Fund commenced investment operations on June 28, 1985.
The distribution of the Fund's Class B and Class C shares commenced on May 1,
1993 and August 13, 1993, respectively.
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--Municipal bonds are valued by independent pricing
services or dealers using the mean of the bid and asked prices or, in the
absence of market quotations, at fair value based upon yield data relating to
municipal bonds with similar characteristics and general market conditions.
Securities which are not valued by independent pricing services are valued at
fair value using procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
F-36
<PAGE> 307
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At September 30, 1999, the Fund had an accumulated capital loss
carryforward for tax purposes of $92,206,265 which expires between September 30,
2002 and September 30, 2006. Net realized gains or losses may differ for
financial reporting and tax purposes primarily as a result of the capitalization
of reorganization and restructuring costs for tax purposes, post October losses
which are not recognized for tax purposes with the first day of the following
fiscal year, the deferral of losses related to wash sale transactions and gains
and losses recognized for tax purposes on open options and futures positions at
September 30, 1999.
At September 30, 1999, for federal income tax purposes, cost of long- and
short-term investments is $1,141,259,853, the aggregate gross unrealized
appreciation is $40,390,420 and the aggregate gross unrealized depreciation is
$56,971,806, resulting in net unrealized depreciation on long- and short-term
investments of $16,581,386.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
Due to inherent differences in the recognition of interest income under
generally accepted accounting principles and federal income tax purposes, for
those securities which the Fund has placed on non-accrual status, the amount of
distributable net investment income may differ between book and federal income
tax purposes for a particular period. These differences are temporary in nature,
but may result in book basis distributions in excess of net investment income
for certain periods.
F. EXPENSE REDUCTIONS--During the year ended September 30, 1999, the Trust's
custody fee was reduced by $30,267 as a result of credits earned on overnight
cash balances.
F-37
<PAGE> 308
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
% PER
AVERAGE NET ASSETS ANNUM
- ------------------------------------------------------------------
<S> <C>
First $500 million...................................... .50 of 1%
Over $500 million....................................... .45 of 1%
</TABLE>
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $56,700 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $305,800 representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended September 30,
1999, the Fund recognized expenses of approximately $587,800. 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.
F-38
<PAGE> 309
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
At September 30, 1999, capital aggregated $850,797,574, $300,435,113 and
$65,840,415 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A............................. 13,253,619 $ 192,139,108
Class B............................. 4,333,895 63,782,837
Class C............................. 1,466,836 21,648,116
----------- -------------
Total Sales........................... 19,054,350 $ 277,570,061
=========== =============
Dividend Reinvestment:
Class A............................. 1,403,007 $ 20,426,304
Class B............................. 394,154 5,741,611
Class C............................. 125,823 1,833,452
----------- -------------
Total Dividend Reinvestment........... 1,922,984 $ 28,001,367
=========== =============
Repurchases:
Class A............................. (12,242,352) $(176,483,940)
Class B............................. (2,963,915) (42,910,916)
Class C............................. (1,363,307) (19,602,426)
----------- -------------
Total Repurchases..................... (16,569,574) $(238,997,282)
=========== =============
</TABLE>
F-39
<PAGE> 310
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At September 30, 1998, capital aggregated $814,716,102, $273,821,581 and
$61,961,273 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A............................. 7,418,156 $ 110,301,687
Class B............................. 4,566,294 67,862,636
Class C............................. 1,827,970 27,149,170
---------- -------------
Total Sales........................... 13,812,420 $ 205,313,493
========== =============
Dividend Reinvestment:
Class A............................. 923,639 $ 13,739,535
Class B............................. 245,550 3,652,560
Class C............................. 71,508 1,063,729
---------- -------------
Total Dividend Reinvestment........... 1,240,697 $ 18,455,824
========== =============
Repurchases:
Class A............................. (4,753,839) $ (70,664,021)
Class B............................. (1,723,537) (25,610,245)
Class C............................. (306,853) (4,553,704)
---------- -------------
Total Repurchases..................... (6,784,229) $(100,827,970)
========== =============
</TABLE>
F-40
<PAGE> 311
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $761,338,901, $227,916,630 and
$38,302,078 for Classes A, B and C, respectively. For the year ended December
31, 1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A............................. 6,584,725 $ 95,897,790
Class B............................. 5,414,821 78,851,895
Class C............................. 1,645,028 24,015,792
---------- -------------
Total Sales........................... 13,644,574 $ 198,765,477
========== =============
Dividend Reinvestment:
Class A............................. 1,260,959 $ 18,367,805
Class B............................. 276,853 4,036,121
Class C............................. 52,358 764,110
---------- -------------
Total Dividend Reinvestment........... 1,590,170 $ 23,168,036
========== =============
Repurchases:
Class A............................. (6,688,927) $ (97,347,533)
Class B............................. (2,235,801) (32,600,924)
Class C............................. (397,427) (5,809,634)
---------- -------------
Total Repurchases..................... (9,322,155) $(135,758,091)
========== =============
</TABLE>
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 eight year following purchase.
The CDSC for Class B and C shares 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-41
<PAGE> 312
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
For the year ended September 30, 1999 Van Kampen, as distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $276,000 and CDSC on redeemed shares of approximately $665,800.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the year ended September 30, 1999, the cost of purchases and proceeds from
sales of investments, excluding short-term investments, were $995,004,442 and
$899,641,751, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising a call option contract or taking
delivery of a security underlying a futures contract. In these instances, the
recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. OPTION CONTRACTS--An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.
F-42
<PAGE> 313
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
Transactions in options for the year ended September 30, 1999, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 30, 1998............... 750 $ 9,550
Options Written and Purchased (Net)............. 5,215 451,135
Options Terminated in Closing Transactions
(Net)......................................... (2,300) (287,623)
Options Expired (Net)........................... (3,165) (157,576)
------ ---------
Outstanding at September 30, 1999............... 500 $ 15,486
====== =========
</TABLE>
The description and market value of the option contracts outstanding as of
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
MARKET
EXP. VALUE
MONTH/ OF
DESCRIPTION CONTRACTS STRIKE PRICE OPTION
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL BOND FUTURES
Dec. 1999 - Written Call............. 250 Dec/118 $(82,031)
Dec. 1999 - Written Put.............. 250 Dec/110 74,219
--- --------
500 $ (7,812)
=== ========
</TABLE>
B. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin). The potential risk of loss
associated with a futures contract could be in excess of the variation margin
reflected on the Statement of Assets and Liabilities.
F-43
<PAGE> 314
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended September 30, 1999,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at September 30, 1998........................... 600
Futures Opened.............................................. 10,221
Futures Closed.............................................. (10,231)
-------
Outstanding at September 30, 1999........................... 590
=======
</TABLE>
The futures contracts outstanding as of September 30, 1999, and the
descriptions and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C>
Long Contracts -- U.S. Treasury Bond
Futures-Dec 1999 (Current notional value
$113,938 per contract)...................... 150 $ 44,099
Short Contracts -- Municipal Bond
Futures-Dec 1999 (Current notional value
$112,281 per contract).................... 440 773,314
--- --------
590 $817,413
=== ========
</TABLE>
C. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to
a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the security's fixed swap rate and the floating swap index. These instruments
are typically used by the Fund to enhance the yield of the portfolio.
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
F-44
<PAGE> 315
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
Annual fees under the Plans of up to .25% for Class A net assets and 1.00%
each for Class B and Class C net assets are accrued daily. Included in these
fees for the year ended September 30, 1999 are payments retained by Van Kampen
of approximately $2,660,900.
7. BORROWINGS
In accordance with its investment policies, the Fund may borrow money from banks
in an amount up to 5% of its total assets. The Fund, in combination with two
other funds in the fund complex, has entered into a $100 million revolving
credit agreement which expires November 10, 1999. The maximum amount available
to any single fund is $75 million. Interest is charged under the agreement at a
rate of .45% above the federal funds rate. The interest rate in effect at
September 30, 1999 was 6.14%. An annual facility fee of .06% is charged on the
unused portion of the credit facility.
The average daily balance of bank borrowings for the year ended September
30, 1999 was approximately $11,116,900 with an average interest rate of 5.89%.
At September 30, 1999, borrowings under this agreement represented .5% of the
Fund's total assets.
F-45
<PAGE> 316
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN INSURED TAX FREE INCOME FUND
Van Kampen Insured Tax Free Income Fund (the "Fund") is a mutual fund with
the investment objective to provide investors with a high level of current
income exempt from federal income taxes, with liquidity and safety of principal,
primarily through investment in a diversified portfolio of insured municipal
securities.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust,
an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective, Policies and Risks.................... B-3
Strategic Transactions...................................... B-10
Investment Restrictions..................................... B-15
Description of Securities Ratings........................... B-16
Description of Insurance Company Claims Paying Ability
Ratings................................................... B-21
Trustees and Officers....................................... B-22
Investment Advisory Agreement............................... B-30
Other Agreements............................................ B-30
Distribution and Service.................................... B-31
Transfer Agent.............................................. B-34
Portfolio Transactions and Brokerage Allocation............. B-34
Shareholder Services........................................ B-35
Redemption of Shares........................................ B-38
Contingent Deferred Sales Charge-Class A.................... B-38
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-38
Taxation.................................................... B-40
Fund Performance............................................ B-43
Other Information........................................... B-46
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-30
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 2000.
B-1
<PAGE> 317
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen
Merritt Tax Free Trust as a Massachusetts business trust (the "Massachusetts
Trust"). The Massachusetts Trust was reorganized into the Trust under the name
Van Kampen American Capital Tax Free Trust on July 31, 1995. The Trust was
created for the purpose of facilitating the Massachusetts Trust reorganization
into a Delaware business trust. On July 14, 1998, the Trust adopted its current
name.
The Fund was originally organized as a Maryland corporation under the name
Van Kampen Merritt Insured Tax Free Fund Inc. The Fund was subsequently
reorganized into a sub-trust of the Massachusetts Trust under the name Van
Kampen Merritt Insured Tax Free Income Fund as of February 22, 1998. The Fund
was reorganized as a series of the Trust under the name Van Kampen American
Capital Insured Tax Free Fund on July 31, 1995. On July 14, 1998, the Fund
adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. ("Morgan Stanley Dean Witter"). 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 and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series such as the Fund and further subdivided into classes of each
series. Each share represents an equal proportionate interest in the assets of
the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
B-2
<PAGE> 318
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less 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 December 31, 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 DECEMBER 31, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
R T Kelley.................................................. 69,075.96 C 14.09%
PO Box 237
Canadian, TX 79014-0237
Merrill Lynch Pierce Fenner & Smith Inc. ................... 176,173.61 B 5.88%
for the Sole Benefit of its Customers 32,810.53 C 6.69%
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
Edward Jones & Co. ......................................... 6,380,966.56 A 10.23%
201 Progress Pkwy 53,986.10 C 11.01%
Maryland Hts, MO 63043-3009
Salomon Smith Barney Inc. .................................. 36,769.69 C 7.50%
333 West 34th Street 3rd Fl.
New York, NY 10001
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RISKS
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
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securities. The Fund may, however, invest in shorter term municipal securities
when yields are greater than yields available on longer term municipal
securities, for temporary defensive purposes or when redemption requests are
expected. The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special obligation" securities, which include
"industrial revenue bonds." General obligation securities are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation securities are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source, such as from the user of the facility being financed. The Fund
may also invest in "moral obligation" bonds which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment but
not a legal obligation of the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally
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will be larger than comparable changes in the value of an equal principal amount
of a fixed rate municipal security having similar credit quality, redemption
provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal or interest when due, the Fund may be subject to delays, expenses and
risks that are greater than those that would have been involved if the Fund had
purchased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Although substantially all of the municipal securities in which the Fund
may invest will be insured as to timely payment of principal and interest,
municipal securities, like other debt obligations, are subject to the risk of
non-payment. The ability of issuers of municipal securities to make timely
payments of interest and principal may be adversely impacted in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal security experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
securities and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
INSURANCE
As described in the Prospectus, the Fund invests substantially all of its
assets in municipal securities which are either pre-insured under a policy
obtained for such securities prior to the purchase of such securities or are
insured under policies obtained by the Fund to cover otherwise uninsured
securities.
ORIGINAL ISSUE INSURANCE. Original Issue Insurance is purchased with
respect to a particular issue of municipal securities by the issuer thereof or a
third party in conjunction with the original issuance of such municipal
securities. Under such insurance, the insurer unconditionally guarantees to the
holder of the insured municipal security the timely payment of principal and
interest on such obligation when and as such payments
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shall become due but shall not be paid by the issuer; except that in the event
of any acceleration of the due date of the principal by reason of mandatory or
optional redemption (other than acceleration by reason of a mandatory sinking
fund payment), default or otherwise, the insured payments may be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer is responsible for such payments less
any amounts received by the holder from any trustee for the municipal security
issuers or from any other source. Original Issue Insurance generally does not
insure payment on an accelerated basis, the payment of any redemption premium
(except with respect to certain premium payments in the case of certain small
issue industrial development and pollution control municipal securities), the
value of the shares of the Fund or the market value of municipal securities, or
payments of any tender purchase price upon the tender of the municipal
securities. Original Issue Insurance also does not insure against nonpayment of
principal of or interest on municipal securities resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
such obligations.
In the event that interest on or principal of a municipal security covered
by insurance is due for payment but is unpaid by reason of nonpayment by the
issuer thereof, the applicable insurer will make payments to its fiscal agent
(the "Fiscal Agent") equal to such unpaid amounts of principal and interest not
later than one business day after the insurer has been notified that such
nonpayment has occurred (but not earlier than the date of such payment is due).
The Fiscal Agent will disburse to the Fund the amount of principal and interest
which is then due for payment but is unpaid upon receipt by the Fiscal Agent of
(i) evidence of the Fund's right to receive payment of such principal and
interest and (ii) evidence, including any appropriate instrument of assignment,
that all of the rights of payment of such principal or interest then due for
payment shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal
securities covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such municipal
securities. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the municipal securities so
insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated.
SECONDARY MARKET INSURANCE. Subsequent to the time of original issuance of
a municipal security, the Fund or a third party may, upon the payment of a
single premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal security
covered thereby remains outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal security.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal security would be to enhance the value of such municipal
security. The Fund, for example, might seek to purchase a particular municipal
security and obtain Secondary Market Insurance with respect thereto if, in the
opinion of the Adviser, the market value of such municipal security, as insured,
would exceed the current value of the municipal security without insurance plus
the cost of the Secondary Market Insurance. Similarly, if the Fund owns but
wishes to sell a municipal security that is then covered by Portfolio Insurance,
the Fund might seek to obtain Secondary Market Insurance with respect thereto
if, in the opinion of the Adviser, the net proceeds of a sale by the Fund of
such obligation, as insured, would exceed the current value of such obligation
plus the cost of the Secondary Market Insurance.
PORTFOLIO INSURANCE. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to
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reduce financial risk, but the cost thereof and compliance with investment
restrictions imposed under the policy will reduce the yield to shareholders of
the Fund. If a municipal security already is covered by Original Issue Insurance
of Secondary Market Insurance, the Fund is not required to additionally insure
any such municipal security under any policy of Portfolio Insurance that the
Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal
security that has been redeemed from or sold by the Fund on the date of such
redemption or the settlement date of such sale, and an insurer shall not have
any liability thereafter under a policy as to any such municipal security,
except that if the date of such redemption or the settlement date of such sale
occurs after a record date and before the related payment date with respect to
any such municipal security, the policy will terminate as to such municipal
security on the business day immediately following such payment date. Each
policy will terminate as to all municipal securities covered thereby on the date
on which the last of the covered municipal securities mature, are redeemed or
are sold by the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant
to an irrevocable commitment of the insurer, with the option to exercise the
right to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
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GENERAL. It is anticipated that certain of the municipal securities to be
purchased by the Fund will be insured under policies obtained by persons other
than the Fund. In instances in which the Fund purchases municipal securities
insured under policies obtained by persons other than the Fund, the Fund does
not pay the premiums for such policies; rather the cost of such policies may be
reflected in a higher purchase price for such municipal securities. Accordingly,
the yield on such municipal securities may be lower than that on similar
uninsured municipal securities. Premiums for a Portfolio Insurance Policy
generally are paid by the Fund monthly, and are adjusted for purchases and sales
of municipal securities covered by the policy during the month. The yield on the
Fund's portfolio is reduced to the extent of the insurance premiums paid by the
Fund which, in turn, will depend upon the characteristics of the covered
municipal securities held by the Fund. In the event the Fund were to purchase
Secondary Market Insurance with respect to any municipal securities then covered
by a Portfolio Insurance policy, the coverage and the obligation of the Fund to
pay monthly premiums under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by
Standard and Poor's ("S&P"), Aaa by Moody's Investor Services, Inc. ("Moody's")
or an equivalent rating by another nationally recognized statistical ratings
organization ("NRSRO"), or if the Adviser anticipates such a lowering or
otherwise does not believe an insurer's claims-paying ability merits its
existing triple-A rating, the Fund could seek to obtain additional insurance
from an insurer whose claims-paying ability is rated AAA by S&P, Aaa by Moody's
or an equivalent rating by another NRSRO, or if the Adviser determines that the
cost of obtaining such additional insurance outweigh the benefits, the Fund may
elect not to obtain additional insurance. In making such determination, the
Adviser will consider the cost of the additional insurance, the new
claims-paying ability rating and financial condition of the existing insurer and
the creditworthiness of the issuer or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. The Fund cannot predict the
consequences of a state takeover of an insurer's obligations and, in particular,
whether such an insurer (or its state regulatory agency) could or would honour
all of the insurer's contractual obligations including any outstanding insurance
contracts insuring the timely payment of principal and interest on municipal
securities. The Fund cannot predict the impact which such events might have on
the market values of such municipal security. In the event of a default by an
insurer on its obligations with respect to any municipal securities in the
Fund's portfolio, the Fund would look to the issuer or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer or
guarantor may not be rated AAA by S&P, Aaa by Moody's or an equivalent rating by
another NRSRO. Accordingly, the Fund could be exposed to greater risk of
non-payment in such circumstances which could adversely affect the Fund's net
asset value. Alternatively, the Fund could elect to dispose of such municipal
securities; however, the market prices for such municipal securities may be
lower than the Fund's purchase price for them and the Fund could sustain a
capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk
(i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value.
"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
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date the Fund actually takes delivery of such securities. These transactions are
subject to market fluctuation; the value of the municipal securities at delivery
may be more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year.
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 for which market quotations are not readily available
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 typically 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, as amended from time to
time.
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STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various Strategic Transactions
(as defined in the Prospectus) to earn income, facilitate portfolio management
and mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Fund's Adviser seeks to use such transactions to further the Fund's
investment objective, no assurance can be given that the use of these
transactions will achieve this result.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale
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of a futures contract creates a firm obligation by the Fund, as seller, to
deliver to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the 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
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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 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
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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.
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INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder 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 at the meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitations on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. The Fund may
not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States government or by its agencies or instrumentalities),
if as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer, except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, the
Fund may from time to time invest more than 25% of its assets in a
particular segment of the municipal bond market; however, the Fund will
not invest more than 25% of its assets in industrial development bonds
in a single industry, and except that the Fund may purchase securities
of other investment companies to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act.
3. Borrow money, except from banks for temporary purposes and then in
amounts not in excess of 5% of the total asset value of the Fund, or
mortgage, pledge or hypothecate any assets except in connection with a
borrowing and in amounts not in excess of 10% of the total asset value
of the Fund. Borrowings may not be made for investment leverage, but
only to enable the Fund to satisfy redemption requests where liquidation
of portfolio securities is considered disadvantageous or inconvenient.
In this connection, the Fund will not purchase portfolio securities
during any period that such borrowings exceed 5% of the total asset
value of the Fund. Notwithstanding this investment restriction, the Fund
may enter into "when issued" and "delayed delivery" transactions as
described in the Prospectus.
4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other
financial futures or index contracts or related options, except as
hedging transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
8. Make investments for the purpose of exercising control or participation
in management, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the
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rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
10. Invest in equity interests in oil, gas or other mineral exploration or
development programs.
11. Purchase or sell real estate, commodities or commodity contracts,
except as set forth in item 6 above and except to the extent the
municipal securities the Fund may invest in are considered to be
interests in real estate.
As long as the percentage restrictions described above are satisfied at the
time of investment or borrowing, the Fund will be considered to have abided by
those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S--A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
<TABLE>
<S> <C>
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to meet its financial commitment on the obligation
is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only
in small degree. Capacity to meet its financial commitment
on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. Capacity to
meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to meet its financial commitment on the obligation.
</TABLE>
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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: Debt rated "C" is currently highly vulnerable to nonpayment.
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.
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 factors 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>
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<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 considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1: This designation indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C: This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the due date, even if the
applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period.
</TABLE>
A commercial paper 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 to S&P by the issuer or obtained 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.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC.--A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
<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.
</TABLE>
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<TABLE>
<S> <C>
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 through Caa. The
modifier 1 indicates that the obligation ranks in the higher
end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of that 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.
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-
B-19
<PAGE> 335
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.
-- 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.
B-20
<PAGE> 336
Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
DESCRIPTION OF INSURANCE COMPANY CLAIMS PAYING ABILITY RATINGS
RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
The claims-paying ability of insurance companies is rated by S&P and
Moody's. Descriptions of these ratings are set forth below:
DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Superior financial security on an absolute and relative basis.
Capacity to meet policyholder obligations is overwhelming under a variety of
economic and underwriting conditions.
AA. Excellent financial security. Capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions.
A. Good financial security, but capacity to meet policyholder obligations
is somewhat susceptible to adverse economic and underwriting conditions.
BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.
DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Insurance companies rated Aaa offer exceptional financial security.
While the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair their fundamentally
strong position.
AA. Insurance companies rated Aa offer excellent financial security.
Together with the Aaa group they constitute what are generally known as high
grade companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
BAA. Insurance companies rated Baa offer adequate financial security.
However, certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Note: Numeric modifiers are used to refer to the ranking within the group -- one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.
B-21
<PAGE> 337
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. Trustee/Director of each of the funds
1632 Morning Mountain Road in the Fund Complex. Co-founder, and prior to August
Raleigh, NC 27614 1996, Chairman, Chief Executive Officer and President,
Date of Birth: 07/14/32 MDT Corporation (now known as Getinge/Castle, Inc., a
Age: 67 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/ Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
Age: 61 January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in the
233 South Wacker Drive Fund Complex. Prior to 1997, Partner, Ray & Berndtson,
Suite 7000 Inc., an executive recruiting and management consulting
Chicago, IL 60606 firm. Formerly, Executive Vice President of ABN AMRO,
Date of Birth: 06/03/48 N.A., a Dutch bank holding company. Prior to 1992,
Age: 51 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.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created to
Washington, D.C. 20016 deepen understanding, promote collaboration and stimulate
Date of Birth: 02/29/52 exchanges of practical experience between Americans and
Age: 47 Europeans. Trustee/Director of each of the funds in the
Fund Complex. Formerly, advisor to the Dennis Trading
Group Inc., a managed futures and option company that
invests money for individuals and institutions. Prior to
1992, President and Chief Executive Officer, Director and
Member of the Investment Committee of the Joyce
Foundation, a private foundation.
</TABLE>
B-22
<PAGE> 338
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset Management
Two World Trade Center of Morgan Stanley Dean Witter since December 1998.
66th Floor President and Director since April 1997 and Chief
New York, NY 10048 Executive Officer since June 1998 of Morgan Stanley Dean
Date of Birth: 08/13/53 Witter Advisors Inc. and Morgan Stanley Dean Witter
Age: 46 Services Company Inc. Chairman, Chief Executive Officer
and Director of Morgan Stanley Dean Witter Distributors
Inc. since June 1998. Chairman and Chief Executive
Officer since June 1998, and Director since January 1998,
of Morgan Stanley Dean Witter Trust FSB. Director of
various Morgan Stanley Dean Witter subsidiaries.
President of the Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series since May 1999.
Trustee/Director of each of the funds in the Fund
Complex, and Vice President of other investment companies
advised by the Advisers and their affiliates. Previously
Chief Strategic Officer of Morgan Stanley Dean Witter
Advisors Inc. and Morgan Stanley Dean Witter Services
Company Inc. and Executive Vice President of Morgan
Stanley Dean Witter Distributors Inc. April 1997-June
1998, Vice President of the Morgan Stanley Dean Witter
Funds and Discover Brokerage Index Series May 1997-April
1999, and Executive Vice President of Dean Witter,
Discover & Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning Services,
423 Country Club Drive Inc., a financial planning company and registered
Winter Park, FL 32789 investment adviser in the State of Florida. President and
Date of Birth: 02/13/36 owner, Nelson Ivest Brokerage Services Inc., a member of
Age: 63 the National Association of Securities Dealers, Inc. and
Securities Investors Protection Corp. Trustee/Director of
each of the funds in the Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor, Van
Oakbrook Terrace, IL 60181-5555 Kampen Advisors Inc. and Van Kampen Management Inc.
Date of Birth: 02/02/46 Director and officer of certain other subsidiaries of Van
Age: 53 Kampen Investments. Trustee/Director and President of
each of the funds in the Fund Complex. Trustee, President
and Chairman of the Board of other investment companies
advised by the Advisers and their affiliates, and Chief
Executive Officer of Van Kampen Exchange Fund. Prior to
May 1998, Executive Vice President and Director of
Marketing at Morgan Stanley Dean Witter and Director of
Dean Witter Discover & Co. and Dean Witter Realty. Prior
to 1996, Director of Dean Witter Reynolds Inc.
</TABLE>
B-23
<PAGE> 339
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Age: 55 Shopping Centers Inc., a retail mall management company.
Trustee, University of Notre Dame. Trustee/Director of
each of the funds in the Fund Complex. Prior to 1998,
Director of Stone Smurfit Container Corp., a paper
manufacturing company. From May 1996 through February
1997 he was President, Chief Executive Officer and Chief
Operating Officer of Waste Management, Inc., an
environmental services company, and from November 1984
through May 1996 he was President and Chief Operating
Officer of Waste Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Age: 75 Dynalysis of Princeton, a firm engaged in 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 investment companies advised by the
Date of Birth: 08/22/39 Advisers or Van Kampen Management Inc. Trustee/Director
Age: 60 of each of the funds in the Fund Complex, and
Trustee/Managing General Partner of other investment
companies advised by the Advisers or Van Kampen
Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Age: 58 Marshall Fund of the United States, Trustee of Colorado
College, and Vice Chair of the Board of the Council for
Excellence in Government. Trustee/Director of each of the
funds in the Fund Complex. Prior to 1993, Executive
Director of the Commission on Behavioral and Social
Sciences and Education at the National Academy of
Sciences/National Research Council. From 1980 through
1989, Partner of Coopers & Lybrand.
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network system
233 South Wacker Drive solutions, COMARCO, Inc., a wireless communications
Suite 9700 products company and APAC Customer Services, Inc., a
Chicago, IL 60606 provider of outsourced customer contact services.
Date of Birth: 10/29/53 Trustee/Director of each of the funds in the Fund
Age: 46 Complex. Prior to May 1996, President of Advance Ross
Corporation, an international transaction services and
pollution control equipment manufacturing company.
</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. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-24
<PAGE> 340
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood 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.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and Van
Age: 57 Kampen Management Inc. Executive Vice President and Chief
Investment Officer of each of the funds in the Fund Complex,
since 1998. Chief Investment Officer, Executive Vice
President and Trustee/Managing General Partner of other
investment companies advised by the Advisers or Van Kampen
Management Inc. ("Management Inc."), since the inception of
funds advised by Advisory Corp. and Management Inc. and
since 1998 for funds advised by Asset Management. Director
of Global Decisions Group LLC, a financial research firm,
and its affiliates MCM Asia Pacific and MCM Europe. Prior to
1998, President, Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital Management, Inc.;
Director of Van Kampen American Capital, Inc.; and
President, Chief Executive Officer and Trustee of each of
the funds advised by Advisory Corp. Prior to July 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996, Chief
Executive Officer and Director of MCM Group, Inc. and
McCarthy, Crisanti & Maffei, Inc., a financial research
firm, and Chairman of MCM Asia Pacific Company, Limited and
MCM (Europe) Limited. Prior to December 1991, Senior Vice
President of Van Kampen Merritt Inc.
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van Kampen
Vice President and Secretary Advisors Inc., Van Kampen Management Inc., the Distributor,
Age: 43 American Capital Contractual Services, Inc., Van Kampen
Exchange Corp., Van Kampen Recordkeeping Services Inc.,
Investor Services, Van Kampen Insurance Agency of Illinois
Inc. and Van Kampen System Inc. Vice President and
Secretary/Vice President, Principal Legal Officer and
Secretary of other investment companies advised by the
Advisers or their affiliates. Vice President and Secretary
of each of the funds in the Fund Complex. Prior to January
1999, Vice President and Associate General Counsel to New
York Life Insurance Company ("New York Life"), and prior to
March 1997, Associate General Counsel of New York Life.
Prior to December 1993, Assistant General Counsel of The
Dreyfus Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission, Division
of Investment Management, Office of Chief Counsel.
</TABLE>
B-25
<PAGE> 341
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen Management
Age: 44 Inc. and Van Kampen Investor Services Inc., and serves as a
Director or Officer of certain other subsidiaries of Van
Kampen Investments. Vice President of each of the funds in
the Fund Complex and certain other investment companies
advised by the Advisers and their affiliates. Prior to 1998,
Senior Vice President and Senior Planning Officer for
Individual Asset Management of Morgan Stanley Dean Witter
and its predecessor since 1994. From 1990-1994, First Vice
President and Assistant Controller in Dean Witter's
Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice President
Vice President of each of the funds in the Fund Complex and certain other
Age: 43 investment companies advised by the Advisers or their
affiliates. Prior to September 1996, Director of McCarthy,
Crisanti & Maffei, Inc, a financial research company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
Age: 59 companies advised by the Advisers or their affiliates. Prior
to October 1998, Vice President and Senior Portfolio Manager
with AIM Capital Management, Inc. Prior to February 1998,
Senior Vice President of Van Kampen American Capital Asset
Management, Inc., Van Kampen American Capital Investment
Advisory Corp. and Van Kampen American Capital Management,
Inc.
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
Age: 44 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.
Age: 53
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.
Age: 44 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
Age: 40 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
B-26
<PAGE> 342
funds in the Fund Complex. Each fund in the Fund Complex 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 provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.
The 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 on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex 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
AGGREGATE PENSION OR ESTIMATED MAXIMUM COMPENSATION
COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FROM THE REGISTRANT(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ---------------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $15,220 $40,303 $60,000 $126,000
Jerry D. Choate(1) 6,754 0 60,000 88,700
Linda Hutton Heagy 15,220 5,045 60,000 126,000
R. Craig Kennedy 15,220 3,571 60,000 125,600
Jack E. Nelson 15,220 21,664 60,000 126,000
Phillip B. Rooney 13,820 7,787 60,000 113,400
Fernando Sisto 15,220 72,060 60,000 126,000
Wayne W. Whalen 15,220 15,189 60,000 126,000
Suzanne H. Woolsey(1) 6,754 0 60,000 88,700
Paul G. Yovovich(1) 14,020 2,845 60,000 126,000
</TABLE>
B-27
<PAGE> 343
- ---------------
(1) Trustees not eligible for compensation or retirement benefits are not
included in the Compensation Table. Mr. Yovovich became a member of the
Board of Trustees for the Fund and other funds in the Fund Complex on
October 22, 1998 and therefore does not have a full fiscal year of
information to report. Mr. Choate and Ms. Woolsey became members of the
Board of Trustees for the Trust and other funds in the Fund Complex
effective May 26, 1999 and therefore do not have a full year of information
to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal year ended September 30, 1999.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The detail of cumulative
deferred compensation (including interest) owed to Trustees, including
former 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 accrued by the operating investment companies in the Fund Complex
for each of the Trustees for the funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
(4) For each Trustee, this is the sum of the estimated maximum annual benefits
payable by the funds 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 funds in the Fund Complex as of December 31, 1999 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, 1999. The deferred compensation earns a
rate of return determined by reference to the return on the shares of the
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those investment
companies selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The Advisers and their affiliates also
serve as investment adviser for other investment companies; however, with
the exception of Mr. Whalen, the Non-Affiliated Trustees were not trustees
of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
As of December 31, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-28
<PAGE> 344
TABLE A
1999 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund....... 9/30 $ 3,322 $1,483 $ 3,322 $ 3,322 $ 3,322 $ 3,122 $ 3,322 $ 3,322
Tax Free High Income Fund......... 9/30 2,998 1,366 2,998 2,998 2,998 2,798 2,998 2,998
California Insured Tax Free
Fund............................ 9/30 1,692 745 1,692 1,692 1,692 1,492 1,692 1,692
Municipal Income Fund............. 9/30 2,781 1,241 2,781 2,781 2,781 2,581 2,781 2,781
Intermediate Term Municipal Income
Fund............................ 9/30 1,460 631 1,460 1,460 1,460 1,260 1,460 1,460
Florida Insured Tax Free Income
Fund............................ 9/30 1,488 646 1,488 1,488 1,488 1,288 1,488 1,488
New York Tax Free Income Fund..... 9/30 1,479 642 1,479 1,479 1,479 1,279 1,479 1,479
------- ------ ------- ------- ------- ------- ------- -------
Trust Total..................... $15,220 $6,754 $15,220 $15,220 $15,220 $13,820 $15,220 $15,220
======= ====== ======= ======= ======= ======= ======= =======
<CAPTION>
TRUSTEE
------------------
FUND NAME WOOLSEY YOVOVICH
--------- ------- --------
<S> <C> <C>
Insured Tax Free Income Fund....... $1,483 $ 3,122
Tax Free High Income Fund......... 1,366 2,798
California Insured Tax Free
Fund............................ 745 1,492
Municipal Income Fund............. 1,241 2,581
Intermediate Term Municipal Income
Fund............................ 631 1,260
Florida Insured Tax Free Income
Fund............................ 646 1,288
New York Tax Free Income Fund..... 642 1,479
------ -------
Trust Total..................... $6,754 $14,020
====== =======
</TABLE>
TABLE B
1999 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ---------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund.......................... 9/30 $ 3,322 $ 819 $ 3,322 $1,661 $ 3,322 $ 3,122 $1,661 $ 3,322 $ 2,373
Tax Free High Income Fund.... 9/30 2,998 769 2,998 1,499 2,998 2,798 1,499 2,998 2,165
California Insured Tax Free
Fund....................... 9/30 1,692 471 1,692 846 1,692 1,492 846 1,692 1,216
Municipal Income Fund........ 9/30 2,781 707 2,781 1,391 2,781 2,581 1,391 2,781 1,991
Intermediate Term Municipal
Income Fund................ 9/30 1,460 415 1,460 730 1,460 1,260 730 1,460 1,045
Florida Insured Tax Free
Income Fund................ 9/30 1,488 423 1,488 744 1,488 1,288 744 1,488 1,069
New York Tax Free Income
Fund....................... 9/30 1,479 422 1,479 740 1,479 1,279 740 1,479 1,060
------- ------ ------- ------ ------- ------- ------ ------- -------
Trust Total................ $15,220 $4,026 $15,220 $7,611 $15,220 $13,820 $7,611 $15,220 $10,919
======= ====== ======= ====== ======= ======= ====== ======= =======
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL ---------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... 9/30 $12,061 $ 829 $13,428 $ 19,013 $ 28,191 $ 8,367 $ 6,888
Tax Free High Income Fund..... 9/30 11,230 778 12,661 18,570 27,209 7,518 4,640
California Insured Tax Free
Fund........................ 9/30 8,666 475 10,273 17,213 24,168 4,910 3,391
Municipal Income Fund......... 9/30 12,068 715 14,058 23,404 33,528 7,594 12,202
Intermediate Term Municipal
Income Fund................. 9/30 8,217 418 9,855 16,976 23,638 4,454 3,172
Florida Insured Tax Free
Income Fund................. 9/30 8,268 426 9,902 10,914 18,313 4,505 3,197
New York Tax Free Income
Fund........................ 9/30 4,537 425 3,611 5,706 8,667 3,632 1,967
------- ------ ------- -------- -------- ------- -------
Trust Total............... $65,047 $4,066 $73,788 $111,796 $163,714 $40,980 $35,457
======= ====== ======= ======== ======== ======= =======
<CAPTION>
TRUSTEES FORMER TRUSTEES
------------------- ----------------------------------------------
FUND NAME WHALEN YOVOVICH CARUSO GAUGHAN MILLER REES ROBINSON
--------- ------ -------- ------ ------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... $ 23,050 $ 2,479 $1,296 $1,064 $10,487 $ 0 $ 17,113
Tax Free High Income Fund..... 22,228 2,257 0 1,064 10,487 0 17,113
California Insured Tax Free
Fund........................ 19,692 1,260 0 1,064 10,487 0 17,113
Municipal Income Fund......... 27,189 2,076 2,778 1,306 14,169 7,077 22,359
Intermediate Term Municipal
Income Fund................. 19,249 1,080 0 1,064 10,487 0 17,113
Florida Insured Tax Free
Income Fund................. 15,409 1,105 0 496 6,656 0 12,280
New York Tax Free Income
Fund........................ 7,188 1,096 0 158 2,682 0 4,783
-------- ------- ------ ------ ------- ------ --------
Trust Total............... $134,005 $11,353 $4,074 $6,216 $65,455 $7,077 $107,874
======== ======= ====== ====== ======= ====== ========
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY YOVOVICH
- --------- -------- ------ ----- ------- ------ ------ ----- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 1995 1999 1995 1993 1984 1997 1995 1984 1999 1998
Tax Free High Income Fund.......... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
California Insured Tax Free Fund... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
Municipal Income Fund.............. 1995 1999 1995 1993 1990 1997 1995 1990 1999 1998
Intermediate Term Municipal Income
Fund............................. 1995 1999 1995 1993 1993 1997 1995 1993 1999 1998
Florida Insured Tax Free Income
Fund............................. 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
New York Tax Free Income Fund...... 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
</TABLE>
B-29
<PAGE> 345
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
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the cost of its day-to-day operations, including the compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), the charges and expenses of
legal counsel and independent accountants, distribution fees, service fees,
custodian fees, the costs of providing 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 Advisor
in the performance of its obligations and duties or by reason of reckless
disregard of its obligations and duties under the agreement.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive applicable expense
limitation in any jurisdiction in which the Fund's shares are qualified for
offer and 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 fiscal 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 year ended September 1999, the period ended September 30,
1998 and the fiscal year ended December 31, 1997, the Adviser received
approximately $6,729,700, $5,135,400 and $6,799,900, respectively, in advisory
fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund supplementary to those provided by the Custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. 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 costs based proportionally on their respective net assets
per fund.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Advisory Corp.
received approximately $310,000, $278,100 and $233,500, 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
B-30
<PAGE> 346
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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Van Kampen
Investments received approximately $26,600, $18,400 and $28,300, 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 a vote of a majority of the Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL AMOUNTS
UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Year Ended September 30, 1999........................ $ 876,462 $ 95,359
Fiscal Period Ended September 30, 1998...................... $ 836,106 $ 99,052
Fiscal Year Ended December 31, 1997......................... $1,239,728 $259,984
</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 DEALERS AS
AS % OF NET 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 the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are
B-31
<PAGE> 347
responsible for purchases of $1 million or more computed 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 contingent 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 or other
Van Kampen funds. 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.
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 the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
B-32
<PAGE> 348
Certain financial intermediaries may be prohibited by law from providing
certain underwriting or distribution services. If a financial intermediary 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 financial intermediary would result in any material adverse consequences
to the Fund.
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 or 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, 1999, there were $581,413 and $16,291 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 1.02% and 0.20% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plans 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 contingent 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 year ended September 30, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $3,011,673 or 0.24% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Class B
Share Plans were $673,532 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $503,849 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $169,683
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended September 30,
1999, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$78,779 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments:
B-33
<PAGE> 349
$37,082 for commissions and transaction fees paid to financial intermediaries in
respect of sales of Class C Shares of the Fund and $41,697 for fees paid to
financial intermediaries for servicing Class C shareholders and administering
the Class C Share Plans.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas
City, MO 64121-8256. 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 purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the
B-34
<PAGE> 350
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 & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("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 require 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 year ended September 30, 1999...................... $ 93,664 -- --
Fiscal period ended September 30, 1998.................... $ 90,152 -- --
Fiscal year ended December 31, 1997....................... $211,776 $0 $0
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions........... 0 -- --
Value of brokerage transactions with affiliate to total
transactions........................................... 0 -- --
</TABLE>
During the fiscal year ended September 30, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
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
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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 (as defined in the prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends 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
gain dividends and systematic purchases or redemptions. Additional shares may be
purchased at any time 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, 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
the fee for replacing the lost certificate equal to no more than 1.50% 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 Money Purchase and Profit Sharing
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
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds 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 redemption proceeds 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 or by calling (800) 341-2911 ((800) 421-2833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, 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 capital gain dividends 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.
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<PAGE> 352
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder 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 payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for monthly, quarterly,
semiannual 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 systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawal plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions 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 upon 30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made by a shareholder during a rolling
365-day period. If exchange privileges are suspended, subsequent exchange
requests for redemption out of that Fund during the stated period will not be
processed. Exchange privileges will be restored when the account history shows
fewer than eight exchanges in the rolling 365-day period.
This policy change does not apply to money market funds, systematic
exchange plans or employer-sponsored retirement plans.
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 contingent deferred sales
charge 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 made 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.
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<PAGE> 353
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(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) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines 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 and gains or loss for federal income tax purposes upon
the sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares--Class A Shares,"
there is no sales charge payable on Class A Shares at the time of purchase on
investments of $1 million or more, but a contingent deferred sales charge
("CDSC-Class A") may be imposed on certain redemptions made within one year of
purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholder's account not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). 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 Internal Revenue Code of 1986, as
amended (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
B-38
<PAGE> 354
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 CDSC-Class B and C 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), the financial hardship of the
employee pursuant to United States Treasury Regulations Section 401(k)-1(d)(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 THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal 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 sent 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 systematic withdrawal plan. The CDSC-Class B and
C will be waived on redemptions made under the systematic withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal 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 systematic withdrawal plan and the ability to offer the
systematic withdrawal 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 value of 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
B-39
<PAGE> 355
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 OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund 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 investment company taxable income (generally including taxable
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss), and at
least 90% of its net tax-exempt interest, and meets certain other requirements,
it will not be required to pay federal income taxes on any income it distributes
to shareholders. The Fund intends to distribute at least the minimum amount of
investment company taxable income and net tax-exempt interest necessary to
satisfy the 90% distribution requirement. The Fund will not be subject to
federal income tax on any net capital gain distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
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<PAGE> 356
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 TO SHAREHOLDERS
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its income will constitute
tax-exempt interest, a significant portion may consist of investment company
taxable income (generally taxable income and net short-term capital gain).
Distributions of the Fund's investment company taxable income are taxable to
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<PAGE> 357
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 gain as 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. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction. 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) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers investing in this Fund 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. The
maximum long-term capital gains rate for corporations is 35%.
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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.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder the amount
of dividends paid to such shareholder and the amount, if any, of tax withheld
with respect to such dividends.
GENERAL
The federal, income tax discussion set forth above is for general
information only. Prospective investors and shareholders should consult their
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge 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 capital gain dividends
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-43
<PAGE> 359
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge imposed at the time of redemption were reflected, it would reduce the
performance quoted.
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. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
of the class of shares 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 and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings and largest holdings and other Fund
information, 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 whether shareholders purchased their fund shares
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 may 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
B-44
<PAGE> 360
performance of mutual funds with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking or rating 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
at 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 Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
September 30, 1999 was -8.35%; (ii) the five-year period ended September 30,
1999 was 4.68% and (iii) the ten-year period ended September 30, 1999 was 6.13%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1999 was 4.41%. The Fund's current distribution rate with
respect to the Class A Shares for the month ending September 30, 1999 was 4.68%.
The Fund's taxable equivalent distribution rate with respect to Class A Shares
for the month ending September 30, 1999 was 7.31%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to September 30, 1999 was 212.38%.
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, 1999 was 227.90%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -8.22%; (ii) the five-year period ended
September 30, 1999 was 4.66% and (iii) the approximately six-year, five month
period from May 1, 1993 (the commencement of distribution for Class B Shares of
the Fund) through September 30, 1999 was 3.93%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1999 was 3.85%. The Fund's current distribution rate with
respect to the Class B Shares for the month ending
B-45
<PAGE> 361
September 30, 1999 was 4.12%. The Fund's taxable equivalent distribution rate
with respect to Class B Shares for the month ending September 30, 1999 was
6.44%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
the commencement of distribution for Class B Shares of the Fund to September 30,
1999 was 28.07%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
the commencement of distribution for Class B Shares of the Fund to September 30,
1999 was 28.07%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -5.45%; (ii) the five-year period ended
September 30, 1999 was 4.90% and (iii) the approximately six-year, one month
period from August 13, 1993 (the commencement of distribution for Class C Shares
of the Fund) to September 30, 1999 was 3.47%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1999 was 3.83%. The Fund's current distribution rate with
respect to the Class C Shares for the month ending September 30, 1999 was 4.12%.
The Fund's taxable equivalent distribution rate with respect to Class C Shares
for the month ending September 30, 1999 was 6.44%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
the commencement of distribution for Class C Shares of the Fund to September 30,
1999 was 23.28%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
the commencement of distribution for Class C Shares of the Fund to September 30,
1999 was 23.28%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
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. The Custodian also provides
accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual 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-46
<PAGE> 362
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Insured Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Insured Tax Free Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1999, the related statement of operations for
the year then ended, the statement of changes in net assets for the year then
ended, for the nine-month period ended September 30, 1998, and for the year
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, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Insured Tax Free Income Fund as of September 30, 1999, the results of its
operations for the year then ended, the changes in its net assets for the year
then ended, for the nine-month period ended September 30, 1998, and for the year
ended December 31, 1997, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG LLP SIG
Chicago, Illinois
November 5, 1999
F-1
<PAGE> 363
PORTFOLIO OF INVESTMENTS
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 98.7%
ALABAMA 2.5%
$ 2,250 Alabama St Brd Edl Rev Shelton St
Cmnty College (MBIA Insd)........... 6.000% 10/01/14 $ 2,336,490
1,955 Alabama Wtr Pollutn Ctl Auth
Revolving Fund Ln Ser A (AMBAC
Insd)............................... 6.750 08/15/17 2,102,993
1,900 Birmingham-Carraway, AL Methodist
Hlth Sys Ser A (Connie Lee Insd).... 5.875 08/15/25 1,870,056
6,000 Jefferson Cnty, AL Swr Rev Cap Impt
Ser A (FGIC Insd)................... 5.000 02/01/33 5,173,380
2,000 Lauderdale Cnty & Florence AL
Hlthcare Auth Rev Eliza Coffee Mem
Hosp Rfdg (MBIA Insd)............... 5.750 07/01/19 2,116,000
5,000 Montgomery, AL BMC Spl Care Fac Fin
Auth Rev Baptist Hlth Ser B (MBIA
Insd)............................... 5.000 11/15/29 4,303,650
5,500 Morgan Cnty Decatur, AL Hlthcare
Auth Hosp Rev Decatur Genl Hosp Rfdg
(Connie Lee Insd)................... 6.250 03/01/13 5,785,450
2,400 Muscle Shoals, AL Util Brd Wtr & Swr
Rev (FSA Insd)...................... 6.500 04/01/16 2,552,448
3,000 Orange Beach, AL Wtr Swr & Fire
Protection Auth Rev (FSA Insd)...... 5.000 05/15/23 2,666,760
1,400 West Morgan East Lawrence Wtr Auth
AL Wtr Rev (FGIC Insd).............. 5.625 08/15/21 1,375,710
1,000 West Morgan East Lawrence Wtr Auth
AL Wtr Rev (FGIC Insd).............. 5.625 08/15/25 975,970
--------------
31,258,907
--------------
ALASKA 0.4%
5,000 Alaska St Hsg Fin Corp Genl Mtg Ser
A (MBIA Insd)....................... 6.000 06/01/49 4,860,200
--------------
ARIZONA 1.6%
11,000 Arizona St Ctfs Partn Ser B Rfdg
(AMBAC Insd)........................ 6.250 09/01/10 11,629,970
2,250 Mesa, AZ Indl Dev Auth Rev Discovery
Hlth Sys Ser A (MBIA Insd).......... 5.625 01/01/29 2,183,850
1,945 Pima Cnty, AZ Indl Dev Auth Indl Rev
Lease Oblig Irvington Proj Tucson
Ser A Rfdg (FSA Insd)............... 7.250 07/15/10 2,101,475
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 364
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ARIZONA (CONTINUED)
$ 1,875 Scottsdale, AZ Indl Dev Hosp
Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)........................ 6.000% 09/01/12 $ 1,932,112
1,750 Scottsdale, AZ Indl Dev Hosp
Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)........................ 6.125 09/01/17 1,774,553
--------------
19,621,960
--------------
CALIFORNIA 15.6%
4,060 Alameda Corridor Tran Auth CA Rev
Cap Apprec Ser 1999 A (MBIA Insd)... * 10/01/33 550,414
9,605 Anaheim, CA Pub Fin Auth Lease Rev
Cap Apprec Sub Pub Impts Proj Ser C
(FSA Insd).......................... * 09/01/36 1,088,823
4,290 Antioch Area, CA Pub Fac Fin Agy
Cmnty Fac Dist No 1989 (FGIC
Insd)............................... 5.300 08/01/15 4,242,124
2,835 Bay Area Govt Assn CA Rev Tax Alloc
CA Redev Agy Pool Rev Ser A (FSA
Insd)............................... 6.000 12/15/14 2,956,650
5,000 Beverly Hills, CA Pub Fin Auth Lease
Rev Ser A (MBIA Insd)............... 5.650 06/01/15 5,057,400
3,345 California Pub Cap Impt Fin Auth Rev
Pooled Proj Ser B (BIGI Insd)....... 8.100 03/01/18 3,406,280
9,000 California St (MBIA Insd)........... 5.000 08/01/24 8,107,110
10,000 California St Pub Wks Brd Lease Rev
Dept of Corrections CA St Prison D
Susanville (MBIA Insd).............. 5.375 06/01/18 9,780,300
16,770 Capistrano, CA Uni Pub Fin Auth Spl
Tax Rev First Lien Ser A Rfdg (AMBAC
Insd)............................... 5.700 09/01/16 17,039,662
2,830 Carlsbad, CA Uni Sch Dist (FGIC
Insd) (a)........................... * 05/01/22 761,921
3,000 Chino, CA Ctfs Partn Redev Agy (MBIA
Insd)............................... 6.200 09/01/18 3,177,660
220 Concord, CA Redev Agy Tax Alloc Cent
Concord Redev Proj Ser 3 (BIGI
Insd)............................... 8.000 07/01/18 224,334
805 Corona Norco, CA Uni Sch Dist Lease
Rev Partn Insd Land Acquis Ser A
(FSA Insd).......................... 6.000 04/15/19 820,867
1,250 Cucamonga, CA Cnty Wtr Dist Ctfs
Partn Fac Refin (FGIC Insd)......... 6.300 09/01/12 1,307,737
425 Earlimart, CA Elem Sch Dist Ser 1
(AMBAC Insd)........................ 6.700 08/01/21 483,561
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 365
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 5,675 Escondido, CA Jt Pwrs Fin Auth Lease
Rev Cap Apprec Cent for the Arts
Rfdg (AMBAC Insd)................... * 09/01/17 $ 1,880,922
1,500 Folsom, CA Pub Fin Auth 1998 Wtr
Proj (FGIC Insd).................... 4.875% 11/01/18 1,357,905
7,440 Foothill/Eastern Tran Corridor Agy
CA Toll Rd Rev (MBIA Insd).......... 5.125 01/15/19 6,951,043
245 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd).................. 5.750 08/01/14 256,336
2,725 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd).................. * 08/01/18 925,683
240 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd).................. 5.750 08/01/18 247,390
265 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd).................. 5.750 08/01/19 272,107
370 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd).................. 5.800 02/01/21 380,749
320 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd).................. 5.800 08/01/22 328,790
475 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd).................. 5.800 02/01/23 487,559
370 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd).................. 5.800 02/01/24 379,487
6,500 Grossmont, CA Union High Sch Dist
Ctfs Partn (MBIA Insd).............. * 11/15/21 1,490,905
1,000 Intermodal Container Transfer Ser A
Rfdg (AMBAC Insd)................... 5.000 11/01/08 1,014,510
1,380 Intermodal Container Transfer Ser A
Rfdg (AMBAC Insd)................... 5.000 11/01/09 1,390,805
3,500 Los Angeles Cnty, CA Cap Asset Lease
Corp Leasehold Rev Rfdg (AMBAC
Insd)............................... 6.000 12/01/16 3,637,235
8,000 Los Angeles Cnty, CA Metro Tran Prop
A Second Tier Rfdg (MBIA Insd)...... 6.000 07/01/21 8,782,560
3,000 Los Angeles, CA Cmnty Redev Agy Tax
Alloc Bunker Hill Ser H Rfdg (FSA
Insd)............................... 6.500 12/01/14 3,254,460
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 366
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 5,420 Manteca, CA Redev Agy Tax Alloc
Redev Proj No 1 Ser A Rfdg (MBIA
Insd)............................... 6.700% 10/01/21 $ 5,785,471
1,290 Martinez, CA Uni Sch Dist Gtd Ctfs
Elig Rfdg (FSA Insd)................ 6.000 08/01/09 1,338,259
2,745 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev (AMBAC Insd)........... * 09/01/20 773,870
2,880 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev (AMBAC Insd)........... * 09/01/21 760,982
2,260 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev (AMBAC Insd)........... * 09/01/29 363,159
2,000 MSR Pub Pwr Agy CA San Juan Proj Rev
Ser F Rfdg (AMBAC Insd)............. 6.000 07/01/20 2,036,220
13,610 Norco, CA Redev Agy Tax Alloc Norco
Redev Proj Area No 1 Rfdg (MBIA
Insd)............................... 6.250 03/01/19 14,286,553
1,500 North City West, CA Sch Fac Fin Auth
Spl Tax Ser B Rfdg (FSA Insd)....... 6.000 09/01/19 1,516,935
2,860 Orange Cnty, CA Ctfs Partn Juvenile
Justice Cent Fac Rfdg (AMBAC
Insd)............................... 6.000 06/01/17 2,958,927
1,130 Palmdale, CA Civic Auth Rev Merged
Redev Proj Areas Ser A (MBIA
Insd)............................... 6.000 09/01/15 1,170,307
2,160 Paramount, CA Redev Agy Tax Alloc
(MBIA Insd)......................... 6.250 08/01/11 2,319,365
2,295 Paramount, CA Redev Agy Tax Alloc
(MBIA Insd)......................... 6.250 08/01/12 2,446,332
2,435 Paramount, CA Redev Agy Tax Alloc
(MBIA Insd)......................... 6.250 08/01/13 2,595,564
2,585 Paramount, CA Redev Agy Tax Alloc
(MBIA Insd)......................... 6.250 08/01/14 2,755,455
2,750 Paramount, CA Redev Agy Tax Alloc
(MBIA Insd)......................... 6.250 08/01/15 2,931,335
2,000 Perris, CA Pub Fin Auth Loc Agy Rev
Parity Ser F (FSA Insd)............. 5.850 09/01/24 2,022,720
1,400 Reedley, CA Pub Fin Auth Lease Rev
Wastewtr Treatment Plant Proj (AMBAC
Insd)............................... 6.050 05/01/15 1,436,162
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 367
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 600 Roseville, CA City Sch Dist Ctfs
Partn Fin Proj (FSA Insd)........... 4.875% 09/01/23 $ 529,008
3,900 Sacramento, CA Muni Util Dist Elec
Rev Ser A Rfdg (MBIA Insd).......... 5.750 08/15/13 3,949,569
13,800 San Bernardino Cnty, CA Ctfs Partn
Ser B (Embedded Swap) (MBIA Insd)... 6.900 07/01/16 13,794,480
8,535 San Joaquin Hills, CA Tran Corridor
Agy Toll Rd Rev (MBIA Insd)......... * 01/15/34 1,129,693
15,000 San Joaquin Hills, CA Tran Corridor
Agy Toll Rd Rev (MBIA Insd)......... * 01/15/35 1,871,100
1,000 San Jose, CA Fin Auth Rev Convention
Cent Proj Ser C Rfdg (FSA Insd)..... 6.300 09/01/09 1,058,610
1,000 Santa Rosa, CA Wastewtr Svc Fac Dist
Rfdg & Impt (AMBAC Insd)............ 6.200 07/02/09 1,063,370
2,000 Santa Rosa, CA Wtr Rev Ser B Rfdg
(FGIC Insd)......................... 6.200 09/01/09 2,120,900
1,635 Saratoga, CA Union Sch Dist Cap
Apprec Ser B (MBIA Insd)............ * 03/01/24 390,111
2,510 Solano Cnty, CA Ctfs Partn Solano
Park Hosp Proj (FSA Insd)........... 5.750 08/01/14 2,699,379
12,600 Southern CA Pub Pwr Auth
Transmission Proj Rev (FSA Insd)
(b)................................. 6.000 07/01/12 13,243,860
3,370 Stockton, CA Pub Fin Auth Rev Ser A
Rfdg (FSA Insd)..................... 5.875 09/02/16 3,448,656
2,500 Temecula Vly, CA Uni Sch Dist Ctfs
Partn Rfdg (FSA Insd)............... 6.000 09/01/25 2,528,225
1,000 Temecula Vly, CA Uni Sch Dist Ser B
Rfdg (FGIC Insd).................... 6.000 09/01/12 1,039,780
2,460 Torrance, CA Hosp Rev Torrance Mem
Hosp Rfdg (MBIA Insd)............... 6.750 01/01/12 2,475,375
3,845 Vista, CA Uni Sch Dist Ctfs Partn
Ser A Rfdg (FSA Insd)............... * 11/01/17 1,325,064
2,000 William S Hart CA Jt Sch Fin Auth
Spl Tax Rev Cmnty Fac Rfdg (FSA
Insd)............................... 6.500 09/01/14 2,179,160
--------------
194,387,245
--------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 368
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COLORADO 2.8%
$ 2,365 Arvada, CO Sales & Use Tax Rev (FGIC
Insd)............................... 4.750% 12/01/18 $ 2,078,528
17,750 Denver, CO City & Cnty Arpt Rev Ser
A (MBIA Insd)....................... 5.700 11/15/25 17,452,687
3,625 Denver, CO City & Cnty Arpt Rev Ser
B (FSA Insd)........................ 5.000 11/15/25 3,208,197
5,500 Denver, CO City & Cnty Arpt Rev Ser
D Rfdg (MBIA Insd).................. 5.500 11/15/25 5,282,585
10 Jefferson Cnty, CO Single Family Mtg
Rev Ser A Rfdg (MBIA Insd).......... 8.875 10/01/13 10,463
1,000 Metropolitan Football Stadium Dist
CO Sales Tax Rev Ser B (MBIA
Insd)............................... * 01/01/06 734,330
2,050 Thornton, CO Rfdg (FGIC Insd)....... * 12/01/11 1,070,592
1,100 Thornton, CO Rfdg (FGIC Insd)....... * 12/01/15 440,539
1,000 Westminster, CO Ctfs Partn (MBIA
Insd)............................... 5.500 09/01/15 992,100
1,000 Westminster, CO Ctfs Partn (MBIA
Insd)............................... 5.625 09/01/19 982,330
2,000 Westminster, CO Wtr & Wastewtr Util
Enterprise Rev (AMBAC Insd)......... 6.250 12/01/14 2,123,220
--------------
34,375,571
--------------
DISTRICT OF COLUMBIA 0.4%
4,000 District of Columbia Rev Catholic
Univ Amer Proj (AMBAC Insd)......... 5.625 10/01/29 3,848,840
1,315 District of Columbia Rev Gonzaga
College High Sch (FSA Insd)......... 5.375 07/01/19 1,241,544
600 District of Columbia Rev Gonzaga
College High Sch (FSA Insd)......... 5.375 07/01/29 556,410
--------------
5,646,794
--------------
FLORIDA 5.6%
1,010 Dade Cnty, FL Seaport Rev Ser E Rfdg
(MBIA Insd) (b)..................... 8.000 10/01/03 1,140,340
690 Dade Cnty, FL Seaport Rev Ser E Rfdg
(MBIA Insd)......................... 8.000 10/01/04 795,280
1,180 Dade Cnty, FL Seaport Rev Ser E Rfdg
(MBIA Insd)......................... 8.000 10/01/05 1,382,630
1,275 Dade Cnty, FL Seaport Rev Ser E Rfdg
(MBIA Insd)......................... 8.000 10/01/06 1,516,485
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 369
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$ 1,375 Dade Cnty, FL Seaport Rev Ser E Rfdg
(MBIA Insd)......................... 8.000% 10/01/07 $ 1,655,912
2,095 Dade Cnty, FL Util Pub Impt Rfdg
(FGIC Insd) (b)..................... 12.000 10/01/04 2,775,854
140 Duval Cnty, FL Hsg Fin Auth Single
Family Mtg Rev Ser C (FGIC Insd).... 7.650 09/01/10 145,568
575 Duval Cnty, FL Hsg Fin Auth Single
Family Mtg Rev Ser C (FGIC Insd).... 7.700 09/01/24 597,546
2,000 Florida St Brd of Edl Cap Outlay Pub
Edl Ser B Rfdg (MBIA Insd).......... 4.500 06/01/24 1,621,660
1,410 Florida St Dept Corrections Ctfs
Partn Okeechobee Correctional (AMBAC
Insd)............................... 6.250 03/01/15 1,483,715
2,000 Indian River Cnty, FL Hosp Rev Rfdg
(FSA Insd).......................... 6.100 10/01/18 2,026,920
1,000 Key West, FL Util Brd Elec Rev Ser D
(AMBAC Insd)........................ * 10/01/13 462,080
4,000 Lee Cnty, FL Hosp Brd Dir Hosp Rev
(Inverse Fltg) (MBIA Insd).......... 9.671 04/01/20 4,405,000
10,000 Miami Dade Cnty, FL Solid Waste Sys
Rev (AMBAC Insd).................... 4.750 10/01/18 8,732,700
10,020 Miami Dade Cnty, FL Spl Oblig Ser B
(MBIA Insd)......................... 5.000 10/01/37 8,692,951
1,500 Miami Dade Cnty, FL Wtr & Swr Rev
Ser A (FGIC Insd)................... 5.000 10/01/29 1,325,490
6,000 Orange Cnty, FL Hlth Fac Auth Rev
(Inverse Fltg) (MBIA Insd).......... 8.746 10/29/21 6,705,000
2,000 Palm Beach Cnty, FL Sch Brd Ctfs
Partn Ser A (Prerefunded @ 08/01/04)
(AMBAC Insd)........................ 6.375 08/01/15 2,181,240
3,725 Santa Rosa Bay Brdg Auth FL Rev Cap
Apprec (MBIA Insd).................. * 07/01/18 1,256,480
5,500 Tallahassee, FL Energy Sys Rev Ser B
(FSA Insd).......................... 5.000 10/01/28 4,868,325
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 370
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$10,000 Tallahassee, FL Hlth Fac Rev
Tallahassee Mem Regl Med Ser A Rfdg
(MBIA Insd) (b)..................... 6.625% 12/01/13 $ 10,882,000
5,235 Volusia Cnty, FL Edl Fac Auth Rev
Edl Facs Embry Riddle Ser B Rfdg
(AMBAC Insd)........................ 5.250 10/15/19 4,946,604
--------------
69,599,780
--------------
GEORGIA 3.0%
1,750 Atlanta, GA Ctfs Partn Atlanta
Pretrial Detention Cent (MBIA
Insd)............................... 6.250 12/01/17 1,880,410
6,500 Georgia Muni Elec Auth Pwr Rev Genl
Ser B (BIGI Insd)................... * 01/01/07 4,533,555
4,750 Georgia Muni Elec Auth Pwr Rev Genl
Ser B (BIGI Insd)................... * 01/01/08 3,127,115
15,550 Georgia Muni Elec Auth Pwr Rev Ser Y
(AMBAC Insd) (b).................... 6.400 01/01/13 17,014,499
10,000 Georgia Muni Elec Auth Pwr Rev Ser Y
(MBIA Insd) (b)..................... 6.500 01/01/17 11,039,100
--------------
37,594,679
--------------
HAWAII 1.8%
12,785 Hawaii St Arpt Sys Rev Ser 1993 Rfdg
(MBIA Insd) (b)..................... 6.400 07/01/08 13,756,788
10,250 Honolulu, HI City & Cnty Wastewtr
Sys Rev (FGIC Insd)................. 4.500 07/01/28 8,148,955
--------------
21,905,743
--------------
ILLINOIS 20.3%
1,000 Berwyn, IL (MBIA Insd).............. 7.000 11/15/10 1,050,130
2,215 Bolingbrook, IL Cap Apprec Ser C
Rfdg (MBIA Insd).................... * 01/01/19 719,033
2,595 Bolingbrook, IL Cap Apprec Ser C
Rfdg (MBIA Insd).................... * 01/01/20 793,006
1,700 Champaign Cnty, IL Cmnty Unit Ser C
(FGIC Insd)......................... * 01/01/14 739,143
1,695 Champaign Cnty, IL Cmnty Unit Ser C
(FGIC Insd)......................... * 01/01/15 690,001
5,000 Chicago, IL (FGIC Insd)............. 5.500 01/01/21 4,791,150
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 371
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$10,000 Chicago, IL Brd of Ed Cap Apprec Sch
Reform B 1 (FGIC Insd).............. * 12/01/27 $ 1,838,300
8,000 Chicago, IL Brd of Ed Cap Apprec Sch
Reform Ser A (FGIC Insd)............ * 12/01/29 1,302,480
10,000 Chicago, IL Brd of Ed Cap Apprec Sch
Reform Ser A (FGIC Insd)............ * 12/01/30 1,532,100
1,400 Chicago, IL Brd of Ed Chicago Sch
Reform (AMBAC Insd)................. 5.750% 12/01/20 1,387,190
16,000 Chicago, IL Brd of Ed Chicago Sch
Reform (AMBAC Insd)................. 5.750 12/01/27 15,681,600
25,725 Chicago, IL Brd of Ed Chicago Sch
Reform (Prerefunded @ 12/01/06)
(MBIA Insd)......................... 6.000 12/01/26 28,066,232
2,000 Chicago, IL Lakefront Millenium Pkg
Fac (MBIA Insd)..................... * 01/01/25 1,338,000
2,000 Chicago, IL Lakefront Millenium Pkg
Fac (MBIA Insd)..................... * 01/01/29 1,326,540
25,050 Chicago, IL Proj Rfdg (FGIC Insd)... 5.250 01/01/28 22,646,953
2,720 Chicago, IL Pub Bldg Comm Bldg Rev
Chicago Transit Auth (AMBAC Insd)... 6.600 01/01/15 2,917,962
3,480 Chicago, IL Pub Bldg Comm Bldg Rev
Ser A (MBIA Insd)................... * 01/01/06 2,564,830
3,105 Chicago, IL Pub Bldg Comm Bldg Rev
Ser A (MBIA Insd)................... * 01/01/07 2,162,570
3,150 Chicago, IL Skyway Toll Brdg Rev
(MBIA Insd)......................... 5.500 01/01/23 3,004,754
2,000 Chicago, IL Wastewtr Transmission
Rev (FGIC Insd)..................... 5.125 01/01/25 1,779,620
7,000 Cook Cnty, IL Cap Impt Ser A (FGIC
Insd)............................... 5.000 11/15/28 6,084,680
1,000 Cook Cnty, IL Cmnty College Dist No
508 Chicago Ctfs Partn (FGIC Insd)
(b)................................. 8.400 01/01/01 1,050,340
5,550 Cook Cnty, IL Cmnty College Dist No
508 Chicago Ctfs Partn (FGIC
Insd)............................... 8.750 01/01/03 6,252,131
8,460 Cook Cnty, IL Cmnty College Dist No
508 Chicago Ctfs Partn (FGIC
Insd)............................... 8.750 01/01/04 9,783,482
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 372
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 2,460 Cook Cnty, IL Cmnty College Dist No
508 Chicago Ctfs Partn (FGIC
Insd)............................... 8.750% 01/01/05 $ 2,907,400
3,500 Cook Cnty, IL Cmnty College Dist No
508 Chicago Ctfs Partn (FGIC
Insd)............................... 8.750 01/01/07 4,294,570
1,280 Cook Cnty, IL Cmnty High Sch Dist No
233 Homewood & Flossmor (AMBAC
Insd)............................... * 12/01/05 948,096
8,280 Cook Cnty, IL Cnty Juvenile
Detention Ser A (AMBAC Insd)........ * 11/01/08 5,216,566
1,505 Cook Cnty, IL Sch Dist No 100 Berwyn
South (FSA Insd).................... 8.200 12/01/14 1,913,984
1,775 Cook Cnty, IL Sch Dist No 100 Berwyn
South (FSA Insd).................... 8.100 12/01/16 2,270,562
850 Evanston, IL Residential Mtg Rev
(AMBAC Insd)........................ 6.375 01/01/09 875,279
1,380 Grundy Cnty, IL Sch Dist No 054
Morris Ser A (AMBAC Insd)........... 5.500 12/01/09 1,424,933
1,455 Grundy Cnty, IL Sch Dist No 054
Morris Ser A (AMBAC Insd)........... 5.500 12/01/10 1,493,383
1,800 Grundy Cnty, IL Sch Dist No 054
Morris Ser A (AMBAC Insd)........... 5.350 12/01/14 1,760,202
1,900 Grundy Cnty, IL Sch Dist No 054
Morris Ser A (AMBAC Insd)........... 5.400 12/01/15 1,854,837
10,000 Illinois Dev Fin Auth Pollutn Ctl
Rev Comwlth Edison Co Proj Ser D
Rfdg (AMBAC Insd) (b)............... 6.750 03/01/15 10,907,000
35,000 Illinois Dev Fin Auth Pollutn Ctl
Rev IL Pwr Co Proj Ser A First Mtg
Rfdg (MBIA Insd) (b)................ 7.400 12/01/24 39,565,400
2,000 Illinois Dev Fin Auth Rev Sch Dist
Pgm Rockford Sch 205 (FSA Insd)..... 6.650 02/01/11 2,234,760
5,025 Illinois Dev Fin Auth Rev Sch Dist
Pgm Rockford Sch 205 Rfdg (FSA
Insd)............................... 6.650 02/01/12 5,446,698
5,000 Illinois Hlth Fac Auth Rev
Children's Mem Hosp Ser A (AMBAC
Insd)............................... 5.625 08/15/19 4,842,800
5,000 Illinois Hlth Fac Auth Rev
Children's Mem Hosp Ser A (AMBAC
Insd)............................... 5.750 08/15/25 4,858,750
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 373
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 924 Illinois Hlth Fac Auth Rev Cmnty
Prov Pooled Pgm Ser B (MBIA Insd)... 7.900% 08/15/03 $ 927,021
220 Illinois Hlth Fac Auth Rev Cmnty
Prov Pooled Pgm Ser B Rfdg (MBIA
Insd)............................... 7.900 08/15/03 241,912
5,000 Illinois Hlth Fac Auth Rev Hosp
Sisters Svcs (Inverse Fltg) (MBIA
Insd)............................... 9.617 06/19/15 5,625,000
5,000 Illinois Hlth Fac Auth Rev Methodist
Hlth Proj (Inverse Fltg)
(Prerefunded @ 05/08/01) (AMBAC
Insd)............................... 9.882 05/18/21 5,568,750
3,400 Illinois Hlth Fac Auth Rev Rush
Presbyterian Saint Luke Hosp
(Inverse Fltg) (Prerefunded @
11/01/01) (MBIA Insd)............... 9.767 10/01/24 3,837,750
3,000 Illinois Hlth Fac Auth Rev Sarah
Bush Lincoln Hlth Rfdg (AMBAC
Insd)............................... 6.000 01/01/27 2,977,770
1,250 Metropolitan Pier & Exposition Auth
IL Dedicated St Tax Rev (FGIC
Insd)............................... 5.375 12/15/18 1,193,700
3,000 Metropolitan Pier & Exposition Auth
IL Dedicated St Tax Rev (FGIC
Insd)............................... 5.500 12/15/24 2,852,700
4,000 Metropolitan Pier & Exposition Auth
IL Dedicated St Tax Rev (FGIC
Insd)............................... 5.250 12/15/28 3,631,880
6,110 Rosemont, IL Tax Increment 3 (FGIC
Insd)............................... * 12/01/06 4,285,187
3,000 Rosemont, IL Tax Increment 3 (FGIC
Insd)............................... * 12/01/07 1,986,540
1,185 Saint Clair Cnty, IL Ctfs Partn
(MBIA Insd)......................... 8.000 12/01/04 1,365,736
1,285 Saint Clair Cnty, IL Ctfs Partn
(MBIA Insd)......................... 8.000 12/01/05 1,503,322
4,000 Southern Illinois Univ Rev Cap
Apprec Hsg & Aux Ser A (MBIA
Insd)............................... * 04/01/19 1,260,400
2,000 Southern Illinois Univ Rev Cap
Apprec Hsg & Aux Ser A (MBIA
Insd)............................... * 04/01/20 592,800
2,500 Southern Illinois Univ Rev Cap
Apprec Hsg & Aux Ser A (MBIA
Insd)............................... * 04/01/23 614,300
2,000 Southern Illinois Univ Rev Cap
Apprec Hsg & Aux Ser A (MBIA
Insd)............................... * 04/01/26 406,840
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 374
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 1,500 Will Cnty, IL Cmnty Unit Sch Dist No
201 Ser C (FSA Insd)................ * 10/01/13 $ 683,745
1,000 Will Cnty, IL Cmnty Unit Sch Dist No
201 Ser C (FSA Insd)................ * 10/01/14 425,960
--------------
252,298,760
--------------
INDIANA 0.7%
2,000 Indiana Bond Bank Spl Pgm Ser A
(AMBAC Insd)........................ 9.750% 08/01/09 2,528,600
5,000 Indiana Hlth Fac Fin Auth Hosp Rev
Cmnty Hosps Proj Rfdg & Impt (MBIA
Insd)............................... 6.400 05/01/12 5,272,800
1,000 Marion Cnty, IN Convention & Rectl
Fac Auth Excise Tax Rev Lease Rental
Ser A (AMBAC Insd).................. 7.000 06/01/21 1,057,330
--------------
8,858,730
--------------
KANSAS 2.0%
18,750 Burlington, KS Pollutn Ctl Rev KS
Gas & Elec Co Proj Rfdg (MBIA
Insd) (b)........................... 7.000 06/01/31 19,793,625
1,400 Kansas St Dev Fin Auth Rev Ltd Tax
Dept Comm Hsg Rfdg (FSA Insd)....... 4.000 06/01/06 1,330,126
1,000 Kansas St Dev Fin Auth Rev Ltd Tax
Dept Comm Hsg Rfdg (FSA Insd)....... 4.200 06/01/07 953,600
2,880 Saline Cnty, KS Uni Sch Dist No 305
Salina (FSA Insd)................... 4.250 09/01/08 2,719,037
--------------
24,796,388
--------------
KENTUCKY 0.0%
20 Kentucky Cntys Single Family Mtg
Presbyterian Homes Ser A Rfdg (MBIA
Insd)............................... 8.625 09/01/15 20,041
--------------
LOUISIANA 1.8%
4,065 Calcasieu Parish, LA Mem Hosp Svcs
Dist Hosp Rev Lake Charles Mem Hosp
Proj Ser A (Connie Lee Insd)........ 6.375 12/01/12 4,436,744
5,530 Calcasieu Parish, LA Mem Hosp Svcs
Dist Hosp Rev Lake Charles Mem Hosp
Proj Ser A (Connie Lee Insd)........ 6.500 12/01/18 6,044,732
310 Louisiana Pub Fac Auth Rev Med Cent
LA at New Orleans Proj (Connie Lee
Insd)............................... 6.250 10/15/10 322,394
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 375
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
LOUISIANA (CONTINUED)
$ 5,000 Louisiana Pub Fac Auth Rev Tulane
Univ of LA (AMBAC Insd)............. 6.050% 10/01/25 $ 5,067,450
10,000 New Orleans, LA Home Mtg Auth Single
Family Mtg Rev 1985 Ser A (MBIA
Insd)............................... * 09/15/16 1,592,000
5,000 Rapides Parish, LA Indl Dev Brd Inc
Pollutn Ctl Rev (AMBAC Insd)........ 5.875 09/01/29 4,978,750
--------------
22,442,070
--------------
MAINE 0.2%
35 Maine Hlth & Higher Edl Fac Auth Rev
Ser B (FSA Insd).................... 7.100 07/01/14 39,414
1,715 Maine Hlth & Higher Edl Fac Auth Rev
Ser B (Prerefunded @ 07/01/04) (FSA
Insd)............................... 7.100 07/01/14 1,927,317
--------------
1,966,731
--------------
MASSACHUSETTS 1.2%
1,700 Massachusetts St Hlth & Edl Fac Auth
Rev Mt Auburn Hosp Ser B1 (MBIA
Insd)............................... 6.250 08/15/14 1,803,462
14,100 Massachusetts St Wtr Res Auth
Houston Ind Inc Proj Ser A (FSA
Insd)............................... 4.750 08/01/37 11,367,561
2,250 Massachusetts St Wtr Res Auth Genl
Ser A (Prerefunded @ 11/01/06) (FGIC
Insd)............................... 5.500 11/01/21 2,374,200
--------------
15,545,223
--------------
MICHIGAN 3.6%
2,325 Bay City, MI (AMBAC Insd)........... * 06/01/15 957,877
1,000 Bay City, MI (AMBAC Insd)........... * 06/01/16 386,180
3,750 Big Rapids, MI Pub Schs Dist Rfdg
(FSA Insd).......................... 4.750 05/01/25 3,155,737
3,250 Central MI Univ Rev (FGIC Insd)..... 5.625 10/01/22 3,447,405
1,100 Central MI Univ Rev (FGIC Insd)..... 5.500 10/01/26 1,158,223
9,270 Detroit, MI City Sch Dist Ser B
(FGIC Insd)......................... 5.000 05/01/21 8,305,364
11,100 Detroit, MI City Sch Dist Ser B
(FGIC Insd)......................... 4.750 05/01/28 9,246,633
3,000 Hazel Park, MI Bldg Auth Ice Arena
(AMBAC Insd)........................ 4.700 04/01/24 2,515,830
21,000 Livonia, MI Pub Sch Dist Ser II
(FGIC Insd)......................... * 05/01/21 5,415,480
5,000 Michigan St Hosp Fin Auth Rev Hosp
Sparrow Oblig Group (MBIA Insd)..... 6.000 11/15/36 4,995,900
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 376
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MICHIGAN (CONTINUED)
$ 2,000 Michigan St Hsg Dev Auth Rental Hsg
Rev Ser B (AMBAC Insd).............. 4.850% 04/01/04 $ 1,998,400
5,000 Mount Clemens, MI Cmnty Sch Dist Cap
Apprec (Prerefunded @ 05/01/07)
(MBIA Insd)......................... * 05/01/17 1,731,900
2,500 Plymouth Canton, MI Cmnty Sch Dist
(FSA Insd).......................... 4.750 05/01/23 2,123,550
--------------
45,438,479
--------------
MINNESOTA 0.6%
1,000 Brainerd, MN Rev Evangelical
Lutheran Ser B Rfdg (FSA Insd)...... 6.650 03/01/17 1,060,960
5,600 Minneapolis-St Paul, MN Hsg & Redev
Auth Hlthcare Sys Rev Hlth One Ser A
(MBIA Insd)......................... 7.400 08/15/11 5,881,176
--------------
6,942,136
--------------
MISSISSIPPI 0.1%
1,000 Harrison Cnty, MS Wastewtr Mgmt Dist
Rev Wastewtr Treatment Fac Ser A
Rfdg (FGIC Insd).................... 8.500 02/01/13 1,287,980
--------------
MISSOURI 0.5%
640 Green Cnty, MO Single Family Mtg Rev
(AMBAC Insd)........................ * 12/01/16 118,663
4,585 Missouri St Hlth & Edl Fac Auth
(MBIA Insd)......................... 6.250 06/01/16 4,698,937
125 Saint Louis Cnty, MO Single Family
Mtg Rev (AMBAC Insd)................ 9.250 10/01/16 127,606
1,000 St Louis, MO Pub Safety (FGIC
Insd)............................... 5.000 02/15/15 949,000
--------------
5,894,206
--------------
NEBRASKA 0.2%
2,250 American Pub Energy Agy NE Gas Sup
Rev NE Pub Gas Agy Proj Ser A (AMBAC
Insd)............................... 4.375 06/01/10 2,084,490
--------------
NEVADA 0.8%
1,000 Carson City, NV Hosp Rev Ser B
(AMBAC Insd)........................ 5.400 03/01/17 951,300
2,000 Clark Cnty, NV Indl Dev Rev NV Pwr
Co Proj Ser C Rfdg (AMBAC Insd)..... 7.200 10/01/22 2,171,240
1,675 Clark Cnty, NV Pub Fac Ser C (FGIC
Insd)............................... 5.000 06/01/24 1,483,196
</TABLE>
See Notes to Financial Statements
F-15
<PAGE> 377
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEVADA (CONTINUED)
$ 1,310 Las Vegas, NV Loc Impt Spl Impt Dist
No 404 Rfdg (FSA Insd).............. 4.400% 11/01/08 $ 1,226,068
1,105 Las Vegas, NV Loc Impt Spl Impt Dist
No 404 Rfdg (FSA Insd).............. 4.500 11/01/09 1,027,164
3,720 Washoe Cnty, NV Rfdg & Impt (MBIA
Insd)............................... * 07/01/07 2,521,379
--------------
9,380,347
--------------
NEW HAMPSHIRE 0.6%
5,000 New Hampshire Higher Edl & Hlth Fac
Auth Rev (AMBAC Insd)............... 6.000 10/01/26 5,015,500
2,500 New Hampshire St Tpk Sys Rev Rfdg
(Inverse Fltg) (FGIC Insd).......... 9.475 11/01/17 2,990,625
--------------
8,006,125
--------------
NEW JERSEY 0.9%
5,500 Howell Twp, NJ Rfdg (FGIC Insd)..... 6.800 01/01/14 5,850,625
3,625 Morristown, NJ Rfdg (FSA Insd)...... 6.400 08/01/14 3,923,011
1,000 New Jersey Econ Dev Auth Rev Trans
Proj Sublease Ser A (FSA Insd)...... 5.125 05/01/10 1,003,200
--------------
10,776,836
--------------
NEW YORK 7.7%
625 Erie Cnty, NY Pub Impt Ser A ( FGIC
Insd)............................... 4.800 10/01/07 620,900
8,000 Metropolitan Tran Auth NY Commuter
Fac Rev Ser A (MBIA Insd)........... 5.625 07/01/27 7,823,360
10,000 Metropolitan Tran Auth NY Tran Fac
Ser C (FSA Insd).................... 4.750 07/01/16 8,849,100
4,350 New York City Indl Dev Agy Civic Fac
Rev USTA Natl Tennis Cent Proj (FSA
Insd)............................... 6.375 11/15/14 4,662,243
5,000 New York City Muni Wtr Fin Auth Wtr
& Swr Sys Rev (FSA Insd)............ * 06/15/14 2,209,550
8,000 New York City Muni Wtr Fin Auth Wtr
& Swr Sys Rev (MBIA Insd)........... 4.750 06/15/25 6,757,120
50 New York City Ser C Subser C1 (FSA
Insd)............................... 6.250 08/01/09 53,018
2,090 New York City Ser G (MBIA Insd)..... 5.750 02/01/14 2,116,710
18,000 New York City Ser G (FGIC Insd)..... 5.750 02/01/14 18,230,040
9,845 New York City Ser I (MBIA Insd)..... 4.750 04/15/17 8,573,912
</TABLE>
See Notes to Financial Statements
F-16
<PAGE> 378
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 6,750 New York City Tran Auth Met Ser A
(AMBAC Insd)........................ 5.250% 01/01/29 $ 6,207,300
3,000 New York St Dorm Auth Lease Rev Muni
Hlth Fac Impt Pgm Ser A (FSA
Insd)............................... 5.500 05/15/25 2,882,400
7,425 New York St Dorm Auth Lease Rev
Office Fac & Audit Ctl (MBIA
Insd)............................... 5.000 04/01/29 6,519,447
2,775 New York St Dorm Auth Rev City Univ
Ser C (FGIC Insd)................... 7.000 07/01/14 2,884,946
3,000 New York St Dorm Auth Rev City Univ
Sys Cons 3rd Genl 1 (FSA
Insd) (a)........................... 5.500 07/01/29 2,879,010
4,700 New York St Dorm Auth Rev Insd Pace
Univ Rfdg (MBIA Insd)............... 5.750 07/01/26 4,645,762
15 New York St Med Care Fac Fin Agy Rev
(FSA Insd).......................... 6.500 08/15/15 15,992
7,000 New York St Med Care Fac Fin Agy Rev
NY Hosp Mtg Ser A (Prerefunded @
02/15/05) (AMBAC Insd) (b).......... 6.750 08/15/14 7,820,470
1,500 New York St Urban Dev Corp Rev
Correctional Fac Rfdg (AMBAC
Insd)............................... 5.250 01/01/18 1,411,740
1,000 Niagara, NY Frontier Tran Auth Arpt
Rev (MBIA Insd)..................... 5.500 04/01/19 966,930
--------------
96,129,950
--------------
NORTH CAROLINA 0.1%
1,250 Franklin Cnty, NC Ctfs Partn Jail &
Sch Projs (FGIC Insd)............... 6.625 06/01/14 1,380,788
--------------
NORTH DAKOTA 0.6%
2,095 Grand Forks, ND Sales Tax Rev Aurora
Proj Ser A (MBIA Insd).............. 5.625 12/15/29 2,015,432
5,000 Mercer Cnty, ND Pollutn Ctl Rev
Antelope Vly Station Rfdg (AMBAC
Insd)............................... 7.200 06/30/13 5,822,500
--------------
7,837,932
--------------
</TABLE>
See Notes to Financial Statements
F-17
<PAGE> 379
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OHIO 2.2%
$ 5,000 Clermont Cnty, OH Hosp Fac Rev Muni
(Inverse Fltg) (Prerefunded @
09/25/01) (AMBAC Insd).............. 9.441% 10/05/21 $ 5,625,000
2,010 Cleveland, OH (Prerefunded @
11/15/04) (MBIA Insd)............... 6.500 11/15/09 2,224,829
15,000 Hamilton Cnty, OH Sales Tax Hamilton
Cnty Football Proj B (MBIA Insd).... 5.000 12/01/27 13,258,200
2,750 Lorain Cnty, OH Hlth Fac Rev
Catholic Hlthcare Partners Ser A
(AMBAC Insd)........................ 5.500 09/01/29 2,616,487
1,500 Ohio St Air Quality Dev Auth Rev
Pollutn Ctl Cleveland Co Proj Rfdg
(FGIC Insd)......................... 8.000 12/01/13 1,659,015
2,500 Ohio St Air Quality Dev Auth Rev
Pollutn Ctl OH Edison Ser A Rfdg
(FGIC Insd)......................... 7.450 03/01/16 2,581,725
--------------
27,965,256
--------------
OKLAHOMA 1.1%
1,760 McAlester, OK Pub Wks Auth Rev Rfdg
& Impt (FSA Insd)................... 5.250 12/01/20 1,815,933
3,300 McAlester, OK Pub Wks Auth Util Sys
Rev (FSA Insd)...................... 5.750 02/01/20 3,311,979
11,000 McAlester, OK Pub Wks Auth Util Sys
Rev (FSA Insd)...................... * 02/01/30 1,681,570
5,660 Mustang, OK Impt Auth Util Rev (FSA
Insd)............................... 5.800 10/01/30 5,575,892
1,820 Oklahoma Hsg Fin Agy Single Family
Rev Mtg Ser A (MBIA Insd)........... 7.200 03/01/11 1,880,115
--------------
14,265,489
--------------
PENNSYLVANIA 4.3%
4,875 Allegheny Cnty, PA Hosp Dev Auth Rev
Pittsburgh Mercy Hlth Sys Inc (AMBAC
Insd)............................... 5.625 08/15/26 4,870,759
2,985 Butler, PA Area Sch Dist Cap Apprec
(Prerefunded @ 11/15/07) (FGIC
Insd)............................... * 11/15/23 791,234
5,650 Butler, PA Area Sch Dist Cap Apprec
(Prerefunded @ 11/15/07) (FGIC
Insd)............................... * 11/15/26 1,248,142
24,000 Dauphin Cnty, PA Genl Auth Hlth Sys
Rev Pinnacle Hlth Sys Proj Rfdg
(MBIA Insd)......................... 5.500 05/15/27 22,619,760
</TABLE>
See Notes to Financial Statements
F-18
<PAGE> 380
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 2,000 Dauphin Cnty, PA Genl Auth Hosp Rev
Hapsco Phoenixville Hosp Proj Ser B
(FGIC Insd)......................... 6.125% 07/01/10 $ 2,129,160
1,000 Lehigh Cnty, PA Indl Dev Auth
Pollutn Ctl Rev PA Pwr & Lt Co Proj
Ser A Rfdg (MBIA Insd).............. 6.400 11/01/21 1,055,670
3,750 Montgomery Cnty, PA Indl Dev Auth
Rev Pollutn Ctl Ser E Rfdg (MBIA
Insd)............................... 6.700 12/01/21 3,979,687
1,500 Philadelphia, PA (FSA Insd)......... 5.000 03/15/28 1,313,955
2,250 Philadelphia, PA Gas Wks Rev 14th
Ser A Rfdg (FSA Insd)............... 6.375 07/01/14 2,403,022
5,000 Philadelphia, PA Gas Wks Rev Second
Ser (FSA Insd)...................... 5.000 07/01/29 4,362,600
2,000 Pittsburgh & Allegheny Cnty, PA Pub
Aud Auth Excise Tax Rev (AMBAC
Insd)............................... 5.000 02/01/19 1,792,800
1,500 Pittsburgh & Allegheny Cnty, PA Pub
Aud Auth Excise Tax Rev (AMBAC
Insd)............................... 5.125 02/01/35 1,317,300
2,500 Pittsburgh & Allegheny Cnty, PA Pub
Aud Auth Regl Asset Dist Sales Tax
Rev (AMBAC Insd).................... 5.000 02/01/24 2,215,500
1,000 Sayre, PA Hlthcare Fac Auth Rev VHA
Cap Asset Fin Pgm Ser H2 (AMBAC
Insd)............................... 7.625 12/01/15 1,035,530
5,000 Westmoreland Cnty, PA Muni Auth Muni
Svc Rev (MBIA Insd)................. * 08/15/22 1,282,900
3,000 Westmoreland Cnty, PA Ser A Rfdg
(MBIA Insd)......................... * 12/01/19 923,070
--------------
53,341,089
--------------
RHODE ISLAND 0.2%
2,000 Rhode Island St Hlth & Edl Bldg Corp
Rev Higher Edl Fac Roger Williams
(Prerefunded @ 11/15/04) (Connie Lee
Insd)............................... 7.250 11/15/24 2,278,760
--------------
SOUTH CAROLINA 1.2%
70 Charleston Cnty, SC Ctfs Partn Ser B
(MBIA Insd)......................... 6.875 06/01/14 76,557
1,430 Charleston Cnty, SC Ctfs Partn Ser B
(Prerefunded @ 06/01/04) (MBIA
Insd)............................... 6.875 06/01/14 1,596,452
2,475 Lancaster Cnty, SC Sch Dist (FSA
Insd)............................... 4.750 03/01/16 2,198,468
</TABLE>
See Notes to Financial Statements
F-19
<PAGE> 381
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SOUTH CAROLINA (CONTINUED)
$ 2,600 Lancaster Cnty, SC Sch Dist (FSA
Insd)............................... 4.750% 03/01/17 $ 2,286,180
2,725 Lancaster Cnty, SC Sch Dist (FSA
Insd)............................... 4.750 03/01/18 2,382,658
6,500 South Carolina Tran Infrastructure
Bk Rev (AMBAC Insd)................. 5.375 10/01/24 6,158,230
--------------
14,698,545
--------------
SOUTH DAKOTA 0.9%
1,610 South Dakota St Hlth & Edl Fac Auth
Rev (AMBAC Insd).................... 5.250 08/01/24 1,467,515
5,205 South Dakota St Lease Rev Trust Ctfs
Ser A (FSA Insd).................... 6.625 09/01/12 5,838,761
4,000 South Dakota St Lease Rev Trust Ctfs
Ser A (FSA Insd).................... 6.700 09/01/17 4,491,000
--------------
11,797,276
--------------
TENNESSEE 0.9%
2,000 Chattanooga-Hamilton Cnty, TN Hosp
Auth Hosp Rev Erlanger Med Cent Ser
B (Inverse Fltg) (Prerefunded @
05/01/01) (FSA Insd)................ 9.672 05/25/21 2,222,500
2,000 Franklin, TN Spl Sch Dist Cap Apprec
(FSA Insd).......................... * 06/01/17 722,040
2,320 Johnson City, TN Sch Sales Tax
(Prerefunded @ 05/01/06) (AMBAC
Insd)............................... 6.700 05/01/18 2,580,791
6,000 Tennergy Corp, TN Gas Rev (MBIA
Insd)............................... 4.125 06/01/09 5,480,100
--------------
11,005,431
--------------
TEXAS 4.6%
3,000 Amarillo, TX Hlth Fac Corp Hosp Rev
High Plains Baptist Hosp (Inverse
Fltg) (FSA Insd).................... 9.149 01/01/22 3,367,500
12,500 Austin, TX Util Sys Rev Ser A Rfdg
(MBIA Insd)......................... * 11/15/10 6,947,375
1,935 Corpus Christi, TX Hsg Fin Corp
Single Family Mtg Rev Ser A Rfdg
(MBIA Insd)......................... 7.700 07/01/11 2,061,104
7,705 Dallas Cnty, TX Util & Reclamation
Dist (MBIA Insd).................... * 02/15/09 4,057,838
8,500 Dallas Cnty, TX Util & Reclamation
Dist Ser B Rfdg (AMBAC Insd) (a).... 5.875 02/15/29 8,445,855
</TABLE>
See Notes to Financial Statements
F-20
<PAGE> 382
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$ 5,750 Dallas, TX Wtrwks & Swr Sys Rev Rfdg
(FSA Insd).......................... 5.000% 10/01/29 $ 4,986,400
1,400 El Paso, TX Hsg Fin Corp Mtg Rev
Single Family (FGIC Insd)........... * 11/01/16 212,464
4,615 Harris Cnty, TX Toll Rd Tax & Sub
Lien Ser A Rfdg (FGIC Insd)......... * 08/15/07 3,108,849
7,510 Harris Cnty-Houston, TX Sports Auth
Spl Rev Ser A (MBIA Insd)........... 5.000 11/15/28 6,504,636
10,000 Lower Co Riv Auth TX Rev Ser A Rfdg
(AMBAC Insd) (a).................... 5.500 05/15/21 9,590,700
2,505 Montgomery Cnty, TX Cap Apprec Rfdg
(MBIA Insd)......................... * 03/01/15 1,034,264
1,000 Montgomery Cnty, TX Cap Apprec Rfdg
(MBIA Insd)......................... * 03/01/16 386,760
1,305 Montgomery Cnty, TX Cap Apprec Rfdg
(MBIA Insd)......................... * 03/01/17 473,141
3,600 North Cent, TX Hlth Fac Dev TX Hlth
Res Sys Ser B (MBIA Insd)........... 5.375 02/15/26 3,319,200
1,000 San Antonio, TX Indpt Sch Dist Pub
Fac Corp Lease Rev (AMBAC Insd)..... 5.850 10/15/10 1,049,250
1,750 Tarrant Cnty, TX Hlth Fac Dev Corp
Hlth Sys Rev Ser B (FGIC Insd)...... 5.000 09/01/15 1,648,168
--------------
57,193,504
--------------
UTAH 2.7%
21,000 Intermountain Pwr Agy UT Pwr Supply
Rev Ser B Rfdg (MBIA Insd).......... 5.750 07/01/19 20,912,010
750 Provo, UT Elec Rev 1984 Ser A Rfdg
(AMBAC Insd)........................ 10.375 09/15/15 1,045,208
7,385 Utah St Muni Fin Co-op Loc Govt Rev
Pool Cap Salt Lake (FSA Insd)....... * 03/01/09 4,532,691
3,115 West Jordan, UT Multi-Family Rev
Broadmoor Vlg Apts Proj Ser A Rfdg
(FSA Insd).......................... 6.800 01/01/15 3,256,826
4,540 West Valley City, UT Muni Bldg Lease
Ser A Rfdg (AMBAC Insd)............. 4.750 04/15/19 3,936,679
--------------
33,683,414
--------------
</TABLE>
See Notes to Financial Statements
F-21
<PAGE> 383
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VIRGINIA 1.6%
$ 4,000 Loudoun Cnty, VA Ctfs Partn (FSA
Insd)............................... 6.800% 03/01/14 $ 4,348,920
5,000 Richmond, VA (FSA Insd) (a)......... 5.500 01/15/16 4,831,050
5,000 Richmond, VA (FSA Insd) (a)......... 5.500 01/15/17 4,801,200
5,000 Richmond, VA (FSA Insd) (a)......... 5.500 01/15/18 4,770,000
750 University of VA Hosp Rev Ser C Rfdg
(Prerefunded @ 06/01/00) (AMBAC
Insd)............................... 9.375 06/01/07 785,123
--------------
19,536,293
--------------
WASHINGTON 1.6%
2,995 Grant Cnty, WA Pub Util Dist No 2
Priest Rapids Hydro Elec Rev Second
Ser C Rfdg (AMBAC Insd)............. 6.000 01/01/13 3,109,858
2,335 Grant Cnty, WA Pub Util Dist No 2
Priest Rapids Hydro Elec Rev Second
Ser C Rfdg (AMBAC Insd)............. 6.000 01/01/17 2,377,030
1,315 Grant Cnty, WA Pub Util Dist No 2
Wanapum Hydro Elec Rev Second Ser C
Rfdg (AMBAC Insd)................... 6.000 01/01/13 1,365,430
1,025 Grant Cnty, WA Pub Util Dist No 2
Wanapum Hydro Elec Rev Second Ser C
Rfdg (AMBAC Insd)................... 6.000 01/01/17 1,043,450
350 Pierce Cnty, WA Swr Rev Ser A (MBIA
Insd)............................... 9.000 02/01/05 420,721
5,000 Spokane, WA Regl Solid Waste Mgmt
Sys Rev (AMBAC Insd)................ 6.250 12/01/11 5,311,650
160 University of WA Univ Rev (MBIA
Insd)............................... 7.000 12/01/21 170,794
3,090 Washington St Pub Pwr Supply Sys
Nuclear Proj No 1 Rev Proj No 1 Rev
Ser A Rfdg (AMBAC Insd)............. 5.700 07/01/09 3,218,204
3,015 Washington St Pub Pwr Supply Sys
Nuclear Proj No 2 Rev Ser C Rfdg
(MBIA Insd)......................... * 07/01/04 2,410,945
--------------
19,428,082
--------------
WISCONSIN 1.4%
1,350 Plover, WI Wtr Sys Rev (AMBAC
Insd)............................... 5.400 12/01/16 1,309,783
1,500 Plover, WI Wtr Sys Rev (AMBAC
Insd)............................... 5.500 12/01/18 1,457,325
12,490 Wisconsin St Hlth & Edl Fac Auth Rev
Aurora Med Group Inc Proj (FSA Insd)
(b)................................. 5.750 11/15/25 12,135,784
</TABLE>
See Notes to Financial Statements
F-22
<PAGE> 384
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WISCONSIN (CONTINUED)
$ 1,000 Wisconsin St Hlth & Edl Fac Auth Rev
Med College of WI Inc Proj (MBIA
Insd)............................... 5.500% 03/01/17 $ 959,400
1,000 Wisconsin St Hlth & Edl Fac Auth Rev
Med College of WI Inc Proj (MBIA
Insd)............................... 5.750 03/01/27 980,350
--------------
16,842,642
--------------
WYOMING 0.2%
2,000 Laramie Cnty, WY Hosp Rev Mem Hosp
Proj (AMBAC Insd)................... 6.700 05/01/12 2,140,160
--------------
PUERTO RICO 0.2%
3,000 Puerto Rico Indl Tourist Edl Med &
Environmental Ctl Fac Hosp Aux (MBIA
Insd)............................... 6.250 07/01/16 3,153,810
--------------
TOTAL LONG-TERM INVESTMENTS 98.7%
(Cost $1,194,403,076)............................................. 1,227,667,842
SHORT-TERM INVESTMENTS 3.3%
(Cost $40,200,000)................................................ 40,200,000
--------------
TOTAL INVESTMENTS 102.0%
(Cost $1,234,603,076)............................................. 1,267,867,842
LIABILITIES IN EXCESS OF OTHER ASSETS (2.0%)....................... (24,444,294)
--------------
NET ASSETS 100.0%.................................................. $1,243,423,548
==============
</TABLE>
* Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
AMBAC--AMBAC Indemnity Corporation
BIGI--Bond Investor Guaranty Inc.
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
F-23
<PAGE> 385
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $1,234,603,076)..................... $1,267,867,842
Cash........................................................ 4,269
Receivables:
Interest.................................................. 17,411,259
Investments Sold.......................................... 17,032,747
Fund Shares Sold.......................................... 2,024,831
Other....................................................... 68,539
--------------
Total Assets.......................................... 1,304,409,487
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 56,182,546
Fund Shares Repurchased................................... 1,646,108
Income Distributions...................................... 1,381,051
Distributor and Affiliates................................ 727,565
Investment Advisory Fee................................... 515,487
Accrued Expenses............................................ 331,443
Trustees' Deferred Compensation and Retirement Plans........ 201,739
--------------
Total Liabilities..................................... 60,985,939
--------------
NET ASSETS.................................................. $1,243,423,548
==============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $1,214,847,932
Net Unrealized Appreciation................................. 33,264,766
Accumulated Distributions in Excess of Net Investment
Income.................................................... (487,916)
Accumulated Net Realized Loss............................... (4,201,234)
--------------
NET ASSETS.................................................. $1,243,423,548
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $1,178,342,105 and 65,168,747 shares of
beneficial interest issued and outstanding)............. $18.08
Maximum sales charge (4.75%* of offering price)......... .90
--------------
Maximum offering price to public........................ $18.98
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $56,764,436 and 3,138,853 shares of
beneficial interest issued and outstanding)............. $18.08
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $8,317,007 and 460,024 shares of
beneficial interest issued and outstanding)............. $18.08
==============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
F-24
<PAGE> 386
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 75,945,082
-------------
EXPENSES:
Investment Advisory Fee..................................... 6,729,700
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B, and C of 2,952,701, 660,342 and $80,230,
respectively)............................................. 3,693,273
Shareholder Services........................................ 1,304,891
Legal....................................................... 99,600
Custody..................................................... 80,288
Trustees' Fees and Related Expenses......................... 56,526
Insurance................................................... 35,500
Other....................................................... 623,787
-------------
Total Operating Expenses.................................... 12,623,565
Less Credits Earned on Cash Balances...................... 54,688
-------------
Net Operating Expenses.................................... 12,568,877
Interest Expense.......................................... 234,497
-------------
NET INVESTMENT INCOME....................................... $ 63,141,708
=============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ (1,043,226)
Futures................................................... (1,580,036)
-------------
Net Realized Loss........................................... (2,623,262)
-------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 143,148,176
End of the Period:
Investments............................................. 33,264,766
-------------
Net Unrealized Depreciation During the Period............... (109,883,410)
-------------
NET REALIZED AND UNREALIZED LOSS............................ $(112,506,672)
=============
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $ (49,364,964)
=============
</TABLE>
See Notes to Financial Statements
F-25
<PAGE> 387
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1999,
the Nine Months Ended September 30, 1998
and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................ $ 63,141,708 $ 49,110,538 $ 68,037,607
Net Realized Gain/Loss............... (2,623,262) 15,077,312 8,525,006
Net Unrealized
Appreciation/Depreciation During
the Period......................... (109,883,410) 12,112,058 31,101,903
-------------- -------------- --------------
Change in Net Assets from
Operations......................... (49,364,964) 76,299,908 107,664,516
-------------- -------------- --------------
Distributions from Net Investment
Income............................. (63,107,634) (49,274,568) (67,785,067)
Distributions in Excess of Net
Investment Income.................. -0- (521,990) -0-
-------------- -------------- --------------
Distributions from and in Excess of
Net Investment Income*............. (63,107,634) (49,796,558) (67,785,067)
Distributions from Net Realized
Gain*.............................. (16,810,581) (2,401,285) (11,111,608)
-------------- -------------- --------------
Total Distributions.................. (79,918,215) (52,197,843) (78,896,675)
-------------- -------------- --------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES.............. (129,283,179) 24,102,065 28,767,841
-------------- -------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............ 692,548,007 505,859,955 631,717,458
Net Asset Value of Shares Issued
Through Dividend Reinvestment...... 57,008,999 35,644,233 54,493,315
Cost of Shares Repurchased........... (809,433,864) (492,241,941) (716,001,683)
-------------- -------------- --------------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS............... (59,876,858) 49,262,247 (29,790,910)
-------------- -------------- --------------
TOTAL INCREASE/DECREASE IN NET
ASSETS............................. (189,160,037) 73,364,312 (1,023,069)
NET ASSETS:
Beginning of the Period.............. 1,432,583,585 1,359,219,273 1,360,242,342
-------------- -------------- --------------
End of the Period (Including
accumulated undistributed net
investment income of $(487,916),
$(521,990) and $164,030,
respectively)...................... $1,243,423,548 $1,432,583,585 $1,359,219,273
============== ============== ==============
* Distributions by Class
Distributions from and in Excess of
Net Investment Income:
Class A Shares...................... $ (60,158,791) $ (47,397,474) $ (64,607,170)
Class B Shares...................... (2,628,280) (2,215,435) (2,965,479)
Class C Shares...................... (320,563) (183,649) (212,418)
-------------- -------------- --------------
$ (63,107,634) $ (49,796,558) $ (67,785,067)
============== ============== ==============
Distributions from Net Realized Gain:
Class A Shares...................... $ (15,893,768) $ (2,262,642) $ (10,489,973)
Class B Shares...................... (826,371) (128,797) (580,452)
Class C Shares...................... (90,442) (9,846) (41,183)
-------------- -------------- --------------
$ (16,810,581) $ (2,401,285) $ (11,111,608)
============== ============== ==============
</TABLE>
See Notes to Financial Statements
F-26
<PAGE> 388
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -----------------------------------------
Class A Shares 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $19.956 $19.631 $ 19.238 $ 19.549 $ 17.572 $ 19.857
------- ------- -------- -------- -------- --------
Net Investment
Income.............. .914 .710 .974 .980 1.021 1.051
Net Realized and
Unrealized
Gain/Loss........... (1.641) .371 .551 (.304) 1.982 (2.280)
------- ------- -------- -------- -------- --------
Total from Investment
Operations.......... (.727) 1.081 1.525 .676 3.003 (1.229)
------- ------- -------- -------- -------- --------
Less:
Distributions from
and in Excess of
Net Investment
Income............ .914 .720 .971 .987 1.026 1.056
Distributions from
Net Realized
Gain.............. .234 .036 .161 -0- -0- -0-
------- ------- -------- -------- -------- --------
Total Distributions... 1.148 .756 1.132 .987 1.026 1.056
------- ------- -------- -------- -------- --------
Net Asset Value, End
of the Period....... $18.081 $19.956 $ 19.631 $ 19.238 $ 19.549 $ 17.572
======= ======= ======== ======== ======== ========
Total Return (a)...... (3.80%) 5.61%* 8.19% 3.65% 17.49% (6.31%)
Net Assets at End of
the Period (In
millions)........... $1,178.3 $1,353.9 $1,283.5 $1,283.7 $1,365.4 $1,110.2
Ratio of Expenses to
Average Net Assets
(b)................. .92% .90% .92% .95% .88% .88%
Ratio of Net
Investment Income to
Average
Net Assets (b)...... 4.77% 4.85% 5.07% 5.11% 5.44% 5.70%
Portfolio Turnover.... 92% 62%* 82% 92% 70% 48%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
F-27
<PAGE> 389
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -------------------------------------
Class B Shares 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................. $19.957 $19.634 $19.240 $19.549 $17.563 $19.824
------- ------- ------- ------- ------- -------
Net Investment
Income............... .769 .598 .826 .832 .890 .899
Net Realized and
Unrealized
Gain/Loss............ (1.643) .370 .551 (.304) 1.978 (2.276)
------- ------- ------- ------- ------- -------
Total from Investment
Operations........... (.874) .968 1.377 .528 2.868 (1.377)
------- ------- ------- ------- ------- -------
Less:
Distributions from
and in Excess of
Net Investment
Income............. .765 .609 .822 .837 .882 .884
Distributions from
Net Realized Gain.. .234 .036 .161 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions.... .999 .645 .983 .837 .882 .884
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period........... $18.084 $19.957 $19.634 $19.240 $19.549 $17.563
======= ======= ======= ======= ======= =======
Total Return (a)....... (4.60%) 5.07%* 7.36% 2.83% 16.67% (7.03%)
Net Assets at End of
the Period (In
millions)............ $56.8 $71.9 $70.1 $71.6 $75.3 $30.0
Ratio of Expenses to
Average Net Assets
(b).................. 1.68% 1.66% 1.69% 1.74% 1.67% 1.71%
Ratio of Net Investment
Income to Average Net
Assets (b)........... 3.99% 4.08% 4.29% 4.38% 4.69% 4.88%
Portfolio Turnover..... 92% 62%* 82% 92% 70% 48%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sale charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
F-28
<PAGE> 390
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -------------------------------------
Class C Shares 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................. $19.952 $19.630 $19.239 $19.548 $17.568 $19.823
------- ------- ------- ------- ------- -------
Net Investment
Income............... .763 .594 .822 .830 .883 .908
Net Realized and
Unrealized
Gain/Loss............ (1.636) .373 .552 (.302) 1.979 (2.279)
------- ------- ------- ------- ------- -------
Total from Investment
Operations........... (.873) .967 1.374 .528 2.862 (1.371)
------- ------- ------- ------- ------- -------
Less:
Distributions from
and in Excess of
Net Investment
Income............. .765 .609 .822 .837 .882 .884
Distributions from
Net Realized
Gain............... .234 .036 .161 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions.... .999 .645 .983 .837 .882 .884
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period........... $18.080 $19.952 $19.630 $19.239 $19.548 $17.568
======= ======= ======= ======= ======= =======
Total Return (a)....... (4.55%) 5.02%* 7.36% 2.83% 16.60% (6.98%)
Net Assets at End of
the Period (In
millions)............ $ 8.3 $ 6.8 $ 5.6 $ 4.9 $ 5.1 $ 3.5
Ratio of Expenses to
Average Net Assets
(b).................. 1.68% 1.66% 1.69% 1.74% 1.67% 1.70%
Ratio of Net Investment
Income to Average Net
Assets (b)........... 3.99% 4.06% 4.29% 4.37% 4.68% 4.89%
Portfolio Turnover..... 92% 62%* 82% 92% 70% 48%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
F-29
<PAGE> 391
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Insured Tax Free Income Fund (the "Fund") is organized as a series of
Van Kampen Tax Free Trust (the "Trust"), a Delaware business trust and is
registered as a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to provide investors with a high level of current income exempt from federal
income taxes, with liquidity and safety of principal, primarily through an
investment in a diversified portfolio of insured municipal securities. The Fund
commenced the distribution of its Class B and Class C shares on May 1, 1993 and
August 13, 1993, respectively. In July, 1998, the Fund's Board of Trustees
approved a change in the Fund's fiscal year end from December 31 to September
30.
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--Municipal bonds are valued by independent pricing
services or dealers using the mean of the bid and asked prices or, in the
absence of market quotations, at fair value based upon yield data relating to
municipal bonds with similar characteristics and general market conditions.
Securities which are not valued by independent pricing services are valued at
fair value using procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when-issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
F-30
<PAGE> 392
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial reporting and tax
reporting purposes primarily as a result of post-October losses which may not be
recognized for tax purposes until the first day of the following fiscal year and
the deferral of losses relating to wash sale transactions.
At September 30, 1999, for federal income tax purposes, cost of long- and
short-term investments is $1,234,611,123; the aggregate gross unrealized
appreciation is $57,607,153 and the aggregate gross unrealized depreciation is
$24,350,434, resulting in net unrealized appreciation on long- and short-term
investments of $33,256,719.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.
Due to inherent differences in the recognition of certain expenses under
generally accepted accounting principles and federal income tax purposes, the
amount of distributed net investment income may differ for a particular period.
These differences are temporary in nature, but may result in book basis
distribution in excess of net investment income for certain periods.
F. INSURANCE EXPENSES--The Fund typically invests in insured bonds. Any
portfolio securities not specifically covered by a primary insurance policy are
insured secondarily through the Fund's portfolio insurance policy. Insurance
premiums are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.
F-31
<PAGE> 393
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
G. EXPENSE REDUCTIONS--During the year ended September 30, 1999, the Trust's
custody fee was reduced by $54,688 as a result of credits earned on cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- -------------------------------------------------------------------
<S> <C>
First $500 million.................................... .525 of 1%
Next $500 million..................................... .500 of 1%
Next $500 million..................................... .475 of 1%
Over $1.5 billion..................................... .450 of 1%
</TABLE>
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $69,300 representing legal expenses provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $336,600 representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended September 30,
1999, the Fund recognized expenses of approximately $964,600. 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.
F-32
<PAGE> 394
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
At September 30, 1999, capital aggregated $1,146,455,777, $59,293,894 and
$9,098,261 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 34,531,055 $ 665,555,139
Class B.................................... 613,802 11,864,633
Class C.................................... 778,739 15,128,235
----------- -------------
Total Sales.................................. 35,923,596 $ 692,548,007
=========== =============
Dividend Reinvestment:
Class A.................................... 2,854,181 $ 54,768,276
Class B.................................... 101,275 1,947,040
Class C.................................... 15,346 293,683
----------- -------------
Total Dividend Reinvestment.................. 2,970,802 $ 57,008,999
=========== =============
Repurchases:
Class A.................................... (40,059,533) $(773,708,764)
Class B.................................... (1,177,316) (22,609,500)
Class C.................................... (676,622) (13,115,600)
----------- -------------
Total Repurchases............................ (41,913,471) $(809,433,864)
=========== =============
</TABLE>
F-33
<PAGE> 395
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At September 30, 1998, capital aggregated $1,199,841,126, $68,091,721 and
$6,791,943 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 24,717,457 $ 483,526,778
Class B.................................... 517,918 10,164,399
Class C.................................... 621,935 12,168,778
----------- -------------
Total Sales.................................. 25,857,310 $ 505,859,955
=========== =============
Dividend Reinvestment:
Class A.................................... 1,747,169 $ 34,263,263
Class B.................................... 63,858 1,252,254
Class C.................................... 6,563 128,716
----------- -------------
Total Dividend Reinvestment.................. 1,817,590 $ 35,644,233
=========== =============
Repurchases:
Class A.................................... (24,001,702) $(470,222,851)
Class B.................................... (552,971) (10,848,637)
Class C.................................... (570,061) (11,170,453)
----------- -------------
Total Repurchases............................ (25,124,734) $(492,241,941)
=========== =============
</TABLE>
F-34
<PAGE> 396
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $1,152,273,936, $67,523,705 and
$5,664,902 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 32,247,420 $ 617,534,974
Class B.................................... 410,394 7,887,393
Class C.................................... 324,754 6,295,091
----------- -------------
Total Sales.................................. 32,982,568 $ 631,717,458
=========== =============
Dividend Reinvestment:
Class A.................................... 2,721,901 $ 52,405,367
Class B.................................... 99,148 1,908,983
Class C.................................... 9,300 178,965
----------- -------------
Total Dividend Reinvestment.................. 2,830,349 $ 54,493,315
=========== =============
Repurchases:
Class A.................................... (36,316,268) $(697,389,583)
Class B.................................... (660,311) (12,665,655)
Class C.................................... (306,866) (5,946,445)
----------- -------------
Total Repurchases............................ (37,283,445) $(716,001,683)
=========== =============
</TABLE>
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 purchased
on or after June 1, 1996 will automatically convert to Class A shares after the
eighth year following purchase. Class B shares purchased before June 1, 1996
automatically convert to Class A shares after the sixth year following purchase.
For the year ended September 30, 1999, 672,438 Class B shares automatically
converted to Class A shares. The CDSC will be imposed on
F-35
<PAGE> 397
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
most redemptions made within six years of the purchase for Class B and one year
of the purchase for Class C as detailed in the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- ---------------------------------------------------------------------------
<S> <C> <C>
First........................................ 4.00% 1.00%
Second....................................... 3.75% None
Third........................................ 3.50% None
Fourth....................................... 2.50% None
Fifth........................................ 1.50% None
Sixth........................................ 1.00% None
Seventh and Thereafter....................... None None
</TABLE>
For the year ended September 30, 1999, Van Kampen as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $79,600 and CDSC on redeemed shares of approximately $95,300.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the year ended September 30, 1999, the cost of purchases and proceeds from
sales of investments, excluding short-term investments, were $1,236,470,758 and
$1,304,031,337, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising a call option contract or taking
delivery of a security underlying a futures contract. In these instances, the
recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.
F-36
<PAGE> 398
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin).
Transactions in futures contracts, each with a par value of $100,000, for
the year ended September 30, 1999 were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -------------------------------------------------------------------------
<S> <C>
Outstanding at September 30, 1998........................... -0-
Futures Opened.............................................. 7,882
Futures Closed.............................................. (7,882)
------
Outstanding at September 30, 1999........................... -0-
======
</TABLE>
B. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to
a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. These instruments
are typically used by the Fund to enhance the yield of the portfolio.
F-37
<PAGE> 399
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended September 30, 1999, are payments retained by Van Kampen of
approximately $805,900.
7. BORROWINGS
In accordance with its investment policies, the Fund may borrow money from banks
in an amount up to 5% of its total assets. The Fund, in combination with two
other funds in the fund complex, has entered into a $100 million revolving
credit agreement which expires November 10, 1999. The maximum amount available
to any single fund is $75 million. Interest is charged under the agreement at a
rate of .45% above the federal funds rate. An annual facility fee of .06% is
charged on the unused portion of the credit facility.
The average daily balance of bank borrowings for the year ended September
30, 1999 was approximate $4,279,045 with an average interest rate of 5.48%. At
September 30, 1999, the Fund did not have any outstanding borrowings under the
agreement.
F-38
<PAGE> 400
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
Van Kampen California Insured Tax Free Fund (the "Fund") is a mutual fund
with the investment objective to provide only California investors with a high
level of current income exempt from federal and California income taxes, with
liquidity and safety of principal, primarily through investment in a diversified
portfolio of insured California municipal securities. The Fund is designed for
investors who are residents of California for tax purposes.
The Fund is organized as a diversified series of the 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, Policies and Risks.................... B-3
Strategic Transactions...................................... B-15
Investment Restrictions..................................... B-20
Description of Securities Ratings........................... B-21
Description of Insurance Company Claims Paying Ability
Ratings................................................... B-26
Trustees and Officers....................................... B-27
Investment Advisory Agreement............................... B-36
Other Agreements............................................ B-36
Distribution and Service.................................... B-37
Transfer Agent.............................................. B-40
Portfolio Transactions and Brokerage Allocation............. B-40
Shareholder Services........................................ B-41
Redemption of Shares........................................ B-43
Contingent Deferred Sales Charge-Class A.................... B-44
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-44
Taxation.................................................... B-46
Fund Performance............................................ B-47
Other Information........................................... B-52
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-16
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 2000.
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GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen
Merritt Tax Free Trust as a Massachusetts business trust (the "Massachusetts
Trust"). The Massachusetts Trust was reorganized into the Trust under the name
Van Kampen American Capital Tax Free Trust on July 31, 1995. The Trust was
created for the purpose of facilitating the Massachusetts Trust reorganization
into a Delaware business trust. On July 14, 1998, the Trust adopted its current
name.
The Fund was originally organized under the name Van Kampen Merritt
California Insured Tax Free Fund as a sub-trust of the Massachusetts Trust. The
Fund was reorganized as a series of the Trust under the name Van Kampen American
Capital California Insured Tax Free Fund on July 31, 1995. On July 14, 1998, the
Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co ("Morgan Stanley Dean Witter"). 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 and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
B-2
<PAGE> 402
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less 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 December 31, 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 DECEMBER 31, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OF OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ------------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith Inc. ................... 63,531.04 C 15.77%
For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
Salomon Smith Barney Inc. .................................. 57,641.71 C 14.31%
333 West 34th St-3rd Floor
New York, NY 10001-2483
Edward Jones & Co. ......................................... 510,436.12 A 5.88%
201 Progress Pkwy
Maryland Hts. MO 63043-3009
FISERV SECURITIES, INC. .................................... 22,108.33 C 5.48%
One Commerce Square
2005 Market Street Suite 1200
Philadelphia PA 19103-7084
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RISKS
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
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<PAGE> 403
conditions, longer term municipal securities generally provide a higher yield
than shorter term municipal securities. The Fund may invest in shorter term
municipal securities when yields are greater than yields available on longer
term municipal securities, for temporary defensive purposes or when redemption
requests are expected. The two principal classifications of municipal securities
are "general obligation" and "revenue" or "special obligation" securities, which
include "industrial revenue bonds." General obligation securities are secured by
the issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation securities are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source, such as from the user of the facility being financed. The Fund
may also invest in "moral obligation" bonds which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment but
not a legal obligation of the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally
B-4
<PAGE> 404
will be larger than comparable changes in the value of an equal principal amount
of a fixed rate municipal security having similar credit quality, redemption
provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal or interest when due, the Fund may be subject to delays, expenses and
risks that are greater than those that would have been involved if the Fund had
purchased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
Although the Fund invests primarily in municipal securities insured as to
timely payment of principal and interest, municipal securities, like other debt
obligations, are subject to the risk of non-payment. The ability of issuers of
municipal securities to make timely payments of interest and principal may be
adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local
governmental units. Such non-payment would result in a reduction of income to
the Fund, and could result in a reduction in the value of the municipal security
experiencing non-payment and a potential decrease in the net asset value of the
Fund. Issuers of municipal securities might seek protection under the bankruptcy
laws. In the event of bankruptcy of such an issuer, the Fund could experience
delays and limitations with respect to the collection of principal and interest
on such municipal securities and the Fund may not, in all circumstances, be able
to collect all principal and interest to which it is entitled. To enforce its
rights in the event of a default in the payment of interest or repayment of
principal, or both, the Fund may take possession of and manage the assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the net asset value of the Fund.
Any income derived from the Fund's ownership or operation of such assets may not
be tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
INSURANCE
As described in the Prospectus, the Fund invests primarily in municipal
securities which are either pre-insured under a policy obtained for such
securities prior to the purchase of such securities or will be insured under
policies obtained by the Fund to cover otherwise uninsured securities.
ORIGINAL ISSUE INSURANCE. Original Issue Insurance is purchased with
respect to a particular issue of municipal securities by the issuer thereof or a
third party in conjunction with the original issuance of such municipal
securities. Under such insurance, the insurer unconditionally guarantees to the
holder of the insured municipal security the timely payment of principal and
interest on such obligation when and as such payments
B-5
<PAGE> 405
shall become due but shall not be paid by the issuer; except that in the event
of any acceleration of the due date of the principal by reason of mandatory or
optional redemption (other than acceleration by reason of a mandatory sinking
fund payment), default or otherwise, the insured payments may be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer is responsible for such payments less
any amounts received by the holder from any trustee for the municipal security
issuers or from any other source. Original Issue Insurance generally does not
insure payment on an accelerated basis, the payment of any redemption premium
(except with respect to certain premium payments in the case of certain small
issue industrial development and pollution control municipal securities), the
value of the shares of the Fund or the market value of municipal securities, or
payments of any tender purchase price upon the tender of the municipal
securities. Original Issue Insurance also does not insure against nonpayment of
principal of or interest on municipal securities resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
such obligations.
In the event that interest on or principal of a municipal security covered
by insurance is due for payment but is unpaid by reason of nonpayment by the
issuer thereof, the applicable insurer will make payments to its fiscal agent
(the "Fiscal Agent") equal to such unpaid amounts of principal and interest not
later than one business day after the insurer has been notified that such
nonpayment has occurred (but not earlier than the date of such payment is due).
The Fiscal Agent will disburse to the Fund the amount of principal and interest
which is then due for payment but is unpaid upon receipt by the Fiscal Agent of
(i) evidence of the Fund's right to receive payment of such principal and
interest and (ii) evidence, including any appropriate instrument of assignment,
that all of the rights of payment of such principal or interest then due for
payment shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal
securities covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such municipal
securities. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the municipal securities so
insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated.
SECONDARY MARKET INSURANCE. Subsequent to the time of original issuance of
a municipal security, the Fund or a third party may, upon the payment of a
single premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal security
covered thereby remains outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal security.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal security would be to enhance the value of such municipal
security. The Fund, for example, might seek to purchase a particular municipal
security and obtain Secondary Market Insurance with respect thereto if, in the
opinion of the Adviser, the market value of such municipal security, as insured,
would exceed the current value of the municipal security without insurance plus
the cost of the Secondary Market Insurance. Similarly, if the Fund owns but
wishes to sell a municipal security that is then covered by Portfolio Insurance,
the Fund might seek to obtain Secondary Market Insurance with respect thereto
if, in the opinion of the Adviser, the net proceeds of a sale by the Fund of
such obligation, as insured, would exceed the current value of such obligation
plus the cost of the Secondary Market Insurance.
PORTFOLIO INSURANCE. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to
B-6
<PAGE> 406
reduce financial risk, but the cost thereof and compliance with investment
restrictions imposed under the policy will reduce the yield to shareholders of
the Fund. If a municipal security already is covered by Original Issue Insurance
of Secondary Market Insurance, the Fund is not required to additionally insure
any such municipal security under any policy of Portfolio Insurance that the
Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal
security that has been redeemed from or sold by the Fund on the date of such
redemption or the settlement date of such sale, and an insurer shall not have
any liability thereafter under a policy as to any such municipal security,
except that if the date of such redemption or the settlement date of such sale
occurs after a record date and before the related payment date with respect to
any such municipal security, the policy will terminate as to such municipal
security on the business day immediately following such payment date. Each
policy will terminate as to all municipal securities covered thereby on the date
on which the last of the covered municipal securities mature, are redeemed or
are sold by the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant
to an irrevocable commitment of the insurer, with the option to exercise the
right to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
B-7
<PAGE> 407
GENERAL. It is anticipated that certain of the municipal securities to be
purchased by the Fund will be insured under policies obtained by persons other
than the Fund. In instances in which the Fund purchases municipal securities
insured under policies obtained by persons other than the Fund, the Fund does
not pay the premiums for such policies; rather the cost of such policies may be
reflected in a higher purchase price for such municipal securities. Accordingly,
the yield on such municipal securities may be lower than that on similar
uninsured municipal securities. Premiums for a Portfolio Insurance Policy
generally are paid by the Fund monthly, and are adjusted for purchases and sales
of municipal securities covered by the policy during the month. The yield on the
Fund's portfolio is reduced to the extent of the insurance premiums paid by the
Fund which, in turn, will depend upon the characteristics of the covered
municipal securities held by the Fund. In the event the Fund were to purchase
Secondary Market Insurance with respect to any municipal securities then covered
by a Portfolio Insurance policy, the coverage and the obligation of the Fund to
pay monthly premiums under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by
Standard and Poor's ("S&P"), Aaa by Moody's Investor Services, Inc. ("Moody's")
or an equivalent rating by another nationally recognized statistical ratings
organization ("NRSRO"), or if the Adviser anticipates such a lowering or
otherwise does not believe an insurer's claims-paying ability merits its
existing triple-A rating, the Fund could seek to obtain additional insurance
from an insurer whose claims-paying ability is rated AAA by S&P, Aaa by Moody's
or an equivalent rating by another NRSRO, or if the Adviser determines that the
cost of obtaining such additional insurance outweigh the benefits, the Fund may
elect not to obtain additional insurance. In making such determination, the
Adviser will consider the cost of the additional insurance, the new
claims-paying ability rating and financial condition of the existing insurer and
the creditworthiness of the issuer or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. The Fund cannot predict the
consequences of a state takeover of an insurer's obligations and, in particular,
whether such an insurer (or its state regulatory agency) could or would honour
all of the insurer's contractual obligations including any outstanding insurance
contracts insuring the timely payment of principal and interest on municipal
securities. The Fund cannot predict the impact which such events might have on
the market values of such municipal security. In the event of a default by an
insurer on its obligations with respect to any municipal securities in the
Fund's portfolio, the Fund would look to the issuer or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer or
guarantor may not be rated AAA by S&P, Aaa by Moody's or an equivalent rating by
another NRSRO. Accordingly, the Fund could be exposed to greater risk of
non-payment in such circumstances which could adversely affect the Fund's net
asset value. Alternatively, the Fund could elect to dispose of such municipal
securities; however, the market prices for such municipal securities may be
lower than the Fund's purchase price for them and the Fund could sustain a
capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk
(i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
As described in the Prospectus, except during temporary periods, the Fund
will invest substantially all of its assets in California municipal securities.
The portfolio of the Fund may include securities issued by the
B-8
<PAGE> 408
State of California (the "State"), by its various public bodies (the "Agencies")
and/or by other municipal entities located within the State (securities of all
such entities are referred to herein as "California municipal securities").
In addition, the specific California municipal securities in which the Fund
will invest will change from time to time. The Fund is therefore susceptible to
political, economic, regulatory or other factors affecting issuers of California
municipal securities. The following information constitutes only a brief summary
of a number of the complex factors which may impact issuers of California
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of California municipal
securities may be subject. Such information is derived from official statements
utilized in connection with the issuance of California municipal securities, as
well as from other publicly available documents. Such information has not been
independently verified by the Fund and the Fund assumes no responsibility for
the completeness or accuracy of such information. Additionally, many factors,
including national, economic, social and environmental policies and conditions,
which are not within the control of such issuers, could have an adverse impact
on the financial condition of such issuers. The Fund cannot predict whether or
to what extent such factors or other factors may affect the issuers of
California municipal securities, the market value or marketability of such
securities or the ability of the respective issuers of such securities acquired
by the Fund to pay interest on or principal of such securities. The
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no assurance on the part of the State of California to
make payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within California, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of California municipal securities.
State Indebtedness. The Treasurer of the State of California (the "State")
is responsible for the sale of debt obligations of the State and its various
authorities and agencies. The State has always paid the principal of and
interest on its general obligation bonds, general obligation commercial paper,
lease-purchase debt and short-term obligations, including revenue anticipation
notes and revenue anticipation warrants, when due.
Capital Facilities Financing. The State Constitution prohibits the creation
of general obligation indebtedness of the State unless a bond law is approved by
a majority of the electorate voting at a general election or a direct primary.
General obligation bond acts provide that debt service on general obligation
bonds shall be appropriated annually from the State's General Fund and all debt
service on general obligation bonds is paid from the General Fund. Under the
State Constitution, debt service on general obligation bonds is the second
charge to the General Fund after the application of moneys in the General Fund
to the support of the public school system and public institutions of higher
education. Certain general obligation bond programs receive revenues from
sources other than the sale of bonds or the investment of bond proceeds.
As of October 1, 1999, the State had outstanding $19,630,276,000 aggregate
principal amount of long-term general obligation bonds, and unused voter
authorizations for the future issuance of $12,827,414,000 of long-term general
obligation bonds. This latter figure consists of $4,451,734,000 of authorized
commercial paper notes, described below (of which $814,565,000 was outstanding),
which has not yet been refunded by general obligation bonds, and $8,375,680,000
of other authorized but unissued general obligation debt.
In its 1999 session, the Legislature passed and the Governor signed five
bond acts, totaling $4.69 billion in new authorizations. These bond acts will be
placed on the March 7, 2000 ballot for voter approval.
Pursuant to legislation enacted in 1995, voter approved general obligation
indebtedness may be issued either as long-term bonds, or, for some but not all
bond acts, as commercial paper notes. Commercial paper notes may be renewed or
may be refunded by the issuance of long-term bonds. The State issues long-term
general obligation bonds from time to time to retire its general obligation
commercial paper notes. Pursuant to the terms of the bank credit agreement
presently in effect supporting the general obligation commercial paper program,
not more than $1.5 billion of general obligation commercial paper notes may be
outstanding at any
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time; this amount may be increased or decreased in the future. Commercial paper
notes are deemed issued upon authorization by the respective Finance Committees,
whether or not such notes are actually issued. As of October 1, 1999 the Finance
Committees had authorized the issuance of up to $4,451,734,000 of commercial
paper notes; as of that date $814,565,000 aggregate principal amount of general
obligation commercial paper notes was outstanding.
In addition to general obligation bonds, the State builds and acquires
capital facilities through the use of lease-purchase borrowing. Under these
arrangements, the State Public Works Board, another State or local agency or a
joint powers authority issues bonds to pay for the construction of facilities
such as office buildings, university buildings or correctional institutions.
These facilities are leased to a State agency or the University of California
under a long-term lease which provides the source of payment of the debt service
on the lease-purchase bonds. In some cases, there is not a separate bond issue,
but a trustee directly creates certificates of participation in the State's
lease obligation, which are marketed to investors. Under applicable court
decisions, such lease arrangements do not constitute the creation of
"indebtedness" within the meaning of the Constitutional provisions which require
voter approval. For purposes of this section, "lease-purchase debt" or
"lease-purchase financing" means principally bonds or certificates of
participation for capital facilities where the rental payments providing the
security are a direct or indirect charge against the General Fund and also
includes revenue bonds for a State energy efficiency program secured by payments
made by various State agencies under energy service contracts. Certain of the
lease-purchase financings are supported by special funds rather than the General
Fund. The State had $6,578,874,434 General Fund-supported lease-purchase debt
outstanding at October 1, 1999. The State Public Works Board, which is
authorized to sell lease revenue bonds, had $2,035,434,000 authorized and
unissued as of October 1, 1999. Also, as of that date certain joint powers
authorities were authorized to issue approximately $69,500,000 of revenue bonds
to be secured by State leases.
Certain State agencies and authorities issue revenue obligations for which
the General Fund has no liability. Revenue bonds represent obligations payable
from State revenue-producing enterprises and projects, which are not payable
from the General Fund, and conduit obligations payable only from revenues paid
by private users of facilities financed by the revenue bonds. The enterprises
and projects include transportation projects, various public works projects,
public and private educational facilities (including the California State
University and University of California systems), housing, health facilities and
pollution control facilities. There are 17 agencies and authorities authorized
to issue revenue obligations (excluding lease-purchase debt). State agencies and
authorities had $26,008,006,628 aggregate principal amount of revenue bonds and
notes which are non-recourse to the General Fund outstanding as of June 30,
1999.
State Finances and the Budget Process. The State's fiscal year begins on
July 1 and ends on June 30. The State operates on a budget basis, using a
modified accrual system of accounting, with revenues credited in the period in
which they are measurable and available and expenditures debited in the period
in which the corresponding liabilities are incurred.
The annual budget is proposed by the Governor by January 10 of each year
for the next fiscal year (the "Governor's Budget"). Under state law, the annual
proposed Governor's Budget cannot provide for projected expenditures in excess
of projected revenues and balances available from prior fiscal years. Following
the submission of the Governor's Budget, the Legislature takes up the proposal.
Under the State Constitution, money may be drawn from the Treasury only
through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature and
signed by the Governor. The Budget Act must be approved by a two-thirds majority
vote of each House of the Legislature. The Governor may reduce or eliminate
specific line items in the Budget Act or any other appropriations bill without
vetoing the entire bill. Such individual line-item vetoes are subject to
override by a two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the Budget
Act. Bills containing appropriations (except for K-14 education) must be
approved by a two-thirds majority vote in each House of the Legislature and be
signed by the Governor. Bills containing K-14 education appropriations only
require a simple majority vote. Continuing appropriations, available without
regard to fiscal year, may also be provided
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by statute or the State Constitution. There is litigation pending concerning the
validity of such continuing appropriations.
Funds necessary to meet an appropriation need not be in the State Treasury
at the time such appropriation is enacted, revenues may be appropriated in
anticipation of their receipt.
The moneys of the State are segregated into the General Fund and over 900
special funds, including bond, trust and pension funds. The General Fund
consists of revenues received by the State Treasury and not required by law to
be credited to any other fund, as well as earnings from the investment of state
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
The Special Fund for Economic Uncertainties ("SFEU") is funded with General
Fund revenues and was established to protect the State from unforeseen revenue
reductions and/or unanticipated expenditure increases. Amounts in the SFEU may
be transferred by the State Controller as necessary to meet cash needs of the
General Fund. The State Controller is required to return moneys so transferred
without payment of interest as soon as there are sufficient moneys in the
General Fund.
At the time of signing of the 1999 Budget Act, on June 29, 1999, the
Department of Finance projected the SFEU would have a balance of about $1.932
billion at June 30, 1999, compared to the original budgeted amount of $1.1
billion. The 1999 Budget Act projects a balance in the SFEU of $880 million at
June 30, 2000.
Local Governments. The primary units of local government in California are
the counties, ranging in population from 1,200 in Alpine County to over
9,600,000 in Los Angeles County. Counties are responsible for the provision of
many basic services, including indigent health care, welfare, jails and public
safety in unincorporated areas. There are also about 470 incorporated cities,
and thousands of special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. Counties, in particular, have had fewer options to raise revenues than
many other local government entities, and have been required to maintain many
services.
In the aftermath of Proposition 13, the State provided aid to local
governments from the General Fund to make up some of the loss of property tax
moneys, including taking over the principal responsibility for funding K-12
schools and community colleges. During the recession, the Legislature eliminated
most of the remaining components of post-Proposition 13 aid to local government
entities other than K-14 education districts by requiring cities and counties to
transfer some of their property tax revenues to school districts. However, the
Legislature also provided additional funding sources (such as sales taxes) and
reduced certain mandates for local services. Since then the State has also
provided additional funding to counties and cities through such programs as
health and welfare realignment, welfare reform, trial court restructuring, the
COPs program supporting local public safety departments, and various other
measures.
The 1999 Budget Act includes a $150 million one-time subvention from the
General Fund to local agencies for relief from the 1992 and 1993 property tax
shifts. Legislation has been passed, subject to voter approval at the election
in November, 2000, to provide a more permanent payment to local governments to
offset the property tax shift. In addition, legislation was enacted in 1999 to
provide annually up to $50 million relief to cities based on 1997-98 costs of
jail booking and processing fees paid to counties.
In 1996, voters approved Proposition 218, entitled the "Right to Vote on
Taxes Act," which incorporates new Articles XIII C and XIII D into the
California Constitution. These new provisions place limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995, must be approved by voters in order to remain in effect. In
addition, Article XIII C clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its
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impact on local governments and their bonded debt which will require
interpretation by the courts or the Legislature. Proposition 218 does not affect
the State or its ability to levy or collect taxes.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," with respect to the State, are authorizations to spend "proceeds of
taxes," which consist of tax revenues, and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent that
such proceeds exceed "the cost reasonably borne by that entity in providing the
regulation, product or service," but "proceeds of taxes" exclude most state
subventions to local governments, tax refunds and some benefit payments such as
unemployment insurance. No limit is imposed on appropriations of funds which are
not "proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
The State's Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in state per capital personal income
and changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government or any transfer of the financial source for the provisions of
services from tax proceeds to non tax proceeds. The measurement of change in
population is a blended average of statewide overall population growth, and
change in attendance at local school and community college ("K-14") districts.
The Appropriations Limit is tested over consecutive two-year periods. Any excess
of the aggregate "proceeds of taxes" received over such two-year period above
the combined Appropriations Limits for those two years is divided equally
between transfers to K-14 districts and refunds to taxpayers.
The Legislature has enacted legislation to implement Article XIII B which
defines certain terms used in Article XIII B and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the university
level and the operation of the State Appropriations Limit, primarily by
guaranteeing K-14 schools a minimum share of General Fund revenues. Under
Proposition 98 (as modified by Proposition 111, which was enacted on June 5,
1990), K-14 schools are guaranteed the greater of (a) in general, a fixed
percent of General Fund revenues ("Test 1"), (b) the amount appropriated to K-14
schools in the prior year, adjusted for changes in the cost of living (measured
as in Article XIII B by reference to State per capita personal income) and
enrollment ("Test 2"), or (c) a third test, which would replace Test 2 in any
year when the percentage growth in per capita General Fund revenues from the
prior year plus one half of one percent is less than the percentage growth in
State per capita personal income ("Test 3"). Under Test 3, schools would receive
the amount appropriated in the prior year adjusted for changes in enrollment and
per capita General Fund revenues, plus an additional small adjustment factor. If
Test 3 is used in any year, the difference between Test 3 and Test 2 would
become a "credit" to schools which would be the basis of payments in future
years when per capital General Fund revenue growth exceeds per capita personal
income growth. Legislation adopted prior to the end of the 1988-89 Fiscal Year,
implementing Proposition 98, determined the K-14 schools' funding guarantee
under Test 1 to be 40.3 percent of the General Fund tax revenues, based on
1986-87 appropriations. However, that
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percent has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State is repaying
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, of from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
Tobacco Litigation. In late 1998, the State signed a settlement agreement
with the four major cigarette manufacturers, which was later ratified by a State
court judge having jurisdiction over a pending lawsuit brought by the State
against these companies. The settlement became final in late September, 1999.
Under the settlement, the companies will pay California governments a total of
approximately $25 billion over a period of 25 years. In addition, payments of
approximately $1 billion per year will continue in perpetuity. Under the
settlement, half of these moneys will be paid to the State and half to local
governments (all counties and the cities of San Diego, Los Angeles, San
Francisco and San Jose). The State's 1999-2000 Budget includes receipt of about
$560 million of these settlement moneys to the General Fund by June 30, 2000.
The specific amount to be received by the State and local governments is,
however, subject to adjustment for a number of reasons. Various details in the
settlement allow reduction of the companies' payments because of events such as
certain federal government actions, or reductions in cigarette sales. In the
event that any of the companies goes into bankruptcy, the State could seek to
terminate the agreement with respect to those companies filing bankruptcy
actions thereby reinstating all claims against those companies. The State may
then pursue those claims in the bankruptcy litigation, or as otherwise provided
by law.
1999-2000 Fiscal Year Budget. On January 8, 1999, Governor Davis released
his proposed budget for Fiscal Year 1999-00 (the "January Governor's Budget").
The January Governor's Budget generally reported that general fund revenues for
FY 1998-99 and FY 1999-00 would be lower than earlier projections (primarily due
to weaker overseas economic conditions perceived in late 1998), while some
caseloads would be higher than earlier projections. The January Governor's
Budget proposed $60.5 billion of general fund expenditures in FY 1999-00, with a
$415 million SFEU reserve at June 30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues for
combined fiscal years 1998-99 and 1999-00. The completion of the 1999 Budget Act
occurred in a timely fashion. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers of
$63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the SFEU would
have a balance at June 30, 2000, of about $880 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated in
bargaining with employee unions), and for litigation reserves. The 1999 Budget
Act anticipates normal cash flow borrowing during the fiscal year.
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"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year.
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 for which market quotations are not readily available
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 typically 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 as amended from time to
time.
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STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various Strategic Transactions
(as defined in the Prospectus) to earn income, facilitate portfolio management
and mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Fund's Adviser seeks to use such transactions to further the Fund's
investment objective, no assurance can be given that the use of these
transactions will achieve this result.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale
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of a futures contract creates a firm obligation by the Fund, as seller, to
deliver to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the 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
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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 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
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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.
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INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder 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 at the meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitations on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. These
restrictions provide that the Fund shall not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the U.S. government or by its agencies or instrumentalities), if as a
result more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities or any single issuer, except that up to 25% of the Fund's
total assets may be invested without regard to such limitation, except
that the Fund may purchase securities of other investment companies to
the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, as
described in the Prospectus, the Fund may from time to time invest more
than 25% of its assets in a particular segment of the municipal bond
market; however, the Fund will not invest more than 25% of its assets in
industrial development bonds in a single industry, and except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
3. Borrow money, except from banks for temporary purposes and then in
amounts not in excess of 5% of the total asset value of the Fund, or
mortgage, pledge or hypothecate any assets except in connection with a
borrowing and in amounts not in excess of 10% of the total asset value
of the Fund. Borrowings may not be made for investment leverage, but
only to enable the Fund to satisfy redemption requests where liquidation
of portfolio securities is considered disadvantageous or inconvenient.
In this connection, the Fund will not purchase portfolio securities
during any period that such borrowings exceed 5% of the total asset
value of the Fund. Notwithstanding this investment restriction, the Fund
may enter into "when issued" and "delayed delivery" transactions as
described in the Prospectus.
4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other
financial futures or index contracts or related options, except as
hedging transactions in accordance with the requirements of the SEC and
the CFTC.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
8. Make investments for the purpose of exercising control or participation
in management, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the
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rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
10. Invest in equity interests in oil, gas or other mineral exploration or
development programs.
11. Purchase or sell real estate commodities or commodity contracts, except
as set forth in item 6 above and except to the extent the municipal
securities in which the Fund may invest are considered to be interests
in real estate.
As long as the percentage restrictions described above are satisfied at the
time of investment or borrowing, the Fund will be considered to have abided by
those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S--A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
<TABLE>
<S> <C>
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to meet its financial commitment on the obligation
is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only
in small degree. Capacity to meet its financial commitment
on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. Capacity to
meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to meet its financial commitment on the obligation.
</TABLE>
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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: Debt rated "C" is currently highly vulnerable to nonpayment.
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.
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 factors 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>
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<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 considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1: This designation indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C: This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the due date, even if the
applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period.
</TABLE>
A commercial paper 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 to S&P by the issuer or obtained 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.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC.--A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
<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.
</TABLE>
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<TABLE>
<S> <C>
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 through Caa. The
modifier 1 indicates that the obligation ranks in the higher
end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of that 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.
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-
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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.
-- 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.
B-25
<PAGE> 425
Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
DESCRIPTION OF INSURANCE COMPANY CLAIMS PAYING ABILITY RATINGS
RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
The claims-paying ability of insurance companies is rated by S&P and
Moody's. Descriptions of these ratings are set forth below:
DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Superior financial security on an absolute and relative basis.
Capacity to meet policyholder obligations is overwhelming under a variety of
economic and underwriting conditions.
AA. Excellent financial security. Capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions.
A. Good financial security, but capacity to meet policyholder obligations
is somewhat susceptible to adverse economic and underwriting conditions.
BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.
DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Insurance companies rated Aaa offer exceptional financial security.
While the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair their fundamentally
strong position.
AA. Insurance companies rated Aa offer excellent financial security.
Together with the Aaa group they constitute what are generally known as high
grade companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
BAA. Insurance companies rated Baa offer adequate financial security.
However, certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Note: Numeric modifiers are used to refer to the ranking within the group -- one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.
B-26
<PAGE> 426
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. Trustee/Director of each of the
1632 Morning Mountain Road funds in the Fund Complex. Co-founder, and prior to
Raleigh, NC 27614 August 1996, Chairman, Chief Executive Officer and
Date of Birth: 07/14/32 President, MDT Corporation (now known as
Age: 67 Getinge/Castle, Inc., a subsidiary of Getinge
Industrier AB), a company which develops,
manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
Age: 61 January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in
233 South Wacker Drive the Fund Complex. Prior to 1997, Partner, Ray &
Suite 7000 Berndtson, Inc., an executive recruiting and
Chicago, IL 60606 management consulting firm. Formerly, Executive Vice
Date of Birth: 06/03/48 President of ABN AMRO, N.A., a Dutch bank holding
Age: 51 company. Prior to 1992, 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.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created
Washington, D.C. 20016 to deepen understanding, promote collaboration and
Date of Birth: 02/29/52 stimulate exchanges of practical experience between
Age: 47 Americans and Europeans. Trustee/Director of each of
the funds in the Fund Complex. Formerly, advisor to
the Dennis Trading Group Inc., a managed futures and
option company that invests money for individuals and
institutions. Prior to 1992, President and Chief
Executive Officer, Director and Member of the
Investment Committee of the Joyce Foundation, a
private foundation.
</TABLE>
B-27
<PAGE> 427
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since April 1997
New York, NY 10048 and Chief Executive Officer since June 1998 of Morgan
Date of Birth: 08/13/53 Stanley Dean Witter Advisors Inc. and Morgan Stanley
Age: 46 Dean Witter Services Company Inc. Chairman, Chief
Executive Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998. Chairman and
Chief Executive Officer since June 1998, and Director
since January 1998, of Morgan Stanley Dean Witter
Trust FSB. Director of various Morgan Stanley Dean
Witter subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index Series
since May 1999. Trustee/Director of each of the funds
in the Fund Complex, and Vice President of other
investment companies advised by the Advisers and their
affiliates. Previously Chief Strategic Officer of
Morgan Stanley Dean Witter Advisors Inc. and Morgan
Stanley Dean Witter Services Company Inc. and
Executive Vice President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice President
of the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series May 1997-April 1999, and
Executive Vice President of Dean Witter, Discover &
Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company and
Winter Park, FL 32789 registered investment adviser in the State of Florida.
Date of Birth: 02/13/36 President and owner, Nelson Ivest Brokerage Services
Age: 63 Inc., a member of the National Association of
Securities Dealers, Inc. and Securities Investors
Protection Corp. Trustee/Director of each of the funds
in the Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor,
Oakbrook Terrace, IL 60181-5555 Van Kampen Advisors Inc. and Van Kampen Management
Date of Birth: 02/02/46 Inc. Director and officer of certain other
Age: 53 subsidiaries of Van Kampen Investments. Trustee and
President of each of the funds in the Fund Complex.
Trustee/Director, President and Chairman of the Board
of other investment companies advised by the Advisers
and their affiliates, and Chief Executive Officer of
Van Kampen Exchange Fund. Prior to May 1998, Executive
Vice President and Director of Marketing at Morgan
Stanley Dean Witter and Director of Dean Witter
Discover & Co. and Dean Witter Realty. Prior to 1996,
Director of Dean Witter Reynolds Inc.
</TABLE>
B-28
<PAGE> 428
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Age: 55 Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the Fund
Complex. Prior to 1998, Director of Stone Smurfit
Container Corp., a paper manufacturing company. From
May 1996 through February 1997 he was President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company,
and from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Age: 75 Dynalysis of Princeton, a firm engaged in 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,
333 West Wacker Drive Meagher & Flom (Illinois), legal counsel to the funds
Chicago, IL 60606 in the Fund Complex, and other investment companies
Date of Birth: 08/22/39 advised by the Advisers or Van Kampen Management Inc.
Age: 60 Trustee/Director of each of the funds in the Fund
Complex, and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or
Van Kampen Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Age: 58 Marshall Fund of the United States, Trustee of
Colorado College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/Director
of each of the funds in the Fund Complex. Prior to
1993, Executive Director of the Commission on
Behavioral and Social Sciences and Education at the
National Academy of Sciences/National Research
Council. From 1980 through 1989, Partner of Coopers &
Lybrand.
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network
233 South Wacker Drive system solutions, COMARCO, Inc., a wireless
Suite 9700 communications products company and APAC Customer
Chicago, IL 60606 Services, Inc., a provider of outsourced customer
Date of Birth: 10/29/53 contact services. Trustee/Director of each of the
Age: 46 funds in the Fund Complex. Prior to May 1996,
President of Advance Ross Corporation, an
international transaction services and pollution
control equipment manufacturing company.
</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. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-29
<PAGE> 429
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood 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.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and
Age: 57 Van Kampen Management Inc. Executive Vice President and
Chief Investment Officer of each of the funds in the Fund
Complex, since 1998. Chief Investment Officer, Executive
Vice President and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or Van
Kampen Management Inc. ("Management Inc."), since the
inception of funds advised by Advisory Corp. and
Management Inc. and since 1998 for funds advised by Asset
Management. Director of Global Decisions Group LLC, a
financial research firm, and its affiliates MCM Asia
Pacific and MCM Europe. Prior to 1998, President, Chief
Operating Officer and a Director of the Advisers, Van
Kampen American Capital Management, Inc.; Director of Van
Kampen American Capital, Inc.; and President, Chief
Executive Officer and Trustee of each of the funds advised
by Advisory Corp. Prior to July 1998, Director and
Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996,
Chief Executive Officer and Director of MCM Group, Inc.
and McCarthy, Crisanti & Maffei, Inc., a financial
research firm, and Chairman of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to December 1991,
Senior Vice President of Van Kampen Merritt Inc.
</TABLE>
B-30
<PAGE> 430
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van
Vice President and Secretary Kampen Advisors Inc., Van Kampen Management Inc., the
Age: 43 Distributor, American Capital Contractual Services, Inc.,
Van Kampen Exchange Corp., Van Kampen Recordkeeping
Services Inc., Investor Services, Van Kampen Insurance
Agency of Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal Legal
Officer and Secretary of other investment companies
advised by the Advisers or their affiliates. Vice
President and Secretary of each of the funds in the Fund
Complex. Prior to January 1999, Vice President and
Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission,
Division of Investment Management, Office of Chief
Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen
Age: 44 Management Inc. and Van Kampen Investor Services Inc., and
serves as a Director or Officer of certain other
subsidiaries of Van Kampen Investments. Vice President of
each of the funds in the Fund Complex and certain other
investment companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President and
Senior Planning Officer for Individual Asset Management of
Morgan Stanley Dean Witter and its predecessor since 1994.
From 1990-1994, First Vice President and Assistant
Controller in Dean Witter's Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice
Vice President President of each of the funds in the Fund Complex and
Age: 43 certain other investment companies advised by the Advisers
or their affiliates. Prior to September 1996, Director of
McCarthy, Crisanti & Maffei, Inc, a financial research
company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
Age: 59 companies advised by the Advisers or their affiliates.
Prior to October 1998, Vice President and Senior Portfolio
Manager with AIM Capital Management, Inc. Prior to
February 1998, Senior Vice President of Van Kampen
American Capital Asset Management, Inc., Van Kampen
American Capital Investment Advisory Corp. and Van Kampen
American Capital Management, Inc.
</TABLE>
B-31
<PAGE> 431
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
Age: 44 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.
Age: 53
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.
Age: 44 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
Age: 40 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 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 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 on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. The compensation of each
Non-Affiliated Trustee includes a per meeting fee from each fund in the Fund
Complex 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
B-32
<PAGE> 432
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
AGGREGATE PENSION OR ESTIMATED MAXIMUM COMPENSATION
COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FROM THE REGISTRANT(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ---------------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $15,220 $40,303 $60,000 $126,000
Jerry D. Choate(1) 6,754 0 60,000 88,700
Linda Hutton Heagy 15,220 5,045 60,000 126,000
R. Craig Kennedy 15,220 3,571 60,000 125,600
Jack E. Nelson 15,220 21,664 60,000 126,000
Phillip B. Rooney 13,820 7,787 60,000 113,400
Dr. Fernando Sisto 15,220 72,060 60,000 126,000
Wayne W. Whalen 15,220 15,189 60,000 126,000
Suzanne H. Woolsey(1) 6,754 0 60,000 88,700
Paul G. Yovovich(1) 14,020 2,845 60,000 126,000
</TABLE>
- ---------------
(1) Trustees not eligible for compensation are not included in the compensation
table. Mr. Yovovich became a member of the Board of Trustees for the Fund
and other funds in the Fund Complex on October 22, 1998 and therefore does
not have a full fiscal year of information to report. Mr. Choate and Ms.
Woolsey became members of the Board of Trustees for the Trust and other
funds in the Fund Complex effective May 26, 1999 and therefore do not have a
full year of information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal year ended September 30, 1999.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The detail of cumulative
deferred compensation (including interest) owed to Trustees, including
former Trustees by each series, including the Fund, is shown in Table C
below. The deferred compensation plan is described above the Compensation
Table.
B-33
<PAGE> 433
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating investment companies in the Fund Complex
for each of the trustees for the funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
(4) For each Trustee, this is the sum of the estimated maximum annual benefits
payable by the funds 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 funds in the Fund Complex as of December 31, 1999 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, 1999. The deferred compensation earns a
rate of return determined by reference to the return on the shares of the
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those investment
companies selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The Advisers and their affiliates also
serve as investment adviser for other investment companies; however, with
the exception of Mr. Whalen, the Non-Affiliated Trustees were not trustees
of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
As of December 31, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-34
<PAGE> 434
TABLE A
1999 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund....... 9/30 $ 3,322 $1,483 $ 3,322 $ 3,322 $ 3,322 $ 3,122 $ 3,322 $ 3,322
Tax Free High Income Fund......... 9/30 2,998 1,366 2,998 2,998 2,998 2,798 2,998 2,998
California Insured Tax Free
Fund............................ 9/30 1,692 745 1,692 1,692 1,692 1,492 1,692 1,692
Municipal Income Fund............. 9/30 2,781 1,241 2,781 2,781 2,781 2,581 2,781 2,781
Intermediate Term Municipal Income
Fund............................ 9/30 1,460 631 1,460 1,460 1,460 1,260 1,460 1,460
Florida Insured Tax Free Income
Fund............................ 9/30 1,488 646 1,488 1,488 1,488 1,288 1,488 1,488
New York Tax Free Income Fund..... 9/30 1,479 642 1,479 1,479 1,479 1,279 1,479 1,479
------- ------ ------- ------- ------- ------- ------- -------
Trust Total..................... $15,220 $6,754 $15,220 $15,220 $15,220 $13,820 $15,220 $15,220
======= ====== ======= ======= ======= ======= ======= =======
<CAPTION>
TRUSTEE
------------------
FUND NAME WOOLSEY YOVOVICH
--------- ------- --------
<S> <C> <C>
Insured Tax Free Income Fund....... $1,483 $ 3,122
Tax Free High Income Fund......... 1,366 2,798
California Insured Tax Free
Fund............................ 745 1,492
Municipal Income Fund............. 1,241 2,581
Intermediate Term Municipal Income
Fund............................ 631 1,260
Florida Insured Tax Free Income
Fund............................ 646 1,288
New York Tax Free Income Fund..... 642 1,479
------ -------
Trust Total..................... $6,754 $14,020
====== =======
</TABLE>
TABLE B
1999 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ---------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund.......................... 9/30 $ 3,322 $ 819 $ 3,322 $1,661 $ 3,322 $ 3,122 $1,661 $ 3,322 $ 2,373
Tax Free High Income Fund.... 9/30 2,998 769 2,998 1,499 2,998 2,798 1,499 2,998 2,165
California Insured Tax Free
Fund....................... 9/30 1,692 471 1,692 846 1,692 1,492 846 1,692 1,216
Municipal Income Fund........ 9/30 2,781 707 2,781 1,391 2,781 2,581 1,391 2,781 1,991
Intermediate Term Municipal
Income Fund................ 9/30 1,460 415 1,460 730 1,460 1,260 730 1,460 1,045
Florida Insured Tax Free
Income Fund................ 9/30 1,488 423 1,488 744 1,488 1,288 744 1,488 1,069
New York Tax Free Income
Fund....................... 9/30 1,479 422 1,479 740 1,479 1,279 740 1,479 1,060
------- ------ ------- ------ ------- ------- ------ ------- -------
Trust Total................ $15,220 $4,026 $15,220 $7,611 $15,220 $13,820 $7,611 $15,220 $10,919
======= ====== ======= ====== ======= ======= ====== ======= =======
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL ---------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... 9/30 $12,061 $ 829 $13,428 $ 19,013 $ 28,191 $ 8,367 $ 6,888
Tax Free High Income Fund..... 9/30 11,230 778 12,661 18,570 27,209 7,518 4,640
California Insured Tax Free
Fund........................ 9/30 8,666 475 10,273 17,213 24,168 4,910 3,391
Municipal Income Fund......... 9/30 12,068 715 14,058 23,404 33,528 7,594 12,202
Intermediate Term Municipal
Income Fund................. 9/30 8,217 418 9,855 16,976 23,638 4,454 3,172
Florida Insured Tax Free
Income Fund................. 9/30 8,268 426 9,902 10,914 18,313 4,505 3,197
New York Tax Free Income
Fund........................ 9/30 4,537 425 3,611 5,706 8,667 3,632 1,967
------- ------ ------- -------- -------- ------- -------
Trust Total............... $65,047 $4,066 $73,788 $111,796 $163,714 $40,980 $35,457
======= ====== ======= ======== ======== ======= =======
<CAPTION>
TRUSTEES FORMER TRUSTEES
------------------- ----------------------------------------------
FUND NAME WHALEN YOVOVICH CARUSO GAUGHAN MILLER REES ROBINSON
--------- ------ -------- ------ ------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... $ 23,050 $ 2,479 $1,296 $1,064 $10,487 $ 0 $ 17,113
Tax Free High Income Fund..... 22,228 2,257 0 1,064 10,487 0 17,113
California Insured Tax Free
Fund........................ 19,692 1,260 0 1,064 10,487 0 17,113
Municipal Income Fund......... 27,189 2,076 2,778 1,306 14,169 7,077 22,359
Intermediate Term Municipal
Income Fund................. 19,249 1,080 0 1,064 10,487 0 17,113
Florida Insured Tax Free
Income Fund................. 15,409 1,105 0 496 6,656 0 12,280
New York Tax Free Income
Fund........................ 7,188 1,096 0 158 2,682 0 4,783
-------- ------- ------ ------ ------- ------ --------
Trust Total............... $134,005 $11,353 $4,074 $6,216 $65,455 $7,077 $107,874
======== ======= ====== ====== ======= ====== ========
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY YOVOVICH
- --------- -------- ------ ----- ------- ------ ------ ----- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 1995 1999 1995 1993 1984 1997 1995 1984 1999 1998
Tax Free High Income Fund.......... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
California Insured Tax Free Fund... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
Municipal Income Fund.............. 1995 1999 1995 1993 1990 1997 1995 1990 1999 1998
Intermediate Term Municipal Income
Fund............................. 1995 1999 1995 1993 1993 1997 1995 1993 1999 1998
Florida Insured Tax Free Income
Fund............................. 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
New York Tax Free Income Fund...... 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
</TABLE>
B-35
<PAGE> 435
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
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund however
bears the costs of its day-to-day operations, including the compensation of
trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), the charges and expenses of
legal counsel and independent accountants, distribution fees, service fees,
custodian fees, the costs of providing 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
errors of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the agreement relates, except a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in any jurisdiction where the Fund's shares are qualified for offer
and 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 fiscal 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 a 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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, the Adviser
received approximately $998,800, $648,200 and $814,400, 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 supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. 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 costs based proportionally on their respective net assets
per fund.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Advisory Corp.
received approximately $88,600, $57,200 and $70,200, respectively, in accounting
services fees from the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by
B-36
<PAGE> 436
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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Van Kampen
Investments received approximately $10,900, $6,800 and $9,100, respectively, in
legal services fees from the Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by a vote of a majority of the Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Year Ended September 30, 1999........................ $570,532 $40,270
Fiscal Period Ended September 30, 1998...................... $252,767 $19,360
Fiscal Year Ended December 31, 1997......................... $212,285 $24,787
</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 $25,000...................................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000......................... 2.75% 2.83% 2.50%
$250,000 but less than $500,000........................ 1.75% 1.78% 1.50%
$500,000 but less than $1,000,000...................... 1.50% 1.52% 1.25%
$1,000,000 or more..................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed 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.
B-37
<PAGE> 437
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 3.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent 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 or other
Van Kampen funds. 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.
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 the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary 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
B-38
<PAGE> 438
Distributor does not believe that termination of a relationship with a financial
intermediary would result in any material adverse consequences to the Fund.
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 or 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, 1999, there were $608,038.33 and $17,705.75 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 1.34% and 0.24% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plans 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 contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended September 30, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $383,139 or 0.24% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $442,323 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $332,705 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $109,618
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended September 30,
1999, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$63,827 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $32,634 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $31,193 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
B-39
<PAGE> 439
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas
City, MO 64121-8256. 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 purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
B-40
<PAGE> 440
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 & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("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 require 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 year ended September 30, 1999...................... $93,664 -- --
Fiscal period ended September 30, 1998.................... $16,184 -- --
Fiscal year ended December 31, 1997....................... $ 0 $0 $0
Fiscal year ended 1999 Percentages:
Commissions with affiliate to total commissions........... 0 -- --
Value of brokerage transactions with affiliate to total
transactions........................................... 0 -- --
</TABLE>
During the fiscal year ended September 30, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds (as defined in the prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends 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
gain dividends and systematic
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purchases or redemptions. Additional shares may be purchased at any time 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc. c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, 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
the fee for replacing the lost certificate equal to no more than 1.50% 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 Money Purchase and Profit Sharing
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
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds 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 redemption proceeds 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 or by calling (800) 341-2911 ((800) 421-2833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, 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 capital gain dividends paid on a class of shares of the Fund invested
into shares of the same class of any Participating Fund so long as the investor
has a pre-existing account for such class of shares of the other fund. Both
accounts must be of the same type, either non-retirement or retirement. If the
accounts are retirement accounts, they must both be for the same class and of
the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual. If a qualified, pre-existing account does
not exist, the shareholder must establish a new account subject to minimum
investment and other requirements of the fund into which distributions would be
invested. Distributions are invested into the selected fund at its net asset
value per share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000
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or more at the next determined net asset value per share at the time the plan is
established, the shareholder 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 payment represents
the proceeds of a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semiannual 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 systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawal plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions 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 upon 30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made by a shareholder during a rolling
365-day period. If exchange privileges are suspended, subsequent exchange
requests for redemption out of that Fund during the stated period will not be
processed. Exchange privileges will be restored when the account history shows
fewer than eight exchanges in the rolling 365-day period.
This policy change does not apply to money market funds, systematic
exchanges plans or employer sponsored retirement plans.
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 contingent deferred sales
charge 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 made 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 New York Stock Exchange
(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) the SEC determines that trading on the Exchange is restricted; (c) the SEC
determines that an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably
B-43
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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 and a gain or loss for federal tax purposes upon the
sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC-Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholder's account not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). 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 Internal Revenue Code of 1986, as
amended (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.
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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 CDSC-Class B and C 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), the financial hardship of the
employee pursuant to United States Treasury Regulations Section 401(k)-1(d)(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 THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal 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 sent 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 systematic withdrawal plan. The CDSC-Class B and
C will be waived on redemptions made under the systematic withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal 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 systematic withdrawal plan and the ability to offer the
systematic withdrawal 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 value of 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.
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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 OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund 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 investment company taxable income (generally including
tax-exempt interest, taxable income and net short-term capital gain but not net
capital gain, which is the excess of net long-term capital gain over net
short-term capital loss), and at least 90% of its net tax-exempt interest, and
meets certain other requirements, it will not be required to pay federal income
taxes on any income it distributes to shareholders. The Fund intends to
distribute at least the minimum amount of investment company taxable income and
net tax-exempt interest necessary to satisfy the 90% distribution requirement.
The Fund will not be subject to federal income tax on any net capital gain
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order
B-46
<PAGE> 446
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 TO SHAREHOLDERS
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its income will constitute
tax-exempt interest, a significant portion may consist of investment company
taxable income (generally taxable income and net short-term capital gain).
Distributions of the Fund's 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 as 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
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<PAGE> 447
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. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction. 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) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers investing in this Fund 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. 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,
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(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.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder the amount
of dividends paid to such shareholder and the amount, if any, of tax withheld
with respect to such dividends.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
CALIFORNIA
<TABLE>
<CAPTION>
FEDERAL STATE COMBINED
SINGLE RETURN JOINT RETURN TAX BRACKET TAX BRACKET* TAX BRACKET*
------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
$ 0-25,750 $ 0-43,050 15.00% 6.00% 20.10%
25,750-62,450 43,050-104,050 28.00% 9.30% 34.70%
62,450-130,250 104,050-158,550 31.00% 9.30% 37.40%
130,250-283,150 158,550-283,150 36.00% 9.30% 42.00%
Over 283,150 Over 283,150 39.60% 9.30% 45.20%
</TABLE>
- ---------------
* Please note that the table does not reflect (i) any federal or state
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits, (ii) any
local taxes imposed, or (iii) any taxes other than personal income taxes. The
table assumes that federal taxable income is equal to state income subject to
tax, and in cases where more than one state rate falls within a federal
bracket, the highest state rate corresponding to the highest income within
that federal bracket is used.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge 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 capital gain dividends
paid by the Fund.
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Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any contingent deferred sales charge
with respect to the contingent deferred sales charge 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. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares 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 and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings and largest holdings and other Fund
information, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio.
B-50
<PAGE> 450
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
whether shareholders purchased their fund shares 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 may also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking or rating 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
at 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 Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
September 30, 1999 was -6.58%; (ii) the five-year period ended September 30,
1999 was 5.56% and (iii) the ten year-period ended September 30, 1999 was 6.50%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1999 was 4.56%. The Fund's current distribution rate with
respect to the Class A Shares for the month ending September 30, 1999 was 4.64%.
The Fund's taxable equivalent distribution rate with respect to Class A Shares
for the month ending September 30, 1999 was 8.00%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to September 30, 1999 was 158.77%.
B-51
<PAGE> 451
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, 1999 was 167.47%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -6.96%, (ii) the five-year period ended
September 30, 1999 was 5.44% and (iii) the approximately six-year, five-month
period from May 1, 1993 (the commencement of distribution for Class B Shares of
the Fund) through September 30, 1999 was 4.20%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1999 was 3.95%. The Fund's current distribution rate with
respect to the Class B Shares for the month ending September 30, 1999 was 4.00%.
The Fund's taxable equivalent distribution rate with respect to Class B Shares
for the month ending September 30, 1999 was 6.90%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
May 1, 1993 (the commencement of distribution for Class B Shares of the Fund) to
September 30, 1999 was 30.20%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
May 1, 1993 (the commencement of distribution for Class B Shares of the Fund) to
September 30, 1999 was 30.20%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, with respect to the Class C Shares of the Fund for the
(i) one-year period ending September 30, 1999 was -5.071%, (ii) the five-year
period ended September 30, 1999 was 5.47% and (iii) the approximately six-year,
one-month period from August 13, 1993 (the commencement of distribution for
Class C Shares of the Fund) through September 30, 1999 was 3.61%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1999 was 3.99%. The Fund's current distribution rate with
respect to the Class C Shares for the month ending September 30, 1999 was 4.00%.
The Fund's taxable equivalent distribution rate with respect to Class C Shares
for the month ending September 30, 1999 was 6.90%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
August 13, 1993 (the commencement of distribution for Class C Shares of the
Fund) to September 30, 1999 was 24.33%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
August 13, 1993 (the commencement of distribution for Class C Shares of the
Fund) to September 30, 1999 was 24.33%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
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. The Custodian also provides
accounting services to the Fund.
B-52
<PAGE> 452
SHAREHOLDER REPORTS
Semiannual 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-53
<PAGE> 453
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen California Insured Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen California Insured Tax Free Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1999, the related statement of operations for
the year then ended, the statement of changes in net assets for the year then
ended, for the nine-month period ended September 30, 1998, and for the year
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, 1999, 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 California Insured Tax Free Fund as of September 30, 1999, the results of
its operations for the year then ended, the changes in its net assets for the
year then ended, for the nine-month period ended September 30, 1998, and for the
year 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 11, 1999
F-1
<PAGE> 454
PORTFOLIO OF INVESTMENTS
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS 97.9%
$ 2,500 Alameda Corridor Tran Auth CA Rev Sr
Lien Ser A (MBIA Insd)............... 5.000% 10/01/29 $ 2,228,550
1,925 Alhambra, CA City Elem Sch Dist Cap
Apprec Ser A (FSA Insd).............. * 09/01/20 569,800
2,000 Anaheim, CA Pub Fin Auth Tax Alloc
Rev (Inverse Fltg) (MBIA Insd)....... 9.220 12/28/18 2,300,000
1,000 Antioch Area Pub Fac Fin Agy CA Spl
Tax Cmnty Fac Dist (FGIC Insd)....... 5.000 08/01/18 926,800
3,675 Bakersfield, CA Ctfs Partn Convention
Cent Expansion Proj (MBIA Insd)...... 5.800 04/01/17 3,720,460
3,000 Bakersfield, CA Ctfs Partn Convention
Cent Expansion Proj (MBIA Insd)...... 5.875 04/01/22 3,042,030
1,000 Banning, CA Ctfs Partn Admin Bldg
Proj Ser A Rfdg (MBIA Insd).......... 5.500 11/01/20 984,620
3,000 Bay Area Govt Assn CA Rev Tax Alloc
CA Redev Agy Pool Ser A2 (FSA Insd)
(b).................................. 6.400 12/15/14 3,248,130
1,000 Brea & Olinda, CA Uni Sch Dist Ctfs
Partn Sr High Sch Pgm Ser A Rfdg (FSA
Insd)................................ 6.000 08/01/09 1,060,840
1,125 California Cmnty College Fin Auth
Lease Rev Ser A (MBIA Insd).......... 4.625 10/01/19 972,709
2,000 California Hlth Fac Fin Auth Rev
Adventist Hlth Ser A Rfdg (MBIA Insd)
(b).................................. 6.500 03/01/14 2,090,940
1,625 California Hlth Fac Fin Auth Rev Insd
Sutter Hlth Ser A Rfdg (FSA Insd).... 5.250 08/15/27 1,507,383
2,000 California Hlth Fac Fin Auth Rev
Kaiser Permanente Ser A (FSA Insd)... 5.550 08/15/25 1,955,540
3,000 California Hsg Fin Agy Rev Cap Apprec
Home Mtg Ser K (MBIA Insd) (a)....... * 08/01/24 663,240
4,000 California Hsg Fin Agy Rev Home Mtg
Ser A (MBIA Insd).................... 5.850 08/01/16 4,100,800
1,000 California Hsg Fin Agy Rev Home Mtg
Ser A (MBIA Insd).................... * 02/01/16 393,410
15 California Hsg Fin Agy Rev Hsg Ser B
(MBIA Insd).......................... 8.625 08/01/15 15,302
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 455
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS
(CONTINUED)
$ 1,110 California Pub Cap Impt Fin Auth Rev
Pooled Proj Ser B (BIGI Insd)........ 8.100% 03/01/18 $ 1,130,335
1,050 California Spl Dist Assn Fin Corp
Ctfs Partn Spl Dists Fin Pgm Ser DD
(FSA Insd)........................... 5.625 01/01/27 1,042,661
1,250 California St (FGIC Insd)............ 6.250 09/01/12 1,386,625
240 California St (MBIA Insd)............ 6.000 10/01/14 250,776
1,000 California St (FGIC Insd)............ 4.500 12/01/21 838,340
820 California St Pub Wks Brd Lease Rev
CA Cmnty Colleges Ser D Rfdg (AMBAC
Insd)................................ 5.250 10/01/10 844,534
1,000 California St Univ Fresno Assn Inc
Rev Aux Residence Student Proj (MBIA
Insd)................................ 6.250 02/01/17 1,060,930
1,000 California Statewide Cmntys Dev Auth
Ctfs Partn San Diego St Univ Fndtn
Rfdg (AMBAC Insd).................... 5.250 03/01/22 939,190
1,570 California Statewide Cmntys Dev Auth
Rev Ctfs Partn Insd Children's Hosps
Rfdg (MBIA Insd)..................... 6.000 06/01/10 1,703,214
2,000 Capistrano, CA Uni Sch Dist Cmnty Fac
Dist Spl Tax (MBIA Insd)............. 5.000 09/01/18 1,857,680
2,000 Castaic Lake Wtr Agy CA Ctfs Partn
Wtr Sys Impt Proj Ser A Rfdg (MBIA
Insd)................................ 7.000 08/01/12 2,328,800
2,195 Castaic Lake Wtr Agy CA Rev Ctfs
Partn (AMBAC Insd)................... * 08/01/30 347,754
1,205 Channel Islands Beach, CA Cmnty Svcs
Dist Ctfs Partn (FSA Insd)........... 5.700 09/01/21 1,209,736
1,105 Chino, CA Ctfs Partn Redev Agy (MBIA
Insd)................................ 6.200 09/01/18 1,170,438
2,350 Chino, CA Uni Sch Dist Ctfs Partn
Master Lease Pgm (FSA Insd).......... 6.250 03/01/09 2,554,638
1,500 Chino, CA Uni Sch Dist Ctfs Partn
Master Lease Pgm (FSA Insd).......... 6.000 03/01/14 1,558,500
3,010 Clayton, CA Redev Agy Tax Alloc Rev
(AMBAC Insd)......................... 5.000 08/01/24 2,711,378
1,000 Clovis, CA Pub Fin Auth Refuse Disp
Rev Ldfill Improv Proj Rfdg (AMBAC
Insd)................................ 5.000 09/01/18 928,840
40 Colton, CA Jt Uni Sch Dist Cmnty Fac
Dist Spl Tax Southridge Vlg Rfdg (FSA
Insd)................................ 5.900 09/01/14 40,014
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 456
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS
(CONTINUED)
$ 2,000 Colton, CA Pub Fin Auth Rev Tax Alloc
Ser A (MBIA Insd).................... 5.000% 08/01/18 $ 1,857,980
20 Concord, CA Redev Agy Tax Alloc Cent
Concord Redev Proj Ser 3 (BIGI
Insd)................................ 8.000 07/01/18 20,394
1,550 Contra Costa, CA Wtr Auth Wtr
Treatment Rev Ser A Rfdg (FGIC
Insd)................................ 5.750 10/01/14 1,575,885
1,500 Corona, CA Pub Fin Auth Wtr Rev (FGIC
Insd)................................ 4.750 09/01/18 1,335,465
5,165 Corona, CA Redev Agy Tax Alloc Redev
Proj Area A Ser A Rfdg (FGIC Insd)... 6.250 09/01/13 5,506,768
1,150 El Centro, CA Redev Agy Tax El Centro
Redev Proj Rfdg (MBIA Insd).......... 5.500 11/01/26 1,122,262
1,000 El Monte, CA Ctfs Partn Dept Pub
Social Svcs Fac (AMBAC Insd)......... 4.750 06/01/30 845,840
2,000 Fairfield Suison, CA Swr Dist Swr Rev
Ser A Rfdg (MBIA Insd) (b)........... 6.250 05/01/16 2,078,440
1,000 Folsom, CA Pub Fin Auth Rev Rfdg
(AMBAC Insd)......................... 6.000 10/01/12 1,040,420
1,400 Folsom, CA Pub Fin Auth Rev Rfdg
(AMBAC Insd)......................... 6.000 10/01/19 1,449,714
2,000 Folsom, CA Spl Tax Cmnty Fac Dist No
2 Rfdg (Connie Lee Insd)............. 5.250 12/01/19 1,905,420
3,000 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev (MBIA Insd).............. * 01/15/17 1,089,390
3,000 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev (MBIA Insd).............. * 01/15/18 1,018,320
1,250 Fresno, CA Jt Pwrs Fin Auth Lease Rev
(AMBAC Insd)......................... 4.750 09/01/18 1,112,888
1,575 Fresno, CA Uni Sch Dist Ser C Rfdg
(MBIA Insd) (a)...................... 5.800 02/01/15 1,650,915
520 Fresno, CA Uni Sch Dist Ser C Rfdg
(MBIA Insd) (a)...................... 5.800 08/01/15 545,589
555 Fresno, CA Uni Sch Dist Ser C Rfdg
(MBIA Insd) (a)...................... 5.800 08/01/16 580,241
590 Fresno, CA Uni Sch Dist Ser C Rfdg
(MBIA Insd) (a)...................... 5.900 08/01/17 620,338
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 457
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS
(CONTINUED)
$ 630 Fresno, CA Uni Sch Dist Ser C Rfdg
(MBIA Insd) (a)...................... 5.900% 08/01/18 $ 660,410
675 Fresno, CA Uni Sch Dist Ser C Rfdg
(MBIA Insd) (a)...................... 5.900 08/01/19 705,213
720 Fresno, CA Uni Sch Dist Ser C Rfdg
(MBIA Insd) (a)...................... 5.900 08/01/20 751,284
1,745 Gilroy, CA Uni Sch Dist Ctfs Partn
Measure J Cap Projs Rfdg (FSA
Insd)................................ 5.875 09/01/06 1,879,801
1,810 Gilroy, CA Uni Sch Dist Ctfs Partn
Measure J Cap Projs Rfdg (FSA
Insd)................................ 6.250 09/01/12 1,925,677
725 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd)................... 5.750 02/01/18 746,982
815 Golden West Schs Fin Auth CA Rev Ser
A Rfdg (MBIA Insd)................... 5.800 02/01/20 840,086
1,000 Grossmont, CA Union High Sch Dist
Ctfs Partn (FSA Insd)................ 5.650 09/01/17 1,008,630
20,000 Grossmont, CA Union High Sch Dist
Ctfs Partn (MBIA Insd)............... * 11/15/21 4,587,400
4,000 Hayward, CA Ctfs Partn Civic Cent
Proj (MBIA Insd)..................... 5.250 08/01/26 3,735,560
1,250 Hemet, CA Uni Sch Dist Ctfs Partn
Nutrition Cent Proj (FSA Insd)....... 5.875 04/01/27 1,266,338
1,545 Imperial, CA Irrig Dist Elec Rev Sys
Rfdg (MBIA Insd)..................... 5.000 11/01/18 1,419,252
2,000 Inglewood, CA Redev Agy Tax Alloc
Merged Redev Proj Ser A Rfdg (AMBAC
Insd)................................ 5.250 05/01/23 1,887,660
1,500 Jurupa, CA Uni Sch Dist Ctfs Partn
(FSA Insd)........................... 5.625 09/01/24 1,469,025
1,000 Kern, CA Cmnty College Dist Ctfs Part
Rfdg (MBIA Insd)..................... 5.000 01/01/18 930,250
1,000 Lancaster, CA Redev Agy Lease Rev Pub
Cap Impt Proj Rfdg (AMBAC Insd)...... 5.000 12/01/28 892,510
1,225 Lincoln, CA Uni Sch Dist (MBIA
Insd)................................ 5.600 09/01/26 1,212,334
850 Loma Linda, CA Hosp Rev Loma Linda
Univ Med Cent Proj B Rfdg (AMBAC
Insd)................................ 7.000 12/01/15 871,998
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 458
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS
(CONTINUED)
$ 2,000 Long Beach, CA Bond Fin Auth Lease
Rev Rainbow Harbor Refing Proj A
(AMBAC Insd)......................... 5.250% 05/01/24 $ 1,875,380
1,535 Long Beach, CA Redev Agy Tax Alloc
Sub Redev Proj Rfdg (AMBAC Insd)..... 5.125 04/01/20 1,409,084
3,000 Los Angeles Cnty, CA Ctfs Partn
Disney Pkg Proj Rfdg (AMBAC Insd).... 4.750 03/01/23 2,600,850
2,020 Los Angeles Cnty, CA Schs
Regionalized Business Svcs Ctfs Partn
(AMBAC Insd)......................... * 08/01/18 673,751
1,265 Los Angeles Cnty, CA Schs
Regionalized Business Svcs Ctfs Partn
(AMBAC Insd)......................... * 08/01/24 287,522
1,320 Los Angeles Cnty, CA Schs
Regionalized Business Svcs Ctfs Partn
(AMBAC Insd)......................... * 08/01/25 281,952
2,460 Los Angeles Cnty, CA Schs
Regionalized Business Svcs Ctfs Partn
(AMBAC Insd)......................... * 08/01/28 439,208
589 Los Angeles Cnty, CA Tran Comm Lease
Rev Dia RR Lease Ltd (FSA Insd)...... 7.375 12/15/06 623,521
2,380 Los Angeles, CA Mtg Rev Security 8
Asstd Proj Ser A Rfdg (MBIA Insd).... 6.100 07/01/25 2,413,082
500 M-S-R Pub Pwr Agy CA San Juan Proj
Rev Ser E (MBIA Insd)................ 6.000 07/01/22 509,420
2,000 Madera Cnty, CA Ctfs Partn Vly
Childrens Hosp Proj (MBIA Insd)...... 5.000 03/15/23 1,799,780
4,305 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev (AMBAC Insd)............ * 08/01/30 627,325
4,520 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev (AMBAC Insd)............ * 08/01/31 618,065
1,250 North City West, CA Sch Fac Fin Auth
Spl Tax Ser B Rfdg (FSA Insd)........ 5.750 09/01/15 1,279,250
1,640 North City West, CA Sch Fac Fin Auth
Spl Tax Ser B Rfdg (FSA Insd)........ 6.000 09/01/19 1,658,516
400 Northern CA Pwr Agy Pub Pwr Rev Hydro
Elec Proj 1 Ser A Rfdg (Prerefunded @
07/01/21) (AMBAC Insd)............... 7.500 07/01/23 489,984
1,220 Oceanside, CA Cmnty Dev Mtg North
River Club Ser A Rfdg (MBIA Insd).... 5.850 07/01/16 1,231,602
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 459
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS
(CONTINUED)
$ 1,000 Pajaro Vly, CA Uni Sch Dist Ctfs
Partn Sch Fac Brdg Fdg Pgm (FSA
Insd)................................ 5.850% 09/01/32 $ 1,009,080
3,000 Palm Desert, CA Fin Auth Tax Alloc
Rev (Inverse Fltg) (MBIA Insd)....... 8.760 04/01/22 3,382,500
1,000 Palmdale, CA Wtr Dist Rev Ctfs Parn
Rfdg (FGIC Insd)..................... 5.000 10/01/18 926,510
2,380 Pasadena, CA Uni Sch Dist Ser B (FGIC
Insd)................................ 5.000 07/01/20 2,177,200
1,000 Perris, CA Sch Dist Ctfs Partn Rfdg
(FSA Insd)........................... 6.100 03/01/16 1,046,210
1,000 Pinole, CA Redev Agy Tax Alloc Pinole
Vista Redev Proj A Rfdg (MBIA
Insd)................................ 5.000 08/01/17 935,470
1,360 Port Hueneme, CA Ctfs Partn Cap Impt
Pgm Rfdg (MBIA Insd)................. 6.000 04/01/19 1,431,522
3,000 Rancho Cucamonga, CA Redev Agy Tax
Alloc (FSA Insd)..................... 5.250 09/01/20 2,848,380
1,680 Rancho, CA Wtr Dist Spl Tax Cmnty Fac
Dist 883 Ser A Rfdg (AMBAC Insd)..... 6.000 09/01/17 1,705,788
1,000 Redding, CA Elec Sys Rev Ctfs Partn
(Inverse Fltg) (MBIA Insd)........... 9.004 07/01/22 1,150,000
1,000 Redlands, CA Redev Agy Tax Alloc
Redev Proj Ser A Rfdg (MBIA Insd).... 4.750 08/01/21 873,640
2,000 Rialto, CA Spl Tax Cmnty Fac Dist
87-1 Rfdg (FSA Insd)................. 5.625 09/01/18 2,006,840
3,000 Riverside Cnty, CA Ctfs Partn
Historic Courthouse Proj (MBIA
Insd)................................ 5.875 11/01/27 3,040,830
1,070 Riverside, CA Elec Rev Rfdg (AMBAC
Insd)................................ 5.000 10/01/18 993,720
1,755 Rohnert Pk, CA Cmnty Dev Agy Tax
Alloc Rohnert Redev Proj (MBIA
Insd)................................ * 08/01/31 266,830
1,755 Rohnert Pk, CA Cmnty Dev Agy Tax
Alloc Rohnert Redev Proj (MBIA
Insd)................................ * 08/01/33 236,434
1,755 Rohnert Pk, CA Cmnty Dev Agy Tax
Alloc Rohnert Redev Proj (MBIA
Insd)................................ * 08/01/35 208,985
1,000 Roseville, CA Fin Auth Loc Agy Rev
Northeast Cmnty Fac Dist Bond Ser A
Rfdg (FSA Insd)...................... 5.000 09/01/21 910,060
2,000 Sacramento, CA Muni Util Dist Elec
Rev Ser A Rfdg (MBIA Insd)........... 5.750 08/15/13 2,025,420
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 460
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS
(CONTINUED)
$ 1,000 Salinas, CA Santn Swr Sys Rev (FGIC
Insd)................................ 5.000% 08/01/20 $ 914,620
2,500 San Bernardino Cnty, CA Ctfs Partn
Ser B (Embedded Swap) (MBIA Insd).... 6.900 07/01/16 2,499,000
2,000 San Diego Cnty, CA Wtr Rev Ctfs Ser A
(FGIC Insd).......................... 4.750 05/01/18 1,782,800
1,000 San Diego, CA Indl Dev Rev San Diego
Gas & Elec Ser A (MBIA Insd)......... 6.400 09/01/18 1,055,560
5,000 San Diego, CA Uni Sch Dist Cap Apprec
Ser A (FGIC Insd).................... * 07/01/19 1,608,450
1,110 San Francisco, CA St Bldg Auth Lease
Rev (AMBAC Insd)..................... 5.250 12/01/16 1,084,759
1,000 San Gabriel, CA Uni Sch Dist Ctfs
Partn (FSA Insd)..................... 6.000 09/01/15 1,031,380
2,525 San Joaquin Cnty, CA Ctfs Partn Genl
Hosp Proj Rfdg (MBIA Insd)........... 5.000 09/01/18 2,312,294
1,045 San Joaquin Cnty, CA Ctfs Partn Genl
Hosp Proj Rfdg (MBIA Insd)........... 5.000 09/01/20 941,472
5,000 San Joaquin Hills, CA Tran Corridor
Agy Toll Rd Rev Cap Apprec Ser A Rfdg
(MBIA Insd).......................... * 01/15/30 842,800
7,050 San Joaquin Hills, CA Tran Corridor
Agy Toll Rd Rev Ser A Rfdg (MBIA
Insd)................................ 5.375 01/15/29 6,749,035
5,750 San Jose, CA Fin Auth Rev Convention
Proj Ser C (FSA Insd)................ 6.375 09/01/13 6,034,280
1,750 San Jose, CA Redev Agy Tax Alloc
Merged Area Redev Proj (AMBAC
Insd)................................ 5.000 08/01/31 1,548,732
5,080 San Marcos, CA Redev Agy Tax Alloc
(FSA Insd)........................... 5.375 08/01/25 4,874,311
5,250 San Mateo Cnty, CA Jt Pwrs Fin Auth
Lease Rev Cap Proj Ser A Rfdg (FSA
Insd)................................ 4.750 07/15/23 4,546,027
1,500 San Rafael, CA Redev Agency Tax Alloc
(AMBAC Insd)......................... 5.000 12/01/22 1,359,510
2,000 Santa Ana, CA Uni Sch Dist Ctfs Part
Fin Proj Ser A (FSA Insd)............ 5.000 04/01/18 1,859,560
2,000 Santa Clara Cnty, CA Fin Auth Lease
Rev Ser A Rfdg (AMBAC Insd).......... 5.750 11/15/13 2,114,100
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 461
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS
(CONTINUED)
$ 1,000 Santa Clara, CA Redev Agy Tax Alloc
Bayshore North Proj Rfdg (AMBAC
Insd)................................ 7.000% 07/01/10 $ 1,138,760
1,000 Santa Fe Springs, CA Cmnty Dev Commn
Tax Alloc Cons Redev Proj Ser A Rfdg
(MBIA Insd).......................... 5.000 09/01/17 935,320
1,000 Shasta Lake, CA Ctfs Partn (FSA
Insd)................................ 6.000 04/01/16 1,025,770
3,735 South Orange Cnty, CA Pub Fin Auth
Spl Tax Rev Sr Lien Ser A Rfdg (MBIA
Insd)................................ 7.000 09/01/08 4,326,811
3,000 South Orange Cnty, CA Pub Fin Auth
Spl Tax Rev Sr Lien Ser A Rfdg (MBIA
Insd)................................ 7.000 09/01/09 3,501,690
570 Temecula Vly, CA Uni Sch Dist Ctfs
Partn Rfdg (FSA Insd)................ 6.000 09/01/18 576,435
2,000 Torrance, CA Hosp Rev Torrance Mem
Hosp Rfdg (MBIA Insd)................ 6.750 01/01/12 2,012,500
2,000 Westlands, CA Wtr Dist Rev Ctfs Partn
Ser A (AMBAC Insd)................... 5.000 03/01/29 1,784,360
------------
TOTAL LONG-TERM INVESTMENTS 97.9%
(Cost $208,961,590)................................................ 210,285,663
SHORT-TERM INVESTMENTS 2.6%
(Cost $5,600,000).................................................. 5,600,000
------------
TOTAL INVESTMENTS 100.5%
(Cost $214,561,590)................................................ 215,885,663
LIABILITIES IN EXCESS OF OTHER ASSETS (0.5%)........................ (1,172,073)
------------
NET ASSETS 100.0%................................................... $214,713,590
============
</TABLE>
* Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
AMBAC--AMBAC Indemnity Corporation
BIGI--Bond Investor Guaranty Inc.
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
F-9
<PAGE> 462
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $214,561,590)....................... $215,885,663
Cash........................................................ 58,828
Receivables:
Investment sold........................................... 3,285,179
Interest.................................................. 2,379,319
Fund Shares Sold.......................................... 301,129
Other....................................................... 27,267
------------
Total Assets.......................................... 221,937,385
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 6,143,187
Income Distributions...................................... 329,466
Fund Shares Repurchased................................... 264,194
Distributor and Affiliates................................ 166,770
Investment Advisory Fee................................... 83,944
Trustees' Deferred Compensation and Retirement Plans........ 174,272
Accrued Expenses............................................ 61,962
------------
Total Liabilities..................................... 7,223,795
------------
NET ASSETS.................................................. $214,713,590
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $215,294,918
Net Unrealized Appreciation................................. 1,324,073
Accumulated Distributions in Excess of Net Investment
Income.................................................... (276,952)
Accumulated Net Realized Loss............................... (1,628,449)
------------
NET ASSETS.................................................. $214,713,590
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $161,956,847 and 9,374,835 shares of
beneficial interest issued and outstanding)............. $ 17.28
Maximum sales charge (3.25%* of offering price)......... .58
------------
Maximum offering price to public........................ $ 17.86
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $45,317,715 and 2,625,524 shares of
beneficial interest issued and outstanding)............. $ 17.26
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $7,439,028 and 431,087 shares of
beneficial interest issued and outstanding)............. $ 17.26
============
</TABLE>
*On sales of $25,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-10
<PAGE> 463
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 11,476,894
----------------
EXPENSES:
Investment Advisory Fee..................................... 998,839
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $387,011, $448,739 and $66,026,
respectively)............................................. 901,776
Shareholder Services........................................ 164,414
Trustees' Fees and Related Expenses......................... 37,645
Legal....................................................... 29,842
Custody..................................................... 15,707
Insurance................................................... 2,786
Other....................................................... 197,365
----------------
Total Expenses.......................................... 2,348,374
Less Credits Earned on Cash Balances.................... 9,415
----------------
Net Expenses............................................ 2,338,959
----------------
NET INVESTMENT INCOME....................................... $ 9,137,935
================
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 361,015
Futures................................................... 198,623
----------------
Net Realized Gain........................................... 559,638
----------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 19,038,988
End of the Period:
Investments............................................. 1,324,073
----------------
Net Unrealized Depreciation During the Period............... (17,714,915)
----------------
NET REALIZED AND UNREALIZED LOSS............................ $ (17,155,277)
================
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $ (8,017,342)
================
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 464
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1999, the Nine Months Ended
September 30, 1998 and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............... $ 9,137,935 $ 6,106,945 $ 8,171,627
Net Realized Gain................... 559,638 1,695,395 1,186,738
Net Unrealized
Appreciation/Depreciation During
the Period........................ (17,714,915) 3,409,163 4,996,359
------------- ------------ ------------
Change in Net Assets from
Operations........................ (8,017,342) 11,211,503 14,354,724
------------- ------------ ------------
Distributions from Net Investment
Income............................ (9,390,470) (6,340,558) (7,894,819)
Distributions in Excess of Net
Investment Income................. (276,952) -0- -0-
------------- ------------ ------------
Total Distributions from and in
Excess of Net Investment
Income*........................... (9,667,422) (6,340,558) (7,894,819)
------------- ------------ ------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES............. (17,684,764) 4,870,945 6,459,905
------------- ------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........... 169,414,699 29,485,437 21,168,004
Net Asset Value of Shares Issued
Through Dividend Reinvestment..... 5,772,779 3,827,238 4,809,591
Cost of Shares Repurchased.......... (138,683,257) (17,753,835) (30,260,768)
------------- ------------ ------------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS.............. 36,504,221 15,558,840 (4,283,173)
------------- ------------ ------------
TOTAL INCREASE IN NET ASSETS........ 18,819,457 20,429,785 2,176,732
NET ASSETS:
Beginning of the Period............. 195,894,133 175,464,348 173,287,616
------------- ------------ ------------
End of the Period (Including
accumulated undistributed net
investment income of $(276,952),
$252,535 and $486,148,
respectively)..................... $ 214,713,590 $195,894,133 $175,464,348
============= ============ ============
<CAPTION>
* DISTRIBUTIONS BY CLASS
<S> <C> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares.................... $ (7,590,523) $ (5,158,867) $ (6,593,552)
Class B Shares.................... (1,810,361) (1,050,450) (1,190,355)
Class C Shares.................... (266,538) (131,241) (110,912)
------------- ------------ ------------
$ (9,667,422) $ (6,340,558) $ (7,894,819)
============= ============ ============
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 465
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
Year Ended Nine Months Ended -------------------------------------
Class A Shares September 30, 1999 September 30, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................. $18.768 $18.294 $17.605 $17.736 $15.802 $18.286
------- ------- ------- ------- ------- -------
Net Investment
Income............... .824 .638 .880 .857 .884 .912
Net Realized and
Unrealized
Gain/Loss............ (1.447) .498 .658 (.145) 1.938 (2.484)
------- ------- ------- ------- ------- -------
Total from Investment
Operations........... (.623) 1.136 1.538 .712 2.822 (1.572)
Less Distributions from
and in Excess of Net
Investment Income.... .869 .662 .849 .843 .888 .912
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period........... $17.276 $18.768 $18.294 $17.605 $17.736 $15.802
======= ======= ======= ======= ======= =======
Total Return* (a)...... (3.44%) 6.38%** 8.93% 4.20% 18.28% (8.75%)
Net Assets at End of
the Period (In
millions)............ $ 162.0 $ 151.0 $ 140.7 $ 142.5 $ 147.6 $ 130.3
Ratio of Expenses to
Average Net
Assets*.............. .92% .88% .96% 1.02% .89% .78%
Ratio of Net Investment
Income to Average Net
Assets*.............. 4.52% 4.66% 4.96% 4.94% 5.23% 5.46%
Portfolio Turnover..... 44% 21%** 46% 35% 42% 56%
* If certain expenses had not been reimbursed by Van Kampen, total return would have been lower and the
ratios would have been as follows:
Ratio of Expenses to
Average Net Assets... N/A N/A N/A 1.03% 1.05% 1.08%
Ratio of Net Investment
Income to Average
Net Assets........... N/A N/A N/A 4.94% 5.07% 5.16%
</TABLE>
** Non-Annualized.
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = Not Applicable
See Notes to Financial Statements
F-13
<PAGE> 466
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
Year Ended Nine Months Ended -------------------------------------
Class B Shares September 30, 1999 September 30, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $18.758 $18.289 $17.603 $17.736 $15.805 $18.266
------- ------- ------- ------- ------- -------
Net Investment
Income.............. .684 .526 .741 .720 .766 .785
Net Realized and
Unrealized
Gain/Loss........... (1.447) .506 .662 (.142) 1.926 (2.482)
------- ------- ------- ------- ------- -------
Total from Investment
Operations.......... (.763) 1.032 1.403 .578 2.692 (1.697)
Less Distributions
from and in Excess
of Net Investment
Income.............. .735 .563 .717 .711 .761 .764
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $17.260 $18.758 $18.289 $17.603 $17.736 $15.805
======= ======= ======= ======= ======= =======
Total Return* (a)..... (4.20%) 5.76%** 8.19% 3.35% 17.33% (9.39%)
Net Assets at End of
the Period (In
millions)........... $ 45.3 $ 40.1 $ 31.0 $ 28.6 $ 24.6 $ 17.1
Ratio of Expenses to
Average Net
Assets*............. 1.68% 1.64% 1.72% 1.79% 1.61% 1.52%
Ratio of Net
Investment Income to
Average Net
Assets*............. 3.76% 3.89% 4.18% 4.17% 4.51% 4.71%
Portfolio Turnover.... 44% 21%** 46% 35% 42% 56%
* If certain expenses had not been reimbursed by Van Kampen, total return would have been lower and the
ratios would have been as follows:
Ratio of Expenses to
Average Net
Assets.............. N/A N/A......... N/A 1.79% 1.77% 1.82%
Ratio of Net
Investment Income to
Average Net
Assets.............. N/A N/A......... N/A 4.16% 4.35% 4.41%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = Not Applicable
See Notes to Financial Statements
F-14
<PAGE> 467
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
Year Ended Nine Months Ended -------------------------------------
Class C Shares September 30, 1999 September 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
the Period........... $18.754 $18.286 $17.602 $17.736 $15.798 $18.257
------- ------- ------- ------- ------- -------
Net Investment
Income............. .694 .529 .727 .722 .758 .773
Net Realized and
Unrealized
Gain/Loss.......... (1.457) .502 .674 (.145) 1.941 (2.468)
------- ------- ------- ------- ------- -------
Total from Investment
Operations......... (.763) 1.031 1.401 .577 2.699 (1.695)
Less Distributions
from and in Excess
of Net Investment
Income............. .735 .563 .717 .711 .761 .764
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period...... $17.256 $18.754 $18.286 $17.602 $17.736 $15.798
======= ======= ======= ======= ======= =======
Total Return* (a).... (4.15%) 5.70** 8.19% 3.35% 17.40% (9.40%)
Net Assets at End of
the Period (In
millions).......... $ 7.4 $ 4.8 $ 3.8 $ 2.2 $ 1.8 $ 2.8
Ratio of Expenses to
Average Net
Assets*............ 1.69% 1.63% 1.71% 1.79% 1.60% 1.51%
Ratio of Net
Investment Income
to Average Net
Assets*............ 3.75% 3.87% 4.15% 4.16% 4.50% 4.71%
Portfolio Turnover... 44% 21%** 46% 35% 42% 56%
*If certain expenses had not been reimbursed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net
Assets............. N/A N/A N/A 1.80% 1.75% 1.82%
Ratio of Net
Investment Income
to Average Net
Assets............. N/A N/A N/A 4.16% 4.34% 4.39%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = Not Applicable
See Notes to Financial Statements
F-15
<PAGE> 468
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen California Insured Tax Free Fund (the "Fund") is organized as a
series of the Van Kampen Tax Free Trust, a Delaware business trust, and is
registered as a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to provide California investors with a high level of current income exempt from
federal and California income taxes, with liquidity and safety of principal,
primarily through investment in a diversified portfolio of insured California
municipal securities. The Fund commenced investment operations on December 13,
1985. The distribution of the Fund's Class B shares and Class C shares commenced
on May 1, 1993 and August 13, 1993, respectively.
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--Municipal bonds are valued by independent pricing
services or dealers using the mean of the bid and asked prices or, in the
absence of market quotations, at fair value based upon yield data relating to
municipal bonds with similar characteristics and general market conditions.
Securities which are not valued by independent pricing services are valued at
fair value using procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
F-16
<PAGE> 469
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, if any, to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the Federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At September 30, 1999, the Fund had an accumulated capital loss
carryforward for tax purposes of $1,628,449, which will expire between September
30, 2002 and September 30, 2003.
At September 30, 1999, for federal income tax purposes, cost of long- and
short-term investments is $214,561,590; the aggregate gross unrealized
appreciation is $6,588,201 and the aggregate gross unrealized depreciation is
$5,264,128, resulting in net unrealized appreciation on long- and short-term
investments of $1,324,073.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
Due to inherent differences in the recognition of expenses under generally
accepted accounting principles and federal income tax purposes, the amount of
distributed net investment income may differ for a particular period. These
differences are temporary in nature, but may result in book basis distribution
in excess of net investment income for certain periods.
F. INSURANCE EXPENSE--The Fund typically invests in insured bonds. Any portfolio
securities not specifically covered by a primary insurance policy are insured
secondarily through the Fund's portfolio insurance policy. Insurance premiums
are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.
F-17
<PAGE> 470
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
G. EXPENSE REDUCTIONS--During the year ended September 30, 1999, the Trust's
custody fee was reduced by $9,415 as a result of credits earned on overnight
cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ----------------------------------------------------------------------
<S> <C>
First $100 million.................................... .500 of 1%
Next $150 million..................................... .450 of 1%
Next $250 million..................................... .425 of 1%
Over $500 million..................................... .400 of 1%
</TABLE>
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $19,000 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $99,500 representing Van Kampen Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended September 30,
1999, the Fund recognized expenses of approximately $116,800. 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.
F-18
<PAGE> 471
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
At September 30, 1999, capital aggregated $159,907,170, $47,220,345 and
$8,167,403 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 8,206,388 $ 147,459,959
Class B.................................... 905,506 16,519,855
Class C.................................... 298,867 5,434,885
---------- -------------
Total Sales.................................. 9,410,761 $ 169,414,699
========== =============
Dividend Reinvestment:
Class A.................................... 243,776 $ 4,426,154
Class B.................................... 65,547 1,188,606
Class C.................................... 8,719 158,019
---------- -------------
Total Dividend Reinvestment.................. 318,042 $ 5,772,779
========== =============
Repurchases:
Class A.................................... (7,118,589) $(127,545,738)
Class B.................................... (486,135) (8,765,169)
Class C.................................... (131,471) (2,372,350)
---------- -------------
Total Repurchases............................ (7,736,195) $(138,683,257)
========== =============
</TABLE>
F-19
<PAGE> 472
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At September 30, 1998, capital aggregated $135,566,795, $38,277,053 and
$4,946,849 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 896,618 $ 16,459,740
Class B..................................... 595,781 10,920,471
Class C..................................... 114,887 2,105,226
--------- ------------
Total Sales................................... 1,607,286 $ 29,485,437
========= ============
Dividend Reinvestment:
Class A..................................... 167,488 $ 3,075,115
Class B..................................... 37,047 680,216
Class C..................................... 3,916 71,907
--------- ------------
Total Dividend Reinvestment................... 208,451 $ 3,827,238
========= ============
Repurchases:
Class A..................................... (709,317) $(13,003,362)
Class B..................................... (188,629) (3,456,135)
Class C..................................... (70,739) (1,294,338)
--------- ------------
Total Repurchases............................. (968,685) $(17,753,835)
========= ============
</TABLE>
F-20
<PAGE> 473
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $129,035,302, $30,132,501 and
$4,064,054 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 692,287 $ 12,283,098
Class B..................................... 403,552 7,140,419
Class C..................................... 97,375 1,744,487
---------- ------------
Total Sales................................... 1,193,214 $ 21,168,004
========== ============
Dividend Reinvestment:
Class A..................................... 224,209 $ 3,981,636
Class B..................................... 43,062 765,183
Class C..................................... 3,529 62,772
---------- ------------
Total Dividend Reinvestment................... 270,800 $ 4,809,591
========== ============
Repurchases:
Class A..................................... (1,319,813) $(23,254,943)
Class B..................................... (375,548) (6,651,902)
Class C..................................... (20,021) (353,923)
---------- ------------
Total Repurchases............................. (1,715,382) $(30,260,768)
========== ============
</TABLE>
F-21
<PAGE> 474
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
Classes B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares purchased
on or after June 1, 1996 will automatically convert to Class A shares after the
eighth year following purchase. Class B shares purchased before June 1, 1996
automatically convert to Class A shares after the sixth year following purchase.
For the year ended September 30, 1999, 9,117 Class B shares automatically
converted to Class A shares. The CDSC will be imposed on most redemptions made
within four years of the purchase for Class B and one year of the purchase for
Class C as detailed in the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
-----------------------
YEAR OF REDEMPTION CLASS B CLASS C
- ---------------------------------------------------------------------------
<S> <C> <C>
First........................................... 3.00% 1.00%
Second.......................................... 2.50% None
Third........................................... 2.00% None
Fourth.......................................... 1.00% None
Fifth and Thereafter............................ None None
</TABLE>
For the year ended September 30, 1999, Van Kampen, as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $40,000 and CDSC on redeemed shares of approximately $100,000.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the year ended September 30, 1999, the cost of purchases and proceeds from
sales of investments, excluding short-term investments, were $127,975,270 and
$92,194,777, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when taking delivery of a security underlying
F-22
<PAGE> 475
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
a futures contract. In this instance the recognition of gain or loss is
postponed until the disposal of the security underlying the futures contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin).
Transactions in futures contracts, each with a par value of $100,000, for
the year ended September 30, 1999, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at September 30, 1998......................... -0-
Futures Opened............................................ 580
Futures Closed............................................ (580)
----
Outstanding at September 30, 1999......................... -0-
====
</TABLE>
B. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to
a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. These instruments
are typically used by the Fund to enhance the yield of the portfolio.
F-23
<PAGE> 476
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended September 30, 1999, are payments retained by Van Kampen of
approximately $388,000.
F-24
<PAGE> 477
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN MUNICIPAL INCOME FUND
Van Kampen Municipal Income Fund (the "Fund") is a mutual fund with the
investment objective to provide investors with a high level of current income
exempt from federal income tax, consistent with preservation of capital. The
Fund's investment adviser seeks to achieve the Fund's investment objective by
investing primarily in a portfolio of investment-grade municipal securities.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust, an
open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information should be read in conjunction with the Fund's
Prospectus (the "Prospectus") dated as of the same date as this Statement of
Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective, Policies and Risks.................... B-3
Strategic Transactions...................................... B-6
Investment Restrictions..................................... B-11
Trustees and Officers....................................... B-13
Investment Advisory Agreement............................... B-22
Other Agreements............................................ B-22
Distribution and Service.................................... B-23
Transfer Agent.............................................. B-26
Portfolio Transactions and Brokerage Allocation............. B-26
Shareholder Services........................................ B-27
Redemption of Shares........................................ B-30
Contingent Deferred Sales Charge-Class A.................... B-30
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-30
Taxation.................................................... B-32
Fund Performance............................................ B-35
Other Information........................................... B-38
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-38
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 2000.
B-1
<PAGE> 478
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen Merritt
Tax Free Trust as a Massachusetts business trust (the "Massachusetts Trust").
The Massachusetts Trust was reorganized into the Trust under the name Van Kampen
American Capital Tax Free Trust on July 31, 1995. The Trust was created for the
purpose of facilitating the Massachusetts Trust reorganization into a Delaware
business trust. On July 14, 1998, the Trust adopted its current name.
The Fund was originally organized in 1985 under the name Van Kampen Merritt
Municipal Income Fund as a sub-trust of the Massachusetts Trust. The Fund was
reorganized as a series of the Trust under the name Van Kampen American Capital
Municipal Income Fund on July 31, 1995. On July 14, 1998, the Fund adopted its
current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp"), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. ("Morgan Stanley Dean Witter"). 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 and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, which can be divided
into series such as the Fund and further subdivided into classes of each series.
Each share represents an equal proportionate interest in the assets of the
series with each other share in such series and no interest in any other series.
No series is subject to the liabilities of any other series. The Declaration of
Trust provides that shareholders are not liable for any liabilities of the Trust
or any of its series, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its series and indemnifies
shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Other classes may be established from time to
time in accordance with provisions of the Declaration of Trust. Each class of
shares of the Fund generally are identical in all respects except that each
class bears certain distribution expenses and has exclusive voting rights with
respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
B-2
<PAGE> 479
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to its
portion of all of the Fund's net assets after all debts and expenses of the Fund
have been paid. Since Class B Shares and Class C Shares have higher distribution
fees and transfer agency costs, the liquidation proceeds to holders of Class B
Shares and Class C Shares are likely to be less 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 December 31, 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 DECEMBER 31, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
Edward Jones & Co. ......................................... 8,108,428 A 15.61%
Attn: Mutual Fund Shareholder Accounting 379,696 B 5.97%
201 Progress Pkwy 104,619 C 8.93%
Maryland Hts, MO 63043-3009
MLPF&S For the Sole Benefit of its Customers................ 110,867 C 9.46%
Attn: Fund Administration 97F05
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RISKS
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. The Fund may invest in shorter term municipal securities
when yields are greater than yields available on longer term municipal
securities, for temporary defensive purposes or 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
B-3
<PAGE> 480
secured by the issuer's pledge of its faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligation securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source, such as from the user of the facility being financed.
The Fund may also invest in "moral obligation" bonds which are normally issued
by special purpose public authorities. If an issuer of moral obligation bonds is
unable to meet its obligations, the repayment of such bonds becomes a moral
commitment but not a legal obligation of the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest or range floaters or capped floaters
whose rates are subject to periodic or lifetime caps. Derivative variable rate
municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate municipal securities in response to changes in
market rates of interest generally will be larger than comparable changes in the
value of an equal principal amount of a fixed rate municipal security having
similar credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities.
B-4
<PAGE> 481
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.
"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
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with the Fund's investment objectives and policies and not for the purposes of
investment leverage. No specific limitation exists as to the percentage of the
Fund's assets which may be used to acquire securities on a "when-issued" or
"delayed delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year.
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 for which market quotations are not readily available 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 typically 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, as amended from time to time.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various Strategic Transactions (as
defined in the Prospectus) to earn income, facilitate portfolio management and
mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Adviser seeks to use such transactions to further the Fund's investment
objective, no assurance can be given that the use of these transactions will
achieve this result.
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
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instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only 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
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that the terms of the OTC option will be satisfied. The Fund will engage in OTC
option transactions only with United States government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers", or
broker dealers, domestic or foreign banks or other financial institutions which
have received (or the guarantors of the obligation of which have received) a
short-term credit rating of "A-1" from S&P or "P-1" from Moody's or an
equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO"). The staff of the SEC currently takes the position that,
in general, OTC options on securities other than U.S. government securities
purchased by the Fund, and portfolio securities "covering" the amount of the
Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on illiquid securities described herein.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the
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contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
futures contracts and options thereon would exceed 5% of the Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
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The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash and liquid
securities with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash and liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash and
liquid securities equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of cash and liquid securities equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out cash and liquid securities equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of cash and liquid securities equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash and liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
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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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
may not be changed without shareholder 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 at the meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy; or (ii) more than 50% of the Fund's outstanding voting
securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitation on borrowings, the percentage limitations apply at the
time of purchase and on an ongoing basis. The Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the U.S. government or by its agencies or
instrumentalities), if, as a result, more than 5% of the Fund's total
assets (taken at current market value) would then be invested in
securities of a single issuer or, if, as a result, the Fund would hold
more than 10% of the outstanding voting securities of an issuer, except
that the Fund may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry, however, the Fund
may from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market; however, the Fund will not invest
more than 25% of its assets in industrial development bonds in a single
industry, and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
when issued and delayed delivery transactions.
4. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
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5. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with hedging transactions nor short term
credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging or risk
management transactions in accordance with the requirements of the SEC and
the CFTC.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the Fund
may purchase securities of other investment companies extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
10. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent the options and futures and index
contracts in which such Funds may invest for hedging and risk management
purposes are considered to be commodities or commodities contracts.
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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. Trustee/Director of each of the
1632 Morning Mountain Road funds in the Fund Complex. Co-founder, and prior to
Raleigh, NC 27614 August 1996, Chairman, Chief Executive Officer and
Date of Birth: 07/14/32 President, MDT Corporation (now known as
Age: 67 Getinge/Castle, Inc., a subsidiary of Getinge
Industrier AB), a company which develops,
manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
Age: 61 January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in
233 South Wacker Drive the Fund Complex. Prior to 1997, Partner, Ray &
Suite 7000 Berndtson, Inc., an executive recruiting and
Chicago, IL 60606 management consulting firm. Formerly, Executive Vice
Date of Birth: 06/03/48 President of ABN AMRO, N.A., a Dutch bank holding
Age: 51 company. Prior to 1992, 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.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created
Washington, D.C. 20016 to deepen understanding, promote collaboration and
Date of Birth: 02/29/52 stimulate exchanges of practical experience between
Age: 47 Americans and Europeans. Trustee/Director of each of
the funds in the Fund Complex. Formerly, advisor to
the Dennis Trading Group Inc., a managed futures and
option company that invests money for individuals and
institutions. Prior to 1992, President and Chief
Executive Officer, Director and Member of the
Investment Committee of the Joyce Foundation, a
private foundation.
</TABLE>
B-13
<PAGE> 490
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since April 1997
New York, NY 10048 and Chief Executive Officer since June 1998 of Morgan
Date of Birth: 08/13/53 Stanley Dean Witter Advisors Inc. and Morgan Stanley
Age: 46 Dean Witter Services Company Inc. Chairman, Chief
Executive Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998. Chairman and
Chief Executive Officer since June 1998, and Director
since January 1998, of Morgan Stanley Dean Witter
Trust FSB. Director of various Morgan Stanley Dean
Witter subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index Series
since May 1999. Trustee/Director of each of the funds
in the Fund Complex, and Vice President of other
investment companies advised by the Advisers and their
affiliates. Previously Chief Strategic Officer of
Morgan Stanley Dean Witter Advisors Inc. and Morgan
Stanley Dean Witter Services Company Inc. and
Executive Vice President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice President
of the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series May 1997-April 1999, and
Executive Vice President of Dean Witter, Discover &
Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company and
Winter Park, FL 32789 registered investment adviser in the State of Florida.
Date of Birth: 02/13/36 President and owner, Nelson Ivest Brokerage Services
Age: 63 Inc., a member of the National Association of
Securities Dealers, Inc. and Securities Investors
Protection Corp. Trustee/Director of each of the funds
in the Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor,
Oakbrook Terrace, IL 60181-5555 Van Kampen Advisors Inc. and Van Kampen Management
Date of Birth: 02/02/46 Inc. Director and officer of certain other
Age: 53 subsidiaries of Van Kampen Investments.
Trustee/Director and President of each of the funds in
the Fund Complex. Trustee, President and Chairman of
the Board of other investment companies advised by the
Advisers and their affiliates, and Chief Executive
Officer of Van Kampen Exchange Fund. Prior to May
1998, Executive Vice President and Director of
Marketing at Morgan Stanley Dean Witter and Director
of Dean Witter Discover & Co. and Dean Witter Realty.
Prior to 1996, Director of Dean Witter Reynolds Inc.
</TABLE>
B-14
<PAGE> 491
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Age: 55 Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the Fund
Complex. Prior to 1998, Director of Stone Smurfit
Container Corp., a paper manufacturing company. From
May 1996 through February 1997 he was President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company,
and from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Age: 75 Dynalysis of Princeton, a firm engaged in 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,
333 West Wacker Drive Meagher & Flom (Illinois), legal counsel to the funds
Chicago, IL 60606 in the Fund Complex, and other investment companies
Date of Birth: 08/22/39 advised by the Advisers or Van Kampen Management Inc.
Age: 60 Trustee/Director of each of the funds in the Fund
Complex, and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or
Van Kampen Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Age: 58 Marshall Fund of the United States, Trustee of
Colorado College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/Director
of each of the funds in the Fund Complex. Prior to
1993, Executive Director of the Commission on
Behavioral and Social Sciences and Education at the
National Academy of Sciences/National Research
Council. From 1980 through 1989, Partner of Coopers &
Lybrand.
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network
233 South Wacker Drive system solutions, COMARCO, Inc., a wireless
Suite 9700 communications products company and APAC Customer
Chicago, IL 60606 Services, Inc., a provider of outsourced customer
Date of Birth: 10/29/53 contact services. Trustee/Director of each of the
Age: 46 funds in the Fund Complex. Prior to May 1996,
President of Advance Ross Corporation, an
international transaction services and pollution
control equipment manufacturing company.
</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. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-15
<PAGE> 492
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood 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.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and
Age: 57 Van Kampen Management Inc. Executive Vice President and
Chief Investment Officer of each of the funds in the Fund
Complex, since 1998. Chief Investment Officer, Executive
Vice President and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or Van
Kampen Management Inc. ("Management Inc."), since the
inception of funds advised by Advisory Corp. and
Management Inc. and since 1998 for funds advised by Asset
Management. Director of Global Decisions Group LLC, a
financial research firm, and its affiliates MCM Asia
Pacific and MCM Europe. Prior to 1998, President, Chief
Operating Officer and a Director of the Advisers, Van
Kampen American Capital Management, Inc.; Director of Van
Kampen American Capital, Inc.; and President, Chief
Executive Officer and Trustee of each of the funds advised
by Advisory Corp. Prior to July 1998, Director and
Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996,
Chief Executive Officer and Director of MCM Group, Inc.
and McCarthy, Crisanti & Maffei, Inc., a financial
research firm, and Chairman of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to December 1991,
Senior Vice President of Van Kampen Merritt Inc.
</TABLE>
B-16
<PAGE> 493
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van
Vice President and Secretary Kampen Advisors Inc., Van Kampen Management Inc., the
Age: 43 Distributor, American Capital Contractual Services, Inc.,
Van Kampen Exchange Corp., Van Kampen Recordkeeping
Services Inc., Investor Services, Van Kampen Insurance
Agency of Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal Legal
Officer and Secretary of other investment companies
advised by the Advisers or their affiliates. Vice
President and Secretary of each of the funds in the Fund
Complex. Prior to January 1999, Vice President and
Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission,
Division of Investment Management, Office of Chief
Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen
Age: 44 Management Inc. and Van Kampen Investor Services Inc., and
serves as a Director or Officer of certain other
subsidiaries of Van Kampen Investments. Vice President of
each of the funds in the Fund Complex and certain other
investment companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President and
Senior Planning Officer for Individual Asset Management of
Morgan Stanley Dean Witter and its predecessor since 1994.
From 1990-1994, First Vice President and Assistant
Controller in Dean Witter's Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice
Vice President President of each of the funds in the Fund Complex and
Age:43 certain other investment companies advised by the Advisers
or their affiliates. Prior to September 1996, Director of
McCarthy, Crisanti & Maffei, Inc, a financial research
company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
Age: 59 companies advised by the Advisers or their affiliates.
Prior to October 1998, Vice President and Senior Portfolio
Manager with AIM Capital Management, Inc. Prior to
February 1998, Senior Vice President of Van Kampen
American Capital Asset Management, Inc., Van Kampen
American Capital Investment Advisory Corp. and Van Kampen
American Capital Management, Inc.
</TABLE>
B-17
<PAGE> 494
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
Age: 44 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.
Age: 53
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.
Age: 44 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
Age: 40 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 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 provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The 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 on the basis of the relative net
assets of each fund as of the last business day of the preceding calendar
quarter. The compensation of each Non-Affiliated Trustee includes a per meeting
fee from each fund in the Fund Complex 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
B-18
<PAGE> 495
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) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $15,220 $40,303 $60,000 $126,000
Jerry D. Choate(1) 6,754 0 60,000 88,700
Linda Hutton Heagy 15,220 5,045 60,000 126,000
R. Craig Kennedy 15,220 3,571 60,000 125,600
Jack E. Nelson 15,220 21,664 60,000 126,000
Phillip B. Rooney 13,820 7,787 60,000 113,400
Fernando Sisto 15,220 72,060 60,000 126,000
Wayne W. Whalen 15,220 15,189 60,000 126,000
Suzanne H. Woolsey(1) 6,754 0 60,000 88,700
Paul G. Yovovich(1) 14,020 2,845 60,000 126,000
</TABLE>
- ---------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Yovovich became a member of the Board of Trustees for the Fund
and other funds in the Fund Complex on October 22, 1998 and therefore does
not have a full fiscal year of information to report. Mr. Choate and Ms.
Woolsey became members of the Board of Trustees for the Fund and other funds
in the Fund Complex on May 26, 1999 and therefore do not have a full year of
information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal year ended September 30, 1999.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The detail of cumulative
deferred compensation (including interest) owed to the Trustees, including
former 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 accrued by the operating investment companies in the Fund Complex
for each of the Trustees for the funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
B-19
<PAGE> 496
(4) For each Trustee, this is the sum of the estimated maximum annual benefits
payable by the funds 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 funds in the Fund Complex as of December 31, 1999 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, 1999. The deferred compensation earns a
rate of return determined by reference to the return on the shares of the
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those investment
companies selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The Advisers and their affiliates also
serve as investment adviser for other investment companies; however, with
the exception of Mr. Whalen, the Non-Affiliated Trustees were not trustees
of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
As of December 31, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-20
<PAGE> 497
TABLE A
1999 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund....... 9/30 $ 3,322 $1,483 $ 3,322 $ 3,322 $ 3,322 $ 3,122 $ 3,322 $ 3,322
Tax Free High Income Fund......... 9/30 2,998 1,366 2,998 2,998 2,998 2,798 2,998 2,998
California Insured Tax Free
Fund............................ 9/30 1,692 745 1,692 1,692 1,692 1,492 1,692 1,692
Municipal Income Fund............. 9/30 2,781 1,241 2,781 2,781 2,781 2,581 2,781 2,781
Intermediate Term Municipal Income
Fund............................ 9/30 1,460 631 1,460 1,460 1,460 1,260 1,460 1,460
Florida Insured Tax Free Income
Fund............................ 9/30 1,488 646 1,488 1,488 1,488 1,288 1,488 1,488
New York Tax Free Income Fund..... 9/30 1,479 642 1,479 1,479 1,479 1,279 1,479 1,479
------- ------ ------- ------- ------- ------- ------- -------
Trust Total..................... $15,220 $6,754 $15,220 $15,220 $15,220 $13,820 $15,220 $15,220
======= ====== ======= ======= ======= ======= ======= =======
<CAPTION>
TRUSTEE
------------------
FUND NAME WOOLSEY YOVOVICH
--------- ------- --------
<S> <C> <C>
Insured Tax Free Income Fund....... $1,483 $ 3,122
Tax Free High Income Fund......... 1,366 2,798
California Insured Tax Free
Fund............................ 745 1,492
Municipal Income Fund............. 1,241 2,581
Intermediate Term Municipal Income
Fund............................ 631 1,260
Florida Insured Tax Free Income
Fund............................ 646 1,288
New York Tax Free Income Fund..... 642 1,479
------ -------
Trust Total..................... $6,754 $14,020
====== =======
</TABLE>
TABLE B
1999 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ---------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund.......................... 9/30 $ 3,322 $ 819 $ 3,322 $1,661 $ 3,322 $ 3,122 $1,661 $ 3,322 $ 2,373
Tax Free High Income Fund.... 9/30 2,998 769 2,998 1,499 2,998 2,798 1,499 2,998 2,165
California Insured Tax Free
Fund....................... 9/30 1,692 471 1,692 846 1,692 1,492 846 1,692 1,216
Municipal Income Fund........ 9/30 2,781 707 2,781 1,391 2,781 2,581 1,391 2,781 1,991
Intermediate Term Municipal
Income Fund................ 9/30 1,460 415 1,460 730 1,460 1,260 730 1,460 1,045
Florida Insured Tax Free
Income Fund................ 9/30 1,488 423 1,488 744 1,488 1,288 744 1,488 1,069
New York Tax Free Income
Fund....................... 9/30 1,479 422 1,479 740 1,479 1,279 740 1,479 1,060
------- ------ ------- ------ ------- ------- ------ ------- -------
Trust Total................ $15,220 $4,026 $15,220 $7,611 $15,220 $13,820 $7,611 $15,220 $10,919
======= ====== ======= ====== ======= ======= ====== ======= =======
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL ---------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... 9/30 $12,061 $ 829 $13,428 $ 19,013 $ 28,191 $ 8,367 $ 6,888
Tax Free High Income Fund..... 9/30 11,230 778 12,661 18,570 27,209 7,518 4,640
California Insured Tax Free
Fund........................ 9/30 8,666 475 10,273 17,213 24,168 4,910 3,391
Municipal Income Fund......... 9/30 12,068 715 14,058 23,404 33,528 7,594 12,202
Intermediate Term Municipal
Income Fund................. 9/30 8,217 418 9,855 16,976 23,638 4,454 3,172
Florida Insured Tax Free
Income Fund................. 9/30 8,268 426 9,902 10,914 18,313 4,505 3,197
New York Tax Free Income
Fund........................ 9/30 4,537 425 3,611 5,706 8,667 3,632 1,967
------- ------ ------- -------- -------- ------- -------
Trust Total............... $65,047 $4,066 $73,788 $111,796 $163,714 $40,980 $35,457
======= ====== ======= ======== ======== ======= =======
<CAPTION>
TRUSTEES FORMER TRUSTEES
------------------- ----------------------------------------------
FUND NAME WHALEN YOVOVICH CARUSO GAUGHAN MILLER REES ROBINSON
--------- ------ -------- ------ ------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... $ 23,050 $ 2,479 $1,296 $1,064 $10,487 $ 0 $ 17,113
Tax Free High Income Fund..... 22,228 2,257 0 1,064 10,487 0 17,113
California Insured Tax Free
Fund........................ 19,692 1,260 0 1,064 10,487 0 17,113
Municipal Income Fund......... 27,189 2,076 2,778 1,306 14,169 7,077 22,359
Intermediate Term Municipal
Income Fund................. 19,249 1,080 0 1,064 10,487 0 17,113
Florida Insured Tax Free
Income Fund................. 15,409 1,105 0 496 6,656 0 12,280
New York Tax Free Income
Fund........................ 7,188 1,096 0 158 2,682 0 4,783
-------- ------- ------ ------ ------- ------ --------
Trust Total............... $134,005 $11,353 $4,074 $6,216 $65,455 $7,077 $107,874
======== ======= ====== ====== ======= ====== ========
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY YOVOVICH
- --------- -------- ------ ----- ------- ------ ------ ----- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 1995 1999 1995 1993 1984 1997 1995 1984 1999 1998
Tax Free High Income Fund.......... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
California Insured Tax Free Fund... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
Municipal Income Fund.............. 1995 1999 1995 1993 1990 1997 1995 1990 1999 1998
Intermediate Term Municipal Income
Fund............................. 1995 1999 1995 1993 1993 1997 1995 1993 1999 1998
Florida Insured Tax Free Income
Fund............................. 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
New York Tax Free Income Fund...... 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
</TABLE>
B-21
<PAGE> 498
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
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the cost of its day-to-day operations, including the compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), the charges and expenses of
legal counsel and independent accountants, distribution fees, service fees,
custodian fees, the costs of providing 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.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive applicable expense
limitation in any jurisdiction in which the Fund's shares are qualified for
offer and 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 fiscal 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 a 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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, the Adviser
received approximately $4,580,700, $3,545,700 and $4,721,600, 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 supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Advisory Corp.
received approximately $261,600, $219,300 and $207,300, 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
B-22
<PAGE> 499
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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Van Kampen
Investments received $30,100, $26,600 and $25,000, 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 a vote of a majority of the Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL AMOUNTS
UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Year Ended September 30, 1999........................ $1,348,405 $128,031
Fiscal Period Ended September 30, 1998...................... $ 727,531 $ 78,171
Fiscal Year Ended December 31, 1997......................... $ 939,551 $111,895
</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 the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed 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
B-23
<PAGE> 500
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 contingent 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 or other
Van Kampen funds. 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.
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 the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
For shares sold prior to the implementation date of the Distribution Plan, the
financial intermediary was not eligible to receive compensation pursuant to such
Distribution and Service Agreement or Selling Agreement. To the extent that
there remain outstanding shares of the Fund that were purchased prior to the
implementation date of the Distribution Plan, the percentage of the total
average daily net asset value of a class of shares that may be utilized pursuant
to the Distribution and Service Agreement will be less than the
B-24
<PAGE> 501
maximum percentage amount permissible with respect to such class of shares under
the Distribution and Service Agreement.
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary 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 financial intermediary would result in any material adverse consequences
to the Fund.
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 or 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, 1999, there were $2,371,367 and $42,954 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 2.23% and 0.25% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plans 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 contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended September 30, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $1,453,154 or 0.24% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $1,475,405 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $1,187,195 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $288,210
for fees paid to financial intermediaries for servicing Class B
B-25
<PAGE> 502
shareholders and administering the Class B Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class C Shares were $162,177 or 1.00% of the Class C Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $64,877 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class C Shares of the Fund and $97,300 for
fees paid to financial intermediaries for servicing Class C shareholders and
administering the Class C Share Plans.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend disbursing
agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas City, MO
64121-8256. 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 purchasers or sellers of securities; (b) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing all of its advisory accounts; not all of such services may be used by
the Adviser in connection with the Fund.
B-26
<PAGE> 503
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 & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("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 require 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 year ended September 30, 1999...................... $311,376 -- --
Fiscal period ended September 30, 1998.................... $362,296 -- --
Fiscal year ended December 31, 1997....................... $868,930 -- --
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions........... 0% 0%
Value of brokerage transactions with affiliate to total
transactions........................................... 0% 0%
</TABLE>
During the fiscal year ended September 30, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
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
B-27
<PAGE> 504
administrative services related to the maintenance of shareholder accounts.
Except as described in the Prospectus and this Statement of Additional
Information, after each share transaction in an account, the shareholder
receives a statement showing the activity in the account. Each shareholder who
has an account in any of the Participating Funds (as defined in the prospectus)
will receive statements quarterly from Investor Services showing any
reinvestments of dividends and capital gain dividends 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 gain dividends and systematic purchases or
redemptions. Additional shares may be purchased at any time 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, 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
the fee for replacing the lost certificate equal to no more than 1.50% 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 Money Purchase and Profit Sharing 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
Shareholders can use ACH to have redemption proceeds deposited electronically
into their bank accounts. Redemption proceeds 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
redemption proceeds 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 or by calling (800) 341-2911 ((800) 421-2833 for
the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, 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
capital gain dividends 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
B-28
<PAGE> 505
investment and other requirements of the fund into which distributions would be
invested. Distributions are invested into the selected fund at its net asset
value per share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder 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 payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for monthly, quarterly,
semiannual 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 systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawal plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions 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 upon 30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than eight
exchanges out of that fund are made during a rolling 365-day period. If exchange
privileges are suspended, subsequent exchange requests for redemption out of
that Fund during the stated period will not be processed. Exchange privileges
will be restored when the account history shows fewer than eight exchanges in
the rolling 365-day period.
This policy does not apply to money market funds, systematic exchange plans or
employee-sponsored retirement plans.
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 contingent deferred sales
charge 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 made 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.
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REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange (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) the
SEC determines trading on the Exchange is restricted; (c) the SEC determines 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 and a gain or loss for federal income tax purposes upon
the sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
As described in the Prospectus under "Purchase of Shares -- Class A Shares,"
there is no sales charge payable on Class A Shares at the time of purchase on
investments of $1 million or more, but a contingent deferred sales charge
("CDSC -- Class A") may be imposed on certain redemptions made within one year
of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares being redeemed
first are any shares in the shareholder's account not subject to a contingent
deferred sales charge followed by shares held the longest in the shareholder's
account. The contingent deferred sales charge is assessed on an amount equal to
the lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC -- Class B and C"). 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 Internal Revenue Code of 1986, as amended
(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
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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
CDSC-Class B and C 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), the financial hardship of the employee pursuant
to United States Treasury Regulations Section 401(k)-1(d)(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 THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal 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 sent to the designated payee of record. 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 systematic withdrawal plan. The
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal 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 systematic withdrawal plan and the ability to offer the
systematic withdrawal 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 value of 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
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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 OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund 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 investment company taxable income (including taxable income and
net short-term capital gain, but not net capital gain, which is the excess of
net long-term capital gain over net short-term capital loss) and at least 90% of
its net tax-exempt interest, and meets certain other requirements, it will not
be required to pay federal income taxes on any income it distributes to
shareholders. The Fund intends to distribute at least the minimum amount of
investment company taxable income and net tax-exempt interest necessary to
satisfy the 90% distribution requirement. The Fund will not be subject to
federal income tax on any net capital gain distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income
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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 TO SHAREHOLDERS
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any, of
a person's social security and railroad retirement benefits will be includable
in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
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While the Fund expects that a major portion of its income will constitute
tax-exempt interest, a significant portion may consist of investment company
taxable income (generally taxable income and net short-term capital gain).
Distributions of the Fund's 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 gain as 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. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction. 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) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by individuals
and other non-corporate taxpayers investing in this Fund is (i) the same as the
maximum ordinary income tax rate for capital assets
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held for one year or less or (ii) 20% for capital assets held for more than one
year. 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.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder the amount of
dividends paid to such shareholder and the amount, if any, of tax withheld with
respect to such dividends.
GENERAL
The federal, income tax discussion set forth above is for general information
only. Prospective investors and shareholders should consult their advisors
regarding the specific federal tax consequences of purchasing, holding and
disposing of shares, as well as the effects of state, local and foreign tax law
and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five year and ten year periods. Other total return
quotations, aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes the maximum sales charge for Class A Shares); that all income
dividends or capital gain dividends during the period are reinvested in Fund
shares at net asset value; and that any applicable contingent deferred sales
charge 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 capital gain dividends
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
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the value of the investment as of the end of the period by the amount of the
initial investment and expressing the result as a percentage. Non-standardized
total return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge 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. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares 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 and discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top sector holdings and largest holdings and other Fund information, 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 whether shareholders purchased their fund shares 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 may also be marketed on the internet.
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In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking or rating 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
at 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 Semiannual Report contain additional performance
information. A copy of the Annual Report or Semiannual Report may be obtained
without charge by calling or writing the Fund at the telephone number and
address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum sales
charge, for Class A Shares of the Fund for (i) the one-year period ended
September 30, 1999 was -8.81%, (ii) the five-year period ended September 30,
1999 was 4.57% and (iii) the approximately nine-year, two month period from
August 1, 1990 (the commencement of distribution for Class A Shares of the Fund)
through September 30, 1999 was 5.99%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1999 was 4.94%. The Fund's current distribution rate with
respect to the Class A Shares for the month ending September 30, 1999 was 5.56%.
The Fund's taxable equivalent distribution rate with respect to the Class A
Shares for the month ending September 30, 1999 was 8.69%.
The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
September 30, 1999 was 70.40%.
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, 1999 was 78.88%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -8.58%, (ii) the five-year period ended
September 30, 1999 was 4.56% and (iii) the approximately seven-year, one month
period
B-37
<PAGE> 514
from August 24, 1992 (the commencement of distribution for Class B Shares of the
Fund) through September 30, 1999 was 4.47%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1999 was 4.41%. The Fund's current distribution rate with
respect to the Class B Shares for the month ending September 30, 1999 was 5.05%.
The Fund's taxable equivalent distribution rate with respect to the Class B
Shares for the month ending September 30, 1999 was 7.89%.
The Fund's cumulative non-standardized total return, including payment of the
contingent deferred sales charge, with respect to the Class B Shares from August
24, 1992 (the commencement of distribution for Class B Shares) to September 30,
1999 was 35.22%.
The Fund's cumulative non-standardized total return, excluding payment of the
contingent deferred sales charge, with respect to the Class B Shares from August
24, 1992 (the commencement of distribution for Class B Shares) to September 30,
1999 was 36.37%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -5.80%, (ii) the five-year period ended
September 30, 1999 was 4.79% and (iii) the approximately six-year, one month
period from August 13, 1993 (the commencement of distribution for Class C Shares
of the Fund) through September 30, 1999 was 3.39%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1999 was 4.43%. The Fund's current distribution rate with
respect to the Class C Shares for the month ending September 30, 1999 was 5.06%.
The Fund's taxable equivalent distribution rate with respect to the Class C
Shares for the month ending September 30, 1999 was 7.91%.
The Fund's cumulative non-standardized total return, including payment of the
contingent deferred sales charge, with respect to the Class C Shares from August
13, 1993 (the commencement of distribution for Class C Shares) to September 30,
1999 was 22.65%.
The Fund's cumulative non-standardized total return, excluding payment of the
contingent deferred sales charge, with respect to the Class C Shares from August
13, 1993 (the commencement of distribution for Class C Shares) to September 30,
1999 was 22.65%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in the Fund's investment practices.
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. The Custodian also provides
accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
B-38
<PAGE> 515
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-39
<PAGE> 516
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Municipal Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1999, the related statement of operations for
the year then ended, the statement of changes in net assets for the year then
ended, for the nine-month period ended September 30, 1998, and for the year
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, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Municipal Income Fund as of September 30, 1999, the results of its
operations for the year then ended, the changes in its net assets for the year
then ended, for the nine-month period ended September 30, 1998, and for the year
ended December 31, 1997, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG LLP SIG
Chicago, Illinois
November 9, 1999
F-1
<PAGE> 517
PORTFOLIO OF INVESTMENTS
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 108.4%
ALABAMA 1.9%
$ 2,100 Alabama St Indl Dev Auth Rev UNR-ROHN
Inc Expansion Proj................... 7.500% 09/15/11 $ 2,217,306
2,930 Alabama Wtr Pollutn Ctl Auth
Revolving Fd Ln Ser A (AMBAC Insd)
(b).................................. 6.750 08/15/17 3,151,801
350 Bessemer, AL Indl Dev Brd ROHN Inc
Proj................................. 9.000 09/15/01 362,982
1,750 Bessemer, AL Indl Dev Brd ROHN Inc
Proj................................. 9.500 09/15/11 2,082,447
240 Mobile, AL Indl Dev Brd Solid Waste
Disp Rev Mobile Energy Svcs Co Proj
Rfdg................................. 6.950 01/01/20 83,181
1,000 Montgomery, AL Med Clinic Brd Jackson
Hosp & Clinic (AMBAC Insd)........... 5.875 03/01/16 1,008,530
2,000 West Jefferson Cnty, AL Amusement &
Pub Pk Auth First Mtg Visionland
Proj................................. 6.375 02/01/29 1,666,940
5,150 West Jefferson Cnty, AL Amusement &
Pub Pk Auth First Mtg Visionland Proj
(Prerefunded @ 12/01/06)............. 8.000 12/01/26 6,228,255
------------
16,801,442
------------
ALASKA 0.8%
10 Alaska Energy Auth Pwr Rev Bradley
Lake Proj Ser 1 (BIGI Insd).......... 6.250 07/01/21 10,017
1,000 Alaska Indl Dev & Expt Auth Pwr Rev
Upper Lynn Canal Regl Pwr............ 5.700 01/01/12 930,300
1,800 Alaska Indl Dev & Expt Auth Pwr Rev
Upper Lynn Canal Regl Pwr............ 5.875 01/01/32 1,612,170
1,650 Juneau, AK City & Borough Nonrecourse
Rev.................................. 6.875 12/01/25 1,614,542
3,265 North Slope Borough, AK Cap Apprec
Ser A (MBIA Insd).................... * 06/30/10 1,850,928
1,000 Valdez, AK Marine Term Rev Sohio
Pipeline Rfdg........................ 7.125 12/01/25 1,071,860
------------
7,089,817
------------
ARIZONA 2.2%
1,000 Maricopa Cnty, AZ Indl Dev Auth
Multi-Family Hsg Rev Rfdg............ 6.500 07/01/09 1,044,210
1,000 Peoria, AZ Indl Dev Auth Rev Sierra
Winds Life Ser A Rfdg................ 6.500 08/15/31 950,440
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 518
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ARIZONA (CONTINUED)
$ 590 Pima Cnty, AZ Indl Dev Auth Single
Family Mtg Rev (GNMA
Collateralized)...................... 6.625% 11/01/14 $ 606,555
5,220 Pinal Cnty, AZ Sch Dist No 8
Mammoth Ser A (b).................... 9.500 07/01/10 5,534,401
500 Scottsdale, AZ Indl Dev Auth Rev
First Mtg Westminster Vlg Ser A
Rfdg................................. 8.250 06/01/15 545,095
1,875 Scottsdale, AZ Indl Dev Hosp
Scottsdale Mem Hosp Ser A Rfdg (AMBAC
Insd)................................ 6.000 09/01/12 1,932,112
1,750 Scottsdale, AZ Indl Dev Hosp
Scottsdale Mem Hosp Ser A Rfdg (AMBAC
Insd)................................ 6.125 09/01/17 1,774,553
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev
Lockheed Aermod Cent Inc............. 8.700 09/01/19 7,372,750
------------
19,760,116
------------
ARKANSAS 0.9%
5,090 Dogwood Addition PRD Muni Ppty Owners
Multi-Purp Impt Dist No 8 AR Impt Ser
A (d)................................ 7.500 01/31/06 4,886,400
5,470 Dogwood Addition PRD Muni Ppty Owners
Multi-Purp Impt Dist No 8 AR Impt Ser
B (d)(g)............................. 7.500 01/31/06 1,641,000
1,835 Jackson Cnty, AR Hlthcare Fac Brd
First Mtg Hosp Rev Newport Hosp &
Clinic Inc........................... 7.375 11/01/11 1,832,651
------------
8,360,051
------------
CALIFORNIA 9.7%
7,195 Anaheim, CA Pub Fin Auth Lease Rev
Cap Apprec Sub Pub Impt Proj C (FSA
Insd)................................ * 09/01/21 2,017,838
4,900 Anaheim, CA Pub Fin Auth Lease Rev
Cap Apprec Sub Pub Impt Proj C (FSA
Insd)................................ * 09/01/25 1,078,784
5,000 Anaheim, CA Pub Fin Auth Lease Rev
Cap Apprec Sub Pub Impt Proj C (FSA
Insd)................................ * 09/01/26 1,038,350
5,000 Anaheim, CA Pub Fin Auth Lease Rev
Sub Cap Apprec Pub Impt Proj Ser C
(FSA Insd)........................... * 09/01/32 723,800
4,990 California Edl Fac Auth Rev College
of Osteopathic Med Pacific
(Prerefunded @ 06/01/03)............. 7.500 06/01/18 5,526,226
2,880 California Edl Fac Auth Rev Univ of
La Verne............................. 6.300 04/01/09 2,979,159
9,650 California St (FGIC Insd)............ 4.500 12/01/24 7,960,575
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 519
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 4,210 Campbell, CA Union Sch Dist Rfdg
(FGIC Insd).......................... * 08/01/19 $ 1,347,874
4,225 Delano, CA Ctfs Partn Ser A
(Prerefunded @ 01/01/03) (b)......... 9.250% 01/01/22 4,921,153
2,660 Escondido, CA Jt Pwrs Fin Auth Lease
Rev (AMBAC Insd)..................... * 09/01/10 1,459,781
5,875 Escondido, CA Jt Pwrs Fin Auth Lease
Rev (AMBAC Insd)..................... * 09/01/11 2,996,191
3,890 Escondido, CA Jt Pwrs Fin Auth Lease
Rev (AMBAC Insd)..................... * 09/01/13 1,718,952
5,430 Escondido, CA Jt Pwrs Fin Auth Lease
Rev (AMBAC Insd)..................... * 09/01/14 2,226,354
875 Fairfield, CA Hsg Auth Mtg Rev
Creekside Estates Proj Rfdg
(Prerefunded @ 08/01/02)............. 7.875 02/01/15 978,066
3,000 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev (MBIA Insd).............. * 01/15/17 1,089,390
21,000 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev.......................... * 01/15/24 4,583,460
3,000 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev.......................... * 01/15/27 1,594,530
15,000 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev.......................... * 01/15/30 2,228,250
54,635 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev.......................... * 01/15/32 7,133,692
15,000 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev.......................... * 01/15/36 1,506,000
15,000 Foothill/Eastern Tran Corridor Agy CA
Toll Rd Rev.......................... * 01/15/38 1,326,300
2,825 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev Cap Apprec (AMBAC
Insd)................................ * 09/01/15 1,159,126
1,155 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev Cap Apprec (AMBAC
Insd)................................ * 09/01/19 364,472
1,265 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev Cap Apprec (AMBAC
Insd)................................ * 09/01/22 330,342
1,380 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev Cap Apprec (AMBAC
Insd)................................ * 09/01/25 300,012
3,500 Midpeninsula Regl Open Space Dist CA
Fin Auth Rev Cap Apprec (AMBAC
Insd)................................ * 09/01/25 718,130
900 Monterey, CA Regl Wastewtr Fin Auth
Wastewtr Contract Rev (FSA Insd)..... * 06/01/10 521,253
800 Monterey, CA Regl Wastewtr Fin Auth
Wastewtr Contract Rev (FSA Insd)..... * 06/01/11 434,248
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 520
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 700 Monterey, CA Regl Wastewtr Fin Auth
Wastewtr Contract Rev (FSA Insd)..... * 06/01/12 $ 356,160
700 Monterey, CA Regl Wastewtr Fin Auth
Wastewtr Contract Rev (FSA Insd)..... * 06/01/13 333,200
700 Monterey, CA Regl Wastewtr Fin Auth
Wastewtr Contract Rev (FSA Insd)..... * 06/01/14 311,115
5,000 Murrieta Vly, CA Uni Sch Dist Ser A
(FGIC Insd).......................... * 09/01/20 1,492,050
5,255 Murrieta Vly, CA Uni Sch Dist Ser A
(FGIC Insd).......................... * 09/01/22 1,387,635
1,650 Riverside Cnty, CA Air Force Vlg West
Inc Ser A Rfdg (Prerefunded @
06/15/02)............................ 8.125% 06/15/20 1,847,241
9,000 Riverside Cnty, CA Asset Leasing Corp
Leasehold Rev Riverside Cnty Hosp
Proj (MBIA Insd)..................... * 06/01/21 2,539,440
3,300 Sacramento, CA City Fin Auth Rev Sr
Convention Cent Hotel Ser A.......... 6.250 01/01/30 3,146,220
25,000 San Joaquin Hills, CA Tran Corridor
Agy Toll Rd Rev Ser A Rfdg (MBIA
Insd)................................ * 01/15/32 3,734,750
29,535 San Joaquin Hills, CA Tran Corridor
Agy Toll Rd Rev Cap Apprec Ser A Rfdg
(MBIA Insd).......................... * 01/15/25 6,712,124
11,155 San Joaquin Hills, CA Tran Corridor
Agy Toll Rd Rev Cap Apprec Ser A Rfdg
(MBIA Insd).......................... * 01/15/26 2,390,851
13,880 San Joaquin Hills, CA Tran Corridor
Agy Toll Rd Rev Cap Apprec Ser A Rfdg
(MBIA Insd).......................... * 01/15/28 2,645,944
------------
87,159,038
------------
COLORADO 4.6%
2,840 Adams Cnty, CO Single Family Mtg Rev
Ser A (b)............................ 8.875 08/01/11 3,694,897
3,985 Adams Cnty, CO Single Family Mtg Rev
Ser A (b)............................ 8.875 08/01/12 5,275,104
300 Berry Creek Metro Dist CO Rfdg &
Impt................................. 8.250 12/01/11 316,170
200 Berry Creek Metro Dist CO Rfdg & Impt
(Prerefunded @ 12/01/01)............. 8.250 12/01/11 218,766
987 Bowles Metro Dist CO (Prerefunded @
12/01/05)............................ 7.750 12/01/15 1,136,530
2,000 Denver, CO City & Cnty Arpt Rev Ser
A (b)................................ 7.000 11/15/99 2,006,820
4,570 Denver, CO City & Cnty Arpt Rev Ser
A (b)................................ 8.000 11/15/25 4,813,764
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 521
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COLORADO (CONTINUED)
$ 6,200 Denver, CO City & Cnty Spl Fac Arpt
Rev United Airls Proj Ser A.......... 6.875% 10/01/32 $ 6,376,328
6,290 E-470 Pub Hwy Auth CO Rev Cap Apprec
Sr Ser B Rfdg (MBIA Insd)............ * 09/01/22 1,629,802
1,000 Edgewater, CO Redev Auth Tax
Increment Rev........................ 6.750 12/01/08 1,088,010
1,320 El Paso Cnty, CO Sch Dist No 003
Widefield Ser A (MBIA Insd).......... * 12/15/14 593,446
1,420 El Paso Cnty, CO Sch Dist No 003
Widefield Ser A (MBIA Insd).......... * 12/15/15 601,796
1,420 El Paso Cnty, CO Sch Dist No 003
Widefield Ser A (MBIA Insd).......... * 12/15/16 564,223
1,330 El Paso Cnty, CO Sch Dist No 003
Widefield Ser A (MBIA Insd).......... * 12/15/18 464,622
3,690 Jefferson Cnty, CO Residential Mtg
Rev.................................. 11.500 09/01/12 5,761,566
5,000 Meridian Metro Dist CO Peninsular &
Oriental Steam Navig Co Rfdg (LOC:
Meridian Assoc East)................. 7.500 12/01/11 5,303,900
1,960 Northern Metro Dist CO Adams Cnty
Rfdg................................. 6.500 12/01/16 2,011,822
------------
41,857,566
------------
CONNECTICUT 1.6%
3,005 Connecticut St Hlth & Edl Fac Auth
Rev Nursing Home Pgm AHF/Hartford
(Prerefunded @ 11/01/04) (b)......... 7.125 11/01/14 3,400,188
495 Mashantucket Western Pequot Tribe CT
Spl Rev Ser A, 144A -- Private
Placement (a)........................ 6.500 09/01/06 547,549
2,530 Mashantucket Western Pequot Tribe CT
Spl Rev Ser A, 144A -- Private
Placement (a)........................ 6.400 09/01/11 2,645,140
2,470 Mashantucket Western Pequot Tribe CT
Spl Rev Ser A, 144A -- Private
Placement (Prerefunded @ 09/01/07)
(a).................................. 6.400 09/01/11 2,755,903
4,000 Mashantucket Western Pequot Tribe CT
Spl Rev Ser B, 144A -- Private
Placement (a)........................ 5.750 09/01/18 3,794,480
1,500 Mashantucket Western Pequot Tribe CT
Spl Rev Ser B, 144A -- Private
Placement (a)........................ 5.750 09/01/27 1,396,770
------------
14,540,030
------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 522
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
DISTRICT OF COLUMBIA 0.6%
$ 2,500 District of Columbia Rev Natl Pub
Radio Ser A (b)...................... 7.700% 01/01/23 $ 2,644,050
3,000 Washington Dist of Columbia
Convention Cent Auth Dedicated Tax
Rev (AMBAC Insd)..................... 5.250 10/01/12 2,943,240
------------
5,587,290
------------
FLORIDA 5.1%
275 Atlantic Beach, FL Rev Fleet Landing
Proj Ser A Rfdg & Impt............... 7.500 10/01/02 280,841
500 Atlantic Beach, FL Rev Fleet Landing
Proj Ser A Rfdg & Impt............... 7.875 10/01/08 543,355
1,490 Broward Cnty, FL Res Recovery Rev
Waste Energy North Proj.............. 7.950 12/01/08 1,542,299
1,950 Broward Cnty, FL Res Recovery Rev
Waste Energy South Proj.............. 7.950 12/01/08 2,018,445
2,500 Cocoa, FL Wtr & Swr Rev Rfdg (FGIC
Insd)................................ 4.500 10/01/22 2,042,150
9,000 Dade Cnty, FL Gtd Entitlement Rev Cap
Apprec Ser A Rfdg (MBIA Insd)........ * 02/01/18 3,014,820
1,800 Florida Hsg Fin Corp Rev Hsg Beacon
Hill Apts Ser C...................... 6.610 07/01/38 1,722,564
3,000 Florida Hsg Fin Corp Rev Hsg Cypress
Trace Apts Ser G..................... 6.600 07/01/38 2,880,480
2,000 Florida Hsg Fin Corp Rev Hsg
Westchase Apts Ser B................. 6.610 07/01/38 1,920,400
560 Florida St Brd Edl Cap Outlay Pub Edl
Ser A Rfdg........................... 7.250 06/01/23 581,437
590 Florida St Brd Edl Cap Outlay Pub Edl
Ser A Rfdg (Prerefunded @
06/01/00)............................ 7.250 06/01/23 615,405
4,845 Hillsborough Cnty, FL Edl Fac Univ
Tampa Proj Rfdg...................... 5.750 04/01/18 4,713,361
2,875 Martin Cnty, FL Indl Dev Auth Indl
Dev Rev Indiantown Cogeneration Proj
Ser A Rfdg........................... 7.875 12/15/25 2,981,835
1,500 Orange Cnty, FL Hlth Fac Auth Rev
First Mtg Orlando Lutheran Twr
Rfdg................................. 8.750 07/01/26 1,671,915
595 Orange Cnty, FL Tourist Dev Tax Rev
(AMBAC Insd)......................... 6.000 10/01/16 602,396
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 523
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$ 405 Orange Cnty, FL Tourist Dev Tax Rev
(Prerefunded @ 10/01/00) (AMBAC
Insd)................................ 6.000% 10/01/16 $ 413,946
7,000 Orlando, FL Util Comm Wtr & Elect
Rev.................................. 5.600 10/06/17 6,952,960
4,095 Sarasota Cnty, FL Hlth Fac Auth Rev
Hlthcare Kobernick/Meadow Pk
(Prerefunded @ 07/01/02)............. 10.000 07/01/22 4,720,225
5,000 Sarasota Cnty, FL Pub Hosp Brd Miles
Sarasota Mem Hosp Proj Ser A
(Embedded Cap) (MBIA Insd)........... 6.688 10/01/21 4,712,500
980 Tampa Palms, FL Open Space & Tran
Cmnty Dev Dist Rev Cap Impt Area 7
Proj................................. 7.500 05/01/18 1,012,732
835 Tampa Palms, FL Open Space & Tran
Cmnty Dev Dist Rev Cap Impt Area 7
Proj................................. 8.500 05/01/17 894,661
------------
45,838,727
------------
GEORGIA 3.9%
3,000 Atlanta, GA Arpt Fac Rev (b)......... 6.250 01/01/21 3,070,800
2,000 Atlanta, GA Urban Residential Fin
Auth Multi-Family Rev Proj Ser A..... 6.750 07/01/30 1,932,000
2,000 Fulton Cnty, GA Hsg Auth Multi-Family
Hsg Rev.............................. 6.500 02/01/28 1,929,660
2,000 George L Smith II GA Wrld Congress
Cent Auth Rev Domed Stadium Proj Rfdg
(MBIA Insd) (c)...................... 5.500 07/01/20 1,875,020
20,000 Georgia Loc Govt Ctfs Partn Grantor
Tr Ser A (MBIA Insd)................. 4.750 06/01/28 16,899,200
1,500 Georgia Muni Elec Auth Pwr Rev Ser X
(MBIA Insd).......................... 6.500 01/01/20 1,655,370
9,070 Municipal Elec Auth GA Proj One Sub
Ser A (MBIA Insd).................... 4.500 01/01/19 7,578,348
------------
34,940,398
------------
HAWAII 2.6%
3,220 Hawaii St Ser CT (FSA Insd).......... 5.750 09/01/14 3,276,833
5,500 Hawaii St Ser CT (FSA Insd).......... 5.875 09/01/16 5,603,620
4,055 Hawaii St Arpts Sys Rev Ser 1993
(MBIA Insd).......................... 6.350 07/01/07 4,356,327
2,350 Hawaii St Dept Trans Spl Fac Rev
Continental Airls Inc................ 9.700 06/01/20 2,460,591
2,365 Hawaii St Dept Trans Spl Fac Rev
Continental Airls Inc................ 5.625 11/15/27 2,077,109
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 524
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HAWAII (CONTINUED)
$ 1,475 Hawaii St Harbor Cap Impt Rev (FGIC
Insd)................................ 6.350% 07/01/07 $ 1,587,247
1,560 Hawaii St Harbor Cap Impt Rev (FGIC
Insd)................................ 6.400 07/01/08 1,681,384
500 Hawaii St Harbor Cap Impt Rev (MBIA
Insd)................................ 7.000 07/01/17 518,785
4,500 Honolulu, HI City & Cnty Wastewtr Sys
Rev (FGIC Insd)...................... * 07/01/15 1,822,770
------------
23,384,666
------------
ILLINOIS 14.5%
4,180 Bedford Park, IL Tax Increment Rev Sr
Lien Bedford City Sq Proj (b)........ 9.250 02/01/12 4,587,132
1,710 Bolingbrook, IL Cap Apprec Ser C Rfdg
(MBIA Insd).......................... * 01/01/29 301,114
1,350 Bridgeview, IL Tax Increment Rev
Rfdg................................. 9.000 01/01/11 1,505,831
6,375 Broadview, IL Tax Increment Rev Sr
Lien................................. 8.250 07/01/13 7,366,376
3,000 Chicago, IL Lakefront Millenium Pkg
Fac (MBIA Insd)...................... * 01/01/19 2,013,480
13,600 Chicago, IL Brd Edl Cap Apprec Sch
Reform B 1 (FGIC Insd)............... * 12/01/22 3,411,288
7,500 Chicago, IL Brd Edl Cap Apprec Sch
Reform B 1 (FGIC Insd)............... * 12/01/29 1,221,075
6,800 Chicago, IL Brd Edl Cap Apprec Sch
Reform Ser A (FGIC Insd)............. * 12/01/19 2,059,788
5,000 Chicago, IL Brd Edl Cap Apprec Sch
Reform Ser A (FGIC Insd)............. * 12/01/20 1,424,550
6,375 Chicago, IL Brd Edl Cap Apprec Sch
Reform Ser A (FGIC Insd)............. * 12/01/21 1,701,041
5,000 Chicago, IL Brd Edl Cap Apprec Sch
Reform Ser A (FGIC Insd)............. * 12/01/27 919,150
1,000 Chicago, IL Gas Supply Rev Ser A..... 8.100 05/01/20 1,040,960
1,000 Chicago, IL Metro Wtr Reclamation
Dist Gtr Chicago..................... 7.000 01/01/11 1,151,320
10,000 Chicago, IL O'Hare Intl Arpt Rev
Second Lien Genl Arpt Rfdg (AMBAC
Insd) (c)............................ 5.500 01/01/15 9,752,300
6,000 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev United Airls Proj Ser B.......... 5.200 04/01/11 5,591,100
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 525
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 4,000 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev United Airls Inc (b)............. 8.500% 05/01/18 $ 4,155,760
4,660 Chicago, IL O'Hare Intl Arpt Spl Fac
Rev United Airls Inc Ser B........... 8.950 05/01/18 4,975,901
1,945 Chicago, IL Single Family Mtg Rev Ser
A (GNMA Collateralized).............. 7.000 09/01/27 2,084,204
450 Chicago, IL Tax Increment Alloc Santn
Drain & Ship Canal Ser A............. 7.375 01/01/05 463,437
1,000 Chicago, IL Tax Increment Alloc Santn
Drain & Ship Canal Ser A............. 7.750 01/01/14 1,056,980
1,000 Cook Cnty, IL Cmnty College Dist No
508 Chicago Ctfs Partn (FGIC Insd)... 8.750 01/01/07 1,227,020
2,265 Cook Cnty, IL Cons High Sch Dist No
200 Oak Park (FSA Insd).............. * 12/01/07 1,499,838
2,265 Cook Cnty, IL Cons High Sch Dist No
200 Oak Park (FSA Insd).............. * 12/01/08 1,413,360
2,265 Cook Cnty, IL Cons High Sch Dist No
200 Oak Park (FSA Insd).............. * 12/01/09 1,333,224
2,265 Cook Cnty, IL Cons High Sch Dist No
200 Oak Park (FSA Insd).............. * 12/01/10 1,251,820
2,265 Cook Cnty, IL Cons High Sch Dist No
200 Oak Park (FSA Insd).............. * 12/01/11 1,173,111
1,000 Crestwood, IL Tax Increment Rev
Rfdg................................. 7.250 12/01/08 1,044,680
1,100 Hodgkins, IL Tax Increment........... 9.500 12/01/09 1,222,364
1,500 Hodgkins, IL Tax Increment Ser A
Rfdg................................. 7.625 12/01/13 1,608,540
1,450 Hoopeston, IL Hosp Cap Impt Rev
Hoopeston Cmnty Mem Hosp Rfdg........ 6.550 11/15/29 1,388,477
1,500 Huntley, IL Increment Alloc Rev
Huntley Redev Proj Ser A............. 8.500 12/01/15 1,682,940
1,000 Huntley, IL Spl Svc Area No 10 Spl
Tax Ser A............................ 6.500 03/01/29 960,140
1,000 Illinois Dev Fin Auth Elderly Hsg Rev
Libertyville Towers Ser A............ 6.500 09/01/09 1,030,560
505 Illinois Dev Fin Auth Rev Cmnty Fac
Clinic Altgeld Proj.................. 8.000 11/15/06 538,921
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 526
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 1,000 Illinois Edl Fac Auth Rev Lake Forest
College (Prerefunded @ 10/01/01) (FSA
Insd)................................ 6.750% 10/01/21 $ 1,068,090
1,000 Illinois Edl Fac Auth Rev
Northwestern Univ Ser 1985
(Prerefunded @ 12/01/01)............. 6.900 12/01/21 1,074,710
1,000 Illinois Edl Fac Auth Rev Peace Mem
Ministries Proj...................... 7.500 08/15/26 1,049,010
1,440 Illinois Hlth Fac Auth Rev Silver
Cross Hosp & Med Rfdg................ 5.500 08/15/19 1,321,776
4,150 Illinois Hlth Fac Auth Rev Silver
Cross Hosp & Med Rfdg................ 5.500 08/15/25 3,649,593
2,000 Illinois Hlth Fac Auth Rev Fairview
Oblig Group Proj B (Prerefunded @
10/01/02)............................ 9.000 10/01/22 2,285,160
4,100 Illinois Hlth Fac Auth Rev Fairview
Oblig Group Proj Ser A (Prerefunded @
10/01/02)............................ 9.500 10/01/22 4,731,523
1,500 Illinois Hlth Fac Auth Rev Fairview
Oblig Group Ser A Rfdg............... 7.400 08/15/23 1,592,910
485 Illinois Hlth Fac Auth Rev Glenoaks
Med Cent Ser D....................... 9.500 11/15/15 525,396
1,000 Illinois Hlth Fac Auth Rev Mem Hosp
(Prerefunded @ 05/01/02)............. 7.250 05/01/22 1,085,610
1,000 Illinois Hlth Fac Auth Rev
Northwestern Mem Hosp (b)............ 6.750 08/15/11 1,059,250
2,600 Illinois Hlth Fac Auth Rev Utd Med
Cent (Prerefunded @ 07/01/03) (b).... 8.375 07/01/12 2,932,956
650 Illinois Hsg Dev Auth Residential Mtg
Rev (Inverse Fltg)................... 9.359 02/13/18 703,625
1,450 McLean & Woodford Cntys, IL Cmty Unit
Sch Dist No 005 Normal............... 4.500 01/01/16 1,224,061
750 Metropolitan Pier & Exposition Auth
IL Dedicated St Tax Rev (FGIC
Insd)................................ 5.250 12/15/28 680,978
895 Mill Creek Wtr Reclamation Dist IL
Sew Rev.............................. 8.000 03/01/10 978,512
540 Mill Creek Wtr Reclamation Dist IL
Wtrwrks Rev.......................... 8.000 03/01/10 590,387
1,000 Palatine, IL Tax Increment Rev
Rand/Dundee Cent Proj (Prerefunded @
01/01/07)............................ 7.750 01/01/17 1,150,620
2,425 Regional Tran Auth IL Rfdg (FSA
Insd)................................ 5.750 06/01/16 2,475,755
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 527
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 2,800 Regional Tran Auth IL Ser A (AMBAC
Insd)................................ 8.000% 06/01/17 $ 3,545,584
7,500 Robbins, IL Res Recovery Rev......... 8.375 10/15/16 4,031,250
3,000 Robbins, IL Res Recovery Rev
Recreation Robbins Res Partn Ser B... 8.375 10/15/16 1,612,500
745 Round Lake Beach, IL Tax Increment
Rev Rfdg............................. 7.200 12/01/04 789,566
500 Round Lake Beach, IL Tax Increment
Rev Rfdg............................. 7.500 12/01/13 535,250
1,525 Saint Charles, IL Indl Dev Rev
Tri-City Cent Proj................... 7.500 11/01/13 1,555,713
7,185 Saint Clair Cnty, IL Cap Apprec (FGIC
Insd)................................ * 10/01/20 1,976,737
7,910 Saint Clair Cnty, IL Cap Apprec (FGIC
Insd)................................ * 10/01/25 1,573,378
8,260 Saint Clair Cnty, IL Cap Apprec (FGIC
Insd)................................ * 10/01/27 1,445,170
8,655 Saint Clair Cnty, IL Cap Apprec (FGIC
Insd)................................ * 10/01/29 1,335,467
1,000 Southern IL Univ Rev Cap Apprec Hsg &
Aux Ser A (MBIA Insd)................ * 04/01/18 335,530
5,500 Southern IL Univ Rev Cap Apprec Hsg &
Aux Ser A (MBIA Insd)................ * 04/01/22 1,437,755
2,000 Southern IL Univ Rev Cap Apprec Hsg &
Aux Ser A (MBIA Insd)................ * 04/01/24 461,840
1,100 Southern IL Univ Rev Cap Apprec Hsg &
Aux Ser A (MBIA Insd)................ * 04/01/28 198,198
1,240 Southern IL Univ Rev Hsg & Aux Fac
Sys Ser A (MBIA Insd)................ 5.800 04/01/10 1,286,488
3,370 Will Cnty, IL Comnty Unit Sch Dist No
365 U Vly View Ser B (FSA Insd)...... * 11/01/18 1,092,453
2,370 Will Cnty, IL Fst Presv Dist Ser B
(FGIC Insd).......................... * 12/01/14 999,998
4,270 Will Cnty, IL Fst Presv Dist Ser B
(FGIC Insd).......................... * 12/01/15 1,688,742
------------
130,239,323
------------
INDIANA 2.6%
1,000 East Chicago, IN Exempt Fac Inland
Steel Co Proj No 14.................. 6.700 11/01/12 957,010
2,750 Elkhart Cnty, IN Hosp Auth Rev
Elkhart Genl Hosp Inc (Prerefunded @
07/01/02)............................ 7.000 07/01/12 2,986,115
1,650 Indiana Bond Bank Spl Pgm Hendricks
Redev Ser B (LOC: Canadian Imperial
Bank Insd)........................... 6.125 02/01/17 1,683,907
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 528
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
INDIANA (CONTINUED)
$ 3,125 Indiana Bond Bank Spl Pgm Hendricks
Redev Ser B (LOC: Canadian Imperial
Bank Insd)........................... 6.200% 02/01/23 $ 3,196,875
2,000 Indiana Hlth Fac Fin Auth Rev Hoosier
Care Proj Ser A...................... 7.125 06/01/34 1,923,200
990 Indiana Hlth Fac Fin Auth Rev Metro
Hlth/IN Inc Proj..................... 6.300 12/01/23 902,167
2,000 Indiana Hlth Fac Fin Auth Rev Metro
Hlth/IN Inc Proj..................... 6.400 12/01/33 1,804,320
7,920 Indiana St Dev Fin Auth Environmental
USX Corp Proj Rfdg & Impt (b)........ 6.250 07/15/30 7,724,772
550 Indianapolis, IN Loc Pub Impt Bond
Bank Ser D........................... 6.750 02/01/14 617,930
140 Saint Joseph Cnty, IN Redev Dist Tax
Increment Rev Ser B.................. * 06/30/11 55,730
140 Saint Joseph Cnty, IN Redev Dist Tax
Increment Rev Ser B.................. * 06/30/12 51,528
135 Saint Joseph Cnty, IN Redev Dist Tax
Increment Rev Ser B.................. * 06/30/13 45,942
130 Saint Joseph Cnty, IN Redev Dist Tax
Increment Rev Ser B.................. * 06/30/14 40,905
130 Saint Joseph Cnty, IN Redev Dist Tax
Increment Rev Ser B.................. * 06/30/15 37,820
135 Saint Joseph Cnty, IN Redev Dist Tax
Increment Rev Ser B.................. * 06/30/16 36,314
225 Saint Joseph Cnty, IN Redev Dist Tax
Increment Rev Ser B.................. * 06/30/17 55,960
1,500 Wells Cnty, IN Hosp Auth Rev
Caylor-Nickel Med Cent Inc Rfdg...... 8.500 04/15/03 1,610,790
------------
23,731,285
------------
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 529
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
IOWA 0.7%
$ 2,045 Iowa Fin Auth Hosp Fac Rev Trinity
Regl Hosp Proj (FSA Insd)............ 6.000% 07/01/07 $ 2,174,244
2,500 Iowa Fin Auth Hosp Fac Rev Trinity
Regl Hosp Proj (FSA Insd)............ 5.750 07/01/17 2,479,175
2,000 Iowa Fin Auth Multi-Family Rev Hsg
Hamlet Apts Proj A Rfdg (GNMA
Collateralized)...................... 6.150 05/01/32 2,040,480
------------
6,693,899
------------
KANSAS 0.1%
1,000 Newton, KS Hosp Rev Newton Hlthcare
Corp Ser A (Prerefunded @
11/15/04)............................ 7.750 11/15/24 1,148,130
------------
KENTUCKY 1.4%
1,000 Bowling Green, KY Indl Dev Rev Coltec
Inds Inc Rfdg........................ 6.550 03/01/09 1,013,110
10,950 Jefferson Cnty, KY Cap Proj Corp Rev
Muni Multi-Lease Ser A............... * 08/15/14 3,919,662
2,800 Jefferson Cnty, KY Hosp Rev (Inverse
Fltg) (MBIA Insd).................... 8.901 10/09/08 3,125,500
1,200 Jefferson Cnty, KY Hosp Rev (Inverse
Fltg) (Prerefunded @ 10/29/02) (MBIA
Insd)................................ 8.931 10/09/08 1,365,000
1,250 Kentucky Econ Dev Fin Auth Med Cent
Rev Ashland Hosp Corp Ser A Rfdg &
Impt (FSA Insd)...................... 6.125 02/01/12 1,315,600
935 Kentucky Hsg Corp Hsg Rev Ser D
(FHA/VA Gtd)......................... 7.450 01/01/23 971,755
1,000 Kentucky St Tpk Auth Toll Rd Rev Ser
A.................................... 5.500 07/01/07 1,001,650
------------
12,712,277
------------
LOUISIANA 1.1%
500 Hodge, LA Util Rev Stone Container
Corp Ser 1990........................ 9.000 03/01/10 515,255
5,755 Jefferson, LA Sales Tax Dist Spl
Sales Tax Rev (FSA Insd)............. * 12/01/15 2,304,820
1,990 Lafayette, LA Econ Dev Auth Indl Dev
Rev Advanced Polymer Proj Ser 1985... 10.000 11/15/04 2,418,029
1,000 Lake Charles, LA Harbor & Terminal
Dist Port Fac Rev Trunkline Rfdg..... 7.750 08/15/22 1,101,160
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 530
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
LOUISIANA (CONTINUED)
$ 380 Louisiana Pub Fac Auth Rev Indl Dev
Beverly Enterprises Inc Rfdg......... 8.250% 09/01/08 $ 406,516
1,000 New Orleans, LA Rfdg (FGIC Insd)..... 5.500 12/01/21 981,700
700 Port New Orleans, LA Indl Dev Rev
Avondale Inds Inc Proj Rfdg.......... 8.250 06/01/04 741,356
1,400 West Feliciana Parish, LA Pollutn Ctl
Rev Gulf States Util Co Proj Ser A... 7.500 05/01/15 1,492,694
------------
9,961,530
------------
MARYLAND 0.3%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev
Bethlehem Steel Corp Proj Ser A
Rfdg................................. 7.550 06/01/17 1,578,150
1,650 Maryland St Econ Dev Corp Student Hsg
Rev.................................. 5.750 06/01/29 1,516,267
------------
3,094,417
------------
MASSACHUSETTS 2.4%
1,000 Boston, MA Rev Boston City Hosp Ser A
(FHA Gtd) (Prerefunded @ 08/15/00)... 7.625 02/15/21 1,050,440
1,315 Massachusetts Edl Ln Auth Rev Edl Ln
Rev Muni Forwards Issue E Ser A
(AMBAC Insd)......................... 7.000 01/01/10 1,379,948
1,000 Massachusetts St Dev Fin Agy Rev
Hillcrest Educ Cent Inc.............. 6.375 07/01/29 963,170
1,000 Massachusetts St Dev Fin Agy Rev
HlthCare Fac Alliance Ser A.......... 7.100 07/01/32 993,550
6,200 Massachusetts St Hlth & Edl Fac Auth
Rev New England Med Cent Hosp Ser G
(Embedded Swap) (MBIA Insd) (f)...... 3.100/ 07/01/13 5,790,490
5.000
1,500 Massachusetts St Indl Fin Agy
Hillcrest Edl Cent Inc Proj.......... 8.450 07/01/18 1,716,645
5,000 Massachusetts St Indl Fin Agy Rev
First Mtg Reeds Landing Proj......... 8.625 10/01/23 5,452,900
970 Massachusetts St Indl Fin Agy Rev Gtr
Lynn Mental Hlth Assoc Proj
(Prerefunded @ 06/01/04)............. 8.800 06/01/14 1,213,130
</TABLE>
See Notes to Financial Statements
F-15
<PAGE> 531
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MASSACHUSETTS (CONTINUED)
$ 1,000 Massachusetts St Indl Fin Agy Rev Wtr
Treatment American Hingham........... 6.600% 12/01/15 $ 1,040,290
2,000 Plymouth Cnty, MA Ctfs Partn Ser A
(Prerefunded @ 10/01/02)............. 7.000 04/01/22 2,186,400
------------
21,786,963
------------
MICHIGAN 2.2%
3,500 Detroit, MI Downtown Dev Auth Tax
Increment Rev (Prerefunded @
07/01/06) (b)........................ 6.200 07/01/17 3,831,345
1,000 Detroit, MI Loc Dev Fin Auth Ser C... 6.850 05/01/21 994,240
650 Grand Traverse Cnty, MI Hosp Fin Auth
Hosp Rev Ser A Rfdg (AMBAC Insd)..... 6.250 07/01/12 686,160
1,350 Grand Traverse Cnty, MI Hosp Fin Auth
Hosp Rev Ser A Rfdg (Prerefunded @
07/01/02) (AMBAC Insd)............... 6.250 07/01/12 1,441,381
1,500 Grand Valley, MI St Univ Rev Gen
(FGIC Insd).......................... 5.500 02/01/18 1,490,460
1,400 Hillsdale, MI Hosp Fin Auth Hosp Rev
Hillsdale Cmty Hlth Cent............. 5.250 05/15/26 1,178,142
3,615 Michigan St House of Representatives
Ctfs Partn (AMBAC Insd).............. * 08/15/24 837,559
7,522 Michigan St Strategic Fd Ltd Oblig
Rev Great Lakes Pulp & Fiber
Proj (e)............................. 8.000 12/01/27 4,929,679
4,500 Michigan St Strategic Fd Solid Waste
Disp Rev Genesee Pwr Station Proj.... 7.500 01/01/21 4,714,380
------------
20,103,346
------------
MINNESOTA 0.1%
1,000 North Saint Paul, MN Multi-Family Rev
Hsg Cottages North Saint Paul Rfdg... 9.250 02/01/22 1,049,380
------------
MISSISSIPPI 0.7%
5,000 Lowndes Cnty, MS Solid Waste Disp &
Pollutn Ctl Rev Weyerhaeuser Co Rfdg
(Inverse Fltg)....................... 6.700 04/01/22 5,438,850
1,140 Ridgeland, MS Urban Renewal Rev The
Orchard Ltd Proj Ser A Rfdg.......... 7.750 12/01/15 1,198,186
------------
6,637,036
------------
</TABLE>
See Notes to Financial Statements
F-16
<PAGE> 532
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MISSOURI 1.7%
$ 1,000 Kansas City, MO Multi-Family Hsg Rev
Vlg Green Apts Proj.................. 6.250% 04/01/30 $ 958,070
2,835 Kansas City, MO Port Auth Fac
Riverfront Park Proj Ser A (b)....... 5.750 10/01/06 2,939,838
2,000 Lees Summit, MO Indl Dev Auth Hlth
Fac Rev John Knox Vlg Proj Rfdg &
Impt................................. 7.125 08/15/12 2,085,460
1,145 Missouri St Econ Dev Export &
Infrastructure Brd Med Office Fac Rev
(MBIA Insd).......................... 7.250 06/01/04 1,224,612
3,920 Missouri St Econ Dev Export &
Infrastructure Brd Med Office Fac Rev
(Prerefunded @ 06/01/04) (MBIA
Insd) (b)............................ 7.250 06/01/14 4,430,502
2,165 Saint Louis Cnty, MO Indl Dev Auth
Nursing Home Rev Mary Queen & Mother
Proj Rfdg (GNMA Collateralized)...... 7.125 03/20/23 2,269,396
805 Saint Louis, MO Tax Increment Rev
Scullin Redev Area Ser A............. 10.000 08/01/10 970,943
------------
14,878,821
------------
NEBRASKA 0.6%
850 Nebraska Invt Fin Auth Single Family
Mtg Rev (Inverse Fltg) (GNMA
Collateralized)...................... 9.314 09/15/24 914,812
800 Nebraska Invt Fin Auth Single Family
Mtg Rev (Inverse Fltg) (GNMA
Collateralized)...................... 10.415 09/10/30 856,000
3,100 Nebraska Invt Fin Auth Single Family
Mtg Rev (Inverse Fltg) (GNMA
Collateralized)...................... 9.508 10/17/23 3,348,000
------------
5,118,812
------------
NEW HAMPSHIRE 0.8%
1,555 New Hampshire Higher Edl & Hlth Fac
Auth Rev............................. 8.800 06/01/09 1,776,090
1,985 New Hampshire Higher Edl & Hlth Fac
Auth Rev Daniel Webster College Issue
Rfdg (Prerefunded @ 07/01/04)........ 7.625 07/01/16 2,257,263
1,000 New Hampshire Higher Edl & Hlth Fac
Auth Rev New London Hosp Assn Proj... 7.500 06/01/05 1,075,740
</TABLE>
See Notes to Financial Statements
F-17
<PAGE> 533
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW HAMPSHIRE (CONTINUED)
$ 955 New Hampshire St Business Fin Auth
Elec Fac Rev Plymouth Cogeneration... 7.750% 06/01/14 $ 982,408
1,000 New Hampshire St Tpk Sys Rev Ser A
Rfdg (FGIC Insd)..................... 6.750 11/01/11 1,105,680
------------
7,197,181
------------
NEW JERSEY 6.2%
400 Atlantic City, NJ Brd Edl Sch
(Prerefunded @ 12/01/02) (AMBAC
Insd)................................ 6.125 12/01/11 429,080
250 Camden Cnty, NJ Impt Auth Lease Rev
Cnty Gtd (Prerefunded @ 10/01/04)
(MBIA Insd).......................... 6.150 10/01/14 272,768
2,000 Camden Cnty, NJ Impt Auth Lease Rev
Dockside Refrig...................... 8.400 04/01/24 2,168,940
500 Essex Cnty, NJ Impt Auth Lease Cnty
Jail Proj A (MBIA Insd).............. 5.600 12/01/16 501,915
250 Essex Cnty, NJ Impt Auth Lease Jail &
Youth House Proj (Prerefunded @
12/01/04) (AMBAC Insd)............... 6.600 12/01/07 278,382
370 Essex Cnty, NJ Ser A1 Rfdg (AMBAC
Insd)................................ 5.375 09/01/10 376,664
250 Hudson Cnty, NJ Ctfs Partn
Correctional Fac Rfdg (MBIA Insd).... 6.600 12/01/21 263,885
250 Lacey Muni Util Auth NJ Wtr Rev
(Prerefunded @ 12/01/04) (MBIA
Insd)................................ 6.250 12/01/24 274,383
6,130 Middlesex Cnty, NJ Util Auth Swr Rev
Ser A Rfdg (MBIA Insd)............... 6.250 08/15/10 6,647,924
500 Millburn Twp, NJ Brd Ed.............. 5.350 07/15/12 508,070
500 New Jersey Econ Dev Auth Dist Heating
& Cooling Rev Trigen Trenton Ser A... 6.200 12/01/10 505,555
2,000 New Jersey Econ Dev Auth Holt Hauling
& Warehsg Rev Ser G Rfdg............. 8.400 12/15/15 2,123,000
300 New Jersey Econ Dev Auth Mkt
Transition Fac Rev Sr Lien Ser A
(MBIA Insd).......................... 5.800 07/01/09 314,775
210 New Jersey Econ Dev Auth Pollutn Ctl
Rev Pub Svcs Elec & Gas Co Proj A
(MBIA Insd).......................... 6.400 05/01/32 222,986
1,900 New Jersey Econ Dev Auth Rev First
Mtg Winchester Gardens Ser A......... 8.500 11/01/16 2,104,991
</TABLE>
See Notes to Financial Statements
F-18
<PAGE> 534
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW JERSEY (CONTINUED)
$ 350 New Jersey Econ Dev Auth Rev RWJ
Hlthcare Corp (FSA Insd)............. 6.250% 07/01/14 $ 370,975
1,000 New Jersey Econ Dev Auth Rev United
Methodist Homes...................... 7.500 07/01/20 1,151,350
1,000 New Jersey Econ Dev Auth Rev United
Methodist Homes Oblig Ser A
(Prerefunded @ 07/01/05)............. 7.500 07/01/25 1,151,350
2,000 New Jersey Econ Dev Auth Spl Fac Rev
Continental Airls Inc Proj........... 6.250 09/15/19 1,967,480
2,000 New Jersey Econ Dev Auth Spl Fac Rev
Continental Airls Inc Proj........... 6.400 09/15/23 1,988,780
50 New Jersey Econ Dev Auth Spl Fac Rev
Continental Airls Inc Proj........... 6.250 09/15/29 48,647
300 New Jersey Econ Dev Auth Wtr Fac Rev
Hackensack Wtr Co Proj B Rfdg (MBIA
Insd)................................ 5.900 03/01/24 303,285
170 New Jersey Hlthcare Fac Fin Auth Rev
(AMBAC Insd)......................... 6.250 07/01/21 175,884
230 New Jersey Hlthcare Fac Fin Auth Rev
(Prerefunded @ 07/01/04) (AMBAC
Insd)................................ 6.250 07/01/21 250,702
490 New Jersey Hlthcare Fac Fin Auth Rev
Atlantic City Med Cent Ser C Rfdg.... 6.800 07/01/11 521,188
700 New Jersey Hlthcare Fac Fin Auth Rev
Christ Hosp Group Issue (Connie Lee
Insd)................................ 7.000 07/01/04 770,140
400 New Jersey Hlthcare Fac Fin Auth Rev
Christ Hosp Group Issue (Connie Lee
Insd)................................ 7.000 07/01/06 449,348
250 New Jersey Hlthcare Fac Fin Auth Rev
Genl Hosp Cent at Passaic (FSA
Insd)................................ 6.000 07/01/06 268,973
250 New Jersey Hlthcare Fac Fin Auth Rev
Genl Hosp Cent at Passaic (FSA
Insd)................................ 6.750 07/01/19 280,562
500 New Jersey Hlthcare Fac Fin Auth Rev
Southern Ocean Cnty Hosp Ser A....... 6.125 07/01/13 496,325
400 New Jersey Sports & Exposition Auth
Convention Cent Luxury Tax Rev Ser A
Rfdg (MBIA Insd)..................... 6.250 07/01/20 427,832
200 New Jersey St Edl Fac Auth Rev
Caldwell College Ser A............... 7.250 07/01/25 208,562
</TABLE>
See Notes to Financial Statements
F-19
<PAGE> 535
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW JERSEY (CONTINUED)
$ 250 New Jersey St Edl Fac Auth Rev
Glassboro St College Ser A
(Prerefunded @ 07/01/01) (MBIA
Insd)................................ 6.700% 07/01/21 $ 265,588
270 New Jersey St Hsg & Mtg Fin Agy Rev
Home Buyer Ser K (MBIA Insd)......... 6.375 10/01/26 279,760
500 New Jersey St Hsg & Mtg Fin Agy Rev
Home Buyer Ser O (MBIA Insd)......... 6.300 10/01/23 515,505
500 New Jersey St Hsg & Mtg Fin Agy Rev
Home Buyer Ser S (MBIA Insd)......... 6.000 10/01/21 505,770
3,480 New Jersey St Tpk Auth Tpk Rev Ser C
Rfdg (MBIA Insd) (b)................. 6.500 01/01/16 3,875,084
4,000 New Jersey St Tran Tr Fd Auth Tran
Sys Ser A (c)........................ 5.500 06/15/11 4,116,280
5,000 New Jersey St Tran Tr Fd Auth Tran
Sys Ser A (c)........................ 5.625 06/15/14 5,084,750
6,660 New Jersey St Tran Tr Fd Auth Tran
Sys Ser A (c)........................ 5.750 06/15/15 6,871,988
6,000 New Jersey St Tran Tr Fd Auth Tran
Sys Ser A (c)........................ 5.750 06/15/20 6,090,480
300 Union City, NJ (FSA Insd)............ 6.375 11/01/10 333,549
------------
55,763,455
------------
NEW MEXICO 0.3%
2,600 Albuquerque, NM Retirement Fac Rev La
Vida Llena Proj Ser B Rfdg........... 6.600 12/15/28 2,398,578
------------
NEW YORK 7.8%
1,000 Brookhaven, NY Indl Dev Agy Sr
Residential Hsg Rev Woodcrest Estates
Fac A................................ 6.375 12/01/37 923,990
1,810 Clifton Springs, NY Hosp & Clinic
Hosp Rev Rfdg........................ 8.000 01/01/20 1,931,487
6,500 Metropolitan Tran Auth NY Commuter
Fac Rev (MBIA Insd) (c).............. 5.000 07/01/16 5,995,990
5,000 Metropolitan Tran Auth NY Svcs
Contract Tran Fac Ser 5 Rfdg......... 7.000 07/01/12 5,277,800
1,000 New York City Indl Dev Agy Field
Hotel Assoc Lp JFK Rfdg.............. 6.000 11/01/28 945,680
</TABLE>
See Notes to Financial Statements
F-20
<PAGE> 536
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 1,000 New York City Indl Dev Agy Laguardia
Assoc Lp Proj Rfdg................... 6.000% 11/01/28 $ 945,680
1,000 New York City Indl Dev Agy Civic Fac
Marymount Manhattan College Proj..... 7.000 07/01/23 1,040,290
4,100 New York City Muni Wtr Fin Auth Wtr &
Swr Sys Rev Ser B (b)................ 5.000 06/15/17 3,691,312
5,000 New York City Ser A (b).............. 7.000 08/01/07 5,606,000
4,055 New York City Ser C (b).............. 6.500 08/01/04 4,309,695
945 New York City Ser C (Prerefunded @
08/01/02)............................ 6.500 08/01/04 1,013,579
640 New York City Ser C Subser C1
(Prerefunded @ 08/01/02)............. 7.500 08/01/20 703,904
2,000 New York City Ser D Rfdg (b)......... 8.000 02/01/05 2,292,380
2,200 New York City Ser E (b).............. 5.700 08/01/08 2,273,282
5,745 New York City Tran Auth Metro Ser A
(AMBAC Insd)......................... 5.625 01/01/14 5,792,109
5,000 New York St Dorm Auth Rev City Univ
Ser F (b)............................ 5.500 07/01/12 4,938,700
2,750 New York St Dorm Auth Rev Court Fac
Lease Ser A.......................... 5.500 05/15/10 2,751,787
2,295 New York St Dorm Auth Rev Mental Hlth
Svcs Fac Ser A....................... 5.750 02/15/11 2,344,021
2,285 New York St Dorm Auth Rev Mental Hlth
Svcs Fac Ser A....................... 5.750 02/15/12 2,320,395
2,500 New York St Energy Resh & Dev Auth
Gas Fac Rev (Inverse Fltg)........... 7.889 04/01/20 2,784,375
3,000 New York St Energy Resh & Dev Auth
Gas Fac Rev Brooklyn Union Gas Co Ser
B (Inverse Fltg)..................... 9.564 07/01/26 3,641,250
2,000 New York St Energy Resh & Dev Auth
Pollutn Ctl Rev Niagara Mohawk Pwr
Corp Ser A Rfdg (FGIC Insd).......... 7.200 07/01/29 2,220,280
185 New York St Med Care Fac Fin Agy Rev
Mental Hlth Svcs Fac Ser A........... 7.750 08/15/11 196,204
175 New York St Med Care Fac Fin Agy Rev
Mental Hlth Svcs Fac Ser C........... 7.300 02/15/21 186,217
2,400 New York St Urban Dev Corp Rev
Correctional Cap Fac Rfdg............ 5.625 01/01/07 2,461,104
</TABLE>
See Notes to Financial Statements
F-21
<PAGE> 537
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 1,000 Peekskill, NY Indl Dev Agy Sr Drum
Hill Sr Living Proj.................. 6.375% 10/01/28 $ 926,330
1,200 Port Auth NY & NJ Cons 95th Ser...... 6.125 07/15/22 1,234,728
1,500 Suffolk Cnty, NY Indl Dev Agy Indl
Dev Rev Spellman High Voltage Fac Ser
A.................................... 6.375 12/01/17 1,420,590
------------
70,169,159
------------
OHIO 1.7%
1,235 Cleveland Cuyahoga Cnty, OH Port Auth
Rev Dev Port Cleveland Bond Fd Ser
A.................................... 5.750 05/15/20 1,153,700
755 Cleveland Cuyahoga Cnty, OH Port Auth
Rev Dev Port Cleveland Bond Fd Ser
A.................................... 5.800 05/15/27 708,152
500 Cleveland, OH Pkg Fac Rev Impt
(Prerefunded @ 09/15/02)............. 8.000 09/15/12 558,360
1,000 Cuyahoga Cnty, OH Hlthcare Fac Rev
Jennings Hall........................ 7.300 11/15/23 1,042,100
295 Fairfield, OH Econ Dev Rev Beverly
Enterprises Inc Proj Rfdg............ 8.500 01/01/03 307,479
1,750 Franklin Cnty, OH Hlthcare Friendship
Vlg Dublin, OH Rfdg.................. 5.625 11/01/22 1,616,755
1,000 Madison Cnty, OH Hosp Impt Rev
Madison Cnty Hosp Proj Rfdg.......... 6.400 08/01/28 922,480
1,000 Ohio St Air Quality Dev Auth Rev JMG
Funding Ltd Partn Proj Rfdg (AMBAC
Insd)................................ 6.375 04/01/29 1,035,900
2,000 Ohio St Solid Waste Rev CSC Ltd
Poj.................................. 8.500 08/01/22 2,000,920
4,000 Ohio St Solid Waste Rev Rep
Engineered Steels Proj............... 8.250 10/01/14 4,049,200
2,000 Ohio St Solid Waste Rev Rep
Engineered Steels Proj............... 9.000 06/01/21 2,107,380
------------
15,502,426
------------
</TABLE>
See Notes to Financial Statements
F-22
<PAGE> 538
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OKLAHOMA 0.6%
$ 1,980 McAlester, OK Pub Wks Auth Rev Rfdg &
Impt (FSA Insd)...................... 5.250% 12/01/22 $ 2,042,925
1,780 Oklahoma Hsg Fin Agy Single Family
Rev Mtg Class B (GNMA
Collateralized)...................... 7.997 08/01/18 1,924,322
1,000 Tulsa, OK Muni Arpt Tran Rev American
Airls Inc............................ 7.600 12/01/30 1,052,370
------------
5,019,617
------------
OREGON 0.5%
2,000 Oregon St Econ Dev Rev Georgia
Pacific Corp......................... 6.350 08/01/25 2,028,680
2,000 Oregon St Hlth Hsg Edl & Cultural
Facs Auth............................ 7.250 06/01/28 1,945,700
475 Salem, OR Hosp Fac Auth Rev Cap Manor
Inc.................................. 7.500 12/01/24 497,116
------------
4,471,496
------------
PENNSYLVANIA 6.8%
500 Chartiers Vly, PA Indl & Coml Dev
Auth First Mtg Rev................... 7.250 12/01/11 512,705
5,000 Chester Cnty, PA Hlth & Edl Fac Auth
Hlth Sys Rev (AMBAC Insd)............ 5.650 05/15/20 4,880,800
1,000 Cliff House Ctf Trust Var Sts Ctfs
Partn Ser A.......................... 6.625 06/01/27 1,000,000
5,000 Dauphin Cnty, PA Genl Auth Rev Hotel
& Conf Cent Hyatt Regency (b)........ 6.200 01/01/29 4,668,400
1,400 Erie, PA Sch Dist Cap Apprec Rfdg
(FSA Insd)........................... * 09/01/25 301,168
2,500 Harrisburg, PA Auth Wtr Rev (Inverse
Fltg) (FGIC Insd).................... 7.580 06/15/18 2,575,000
1,320 Harrisburg, PA Cap Apprec Nts Ser D
Rfdg (AMBAC Insd).................... * 09/15/16 498,128
1,535 Harrisburg, PA Cap Apprec Nts Ser D
Rfdg (AMBAC Insd).................... * 09/15/19 478,168
1,000 Lebanon Cnty, PA Hlth Fac Auth Hlth
Cent Rev United Church of Christ
Homes Rfdg........................... 6.750 10/01/10 1,000,290
1,000 Lehigh Cnty, PA Indl Dev Auth
Lifepath Inc Proj.................... 6.100 06/01/18 901,610
875 Lehigh Cnty, PA Indl Dev Auth Rev
Rfdg................................. 8.000 08/01/12 909,248
1,230 Luzerne Cnty, PA Indl Dev Auth First
Mtg Gross Rev Rfdg................... 7.875 12/01/13 1,303,099
</TABLE>
See Notes to Financial Statements
F-23
<PAGE> 539
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 1,500 McKean Cnty, PA Hosp Auth Hosp Rev
Bradford Hosp Proj (Crossover Rfdg @
10/01/00)............................ 8.875% 10/01/20 $ 1,598,535
1,000 Montgomery Cnty, PA Higher Edl & Hlth
Auth Rev............................. 6.750 07/01/29 942,640
3,000 Montgomery Cnty, PA Higher Edl & Hlth
Auth Hosp Rev (Embedded Swap) (AMBAC
Insd)................................ 7.130 06/01/12 3,192,060
1,000 Montgomery Cnty, PA Indl Dev Auth
Retirement Cmnty Rev................. 6.300 01/01/13 960,440
5,000 Pennsylvania St Higher Edl Assistance
Agy Student Ln Rev Rfdg (Inverse
Fltg) (AMBAC Insd)................... 9.267 09/01/26 5,818,750
3,500 Pennsylvania St Higher Edl Fac Auth
College & Univ Rev................... 4.500 07/15/21 2,878,925
3,150 Philadelphia, PA Auth For Indl Dev
Rev Coml Dev RMK Rfdg................ 7.750 12/01/17 3,408,394
685 Philadelphia, PA Hosp & Higher Edl
Fac Auth Hosp Rev.................... 7.250 03/01/24 695,090
25,000 Pittsburgh & Allegheny Cnty PA Pub
Auditorium Auth Excise Tax Rev (AMBAC
Insd)................................ 4.500 02/01/29 19,837,000
1,450 Ridley Park, PA Hosp Auth Rev Taylor
Hosp Ser A Rfdg Hosp Auth Rev Ser
1993A................................ 6.000 12/01/13 1,532,157
1,000 Scranton Lackawanna, PA Hlth &
Welfare Auth Rev Allied Svcs Rehab
Hosp Ser A........................... 7.375 07/15/08 1,065,780
500 Scranton Lackawanna, PA Hlth &
Welfare Auth Rev Moses Taylor Hosp
Proj (Prerefunded @ 07/01/01)........ 8.250 07/01/09 542,765
------------
61,501,152
------------
RHODE ISLAND 0.6%
1,950 Providence, RI Redev Agy Ctfs Partn
Ser A................................ 8.000 09/01/24 2,068,385
2,345 Rhode Island Hsg & Mtg Fin Corp
Rental Hsg Pgm Ser B (FHA Gtd)....... 7.950 10/01/30 2,397,575
555 West Warwick, RI Ser A............... 7.300 07/15/08 600,321
------------
5,066,281
------------
</TABLE>
See Notes to Financial Statements
F-24
<PAGE> 540
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SOUTH CAROLINA 1.6%
$ 2,000 Charleston Cnty, SC Indl Rev Zeigler
Coal Hldg............................ 6.950% 08/10/28 $ 1,947,380
1,070 Piedmont Muni Pwr Agy SC Elec Rev.... 5.000 01/01/25 892,851
11,420 South Carolina Tran Infrastructure
Bank Rev............................. * 10/01/15 11,204,390
------------
14,044,621
------------
SOUTH DAKOTA 0.4%
2,500 South Dakota St Hlth & Edl Fac Auth
Rev.................................. 5.650 04/01/22 2,271,100
1,000 South Dakota St Hlth & Edl Fac Auth
Rev Huron Regl Med Cent.............. 7.250 04/01/20 1,070,480
------------
3,341,580
------------
TENNESSEE 0.3%
2,000 Springfield, TN Hlth & Edl Jesse
Holman Jones Hosp Proj (Prerefunded @
04/01/06)............................ 8.500 04/01/24 2,439,180
------------
TEXAS 10.8%
1,000 Abia Dev Corp TX Arpt Fac Rev Austin
Belly Port Dev Proj A................ 6.500 10/01/23 949,590
1,000 Austin, TX Arpt Sys Rev Prior Lien
Ser A (MBIA Insd).................... 6.125 11/15/25 1,013,950
5,730 Austin, TX Rev Sub Ser A Rfdg (MBIA
Insd)................................ * 05/15/16 2,204,159
1,000 Austin-Bergstorm Landhost Enterprises
Inc TX Arpt Hotel Sr Ser A........... 6.750 04/01/27 956,890
500 Baytown, TX Ppty Mgmt & Dev Corp Ser
A (FNMA Collateralized).............. 6.100 08/15/21 504,925
130 Bell Cnty, TX Hlth Fac Dev Corp Rev
Hosp Proj............................ 9.250 07/01/08 134,195
2,000 Bell Cnty, TX Indl Dev Corp Solid
Waste Disposal Rev................... 7.600 12/01/17 1,903,200
500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp
Rev Saint Luke's Lutheran Hosp....... 7.000 05/01/21 580,930
1,500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp
Rev Saint Luke's Lutheran Hosp
(Prerefunded @ 05/01/03) (b)......... 7.900 05/01/18 1,662,315
242 Bexar Cnty, TX Hsg Fin Corp Rev Ser A
(GNMA Collateralized)................ 8.200 04/01/22 249,587
3,350 Brazos River Auth TX Rev Houston Inds
Inc Proj Ser D Rfdg (MBIA Insd)...... 4.900 10/01/15 3,054,664
</TABLE>
See Notes to Financial Statements
F-25
<PAGE> 541
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$ 1,675 Cedar Hill, TX Indpt Sch Dist Cap
Apprec Rfdg.......................... * 08/15/15 $ 664,355
625 Clear Creek, TX Indpt Sch Dist
(Prerefunded @ 02/01/01) (b)......... 6.250% 02/01/11 642,294
250 Coastal Wtr Auth TX Conveyance Sys
Rev (AMBAC Insd)..................... 6.250 12/15/17 261,218
5,000 Dallas Cnty, TX Util & Reclamation
Dist Ser B Rfdg (AMBAC Insd) (c)..... 5.875 02/15/29 4,968,150
940 Dallas-Fort Worth, TX Intl Arpt Fac
Impt Corp Rev American Airls Inc..... 7.500 11/01/25 980,467
250 El Paso, TX Hsg Auth Multi-Family Rev
Ser A................................ 6.250 12/01/09 257,235
75 Galveston, TX Ppty Fin Auth Single
Family Mtg Rev Ser A................. 8.500 09/01/11 79,130
7,350 Grapevine Colleyville Indpt Sch Dist
TX................................... * 08/15/11 3,881,314
250 Guadalupe Blanco River Auth TX Indl
Dev Corp Pollutn Ctl Rev............. 6.350 07/01/22 261,078
1,250 Harris Cnty, TX Hlth Fac Dev Corp Mem
Hosp Sys Proj Rfdg................... 7.125 06/01/15 1,361,587
250 Harris Cnty, TX Muni Util Dist No 120
(Prerefunded @ 08/01/01)............. 8.000 08/01/14 266,415
375 Harris Cnty, TX Sch Hlthcare Corp Sys
Rev (Prerefunded @ 07/01/01)......... 7.100 07/01/21 400,298
1,250 Irving, TX Indpt Sch Dist (PFS
Gtd)................................. * 02/15/17 457,450
1,000 Irving, TX Indpt Sch Dist Cap Apprec
Ser A Rfdg (PFS Gtd)................. * 02/15/18 342,930
5,045 Leander, TX Indpt Sch Dist Cap Apprec
Rfdg (PFS Gtd)....................... * 08/15/19 1,567,078
250 Lockhart, TX Correctional Fac Fin
Corp Rev (Prerefunded @ 04/01/01)
(MBIA Insd).......................... 6.625 04/01/12 259,055
15,000 Lower Co River Auth TX Rev Ser A Rfdg
(FSA Insd)........................... 5.875 05/15/14 15,380,250
7,500 Lower Co River Auth TX Rev Ser A Rfdg
(FSA Insd)........................... 5.875 05/15/15 7,653,900
6,500 Lower Co River Auth TX Rev Ser A Rfdg
(FSA Insd)........................... 5.875 05/15/16 6,602,180
</TABLE>
See Notes to Financial Statements
F-26
<PAGE> 542
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$ 2,000 Montgomery Cnty, TX Muni Util Dist No
47 Wtrwks & Swr (AMBAC Insd)......... 4.750% 10/01/24 $ 1,677,220
3,500 North Central TX Hlth Fac Dev Corp
Rev Presbyterian Hlthcare Sys Ser C
(Inverse Fltg) (Prerefunded @
06/19/01) (MBIA Insd)................ 9.295 06/22/21 3,893,750
750 Northwest Harris Cnty, TX Muni Util
Dist No 23 (Prerefunded @
04/01/01)............................ 8.100 10/01/15 792,202
3,560 Rockwall, TX Ind Sch Dist Cap Apprec
Rfdg (PSF Gtd)....................... * 08/15/20 1,021,720
2,600 Rockwall, TX Ind Sch Dist Cap Apprec
Rfdg (PSF Gtd)....................... * 08/15/24 579,566
250 San Antonio, TX Hlth Fac Dev Corp Rev
Encore Nursing Cent Partn............ 8.250 12/01/19 268,400
250 Tarrant Cnty, TX Hlth Fac Dev Corp
Hosp Rev Rfdg & Impt................. 7.000 05/15/28 262,800
250 Tarrant Cnty, TX Hlth Fac Dev Corp
Hosp Rev Rfdg & Impt (Prerefunded @
05/15/03)............................ 7.000 05/15/28 274,885
2,000 Tarrant Cnty, TX Hlth Facs Dev Corp
Rev (MBIA Insd)...................... 6.000 01/01/37 2,009,780
227 Texas Genl Svcs Cmnty Partn Interests
Office Bldg & Land Acquisition
Proj................................. 7.000 08/01/09 232,511
500 Texas Genl Svcs Cmnty Partn Interests
Office Bldg & Land Acquisition
Proj................................. 7.000 08/01/19 510,975
500 Texas Genl Svcs Cmnty Partn Interests
Office Bldg & Land Acquisition
Proj................................. 7.000 08/01/24 510,975
858 Texas Genl Svcs Cmnty Partn Lease
Purchase Ctfs........................ 7.500 02/15/13 876,106
95 Texas Hsg Agy Single Family Mtg Rev
Ser A Rfdg........................... 7.150 09/01/12 99,228
5,430 Texas St College Student Ln.......... 5.000 08/01/23 4,843,397
6,000 Texas St Dept Hsg & Cmnty Affairs
Home Mtg Rev Coll Ser C Rfdg (Inverse
Fltg) (GNMA Collateralized).......... 9.612 07/02/24 6,765,000
175 Texas St Higher Edl Brd College Sr
Lien................................. 7.700 10/01/25 183,453
</TABLE>
See Notes to Financial Statements
F-27
<PAGE> 543
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$ 4,025 Texas St Higher Edl Coordinating Brd
College Student Ln................... * 10/01/25 $ 4,045,004
1,000 Texas St Veterans Hsg Assist......... 6.800% 12/01/10 1,043,000
990 Texas St Veterans Hsg Assist (MBIA
Insd)................................ 6.800 12/01/23 1,039,579
5,100 Uvalde, TX Cons Indpt Sch Dist....... 4.500 08/01/22 4,146,963
2,250 West Side Calhoun Cnty, TX Navig Dist
Solid Waste Disp Union Carbide Chem &
Plastics............................. 8.200 03/15/21 2,377,957
3,245 Wylie, TX Indpt Sch Dist Cap Apprec
Rfdg (PSF Gtd)....................... * 08/15/26 636,961
------------
97,592,221
------------
UTAH 2.1%
3,025 Bountiful, UT Hosp Rev South Davis
Cmnty Hosp Proj (Prerefunded @
06/15/04)............................ 9.500 12/15/18 3,716,938
1,340 Hildale, UT Elec Rev Gas Turbine Elec
Fac Proj............................. 7.800 09/01/15 1,273,456
1,000 Hildale, UT Elec Rev Gas Turbine Elec
Fac Proj............................. 8.000 09/01/20 947,190
1,000 Hildale, UT Elec Rev Gas Turbine Elec
Fac Proj............................. 7.800 09/01/25 942,030
11,000 Salt Lake City, UT Hosp Rev IHC Hosp
Inc Rfdg............................. 7.050 02/15/12 11,693,880
310 Utah St Hsg Fin Agy Single Family Mtg
Sr Ser A1 (FHA Gtd).................. 7.100 07/01/14 312,006
420 Utah St Hsg Fin Agy Single Family Mtg
Sr Ser A2 (FHA Gtd).................. 7.200 01/01/27 422,801
------------
19,308,301
------------
VIRGINIA 2.7%
4,000 Alexandria, VA Redev & Hsg Auth 3001
Pk Cent Apts Ser A Rfdg (b).......... 6.375 04/01/34 3,772,360
3,850 Charles City Cnty, VA Indl Dev Auth
Solid Waste Disp Fac Rev Waste Mgmt
VA Inc Proj Rfdg..................... 4.875 02/01/09 3,508,775
2,000 Fairfax Cnty, VA Pk Auth Pk Fac
Rev.................................. 6.625 07/15/14 2,082,460
3,500 Fredericksburg, VA Indl Dev Auth Hosp
Fac Rev (Prerefunded @ 08/15/01)
(FGIC Insd).......................... 6.600 08/15/23 3,703,700
2,080 Loudoun Cnty, VA Ctfs Partn (FSA
Insd)................................ 6.800 03/01/14 2,261,438
1,000 Loudoun Cnty, VA Ctfs Partn (FSA
Insd)................................ 6.900 03/01/19 1,089,320
</TABLE>
See Notes to Financial Statements
F-28
<PAGE> 544
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VIRGINIA (CONTINUED)
$ 3,000 Peninsula Ports Auth VA Rev Port Fac
Zeigler Coal Rfdg.................... 6.900% 05/02/22 $ 2,937,000
5,000 Roanoke, VA Indl Dev Auth Hosp Rev
Roanoke Mem Hosp Ser B Rfdg (MBIA
Insd)................................ 4.700 07/01/20 5,188,800
------------
24,543,853
------------
WASHINGTON 1.1%
5,550 Chelan Cnty, WA Pub Util Dist Cap
Apprec Rfdg A (MBIA Insd)............ * 06/01/28 992,507
10,000 Chelan Cnty, WA Pub Util Dist No 1
Columbia River Rock 1S Hydro Elec Sys
Rev Ser A Rfdg (MBIA Insd)........... * 06/01/29 1,683,100
1,250 Washington St Pub Pwr Supply Sys
Nuclear Proj No 1 Rev (FGIC Insd).... 7.125 07/01/16 1,453,063
2,555 Washington St Pub Pwr Supply Sys
Nuclear Proj No 1 Rev Ser C Rfdg (FSA
Insd)................................ 5.375 07/01/15 2,473,061
3,750 Washington St Pub Pwr Supply Sys
Nuclear Proj No 3 Rev Ser C Rfdg (FSA
Insd)................................ 5.375 07/01/15 3,629,737
------------
10,231,468
------------
WEST VIRGINIA 0.6%
4,000 West VA St Hosp Fin Auth Hosp Rev
Bears & Bulls WV Univ Med Corp Rfdg
(MBIA Insd).......................... 6.100 01/01/18 4,058,480
1,500 West VA St Hosp Fin Auth Hosp Rev
Hosp Rev Bulls (MBIA Insd)........... 8.700 01/01/18 1,608,600
------------
5,667,080
------------
WISCONSIN 0.8%
750 Jefferson, WI Swr Sys Wtrwrks & Elec
Sys Mtg Rev (Prerefunded @
07/01/01)............................ 7.400 07/01/16 789,885
1,000 Oconto Falls, WI Cmnty Dev Oconto
Falls Tissue Inc Proj................ 7.750 12/01/22 1,023,620
2,000 Southeast WI Professional Baseball Pk
Dist Sales Tax Rev (MBIA Insd) (b)... * 12/15/27 373,900
3,500 Southeast WI Professional Baseball Pk
Dist Sales Tax Rev (MBIA Insd) (b)... * 12/15/28 616,210
3,500 Southeast WI Professional Baseball Pk
Dist Sales Tax Rev (MBIA Insd) (b)... * 12/15/29 580,300
</TABLE>
See Notes to Financial Statements
F-29
<PAGE> 545
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WISCONSIN (CONTINUED)
$ 1,150 Wisconsin Hsg & Econ Dev Auth Home
Ownership Rev Rfdg (Inverse Fltg).... 9.753% 10/25/22 $ 1,243,437
540 Wisconsin St Hlth & Edl Fac Auth Rev
Hess Mem Hosp Assn................... 7.200 11/01/05 552,053
2,000 Wisconsin St Hlth & Edl Milwaukee
Catholic Home Proj................... 7.500 07/01/26 2,099,880
------------
7,279,285
------------
GUAM 0.0%
250 Guam Govt Ser A...................... 5.750 09/01/04 252,492
------------
MARIANA ISLANDS 0.2%
500 Northern Mariana Islands Pub Sch Sys
Proj Ser A........................... 5.125 10/01/06 514,510
500 Northern Mariana Islands Pub Sch Sys
Proj Ser A........................... 5.125 10/01/07 512,865
500 Northern Mariana Islands Pub Sch Sys
Proj Ser A........................... 5.125 10/01/08 510,480
------------
1,537,855
------------
PUERTO RICO 0.2%
200 Puerto Rico Comwlth Hwy & Tran Auth
Hwy Rev Ser V Rfdg................... 6.625 07/01/12 212,224
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser
T (Prerefunded @ 07/01/04)........... 6.375 07/01/24 276,777
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser
U Rfdg............................... 6.000 07/01/14 257,160
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser
Z Rfdg............................... 5.500 07/01/14 249,853
310 Puerto Rico Hsg Bank & Fin Agy Single
Family Mtg Rev (GNMA
Collateralized)...................... 6.250 04/01/29 314,982
300 Puerto Rico Pub Bldgs Auth Gtd Pub
Edl & Hlth Fac Ser M Rfdg (FSA
Insd)................................ 5.750 07/01/15 305,625
------------
1,616,621
------------
TOTAL INVESTMENTS 108.4%
(Cost $971,829,318)................................................ 977,418,262
LIABILITIES IN EXCESS OF OTHER ASSETS (8.4%)........................ (75,833,298)
------------
NET ASSETS 100.0%................................................... $901,584,964
============
</TABLE>
See Notes to Financial Statements
F-30
<PAGE> 546
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
* Zero coupon bond
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may not be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments, open futures and open options transactions.
(c) Securities purchased on a when issued or delayed delivery basis.
(d) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
(e) Currently is a payment-in-kind security which will convert to a cash paying
security at a predetermined date.
(f) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(g) Interest is accruing less than the stated coupon.
AMBAC--AMBAC Indemnity Corporation
BIGI--Bond Investor Guaranty Inc.
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FHA/VA--Federal Housing Administration/Department of Veterans Affairs
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
LOC--Letter of Credit
MBIA--Municipal Bond Investors Assurance Corp.
PSF--Public School Fund
See Notes to Financial Statements
F-31
<PAGE> 547
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $971,829,318)....................... $ 977,418,262
Receivables:
Interest.................................................. 15,441,251
Investments Sold.......................................... 12,962,551
Fund Shares Sold.......................................... 347,725
Other....................................................... 52,638
--------------
Total Assets.......................................... 1,006,222,427
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 79,484,892
Bank Borrowings........................................... 20,233,410
Income Distributions...................................... 1,739,548
Fund Shares Repurchased................................... 1,101,692
Distributor and Affiliates................................ 922,552
Investment Advisory Fee................................... 354,766
Variation Margin on Futures............................... 55,873
Accrued Expenses............................................ 507,248
Trustees' Deferred Compensation and Retirement Plans........ 229,670
Options at Market Value (Net premiums received of
$15,486).................................................. 7,812
--------------
Total Liabilities..................................... 104,637,463
--------------
NET ASSETS.................................................. $ 901,584,964
==============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $ 911,713,769
Net Unrealized Appreciation................................. 6,301,745
Accumulated Undistributed Net Investment Income............. 691,607
Accumulated Net Realized Loss............................... (17,122,157)
--------------
NET ASSETS.................................................. $ 901,584,964
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $777,523,133 and 53,609,969 shares of
beneficial interest issued and outstanding)........... $ 14.50
Maximum sales charge (4.75%* of offering price)......... .72
--------------
Maximum offering price to public........................ $ 15.22
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $106,559,134 and 7,354,016 shares of
beneficial interest issued and outstanding)........... $ 14.49
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $17,502,697 and 1,209,052 shares of
beneficial interest issued and outstanding)........... $ 14.48
==============
* On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
F-32
<PAGE> 548
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 61,364,894
------------
EXPENSES:
Investment Advisory Fee..................................... 4,580,681
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,915,857, $1,508,645 and $163,812)........ 3,588,314
Shareholder Services........................................ 786,700
Legal....................................................... 79,650
Custody..................................................... 91,966
Trustees' Fees and Related Expenses......................... 55,542
Other....................................................... 712,375
------------
Total Operating Expenses................................ 9,895,228
Less Credits Earned on Overnight Cash Balances.......... 31,223
------------
Net Operating Expenses.................................. 9,864,005
Interest Expense........................................ 1,462,202
------------
NET INVESTMENT INCOME....................................... $ 50,038,687
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ (2,353,389)
Options................................................... (813,569)
Futures................................................... (2,707,560)
------------
Net Realized Loss........................................... (5,874,518)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 90,902,720
------------
End of the Period:
Investments............................................. 5,588,944
Options................................................. 7,674
Futures................................................. 705,127
------------
6,301,745
------------
Net Unrealized Depreciation During the Period............... (84,600,975)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(90,475,493)
============
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $(40,436,806)
============
</TABLE>
See Notes to Financial Statements
F-33
<PAGE> 549
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1999, Nine Months Ended
September 30, 1998 and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.......... $ 50,038,687 $ 40,753,662 $ 53,413,395
Net Realized Gain/Loss......... (5,874,518) 6,553,399 10,327,114
Net Unrealized
Appreciation/Depreciation
During the Period............ (84,600,975) 6,332,209 23,723,238
------------- -------------- -------------
Change in Net Assets from
Operations................... (40,436,806) 53,639,270 87,463,747
------------- -------------- -------------
Distributions from Net
Investment Income:
Class A Shares............... (43,701,298) (31,284,803) (43,085,857)
Class B Shares............... (7,150,083) (7,203,055) (9,834,294)
Class C Shares............... (777,748) (518,861) (604,662)
------------- -------------- -------------
Total Distributions........ (51,629,129) (39,006,719) (53,524,813)
------------- -------------- -------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES........ (92,065,935) 14,632,551 33,938,934
------------- -------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold...... 753,276,652 531,715,930 535,028,913
Net Asset Value of Shares
Issued Through Dividend
Reinvestment................. 27,273,773 19,893,086 27,237,798
Cost of Shares Repurchased..... (789,074,743) (556,676,605) (619,837,342)
------------- -------------- -------------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS......... (8,524,318) (5,067,589) (57,570,631)
------------- -------------- -------------
TOTAL INCREASE/DECREASE IN NET
ASSETS....................... (100,590,253) 9,564,962 (23,631,697)
NET ASSETS:
Beginning of the Period........ 1,002,175,217 992,610,255 1,016,241,952
------------- -------------- -------------
End of the Period (Including
accumulated undistributed net
investment income of
$691,607, $2,282,049 and
$535,106, respectively)...... $ 901,584,964 $1,002,175,217 $ 992,610,255
============= ============== =============
</TABLE>
See Notes to Financial Statements
F-34
<PAGE> 550
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -------------------------------------
Class A Shares 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................... $ 15.991 $15.767 $15.267 $15.549 $14.261 $16.164
----------------- ------- ------- ------- ------- -------
Net Investment Income.... .819 .664 .852 .898 .874 .886
Net Realized and
Unrealized Gain/Loss... (1.461) .195 .500 (.298) 1.296 (1.907)
----------------- ------- ------- ------- ------- -------
Total from Investment
Operations............. (.642) .859 1.352 .600 2.170 (1.021)
Less Distributions from
Net Investment
Income................. .846 .635 .852 .882 .882 .882
----------------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............. $ 14.503 $15.991 $15.767 $15.267 $15.549 $14.261
================= ======= ======= ======= ======= =======
Total Return (a)......... (4.25%) 5.62%* 9.14% 4.07% 15.61% (6.37%)
Net Assets at End of the
Period (In millions)... $777.5 $ 788.7 $ 766.2 $ 792.3 $ 839.7 $ 495.8
Ratio of Operating
Expenses to Average Net
Assets (b)............. .88% .84% .89% .94% .99% .99%
Ratio of Interest Expense
to Average Net
Assets................. .17% .03% N/A N/A N/A N/A
Ratio of Net Investment
Income to Average Net
Assets (b)............. 5.34% 5.63% 5.54% 5.93% 5.86% 5.93%
Portfolio Turnover....... 116% 89%* 104% 73% 61% 75%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
N/A = Not Applicable
See Notes to Financial Statements
F-35
<PAGE> 551
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -------------------------------------
Class B Shares 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period.................. $15.982 $15.764 $15.267 $15.549 $14.261 $16.139
------- ------- ------- ------- ------- -------
Net Investment Income... .713 .572 .734 .783 .762 .780
Net Realized and
Unrealized
Gain/Loss............. (1.473) .195 .501 (.297) 1.294 (1.890)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............ (.760) .767 1.235 .486 2.056 (1.110)
Less Distributions from
Net Investment
Income................ .732 .549 .738 .768 .768 .768
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............ $14.490 $15.982 $15.764 $15.267 $15.549 $14.261
======= ======= ======= ======= ======= =======
Total Return (a)........ (4.95%) 5.05%* 8.27% 3.29% 14.74% (6.96%)
Net Assets at End of the
Period (In
millions)............. $106.6 $197.9 $211.2 $211.0 $216.6 $158.7
Ratio of Operating
Expenses to Average
Net Assets (b)........ 1.63% 1.62% 1.65% 1.70% 1.73% 1.70%
Ratio of Interest
Expense to Average Net
Assets................ .17% .03% N/A N/A N/A N/A
Ratio of Net Investment
Income to Average Net
Assets (b)............ 4.57% 4.85% 4.78% 5.17% 5.09% 5.22%
Portfolio Turnover...... 116% 89%* 104% 73% 61% 75%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
(c) Based on average shares outstanding.
* Non-Annualized
N/A = Not Applicable
See Notes to Financial Statements
F-36
<PAGE> 552
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31,
September 30, September 30, -------------------------------------
Class C Shares 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................... $ 15.964 $15.747 $15.254 $15.545 $14.262 $16.141
----------------- ------- ------- ------- ------- -------
Net Investment Income.... .699 .570 .730 .782 .771 .783
Net Realized and
Unrealized Gain/Loss... (1.455) .196 .501 (.305) 1.280 (1.894)
----------------- ------- ------- ------- ------- -------
Total from Investment
Operations............. (.756) .766 1.231 .477 2.051 (1.111)
Less Distributions from
Net Investment
Income................. .732 .549 .738 .768 .768 .768
----------------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............. $ 14.476 $15.964 $15.747 $15.254 $15.545 $14.262
================= ======= ======= ======= ======= =======
Total Return (a)......... (4.90%) 4.99%* 8.34% 3.16% 14.74% (6.97%)
Net Assets at End of the
Period (In millions)... $ 17.5 $ 15.5 $ 15.3 $ 12.9 $ 11.2 $ 3.9
Ratio of Operating
Expenses to Average Net
Assets (b)............. 1.63% 1.62% 1.66% 1.70% 1.72% 1.74%
Ratio of Interest Expense
to Average net
Assets................. .17% .03% N/A N/A N/A N/A
Ratio of Net Investment
Income to Average Net
Assets (b)............. 4.55% 4.86% 4.75% 5.17% 5.24% 5.19%
Portfolio Turnover....... 116% 89%* 104% 73% 61% 75%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
N/A = Not Applicable
See Notes to Financial Statements
F-37
<PAGE> 553
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Municipal Income Fund (the "Fund") is organized as a series of the
Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund's investment objective is to provide a high
level of current income exempt from federal income tax, consistent with
preservation of capital. The Fund commenced investment operations on August 1,
1990. The distribution of the Fund's Class B and Class C shares commenced on
August 24, 1992 and August 13, 1993, respectively. In July, 1998, the Fund's
Board of Trustees approved a change in the Fund's fiscal year end from December
31 to September 30.
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--Municipal bonds are valued by independent pricing
services or dealers using the mean of the bid and asked prices or, in the
absence of market quotations, at fair value based upon yield data relating to
municipal bonds with similar characteristics and general market conditions.
Securities which are not valued by independent pricing services are valued at
fair value using procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
F-38
<PAGE> 554
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At September 30, 1999, the Fund had an accumulated capital loss
carryforward for tax purposes of $9,418,021 which will expire on September 30,
2003. Net realized gains or losses may differ for financial reporting and tax
reporting purposes primarily as a result of post-October losses which may not be
recognized for tax purposes until the first day of the following fiscal year,
the deferral of losses relating to wash sale transactions and gains and losses
recognized for tax purposes on open options and futures positions at September
30, 1999.
At September 30, 1999, for federal income tax purposes, cost of long-term
investments is $971,994,218; the aggregate gross unrealized appreciation is
$39,621,864 and the aggregate gross unrealized depreciation is $34,197,821,
resulting in net unrealized appreciation on long-term investments of $5,424,043.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.
F. EXPENSE REDUCTIONS--During the year ended September 30, 1999, the Fund's
custody fee was reduced by $31,223 as a result of credits earned on overnight
cash balances.
F-39
<PAGE> 555
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
First $500 million................................. .50 of 1%
Over $500 million.................................. .45 of 1%
</TABLE>
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $49,500 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $291,800 representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended September 30,
1999, the Fund recognized expenses of approximately $553,700. 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.
F-40
<PAGE> 556
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
At September 30, 1999, capital aggregated $784,371,726, $109,009,485 and
$18,332,558 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................. 46,553,762 $ 718,745,672
Class B.................................. 1,694,567 26,081,104
Class C.................................. 554,621 8,449,876
----------- -------------
Total Sales................................ 48,802,950 $ 753,276,652
=========== =============
Dividend Reinvestment:
Class A.................................. 1,513,632 $ 23,151,168
Class B.................................. 240,540 3,697,605
Class C.................................. 27,857 425,000
----------- -------------
Total Dividend Reinvestment................ 1,782,029 $ 27,273,773
=========== =============
Repurchases:
Class A.................................. (43,778,916) $(676,460,122)
Class B.................................. (6,966,979) (107,374,098)
Class C.................................. (345,002) (5,240,523)
----------- -------------
Total Repurchases.......................... (51,090,897) $(789,074,743)
=========== =============
</TABLE>
F-41
<PAGE> 557
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At September 30, 1998, capital aggregated $718,935,008, $186,604,874 and
$14,698,205 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................... 32,662,126 $ 513,944,856
Class B................................... 929,950 14,649,977
Class C................................... 198,389 3,121,097
----------- -------------
Total Sales................................. 33,790,465 $ 531,715,930
=========== =============
Dividend Reinvestment:
Class A................................... 1,003,395 $ 15,819,172
Class B................................... 239,468 3,773,374
Class C................................... 19,090 300,540
----------- -------------
Total Dividend Reinvestment................. 1,261,953 $ 19,893,086
=========== =============
Repurchases:
Class A................................... (32,937,857) $(518,889,151)
Class B................................... (2,179,386) (34,392,429)
Class C................................... (216,155) (3,395,025)
----------- -------------
Total Repurchases........................... (35,333,398) $(556,676,605)
=========== =============
</TABLE>
At December 31, 1997, capital aggregated $708,060,131, $202,573,952 and
$14,671,593 for Classes A, B and C, respectively. For the year ended December
31, 1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................... 33,152,701 $ 506,790,274
Class B................................... 1,551,226 23,205,097
Class C................................... 328,583 5,033,542
----------- -------------
Total Sales................................. 35,032,510 $ 535,028,913
=========== =============
</TABLE>
F-42
<PAGE> 558
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Dividend Reinvestment:
Class A................................... 1,410,217 $ 21,710,873
Class B................................... 338,503 5,210,731
Class C................................... 20,537 316,194
----------- -------------
Total Dividend Reinvestment................. 1,769,257 $ 27,237,798
=========== =============
Repurchases:
Class A................................... (37,868,614) $(580,864,995)
Class B................................... (2,313,649) (35,527,835)
Class C................................... (225,699) (3,444,512)
----------- -------------
Total Repurchases........................... (40,407,962) $(619,837,342)
=========== =============
</TABLE>
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 purchased
on or after June 1, 1996 will automatically convert to Class A shares after the
eighth year following purchase. Class B shares purchased before June 1, 1996
automatically convert to Class A shares after the sixth year following purchase.
For the year ended September 30, 1999, 5,171,230 Class B shares automatically
converted to Class A shares. The CDSC will be imposed on most redemptions made
within six years of the purchase for Class B and one year of the purchase for
Class C as detailed in the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
- ---------------------------------------------------------------------------
<S> <C> <C>
First........................................ 4.00% 1.00%
Second....................................... 3.75% None
Third........................................ 3.50% None
Fourth....................................... 2.50% None
Fifth........................................ 1.50% None
Sixth........................................ 1.00% None
Seventh and Thereafter....................... None None
</TABLE>
For the year ended September 30, 1999, Van Kampen as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $157,400 and CDSC on redeemed shares of approximately $229,000.
Sales charges do not represent expenses of the Fund.
F-43
<PAGE> 559
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
On December 19, 1997, the Fund acquired all of the assets and liabilities of
the Van Kampen American Capital New Jersey Tax Free Income Fund (the "NJ Fund"),
through a tax free reorganization approved by NJ Fund shareholders on December
18, 1997. The Fund issued 468,278, 621,329 and 62,562 shares of Classes A, B and
C valued at $7,384,748, $9,798,388 and $985,356, respectively, in exchange for
NJ Fund's net assets. Included in these net assets was a capital loss
carryforward of $203,930 which is included in accumulated net realized gain/loss
and cumulative book and tax basis differences related to expenses not yet
deductible for tax purposes of $15,721 which is a component of undistributed net
investment income. Shares issued in connection with this reorganization are
included in common share sales for the year ended December 31, 1997. Combined
net assets on the day of acquisition were $1,013,024,339.
4. INVESTMENT TRANSACTIONS
For the year ended September 30, 1999, the cost of purchases and proceeds from
sales of investments, excluding short-term investments, were $1,199,470,177 and
$1,181,081,187, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising a call option contract or taking
delivery of a security underlying a futures contract. In these instances the
recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. OPTION CONTRACTS--An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a
F-44
<PAGE> 560
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
specified period. These contracts are generally used by the Fund to manage the
portfolio's effective maturity and duration.
Transactions in options for the year ended September 30, 1999, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 30, 1998............... 2,250 $ 6,775
Options Written and Purchased (Net)............. 5,875 (569,838)
Options Terminated in Closing Transactions
(Net)......................................... (3,500) 120,535
Options Expired (Net)........................... (4,125) 458,014
------ ---------
Outstanding at September 30, 1999............... 500 $ 15,486
====== =========
</TABLE>
The related futures contracts of the outstanding option transactions as of
September 30, 1999, and the description and market value are as follows:
<TABLE>
<CAPTION>
MARKET
EXPIRATION MONTH/ VALUE OF
CONTRACTS STRIKE PRICE OPTIONS
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond Futures
December 1999--Written Call.... 250 Dec./118 $(82,031)
December 1999--Purchased
Puts......................... 250 Dec./110 74,219
--- --------
500 $ (7,812)
=== ========
</TABLE>
B. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin). The potential risk of loss
associated with a futures contract could be in excess of the variation margin
reflected on the Statement of Assets and Liabilities.
F-45
<PAGE> 561
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended September 30, 1999 were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at September 30, 1998......................... 1,660
Futures Opened............................................ 18,957
Futures Closed............................................ (20,092)
-------
Outstanding at September 30, 1999......................... 525
=======
</TABLE>
The futures contracts outstanding at September 30, 1999, and the
descriptions and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
DESCRIPTION CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C>
Long Contracts--U.S. Treasury Bond Futures
Dec 1999
(Current notional value $113,937 per
contract).............................. 150 $ 44,099
Short Contracts--Municipal Bond Index Futures Dec 1999
(Current notional value $112,281 per
contract).............................. 375 661,028
--- --------
525 $705,127
=== ========
</TABLE>
C. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to
a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. These instruments
are typically used by the Fund to enhance the yield of the portfolio.
An Embedded Cap security includes a cap strike level such that the coupon
payment may be supplemented by cap payments if the floating rate index upon
which the cap is based rises above the strike level. The Trust invests in these
instruments as a hedge against a rise in the short-term interest rates which it
pays on its preferred shares.
F-46
<PAGE> 562
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% for Class A net assets and 1.00%
each for Class B and Class C net assets are accrued daily. Included in these
fees for the year ended September 30, 1999, are payments retained by Van Kampen
of approximately $1,287,900.
7. BORROWINGS
In accordance with its investment policies, the Fund may borrow money from banks
in an amount up to 5% of its total assets. The Fund, in combination with two
other funds in the fund complex, has entered into a $100 million revolving
credit agreement which expires November 10, 1999. The maximum amount available
to any single fund is $75 million. Interest is charged under the agreement at a
rate of .45% above the federal funds rate. The interest rate in effect at
September 30, 1999 was 6.138%. An annual facility fee of .06% is charged on the
unused portion of the credit facility.
The average daily balance of bank borrowings for the year ended September
30, 1999 was approximately $26,722,421 with an average interest rate of 5.47%.
At September 30, 1999, borrowings under this agreement represented 2.0% of the
Fund's total assets.
F-47
<PAGE> 563
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
Van Kampen Intermediate Term Municipal Income Fund (the "Fund") is a mutual
fund with the investment objective to provide investors with a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Fund's investment adviser seeks to achieve the Fund's investment
objective by investing primarily in a portfolio of municipal securities that are
rated investment-grade at the time of purchase, and by seeking to maintain a
dollar-weighted average portfolio life of three to ten years.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust,
an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective, Policies and Risks.................... B-4
Strategic Transactions...................................... B-7
Investment Restrictions..................................... B-11
Trustees and Officers....................................... B-13
Investment Advisory Agreement............................... B-23
Other Agreements............................................ B-23
Distribution and Service.................................... B-24
Transfer Agent.............................................. B-27
Portfolio Transactions and Brokerage Allocation............. B-27
Shareholder Services........................................ B-28
Redemption of Shares........................................ B-30
Contingent Deferred Sales Charge-Class A.................... B-31
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-31
Taxation.................................................... B-33
Fund Performance............................................ B-36
Other Information........................................... B-39
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-15
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 2000.
B-1
<PAGE> 564
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen
Merritt Tax Free Trust as a Massachusetts business trust (the "Massachusetts
Trust"). The Massachusetts Trust was reorganized into the Trust under the name
Van Kampen American Capital Tax Free Trust on July 31, 1995. The Trust was
created for the purpose of facilitating the Massachusetts Trust reorganization
into a Delaware business trust. On July 14, 1998, the Trust adopted its current
name.
The Fund was originally organized in 1993 under the name Van Kampen Merritt
Limited Term Municipal Income Fund as a sub-trust of the Massachusetts Trust.
The Fund was reorganized as a series of the Trust on July 31, 1995 under the
name Van Kampen American Capital Limited Term Municipal Income Fund and was
renamed Van Kampen American Capital Intermediate Term Municipal Income Fund on
January 26, 1996. On July 14, 1998, the Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. ("Morgan Stanley Dean Witter"). 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 and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series such as the Fund and further subdivided into classes of each
series. Each share represents an equal proportionate interest in the assets of
the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
B-2
<PAGE> 565
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less 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 December 31, 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 DECEMBER 31, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------ ---------------- ------------ ----------
<S> <C> <C> <C> <C>
First Clearing Corporation...................... 155,027 A 5.33%
Donald H Kohnken &
Beverlee M Kohnken JTWROS
Account 4860 4894
1799 Sabal Palm Drive
Boca Raton, FL 33432-7424
Barbara J. Rauman & David Heide TR.............. 294,292 A 10.12%
Barbara J. Rauman 1999 Trust
DTD 01/11/99
3 Hampton Ct
Dekalb, IL 60115-4920
Edward Jones & Co. ............................. 492,032 A 16.93%
ATTN: Mutual Fund Shareholder Accounting
201 Progress Pkwy
Maryland Hts, MO 63043-3009
MLPF&S For The Sole Benefit of Its Customers.... 60,075 B 6.17%
ATTN: Fund Administration 97FU2
4800 Deer Lake Dr. E 2nd FL
Jacksonville, FL 32246-6484
Stanley J. Holuba & Robert J. Holuba Tr......... 49,168 C 9.30%
Stanton Chemicals Trust
DTD 10/31/86 FBO Angela Holuba
2 N Hackensack Ave
Kearny, NJ 07032-4611
</TABLE>
B-3
<PAGE> 566
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS DECEMBER 31, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------ ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Sea Gardens Beach and Tennis.................... 48,987 C 9.27%
Resort Condo Assoc Inc 40,641 7.69%
Waterfalls
C/O Ken Paul
6400 North Andrews Avenue
Ft Lauderdale, FL 33309-2172
Edward Jones and Co............................. 85,525 C 16.18%
ATTN: Mutual Fund Shareholder Accounting
201 Progress Pkwy
Maryland Heights, MO 63043-3009
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RISKS
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. The Fund generally expects to be invested in municipal
securities with a weighted-average portfolio life of three to ten years. The
Fund may, however, invest in shorter term municipal securities when yields are
greater than yields available on longer term municipal securities, for temporary
defensive purposes or 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
B-4
<PAGE> 567
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically 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
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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.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year.
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 for which market quotations are not readily available
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 typically 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
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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, as amended from time to
time.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various Strategic Transactions
(as defined in the Prospectus) to earn income, facilitate portfolio management
and mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Adviser seeks to use such transactions to further the Fund's investment
objective, no assurance can be given that the use of these transactions will
achieve this result.
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
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absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though 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.
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The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is 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
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or other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate cash and
liquid securities with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid securities at least
equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash and
liquid
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securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash and
liquid securities equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash and liquid
securities equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out cash and liquid securities equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of cash and liquid securities equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash and liquid securities sufficient to meet its obligation to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of the Code for qualification as a regulated investment
company.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder 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 at the meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitation on
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illiquid securities and borrowings, the percentage limitations apply at the time
of purchase and on an ongoing basis. The Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the U.S. government or by its agencies or
instrumentalities), if, as a result, more than 5% of the Fund's total
assets (determined at the time of investment) would then be invested in
securities of a single issuer or, if, as a result, the Fund would hold
more than 10% of the outstanding voting securities of an issuer, except
that the Fund may purchase securities of other investment companies to
the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, the
Fund may from time to time invest more than 25% of its assets in a
particular segment of the municipal securities market; however, the Fund
will not invest more than 25% of its assets in industrial development
bonds in a single industry; and except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
3. Borrow money, except from banks for temporary purposes and then in
amounts not in excess of 5% of the total asset value of the Fund, or
mortgage, pledge, or hypothecate any assets except in connection with a
borrowing and in amounts not in excess of 10% of the total asset value
of the Fund. Borrowings may not be made for investment leverage, but
only to enable the Fund to satisfy redemption requests where liquidation
of portfolio securities is considered disadvantageous or inconvenient.
In this connection, the Fund will not purchase portfolio securities
during any period that such borrowings exceed 5% of the total asset
value of the Fund. Notwithstanding this investment restriction, the Fund
may enter into when issued and delayed delivery transactions.
4. Make loans of money or property, except to the extent the obligations
the Fund may invest in are considered to be loans and except to the
extent that the Fund may lend money or property in connection with
maintenance of the value of or the Fund's interest with respect to the
securities owned by the Fund.
5. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic Transactions nor short
term credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other
financial futures or index contracts or related options, except in
connection with Strategic Transactions in accordance with the
requirements of the SEC and the CFTC.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
8. Make investments for the purpose of exercising control or participation
in management, except to the extent that exercise by the Fund of its
rights under agreements related to municipal securities would be deemed
to constitute such control or participation and except that the Fund may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
B-12
<PAGE> 575
10. Invest in oil, gas or mineral leases or in equity interests in oil,
gas, or other mineral exploration or development programs except
pursuant to the exercise by the Fund of its rights under agreements
relating to municipal securities.
11. Purchase or sell real estate, commodities or commodity contracts,
except to the extent that the securities that the Fund may invest in
are considered to be interests in real estate, commodities or commodity
contracts or to the extent the Fund exercises its rights under
agreements relating to such municipal securities (in which case the
Fund may liquidate real estate acquired as a result of a default on a
mortgage), and except to the extent that Strategic Transactions the
Fund may engage in are considered to be commodities or commodities
contracts.
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. Trustee/Director of each of the
1632 Morning Mountain Road funds in the Fund Complex. Co-founder, and prior to
Raleigh, NC 27614 August 1996, Chairman, Chief Executive Officer and
Date of Birth: 07/14/32 President, MDT Corporation (now known as
Age: 67 Getinge/Castle, Inc., a subsidiary of Getinge
Industrier AB), a company which develops,
manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
Age: 61 January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in
233 South Wacker Drive the Fund Complex. Prior to 1997, Partner, Ray &
Suite 7000 Berndtson, Inc., an executive recruiting and
Chicago, IL 60606 management consulting firm. Formerly, Executive Vice
Date of Birth: 06/03/48 President of ABN AMRO, N.A., a Dutch bank holding
Age: 51 company. Prior to 1992, 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.
</TABLE>
B-13
<PAGE> 576
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created
Washington, D.C. 20016 to deepen understanding, promote collaboration and
Date of Birth: 02/29/52 stimulate exchanges of practical experience between
Age: 47 Americans and Europeans. Trustee/Director of each of
the funds in the Fund Complex. Formerly, advisor to
the Dennis Trading Group Inc., a managed futures and
option company that invests money for individuals and
institutions. Prior to 1992, President and Chief
Executive Officer, Director and Member of the
Investment Committee of the Joyce Foundation, a
private foundation.
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since April 1997
New York, NY 10048 and Chief Executive Officer since June 1998 of Morgan
Date of Birth: 08/13/53 Stanley Dean Witter Advisors Inc. and Morgan Stanley
Age: 46 Dean Witter Services Company Inc. Chairman, Chief
Executive Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998. Chairman and
Chief Executive Officer since June 1998, and Director
since January 1998, of Morgan Stanley Dean Witter
Trust FSB. Director of various Morgan Stanley Dean
Witter subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index Series
since May 1999. Trustee/Director of each of the funds
in the Fund Complex, and Vice President of other
investment companies advised by the Advisers and their
affiliates. Previously Chief Strategic Officer of
Morgan Stanley Dean Witter Advisors Inc. and Morgan
Stanley Dean Witter Services Company Inc. and
Executive Vice President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice President
of the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series May 1997-April 1999, and
Executive Vice President of Dean Witter, Discover &
Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company and
Winter Park, FL 32789 registered investment adviser in the State of Florida.
Date of Birth: 02/13/36 President and owner, Nelson Ivest Brokerage Services
Age: 63 Inc., a member of the National Association of
Securities Dealers, Inc. and Securities Investors
Protection Corp. Trustee/Director of each of the funds
in the Fund Complex.
</TABLE>
B-14
<PAGE> 577
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor,
Oakbrook Terrace, IL 60181-5555 Van Kampen Advisors Inc. and Van Kampen Management
Date of Birth: 02/02/46 Inc. Director and officer of certain other
Age: 53 subsidiaries of Van Kampen Investments.
Trustee/Director and President of each of the funds in
the Fund Complex. Trustee, President and Chairman of
the Board of other investment companies advised by the
Advisers and their affiliates, and Chief Executive
Officer of Van Kampen Exchange Fund. Prior to May
1998, Executive Vice President and Director of
Marketing at Morgan Stanley Dean Witter and Director
of Dean Witter Discover & Co. and Dean Witter Realty.
Prior to 1996, Director of Dean Witter Reynolds Inc.
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Age: 55 Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the Fund
Complex. Prior to 1998, Director of Stone Smurfit
Container Corp., a paper manufacturing company. From
May 1996 through February 1997 he was President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company,
and from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Age: 75 Dynalysis of Princeton, a firm engaged in 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,
333 West Wacker Drive Meagher & Flom (Illinois), legal counsel to the funds
Chicago, IL 60606 in the Fund Complex, and other investment companies
Date of Birth: 08/22/39 advised by the Advisers or Van Kampen Management Inc.
Age: 60 Trustee/Director of each of the funds in the Fund
Complex, and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or
Van Kampen Management Inc.
</TABLE>
B-15
<PAGE> 578
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Age: 58 Marshall Fund of the United States, Trustee of
Colorado College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/Director
of each of the funds in the Fund Complex. Prior to
1993, Executive Director of the Commission on
Behavioral and Social Sciences and Education at the
National Academy of Sciences/National Research
Council. From 1980 through 1989, Partner of Coopers &
Lybrand.
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network
233 South Wacker Drive system solutions, COMARCO, Inc., a wireless
Suite 9700 communications products company and APAC Customer
Chicago, IL 60606 Services, Inc., a provider of outsourced customer
Date of Birth: 10/29/53 contact services. Trustee/Director of each of the
Age: 46 funds in the Fund Complex. Prior to May 1996,
President of Advance Ross Corporation, an
international transaction services and pollution
control equipment manufacturing company.
</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. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-16
<PAGE> 579
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood 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.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and
Age: 57 Van Kampen Management Inc. Executive Vice President and
Chief Investment Officer of each of the funds in the Fund
Complex, since 1998. Chief Investment Officer, Executive
Vice President and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or Van
Kampen Management Inc. ("Management Inc."), since the
inception of funds advised by Advisory Corp. and
Management Inc. and since 1998 for funds advised by Asset
Management. Director of Global Decisions Group LLC, a
financial research firm, and its affiliates MCM Asia
Pacific and MCM Europe. Prior to 1998, President, Chief
Operating Officer and a Director of the Advisers, Van
Kampen American Capital Management, Inc.; Director of Van
Kampen American Capital, Inc.; and President, Chief
Executive Officer and Trustee of each of the funds advised
by Advisory Corp. Prior to July 1998, Director and
Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996,
Chief Executive Officer and Director of MCM Group, Inc.
and McCarthy, Crisanti & Maffei, Inc., a financial
research firm, and Chairman of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to December 1991,
Senior Vice President of Van Kampen Merritt Inc.
</TABLE>
B-17
<PAGE> 580
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van
Vice President and Secretary Kampen Advisors Inc., Van Kampen Management Inc., the
Age: 43 Distributor, American Capital Contractual Services, Inc.,
Van Kampen Exchange Corp., Van Kampen Recordkeeping
Services Inc., Investor Services, Van Kampen Insurance
Agency of Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal Legal
Officer and Secretary of other investment companies
advised by the Advisers or their affiliates. Vice
President and Secretary of each of the funds in the Fund
Complex. Prior to January 1999, Vice President and
Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission,
Division of Investment Management, Office of Chief
Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen
Age: 44 Management Inc. and Van Kampen Investor Services Inc., and
serves as a Director or Officer of certain other
subsidiaries of Van Kampen Investments. Vice President of
each of the funds in the Fund Complex and certain other
investment companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President and
Senior Planning Officer for Individual Asset Management of
Morgan Stanley Dean Witter and its predecessor since 1994.
From 1990-1994, First Vice President and Assistant
Controller in Dean Witter's Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice
Vice President President of each of the funds in the Fund Complex and
Age: 43 certain other investment companies advised by the Advisers
or their affiliates. Prior to September 1996, Director of
McCarthy, Crisanti & Maffei, Inc, a financial research
company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
Age: 59 companies advised by the Advisers or their affiliates.
Prior to October 1998, Vice President and Senior Portfolio
Manager with AIM Capital Management, Inc. Prior to
February 1998, Senior Vice President of Van Kampen
American Capital Asset Management, Inc., Van Kampen
American Capital Investment Advisory Corp. and Van Kampen
American Capital Management, Inc.
</TABLE>
B-18
<PAGE> 581
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
Age: 44 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.
Age: 53
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.
Age: 44 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
Age: 40 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 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 provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The 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 on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex 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
B-19
<PAGE> 582
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) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan........... $15,220 $40,303 $60,000 $126,000
Jerry D. Choate(1).......... 6,754 0 60,000 88,700
Linda Hutton Heagy.......... 15,220 5,045 60,000 126,000
R. Craig Kennedy............ 15,220 3,571 60,000 125,600
Jack E. Nelson.............. 15,220 21,664 60,000 126,000
Phillip B. Rooney........... 13,820 7,787 60,000 113,400
Fernando Sisto.............. 15,220 72,060 60,000 126,000
Wayne W. Whalen............. 15,220 15,189 60,000 126,000
Suzanne H. Woolsey(1)....... 6,754 0 60,000 88,700
Paul G. Yovovich(1)......... 14,020 2,845 60,000 126,000
</TABLE>
- ---------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Yovovich became a member of the Board of Trustees for the Fund
and other funds in the Fund Complex on October 22, 1998 and therefore does
not have a full fiscal year of information to report. Mr. Choate and Ms.
Woolsey became members of the Board of Trustees for the Fund and other funds
in the Fund Complex on May 26, 1999 and therefore do not have a full year of
information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal year ended September 30, 1999.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The detail of cumulative
deferred compensation (including interest) owed to the Trustees, including
former 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 accrued by the operating investment companies in the Fund Complex
for each of the Trustees for the funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
B-20
<PAGE> 583
(4) For each Trustee, this is the sum of the estimated maximum annual benefits
payable by the funds 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 funds in the Fund Complex as of December 31, 1999 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, 1999. The deferred compensation earns a
rate of return determined by reference to the return on the shares of the
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those investment
companies selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The Advisers and their affiliates also
serve as investment adviser for other investment companies; however, with
the exception of Mr. Whalen, the Non-Affiliated Trustees were not trustees
of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
As of December 31, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-21
<PAGE> 584
TABLE A
1999 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund....... 9/30 $ 3,322 $1,483 $ 3,322 $ 3,322 $ 3,322 $ 3,122 $ 3,322 $ 3,322
Tax Free High Income Fund......... 9/30 2,998 1,366 2,998 2,998 2,998 2,798 2,998 2,998
California Insured Tax Free
Fund............................ 9/30 1,692 745 1,692 1,692 1,692 1,492 1,692 1,692
Municipal Income Fund............. 9/30 2,781 1,241 2,781 2,781 2,781 2,581 2,781 2,781
Intermediate Term Municipal Income
Fund............................ 9/30 1,460 631 1,460 1,460 1,460 1,260 1,460 1,460
Florida Insured Tax Free Income
Fund............................ 9/30 1,488 646 1,488 1,488 1,488 1,288 1,488 1,488
New York Tax Free Income Fund..... 9/30 1,479 642 1,479 1,479 1,479 1,279 1,479 1,479
------- ------ ------- ------- ------- ------- ------- -------
Trust Total..................... $15,220 $6,754 $15,220 $15,220 $15,220 $13,820 $15,220 $15,220
======= ====== ======= ======= ======= ======= ======= =======
<CAPTION>
TRUSTEE
------------------
FUND NAME WOOLSEY YOVOVICH
--------- ------- --------
<S> <C> <C>
Insured Tax Free Income Fund....... $1,483 $ 3,122
Tax Free High Income Fund......... 1,366 2,798
California Insured Tax Free
Fund............................ 745 1,492
Municipal Income Fund............. 1,241 2,581
Intermediate Term Municipal Income
Fund............................ 631 1,260
Florida Insured Tax Free Income
Fund............................ 646 1,288
New York Tax Free Income Fund..... 642 1,479
------ -------
Trust Total..................... $6,754 $14,020
====== =======
</TABLE>
TABLE B
1999 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ---------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund.......................... 9/30 $ 3,322 $ 819 $ 3,322 $1,661 $ 3,322 $ 3,122 $1,661 $ 3,322 $ 2,373
Tax Free High Income Fund.... 9/30 2,998 769 2,998 1,499 2,998 2,798 1,499 2,998 2,165
California Insured Tax Free
Fund....................... 9/30 1,692 471 1,692 846 1,692 1,492 846 1,692 1,216
Municipal Income Fund........ 9/30 2,781 707 2,781 1,391 2,781 2,581 1,391 2,781 1,991
Intermediate Term Municipal
Income Fund................ 9/30 1,460 415 1,460 730 1,460 1,260 730 1,460 1,045
Florida Insured Tax Free
Income Fund................ 9/30 1,488 423 1,488 744 1,488 1,288 744 1,488 1,069
New York Tax Free Income
Fund....................... 9/30 1,479 422 1,479 740 1,479 1,279 740 1,479 1,060
------- ------ ------- ------ ------- ------- ------ ------- -------
Trust Total................ $15,220 $4,026 $15,220 $7,611 $15,220 $13,820 $7,611 $15,220 $10,919
======= ====== ======= ====== ======= ======= ====== ======= =======
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL ---------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... 9/30 $12,061 $ 829 $13,428 $ 19,013 $ 28,191 $ 8,367 $ 6,888
Tax Free High Income Fund..... 9/30 11,230 778 12,661 18,570 27,209 7,518 4,640
California Insured Tax Free
Fund........................ 9/30 8,666 475 10,273 17,213 24,168 4,910 3,391
Municipal Income Fund......... 9/30 12,068 715 14,058 23,404 33,528 7,594 12,202
Intermediate Term Municipal
Income Fund................. 9/30 8,217 418 9,855 16,976 23,638 4,454 3,172
Florida Insured Tax Free
Income Fund................. 9/30 8,268 426 9,902 10,914 18,313 4,505 3,197
New York Tax Free Income
Fund........................ 9/30 4,537 425 3,611 5,706 8,667 3,632 1,967
------- ------ ------- -------- -------- ------- -------
Trust Total............... $65,047 $4,066 $73,788 $111,796 $163,714 $40,980 $35,457
======= ====== ======= ======== ======== ======= =======
<CAPTION>
TRUSTEES FORMER TRUSTEES
------------------- ----------------------------------------------
FUND NAME WHALEN YOVOVICH CARUSO GAUGHAN MILLER REES ROBINSON
--------- ------ -------- ------ ------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... $ 23,050 $ 2,479 $1,296 $1,064 $10,487 $ 0 $ 17,113
Tax Free High Income Fund..... 22,228 2,257 0 1,064 10,487 0 17,113
California Insured Tax Free
Fund........................ 19,692 1,260 0 1,064 10,487 0 17,113
Municipal Income Fund......... 27,189 2,076 2,778 1,306 14,169 7,077 22,359
Intermediate Term Municipal
Income Fund................. 19,249 1,080 0 1,064 10,487 0 17,113
Florida Insured Tax Free
Income Fund................. 15,409 1,105 0 496 6,656 0 12,280
New York Tax Free Income
Fund........................ 7,188 1,096 0 158 2,682 0 4,783
-------- ------- ------ ------ ------- ------ --------
Trust Total............... $134,005 $11,353 $4,074 $6,216 $65,455 $7,077 $107,874
======== ======= ====== ====== ======= ====== ========
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY YOVOVICH
- --------- -------- ------ ----- ------- ------ ------ ----- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 1995 1999 1995 1993 1984 1997 1995 1984 1999 1998
Tax Free High Income Fund.......... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
California Insured Tax Free Fund... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
Municipal Income Fund.............. 1995 1999 1995 1993 1990 1997 1995 1990 1999 1998
Intermediate Term Municipal Income
Fund............................. 1995 1999 1995 1993 1993 1997 1995 1993 1999 1998
Florida Insured Tax Free Income
Fund............................. 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
New York Tax Free Income Fund...... 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
</TABLE>
B-22
<PAGE> 585
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
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such position. The Fund,
however, bears the cost of its day-to-day operations, including the compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), the charges and expenses of
legal counsel and independent accountants, distribution fees, service fees,
custodian fees, the costs of providing 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.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive applicable expense
limitation in any jurisdiction in which the Fund's shares are qualified for
offer and 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 fiscal 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 a 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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, the Adviser
received approximately $220,587, $139,295 and $164,970, 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 supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Advisory Corp.
received approximately $57,300, $45,400 and $36,000, 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
B-23
<PAGE> 586
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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Van Kampen
Investments received approximately $2,600, $1,700 and $7,200, 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 a vote of a majority of the Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Year Ended September 30, 1999........................ $ 4,303 $ 126
Fiscal Period Ended September 30, 1998...................... $100,892 $ 3,044
Fiscal Year Ended December 31, 1997......................... $ 10,982 $ 636
</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 $25,000...................................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000......................... 2.75% 2.83% 2.50%
$250,000 but less than $500,000........................ 1.75% 1.78% 1.50%
$500,000 but less than $1,000,000...................... 1.50% 1.52% 1.25%
$1,000,000 or more..................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed on a percentage of the dollar value of such
shares
B-24
<PAGE> 587
sold as follows: 1.00% on sales to $2 million, plus 0.80% on the next $1
million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 3.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent 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 or other
Van Kampen funds. 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.
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 the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
B-25
<PAGE> 588
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary 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 financial intermediary would result in any material adverse consequences
to the Fund.
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 or 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, 1999, there were $6,716 and $12,570 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 0.06% and 0.23% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plans 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 contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended September 30, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $62,887 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 Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $143,540 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $110,033 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $37,534 for
fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended September 30,
1999, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$46,428 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following
B-26
<PAGE> 589
payments: $19,910 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class C Shares of the Fund and $24,680 for
fees paid to financial intermediaries for servicing Class C shareholders and
administering the Class C Share Plans.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas
City, MO 64121-8256. The transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or pur-chasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
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
B-27
<PAGE> 590
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 & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("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 require 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 year ended September 30, 1999...................... $4,640 -- --
Fiscal period ended September 30, 1998.................... $1,600 -- --
Fiscal year ended December 31, 1997....................... -- -- --
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions........... 0% 0%
Value of brokerage transactions with affiliate to total
transactions........................................... 0% 0%
</TABLE>
During the fiscal year ended September 30, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the
B-28
<PAGE> 591
shareholder receives a statement showing the activity in the account. Each
shareholder who has an account in any of the Participating Funds (as defined in
the prospectus) will receive statements quarterly from Investor Services showing
any reinvestments of dividends and capital gain dividends 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 gain dividends and systematic purchases or
redemptions. Additional shares may be purchased at any time 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, 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
the fee for replacing the lost certificate equal to no more than 1.50% 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 Money Purchase and Profit Sharing
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
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds 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 redemption proceeds 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 or by calling (800) 341-2911 ((800) 421-2833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, 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 capital gain dividends 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.
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SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder 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 payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for monthly, quarterly,
semiannual 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 systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawal plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions 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.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made during a rolling 365-day period. If
exchange privileges are suspended, subsequent exchange requests for redemption
out of that Fund during the stated period will not be processed. Exchange
privileges will be restored when the account history shows fewer than eight
exchanges in the rolling 365-day period.
This policy does not apply to money market funds, systematic exchange plans
or employee-sponsored retirement plans.
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 contingent deferred sales
charge 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 made 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 New York Stock Exchange
(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;
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(b) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines 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 and a gain or loss for federal income tax purposes upon
the sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares--Class A Shares,"
there is no sales charge payable on Class A Shares at the time of purchase on
investments of $1 million or more, but a contingent deferred sales charge
("CDSC-Class A") may be imposed on certain redemptions made within one year of
purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholder's account not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). 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 Internal Revenue Code of 1986, as
amended (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.
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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 CDSC-Class B and C 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), the financial hardship of the
employee pursuant to United States Treasury Regulations Section 401(k)-1(d)(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 THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal 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 sent to the designated payee of record. 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 systematic withdrawal plan. The
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal 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 systematic withdrawal plan and the ability to offer the
systematic withdrawal 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 value of 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.
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<PAGE> 595
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 OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund 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 investment company taxable income (generally including taxable
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss) and at
least 90% of its net tax-exempt interest, and meets certain other requirements,
it will not be required to pay federal income taxes on any income it distributes
to shareholders. The Fund intends to distribute at least the minimum amount of
investment company taxable income and net tax-exempt interest necessary to
satisfy the 90% distribution requirement. The Fund will not be subject to
federal income tax on any net capital gain distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order
B-33
<PAGE> 596
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 TO SHAREHOLDERS
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its income will constitute
tax-exempt interest, a significant portion may consist of investment company
taxable income (generally, taxable income and net short-term capital gain).
Distributions of the Fund's 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 gain as 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
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<PAGE> 597
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. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction. The aggregate amount of dividends designated as exempt-interest
dividends cannot exceed excess of the amount of interest exempt from tax under
Section 103 of the Code received by the Fund during the year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the Code. Since the
percentage of dividends which are exempt-interest dividends is determined on an
average annual method for the taxable year, the percentage of income designated
as tax-exempt for any particular dividend may be substantially different from
the percentage of the Fund's income that was tax exempt during the period
covered by the dividend. Fund distributions generally will not qualify for the
dividends received deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers investing in this Fund 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. 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,
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<PAGE> 598
(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.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder the amount
of dividends paid to such shareholder and the amount, if any, of tax withheld
with respect of such dividends.
GENERAL
The federal, income tax discussion set forth above is for general
information only. Prospective investors and shareholders should consult their
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge 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 capital gain dividends
paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge 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
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<PAGE> 599
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. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares 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 and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings and largest holdings and other Fund
information, 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 whether shareholders purchased their fund shares
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 may also be marketed on the
internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking or rating 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
B-37
<PAGE> 600
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
at 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 Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of the this Statement of Additional
Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
September 30, 1999 was -3.34%, (ii) the five-year period ended September 30,
1999 was 5.39% and (iii) the approximately six-year, four month period from May
28, 1993 (the commencement of distribution for Class A Shares of the Fund)
through September 30, 1999 was 5.19%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1999 was 3.51%. The Fund's current distribution rate with
respect to the Class A Shares for the month ending September 30, 1999 was 4.89%.
The Fund's taxable equivalent distribution rate with respect to the Class A
Shares for the month ending September 30, 1999 was 7.64%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to September 30, 1999 was 37.82%.
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, 1999 was 42.51%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -3.67%, (ii) the five-year period ended
September 30, 1999 was 5.32% and (iii) the approximately six-year, four month
period from May 28, 1993 (the commencement of distribution for Class B Shares of
the Fund) through September 30, 1999 was 5.03%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1999 was 2.85%. The Fund's current distribution rate with
respect to the Class B Shares for the month ending September 30, 1999 was 4.29%.
The Fund's taxable equivalent distribution rate with respect to the Class B
Shares for the month ending September 30, 1999 was 6.70%.
B-38
<PAGE> 601
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
its inception to September 30, 1999 was 36.03%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
its inception to September 30, 1999 was 36.03%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -1.77%, (ii) the five-year period ended
September 30, 1999 was 5.34% and (iii) the five-year, eleven month period from
October 19, 1993 (the commencement of distribution of Class C Shares of the
Fund) through September 30, 1999 was 4.08%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1999 was 2.90%. The Fund's current distribution rate with
respect to the Class C Shares for the month ending September 30, 1999 was 4.29%.
The Fund's taxable equivalent distribution rate with respect to the Class C
Shares for the month ending September 30, 1999 was 6.70%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
its inception to September 30, 1999 was 26.87%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
its inception to September 30, 1999 was 26.87%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
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. The Custodian also provides
accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual 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-39
<PAGE> 602
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Intermediate Term Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Intermediate Term Municipal Income Fund (the "Fund"), including the
portfolio of investments, as of September 30, 1999, the related statement of
operations for the year then ended, the statement of changes in net assets for
the year then ended, for the nine-month period ended September 30, 1998, and for
the year 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, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Intermediate Term Municipal Income Fund as of September 30, 1999, the
results of its operations for the year then ended, the changes in its net assets
for the year then ended, for the nine-month period ended September 30, 1998, and
for the year 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 11, 1999
F-1
<PAGE> 603
PORTFOLIO OF INVESTMENTS
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 104.3%
ALABAMA 3.5%
$1,015 Birmingham, AL Arpt Auth Arpt Rev Rfdg
(AMBAC Insd) (b)....................... 5.250% 07/01/06 $ 1,029,017
500 West Jefferson Cnty, AL Amusement & Pub
Pk Auth (Prerefunded @ 12/01/06)....... 7.500 12/01/08 566,045
-----------
1,595,062
-----------
ALASKA 0.6%
250 Seward, AK Rev AK Sealife Cent Proj.... 7.100 10/01/05 255,198
-----------
ARIZONA 3.6%
500 Maricopa Cnty, AZ Indl Dev Auth Sr
Living Fac Rev......................... 7.250 04/01/05 506,195
1,070 Pima Cnty, AZ Indl Dev Auth Indl Rev
Lease Oblig Irvington Proj Tucson Ser A
Rfdg (FSA Insd)........................ 7.250 07/15/10 1,156,082
-----------
1,662,277
-----------
CALIFORNIA 4.2%
335 California Edl Fac Auth Rev Pacific
Grad School............................ 6.950 11/01/07 337,747
1,000 California St (AMBAC Insd)............. 6.400 09/01/08 1,119,480
240 Del Mar, CA Race Track Auth Rev Rfdg... 6.000 08/15/06 249,348
200 Stockton, CA Cmnty Fac Dist Spl Tax No
1 Mello Roos Weston Ranch Ser A........ 5.500 09/01/09 195,290
-----------
1,901,865
-----------
COLORADO 4.4%
310 Colorado Hlth Fac Auth Rev Sr Living
Fac Eaton Terrace Ser A................ 6.800 07/01/09 308,323
99 Colorado Hsg Fin Auth Access Pgm Single
Family Pgm Ser E....................... 8.125 12/01/24 105,329
1,000 Denver, CO City & Cnty Arpt Rev Ser
A...................................... 7.400 11/15/04 1,090,840
1,000 Metropolitan Football Stadium Cap
Apprec Ser A (MBIA Insd)............... * 01/01/12 511,930
-----------
2,016,422
-----------
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 604
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONNECTICUT 1.3%
$ 145 Mashantucket Western Pequot Tribe CT
Spl Rev Ser A (Escrowed to Maturity),
144A - Private Placement (a)........... 6.500% 09/01/06 $ 160,393
445 New Haven, CT Indl Fac Rev Adj Govt
Cent Thermal Energies.................. 7.250 07/01/09 451,657
-----------
612,050
-----------
FLORIDA 5.4%
1,150 Florida Hsg Fin Agy Hsg Maitland Club
Apts Ser B1 (AMBAC Insd)............... 6.750 08/01/14 1,225,095
190 Lee Cnty, FL Indl Dev Auth Econ Rev
Encore Nursing Cent Partner Rfdg....... 8.125 12/01/07 202,935
225 Orange Cnty, FL Hlth Fac Auth Rev First
Mtg Orlando Lutheran Twr Rfdg.......... 8.125 07/01/06 238,833
300 Volusia Cnty, FL Indl Dev Auth Bishops
Glen Proj Rfdg......................... 7.125 11/01/06 330,171
440 Westchase East Cmnty Dev Dist FL Cap
Impt Rev............................... 7.250 05/01/03 446,239
-----------
2,443,273
-----------
GEORGIA 6.7%
1,445 De Kalb Cnty, GA Hsg Auth Multi-Family
Hsg Rev North Hill Apts Proj Rfdg (FNMA
Collateralized) (c).................... 6.625 01/01/25 1,532,321
500 Forsyth Cnty, GA Hosp Auth Rev Antic
Ctfs GA Baptist Hlth Care Sys Proj..... 6.000 10/01/08 479,225
1,000 George L Smith II GA World Congress Ctr
Auth Rev Rfdg Domed Stadium Proj (MBIA
Insd) (b).............................. 6.000 07/01/04 1,037,520
-----------
3,049,066
-----------
ILLINOIS 10.5%
400 Bedford Park, IL Tax Increment 71st &
Cicero Proj Rfdg....................... 7.000 01/01/06 416,160
500 Carol Stream, IL First Mtg Rev Windsor
Pk Mnr Proj............................ 6.500 12/01/07 510,600
445 Chicago, IL Tax Increment Allocation
San Drainage & Ship Canal A............ 7.375 01/01/05 458,288
545 Clay Cnty, IL Hosp Rev................. 5.500 12/01/10 511,602
115 Danville, IL Single Family Mtg Rev
Rfdg................................... 7.300 11/01/10 119,444
330 Huntley, IL Spl Svc Area No 7 Spl
Tax.................................... 6.000 03/01/09 317,704
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 605
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$1,335 Illinois Dev Fin Auth Elderly Hsg Rev
Libertyville Towers Ser A.............. 6.500% 09/01/09 $ 1,375,798
750 Illinois Hlth Fac Auth Rev Holy Cross
Hosp Proj Ser 94-A..................... 6.250 03/01/04 765,082
300 Peoria, IL Spl Tax WeaverRidge Spl Svc
Area................................... 7.625 02/01/08 315,432
-----------
4,790,110
-----------
KENTUCKY 1.2%
500 Kenton Cnty, KY Arpt Brd Rev (MBIA
Insd).................................. 5.900 03/01/05 525,780
-----------
LOUISIANA 3.7%
220 Iberia Parish, LA Hosp Svc Dist No 1
Hosp Rev............................... 7.500 05/26/06 217,149
500 Louisiana Hsg Fin Agy Rev Multi-Family
Hsg Plantation Ser A................... 7.200 01/01/03 499,255
1,000 St John Baptist Parish LA Sales Tax
Dist (FSA Insd)........................ 5.000 12/01/11 975,460
-----------
1,691,864
-----------
MASSACHUSETTS 3.6%
500 Massachusetts St Hlth & Edl Fac Auth
Rev Cent New England Hlth Sys Ser A.... 6.125 08/01/13 487,000
500 Massachusetts St Hlth & Edl North Adams
Regl Hosp Ser C........................ 6.250 07/01/04 517,980
190 Massachusetts St Indl Fin Agy East
Boston Neighborhood Proj............... 7.250 07/01/06 180,409
465 Massachusetts St Indl Fin Agy Rev Grtr
Lynn Mental Hlth, 144A - Private
Placement (a).......................... 6.200 06/01/08 448,395
-----------
1,633,784
-----------
MICHIGAN 4.0%
440 John Tolfree Health Sys Corp Mich Mtg
Rev.................................... 5.450 09/15/06 426,070
1,500 Michigan St Strategic Fd Ltd Oblig Rev
United Waste Sys Proj.................. 5.200 04/01/10 1,400,280
-----------
1,826,350
-----------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 606
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MINNESOTA 1.7%
$ 500 Dakota Cnty, MN Hsg & Redev Auth
Multi-Family Hsg Rev Affordable Hsg
View Pointe Proj....................... 6.000% 11/01/09 $ 484,190
285 Minneapolis, MN Multi-Family Rev Hsg
Belmont Apts Proj...................... 7.000 11/01/06 288,300
-----------
772,490
-----------
MISSOURI 4.5%
1,500 Kansas City, MO Arpt Rev Genl Impt Ser
A (FSA Insd) (c)....................... 7.000 09/01/12 1,642,125
400 West Plains, MO Indl Dev Auth Hosp Rev
Ozarks Med Ctr......................... 6.300 11/15/11 394,308
-----------
2,036,433
-----------
MONTANA 1.1%
500 Crow Fin Auth MT Tribal Purp Rev,
144A - Private Placement (a)........... 5.400 10/01/07 503,645
-----------
NEBRASKA 2.0%
1,000 American Pub Energy Agy NE Gas Sup Rev
NE Pub Gas Agy Proj Ser A (AMBAC
Insd).................................. 4.375 06/01/10 926,440
-----------
NEW JERSEY 8.2%
500 Camden Cnty, NJ Impt Auth Lease Rev
Kaighn Pt Marine Terminal A............ 7.375 06/01/07 517,710
1,000 East Orange, NJ Brd Ed Ctfs Partn Cap
Apprec (FSA Insd)...................... * 02/01/16 398,630
250 New Jersey Econ Dev Auth Rev Sr Mtg
Arbor Glen Proj Ser A (Escrowed to
Maturity).............................. 8.000 05/15/04 281,195
225 New Jersey Health Care Facs Fing Auth
Rev-Palisades (Prerefunded @
07/01/02).............................. 7.500 07/01/06 241,447
115 New Jersey Health Care Facs Fing Auth
Rev-Palisades.......................... 7.500 07/01/06 121,708
1,000 New Jersey Hlthcare Fac Fin Auth Rev
Christ Hosp Group Issue (Connie Lee
Insd).................................. 7.000 07/01/06 1,123,370
1,000 New Jersey St Transn Tr Fd Auth Transn
Sys Ser A (b).......................... 5.500 06/15/11 1,029,070
-----------
3,713,130
-----------
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 607
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK 8.2%
$ 500 Brookhaven, NY Indl Dev Agy Sr
Residential Hsg Rev Woodcrest Estates
Fac Ser A.............................. 5.875% 12/01/09 $ 478,960
500 New York City Ser A.................... 7.000 08/01/07 560,600
500 New York St Dorm Auth Rev Rfdg Secd
Hosp North Gen Hosp Ser G.............. 5.125 02/15/08 496,610
1,000 New York St Med Care Fac Fin Agy Rev NY
Hosp Mtg Ser A (Prerefunded @ 02/15/05)
(AMBAC Insd)........................... 6.200 08/15/05 1,089,780
1,000 Niagara Falls, NY Pub Impt (MBIA
Insd).................................. 6.900 03/01/20 1,095,590
-----------
3,721,540
-----------
OHIO 7.5%
500 Cuyahoga Cnty, OH Hlthcare Fac Rev
Judson Retirement Cmnty Ser A Rfdg..... 7.000 11/15/10 512,120
500 Dayton, OH Spl Facs Rev Afco Cargo Day
LLC Proj............................... 6.000 04/01/09 487,655
250 Marion Cnty, OH Hosp Impt Rev Cmnty
Hosp Rfdg.............................. 6.375 05/15/11 250,550
400 Montgomery Cnty, OH Hosp Rev Grandview
Hosp & Med Cent Rfdg................... 5.250 12/01/01 399,752
1,000 Ohio St Air Quality Dev Auth Rev Owens
Corning Fiberglass Proj Rfdg........... 6.250 06/01/04 1,019,430
775 Sandusky Cnty, OH Hosp Fac Rev Rfdg Mem
Hosp................................... 5.000 01/01/06 759,392
-----------
3,428,899
-----------
OKLAHOMA 0.8%
365 Shawnee, OK Hosp Auth Hosp Rev
Midamerica Hlthcare Inc Rfdg........... 5.750 10/01/03 366,551
-----------
OREGON 3.0%
1,465 Multnomah Cnty, OR Ctfs Partn Ser A.... 4.200 08/01/08 1,378,931
-----------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 608
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA 2.1%
$ 225 Erie, PA Higher Edl Bldg Auth College
Rev Mercyhurst College Proj A Rfdg..... 5.300% 03/15/03 $ 229,079
250 Philadelphia, PA Auth For Indl Dev Revs
1st Mtg - Crime Prevention Assn........ 6.000 04/01/09 244,000
490 Philadelphia, PA Auth For Indl Dev
Hlthcare Fac Rev Baptist Home of Phil
Ser A.................................. 5.200 11/15/04 480,911
-----------
953,990
-----------
TENNESSEE 4.0%
1,500 Franklin, TN Spl Sch Dist Cap Apprec
(FSA Insd)............................. * 06/01/15 616,095
1,300 Municipal Energy Acq Corp TN Gas Rev
(FSA Insd)............................. 4.125 03/01/09 1,189,643
-----------
1,805,738
-----------
TEXAS 4.1%
500 Austin, TX Util Sys Rev Rfdg (AMBAC
Insd).................................. 6.500 11/15/05 547,525
405 Mesquite, TX Hlth Fac Dev Retirement
Fac Christian Ser A.................... 6.100 02/15/08 411,326
585 Parker Cnty, TX Hosp Dist Hosp Rev
Campbell Health Sys.................... 5.700 08/15/09 580,864
300 San Antonio, TX Hsg Fin Corp
Multi-Family Hsg Rev Beverly Oaks Arpt
Proj Ser A............................. 7.500 02/01/10 304,911
-----------
1,844,626
-----------
UTAH 1.9%
845 Utah St Hsg Fin Agy Single Family Mtg
Mezz Ser A (FHA Gtd)................... 7.150 07/01/12 882,197
-----------
VIRGINIA 1.2%
500 Pittsylvania Cnty, VA Indl Dev Auth Rev
Exempt Fac Ser A....................... 7.450 01/01/09 531,350
-----------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 609
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U. S. VIRGIN ISLANDS 1.3%
$ 600 Virgin Islands Pub Fin Auth Rev Sr Lien
Fd Ln Nts Ser C........................ 5.500% 10/01/07 $ 606,576
-----------
TOTAL LONG-TERM INVESTMENTS 104.3%
(Cost $46,582,997).................................................. 47,475,637
TOTAL SHORT-TERM INVESTMENTS 0.6%
(Cost $300,000)..................................................... 300,000
-----------
TOTAL INVESTMENTS 104.9%
(Cost $46,882,997).................................................. 47,775,637
LIABILITIES IN EXCESS OF OTHER ASSETS (4.9%)......................... (2,243,921)
-----------
NET ASSETS 100.0%.................................................... $45,531,716
===========
</TABLE>
* Zero coupon bond
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be resold only in
transactions exempt from registration which are normally those transactions
with qualified institutional buyers.
(b) Securities purchased on a when issued or delayed delivery basis.
(c) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
AMBAC--AMBAC Indemnity Corporation
Connie Lee--Connie Lee Insurance Company
FHA--Federal Housing Administration
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
F-8
<PAGE> 610
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $46,882,997)........................ $47,775,637
Cash........................................................ 201,839
Receivables:
Interest.................................................. 699,241
Investments Sold.......................................... 388,220
Fund Shares Sold.......................................... 38,696
Other....................................................... 1,741
-----------
Total Assets.......................................... 49,105,374
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 3,106,745
Fund Shares Repurchased................................... 150,713
Income Distributions...................................... 54,246
Distributor and Affiliates................................ 45,491
Investment Advisory Fee................................... 18,782
Trustees' Deferred Compensation and Retirement Plans........ 137,203
Accrued Expenses............................................ 60,478
-----------
Total Liabilities..................................... 3,573,658
-----------
NET ASSETS.................................................. $45,531,716
===========
NET ASSETS CONSIST OF:
Capital ($.01 par value with an unlimited number of shares
authorized)............................................... $44,914,978
Net Unrealized Appreciation................................. 892,640
Accumulated Distributions in Excess of Net Investment
Income.................................................... (94,570)
Accumulated Net Realized Loss............................... (181,332)
-----------
NET ASSETS.................................................. $45,531,716
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $29,498,083 and 2,886,338 shares of
beneficial interest issued and outstanding)............. $ 10.22
Maximum sales charge (3.25%* of offering price)......... .34
-----------
Maximum offering price to public........................ $ 10.56
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $10,442,070 and 1,023,439 shares of
beneficial interest issued and outstanding)............. $ 10.20
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $5,591,563 and 548,062 shares of
beneficial interest issued and outstanding)............. $ 10.20
===========
</TABLE>
*On sales of $25,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-9
<PAGE> 611
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 2,546,686
-----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $62,887, $143,540 and $46,428,
respectively)............................................. 252,855
Investment Advisory Fee..................................... 220,587
Accounting Services......................................... 57,312
Shareholder Services........................................ 45,637
Trustees' Fees and Related Expenses......................... 31,682
Custody..................................................... 6,004
Legal....................................................... 4,755
Other....................................................... 79,916
-----------
Total Expenses.......................................... 698,748
Less Credits Earned on Cash Balances.................... 685
-----------
Net Expenses............................................ 698,063
-----------
NET INVESTMENT INCOME....................................... $ 1,848,623
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 118,720
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................. 3,084,453
End of the Period....................................... 892,640
-----------
Net Unrealized Depreciation During the Period............... (2,191,813)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(2,073,093)
===========
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $ (224,470)
===========
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 612
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1999, the Nine Months Ended September 30, 1998
and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............ $ 1,848,623 $ 1,184,525 $ 1,380,936
Net Realized Gain................ 118,720 38,354 347,481
Net Unrealized
Appreciation/Depreciation
During the Period.............. (2,191,813) 650,720 651,462
----------- ----------- -----------
Change in Net Assets from
Operations..................... (224,470) 1,873,599 2,379,879
----------- ----------- -----------
Distributions from Net Investment
Income......................... (1,881,557) (1,184,915) (1,375,554)
Distributions in Excess of Net
Investment Income.............. (94,570) -0- -0-
----------- ----------- -----------
Distributions from and in Excess
of Net Investment Income*...... (1,976,127) (1,184,915) (1,375,554)
----------- ----------- -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES.......... (2,200,597) 688,684 1,004,325
----------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........ 22,415,763 13,360,043 5,579,082
Net Asset Value of Shares Issued
Through Dividend
Reinvestment................... 1,287,591 800,943 883,487
Cost of Shares Repurchased....... (15,031,256) (8,183,923) (9,753,115)
----------- ----------- -----------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS........... 8,672,098 5,977,063 (3,290,546)
----------- ----------- -----------
TOTAL INCREASE/DECREASE IN NET
ASSETS......................... 6,471,501 6,665,747 (2,286,221)
NET ASSETS:
Beginning of the Period.......... 39,060,215 32,394,468 34,680,689
----------- ----------- -----------
End of the Period (Including
accumulated undistributed net
investment income of ($94,570),
$32,934 and $33,324,
respectively).................. $45,531,716 $39,060,215 $32,394,468
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
*Distributions by Class
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions from and in Excess
of Net Investment Income:
Class A Shares................. $(1,205,493) $ (625,738) $ (560,309)
Class B Shares................. (581,561) (469,656) (628,468)
Class C Shares................. (189,073) (89,521) (186,777)
----------- ----------- -----------
$(1,976,127) $(1,184,915) $(1,375,554)
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 613
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Year Ended December 31,
Year Ended Ended -------------------------------------
Class A Shares Sept. 30, 1999 Sept. 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $10.728 $10.536 $10.213 $10.264 $ 9.330 $10.145
------- ------- ------- ------- ------- -------
Net Investment
Income.............. .471 .358 .480 .455 .508 .489
Net Realized and
Unrealized
Gain/Loss........... (.475) .199 .317 (.032) .900 (.815)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............ (.004) .557 .797 .423 1.408 (.326)
------- ------- ------- ------- ------- -------
Less Distributions from
and in Excess of Net
Investment Income..... .504 .365 .474 .474 .474 .489
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............ $10.220 $10.728 $10.536 $10.213 $10.264 $ 9.330
======= ======= ======= ======= ======= =======
Total Return* (a)....... (0.10%) 5.36%** 8.08% 4.27% 15.31% (3.32%)
Net Assets at End of the
Period (In
millions)............. $ 29.5 $ 20.6 $ 12.9 $ 12.5 $ 15.6 $ 15.7
Ratio of Expenses to
Average Net Assets*... 1.28% 1.30% 1.52% 1.56% 1.00% .67%
Ratio of Net Investment
Income to Average Net
Assets*............... 4.49% 4.61% 4.67% 4.45% 5.10% 5.07%
Portfolio Turnover...... 65% 15%** 37% 45% 75% 274%
* If certain expenses had
not been reimbursed by
Van Kampen, Total Return
would have been lower and
the ratios would have been
as follows:
Ratio of Expenses to
Average Net Assets.... N/A N/A 1.67% 1.74% 1.61% 1.75%
Ratio of Net Investment
Income to Average Net
Assets................ N/A N/A 4.52% 4.27% 4.49% 3.99%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A--Not Applicable
See Notes to Financial Statements
F-12
<PAGE> 614
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Year Ended December 31,
Year Ended Ended -------------------------------------
Class B Shares Sept. 30, 1999 Sept. 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $10.714 $10.526 $10.209 $10.263 $ 9.319 $10.137
------- ------- ------- ------- ------- -------
Net Investment
Income.............. .392 .308 .402 .375 .430 .417
Net Realized and
Unrealized
Gain/Loss........... (.475) .191 .317 (.027) .916 (.818)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............ (.083) .499 .719 .348 1.346 (.401)
------- ------- ------- ------- ------- -------
Less Distributions from
and in Excess of Net
Investment Income..... .428 .311 .402 .402 .402 .417
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............ $10.203 $10.714 $10.526 $10.209 $10.263 $ 9.319
======= ======= ======= ======= ======= =======
Total Return* (a)....... (0.81%) 4.74%** 7.23% 3.54% 14.62% (4.04%)
Net Assets at End of the
Period (In
millions)............. $ 10.4 $ 15.2 $ 16.4 $ 16.4 $ 17.5 $ 17.7
Ratio of Expenses to
Average Net Assets*... 1.97% 2.06% 2.28% 2.32% 1.75% 1.43%
Ratio of Net Investment
Income to Average Net
Assets*............... 3.80% 3.90% 3.91% 3.69% 4.33% 4.30%
Portfolio Turnover...... 65% 15%** 37% 45% 75% 274%
* If certain expenses had not been reimbursed by Van Kampen, Total Return would have been
lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net Assets.... N/A N/A 2.42% 2.50% 2.36% 2.50%
Ratio of Net Investment
Income to Average Net
Assets................ N/A N/A 3.77% 3.51% 3.72% 3.24%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = Not Applicable
See Notes to Financial Statements
F-13
<PAGE> 615
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Year Ended December 31,
Year Ended Ended -------------------------------------
Class C Shares Sept. 30, 1999 Sept. 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period.................. $10.712 $10.525 $10.206 $10.260 $ 9.314 $10.134
------- ------- ------- ------- ------- -------
Net Investment
Income.............. .399 .308 .402 .374 .430 .419
Net Realized and
Unrealized
Gain/Loss........... (.481) .190 .319 (.026) .918 (.822)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............ (.082) .498 .721 .348 1.348 (.403)
------- ------- ------- ------- ------- -------
Less Distributions from
and in Excess of Net
Investment Income..... .428 .311 .402 .402 .402 .417
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............ $10.202 $10.712 $10.525 $10.206 $10.260 $ 9.314
======= ======= ======= ======= ======= =======
Total Return* (a)....... (0.81%) 4.74%** 7.23% 3.54% 14.74% (4.04%)
Net Assets at End of the
Period (In
millions)............. $ 5.6 $ 3.3 $ 3.1 $ 5.8 $ 4.9 $ 4.7
Ratio of Expenses to
Average Net Assets*... 2.02% 2.06% 2.29% 2.32% 1.74% 1.43%
Ratio of Net Investment
Income to Average Net
Assets*............... 3.75% 3.89% 3.88% 3.70% 4.36% 4.34%
Portfolio Turnover...... 65% 15%** 37% 45% 75% 274%
* If certain expenses had not been reimbursed by Van Kampen, Total Return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net Assets.... N/A N/A 2.43% 2.50% 2.34% 2.46%
Ratio of Net Investment
Income to Average Net
Assets................ N/A N/A 3.74% 3.52% 3.75% 3.31%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A--Not Applicable
See Notes to Financial Statements
F-14
<PAGE> 616
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Intermediate Term Municipal Income Fund (the "Fund") is organized as
a series of Van Kampen Tax Free Trust (the "Trust"), a Delaware business trust,
and is registered as a diversified open-end management investment company under
the Investment Company Act of 1940, as amended. The Fund's investment objective
is to seek a high level of current income exempt from federal income tax,
consistent with preservation of capital. The Fund commenced investment
operations on May 28, 1993 with two classes of common shares, Class A and Class
B shares. The distribution of the Fund's Class C shares commenced on October 19,
1993.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Municipal bonds are valued by independent pricing
services or dealers using the mean of the bid and asked prices or, in the
absence of market quotations, at fair value based upon yield data relating to
municipal bonds with similar characteristics and general market conditions.
Securities which are not valued by independent pricing services are valued at
fair value using procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
F-15
<PAGE> 617
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such losses against any future realized capital gains.
At September 30, 1999, the Fund had an accumulated capital loss carryforward for
tax purposes of $181,332 which will expire on September 30, 2003.
At September 30, 1999, for federal income tax purposes, cost of long- and
short-term investments is $46,882,997; the aggregate gross unrealized
appreciation is $1,476,442 and the aggregate gross unrealized depreciation is
$583,802, resulting in net unrealized appreciation on long- and short-term
investments of $892,640.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays dividends
monthly from net investment income. Net realized gains, if any, are distributed
annually.
Due to inherent differences in the recognition of expenses under generally
accepted accounting principles and federal income tax purposes, the amount of
distributed net investment income may differ for a particular period. These
differences are temporary in nature, but may result in book basis distribution
in excess of net investment income for certain periods.
F. EXPENSE REDUCTIONS--During the year ended September 30, 1999, the Fund's
custody fee was reduced by $685 as a result of credits earned on overnight cash
balances.
F-16
<PAGE> 618
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ---------------------------------------------------------------------
<S> <C>
First $500 million.................................... .500 of 1%
Over $500 million..................................... .450 of 1%
</TABLE>
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $2,100 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $59,900 representing Van Kampen's cost of providing accounting and
legal services to the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent for the Fund. For the year ended September 30,
1999, the Fund recognized expenses of approximately $23,200. 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.
F-17
<PAGE> 619
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
At September 30, 1999, capital aggregated $29,626,819, $9,940,594 and
$5,347,565 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................................... 1,523,720 $ 16,094,310
Class B...................................... 283,297 2,990,396
Class C...................................... 315,962 3,331,057
---------- ------------
Total Sales.................................... 2,122,979 $ 22,415,763
========== ============
Dividend Reinvestment:
Class A...................................... 77,116 $ 810,720
Class B...................................... 30,595 322,125
Class C...................................... 14,739 154,746
---------- ------------
Total Dividend Reinvestment.................... 122,450 $ 1,287,591
========== ============
Repurchases:
Class A...................................... (633,044) $ (6,690,021)
Class B...................................... (708,231) (7,395,119)
Class C...................................... (89,710) (946,116)
---------- ------------
Total Repurchases.............................. (1,430,985) $(15,031,256)
========== ============
</TABLE>
F-18
<PAGE> 620
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At September 30, 1998, capital aggregated $19,411,810, $14,023,192 and
$2,807,878 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 1,074,637 $11,350,330
Class B....................................... 130,358 1,377,259
Class C....................................... 59,963 632,454
--------- -----------
Total Sales..................................... 1,264,958 $13,360,043
========= ===========
Dividend Reinvestment:
Class A....................................... 43,203 $ 457,668
Class B....................................... 25,218 266,756
Class C....................................... 7,232 76,519
--------- -----------
Total Dividend Reinvestment..................... 75,653 $ 800,943
========= ===========
Repurchases:
Class A....................................... (425,765) $(4,501,920)
Class B....................................... (297,555) (3,150,507)
Class C....................................... (50,238) (531,496)
--------- -----------
Total Repurchases............................... (773,558) $(8,183,923)
========= ===========
</TABLE>
F-19
<PAGE> 621
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $12,105,732, $15,529,684 and
$2,630,401 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A......................................... 224,786 $ 2,319,832
Class B......................................... 176,313 1,821,383
Class C......................................... 141,162 1,437,867
-------- -----------
Total Sales....................................... 542,261 $ 5,579,082
======== ===========
Dividend Reinvestment:
Class A......................................... 36,275 $ 374,192
Class B......................................... 34,418 354,505
Class C......................................... 15,094 154,790
-------- -----------
Total Dividend Reinvestment....................... 85,787 $ 883,487
======== ===========
Repurchases:
Class A......................................... (255,254) $(2,615,305)
Class B......................................... (255,930) (2,632,842)
Class C......................................... (437,360) (4,504,968)
-------- -----------
Total Repurchases................................. (948,544) $(9,753,115)
======== ===========
</TABLE>
F-20
<PAGE> 622
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
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 purchased
on or after June 1, 1996 will automatically convert to Class A shares after the
eighth year following purchase. Class B shares purchased before June 1, 1996
automatically convert to Class A shares after the sixth year following purchase.
For the year ended September 30, 1999, 347,734 Class B shares automatically
converted to Class A shares. The CDSC for Class B and Class C shares will be
imposed on most redemptions made within four years of the purchase for Class B
and one year of the purchase for Class C as detailed in the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- ------------------------------------------------------------------------------
<S> <C> <C>
First............................................ 3.00% 1.00%
Second........................................... 2.50% None
Third............................................ 2.00% None
Fourth........................................... 1.00% None
Fifth and Thereafter............................. None None
</TABLE>
For the year ended September 30, 1999, Van Kampen, as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $4,300 and CDSC on redeemed shares of approximately $36,600. Sales
charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the year ended September 30, 1999, the cost of purchases and proceeds from
sales of investments, excluding short-term investments, were $38,933,363 and
$29,431,524, respectively.
5. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended September 30, 1999, are payments retained by Van Kampen of
approximately $251,300.
F-21
<PAGE> 623
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND
Van Kampen Florida Insured Tax Free Income Fund (the "Fund") is a mutual fund
with the investment objective to provide investors with a high level of current
income exempt from federal income tax and Florida intangible personal property
taxes, consistent with preservation of capital. The Fund is designed for
investors who are residents of Florida for tax purposes. The Fund's investment
adviser seeks to achieve the Fund's investment objective by investing primarily
in a portfolio of Florida municipal securities that are insured at the time of
investment as to timely payment of principal and interest by a top-rated private
insurance company.
The Fund is organized as a non-diversified series of the 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, Policies and Risks.................... B-4
Strategic Transactions...................................... B-13
Investment Restrictions..................................... B-18
Description of Securities Ratings........................... B-19
Description of Insurance Company Claims Paying Ability
Ratings................................................... B-23
Trustees and Officers....................................... B-24
Investment Advisory Agreement............................... B-34
Other Agreements............................................ B-34
Distribution and Service.................................... B-35
Transfer Agent.............................................. B-38
Portfolio Transactions and Brokerage Allocation............. B-38
Shareholder Services........................................ B-39
Redemption of Shares........................................ B-42
Contingent Deferred Sales Charge-Class A.................... B-42
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-42
Taxation.................................................... B-44
Fund Performance............................................ B-47
Other Information........................................... B-50
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-12
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 2000.
B-1
<PAGE> 624
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen Merritt
Tax Free Trust as a Massachusetts business trust (the "Massachusetts Trust").
The Massachusetts Trust was reorganized into the Trust under the name Van Kampen
American Capital Tax Free Trust on July 31, 1995. The Trust was created for the
purpose of facilitating the Massachusetts Trust reorganization into a Delaware
business trust. On July 14, 1998, the Trust adopted its current name.
The Fund was originally organized in 1994 under the name Van Kampen Merritt
Florida Insured Tax Free Income Fund as a sub-trust of the Massachusetts Trust.
The Fund was reorganized as a series of the Trust under the name Van Kampen
American Capital Florida Insured Tax Free Income Fund on July 31, 1995. On July
14, 1998, the Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co ("Morgan Stanley Dean Witter"). 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 and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, which can be divided
into series, such as the Fund, and further subdivided into classes of each
series. Each share represents an equal proportionate interest in the assets of
the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Other classes may be established from time to
time in accordance with provisions of the Declaration of Trust. Each class of
shares of the Fund generally are identical in all respects except that each
class bears certain distribution expenses and has exclusive voting rights with
respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to
B-2
<PAGE> 625
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 less 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 December 31, 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 DECEMBER 31, CLASS PERCENTAGE
OF RECORD HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
Edward Jones & Co........................................... 382,987.85 A 14.28%
Shareholder Accounting
201 Progress Pkwy
Maryland Hts, MO 63043-3009
MLPF & S for the sold benefit of its customers.............. 42,600.88 C 20.14%
4800 Deer Lake Dr. E. 2nd fl.
Jacksonville, FL 32246-6484
NFSC FEBO................................................... 19,667.06 C 9.29%
Anthony R. Medici
Helen Medici
11439 SW Courtney Dr.
Arcadia, FL 34266-8496
Salomon Smith Barney Inc. .................................. 17,574.22 C 8.309%
333 West 34th St--3rd Floor
New York, NY 10001-2483
NFSC FEBO................................................... 11,573.00 C 5.47%
Juergen Haar
Gottfried Kellner
7148 Estero Blvd
Ft. Myers Beach, FL 33931
</TABLE>
B-3
<PAGE> 626
INVESTMENT OBJECTIVE, POLICIES AND RISKS
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. The Fund may, however, invest in shorter term municipal
securities when yields are greater than yields available on longer term
municipal securities, for temporary defensive purposes or 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.
"Non-Substitution" clauses in municipal lease transactions have recently been
held unenforceable in Florida as violative of public policy. The Fund will
invest in lease obligations which contain non-appropriation clauses only if such
obligations are rated investment grade, at the time of investment.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
B-4
<PAGE> 627
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 20% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest or range floaters or capped floaters
whose rates are subject to periodic or lifetime caps. Derivative variable rate
securities may pay a rate of interest determined by applying a multiple to the
variable rate. The extent of increases and decreases in the value of derivative
variable rate securities in response to changes in market rates of interest
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Although the Fund invests primarily in municipal securities which will be
insured as to timely payment of principal and interest, municipal securities,
like other debt obligations, are subject to the risk of non-payment. The ability
of issuers of municipal securities to make timely payments of interest and
principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Fund, and could result in a reduction in the value of the
municipal security experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal securities and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), may limit the extent to which the Fund may exercise its
rights by taking possession of such assets, because as a regulated investment
company the Fund is subject to certain limitations on its investments and on the
nature of its income. Further, in connection with the working out or
restructuring of a defaulted security, the Fund may acquire additional
securities of the issuer, the acquisition of which may be deemed to be a loan of
money or property. Such additional securities should be considered speculative
with respect to the capacity to pay interest or repay principal in accordance
with their terms.
B-5
<PAGE> 628
INSURANCE
As described in the Prospectus, the Fund invests primarily in municipal
securities which are either pre-insured under a policy obtained for such
securities prior to the purchase of such securities or are insured under
policies obtained by the Fund to cover otherwise uninsured securities.
ORIGINAL ISSUE INSURANCE. Original Issue Insurance is purchased with respect
to a particular issue of municipal securities by the issuer thereof or a third
party in conjunction with the original issuance of such municipal securities.
Under such insurance, the insurer unconditionally guarantees to the holder of
the insured municipal security the timely payment of principal and interest on
such obligation when and as such payments shall become due but shall not be paid
by the issuer; except that in the event of any acceleration of the due date of
the principal by reason of mandatory or optional redemption (other than
acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the insured payments may be made in such amounts and at such times as
payments of principal would have been due had there not been such acceleration.
The insurer is responsible for such payments less any amounts received by the
holder from any trustee for the municipal security issuers or from any other
source. Original Issue Insurance generally does not insure payment on an
accelerated basis, the payment of any redemption premium (except with respect to
certain premium payments in the case of certain small issue industrial
development and pollution control municipal securities), the value of the shares
of the Fund or the market value of municipal securities, or payments of any
tender purchase price upon the tender of the municipal securities. Original
Issue Insurance also does not insure against nonpayment of principal of or
interest on municipal securities resulting from the insolvency, negligence or
any other act or omission of the trustee or other paying agent for such
obligations.
In the event that interest on or principal of a municipal security covered by
insurance is due for payment but is unpaid by reason of nonpayment by the issuer
thereof, the applicable insurer will make payments to its fiscal agent (the
"Fiscal Agent") equal to such unpaid amounts of principal and interest not later
than one business day after the insurer has been notified that such nonpayment
has occurred (but not earlier than the date of such payment is due). The Fiscal
Agent will disburse to the Fund the amount of principal and interest which is
then due for payment but is unpaid upon receipt by the Fiscal Agent of (i)
evidence of the Fund's right to receive payment of such principal and interest
and (ii) evidence, including any appropriate instrument of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
Consequently, Original Issue Insurance may be considered to represent an element
of market value with respect to the municipal securities so insured, but the
exact effect, if any, of this insurance on such market value cannot be
estimated.
SECONDARY MARKET INSURANCE. Subsequent to the time of original issuance of a
municipal security, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal security
covered thereby remains outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal security.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enhance the value of such municipal
security. The Fund, for example, might seek to purchase a particular municipal
security and obtain Secondary Market Insurance with respect thereto if, in the
opinion of the Adviser, the market value of such municipal security, as insured,
would exceed the current value of the municipal security without insurance plus
the cost of the Secondary Market Insurance. Similarly, if the Fund owns but
wishes to sell a municipal security that is then covered by Portfolio Insurance,
the Fund might seek to obtain Secondary Market Insurance with respect thereto
if, in the opinion of the Adviser, the net
B-6
<PAGE> 629
proceeds of a sale by the Fund of such obligation, as insured, would exceed the
current value of such obligation plus the cost of the Secondary Market
Insurance.
PORTFOLIO INSURANCE. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original Issue Insurance of Secondary Market Insurance, the Fund is
not required to additionally insure any such municipal security under any policy
of Portfolio Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such municipal security, except that if the
date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
municipal security, the policy will terminate as to such municipal security on
the business day immediately following such payment date. Each policy will
terminate as to all municipal securities covered thereby on the date on which
the last of the covered municipal securities mature, are redeemed or are sold by
the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or
B-7
<PAGE> 630
in significant risk of default. On the other hand, since Original Issue
Insurance and Secondary Market Insurance will remain in effect as long as
municipal securities covered thereby are outstanding, such insurance may enhance
the marketability of such securities even when such securities are in default or
in significant risk of default, but the exact effect, if any, on the
marketability cannot be estimated. Accordingly, the Fund may determine to retain
or, alternatively, to sell municipal securities covered by Original Issue
Insurance or Secondary Market Insurance that are in default or in significant
risk of default.
GENERAL. It is anticipated that certain of the municipal securities to be
purchased by the Fund will be insured under policies obtained by persons other
than the Fund. In instances in which the Fund purchases municipal securities
insured under policies obtained by persons other than the Fund, the Fund does
not pay the premiums for such policies; rather the cost of such policies may be
reflected in a higher purchase price for such municipal securities. Accordingly,
the yield on such municipal securities may be lower than that on similar
uninsured municipal securities. Premiums for a Portfolio Insurance Policy
generally are paid by the Fund monthly, and are adjusted for purchases and sales
of municipal securities covered by the policy during the month. The yield on the
Fund's portfolio is reduced to the extent of the insurance premiums paid by the
Fund which, in turn, will depend upon the characteristics of the covered
municipal securities held by the Fund. In the event the Fund were to purchase
Secondary Market Insurance with respect to any municipal securities then covered
by a Portfolio Insurance policy, the coverage and the obligation of the Fund to
pay monthly premiums under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by
Standard and Poor's ("S&P"), Aaa by Moody's Investor Services, Inc. ("Moody's")
or an equivalent rating by another nationally recognized statistical ratings
organization ("NRSRO"), or if the Adviser anticipates such a lowering or
otherwise does not believe an insurer's claims-paying ability merits its
existing triple-A rating, the Fund could seek to obtain additional insurance
from an insurer whose claims-paying ability is rated AAA by S&P, Aaa by Moody's
or an equivalent rating by another NRSRO, or if the Adviser determines that the
cost of obtaining such additional insurance outweigh the benefits, the Fund may
elect not to obtain additional insurance. In making such determination, the
Adviser will consider the cost of the additional insurance, the new
claims-paying ability rating and financial condition of the existing insurer and
the creditworthiness of the issuer or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. The Fund cannot predict the
consequences of a state takeover of an insurer's obligations and, in particular,
whether such an insurer (or its state regulatory agency) could or would honour
all of the insurer's contractual obligations including any outstanding insurance
contracts insuring the timely payment of principal and interest on municipal
securities. The Fund cannot predict the impact which such events might have on
the market values of such municipal security. In the event of a default by an
insurer on its obligations with respect to any municipal securities in the
Fund's portfolio, the Fund would look to the issuer or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer or
guarantor may not be rated AAA by S&P, Aaa by Moody's or an equivalent rating by
another NRSRO. Accordingly, the Fund could be exposed to greater risk of
non-payment in such circumstances which could adversely affect the Fund's net
asset value. Alternatively, the Fund could elect to dispose of such municipal
securities; however, the market prices for such municipal securities may be
lower than the Fund's purchase price for them and the Fund could sustain a
capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk
B-8
<PAGE> 631
(i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value.
SPECIAL CONSIDERATIONS REGARDING FLORIDA MUNICIPAL SECURITIES
GENERAL. As described in the Prospectus, except during temporary periods, the
Fund will invest substantially all of its assets in Florida municipal
securities. The Fund is therefore susceptible to political, economic, regulatory
or other factors affecting issuers of Florida municipal securities. In addition,
the specific Florida municipal securities in which the Fund will invest are
expected to change from time to time. The following information constitutes only
a brief summary of some of the complex factors which may have an impact on the
financial situation of issuers of Florida municipal securities and does not
purport to be a complete or exhaustive description of all adverse conditions to
which issuers of Florida municipal securities may be subject and is not
applicable to "conduit" obligations, such as industrial development revenue
bonds, with respect to which the public issuer itself has no financial
responsibility. Such information is derived from certain official statements of
the State of Florida published in connection with the issuance of specific State
of Florida securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all Florida municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial condition of such
issuers. The Fund cannot predict whether or to what extent such factors or other
factors may affect the issuers of Florida municipal securities, the market value
or marketability of such securities or the ability of the respective issuers of
such securities acquired by the Fund to pay interest on or principal of such
securities. The creditworthiness of obligations issued by local Florida issuers
may be unrelated to the creditworthiness of obligations issued by the State of
Florida, and there is no responsibility on the part of the State of Florida to
make payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within Florida, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of Florida municipal securities.
Florida state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of Florida
and the nation as a whole. Florida's economic outlook is generally projected to
reflect the national economic outlook, and is expected to experience steady if
unspectacular growth over the next couple of years. The Florida constitution and
statutes require a balanced budget, which may affect the ability of the State of
Florida to issue and/or repay its obligations. In addition, various limitations
on the State of Florida, its governmental agencies and its local governments,
including school and special districts and authorities, may inhibit the ability
of these issuers to repay existing indebtedness and issue additional
indebtedness. The ability of such issuers to repay revenue bonds may also depend
on the success of the capital projects to which they relate. The ability of such
issuers to repay general obligation bonds will also depend on the success of
such issuer maintaining its ad valorem tax base.
INVESTMENT PRACTICES AND POLICIES OF ISSUERS OF FLORIDA MUNICIPAL
ISSUERS. Florida law does provide certain restrictions on the investment of
funds for the State of Florida and its local governments; however, with respect
to all municipalities and its charter counties, such restrictions may be limited
by the constitutional home rule powers of such entities. Although the Florida
municipal securities which may be purchased by the Fund will be insured, only
those securities which are insured by Original Issuance Insurance will contain
restrictions on investments imposed by the issuer of such insurance. Because
statutory restrictions on investments and investment policies with respect to
the investment of funds is limited by constitutional home rule powers, there can
be no assurance as to whether any issuer will suffer losses as a result of
investments or the magnitude or any such losses.
POPULATION, INCOME AND EMPLOYMENT. Florida has experienced a large population
growth. As of April 1, 1998, Florida ranks fourth with an estimated population
of 15 million. Since the beginning of the eighties, Florida has surpassed Ohio,
Illinois and Pennsylvania in total population. Because of the national
recession,
B-9
<PAGE> 632
Florida's net in-migration declined to 140,000 in 1992, but migration has since
recovered and reached 232,000 in 1998. The personal income of residents of
Florida has been growing strongly the last several years and generally has
historically outperformed both the nation as a whole and the southeast in
particular. The State's economy since the early seventies has diversified in
such a way as to provide a greater insulation from national economic downturns.
The structure of income of residents of Florida differs from that of the nation
and the southeast in that, due to a proportionately greater retirement age
population, property income (dividends, interest and rent) and transfer payments
(Social Security and pension benefits, among other sources of income) are an
important source of income.
Real personal income in Florida is estimated to increase at 4.5% and 3.6% for
1999-00 and 2000-01 respectively, while real personal income per capita is
projected to grow 3.1% in 1999-00 and 1.8% in 2000-01.
Florida's economic dependence on the highly cyclical construction and
construction related industries has declined over time. The service and trade
sectors are Florida's largest employers. Presently, the State's service and
trade sectors employment constitutes approximately 60% of the total non-farm
employment. While structurally the southeast and the nation are endowed with a
greater proportion of manufacturing jobs, which tend to pay higher wages,
service jobs are less sensitive to business cycle swings.
Historically, Florida's unemployment rate has generally tracked below that of
the nation; however, beginning with the recession in the early 1990's, the trend
reversed. Since 1995, the State's unemployment rate has again been below or
about the same as the nation's. The unemployment rate for Florida in 1999 was
4.09% while the nation's rate in 1999 was 4.2%. Florida's unemployment rate is
expected to be 4.3% for fiscal year 1999-00 and 4.5% in 2001-02.
TOURISM INDUSTRY. Tourism is one of Florida's most important industries.
Approximately 48.7 million people visited the State in 1998. By the end of
fiscal year 1999-00, 51.2 million domestic and international tourists are
estimated to have visited the State. In 2000-01 tourist arrivals should
approximate 52.6 million.
STATE FINANCIAL OPERATIONS. Financial operations of the State covering all
receipts and expenditures are maintained through the use of four funds--the
General Revenue Fund, Trust Funds, the Working Capital Fund, and the Budget
Stabilization Fund. In fiscal year 1998-99, the State derived an estimated 67%
of its total direct revenues to these funds from state taxes and fees. Federal
funds and other special revenues accounted for the remaining revenues. Major
sources of tax revenues to the General Revenue Fund are the sales and use tax,
corporate income tax, intangible personal property tax, beverage tax and estate
tax, which amounted to 70%, 8%, 4%, 3% and 4% respectively, of the total General
Revenue funds available. State expenditures are categorized for budget and
appropriation purposes by type of fund and spending unit, which are further
subdivided by line item. In fiscal year 1999-00, appropriations from the General
Revenue Fund for education, health and welfare, and public safety are expected
to amount to approximately 55%, 24% and 16%, respectively, of total General
Revenues.
The sales and use tax is the greatest single source of tax receipts in
Florida. The sales tax is 6% of the sales price of tangible personal property
sold at retail in the State. The use tax is at 6% of the cost price of tangible
personal property when the same is not sold but is used, or stored for use, in
the State. Slightly less than 10% of the sales tax is designated for local
governments and is distributed to the respective counties in which collected for
use by the county and the municipalities therein. In addition to this
distribution, local governments may (by referendum) assess certain discretionary
sales surtaxes within their county, for certain purposes, restricted as to
amount. The proceeds of these surtaxes are required to be applied to the
purposes for which such surtax is assessed.
For the State fiscal year which ended June 30, 1998, receipts from the sales
and use tax were $13,918 million, an increase of 7.3% from fiscal year 1997-98.
The second largest source of State tax receipts, including those distributed
to local governments, is the tax on motor fuels. Preliminary data show
collections from this source in the State fiscal year ending June 30, 1999 were
$2,215.7 million. However, these revenues are almost entirely trust funds
dedicated for specific purposes and are not included in the State General
Revenue Fund. Alcoholic beverage tax and license revenues totalled $466.3
million in the State fiscal year ended June 30, 1999. The receipts of corporate
income tax for the State fiscal year ended June 30, 1999 were $1,472.2 million,
an increase of 5.5% over the prior fiscal
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year. In November 1986, the voters of the State approved a constitutional
amendment to allow the State to operate a lottery, the proceeds of which are
required to be applied as follows: 50% to be returned to the public as prizes,
at least 38% to be deposited in the Educational Enhancement Trust (for public
education), and no more than 12% to be spent on the administrative cost of
operating the lottery. State fiscal year 1998-99 produced gross revenues of
$2.11 billion of which education received approximately $802.9 million.
The State Constitution does not permit a personal income tax. An amendment to
the State Constitution would be required to impose a personal income tax in the
State.
For fiscal year 1999-00, the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $20,455.9 million, a 4.4%
increase over 1998-99.
For fiscal year 2000-01, the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $21,253.4 million, a 3.9%
increase over 1999-00. The $19,454.7 million in Estimated Revenues represent a
4.6% increase over the analogous figure in 1999-00.
LOCAL GOVERNMENT REVENUE SOURCES. County and municipal governments in Florida
depend primarily upon ad valorem property taxes, and sales, motor fuels and
other local excise taxes and miscellaneous revenue sources, including revenues
from utilities services. Florida school districts derive substantially all of
their revenues from local property taxes. The overall levels of revenues from
these sources is in part dependent upon the local, state and national economy.
Local government obligations held by the Fund may constitute general obligations
or may be special obligations payable solely from one or more specified revenue
sources. The ability of the local governments to repay their obligations on a
timely basis will be dependent upon the continued strength of the revenues
pledged and of the overall fiscal status of the local government.
STATE CONSTITUTIONAL AMENDMENT LIMITING STATE REVENUES. An amendment to the
Constitution of the State of Florida was approved by the voters of the State of
Florida at the November 1994 general election. This amendment limits the amount
of taxes, fees, licenses and charges imposed by the State Legislature and
collected during any fiscal year to the amount of revenues allowed for the prior
fiscal year, plus an adjustment for growth. Growth is defined as the amount
equal to the average annual rate of growth in Florida personal income over the
most recent twenty quarters times the state revenues allowed for the prior
fiscal year. The revenues allowed for any fiscal year could be increased by a
two-thirds vote of the Legislature. The limit was effective in the fiscal year
1995-1996. Excess revenues generated will initially be deposited in the budget
stabilization fund until it is fully funded; any additional excess revenues will
then be refunded to taxpayers. This amendment could limit the amount of actual
revenues from which the State of Florida could appropriate funds, including
funds appropriated to local governments. It is unclear at this point what
effect, if any, this amendment would have on local government debt obligations
payable from state revenues which may be subject to this amendment, such as
state revenue sharing moneys or other state revenues distributed to local
governments. Certain State of Florida debt obligations, which are not by their
terms subject to appropriation, should not be affected, depending upon the
language of the legislation authorizing the issuance of such obligations.
OTHER FACTORS. Florida will continue to face enormous spending pressures well
into the future. The large number of elderly residents will continue to demand
health services, an area where cost escalation is significant, and the constant
influx of people to Florida will continue to place sizable pressure on the State
for infrastructure needs.
The value of Florida municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.
There can be no assurance that there will not be a decline in economic
conditions or that particular Florida municipal securities in the portfolio of
the Fund will not be adversely affected by any such changes.
"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
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the Fund actually takes delivery of such securities. These transactions are
subject to market fluctuation; the value of the municipal securities at delivery
may be more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year.
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 for which market quotations are not readily available 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 typically 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, as amended from time to time.
NON-DIVERSIFICATION
The Fund is a "non-diversified" investment company, which means the Fund is
not limited in the proportion of its assets that may be invested in the
securities of a single issuer. However, the Fund intends to conduct its
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operations so as to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Fund
qualifies as a regulated investment company under the Code, it will be relieved
of any liability for federal income tax to the extent its earnings are
distributed to shareholders. In order to qualify, among other requirements, the
Fund must limit its investments so that, at the close of each calendar quarter,
(i) not more than 25% of the market value of the Fund's total assets are
invested in securities of a single issuer (other than the U.S. government, its
agencies and instrumentalities), and (ii) at least 50% of the market value of
its total assets is invested in cash, securities of the U.S. government, its
agencies and instrumentalities and other securities limited in respect of any
one issuer to an amount not greater than 5% of the market value of the Fund's
total assets. Since the Fund, as a non-diversified investment company, may
invest in a smaller number of individual issuers than a diversified investment
company, an investment in the Fund may, under certain circumstances, present
greater risks to an investor than an investment in a diversified company.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various Strategic Transactions (as
defined in the Prospectus) to earn income, facilitate portfolio management and
mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Fund's Adviser seeks to use such transactions to further the Fund's
investment objective, no assurance can be given that the use of these
transactions will achieve this result.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options;
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(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange;
(v) inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only 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
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assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
futures contracts and options thereon would exceed 5% of the Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of
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futures, options and interest rate transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Adviser, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions are normally entered into based on the Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate 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.
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OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of cash and liquid securities equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out cash and liquid securities equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of cash and liquid securities equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash and liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of the Code for qualification as a regulated investment company.
B-17
<PAGE> 640
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
may not be changed without shareholder 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 at the meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy; or (ii) more than 50% of the Fund's outstanding voting
securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitations on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. These
restrictions provide that the Fund shall not:
1. Invest more than 25% of its assets in a single industry; however, the Fund
may from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market; however, the Fund will not invest
more than 25% of its assets in industrial development bonds in a single
industry, and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
2. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
when issued and delayed delivery transactions.
3. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
4. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with hedging transactions nor short term
credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
5. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except in connection with
Strategic Transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.
6. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
7. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation, and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
8. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
B-18
<PAGE> 641
9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs, except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.
10. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent that Strategic Transactions the Fund
may engage in are considered to be commodities or commodities contracts.
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-19
<PAGE> 642
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: Debt rated "C" is currently highly vulnerable to nonpayment.
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.
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 factors 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-20
<PAGE> 643
<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 considered short-term in the relevant
market
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1: This designation indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C: This rating is assigned to short-term debt obligations with
a doubtful capacity for payments.
D: Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the due date, even if the
applicable grace period has not expired, unless S&P believes
such payments will be made during such grace period.
</TABLE>
A commercial paper 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 to S&P by the issuer or obtained 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 result of changes in, or
unavailability of, such information, or based on other circumstances.
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-21
<PAGE> 644
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:
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date date to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
B-22
<PAGE> 645
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a ranges of financial markets and
assured sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
DESCRIPTION OF INSURANCE COMPANY CLAIMS PAYING ABILITY RATINGS
RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
The claims-paying ability of insurance companies is rated by S&P and Moody's.
Descriptions of these ratings are set forth below:
DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Superior financial security on an absolute and relative basis. Capacity
to meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
AA. Excellent financial security. Capacity to meet policyholder obligations is
strong under a variety of economic and underwriting conditions.
A. Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.
DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Insurance companies rated Aaa offer exceptional financial security. While
the financial strength of these companies is likely to change, such changes as
can be visualized are most unlikely to impair their fundamentally strong
position.
B-23
<PAGE> 646
AA. Insurance companies rated Aa offer excellent financial security. Together
with the Aaa group they constitute what are generally known as high grade
companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
BAA. Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Note: Numeric modifiers are used to refer to the ranking within the group -- one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.
TRUSTEES AND OFFICERS
The 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. Trustee/Director of each of the funds
1632 Morning Mountain Road in the Fund Complex. Co-founder, and prior to August
Raleigh, NC 27614 1996, Chairman, Chief Executive Officer and President,
Date of Birth: 07/14/32 MDT Corporation (now known as Getinge/Castle, Inc., a
Age: 67 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
Age: 61 January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
</TABLE>
B-24
<PAGE> 647
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in the
233 South Wacker Drive Fund Complex. Prior to 1997, Partner, Ray & Berndtson,
Suite 7000 Inc., an executive recruiting and management consulting
Chicago, IL 60606 firm. Formerly, Executive Vice President of ABN AMRO,
Date of Birth: 06/03/48 N.A., a Dutch bank holding company. Prior to 1992,
Age: 51 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.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created to
Washington, D.C. 20016 deepen understanding, promote collaboration and stimulate
Date of Birth: 02/29/52 exchanges of practical experience between Americans and
Age: 47 Europeans. Trustee/Director of each of the funds in the
Fund Complex. Formerly, advisor to the Dennis Trading
Group Inc., a managed futures and option company that
invests money for individuals and institutions. Prior to
1992, President and Chief Executive Officer, Director and
Member of the Investment Committee of the Joyce
Foundation, a private foundation.
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset Management
Two World Trade Center of Morgan Stanley Dean Witter since December 1998.
66th Floor President and Director since April 1997 and Chief
New York, NY 10048 Executive Officer since June 1998 of Morgan Stanley Dean
Date of Birth: 08/13/53 Witter Advisors Inc. and Morgan Stanley Dean Witter
Age: 46 Services Company Inc. Chairman, Chief Executive Officer
and Director of Morgan Stanley Dean Witter Distributors
Inc. since June 1998. Chairman and Chief Executive
Officer since June 1998, and Director since January 1998,
of Morgan Stanley Dean Witter Trust FSB. Director of
various Morgan Stanley Dean Witter subsidiaries.
President of the Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series since May 1999.
Trustee/Director of each of the funds in the Fund
Complex, and Vice President of other investment companies
advised by the Advisers and their affiliates. Previously
Chief Strategic Officer of Morgan Stanley Dean Witter
Advisors Inc. and Morgan Stanley Dean Witter Services
Company Inc. and Executive Vice President of Morgan
Stanley Dean Witter Distributors Inc. April 1997-June
1998, Vice President of the Morgan Stanley Dean Witter
Funds and Discover Brokerage Index Series May 1997-April
1999, and Executive Vice President of Dean Witter,
Discover & Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning Services,
423 Country Club Drive Inc., a financial planning company and registered
Winter Park, FL 32789 investment adviser in the State of Florida. President and
Date of Birth: 02/13/36 owner, Nelson Ivest Brokerage Services Inc., a member of
Age: 63 the National Association of Securities Dealers, Inc. and
Securities Investors Protection Corp. Trustee/Director of
each of the funds in the Fund Complex.
</TABLE>
B-25
<PAGE> 648
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor, Van
Oakbrook Terrace, IL 60181-5555 Kampen Advisors Inc. and Van Kampen Management Inc.
Date of Birth: 02/02/46 Director and officer of certain other subsidiaries of Van
Age: 53 Kampen Investments. Trustee/Director and President of
each of the funds in the Fund Complex. Trustee, President
and Chairman of the Board of other investment companies
advised by the Advisers and their affiliates, and Chief
Executive Officer of Van Kampen Exchange Fund. Prior to
May 1998, Executive Vice President and Director of
Marketing at Morgan Stanley Dean Witter and Director of
Dean Witter Discover & Co. and Dean Witter Realty. Prior
to 1996, Director of Dean Witter Reynolds Inc.
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Age: 55 Shopping Centers Inc., a retail mall management company.
Trustee, University of Notre Dame. Trustee/Director of
each of the funds in the Fund Complex. Prior to 1998,
Director of Stone Smurfit Container Corp., a paper
manufacturing company. From May 1996 through February
1997 he was President, Chief Executive Officer and Chief
Operating Officer of Waste Management, Inc., an
environmental services company, and from November 1984
through May 1996 he was President and Chief Operating
Officer of Waste Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Age: 75 Dynalysis of Princeton, a firm engaged in 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 investment companies advised by the
Date of Birth: 08/22/39 Advisers or Van Kampen Management Inc. Trustee/Director
Age: 60 of each of the funds in the Fund Complex, and
Trustee/Managing General Partner of other investment
companies advised by the Advisers or Van Kampen
Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Age: 58 Marshall Fund of the United States, Trustee of Colorado
College, and Vice Chair of the Board of the Council for
Excellence in Government. Trustee/Director of each of the
funds in the Fund Complex. Prior to 1993, Executive
Director of the Commission on Behavioral and Social
Sciences and Education at the National Academy of
Sciences/National Research Council. From 1980 through
1989, Partner of Coopers & Lybrand.
</TABLE>
B-26
<PAGE> 649
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network system
233 South Wacker Drive solutions, COMARCO, Inc., a wireless communications
Suite 9700 products company and APAC Customer Services, Inc., a
Chicago, IL 60606 provider of outsourced customer contact services.
Date of Birth: 10/29/53 Trustee/Director of each of the funds in the Fund
Age: 46 Complex. Prior to May 1996, President of Advance Ross
Corporation, an international transaction services and
pollution control equipment manufacturing company.
</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. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-27
<PAGE> 650
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood 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.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and Van
Age: 57 Kampen Management Inc. Executive Vice President and Chief
Investment Officer of each of the funds in the Fund Complex,
since 1998. Chief Investment Officer, Executive Vice
President and Trustee/Managing General Partner of other
investment companies advised by the Advisers or Van Kampen
Management Inc. ("Management Inc."), since the inception of
funds advised by Advisory Corp. and Management Inc. and
since 1998 for funds advised by Asset Management. Director
of Global Decisions Group LLC, a financial research firm,
and its affiliates MCM Asia Pacific and MCM Europe. Prior to
1998, President, Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital Management, Inc.;
Director of Van Kampen American Capital, Inc.; and
President, Chief Executive Officer and Trustee of each of
the funds advised by Advisory Corp. Prior to July 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996, Chief
Executive Officer and Director of MCM Group, Inc. and
McCarthy, Crisanti & Maffei, Inc., a financial research
firm, and Chairman of MCM Asia Pacific Company, Limited and
MCM (Europe) Limited. Prior to December 1991, Senior Vice
President of Van Kampen Merritt Inc.
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van Kampen
Vice President and Secretary Advisors Inc., Van Kampen Management Inc., the Distributor,
Age: 43 American Capital Contractual Services, Inc., Van Kampen
Exchange Corp., Van Kampen Recordkeeping Services Inc.,
Investor Services, Van Kampen Insurance Agency of Illinois
Inc. and Van Kampen System Inc. Vice President and
Secretary/Vice President, Principal Legal Officer and
Secretary of other investment companies advised by the
Advisers or their affiliates. Vice President and Secretary
of each of the funds in the Fund Complex. Prior to January
1999, Vice President and Associate General Counsel to New
York Life Insurance Company ("New York Life"), and prior to
March 1997, Associate General Counsel of New York Life.
Prior to December 1993, Assistant General Counsel of The
Dreyfus Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission, Division
of Investment Management, Office of Chief Counsel.
</TABLE>
B-28
<PAGE> 651
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen Management
Age: 44 Inc. and Van Kampen Investor Services Inc., and serves as a
Director or Officer of certain other subsidiaries of Van
Kampen Investments. Vice President of each of the funds in
the Fund Complex and certain other investment companies
advised by the Advisers and their affiliates. Prior to 1998,
Senior Vice President and Senior Planning Officer for
Individual Asset Management of Morgan Stanley Dean Witter
and its predecessor since 1994. From 1990-1994, First Vice
President and Assistant Controller in Dean Witter's
Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice President
Vice President of each of the funds in the Fund Complex and certain other
Age: 43 investment companies advised by the Advisers or their
affiliates. Prior to September 1996, Director of McCarthy,
Crisanti & Maffei, Inc, a financial research company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
Age: 59 companies advised by the Advisers or their affiliates. Prior
to October 1998, Vice President and Senior Portfolio Manager
with AIM Capital Management, Inc. Prior to February 1998,
Senior Vice President of Van Kampen American Capital Asset
Management, Inc., Van Kampen American Capital Investment
Advisory Corp. and Van Kampen American Capital Management,
Inc.
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
Age: 44 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.
Age: 53
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.
Age: 44 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
Age: 40 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
B-29
<PAGE> 652
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows trustees/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 provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The 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 on the basis of the relative net
assets of each fund as of the last business day of the preceding calendar
quarter. The compensation of each Non-Affiliated Trustee includes a per meeting
fee from each fund in the Fund Complex 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.
B-30
<PAGE> 653
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
PENSION OR ESTIMATED
AGGREGATE RETIREMENT MAXIMUM TOTAL
COMPENSATION BENEFITS ANNUAL BENEFITS COMPENSATION
BEFORE DEFERRAL ACCRUED AS FROM THE FUND BEFORE DEFERRAL
FROM THE PART OF UPON FROM FUND
NAME(1) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- --------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $15,220 $40,303 $60,000 $126,000
Jerry D. Choate(1) 6,754 0 60,000 88,700
Linda Hutton Heagy 15,220 5,045 60,000 126,000
R. Craig Kennedy 15,220 3,571 60,000 125,600
Jack E. Nelson 15,220 21,664 60,000 126,000
Phillip B. Rooney 13,820 7,787 60,000 113,400
Fernando Sisto 15,220 72,060 60,000 126,000
Wayne W. Whalen 15,220 15,189 60,000 126,000
Suzanne H. Woolsey(1) 6,754 0 60,000 88,700
Paul G. Yovovich(1) 14,020 2,845 60,000 126,000
</TABLE>
- ------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Yovovich became a member of the Board of Trustees for the Fund
and other funds in the Fund Complex on October 22, 1998 and therefore does
not have a full fiscal year of information to report. Mr. Choate and Ms.
Woolsey became members of the Board of Trustees for the Fund and other funds
in the Fund Complex on May 26, 1999 and therefore do not have a full year of
information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal year ended September 30, 1999.
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, are shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The detail of cumulative
deferred compensation (including interest) owed to the Trustees, including
former 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 accrued by the operating investment companies in the Fund Complex
for each of the Trustees for the funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
(4) For each Trustee, this is the sum of the estimated maximum annual benefits
payable by the funds 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 funds in the Fund Complex as of December 31, 1999 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, 1999. The deferred
B-31
<PAGE> 654
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
Non-Affiliated Trustees were not trustees of such investment companies.
Combining the Fund Complex with other investment companies advised by the
Advisers and their affiliates, Mr. Whalen received Total Compensation of
$279,250 during the calendar year ended December 31, 1999.
As of December 31, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-32
<PAGE> 655
TABLE A
1999 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund....... 9/30 $ 3,322 $1,483 $ 3,322 $ 3,322 $ 3,322 $ 3,122 $ 3,322 $ 3,322
Tax Free High Income Fund......... 9/30 2,998 1,366 2,998 2,998 2,998 2,798 2,998 2,998
California Insured Tax Free
Fund............................ 9/30 1,692 745 1,692 1,692 1,692 1,492 1,692 1,692
Municipal Income Fund............. 9/30 2,781 1,241 2,781 2,781 2,781 2,581 2,781 2,781
Intermediate Term Municipal Income
Fund............................ 9/30 1,460 631 1,460 1,460 1,460 1,260 1,460 1,460
Florida Insured Tax Free Income
Fund............................ 9/30 1,488 646 1,488 1,488 1,488 1,288 1,488 1,488
New York Tax Free Income Fund..... 9/30 1,479 642 1,479 1,479 1,479 1,279 1,479 1,479
------- ------ ------- ------- ------- ------- ------- -------
Trust Total..................... $15,220 $6,754 $15,220 $15,220 $15,220 $13,820 $15,220 $15,220
======= ====== ======= ======= ======= ======= ======= =======
<CAPTION>
TRUSTEE
------------------
FUND NAME WOOLSEY YOVOVICH
--------- ------- --------
<S> <C> <C>
Insured Tax Free Income Fund....... $1,483 $ 3,122
Tax Free High Income Fund......... 1,366 2,798
California Insured Tax Free
Fund............................ 745 1,492
Municipal Income Fund............. 1,241 2,581
Intermediate Term Municipal Income
Fund............................ 631 1,260
Florida Insured Tax Free Income
Fund............................ 646 1,288
New York Tax Free Income Fund..... 642 1,479
------ -------
Trust Total..................... $6,754 $14,020
====== =======
</TABLE>
TABLE B
1999 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ---------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund.......................... 9/30 $ 3,322 $ 819 $ 3,322 $1,661 $ 3,322 $ 3,122 $1,661 $ 3,322 $ 2,373
Tax Free High Income Fund.... 9/30 2,998 769 2,998 1,499 2,998 2,798 1,499 2,998 2,165
California Insured Tax Free
Fund....................... 9/30 1,692 471 1,692 846 1,692 1,492 846 1,692 1,216
Municipal Income Fund........ 9/30 2,781 707 2,781 1,391 2,781 2,581 1,391 2,781 1,991
Intermediate Term Municipal
Income Fund................ 9/30 1,460 415 1,460 730 1,460 1,260 730 1,460 1,045
Florida Insured Tax Free
Income Fund................ 9/30 1,488 423 1,488 744 1,488 1,288 744 1,488 1,069
New York Tax Free Income
Fund....................... 9/30 1,479 422 1,479 740 1,479 1,279 740 1,479 1,060
------- ------ ------- ------ ------- ------- ------ ------- -------
Trust Total................ $15,220 $4,026 $15,220 $7,611 $15,220 $13,820 $7,611 $15,220 $10,919
======= ====== ======= ====== ======= ======= ====== ======= =======
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL ---------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... 9/30 $12,061 $ 829 $13,428 $ 19,013 $ 28,191 $ 8,367 $ 6,888
Tax Free High Income Fund..... 9/30 11,230 778 12,661 18,570 27,209 7,518 4,640
California Insured Tax Free
Fund........................ 9/30 8,666 475 10,273 17,213 24,168 4,910 3,391
Municipal Income Fund......... 9/30 12,068 715 14,058 23,404 33,528 7,594 12,202
Intermediate Term Municipal
Income Fund................. 9/30 8,217 418 9,855 16,976 23,638 4,454 3,172
Florida Insured Tax Free
Income Fund................. 9/30 8,268 426 9,902 10,914 18,313 4,505 3,197
New York Tax Free Income
Fund........................ 9/30 4,537 425 3,611 5,706 8,667 3,632 1,967
------- ------ ------- -------- -------- ------- -------
Trust Total............... $65,047 $4,066 $73,788 $111,796 $163,714 $40,980 $35,457
======= ====== ======= ======== ======== ======= =======
<CAPTION>
TRUSTEES FORMER TRUSTEES
------------------- ----------------------------------------------
FUND NAME WHALEN YOVOVICH CARUSO GAUGHAN MILLER REES ROBINSON
--------- ------ -------- ------ ------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... $ 23,050 $ 2,479 $1,296 $1,064 $10,487 $ 0 $ 17,113
Tax Free High Income Fund..... 22,228 2,257 0 1,064 10,487 0 17,113
California Insured Tax Free
Fund........................ 19,692 1,260 0 1,064 10,487 0 17,113
Municipal Income Fund......... 27,189 2,076 2,778 1,306 14,169 7,077 22,359
Intermediate Term Municipal
Income Fund................. 19,249 1,080 0 1,064 10,487 0 17,113
Florida Insured Tax Free
Income Fund................. 15,409 1,105 0 496 6,656 0 12,280
New York Tax Free Income
Fund........................ 7,188 1,096 0 158 2,682 0 4,783
-------- ------- ------ ------ ------- ------ --------
Trust Total............... $134,005 $11,353 $4,074 $6,216 $65,455 $7,077 $107,874
======== ======= ====== ====== ======= ====== ========
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY YOVOVICH
- --------- -------- ------ ----- ------- ------ ------ ----- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 1995 1999 1995 1993 1984 1997 1995 1984 1999 1998
Tax Free High Income Fund.......... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
California Insured Tax Free Fund... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
Municipal Income Fund.............. 1995 1999 1995 1993 1990 1997 1995 1990 1999 1998
Intermediate Term Municipal Income
Fund............................. 1995 1999 1995 1993 1993 1997 1995 1993 1999 1998
Florida Insured Tax Free Income
Fund............................. 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
New York Tax Free Income Fund...... 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
</TABLE>
B-33
<PAGE> 656
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
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the cost of its day-to-day operations, including the compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), the charges and expenses of
legal counsel and independent accountants, distribution fees, service fees,
custodian fees, the costs of providing 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
errors 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, gross negligence on the part of the Adviser in
the performance of its obligations and duties or by reason of reckless disregard
of its obligations and duties under the agreement.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive applicable expense
limitation in any jurisdiction in which the Fund's shares are qualified for
offer and 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 fiscal 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 a 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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, 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 supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. The Fund shares together with the other Van Kampen funds in the
cost of providing such services with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, 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
B-34
<PAGE> 657
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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, 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 a vote of a majority of the Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Year ended September 30, 1999........................ $305,087 $ 32,731
Fiscal Period Ended September 30, 1998...................... $144,891 $ 16,749
Fiscal Year Ended December 31, 1997......................... $ 15,284 $128,317
</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 the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the
B-35
<PAGE> 658
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 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 contingent 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 or other
Van Kampen funds. 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.
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 the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers
B-36
<PAGE> 659
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."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary 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 financial intermediary would result in any material adverse consequences
to the Fund.
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 or 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, 1999, there were $1,048,505 and $19,502 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 3.62% and 0.63% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plans 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 contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended September 30, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $80,368 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 Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $268,806 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $203,399 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $65,407 for
fees paid to financial intermediaries for servicing Class B
B-37
<PAGE> 660
shareholders and administering the Class B Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class C Shares were $23,830 or 1.00% of the Class C Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $16,312 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class C Shares of the Fund and $7,518 for
fees paid to financial intermediaries for servicing Class C shareholders and
administering the Class C Share Plans.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend disbursing
agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas City, MO
64121-8256. 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 purchasers or sellers of securities; (b) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing all of its advisory accounts; not all of such services may be used by
the Adviser in connection with the Fund.
B-38
<PAGE> 661
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 & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("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 require 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 year ended September 30, 1999...................... $ 400 $0 $0
Fiscal period ended September 30, 1998.................... $ 880 $0 $0
Fiscal year ended December 31, 1997....................... $2,232 $0 $0
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions........... -- -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- -- --
</TABLE>
During the fiscal year ended September 30, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
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
B-39
<PAGE> 662
administrative services related to the maintenance of shareholder accounts.
Except as described in the Prospectus and this Statement of Additional
Information, after each share transaction in an account, the shareholder
receives a statement showing the activity in the account. Each shareholder who
has an account in any of the Participating Funds (as defined in the prospectus)
will receive statements quarterly from Investor Services showing any
reinvestments of dividends and capital gain dividends 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 gain dividends and systematic purchases or
redemptions. Additional shares may be purchased any time 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256 Kansas City, MO 64121-8256, 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
the fee for replacing the lost certificate equal to no more than 1.50% 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 Money Purchase and Profit Sharing 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
Shareholders can use ACH to have redemption proceeds deposited electronically
into their bank accounts. Redemption proceeds 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
redemption proceeds 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 or by calling (800) 341-2911 ((800) 421-2833) for the
hearing impaired.
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, 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
capital gain dividends 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
B-40
<PAGE> 663
investment and other requirements of the fund into which distributions would be
invested. Distributions are invested into the selected fund at its net asset
value per share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder 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 payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for monthly, quarterly,
semiannual 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 systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawal plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions 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 upon 30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than eight
exchanges out of that fund are made during a rolling 365-day period. If exchange
privileges are suspended, subsequent exchange requests for redemptions out of
that fund during the stated period will not be processed. Exchange privileges
will be restored when the account history shows fewer than eight exchanges in
the rolling 365-day period.
This policy change does not apply to money market funds, systematic exchange
plans, or employer-sponsored retirement plans.
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 contingent deferred sales
charge 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 made 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.
B-41
<PAGE> 664
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange (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) the
SEC determines trading on the Exchange is restricted; (c) the SEC determines 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 and gains or losses for federal income tax purpose upon
the sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares -- Class A Shares,"
there is no sales charge payable on Class A Shares at the time of purchase on
investments of $1 million or more, but a contingent deferred sales charge
("CDSC -- Class A") may be imposed on certain redemptions made within one year
of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholder's account not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). 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 Internal Revenue Code of 1986, as amended
(the "Code"), which in pertinent part defines a person as disabled if such
person "is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or to be of long-continued and indefinite duration." While the
Fund does not specifically adopt the balance of the Code's definition which
pertains to furnishing the Secretary of Treasury with such proof as he or she
may require, the Distributor will require satisfactory proof of death or
disability before it determines to waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived where
the decedent or disabled person is either an individual shareholder or owns the
shares as a joint tenant with right of survivorship or is the beneficial owner
of a custodial or fiduciary account, and where the redemption is made within one
year of the death or initial determination of disability. This waiver of the
CDSC-Class B and C applies to a total or partial redemption, but only to
redemptions of shares held at the time of the death or initial determination of
disability.
B-42
<PAGE> 665
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
CDSC--Class B and C 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), the financial hardship of the employee pursuant
to United States Treasury Regulations Section 401(k)-1(d)(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 THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal 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 sent to the designated payee of record. 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 systematic withdrawal plan. The
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal 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 systematic withdrawal plan and the ability to offer the
systematic withdrawal 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 value of 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.
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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 OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund 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 investment company taxable income (generally including taxable
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss), and at
least 90% of its net tax-exempt interest, and meets certain other requirements,
it will not be required to pay federal income taxes on any income it distributes
to shareholders. The Fund intends to distribute at least the minimum amount of
investment company taxable income and net tax-exempt interest necessary to
satisfy the 90% distribution requirement. The Fund will not be subject to
federal income tax on any net capital gain distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
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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 TO SHAREHOLDERS
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any, of
a person's social security and railroad retirement benefits will be includable
in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its income will constitute
tax-exempt interest, a significant portion may consist of investment company
taxable income (generally taxable income and net short-term capital gain).
Distributions of the Fund's 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 as 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
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such holder (assuming such shares are held as a capital asset). For a summary of
the maximum 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. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction. 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) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by individuals
and other non-corporate taxpayers investing in this fund 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. 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
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<PAGE> 669
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.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each Non-U.S. Shareholder the
amount of dividends paid to such shareholder and the amount, if any, of tax
withheld pursuant to backup withholding rules with respect to such dividends.
This information may also be made available to the tax authorities in the
Non-U.S. Shareholder's country of residence.
GENERAL
The federal, income tax discussion set forth above is for general information
only. Prospective investors and shareholders should consult their advisors
regarding the specific federal tax consequences of purchasing, holding and
disposing of shares, as well as the effects of state, local and foreign tax law
and any proposed tax law changes.
The table below illustrates approximate equivalent taxable and tax-free yields
at the 1998 federal individual income tax rates in effect on the date of this
Statement of Additional Information, including the 36% and 39.6% rates enacted
in August 1993 as part of the Revenue Reconciliation Act of 1993.
The table shows, for example, that a couple with a taxable income of $90,000,
or a single individual with a taxable income of $55,000, whose investments earn
a 6% tax-free yield, would have to earn approximately an 8.3% taxable yield at
current federal income tax rates to receive the same benefit.
The State of Florida imposes no income tax on individuals; accordingly, the
table reflects only the exemption from Federal income taxes. The table does not
reflect the exemption of shares of the Fund from the State's intangible tax;
accordingly, Florida residents subject to such tax would need a somewhat higher
taxable return than those shown to equal the tax-exempt return of the Florida
Fund.
1999 FEDERAL TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX -------------------------------------------------------------------------------
RETURN RETURN BRACKET 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5%
- ---------------- --------------- ------- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,750 0-43,050 15.00% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41% 10.00%
25,750-62,450 43,050-104,050 28.00% 4.86 5.56 6.25 6.94 7.64 8.33 9.03 9.72 10.42 11.11 11.81
62,450-130,250 104,050-158,550 31.00% 5.07 5.80 6.52 7.25 7.97 8.70 9.42 10.14 10.87 11.59 12.32
130,250-283,150 158,550-283,150 36.00% 5.47 6.25 7.03 7.81 8.59 9.38 10.16 10.94 11.72 12.50 13.28
Over 283,150 Over 283,150 39.60% 5.79 6.62 7.45 8.28 9.11 9.93 10.76 11.59 12.42 13.25 14.07
</TABLE>
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five year and ten year periods. Other total return
quotations, aggregate or average, over other time periods may also be included.
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 gain dividends during the period are reinvested in Fund
shares at net asset value; and that any applicable contingent deferred sales
charge has been paid. The Fund's total return will vary
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<PAGE> 670
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
capital gain dividends paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of a
contingent deferred sales charge, and if any contingent deferred sales charge
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. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
of the class of shares 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.
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From time to time marketing materials may provide a portfolio manager update,
an Adviser update and discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top sector holdings and largest holdings and other Fund information, 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 whether shareholders purchased their fund shares 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 may also be marketed on the internet.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking or rating 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
at 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 Semiannual Report contain additional performance
information. A copy of the Annual Report or Semiannual Report may be obtained
without charge by calling or writing the Fund at the telephone number and
address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum sales
charge, for Class A Shares of the Fund for (i) the one year period ended
September 30, 1999 was -8.29% and (ii) the approximately five year, two month
period from July 29, 1994 (the commencement of distribution for Class A Shares
of the Fund) through September 30, 1999 was 4.68%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1999 was 5.12%. The Fund's current distribution rate with
respect to the Class A Shares for the month ending
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<PAGE> 672
September 30, 1999 was 4.70%. The Fund's taxable equivalent distribution rate
with respect to the Class A Shares for the month ending September 30, 1999 was
7.34%.
The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
September 30, 1999 was 26.70%.
The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
September 30, 1999 was 32.99%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one year
period ended September 30, 1999 was -8.17% and (ii) the approximately five year,
two month period from July 29, 1994 (the commencement of distribution for Class
B Shares of the Fund) through September 30, 1999 was 4.73%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1999 was 4.62%. The Fund's current distribution rate with
respect to the Class B Shares for the month ending September 30, 1999 was 4.16%.
The Fund's taxable equivalent distribution rate with respect to the Class B
Shares for the month ending September 30, 1999 was 6.50%.
The Fund's cumulative non-standardized total return, including payment of the
contingent deferred sales charge, with respect to the Class B Shares from its
inception to September 30, 1999 was 27.03%.
The Fund's cumulative non-standardized total return, excluding payment of the
contingent deferred sales charge, with respect to the Class B Shares from its
inception to September 30, 1999 was 28.03%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one year
period ended September 30, 1999 was -5.42% and (ii) the approximately five year,
two month period from July 29, 1994 (the commencement of distribution for Class
C Shares of the Fund) through September 30, 1999 was 4.90%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1999 was 4.61%. The Fund's current distribution rate with
respect to the Class C Shares for the month ending September 30, 1999 was 4.15%.
The Fund's taxable equivalent distribution rate with respect to the Class C
Shares for the month ending September 30, 1999 was 6.48%.
The Fund's cumulative non-standardized total return, including payment of the
contingent deferred sales charge, with respect to the Class C Shares from its
inception to September 30, 1999 was 28.10%.
The Fund's cumulative non-standardized total return, excluding payment of the
contingent deferred sales charge, with respect to the Class C Shares from its
inception to September 30, 1999 was 28.10%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in the Fund's investment practices.
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. The Custodian also provides
accounting services to the Fund.
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SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS
KPMG LLP, 303 East Wacker Drive, Chicago, Illinois 60601, the independent
accountants for the Fund, performs an annual audit of the Fund's financial
statements.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
Squire, Sanders & Dempsey L.L.P. acts as special counsel to the Fund for Florida
disclosure and Florida tax matters.
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REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Florida Insured Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Florida Insured Tax Free Income Fund (the "Fund"), including the
portfolio of investments, as of September 30, 1999, the related statement of
operations for the year ended, the statement of changes in net assets for the
year then ended, for the nine-month period ended September 30, 1998, and for the
year 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, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Florida Insured Tax Free Income Fund as of September 30, 1999, the
results of its operations for the year then ended, the changes in its net assets
for the year then ended, for the nine-month period ended September 30, 1998, and
for the year ended December 31, 1997, and the financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.
KPMG LLP SIG
Chicago, Illinois
November 11, 1999
F-1
<PAGE> 675
PORTFOLIO OF INVESTMENTS
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 94.5%
FLORIDA 92.6%
$ 600 Alachua Cnty, FL Sch Brd Ctfs Partn
(AMBAC Insd)........................... 5.000% 07/01/18 $ 549,036
500 Bartow, FL Wtr & Swr Sys Rev (FGIC
Insd).................................. 5.125 10/01/29 450,645
940 Bay Cnty, FL Sch Brd Ctfs Partn (AMBAC
Insd).................................. 4.750 07/01/17 831,891
1,850 Boca Raton, FL Cmnty Redev Agy Tax
Increment Rev Mizner Pk Proj Rfdg (FSA
Insd).................................. * 03/01/15 775,354
465 Brevard Cnty, FL Hsg Fin Auth Single
Family Mtg Rev (GNMA Collateralized)... 6.650 09/01/21 480,610
650 Brevard Cnty, FL Sales Tax Rev (MBIA
Insd).................................. 5.750 12/01/13 660,894
1,000 Brevard Cnty, FL Sch Brd Ctfs Partn Ser
A (AMBAC Insd)......................... 5.400 07/01/12 1,009,560
370 Broward Cnty, FL Hsg Fin Auth Single
Family Mtg Rev Rfdg Ser A (GNMA
Collateralized)........................ 6.100 10/01/19 376,671
560 Broward Cnty, FL Hsg Fin Auth Single
Family Mtg Rev Rfdg Ser A (GNMA
Collateralized)........................ 6.200 04/01/30 570,864
500 Citrus Cnty, FL Hosp Brd Rev Citrus Mem
Hosp Ser A Rfdg (FSA Insd)............. 6.500 08/15/12 532,865
1,000 Dade Cnty, FL Aviation Rev Ser B (MBIA
Insd).................................. 5.600 10/01/26 984,270
1,000 Dade Cnty, FL Edl Fac Auth Rev Univ of
Miami Ser B (MBIA Insd)................ 5.750 04/01/20 1,003,660
500 Dade Cnty, FL Sch Brd Ctfs Partn Ser A
(Prerefunded @ 05/01/04) (MBIA Insd)... 5.750 05/01/08 530,720
500 Dade Cnty, FL Sch Brd Ctfs Partn Ser A
(Prerefunded @ 05/01/04) (MBIA Insd)... 6.000 05/01/14 535,850
750 Dade Cnty, FL Wtr & Swr Sys Rev (FGIC
Insd).................................. 5.375 10/01/16 732,855
900 Daytona Beach, FL Wtr & Swr Rev Rfdg
(AMBAC Insd)........................... 5.750 11/15/10 936,306
1,000 Escambia Cnty, FL Util Auth Util Sys
Rev Ser B (FGIC Insd).................. * 01/01/15 423,070
1,500 Florida Ports Fin Comm Rev St Trans
Trust Fd Intermodal Pgm (FGIC Insd)
(a).................................... 5.500 10/01/29 1,439,445
3,250 Florida St Brd of Edl Cap Outlay Pub
Edl Ser A Rfdg (FGIC Insd)............. 4.500 06/01/23 2,653,690
500 Florida St Brd of Edl Cap Outlay Pub
Edl Ser B Rfdg (MBIA Insd)............. 4.500 06/01/24 405,415
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 676
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$2,500 Florida St Brd of Edl Cap Outlay Pub
Edl Ser C (MBIA Insd).................. 5.600% 06/01/20 $ 2,477,125
3,250 Florida St Brd of Edl Lottery Rev Ser B
(FGIC Insd)............................ 5.250 07/01/13 3,223,025
1,750 Florida St Brd of Regts Univ Sys Impt
Rev (MBIA Insd)........................ 5.625 07/01/19 1,741,565
2,000 Florida St Brd of Regts Univ Sys Impt
Rev (AMBAC Insd)....................... 4.500 07/01/23 1,628,060
1,750 Florida St Div Bond Fin Dept Genl Svcs
Rev Dept Envrnmtl Presvtn 2000 Ser A
(AMBAC Insd) (b)....................... 5.000 07/01/12 1,700,842
2,000 Florida St Tpk Auth Tpk Rev Dept Trans
Ser A (FGIC Insd)...................... 4.500 07/01/27 1,620,940
2,000 Florida St Tpk Auth Tpk Rev Dept Trans
Ser B (MBIA Insd)...................... 5.000 07/01/16 1,863,280
1,300 Greater Orlando Aviation Auth Orlando
FL Arpt Facs Rev Ser A (FGIC Insd)..... 5.125 10/01/28 1,158,391
1,450 Hillsborough Cnty, FL Edl Fac Univ
Tampa Proj Rfdg........................ 5.750 04/01/18 1,410,603
500 Hillsborough Cnty, FL Hosp Auth Hosp
Rev Tampa Genl Hosp Proj Rfdg (FSA
Insd).................................. 6.375 10/01/13 530,985
750 Hillsborough Cnty, FL Indl Dev Auth
Pollutn Ctl Rev Tampa Elec Co Proj Rfdg
(MBIA Insd)............................ 6.250 12/01/34 767,948
1,300 Indian River Cnty, FL Hosp Rev Rfdg
(FSA Insd) (b)......................... 5.700 10/01/15 1,309,555
1,000 Indian River Cnty, FL Hosp Rev Rfdg
(FSA Insd)............................. 6.100 10/01/18 1,013,460
1,000 Jacksonville, FL Elec Auth Rev Saint
John's Pwr-2 Ser 7 Rfdg (MBIA Insd).... 5.500 10/01/14 997,470
1,000 Jacksonville, FL Wtr & Swr Rev United
Wtr FL Proj (AMBAC Insd)............... 6.350 08/01/25 1,038,920
745 Lee Cnty, FL Hsg Fin Auth Single Family
Mtg Rev Multi-Cnty Pgm Ser A (GNMA
Collateralized)........................ 7.450 09/01/27 829,967
1,000 Lee Cnty, FL Wtr & Swr Rev Ser A (AMBAC
Insd).................................. 5.000 10/01/29 883,660
330 Leon Cnty, FL Sch Dist Rfdg (AMBAC
Insd) (a).............................. 5.000 07/01/08 328,429
885 Manatee Cnty, FL Hsg Fin Auth Mtg Rev
(GNMA Collateralized).................. 6.875 11/01/26 949,932
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 677
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$ 835 Martin Cnty, FL Consolidated Util Sys
Rev (FGIC Insd)........................ 5.750% 10/01/08 $ 876,900
750 Martin Cnty, FL Indl Dev Auth Indl Dev
Rev Indiantown Cogeneration Proj Ser A
Rfdg................................... 7.875 12/15/25 777,870
545 Melbourne, FL Arpt Rev Rfdg (MBIA
Insd).................................. 6.250 10/01/18 565,416
500 Miramar, FL Wastewtr Impt Assmt Rev
(FGIC Insd)............................ 6.750 10/01/25 553,660
1,250 North Broward, FL Hosp Dist Rev Rfdg &
Impt (MBIA Insd)....................... 5.375 01/15/24 1,189,712
775 Orange Cnty, FL Hsg Fin Auth Single
Family Mtg Rev (GNMA Collateralized)... 6.550 10/01/21 799,033
1,000 Orange Cnty, FL Sch Brd Ctfs Partn Ser
A (MBIA Insd).......................... 5.000 08/01/20 904,460
900 Orange Cnty, FL Tourist Dev Tax Rev Ser
B (Prerefunded @ 10/01/02) (AMBAC
Insd).................................. 6.500 10/01/19 971,856
750 Palm Beach Cnty, FL Hlth Fac Auth Rev
Abbey Delray South Proj Rfdg........... 5.500 10/01/11 731,243
1,550 Palm Beach Cnty, FL Hlth Fac Auth Rev
Retirement Cmnty....................... 5.625 11/15/20 1,450,025
450 Palm Beach Cnty, FL Hlth Fac Auth Rev
Waterford Proj Rfdg.................... 5.500 10/01/15 424,589
750 Palm Beach Cnty, FL Sch Brd Ctfs Partn
Ser A (Prerefunded @ 08/01/04) (AMBAC
Insd).................................. 6.375 08/01/15 817,965
1,000 Polk Cnty, FL Indl Dev Auth Tampa Elec
Co Proj................................ 5.850 12/01/30 993,520
1,100 Port Saint Lucie, FL Spl Assmt Rev Util
Svc Area No 3 & 4A (MBIA Insd) (a)..... 5.000 10/01/18 1,005,972
1,000 Santa Rosa Bay Brdg Auth FL Rev........ 6.250 07/01/28 1,016,380
750 Sarasota Cnty, FL Util Sys Rev
(Prerefunded @ 10/01/04) (FGIC Insd)... 6.500 10/01/14 829,957
4,750 Sunrise, FL Util Sys Rev Rfdg (AMBAC
Insd).................................. 5.000 10/01/28 4,228,735
1,000 Tampa Bay Wtr FL Util Sys Rev Ser A
Rfdg (FGIC Insd)....................... 4.750 10/01/27 837,960
1,000 Tampa, FL Hosp Rev Cap Impt H Lee
Moffitt Ser A.......................... 5.750 07/01/29 938,470
1,000 Volusia Cnty, FL Edl Fac Auth Rev Edl
Facs Embry Riddle Ser B Rfdg (AMBAC
Insd).................................. 5.250 10/15/19 944,910
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 678
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$1,000 Volusia Cnty, FL Edl Fac Auth Rev Edl
Facs Embry Riddle Ser B Rfdg (AMBAC
Insd).................................. 5.250% 10/15/22 $ 937,170
1,000 Volusia Cnty, FL Edl Fac Auth Rev
Stetson Univ Proj Ser A (MBIA Insd).... 5.500 06/01/26 970,660
500 Volusia Cnty, FL Hlth Fac Auth Rev Hosp
Fac Mem Hlth Rfdg & Impt (AMBAC
Insd).................................. 5.750 11/15/13 509,460
1,000 Volusia Cnty, FL Hlth Fac Auth Rev John
Knox Hlthcare Rfdg (Asset Gty Insd).... 6.000 06/01/17 1,005,600
1,000 Volusia Cnty, FL Sch Brd Ctfs Partn
Master Lease Pgm (FSA Insd)............ 5.500 08/01/24 974,160
-----------
66,613,511
-----------
PUERTO RICO 1.9%
670 Puerto Rico Comwlth Hwy & Tran Auth Hwy
Rev Ser V Rfdg......................... 6.625 07/01/12 710,950
650 Puerto Rico Pub Bldgs Auth Gtd Pub Edl
& Hlth Fac Ser M Rfdg (FSA Insd)....... 5.750 07/01/15 662,188
-----------
1,373,138
-----------
TOTAL LONG-TERM INVESTMENTS 94.5%
(Cost $68,443,300).................................................. 67,986,649
SHORT-TERM INVESTMENTS 3.5%
(Cost $2,500,000)................................................... 2,500,000
-----------
TOTAL INVESTMENTS 98.0%
(Cost $70,943,300).................................................. 70,486,649
OTHER ASSETS IN EXCESS OF LIABILITIES 2.0%........................... 1,422,053
-----------
NET ASSETS 100.0%.................................................... $71,908,702
===========
</TABLE>
* Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
AMBAC--AMBAC Indemnity Corporation
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
Asset Gty--Asset Guaranty Insurance Company
See Notes to Financial Statements
F-5
<PAGE> 679
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $70,943,300)........................ $70,486,649
Cash........................................................ 37,092
Receivables:
Investments Sold.......................................... 2,350,796
Fund Shares Sold.......................................... 1,865,207
Interest.................................................. 1,346,509
Expense Reimbursement from Advisor........................ 15,450
Other....................................................... 3,056
-----------
Total Assets.......................................... 76,104,759
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 3,758,202
Income Distributions...................................... 131,844
Distributor and Affiliates................................ 102,716
Fund Shares Repurchased................................... 42,456
Trustees' Deferred Compensation and Retirement Plans........ 101,549
Accrued Expenses............................................ 59,290
-----------
Total Liabilities..................................... 4,196,057
-----------
NET ASSETS.................................................. $71,908,702
===========
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $73,656,525
Accumulated Distributions in Excess of Net Investment
Income.................................................... (57,917)
Net Unrealized Depreciation................................. (456,651)
Accumulated Net Realized Loss............................... (1,233,255)
-----------
NET ASSETS.................................................. $71,908,702
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $39,811,908 and 2,731,287 shares of
beneficial interest issued and outstanding)............. $ 14.58
Maximum sales charge (4.75%* of offering price)......... .73
-----------
Maximum offering price to public........................ $ 15.31
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $28,990,141 and 1,988,805 shares of
beneficial interest issued and outstanding)............. $ 14.58
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,106,653 and 212,904 shares of
beneficial interest issued and outstanding)............. $ 14.59
===========
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 680
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 3,418,318
-----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $85,959, $271,199, and $23,808,
respectively)............................................. 380,966
Investment Advisory Fee..................................... 319,038
Accounting.................................................. 60,622
Shareholder Services........................................ 31,297
Trustees' Fees and Related Expenses......................... 28,891
Shareholder Reports......................................... 26,165
Legal....................................................... 15,425
Amortization of Organizational Costs........................ 11,102
Custody..................................................... 8,032
Other....................................................... 48,426
-----------
Total Expenses.......................................... 929,964
Expense Reduction ($319,038 related to Advisory Fees and
$147,311 related to Other Expenses)................... 466,349
Less Credits Earned on Cash Balances.................... 3,466
-----------
Net Expenses............................................ 460,149
-----------
NET INVESTMENT INCOME....................................... $ 2,958,169
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ (962,695)
Futures................................................... 12,227
-----------
Net Realized Loss........................................... (950,468)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 4,590,349
End of the Period......................................... (456,651)
-----------
Net Unrealized Depreciation During the Period............... (5,047,000)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(5,997,468)
===========
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $(3,039,299)
===========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 681
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1999,
the Nine Months Ended September 30, 1998
and Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................ $ 2,958,169 $ 1,689,056 $ 2,104,005
Net Realized Gain/Loss............... (950,468) 310,611 (593,398)
Net Unrealized
Appreciation/Depreciation During
the Period......................... (5,047,000) 952,580 2,178,761
------------ ----------- -----------
Change in Net Assets from
Operations......................... (3,039,299) 2,952,247 3,689,368
------------ ----------- -----------
Distributions from Net Investment
Income............................. (2,958,015) (1,689,056) (2,104,005)
Distributions in Excess of Net
Investment Income.................. -0- (53,515) (24,977)
------------ ----------- -----------
Distributions from and in Excess of
Net Investment Income*............. (2,958,015) (1,742,571) (2,128,982)
Distributions from Net Realized
Gain*.............................. -0- -0- (28,108)
------------ ----------- -----------
Total Distributions.................. (2,958,015) (1,742,571) (2,157,090)
------------ ----------- -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES.............. (5,997,314) 1,209,676 1,532,278
------------ ----------- -----------
FROM CAPITAL TRANSACTIONS
Proceeds from Shares Sold............ 40,933,657 11,498,972 15,913,603
Net Asset Value of Shares Issued
Through Dividend Reinvestment...... 1,349,269 804,084 999,451
Cost of Shares Repurchased........... (16,727,671) (14,206,014) (7,278,428)
------------ ----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS....................... 25,555,255 (1,902,958) 9,634,626
------------ ----------- -----------
TOTAL INCREASE/DECREASE IN NET
ASSETS............................. 19,557,941 (693,282) 11,166,904
NET ASSETS:
Beginning of the Period.............. 52,350,761 53,044,043 41,877,139
------------ ----------- -----------
End of the Period (Including
accumulated distributions in excess
of net investment income of
$57,917, $58,071 and $4,556,
respectively)...................... $ 71,908,702 $52,350,761 $53,044,043
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
*Distributions by Class
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares...................... $(1,709,865) $ (981,519) $(1,223,114)
Class B Shares...................... (1,147,849) (722,360) (878,013)
Class C Shares...................... (100,301) (38,692) (27,855)
----------- ----------- -----------
$(2,958,015) $(1,742,571) $(2,128,982)
=========== =========== ===========
Distributions from Net Realized Gain:
Class A Shares...................... $ -0- $ -0- $ (14,898)
Class B Shares...................... -0- -0- (12,813)
Class C Shares...................... -0- -0- (397)
----------- ----------- -----------
$ -0- $ -0- $ (28,108)
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 682
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
Year Nine Months of Investment
Ended Ended Year Ended December 31, Operations) to
September 30, September 30, ---------------------------- December 31,
Class A Shares 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................... $15.921 $15.550 $15.060 $ 15.203 $13.796 $14.300
------- ------- ------- -------- ------- -------
Net Investment Income........ .778 .564 .766 .784 .789 .291
Net Realized and Unrealized
Gain/Loss.................. (1.353) .388 .508 (.153) 1.416 (.507)
------- ------- ------- -------- ------- -------
Total from Investment
Operations................... (.575) .952 1.274 .631 2.205 (.216)
------- ------- ------- -------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income..................... .770 .581 .774 .774 .798 .288
Distributions from Net
Realized Gain.............. -0- -0- .010 -0- -0- -0-
------- ------- ------- -------- ------- -------
Total Distributions............ .770 .581 .784 .774 .798 .288
------- ------- ------- -------- ------- -------
Net Asset Value, End of the
Period....................... $14.576 $15.921 $15.550 $ 15.060 $15.203 $13.796
======= ======= ======= ======== ======= =======
Total Return* (a).............. (3.74%) 6.26%** 8.72% 4.37% 16.29% (1.47%)**
Net Assets at End of the Period
(In millions)................ $ 39.8 $ 27.1 $ 29.3 $ 22.2 $ 16.2 $ 9.0
Ratio of Expenses to Average
Net Assets*.................. .37% .60% .59% .28% .44% .49%
Ratio of Net Investment Income
to Average Net Assets*....... 4.98% 4.85% 5.05% 5.31% 5.33% 5.13%
Portfolio Turnover............. 101% 50%** 48% 73% 41% 19%**
* If certain expenses had not
been assumed by Van Kampen,
total return would have been
lower and the ratios would
have been as follows:
Ratio of Expenses to Average
Net Assets................... 1.10% 1.30% 1.29% 1.47% 1.70% 1.99%
Ratio of Net Investment Income
to Average Net Assets........ 4.25% 4.15% 4.35% 4.13% 4.07% 3.64%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
F-9
<PAGE> 683
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
Year Nine Months of Investment
Ended Ended Year Ended December 31, Operations) to
September 30, September 30, ------------------------------ December 31,
Class B Shares 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................. $15.925 $ 15.554 $ 15.064 $ 15.201 $13.792 $14.300
------- -------- --------- -------- ------- -------
Net Investment Income...... .658 .478 .650 .677 .685 .251
Net Realized and Unrealized
Gain/Loss................ (1.350) .388 .510 (.154) 1.415 (.509)
------- -------- --------- -------- ------- -------
Total from Investment
Operations................. (.692) .866 1.160 .523 2.100 (.258)
------- -------- --------- -------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income................... .656 .495 .660 .660 .691 .250
Distributions from Net
Realized Gain............ -0- -0- .010 -0- -0- -0-
------- -------- --------- -------- ------- -------
Total Distributions.......... .656 .495 .670 .660 .691 .250
------- -------- --------- -------- ------- -------
Net Asset Value, End of the
Period..................... $14.577 $ 15.925 $ 15.554 $ 15.064 $15.201 $13.792
======= ======== ========= ======== ======= =======
Total Return* (a)............ (4.51%) 5.74%** 7.91% 3.58% 15.53% (1.81%)**
Net Assets at End of the
Period (In millions)....... $ 29.0 $ 23.6 $ 22.5 $ 18.9 $ 16.9 $ 10.9
Ratio of Expenses to Average
Net Assets*................ 1.13% 1.35% 1.33% 1.03% 1.12% 1.26%
Ratio of Net Investment
Income to Average Net
Assets*.................... 4.23% 4.09% 4.30% 4.56% 4.66% 4.31%
Portfolio Turnover........... 101% 50%** 48% 73% 41% 19%**
* If certain expenses had not
been assumed by Van Kampen,
total return would have
been lower and the ratios
would have been as follows:
Ratio of Expenses to Average
Net Assets................. 1.86% 2.05% 2.03% 2.22% 2.38% 2.75%
Ratio of Net Investment
Income to Average Net
Assets..................... 3.50% 3.39% 3.60% 3.38% 3.40% 2.81%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
F-10
<PAGE> 684
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
Year Nine Months of Investment
Ended Ended Year Ended December 31, Operations) to
September 30, September 30, ----------------------------- December 31,
Class C Shares 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................. $ 15.941 $ 15.581 $ 15.081 $ 15.213 $13.786 $14.300
-------- -------- -------- -------- ------- -------
Net Investment Income....... .662 .483 .666 .668 .690 .249
Net Realized and Unrealized
Gain/Loss................. (1.355) .372 .504 (.140) 1.428 (.513)
-------- -------- -------- -------- ------- -------
Total from Investment
Operations.................. (.693) .855 1.170 .528 2.118 (.264)
-------- -------- -------- -------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income.................... .656 .495 .660 .660 .691 .250
Distribution from Net
Realized Gain............. -0- -0- .010 -0- -0- -0-
-------- -------- -------- -------- ------- -------
Total Distributions........... .656 .495 .670 .660 .691 .250
-------- -------- -------- -------- ------- -------
Net Asset Value, End of the
Period...................... $ 14.592 $ 15.941 $ 15.581 $ 15.081 $15.213 $13.786
======== ======== ======== ======== ======= =======
Total Return* (a)............. (4.51%) 5.60%** 7.97% 3.65% 15.61% (1.81%)**
Net Assets at End of the
Period (In thousands)....... $3,106.7 $1,622.4 $1,195.1 $ 849.2 $ 461.8 $ 11.4
Ratio of Expenses to Average
Net Assets*................. 1.14% 1.32% 1.37% 1.03% 1.13% 1.26%
Ratio of Net Investment Income
to Average Net Assets*...... 4.28% 4.08% 4.38% 4.56% 4.51% 4.28%
Portfolio Turnover............ 101% 50%** 48% 73% 41% 19%**
* If certain expenses had not
been assumed by Van Kampen,
total return would have been
lower and the ratios would
have been as follows:
Ratio of Expenses to Average
Net Assets.................. 1.87% 2.03% 2.06% 2.22% 2.39% 2.74%
Ratio of Net Investment Income
to Average Net Assets....... 3.55% 3.38% 3.68% 3.38% 3.25% 2.87%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
F-11
<PAGE> 685
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Florida Insured Tax Free Income Fund (the "Fund") is organized as a
series of the Van Kampen Tax Free Trust, a Delaware business trust, and is
registered as a non-diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to provide investors a high level of current income exempt from federal income
and Florida state intangibles taxes, consistent with preservation of capital.
Under normal market conditions, the Fund will invest at least 80% of its assets
in insured Florida municipal securities. The Fund commenced investment
operations on July 29, 1994.
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--Municipal bonds are valued by independent pricing
services or dealers using the mean of the bid and asked prices or, in the
absence of market quotations, at fair value based upon yield data relating to
municipal bonds with similar characteristics and general market conditions.
Securities which are not valued by independent pricing services are valued at
fair value using procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount on securities purchased are amortized over
the
F-12
<PAGE> 686
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
expected life of each applicable security. Income and expenses of the Fund are
allocated on a pro rata basis to each class of shares, except for distribution
and service fees and transfer agency costs which are unique to each class of
shares.
D. ORGANIZATIONAL COSTS--The Fund has reimbursed Van Kampen Funds Inc. or its
affiliates (collectively "Van Kampen") for costs incurred in connection with the
Fund's organization in the amount of $70,000. These costs were amortized on a
straight line basis over the 60 month period ending July 28, 1999.
E. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, if any, to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such losses against any future realized capital gains.
At September 30, 1999, the Fund had an accumulated capital loss carryforward for
tax purposes of $240,022 which will expire on September 30, 2005. Net realized
gains or losses differ for financial reporting and tax purposes as a result of
post October 31 losses which are not realized for tax purposes until the first
day of the following fiscal year.
At September 30, 1999, for federal income tax purposes the cost of long- and
short-term investments is $70,943,300, the aggregate gross unrealized
appreciation is $1,309,229 and the aggregate gross unrealized depreciation is
$1,765,880, resulting in net unrealized depreciation on long- and short-term
investments of $456,651.
F. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Due to inherent differences in the recognition of expenses
under generally accepted accounting principles and federal income tax purposes,
the amount of distributed net investment income may differ for a particular
period. These differences are temporary in nature, but may result in book basis
distribution in excess of net investment income for certain periods.
F-13
<PAGE> 687
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
G. EXPENSE REDUCTIONS--During the year ended September 30, 1999, the Fund's
custody fee was reduced by $3,466 as a result of credits earned on overnight
cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ---------------------------------------------------------------------
<S> <C>
First $500 million.................................... .500 of 1%
Over $500 million..................................... .450 of 1%
</TABLE>
For the year ended September 30, 1999, the Adviser voluntarily waived
$319,038 of its investment advisory fees and assumed $147,311 of the Fund's
other expenses. This waiver is voluntary in nature and can be discontinued at
the Adviser's discretion.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $4,400 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $71,700 representing Van Kampen's cost of providing accounting and
legal services to the Fund. All of these expenses were assumed by Van Kampen.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended September 30,
1999, the Fund recognized expenses of approximately $15,100. All of these
expenses were assumed by Van Kampen. 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, 1999, Van Kampen owned 100 shares each of Classes A, B and
C.
F-14
<PAGE> 688
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
At September 30, 1999, capital aggregated $40,884,308, $29,507,619 and
$3,264,598 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 1,535,773 $ 23,866,507
Class B.................................... 915,485 14,180,809
Class C.................................... 186,134 2,886,341
---------- ------------
Total Sales.................................. 2,637,392 $ 40,933,657
========== ============
Dividend Reinvestment:
Class A.................................... 52,779 $ 808,309
Class B.................................... 32,141 494,596
Class C.................................... 3,009 46,364
---------- ------------
Total Dividend Reinvestment.................. 87,929 $ 1,349,269
========== ============
Repurchases:
Class A.................................... (560,294) $ (8,714,774)
Class B.................................... (441,657) (6,786,954)
Class C.................................... (78,013) (1,225,943)
---------- ------------
Total Repurchases............................ (1,079,964) $(16,727,671)
========== ============
</TABLE>
F-15
<PAGE> 689
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At September 30, 1998, capital aggregated $24,924,266, $21,619,168 and
$1,557,836 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 352,234 $ 5,494,787
Class B..................................... 320,092 4,997,538
Class C..................................... 64,525 1,006,647
-------- ------------
Total Sales................................... 736,851 $ 11,498,972
======== ============
Dividend Reinvestment:
Class A..................................... 30,117 $ 469,824
Class B..................................... 19,918 310,753
Class C..................................... 1,504 23,507
-------- ------------
Total Dividend Reinvestment................... 51,539 $ 804,084
======== ============
Repurchases:
Class A..................................... (566,619) $ (8,834,774)
Class B..................................... (303,798) (4,731,240)
Class C..................................... (40,958) (640,000)
-------- ------------
Total Repurchases............................. (911,375) $(14,206,014)
======== ============
</TABLE>
F-16
<PAGE> 690
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $27,794,429, $21,042,117 and
$1,167,682 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 609,339 $ 9,274,646
Class B..................................... 384,943 5,831,452
Class C..................................... 52,399 807,505
--------- -----------
Total Sales................................... 1,046,681 $15,913,603
========= ===========
Dividend Reinvestment:
Class A..................................... 39,223 $ 594,339
Class B..................................... 25,536 387,076
Class C..................................... 1,188 18,036
--------- -----------
Total Dividend Reinvestment................... 65,947 $ 999,451
========= ===========
Repurchases:
Class A..................................... (232,349) $(3,502,983)
Class B..................................... (216,650) (3,274,422)
Class C..................................... (33,195) (501,023)
--------- -----------
Total Repurchases............................. (482,194) $(7,278,428)
========= ===========
</TABLE>
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-17
<PAGE> 691
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
For the year ended September 30, 1999, Van Kampen as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $32,200 and CDSC on redeemed shares of approximately $115,000.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the year ended September 30, 1999, the cost of purchases and proceeds from
sales of investments, excluding short-term investments, were $82,654,221 and
$63,963,114, 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, cash or liquid 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-18
<PAGE> 692
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
Transactions in futures contracts, each with a par value of $100,000, for
the year ended September 30, 1999, were as follows.
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at September 30, 1998......................... -0-
Futures Opened............................................ 30
Futures Closed............................................ (30)
---
Outstanding at September 30, 1999......................... -0-
===
</TABLE>
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended September 30, 1999, are payments retained by Van Kampen of
approximately $222,300.
F-19
<PAGE> 693
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
the 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 investment adviser seeks
to achieve the Fund's 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, Policies and Risks.................... B-3
Strategic Transactions...................................... B-10
Investment Restrictions..................................... B-15
Trustees and Officers....................................... B-16
Investment Advisory Agreement............................... B-25
Other Agreements............................................ B-25
Distribution and Service.................................... B-26
Transfer Agent.............................................. B-29
Portfolio Transactions and Brokerage Allocation............. B-29
Shareholder Services........................................ B-30
Redemption of Shares........................................ B-32
Contingent Deferred Sales Charge-Class A.................... B-33
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-33
Taxation.................................................... B-35
Fund Performance............................................ B-39
Other Information........................................... B-42
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-15
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 2000.
B-1
<PAGE> 694
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. ("Morgan Stanley Dean Witter"). 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 and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, which can be divided
into series such as the Fund and further subdivided into classes of each series.
Each share represents an equal proportionate interest in the assets of the
series with each other share in such series and no interest in any other series.
No series is subject to the liabilities of any other series. The Declaration of
Trust provides that shareholders are not liable for any liabilities of the Trust
or any of its series, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its series and indemnifies
shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Other classes may be established from time to
time in accordance with provisions of the Declaration of Trust. Each class of
shares of the Fund generally are identical in all respects except that each
class bears certain distribution expenses and has exclusive voting rights with
respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to
B-2
<PAGE> 695
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 less 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 December 31, 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 DECEMBER 31, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
BNY Clearing Services LLC................................... 212,842 A 10.02%
A/C 4984-8420
Patricia Lanza
111 E. Kilbourn Ave.
Milwaukee, WI 53202-6611
Dean Witter FBO............................................. 107,993 A 5.09%
Helen E. Fosburgh
P.O. Box 250
New York, NY 10008-0250
Painewebber For The Benefit of.............................. 33,766 C 9.32%
Mrs. Diana Riklis
1020 Park Ave
New York, NY 10028-0913
MLPF&S For the Sole Benefit of its Customers................ 18,919 C 5.22%
Attn Fund Administration 97F02
4800 Deer Lake Dr. E. 2nd FL
Jacksonville, FL 32246-6484
Salomon Smith Barney Inc.................................... 28,023 C 7.74%
00124607845
333 West 34th St - 3rd Floor
New York, NY 10001-2483
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RISKS
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.
B-3
<PAGE> 696
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. The Fund may invest in shorter term municipal securities
when yields are greater than yields available on longer term municipal
securities, for temporary defensive purposes or when redemption requests are
expected. The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special obligation" securities, which include
"industrial revenue bonds." General obligation securities are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation securities are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source, such as from the user of the facility being financed. The Fund
may also invest in "moral obligation" bonds which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment but
not a legal obligation of the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 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
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floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
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.
SPECIAL CONDITIONS REGARDING NEW YORK MUNICIPAL SECURITIES
As described in the Prospectus, except during temporary periods, the Fund will
invest primarily 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
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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 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.
The service 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 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 produces
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.
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 business and retail businesses, such
as department stores and eating and drinking establishments.
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 the sector accounts for under one-tenth of all nonagricultural
jobs in the state, it contributes over one-sixth of all non-farm labor and
proprietors' income.
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 diary 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.
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 to propose a
balanced budget each year. Preliminary analysis by the State Department of
Budget (DOB) indicates that the State will have a 2000-01 budget gap of
approximately $1.9 billion, or about $300 million above the 1999-2000 Executive
Budget estimate (after adjusting for the projected costs of collective
bargaining agreements, $500 million in assumed operating efficiencies, as well
as the planned application of approximately $615 million of the $1.82 billion
tax reduction reserve. In recent years, the State has closed projected budget
gaps which DOB estimates at $5.0 billion (1995-96), $3.9 billion (1996-97), $2.3
billion (1997-98), and less than $1 billion (1998-99). DOB will formally update
its projections of receipts and disbursements for future years as part of the
Governor's 2000-01 Executive Budget recommendations.
The State and the United University Professionals (UUP) union have reached a
tentative agreement on a new four-year labor contact. The State is continuing
negotiations with other unions representing State employees, the largest of
which is the Civil Service Employees Association (CSEA). CSEA previously failed
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to ratify a tentative agreement on a new four-year contract earlier in 1999. The
1999-2000 Financial Plan has reserved $100 million for possible collective
bargaining agreements, and reserves are contained in the preliminary outyear
projection for 2000-01 to cover the recurring costs of any new agreements. To
the extent these reserves are inadequate to finance such agreements, the costs
of new labor contracts could increase the size of future budget gaps.
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. The State assumes
that the 2000-01 Financial Plan will achieve $500 million in savings from
initiatives by State agencies to deliver services more efficiently, workforce
management efforts, maximization of federal and non-General Fund spending
offsets, and other actions necessary to help bring projected disbursements and
receipts into balance. The projections do not assume any gap-closing benefit
from the potential settlement of State claims against the tobacco industry.
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.
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.
The fiscal health of the State may also be affected by the fiscal health of
New York City, which continues to receive significant financial assistance from
the State. State aid contributes to the City's ability to balance its budget and
meet its cash requirements. The State may also be affected by the ability of the
City and certain entities issuing debt for the benefit of the City to market
their securities successfully in the public credit markets. The City has
achieved balance operating results for each of its fiscal years since 1981 as
measured by the GAAP standards in force at that time. The City prepares a
four-year financial plan annually and updates it periodically, and prepares a
comprehensive annual financial report each October describing its most recent
fiscal year.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the State
established the Municipal Assistance Corporation for the City of New York (NYC
MAC) to provide financing assistance to the City; the New York State Financial
Control Board (the Control Board) to oversee the City's financial affairs; and
the Office of the State Deputy Comptroller for the City of New York (OSDC) to
assist the Control Board in exercising its powers and responsibilities. A
"control period" existed from 1975 to 1986, during which the City was subject to
certain statutorily-prescribed fiscal controls. The Control Board terminated the
control period in 1986 when certain statutory conditions were met. State law
requires the Control Board to reimpose a control period upon the occurrence, or
"substantial likelihood and imminence" of the occurrence, of certain events,
including (but not limited to) a City operating budget deficit of more than $100
million or impaired access to the public credit markets.
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Currently, the City and its covered Organizations (i.e., those organizations
which receive or may receive moneys from the City directly, indirectly or
contingently) operate under the City's Financial Plan. The City's Financial Plan
summarizes its capital, revenue and expense projection and outlines proposed
gap-closing programs for years with projected budget gaps. The City's
projections set forth in its Financial Plan are based on various assumptions and
contingencies, some of which are uncertain and may not materialize. Unforeseen
developments an changes in major assumptions could significantly affect the
City's availability to balance its budget as required by State law and to meet
its annual cash flow and financing requirements.
To successfully implement its Financial Plan, the City an certain entities
issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In City fiscal year 1997-98, the State constitutional debt limit would have
prevented the City from entering into new capital contracts. Therefore, in 1997,
the State created the New York Transitional Finance Authority (TFA) in order to
finance a portion of the City's capital program. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken it will reach its debt limit in City's current fiscal year 1999-2000. To
continue its capital plan without interruption, the City is proposing an
amendment to the State Constitution to change the methodology used to calculate
the debt limit. Since an amendment to the Constitution to raise the debt limit
could not take effect until City fiscal year 2001-02 at the earliest, the City
has decided to securitize a portion of its share of the proceeds from the
settlement with the nation's tobacco companies. However, a number of potential
deployments may affect both the availability and level of funding the City will
receive from the tobacco settlement. City officials have indicated that, should
their efforts to securitize a portion of City tobacco settlement proceeds fail
or not be accomplished in a timely manner, the City will request that the State
increase the borrowing authority of the TFA.
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, 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 conditions 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 of 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 above is intended only as a
general summary and not a discussion of any specific factors that may affect any
particular issuer of New York municipal securities.
"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
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available on municipal securities when delivery occurs may be higher or lower
than yields on the municipal securities obtained pursuant to such transactions.
Because the Fund relies on the buyer or seller, as the case may be, to
consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase municipal securities on such basis only with the
intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent the Fund engages in "when-issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purposes of investment leverage. No specific limitation
exists as to the percentage of the Fund's assets which may be used to acquire
securities on a "when-issued" or "delayed delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year.
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 for which market quotations are not readily available 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 typically 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, as amended from time to time.
NON-DIVERSIFICATION
The Fund is a "non-diversified" investment company, which means the Fund is
not limited in the proportion of its assets that may be invested in the
securities of a single issuer. However, the Fund intends to conduct its
operations so as to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Fund
qualifies as a regulated investment company under the Code, it
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will be relieved of any liability for federal income tax to the extent its
earnings are distributed to shareholders. In order to qualify, among other
requirements, the Fund must limit its investments so that, at the close of each
calendar quarter, (i) not more than 25% of the market value of the Fund's total
assets are invested in securities of a single issuer (other than the U.S.
government, its agencies and instrumentalities), and (ii) at least 50% of the
market value of its total assets is invested in cash, securities of the U.S.
government, its agencies and instrumentalities and other securities limited in
respect of any one issuer to an amount not greater than 5% of the market value
of the Fund's total assets. Since the Fund, as a non-diversified investment
company, may invest in a smaller number of individual issuers than a diversified
investment company, an investment in the Fund may, under certain circumstances,
present greater risks to an investor than an investment in a diversified
company.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various Strategic Transactions (as
defined in the Prospectus) to earn income, facilitate portfolio management and
mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Fund's Adviser seeks to use such transactions to further the Fund's
investment objective, no assurance can be given that the use of these
transactions will achieve this result.
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
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<PAGE> 703
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though 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
B-11
<PAGE> 704
those with respect to futures and options thereon. In selling put options, there
is a risk that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
futures contracts and options thereon would exceed 5% of the Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is 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
B-12
<PAGE> 705
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash and liquid
securities with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities 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.
B-13
<PAGE> 706
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of cash and liquid securities equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out cash and liquid securities equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of cash and liquid securities equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash and liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of the Code for qualification as a regulated investment company.
B-14
<PAGE> 707
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
may not be changed without shareholder 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 at the meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy; or (ii) more than 50% of the Fund's outstanding voting
securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitation on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. 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 CFTC.
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.
B-15
<PAGE> 708
9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs, except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.
10. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent that Strategic Transactions the Fund
may engage in are considered to be commodities or commodities contracts.
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. Trustee/Director of each of the
1632 Morning Mountain Road funds in the Fund Complex. Co-founder, and prior to
Raleigh, NC 27614 August 1996, Chairman, Chief Executive Officer and
Date of Birth: 07/14/32 President, MDT Corporation (now known as
Age: 67 Getinge/Castle, Inc., a subsidiary of Getinge
Industrier AB), a company which develops,
manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
Age: 61 January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in
233 South Wacker Drive the Fund Complex. Prior to 1997, Partner, Ray &
Suite 7000 Berndtson, Inc., an executive recruiting and
Chicago, IL 60606 management consulting firm. Formerly, Executive Vice
Date of Birth: 06/03/48 President of ABN AMRO, N.A., a Dutch bank holding
Age: 51 company. Prior to 1992, 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.
</TABLE>
B-16
<PAGE> 709
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created
Washington, D.C. 20016 to deepen understanding, promote collaboration and
Date of Birth: 02/29/52 stimulate exchanges of practical experience between
Age: 47 Americans and Europeans. Trustee/Director of each of
the funds in the Fund Complex. Formerly, advisor to
the Dennis Trading Group Inc., a managed futures and
option company that invests money for individuals and
institutions. Prior to 1992, President and Chief
Executive Officer, Director and Member of the
Investment Committee of the Joyce Foundation, a
private foundation.
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since April 1997
New York, NY 10048 and Chief Executive Officer since June 1998 of Morgan
Date of Birth: 08/13/53 Stanley Dean Witter Advisors Inc. and Morgan Stanley
Age: 46 Dean Witter Services Company Inc. Chairman, Chief
Executive Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998. Chairman and
Chief Executive Officer since June 1998, and Director
since January 1998, of Morgan Stanley Dean Witter
Trust FSB. Director of various Morgan Stanley Dean
Witter subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index Series
since May 1999. Trustee/Director of each of the funds
in the Fund Complex, and Vice President of other
investment companies advised by the Advisers and their
affiliates. Previously Chief Strategic Officer of
Morgan Stanley Dean Witter Advisors Inc. and Morgan
Stanley Dean Witter Services Company Inc. and
Executive Vice President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice President
of the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series May 1997-April 1999, and
Executive Vice President of Dean Witter, Discover &
Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company and
Winter Park, FL 32789 registered investment adviser in the State of Florida.
Date of Birth: 02/13/36 President and owner, Nelson Ivest Brokerage Services
Age: 63 Inc., a member of the National Association of
Securities Dealers, Inc. and Securities Investors
Protection Corp. Trustee/Director of each of the funds
in the Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor,
Oakbrook Terrace, IL 60181-5555 Van Kampen Advisors Inc. and Van Kampen Management
Date of Birth: 02/02/46 Inc. Director and officer of certain other
Age: 53 subsidiaries of Van Kampen Investments.
Trustee/Director and President of each of the funds in
the Fund Complex. Trustee, President and Chairman of
the Board of other investment companies advised by the
Advisers and their affiliates, and Chief Executive
Officer of Van Kampen Exchange Fund. Prior to May
1998, Executive Vice President and Director of
Marketing at Morgan Stanley Dean Witter and Director
of Dean Witter Discover & Co. and Dean Witter Realty.
Prior to 1996, Director of Dean Witter Reynolds Inc.
</TABLE>
B-17
<PAGE> 710
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Age: 55 Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the Fund
Complex. Prior to 1998, Director of Stone Smurfit
Container Corp., a paper manufacturing company. From
May 1996 through February 1997 he was President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company,
and from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Age: 75 Dynalysis of Princeton, a firm engaged in 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,
333 West Wacker Drive Meagher & Flom (Illinois), legal counsel to the funds
Chicago, IL 60606 in the Fund Complex, and other investment companies
Date of Birth: 08/22/39 advised by the Advisers or Van Kampen Management Inc.
Age: 60 Trustee/Director of each of the funds in the Fund
Complex, and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or
Van Kampen Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Age: 58 Marshall Fund of the United States, Trustee of
Colorado College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/Director
of each of the funds in the Fund Complex. Prior to
1993, Executive Director of the Commission on
Behavioral and Social Sciences and Education at the
National Academy of Sciences/National Research
Council. From 1980 through 1989, Partner of Coopers &
Lybrand.
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network
233 South Wacker Drive system solutions, COMARCO, Inc., a wireless
Suite 9700 communications products company and APAC Customer
Chicago, IL 60606 Services, Inc., a provider of outsourced customer
Date of Birth: 10/29/53 contact services. Trustee/Director of each of the
Age: 46 funds in the Fund Complex. Prior to May 1996,
President of Advance Ross Corporation, an
international transaction services and pollution
control equipment manufacturing company.
</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. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-18
<PAGE> 711
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood 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.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and
Age: 57 Van Kampen Management Inc. Executive Vice President and
Chief Investment Officer of each of the funds in the Fund
Complex, since 1998. Chief Investment Officer, Executive
Vice President and Trustee/ Managing General Partner of
other investment companies advised by the Advisers or Van
Kampen Management Inc. ("Management Inc."), since the
inception of funds advised by Advisory Corp. and
Management Inc. and since 1998 for funds advised by Asset
Management. Director of Global Decisions Group LLC, a
financial research firm, and its affiliates MCM Asia
Pacific and MCM Europe. Prior to 1998, President, Chief
Operating Officer and a Director of the Advisers, Van
Kampen American Capital Management, Inc.; Director of Van
Kampen American Capital, Inc.; and President, Chief
Executive Officer and Trustee of each of the funds advised
by Advisory Corp. Prior to July 1998, Director and
Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996,
Chief Executive Officer and Director of MCM Group, Inc.
and McCarthy, Crisanti & Maffei, Inc., a financial
research firm, and Chairman of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to December 1991,
Senior Vice President of Van Kampen Merritt Inc.
</TABLE>
B-19
<PAGE> 712
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van
Vice President and Secretary Kampen Advisors Inc., Van Kampen Management Inc., the
Age: 43 Distributor, American Capital Contractual Services, Inc.,
Van Kampen Exchange Corp., Van Kampen Recordkeeping
Services Inc., Investor Services, Van Kampen Insurance
Agency of Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal Legal
Officer and Secretary of other investment companies
advised by the Advisers or their affiliates. Vice
President and Secretary of each of the funds in the Fund
Complex. Prior to January 1999, Vice President and
Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission,
Division of Investment Management, Office of Chief
Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen
Age: 44 Management Inc. and Van Kampen Investor Services Inc., and
serves as a Director or Officer of certain other
subsidiaries of Van Kampen Investments. Vice President of
each of the funds in the Fund Complex and certain other
investment companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President and
Senior Planning Officer for Individual Asset Management of
Morgan Stanley Dean Witter and its predecessor since 1994.
From 1990-1994, First Vice President and Assistant
Controller in Dean Witter's Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice
Vice President President of each of the funds in the Fund Complex and
Age: 43 certain other investment companies advised by the Advisers
or their affiliates. Prior to September 1996, Director of
McCarthy, Crisanti & Maffei, Inc, a financial research
company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
Age: 59 companies advised by the Advisers or their affiliates.
Prior to October 1998, Vice President and Senior Portfolio
Manager with AIM Capital Management, Inc. Prior to
February 1998, Senior Vice President of Van Kampen
American Capital Asset Management, Inc., Van Kampen
American Capital Investment Advisory Corp. and Van Kampen
American Capital Management, Inc.
</TABLE>
B-20
<PAGE> 713
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
Age: 44 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.
Age: 53
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.
Age: 44 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
Age: 40 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 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 provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The 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 on the basis of the relative net
assets of each fund as of the last business day of the preceding calendar
quarter. The compensation of each Non-Affiliated Trustee includes a per meeting
fee from each fund in the Fund Complex 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
B-21
<PAGE> 714
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) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan............ $15,220 $ 40,303 $60,000 $126,000
Jerry D. Choate(1)........... 6,754 0 60,000 88,700
Linda Hutton Heagy........... 15,220 5,045 60,000 126,000
R. Craig Kennedy............. 15,220 3,571 60,000 125,600
Jack E. Nelson............... 15,220 21,664 60,000 126,000
Phillip B. Rooney............ 13,820 7,787 60,000 113,400
Fernando Sisto............... 15,220 72,060 60,000 126,000
Wayne W. Whalen.............. 15,220 15,189 60,000 126,000
Suzanne H. Woolsey(1)........ 6,754 0 60,000 88,700
Paul G. Yovovich(1).......... 14,020 2,845 60,000 126,000
</TABLE>
- ---------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Yovovich became a member of the Board of Trustees for the Fund
and other funds in the Fund Complex on October 22, 1998 and therefore does
not have a full fiscal year of information to report. Mr. Choate and Ms.
Woolsey became members of the Board of Trustees for the Fund and other funds
in the Fund Complex on May 26, 1999 and therefore do not have a full year of
information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal year ended September 30, 1999.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The detail of cumulative
deferred compensation (including interest) owed to the Trustees, including
former 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 accrued by the operating investment companies in the Fund Complex
for each of the Trustees for the funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
(4) For each Trustee, this is the sum of the estimated maximum annual benefits
payable by the funds 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.
B-22
<PAGE> 715
(5) The amounts shown in this column represent the aggregate compensation paid
by all funds in the Fund Complex as of December 31, 1999 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, 1999. The deferred compensation earns a
rate of return determined by reference to the return on the shares of the
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those investment
companies selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The Advisers and their affiliates also
serve as investment adviser for other investment companies; however, with
the exception of Mr. Whalen, the Non-Affiliated Trustees were not trustees
of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
As of December 31, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-23
<PAGE> 716
TABLE A
1999 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund...... 9/30 $ 3,322 $1,483 $ 3,322 $ 3,322 $ 3,322 $ 3,122 $ 3,322 $ 3,322
Tax Free High Income Fund......... 9/30 2,998 1,366 2,998 2,998 2,998 2,798 2,998 2,998
California Insured Tax Free
Fund............................ 9/30 1,692 745 1,692 1,692 1,692 1,492 1,692 1,692
Municipal Income Fund............. 9/30 2,781 1,241 2,781 2,781 2,781 2,581 2,781 2,781
Intermediate Term Municipal Income
Fund............................ 9/30 1,460 631 1,460 1,460 1,460 1,260 1,460 1,460
Florida Insured Tax Free Income
Fund............................ 9/30 1,488 646 1,488 1,488 1,488 1,288 1,488 1,488
New York Tax Free Income Fund..... 9/30 1,479 642 1,479 1,479 1,479 1,279 1,479 1,479
------- ------ ------- ------- ------- ------- ------- -------
Trust Total..................... $15,220 $6,754 $15,220 $15,220 $15,220 $13,820 $15,220 $15,220
======= ====== ======= ======= ======= ======= ======= =======
<CAPTION>
TRUSTEE
------------------
FUND NAME WOOLSEY YOVOVICH
--------- ------- --------
<S> <C> <C>
Insured Tax Free Income Fund...... $1,483 $ 3,122
Tax Free High Income Fund......... 1,366 2,798
California Insured Tax Free
Fund............................ 745 1,492
Municipal Income Fund............. 1,241 2,581
Intermediate Term Municipal Income
Fund............................ 631 1,260
Florida Insured Tax Free Income
Fund............................ 646 1,288
New York Tax Free Income Fund..... 642 1,479
------ -------
Trust Total..................... $6,754 $14,020
====== =======
</TABLE>
TABLE B
1999 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ---------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund......................... 9/30 $ 3,322 $ 819 $ 3,322 $1,661 $ 3,322 $ 3,122 $1,661 $ 3,322 $ 2,373
Tax Free High Income Fund.... 9/30 2,998 769 2,998 1,499 2,998 2,798 1,499 2,998 2,165
California Insured Tax Free
Fund....................... 9/30 1,692 471 1,692 846 1,692 1,492 846 1,692 1,216
Municipal Income Fund........ 9/30 2,781 707 2,781 1,391 2,781 2,581 1,391 2,781 1,991
Intermediate Term Municipal
Income Fund................ 9/30 1,460 415 1,460 730 1,460 1,260 730 1,460 1,045
Florida Insured Tax Free
Income Fund................ 9/30 1,488 423 1,488 744 1,488 1,288 744 1,488 1,069
New York Tax Free Income
Fund....................... 9/30 1,479 422 1,479 740 1,479 1,279 740 1,479 1,060
------- ------ ------- ------ ------- ------- ------ ------- -------
Trust Total................ $15,220 $4,026 $15,220 $7,611 $15,220 $13,820 $7,611 $15,220 $10,919
======= ====== ======= ====== ======= ======= ====== ======= =======
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL ---------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund.. 9/30 $12,061 $ 829 $13,428 $ 19,013 $ 28,191 $ 8,367 $ 6,888
Tax Free High Income Fund..... 9/30 11,230 778 12,661 18,570 27,209 7,518 4,640
California Insured Tax Free
Fund........................ 9/30 8,666 475 10,273 17,213 24,168 4,910 3,391
Municipal Income Fund......... 9/30 12,068 715 14,058 23,404 33,528 7,594 12,202
Intermediate Term Municipal
Income Fund................. 9/30 8,217 418 9,855 16,976 23,638 4,454 3,172
Florida Insured Tax Free
Income Fund................. 9/30 8,268 426 9,902 10,914 18,313 4,505 3,197
New York Tax Free Income
Fund........................ 9/30 4,537 425 3,611 5,706 8,667 3,632 1,967
------- ------ ------- -------- -------- ------- -------
Trust Total............... $65,047 $4,066 $73,788 $111,796 $163,714 $40,980 $35,457
======= ====== ======= ======== ======== ======= =======
<CAPTION>
TRUSTEES FORMER TRUSTEES
------------------- ----------------------------------------------
FUND NAME WHALEN YOVOVICH CARUSO GAUGHAN MILLER REES ROBINSON
--------- ------ -------- ------ ------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund.. $ 23,050 $ 2,479 $1,296 $1,064 $10,487 $ 0 $ 17,113
Tax Free High Income Fund..... 22,228 2,257 0 1,064 10,487 0 17,113
California Insured Tax Free
Fund........................ 19,692 1,260 0 1,064 10,487 0 17,113
Municipal Income Fund......... 27,189 2,076 2,778 1,306 14,169 7,077 22,359
Intermediate Term Municipal
Income Fund................. 19,249 1,080 0 1,064 10,487 0 17,113
Florida Insured Tax Free
Income Fund................. 15,409 1,105 0 496 6,656 0 12,280
New York Tax Free Income
Fund........................ 7,188 1,096 0 158 2,682 0 4,783
-------- ------- ------ ------ ------- ------ --------
Trust Total............... $134,005 $11,353 $4,074 $6,216 $65,455 $7,077 $107,874
======== ======= ====== ====== ======= ====== ========
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY YOVOVICH
- --------- -------- ------ ----- ------- ------ ------ ----- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund....... 1995 1999 1995 1993 1984 1997 1995 1984 1999 1998
Tax Free High Income Fund.......... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
California Insured Tax Free Fund... 1995 1999 1995 1993 1985 1997 1995 1985 1999 1998
Municipal Income Fund.............. 1995 1999 1995 1993 1990 1997 1995 1990 1999 1998
Intermediate Term Municipal Income
Fund............................. 1995 1999 1995 1993 1993 1997 1995 1993 1999 1998
Florida Insured Tax Free Income
Fund............................. 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
New York Tax Free Income Fund...... 1995 1999 1995 1994 1994 1997 1995 1994 1999 1998
</TABLE>
B-24
<PAGE> 717
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
strategy and implement the Fund's investment objectives. The Adviser also
furnishes officers, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the cost of its day-to-day operations, including the compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), the charges and expenses of
legal counsel and independent accountants, distribution fees, service fees,
custodian fees, the costs of providing 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.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in any jurisdiction where the Fund's shares are qualified for offer
and 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 fiscal 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 a 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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, the Adviser
received approximately $353,500, $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 supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. 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 costs based proportionally on their respective net assets
per fund.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Advisory Corp.
received approximately $61,900, $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
B-25
<PAGE> 718
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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Van Kampen
Investments received approximately $8,000, $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 a 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 Year Ended September 30, 1999........................ $333,700 $25,600
Fiscal Period Ended September 30, 1998...................... $153,026 $12,738
Fiscal Year Ended December 31, 1997......................... $163,312 $12,562
</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 the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed 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.
B-26
<PAGE> 719
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 contingent 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 or other
Van Kampen funds. 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.
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 the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary 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
B-27
<PAGE> 720
Distributor does not believe that termination of a relationship with a financial
intermediary would result in any material adverse consequences to the Fund.
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 or 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, 1999, there were $962,685 and $22,401 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 3.41% and 0.44% 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 contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended September 30, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $72,549 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 Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $233,661 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $178,004 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $55,657 for
fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended September 30,
1999, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$41,137 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $29,408 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $11,729 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
B-28
<PAGE> 721
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend disbursing
agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas City, MO
64121-8256. The transfer agency prices are determined through negotiations with
the Fund's Board of Trustees and are based on competitive benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so in a
manner deemed fair and reasonable to the Fund and not according to any formula.
The primary consideration in all portfolio transactions is prompt execution of
orders in an effective manner at the most favorable price. In selecting
broker-dealers and in negotiating prices and any brokerage commissions on such
transactions, the Adviser considers the firm's reliability, integrity and
financial condition and the firm's execution capability, the size and breadth of
the market for the security, the size of and difficulty in executing the order,
and the best net price. There are many instances when, in the judgment of the
Adviser, more than one firm can offer comparable execution services. In
selecting among such firms, consideration may be given to those firms which
supply research and other services in addition to execution services. The
Adviser is authorized to pay higher commissions to brokerage firms that provide
it with investment and research information than to firms which do not provide
such services if the Adviser determines that such commissions are reasonable in
relation to the overall services provided. No specific value can be assigned to
such research services which are furnished without cost to the Adviser. Since
statistical and other research information is only supplementary to the research
efforts of the Adviser to the Fund and still must be analyzed and reviewed by
its staff, the receipt of research information is not expected to reduce its
expenses materially. The investment advisory fee is not reduced as a result of
the Adviser's receipt of such research services. Services provided may include
(a) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or pur-chasers or sellers of securities; (b) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing all of its advisory accounts; not all of such services may be used by
the Adviser in connection with the Fund.
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.
B-29
<PAGE> 722
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 & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("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 year ended September 30, 1999...................... -- -- --
Fiscal period ended September 30, 1998.................... -- -- --
Fiscal year ended December 31, 1997....................... -- -- --
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions........... 0% 0%
Value of brokerage transactions with affiliate to total
transactions........................................... 0% 0%
</TABLE>
During the fiscal year ended September 30, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's shares
of the Fund are held by Investor Services, the Fund's transfer agent. Investor
Services performs bookkeeping, data processing and administrative services
related to the maintenance of shareholder accounts. Except as described in the
Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds (as defined in the prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends 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
gain dividends and systematic
B-30
<PAGE> 723
purchases or redemptions. Additional shares may be purchased at any time 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, 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
the fee for replacing the lost certificate equal to no more than 1.50% 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 Money Purchase and Profit Sharing 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
Shareholders can use ACH to have redemption proceeds deposited electronically
into their bank accounts. Redemption proceeds 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
redemption proceeds 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 or by calling (800) 341-2911 ((800) 421-2833 for the
hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, 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
capital gain dividends paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder may establish
B-31
<PAGE> 724
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 payment represents the proceeds of a redemption of shares on
which any capital gain or loss will be recognized. The planholder may arrange
for monthly, quarterly, semiannual 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 systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawal plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions 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 upon 30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than eight
exchanges out of that fund are made during a rolling 365-day period. If exchange
privileges are suspended, subsequent exchange requests for redemption out of
that Fund during the stated period will not be processed. Exchange privileges
will be restored when the account history shows fewer than eight exchanges in
the rolling 365-day period.
This policy does not apply to money market funds, systematic exchange plans or
employee-sponsored retirement plans.
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 contingent deferred sales
charge 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 made 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 New York Stock Exchange (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) the
SEC determines trading on the Exchange is restricted; (c) the SEC determines 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.
B-32
<PAGE> 725
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 and a gain or loss for federal income tax purposes upon
the sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares--Class A Shares,"
there is no sales charge payable on Class A Shares at the time of purchase on
investments of $1 million or more, but a contingent deferred sales charge
("CDSC--Class A") may be imposed on certain redemptions made within one year of
purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholder's account not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). 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 Internal Revenue Code of 1986, as amended
(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
CDSC-Class B and C 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
B-33
<PAGE> 726
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), the
financial hardship of the employee pursuant to United States Treasury
Regulations Section 401(k)-1(d)(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 THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal 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 sent to the designated payee of record. 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 systematic withdrawal plan. The
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal 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 systematic withdrawal Plan and the ability to offer the
systematic withdrawal 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 value of 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.
B-34
<PAGE> 727
TAXATION
FEDERAL INCOME TAXATION OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund 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 investment company taxable income (including interest, taxable
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss) and 90%
of its net tax-exempt interest, and meets certain other requirements, it will
not be required to pay federal income taxes on any income it distributes to
shareholders. The Fund intends to distribute at least the minimum amount of
investment company taxable income and net tax-exempt interest necessary to
satisfy the 90% distribution requirement. The Fund will not be subject to
federal income tax on any net capital gain distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold. A
portion of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income when distributed to shareholders.
B-35
<PAGE> 728
DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any, of
a person's social security and railroad retirement benefits will be includable
in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its income will constitute
tax-exempt interest, a significant portion may consist of investment company
taxable income (generally, taxable income and net short-term capital gain).
Distributions of the Fund's 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 gain as 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.
B-36
<PAGE> 729
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. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction. 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) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by individuals
and other non-corporate taxpayers investing in this Fund (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. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with its correct taxpayer identification
number, (ii) the IRS notifies the Fund that the shareholder has failed to
properly report certain interest and dividend income to the IRS and to respond
to notices to that effect or (iii) when required to do so, the shareholder fails
to certify that he or she is not subject to backup withholding. Redemption
proceeds may be subject to withholding under the circumstances described in (i)
above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
B-37
<PAGE> 730
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder the amount of
dividends paid to such shareholder and the amount, if any, of tax withheld with
respect to such dividends.
GENERAL
The federal income tax discussion set forth above is for general information
only. Prospective investors and shareholders 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.
1999 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 York State adjusted gross income. This
supplemental tax results in an increased marginal State income tax rate to the
extent a taxpayer's New York State adjusted gross income ranges between
$100,000 and $150,000.
B-38
<PAGE> 731
1999 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 gain dividends during the period are reinvested in Fund
shares at net asset value; and that any applicable contingent deferred sales
charge 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 capital gain dividends
paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge imposed at the time of redemption were reflected, it would reduce the
performance quoted.
B-39
<PAGE> 732
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. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares 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 and discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top sector holdings and largest holdings and other Fund information, 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 whether shareholders purchased their fund shares 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 may also be marketed on the internet.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking or rating services and by nationally recognized
financial publications. Such comparative performance information will be stated
in the same terms in which
B-40
<PAGE> 733
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
at 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 Semiannual Report contain additional performance
information. A copy of the Annual Report or Semiannual Report may be obtained
without charge by calling or writing the Fund at the telephone number and
address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum sales
charge, for Class A Shares of the Fund for (i) the one-year period ended
September 30, 1999 was -7.24%, (ii) the five-year period ended September 30,
1999 was 5.94% and (iii) the five-year, two month period from July 29, 1994 (the
commencement of distribution for Class A Shares of the Fund) through September
30, 1999 was 5.51%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1999 was 5.20%. The Fund's current distribution rate with
respect to the Class A Shares for the month ending September 30, 1999 was 4.67%.
The Fund's taxable equivalent distribution rate with respect to the Class A
Shares for the month ending September 30, 1999 was 7.84%.
The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to September 30, 1999 was 32.01%.
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, 1999 was 38.56%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -7.02%, (ii) the five-year period ended
September 30, 1999 was 5.95% and (iii) the five-year, two month period from July
29, 1994 (the commencement of distribution for Class B Shares of the Fund)
through September 30, 1999 was 5.58%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1999 was 4.71%. The Fund's current distribution rate with
respect to the Class B Shares for the month ending September 30, 1999 was 4.14%.
The Fund's taxable equivalent distribution rate with respect to the Class B
Shares for the month ending September 30, 1999 was 6.95%.
The Fund's cumulative non-standardized total return, including payment of the
contingent deferred sales charge, with respect to the Class B Shares from its
inception to September 30, 1999 was 32.43%.
B-41
<PAGE> 734
The Fund's cumulative non-standardized total return, excluding payment of the
contingent deferred sales charge, with respect to the Class B Shares from its
inception to September 30, 1999 was 33.43%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -4.20%, (ii) the five-year period ended
September 30, 1999 was 6.21% and (iii) the five-year, two month period from July
29, 1994 (the commencement of distribution for Class C Shares of the Fund)
through September 30, 1999 was 5.73%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1999 was 4.70%. The Fund's current distribution rate with
respect to the Class C Shares for the month ending September 30, 1999 was 4.14%.
The Fund's taxable equivalent distribution rate with respect to the Class C
Shares for the month ending September 30, 1999 was 6.95%.
The Fund's cumulative non-standardized total return, including payment of the
contingent deferred sales charge, with respect to the Class C Shares from its
inception to September 30, 1999 was 33.43%.
The Fund's cumulative non-standardized total return, excluding payment of the
contingent deferred sales charge, with respect to the Class C Shares from its
inception to September 30, 1999 was 33.43%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in the Fund's investment practices.
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. The Custodian also provides
accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS
KPMG LLP, 303 East Wacker Drive, Chicago, Illinois 60601, the independent
accountants for the Fund, performs an annual audit of the Fund's financial
statements.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-42
<PAGE> 735
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, 1999, the related statement of operations for
the year then ended, the statement of changes in net assets for the year then
ended, for the nine-month period ended September 30, 1998, and for the year
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, 1999, 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, 1999, the results of
its operations for the year then ended, the changes in its net assets for the
year then ended, for the nine-month period ended September 30, 1998, and for the
year 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 11, 1999
F-1
<PAGE> 736
PORTFOLIO OF INVESTMENTS
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 102.6%
NEW YORK 96.4%
$ 330 Bethlehem, NY Indl Dev Agy Sr Hsg Rev
Van Allen Proj Ser A................... 6.875% 06/01/39 $ 315,546
760 Brookhaven, NY Indl Dev Agy Sr
Residential Hsg Rev.................... 6.375 12/01/37 702,232
1,205 Buffalo, NY Genl Impt Ser A (AMBAC
Insd) (b).............................. 4.750 02/01/09 1,177,839
155 Buffalo, NY Sch Ser B (FSA Insd)....... 4.750 02/01/09 151,506
195 Cattaraugus Cnty, NY Indl Dev Agy Civic
Fac Rev................................ 4.400 09/15/04 190,340
1,630 Clifton Park, NY Wtr Auth Sys Rev Ser A
(FGIC Insd)............................ 5.000 10/01/29 1,429,950
750 Clifton Springs, NY Hosp & Clinic Ser A
Rfdg & Impt (b)........................ 7.650 01/01/12 814,477
500 Erie Cnty, NY Indl Dev Agy Civic Fac
Rev Depaul Ppty Inc Proj Ser A......... 5.750 09/01/28 448,785
250 Erie Cnty, NY Indl Dev Agy Life Care
Cmnty Rev Episcopal Church Home Ser
A (b).................................. 6.000 02/01/28 232,360
1,250 Huntington, NY Hsg Auth Sr Hsg Fac Rev
Gurwin Jewish Sr Residences A.......... 6.000 05/01/29 1,176,037
500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev
NY Institute of Technology Rfdg (b).... 7.500 03/01/26 531,225
1,000 Long Island Power Auth, NY Electric Sys
Rev Gen Ser A (FSA Insd)............... 5.000 12/01/18 905,400
1,645 Metropolitan Tran Auth NY Commuter Fac
Rev.................................... 5.500 07/01/14 1,605,109
800 Metropolitan Tran Auth NY Commuter Fac
Rev Ser A (MBIA Insd).................. 5.625 07/01/27 782,336
400 Metropolitan Tran Auth NY Commuter Fac
Svc Contract Ser O..................... 5.750 07/01/13 411,040
1,155 Monroe Cnty, NY Indl Dev Agy St John
Fisher College Proj.................... 5.375 06/01/09 1,164,436
295 Monroe Cnty, NY Indl Dev Agy Student
Hsg Collegiate Ser A................... 4.650 04/01/06 284,663
310 Monroe Cnty, NY Indl Dev Agy Student
Hsg Collegiate Ser A................... 4.700 04/01/07 296,813
325 Monroe Cnty, NY Indl Dev Agy Student
Hsg Collegiate Ser A................... 4.800 04/01/08 309,650
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 737
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 170 Monroe Cnty, NY Indl Dev Agy Student
Hsg Collegiate Ser A................... 4.900% 04/01/09 $ 161,214
395 Monroe Cnty, NY Indl Dev Agy Student
Hsg Collegiate Ser A................... 5.150 04/01/12 368,890
1,705 Monroe Cnty, NY Indl Dev Agy Student
Hsg Collegiate Ser A................... 5.250 04/01/19 1,561,899
500 Monroe Cnty, NY Indl Dev Agy Rev Indl
Dev Empire Sports Proj Ser A (b)....... 6.250 03/01/28 466,105
500 Mount Vernon, NY Indl Dev Agy Wartburg
Sr Hsg Inc. Meadow View (b)............ 6.000 06/01/09 488,855
1,250 Nassau Cnty, NY Indl Dev Agy Civic Fac
Rev (MBIA Insd)........................ 4.750 07/01/28 1,045,250
1,250 New York City Indl Dev Agy LaGuardia
Assoc LP Proj Rfdg..................... 6.000 11/01/28 1,182,100
600 New York City Indl Dev Agy Brooklyn
Navy Yard.............................. 5.650 10/01/28 560,790
500 New York City Indl Dev Agy Civic Fac
Rev Cmnty Res Developmentally
Disabled............................... 7.500 08/01/26 522,490
500 New York City Indl Dev Agy Civic Fac
Rev College of New Rochelle Proj....... 5.750 09/01/17 487,700
375 New York City Indl Dev Agy Spl Fac Rev
Terminal One Group Assn Proj........... 5.700 01/01/04 384,769
500 New York City Indl Dev Agy Spl Facs
United Airls Inc Proj.................. 5.650 10/01/32 465,850
500 New York City Indl Dev Civic Touro
College Proj Ser A..................... 6.350 06/01/29 481,560
500 New York City Indl Dev Civic YMCA
Greater NY Proj........................ 6.000 08/01/07 516,020
515 New York City Indl Dev Civic YMCA
Greater NY Proj........................ 5.800 08/01/16 504,932
500 New York City Muni Wtr Fin Auth Wtr &
Swr Sys Rev Ser B (AMBAC Insd) (b)..... 5.375 06/15/19 477,165
500 New York City Ser B.................... 5.700 08/15/07 522,025
500 New York City Ser C (Prerefunded @
08/15/01) (b).......................... 7.250 08/15/24 528,280
1,700 New York City Ser F (AMBAC Insd) (b)... 5.250 08/01/14 1,641,265
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 738
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 500 New York City Ser H (Prerefunded @
02/01/02) (FSA Insd)................... 7.000% 02/01/21 $ 537,555
1,500 New York City Ser J (MBIA Insd)........ 5.000 05/15/20 1,337,595
1,000 New York City Tran Auth Met Ser A...... 5.250 01/01/29 919,600
720 New York St Dorm Auth Lease Rev Office
Fac Audit & Control (MBIA Insd)........ 5.250 04/01/13 702,670
1,000 New York St Dorm Auth Rev Mental Hlth
Svcs Facs Ser C (MBIA Insd)............ 4.750 08/15/19 859,580
1,410 New York St Dorm Auth Rev Univ
Rochester Ser A (MBIA Insd)............ 5.000 07/01/17 1,288,063
300 New York St Dorm Auth Rev City Univ Sys
Ser F.................................. 5.000 07/01/14 274,308
1,000 New York St Dorm Auth Rev City Univ Sys
Cons Third Genl Res 1 Rfdg (FSA
Insd) (a).............................. 5.500 07/01/29 959,670
600 New York St Dorm Auth Rev City Univ Sys
Third Genl Res 2 Rfdg.................. 6.000 07/01/05 633,150
750 New York St Dorm Auth Rev Cons City
Univ Sys Ser A......................... 5.625 07/01/16 748,312
500 New York St Dorm Auth Rev Court Fac
Lease Ser A............................ 5.700 05/15/22 485,435
570 New York St Dorm Auth Rev Dept Ed St of
NY Issue Ser A......................... 5.800 07/01/22 559,005
750 New York St Dorm Auth Rev FHA Nursing
Home Menorah (FHA Insd)................ 5.950 02/01/17 757,147
1,245 New York St Dorm Auth Rev NY Univ Ser A
(AMBAC Insd) (a)....................... 5.250 07/01/07 1,260,376
1,000 New York St Dorm Auth Rev Second Hosp
Interfaith Med Cent Ser D.............. 5.750 02/15/08 1,034,490
500 New York St Dorm Auth Rev St Univ Edl
Fac.................................... 5.750 05/15/10 515,205
1,200 New York St Dorm Auth Rev Svc Contract
Albany Cnty............................ 5.250 04/01/13 1,150,164
1,000 New York St Dorm Auth Rev Svc Contract
Albany Cnty (b)........................ 5.250 04/01/17 930,160
830 New York St Dorm Auth Revs NY Univ Ser
A (a).................................. 5.250 07/01/06 842,442
500 New York St Energy Resh & Dev Auth Elec
Fac Rev Cons Edison Co NY Inc Proj Ser
A (MBIA Insd).......................... 7.500 01/01/26 508,905
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 739
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 500 New York St Energy Resh & Dev Auth Gas
Fac Rev Brooklyn Union Gas Co Ser B
(Inverse Fltg) (c)..................... 10.06% 07/01/26 $ 606,875
500 New York St Environmental Fac Corp
Pollutn Ctl Rev St Wtr Revolving Fund
Ser D.................................. 6.850 11/15/11 554,130
490 New York St Hsg Fin Agy Rev Insd
Multi-Family Mtg Ser B (AMBAC Insd).... 6.250 08/15/14 513,334
500 New York St Med Care Fac Fin Agy Rev NY
Hosp Mtg Ser A (Prerefunded @ 02/15/05)
(AMBAC Insd)........................... 6.200 08/15/05 544,890
300 New York St Med Care Fac Fin Agy Rev
Presbyterian Hosp Mtg Ser A Rfdg (FHA
Insd).................................. 5.250 08/15/14 291,390
500 New York St Mtg Agy Rev Homeowner Mtg
Ser 30 B............................... 6.650 10/01/25 517,615
735 New York St Mtg Agy Rev Homeowner Mtg
Ser 58................................. 6.400 04/01/27 762,460
540 New York St Thruway Auth Svc Contract
Rev Loc Hwy & Brdg..................... 5.100 04/01/08 538,342
290 New York St Thruway Auth Svc Contract
Rev Loc Hwy & Brdg..................... 5.750 04/01/09 299,541
1,000 New York St Urban Dev Corp Rev Corrtl
Facs Svcs Contract Ser B (AMBAC
Insd).................................. 4.750 01/01/28 837,310
1,000 New York St Urban Dev Corp Rev Sports
Fac Assist Pg Ser A.................... 5.000 04/01/18 892,750
370 New York St Urban Dev Corp Rev
Correctional Cap Fac Rfdg.............. 5.625 01/01/07 379,420
500 New York St Urban Dev Corp Rev
Correctional Cap Fac Ser A Rfdg........ 5.500 01/01/14 494,365
450 New York St Urban Dev Corp Rev
Correctional Cap Facs Ser 7............ 5.700 01/01/27 433,404
300 New York St Urban Dev Corp Rev
Correctional Cap Fac Rfdg.............. 5.750 01/01/13 300,981
1,245 New York St Dorm Auth Rev Insd Long
Island Univ............................ 5.000 09/01/16 1,130,373
1,500 New York St Dorm Auth Rev Insd Long
Island Univ............................ 5.125 09/01/19 1,355,820
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 740
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 500 New York St Dorm Auth Rev Univ
Rochester Ser B........................ 5.625% 07/01/24 $ 485,015
1,000 New York St Enrgy Resh & Dev Rfdg
Central Hudson Gas Ser A (AMBAC
Insd).................................. 5.450 08/01/27 953,310
420 Niagara Falls, NY Pub Impt (MBIA
Insd).................................. 6.900 03/01/20 460,148
1,000 Niagara Falls, NY Frontier Tran Auth
Arpt Rev (MBIA Insd)................... 5.500 04/01/19 966,930
325 Oneida Cnty, NY Indl Dev Agy Civic Fac
St Elizabeth Med A..................... 5.875 12/01/29 295,084
500 Oneida Cnty, NY Pub Impt (Prerefunded @
03/15/01).............................. 5.850 03/15/12 521,470
500 Oneida Cnty, NY Indl Dev Agy Rev Civic
Fac Mohawk Vly Handicap................ 5.300 03/15/19 460,600
455 Orange Cnty, NY Indl Dev Agy Life Care
Cmnty Rev.............................. 5.625 01/01/18 420,525
500 Peekskill, NY Indl Dev Agy Sr Drum Hill
Sr Living Proj......................... 6.375 10/01/28 463,165
300 Port Auth NY & NJ Spl Oblig............ 7.000 10/01/07 320,652
1,000 Port Auth NY & NJ Spl Oblig Rev Spl
Proj JFK Intl Arpt Terminal 6 (MBIA
Insd) (b).............................. 5.750 12/01/25 1,004,110
1,000 Port Auth NY & NJ Consolidated 119th
Series (FGIC Insd) (a)................. 5.500 09/15/17 980,420
555 Rockland Cnty, NY Indl Dev Agy Civic
Fac Rev Dominican College Proj 144A
Private Placement (d).................. 6.250 05/01/28 519,014
625 Rockland Cnty, NY Solid Waste Mgmt Auth
Ser B (AMBAC Insd)..................... 5.550 12/15/16 618,456
330 Saratoga Cnty, NY Indl Dev Agy Sr Hsg
Rev.................................... 6.875 06/01/39 315,134
1,500 Saint Lawrence Cnty, NY Indl St.
Lawrence Univ Project Series A......... 5.000 07/01/28 1,318,725
500 Suffolk Cnty, NY Indl Dev Agy Indl Dev
Rev Spellman High Voltage Fac Ser A.... 6.375 12/01/17 473,530
500 Suffolk Cnty, NY Indl Dev Agy Civic Fac
Rev (MBIA Insd)........................ 4.750 01/01/19 432,500
1,000 Syracuse, NY Ser C (FSA Insd).......... 4.900 10/01/09 968,720
225 Syracuse, NY Hsg Auth Rev Sub Proj
Loretto Rest Ser B..................... 7.500 08/01/10 220,649
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 741
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 400 Triborough Brdg & Tunl Auth NY Ser A
Rfdg................................... 5.000% 01/01/12 $ 387,328
500 Triborough Brdg & Tunl Auth NY Ser A
Rfdg (FGIC Insd)....................... 5.000 01/01/17 458,495
500 Ulster Cnty, NY Indl Dev Agy Civic Fac
Rev.................................... 6.250 06/01/08 491,045
1,000 Utica, NY Indl Dev Agy Civic Fac Rev
Utica College Proj Ser A............... 5.750 08/01/28 951,370
1,000 Yonkers, NY Ser C...................... 5.000 06/01/19 900,820
-----------
67,440,950
-----------
GUAM 0.8%
500 Guam Arpt Auth Rev Ser B............... 6.700 10/01/23 533,530
-----------
PUERTO RICO 2.9%
2,000 Puerto Rico Pub Bldgs Auth Gtd Pub Ed &
Hlth Fac............................... 5.700 07/01/16 2,006,120
-----------
U. S. VIRGIN ISLANDS 0.9%
650 Virgin Islands Pub Fin Auth Rev Sr Lien
Fd Ln Nts Ser C........................ 5.500 10/01/07 657,124
-----------
MARIANA ISLANDS 1.6%
850 Northern Mariana Islands Pub Sch Sys
Proj Ser A (FSA Insd).................. 5.000 10/01/05 870,570
250 Northern Mariana Islands Pub Sch Sys
Proj Ser A (FSA Insd).................. 5.000 10/01/04 256,613
-----------
1,127,183
-----------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 742
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Market Value
- --------------------------------------------------------------------------------------
<S> <C>
TOTAL LONG-TERM INVESTMENTS 102.6%
(Cost $73,476,539).................................................. $71,764,907
SHORT-TERM INVESTMENTS 2.0%
(Cost $1,400,000)................................................... 1,400,000
-----------
TOTAL INVESTMENTS 104.6%
(Cost $74,876,539).................................................. 73,164,907
LIABILITIES IN EXCESS OF OTHER ASSETS (4.6%)......................... (3,210,122)
-----------
NET ASSETS 100.0%.................................................... $69,954,785
===========
</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.
(d) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
AMBAC--AMBAC Indemnity Corporation
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Administration
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
F-8
<PAGE> 743
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $74,876,539)........................ $73,164,907
Cash........................................................ 83,986
Receivables:
Interest.................................................. 1,128,723
Fund Shares Sold.......................................... 72,870
Expense Reimbursement from Advisor........................ 12,808
Investments sold.......................................... 5,000
Other....................................................... 2,922
-----------
Total Assets.......................................... 74,471,216
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 4,067,364
Fund Shares Repurchased................................... 189,206
Income Distributions...................................... 81,023
Distributor and Affiliates................................ 80,304
Trustees' Deferred Compensation and Retirement Plans........ 53,680
Accrued Expenses............................................ 44,854
-----------
Total Liabilities..................................... 4,516,431
-----------
NET ASSETS.................................................. $69,954,785
===========
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $71,788,450
Accumulated Distributions in Excess of Net Investment
Income.................................................... (31,689)
Accumulated Net Realized Loss............................... (90,344)
Net Unrealized Depreciation................................. (1,711,632)
-----------
NET ASSETS.................................................. $69,954,785
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $36,607,970 and 2,450,569 shares of
beneficial interest issued and outstanding)........... $ 14.94
Maximum sales charge (4.75%* of offering price)......... .75
-----------
Maximum offering price to public........................ $ 15.69
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $28,214,424 and 1,891,680 shares of
beneficial interest issued and outstanding)........... $ 14.92
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $5,132,391 and 344,046 shares of
beneficial interest issued and outstanding)........... $ 14.92
===========
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-9
<PAGE> 744
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 3,160,479
-----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $77,907, $237,338 and $41,109,
respectively)............................................. 356,354
Investment Advisory Fee..................................... 353,477
Accounting Services......................................... 61,895
Shareholder Reports......................................... 46,975
Shareholder Services........................................ 28,654
Trustees' Fees and Related Expenses......................... 21,612
Legal....................................................... 13,432
Custody..................................................... 9,245
Other....................................................... 45,777
-----------
Total Expenses.......................................... 937,421
Less: Expense Reduction ($353,477 Advisory Fees and
$180,785 Other)....................................... 534,262
Credits Earned on Cash Balances......................... 995
-----------
Net Expenses............................................ 402,164
-----------
NET INVESTMENT INCOME....................................... $ 2,758,315
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (81,746)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 3,166,131
End of the Period......................................... (1,711,632)
-----------
Net Unrealized Depreciation During the Period............... (4,877,763)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(4,959,509)
===========
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $(2,201,194)
===========
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 745
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1999, the Nine Months Ended
September 30, 1998 and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................... $ 2,758,315 $ 1,386,721 $ 1,115,725
Net Realized Gain/Loss.................. (81,746) 271,958 255,029
Net Unrealized Appreciation/Depreciation
During the Period..................... (4,877,763) 1,080,991 1,117,382
------------------ ------------------ -----------------
Change in Net Assets from Operations.... (2,201,194) 2,739,670 2,488,136
------------------ ------------------ -----------------
Distributions from Net Investment
Income................................ (2,758,315) (1,386,749) (1,126,124)
Distributions in Excess of Net
Investment Income..................... (16,019) (15,670) -0-
------------------ ------------------ -----------------
Distributions from and in Excess of Net
Investment Income*.................... (2,774,334) (1,402,419) (1,126,124)
Distributions from Net Realized
Gains*................................ (280,511) (40,996) (83,754)
------------------ ------------------ -----------------
Total Distributions..................... (3,054,845) (1,443,415) (1,209,878)
------------------ ------------------ -----------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................ (5,256,039) 1,296,255 1,278,258
------------------ ------------------ -----------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............... 37,031,717 16,595,104 16,610,486
Net Asset Value of Shares Issued Through
Dividend Reinvestment................. 2,056,860 924,200 683,838
Cost of Shares Repurchased.............. (10,970,966) (3,838,934) (4,637,600)
------------------ ------------------ -----------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.......................... 28,117,611 13,680,370 12,656,724
------------------ ------------------ -----------------
TOTAL INCREASE IN NET ASSETS............ 22,861,572 14,976,625 13,934,982
NET ASSETS:
Beginning of the Period................. 47,093,213 32,116,588 18,181,606
------------------ ------------------ -----------------
End of the Period (Including accumulated
undistributed net investment income of
($31,689), ($15,670) and $28,
respectively)......................... $ 69,954,785 $ 47,093,213 $ 32,116,588
================== ================== =================
</TABLE>
<TABLE>
<CAPTION>
*Distributions by Class
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions from and in Excess of Net
Investment Income:
Class A Shares........................ $ (1,566,371) $ (809,026) $ (584,822)
Class B Shares........................ (1,029,529) (523,570) (515,371)
Class C Shares........................ (178,434) (69,823) (25,931)
------------------ ------------------ -----------------
$ (2,774,334) $ (1,402,419) $ (1,126,124)
================== ================== =================
Distributions from Net Realized Gain:
Class A Shares........................ $ (147,076) $ (22,100) $ (46,829)
Class B Shares........................ (116,190) (16,870) (34,234)
Class C Shares........................ (17,245) (2,026) (2,691)
------------------ ------------------ -----------------
$ (280,511) $ (40,996) $ (83,754)
================== ================== =================
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 746
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
Nine Months of Investment
Year Ended Ended Year Ended December 31 Operations) to
September 30, September 30, --------------------------- December 31,
Class A Shares 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $16.223 $15.734 $14.992 $15.048 $13.579 $14.300
------- ------- ------- ------- ------- -------
Net Investment
Income............ .794 .596 .786 .816 .821 .302
Net Realized and
Unrealized
Gain/Loss......... (1.198) .509 .795 (.074) 1.476 (.722)
------- ------- ------- ------- ------- -------
Total from Investment
Operations.......... (.404) 1.105 1.581 .742 2.297 (.420)
------- ------- ------- ------- ------- -------
Less:
Distributions from
and in Excess of
Net Investment
Income............ .792 .599 .798 .798 .828 .301
Distributions from
Net Realized
Gain.............. .088 .017 .041 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions... .880 .616 .839 .798 .828 .301
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $14.939 $16.223 $15.734 $14.992 $15.048 $13.579
======= ======= ======= ======= ======= =======
Total Return*(a)...... (2.61%) 7.11%** 10.92% 5.14% 17.33% (2.93%)**
Net Assets at End of
the Period (In
millions)........... $ 36.6 $ 25.0 $ 18.0 $ 7.7 $ 5.4 $ 2.9
Ratio of Expenses to
Average Net
Assets*............. .33% .39% .64% .31% .21% .26%
Ratio of Net
Investment Income to
Average Net
Assets*............. 5.03% 5.01% 5.16% 5.56% 5.63% 5.27%
Portfolio Turnover.... 67% 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.............. 1.23% 1.43% 1.47% 1.82% 2.10% 2.73%
Ratio of Net
Investment Income to
Average Net
Assets.............. 4.13% 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-12
<PAGE> 747
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
Nine Months of Investment
Year Ended Ended Year Ended December 31, Operations) to
September 30, September 30, --------------------------- December 31,
Class B Shares 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............... $16.208 $15.727 $14.992 $15.046 $13.578 $14.300
------- ------- ------- ------- ------- -------
Net Investment
Income........... .679 .509 .684 .704 .713 .263
Net Realized and
Unrealized
Gain/Loss........ (1.200) .507 .782 (.068) 1.476 (.722)
------- ------- ------- ------- ------- -------
Total from Investment
Operations......... (.521) 1.016 1.466 .636 2.189 (.459)
------- ------- ------- ------- ------- -------
Less:
Distributions from
and in Excess of
Net Investment
Income........... .684 .518 .690 .690 .721 .263
Distributions from
Net Realized
Gain............. .088 .017 .041 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total
Distributions...... .772 .535 .731 .690 .721 .263
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period...... $14.915 $16.208 $15.727 $14.992 $15.046 $13.578
======= ======= ======= ======= ======= =======
Total Return*(a)..... (3.34%) 6.58%** 10.07% 4.37% 16.47% (3.20%)**
Net Assets at End of
the Period (In
millions).......... $ 28.2 $ 19.0 $ 13.1 $ 10.1 $ 9.7 $ 8.1
Ratio of Expenses to
Average Net
Assets*............ 1.08% 1.14% 1.36% 1.07% .93% .96%
Ratio of Net
Investment Income
to Average Net
Assets*............ 4.27% 4.26% 4.49% 4.79% 4.93% 4.58%
Portfolio Turnover... 67% 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............. 1.98% 2.19% 2.18% 2.60% 2.82% 3.42%
Ratio of Net
Investment Income
to Average Net
Assets............. 3.37% 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-13
<PAGE> 748
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
Nine Months of Investment
Year Ended Ended Year Ended December 31, Operations) to
September 30, September 30, --------------------------- December 31,
Class C Shares 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............... $16.204 $15.726 $14.992 $15.041 $13.579 $14.300
------- ------- ------- ------- ------- -------
Net Investment
Income........... .682 .515 .676 .701 .711 .267
Net Realized and
Unrealized
Gain/Loss........ (1.196) .498 .789 (.060) 1.472 (.725)
------- ------- ------- ------- ------- -------
Total from Investment
Operations......... (.514) 1.013 1.465 .641 2.183 (.458)
------- ------- ------- ------- ------- -------
Less:
Distributions from
and in Excess of
Net Investment
Income........... .684 .518 .690 .690 .721 .263
Distributions from
Net Realized
Gain............. .088 .017 .041 -0- -0- -0-
------- ------- ------- ------- ------- -------
Total
Distributions...... .772 .535 .731 .690 .721 .263
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period...... $14.918 $16.204 $15.726 $14.992 $15.041 $13.579
======= ======= ======= ======= ======= =======
Total Return*(a)..... (3.28%) 6.51%** 10.07% 4.44% 16.39% (3.20%)**
Net Assets at End of
the Period (In
millions).......... $ 5.1 $ 3.1 $ 1.0 $ .4 $ .4 $ .2
Ratio of Expenses to
Average Net
Assets*............ 1.08% 1.14% 1.41% 1.08% .98% .96%
Ratio of Net
Investment Income
to Average Net
Assets*............ 4.28% 4.22% 4.37% 4.78% 4.81% 4.58%
Portfolio Turnover... 67% 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............. 1.98% 2.18% 2.23% 2.61% 2.86% 3.42%
Ratio of Net
Investment Income
to Average Net
Assets............. 3.38% 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-14
<PAGE> 749
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
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.
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--Municipal bonds are valued by independent pricing
services or dealers using the mean of the bid and asked prices or, in the
absence of market quotations, at fair value based upon yield data relating to
municipal bonds with similar characteristics and general market conditions.
Securities which are not valued by independent pricing services are valued at
fair value using procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
F-15
<PAGE> 750
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
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. Income and 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 were amortized on a
straight line basis over the 60 month period ended July 28, 1999.
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, 1999, for federal income tax purposes, cost of long- and
short-term investments is $74,876,539; the aggregate gross unrealized
appreciation is $918,063 and the aggregate gross unrealized depreciation is
$2,629,695, resulting in net unrealized depreciation on long- and short-term
investments of $1,711,632.
Net realized gains or losses may differ for financial reporting and tax
reporting purposes primarily as a result of post-October losses which may not be
recognized for tax purposes until the first day of the following fiscal year.
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.
Due to inherent differences in the recognition of expenses under generally
accepted accounting principles and federal income tax purposes, the amount of
distributed net investment income may differ for a particular period. These
differences are temporary in nature, but may result in book basis distribution
in excess of net investment income for certain periods.
F-16
<PAGE> 751
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
G. EXPENSE REDUCTIONS--During the year ended September 30, 1999, the Fund's
custody fee was reduced by $995 as a result of credits earned on overnight cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser"), will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ---------------------------------------------------------------------
<S> <C>
First $500 million.................................... .600 of 1%
Over $500 million..................................... .500 of 1%
</TABLE>
For the year ended September 30, 1999, the Adviser voluntarily waived
$353,477 of its investment advisory fees and assumed $180,785 of the Fund's
other expenses. This waiver is voluntary in nature and can be discontinued at
the Adviser's discretion.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $5,400, 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 year ended September 30, 1999, the Fund recognized expenses of
approximately $69,900 representing Van Kampen's cost of providing accounting and
legal services to the Fund. A portion of this cost has been assumed by Van
Kampen.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended September 30,
1999, the Fund recognized expenses of approximately $15,200. 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.
F-17
<PAGE> 752
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
At September 30, 1999, Van Kampen owned 100 shares each of Classes A, B and
C.
3. CAPITAL TRANSACTIONS
At September 30, 1999, capital aggregated $37,735,427, $28,665,275 and
$5,387,748 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................................... 1,174,020 $ 18,522,207
Class B...................................... 984,624 15,451,431
Class C...................................... 195,063 3,058,079
---------- ------------
Total Sales.................................... 2,353,707 $ 37,031,717
========== ============
Dividend Reinvestment:
Class A...................................... 82,755 $ 1,297,421
Class B...................................... 39,877 624,335
Class C...................................... 8,638 135,104
---------- ------------
Total Dividend Reinvestment.................... 131,270 2,056,860
========== ============
Repurchases:
Class A...................................... (347,401) $ (5,425,572)
Class B...................................... (302,183) (4,719,677)
Class C...................................... (53,303) (825,717)
---------- ------------
Total Repurchases.............................. (702,887) $(10,970,966)
========== ============
</TABLE>
F-18
<PAGE> 753
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
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-19
<PAGE> 754
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
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>
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-20
<PAGE> 755
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
For the year ended September 30, 1999, Van Kampen, as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $25,700 and CDSC on redeemed shares of approximately $73,300.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the year ended September 30, 1999, the cost of purchases and proceeds from
sales of investments, excluding short-term investments, were $70,060,386 and
$39,573,306, respectively.
5. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended September 30, 1999, are payments retained by Van Kampen of
approximately $210,000.
F-21
<PAGE> 756
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<C> <C> <S>
(a)(1) -- Agreement and Declaration of Trust(1)
(2) -- Certificate of Amendment(10)
(3) -- Second Amended and Restated Certificate of Designation for:
(i) Van Kampen Insured Tax Free Income Fund(10)
(ii) Van Kampen Tax Free High Income Fund(10)
(iii) Van Kampen California Insured Tax Free Fund(10)
(iv) Van Kampen Municipal Income Fund(10)
(v) Van Kampen Florida Insured Tax Free Income Fund(10)
(vi) Van Kampen New York Tax Free Income Fund(10)
(vii) Van Kampen Michigan Tax Free Income Fund(10)
(viii) Van Kampen Missouri Tax Free Income Fund(10)
(ix) Van Kampen Ohio Tax Free Income Fund(10)
-- Third Amended and Restated Certificate of Designation for:
(x) Van Kampen Intermediate Term Municipal Income Fund(10)
(xi) Van Kampen California Municipal Income Fund++
(b) -- By-Laws(1)
(c) -- Specimen Certificate of Share of Beneficial Interest of:
(i) Van Kampen Insured Tax Free Income Fund(1)
(ii) Van Kampen Tax Free High Income Fund(1)
(iii) Van Kampen California Insured Tax Free Fund(1)
(iv) Van Kampen Municipal Income Fund(1)
(v) Van Kampen Intermediate Term Municipal Income Fund(1)
(vi) Van Kampen Florida Insured Tax Free Income Fund(1)
(vii) Van Kampen New York Tax Free Income Fund(1)
(viii) Van Kampen California Municipal Income Fund
1. Class A Shares++
2. Class B Shares++
3. Class C Shares++
(ix) Van Kampen Michigan Tax Free Income Fund
1. Class A Shares(2)
2. Class B Shares(2)
3. Class C Shares(2)
(x) Van Kampen Missouri Tax Free Income Fund
1. Class A Shares(2)
2. Class B Shares(2)
3. Class C Shares(2)
(xi) Van Kampen Ohio Tax Free Income Fund
1. Class A Shares(2)
2. Class B Shares(2)
3. Class C Shares(2)
(d) -- Investment Advisory Agreement for:
(i) Van Kampen Insured Tax Free Income Fund(3)
(ii) Van Kampen Tax Free High Income Fund(3)
(iii) Van Kampen California Insured Tax Free Fund(3)
(iv) Van Kampen Municipal Income Fund(3)
(v) Van Kampen Intermediate Term Municipal Income Fund(3)
(vi) Van Kampen Florida Insured Tax Free Income Fund(3)
(vii) Van Kampen New York Tax Free Income Fund(3)
(viii) Van Kampen California Municipal Income Fund++
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
</TABLE>
C-1
<PAGE> 757
<TABLE>
<S> <C> <C>
(e)(1) -- Distribution and Service Agreement for:
(i) Van Kampen Insured Tax Free Income Fund(3)
(ii) Van Kampen Tax Free High Income Fund(3)
(iii) Van Kampen California Insured Tax Free Fund(3)
(iv) Van Kampen Municipal Income Fund(3)
(v) Van Kampen Intermediate Term Municipal Income Fund(3)
(vi) Van Kampen Florida Insured Tax Free Income Fund(3)
(vii) Van Kampen New York Tax Free Income Fund(3)
(viii) Van Kampen California Municipal Income Fund++
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
(2) -- Form of Dealer Agreement(4)
(3) -- Form of Broker Fully Disclosed Selling Agreement(4)
(4) -- Form of Bank Fully Disclosed Selling Agreement(4)
(f)(1) -- Form of Trustee Deferred Compensation Plan(11)
(f)(2) -- Form of Trustee Retirement Plan(11)
(g)(1) -- Custodian Contract for:
(i) Van Kampen Insured Tax Free Income Fund(5)
(ii) Van Kampen Tax Free High Income Fund(5)
(iii) Van Kampen California Insured Tax Free Fund(5)
(iv) Van Kampen Municipal Income Fund(5) and (6)
(v) Van Kampen Intermediate Term Municipal Income Fund(5)
(vi) Van Kampen Florida Insured Tax Free Income Fund(5)
(vii) Van Kampen New York Tax Free Income Fund(5)
(viii) Van Kampen California Municipal Income Fund(2) and (5)
(ix) Van Kampen Michigan Tax Free Income Fund(2) and (7)
(x) Van Kampen Missouri Tax Free Income Fund(2) and (7)
(xi) Van Kampen Ohio Tax Free Income Fund(2) and (7)
(2) -- Transfer Agency and Service Agreement(5)
(h)(2) -- Fund Accounting Agreement(5)
(3) -- Legal Services Agreement(3)
(i)(1) -- Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois) for:
(i) Van Kampen Insured Tax Free Income Fund(8)
(ii) Van Kampen Tax Free High Income Fund(8)
(iii) Van Kampen California Insured Tax Free Fund(8)
(iv) Van Kampen Municipal Income Fund(8)
(v) Van Kampen Intermediate Term Municipal Income Fund(8)
(vi) Van Kampen Florida Insured Tax Free Income Fund(8)
(vii) Van Kampen New York Tax Free Income Fund(8)
(viii) Van Kampen California Municipal Income Fund++
(ix) Van Kampen Michigan Tax Free Income Fund++
(x) Van Kampen Missouri Tax Free Income Fund++
(xi) Van Kampen Ohio Tax Free Income Fund++
(2) -- Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)+
(j) -- Consents of KPMG LLP for:
(i) Van Kampen Insured Tax Free Income Fund+
(ii) Van Kampen Tax Free High Income Fund+
(iii) Van Kampen California Insured Tax Free Fund+
(iv) Van Kampen Municipal Income Fund+
(v) Van Kampen Intermediate Term Municipal Income Fund+
(vi) Van Kampen Florida Insured Tax Free Income Fund+
</TABLE>
C-2
<PAGE> 758
<TABLE>
<CAPTION>
<C> <C> <S>
(vii) Van Kampen New York Tax Free Income Fund+
(viii) Van Kampen California Municipal Income Fund++
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
(k) -- Not applicable
(l) -- Letter of understanding relating to initial capital(9)
(m)(1) -- Plan of Distribution Pursuant to Rule 12b-1 for:
(i) Van Kampen Insured Tax Free Income Fund(1)
(ii) Van Kampen Tax Free High Income Fund(1)
(iii) Van Kampen California Insured Tax Free Fund(1)
(iv) Van Kampen Municipal Income Fund(1)
(v) Van Kampen Intermediate Term Municipal Income Fund(1)
(vi) Van Kampen Florida Insured Tax Free Income Fund(1)
(vii) Van Kampen New York Tax Free Income Fund(1)
(viii) Van Kampen California Municipal Income Fund(2)
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
(2) -- Form of Shareholder Assistance Agreement(4)
(3) -- Form of Administrative Services Agreement(4)
(4) -- Service Plan for:
(i) Van Kampen Insured Tax Free Income Fund(1)
(ii) Van Kampen Tax Free High Income Fund(1)
(iii) Van Kampen California Insured Tax Free Fund(1)
(iv) Van Kampen Municipal Income Fund(1)
(v) Van Kampen Intermediate Term Municipal Income Fund(1)
(vi) Van Kampen Florida Insured Tax Free Income Fund(1)
(vii) Van Kampen New York Tax Free Income Fund(1)
(viii) Van Kampen California Municipal Income Fund(2)
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
(n) -- Not applicable
(o) -- Amended Multi-Class Plan(8)
(p) -- Power of Attorney(11)
(z)(1) -- List of Investment Companies in response to Item 27(a)+
(2) -- List of Officers and Directors of Van Kampen Funds Inc. in response
to Item 27(b)+
</TABLE>
- ---------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 39 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 29, 1996.
(2) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on September 30, 1994.
C-3
<PAGE> 759
(3) Incorporated herein by reference to Post-Effective Amendment No. 41 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 30, 1998.
(4) Incorporated herein by reference to Post-Effective Amendment No. 37 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on August 1, 1995.
(5) Incorporated herein by reference to Post-Effective Amendment No. 50 to Van
Kampen American Capital Comstock Fund, File No. 2-27778 filed on April 27,
1998.
(6) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 25, 1990.
(7) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration
on Form N-1A, File Number 2-99715, filed February 22, 1988.
(8) Incorporated herein by reference to Post-Effective Amendment No. 40 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 29, 1997.
(9) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 2-99715, filed August 15, 1985.
(10) Incorporated herein by reference to Post-Effective Amendment No. 42 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on November 25, 1998.
(11) Incorporated herein by reference to Post-Effective Amendment No. 44 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on January 7, 2000.
+ Filed herewith.
++ To be filed by further amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See the Statements of Additional Information.
ITEM 25. INDEMNIFICATION.
Pursuant to Del. Code Ann. Title 12 Section 3817, a Delaware business trust
may provide in its governing instrument for the indemnification of its officers
and trustees from and against any and all claims and demands whatsoever.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust. Article 8, Section 8.4 of the Agreement and
Declaration of Trust provides that each officer and trustee of the Registrant
shall be indemnified by the Registrant against all liabilities incurred in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which the officer or trustee may be or
may have been involved by reason of being or having been an officer or trustee,
except that such indemnity shall not protect any such person against a liability
to the Registrant or any shareholder thereof to which such person would
otherwise be subject by reason of (i) not acting in good faith in the reasonable
belief that such person's actions were not in the best interests of the Trust,
(ii) willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office or (iii) for a criminal
proceeding, not having a reasonable cause to believe that such conduct was
unlawful (collectively, "Disabling Conduct"). Absent a court determination that
an officer or trustee seeking indemnification was not liable on the merits or
guilty of Disabling Conduct in the conduct of his or her office, the decision by
the Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of Disabling
Conduct in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
C-4
<PAGE> 760
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "1933 Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by the trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Pursuant to Section 7 of the Distribution and Service Agreement, the
Registrant agrees to indemnify and hold harmless Van Kampen Funds Inc. (the
"Distributor") and each of its trustees and officers and each person, if any,
who controls the Distributor within the meaning of Section 15 of the Securities
Act of 1933 (the "1933 Act") against any loss, liability, claim, damages or
expense (including the reasonable cost of investigating or defending any alleged
loss, liability, claim, damages, or expense and reasonable counsel fees) arising
by reason of any person acquiring any shares, based upon the ground that the
registration statement, prospectus, shareholder reports or other information
filed or made public by the Registrant (as from time to time amended) included
an untrue statement of a material fact or omitted to state a material fact
required to be stated or necessary in order to make the statements not
misleading under the 1933 Act, or any other statute or the common law. The
Registrant does not agree to indemnify the Distributor or hold it harmless to
the extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Registrant by or on behalf of the
Distributor. In no case is the indemnity of the Registrant in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor or
any person against any liability to the Fund or its security holders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
agreement.
Pursuant to the agreement by which Van Kampen Investor Services Inc.
("Investor Services") is appointed transfer agent of the Fund, the Registrant
agrees to indemnify and hold Investor Services harmless against any losses
damages, costs, charges, payments, liabilities and expenses (including
reasonable counsel fees) arising out of or attributable to:
(1) the performance of Investor Services under the agreement provided that
Investor Services acted in good faith with due diligence and without negligence
or willful misconduct.
(2) reliance by Investor Services on, or reasonable use by, Investor
Services of information, records and documents which have been prepared on
behalf of, or have been furnished by, the Fund, or the carrying out by Investor
Services of any instructions or requests of the Fund.
(3) the offer or sale of the Fund's shares in violation of any federal or
state law or regulation or ruling by any federal agency unless such violation
results from any failure by Investor Services to comply with written
instructions from the Fund that such offers or sales were not permitted under
such law, rule or regulation.
(4) the refusal of the Fund to comply with terms of the agreement, or the
Fund's lack of good faith, negligence or willful misconduct or breach of any
representation or warranty made by the Fund under the agreement provided that if
the reason for such failure is attributable to any action of the Fund's
investment
C-5
<PAGE> 761
adviser or distributor or any person providing accounting or legal services to
the Fund, Investor Services only will be entitled to indemnification if such
entity is otherwise entitled to the indemnification from the Fund.
See also "Investment Advisory Agreement" in the Statement of Additional
Information.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in the Prospectus and "Investment
Advisory Agreement", "Other Agreements", and "Trustees and Officers" in the
Statement of Additional Information for information regarding the business of
Van Kampen Investment Advisory Corp. (the "Adviser"). For information as to the
business, profession, vocation and employment of a substantial nature of
directors and officers of the Adviser, reference is made to the Adviser's
current Form ADV (File No. 801-18161) filed under the Investment Advisers Act of
1940, as amended, incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) The Registrant's sole principal underwriter is Van Kampen Funds Inc.
(the "Distributor"), which acts as principal underwriter for certain investment
companies and unit investment trusts. See Exhibit (z)(1).
(b) Van Kampen Funds Inc., which is an affiliated person of an affiliated
person of the Registrant, is the only principal underwriter for the Registrant.
The name, principal business address and positions and offices with Van Kampen
Funds Inc. of each of its directors and officers are disclosed in Exhibit
(z)(2). Except as disclosed under the heading "Trustees and Officers" in Part B
of this Registration Statement, none of such persons has any position or office
with Registrant.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents of the Registrant required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended,
and the Rules thereunder will be maintained (i) by the Registrant will be
maintained at its offices, located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555, or at Van Kampen Investors Services Inc., 7501
Tiffany Springs Parkway, Kansas City, Missouri 64153, or at State Street Bank
and Trust Company, 1776 Heritage Drive, North Quincy, Massachusetts 02171; (ii)
by the Adviser, will be maintained at its offices, located at 1 Parkview Plaza,
PO Box 5555, Oakbrook Terrace, Illinois 60181-5555 and (iii) all such accounts,
books and other documents required to be maintained by the Adviser and by Van
Kampen Funds Inc., the principal underwriter, will be maintained at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-6
<PAGE> 762
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended, the Registrant,
VAN KAMPEN TAX FREE TRUST, certifies that it meets all of the requirements for
effectiveness of this Amendment to the Registration Statement pursuant to Rule
485(b) under the 1933 Act and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Oakbrook Terrace and the State of Illinois, on the
28th day of January, 2000.
VAN KAMPEN TAX FREE TRUST
By: /s/ A. THOMAS SMITH III
---------------------------------------
A. Thomas Smith III,
Executive Vice President,
General Counsel and Secretary
Pursuant to the requirements of the 1933 Act, this Amendment to this
Registration Statement has been signed on January 28, 2000 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
Principal Executive Officer:
/s/ RICHARD F. POWERS, III* Trustee and President
- -----------------------------------------------------
Richard F. Powers, III
Principal Financial Officer:
/s/ JOHN L. SULLIVAN* Vice President, Chief Financial Officer and
- ----------------------------------------------------- Treasurer
John L. Sullivan
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ JERRY D. CHOATE* Trustee
- -----------------------------------------------------
Jerry D. Choate
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ MITCHELL M. MERIN* Trustee
- -----------------------------------------------------
Mitchell M. Merin
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
/s/ SUZANNE H. WOOLSEY* Trustee
- -----------------------------------------------------
Suzanne H. Woolsey
/s/ PAUL G. YOVOVICH* Trustee
- -----------------------------------------------------
Paul G. Yovovich
- ------------
* Signed by A. Thomas Smith III pursuant to a power of attorney filed herewith.
/s/ A. THOMAS SMITH III January 28, 2000
- -----------------------------------------------------
A. Thomas Smith III
Attorney-in-Fact
</TABLE>
C-7
<PAGE> 763
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 45 TO FORM N-1A
AS SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
(i)(2) -- Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)
(j) -- Consents of KPMG LLP for:
(i) Van Kampen Insured Tax Free Income Fund
(ii) Van Kampen Tax Free High Income Fund
(iii) Van Kampen California Insured Tax Free Fund
(iv) Van Kampen Municipal Income Fund
(v) Van Kampen Intermediate Term Municipal Income Fund
(vi) Van Kampen Florida Insured Tax Free Income Fund
(vii) Van Kampen New York Tax Free Income Fund
(z)(1) -- List of Investment Companies in response to Item 27(a)
List of Officers and Directors of Van Kampen Funds Inc. in response
(2) -- to Item 27(b)
</TABLE>
<PAGE> 1
Exhibit(i)(2)
[Letterhead of Skadden, Arps, Slate, Meagher & Flom (Illinois)]
January 28, 2000
Van Kampen Tax Free Trust
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
Re: Post-Effective Amendment No. 45 to the
Registration Statement on Form N-1A for
the Van Kampen Tax Free Trust
(the "Registration Statement")
(File Nos. 2-99715 and 811-4386)
--------------------------------
We hereby consent to the reference to our firm under the heading "Legal
Counsel" in the Registration Statement. In giving this consent, we do not
hereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom (Illinois)
<PAGE> 1
EXHIBIT (j)(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Insured Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 28, 2000
<PAGE> 1
EXHIBIT (j)(ii)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Tax Free High Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 28, 2000
<PAGE> 1
EXHIBIT (j)(iii)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen California Insured Tax Free Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 28, 2000
<PAGE> 1
EXHIBIT (j)(iv)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Municipal Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 28, 2000
<PAGE> 1
EXHIBIT (j)(v)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Intermediate Term Municipal Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 28, 2000
<PAGE> 1
EXHIBIT (j)(vi)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Florida Insured Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 28, 2000
<PAGE> 1
EXHIBIT (j)(vii)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen New York Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 28, 2000
<PAGE> 1
EXHIBIT (z)(1)
Item 27(a)
- ----------
Van Kampen U.S. Government Trust
Van Kampen U.S. Government Fund
Van Kampen Tax Free Trust
Van Kampen Insured Tax Free Income Fund
Van Kampen Tax Free High Income Fund
Van Kampen California Insured Tax Free Fund
Van Kampen Municipal Income Fund
Van Kampen Intermediate Term Municipal Income Fund
Van Kampen Florida Insured Tax Free Income Fund
Van Kampen New York Tax Free Income Fund
Van Kampen California Tax Free Income Fund*
Van Kampen Michigan Tax Free Income Fund*
Van Kampen Missouri Tax Free Income Fund*
Van Kampen Ohio Tax Free Income Fund*
Van Kampen Trust
Van Kampen High Yield Fund
Van Kampen Strategic Income Fund
Van Kampen Equity Trust
Van Kampen Aggressive Growth Fund
Van Kampen Great American Companies Fund
Van Kampen Growth Fund
Van Kampen Mid Cap Value Fund
Van Kampen Prospector Fund
Van Kampen Small Cap Value Fund
Van Kampen Utility Fund
Van Kampen Equity Trust II
Van Kampen Technology Fund
Van Kampen Pennsylvania Tax Free Income Fund
Van Kampen Tax Free Money Fund
Van Kampen Prime Rate Income Trust
Van Kampen Senior Floating Rate Fund
Van Kampen Comstock Fund
Van Kampen Corporate Bond Fund
Van Kampen Emerging Growth Fund
Van Kampen Enterprise Fund
Van Kampen Equity Income Fund
Van Kampen Exchange Fund
The Explorer Institutional Trust
Explorer Institutional Active Core Fund
Explorer Institutional Limited Duration Fund
<PAGE> 2
Van Kampen Limited Maturity Government Fund
Van Kampen Global Managed Assets Fund
Van Kampen Government Securities Fund
Van Kampen Growth and Income Fund
Van Kampen Harbor Fund
Van Kampen High Income Corporate Bond Fund
Van Kampen Life Investment Trust on behalf of its series
Asset Allocation Portfolio
Comstock Portfolio
Domestic Income Portfolio
Emerging Growth Portfolio
Enterprise Portfolio
Global Equity Portfolio
Government Portfolio
Growth and Income Portfolio
Money Market Portfolio
Strategic Stock Portfolio
Morgan Stanley Real Estate Securities Portfolio
Van Kampen Pace Fund
Van Kampen Real Estate Securities Fund
Van Kampen Reserve Fund
Van Kampen Tax Exempt Trust
Van Kampen High Yield Municipal Fund
Van Kampen U.S. Government Trust for Income
Van Kampen World Portfolio Series Trust
Van Kampen Global Government Securities Fund
Van Kampen Series Fund, Inc.
Van Kampen American Value Fund
Van Kampen Asian Growth Fund
Van Kampen Emerging Markets Debt Fund*
Van Kampen Emerging Markets Fund
Van Kampen Equity Growth Fund
Van Kampen European Equity Fund
Van Kampen Focus Equity Fund
Van Kampen Global Equity Allocation Fund
Van Kampen Global Equity Fund
Van Kampen Global Fixed Income Fund
Van Kampen Global Franchise Fund
Van Kampen Growth and Income Fund II*
Van Kampen High Yield & Total Return Fund
Van Kampen International Magnum Fund
Van Kampen Japanese Equity Fund*
Van Kampen Latin American Fund
Van Kampen Mid Cap Growth Fund
Van Kampen Value Fund
Van Kampen Worldwide High Income Fund
* Funds that have not commenced investment operations.
<PAGE> 3
<TABLE>
<S> <C>
Insured Municipals Income Trust Series 417
California Insured Municipals Income Trust Series 182
FLORIDA INSURED MUNICIPALS INCOME TRUST SERIES 128
MICHIGAN INSURED MUNICIPALS INCOME TRUST SERIES 159
New York Insured Municipals Income Trust Series 149
PENNSYLVANIA INSURED MUNICIPALS INCOME TRUST SERIES 246
Van Kampen Focus Portfolios, Insured Income Trust Series 75
THE DOW(SM) STRATEGIC 10 TRUST January 2000
SERIES
THE DOW(SM) STRATEGIC 10 TRUST January 2000
TRADITIONAL
SERIES
THE DOW(SM) STRATEGIC 5 TRUST January 2000
SERIES
THE DOW(SM) STRATEGIC 5 TRUST January 2000
TRADITIONAL
SERIES
EAFE STRATEGIC 20 TRUST January 2000
SERIES
STRATEGIC PICKS OPPORTUNITY TRUST January 2000
SERIES
NASDAQ Strategic 10 Trust January 2000 Series
Dow 30 Index Trust Series 9
Dow & Tech Strategic 10 Trust Series 1299a
Dow & Tech Strategic 10 Trust Series 1299b
Global Energy Trust Series 12
Financial Institutions Trust Series 3a
Financial Institutions Trust Series 3b
Edward Jones Select Growth Trust November 1999
Series
Internet Trust Series 18A
Internet Trust Series 18B
Morgan Stanley High-Technology 35 Index Trust Series 9A
Morgan Stanley High-Technology 35 Index Trust Series 9B
Pharmaceutical Trust Series 8A
Pharmaceutical Trust Series 8B
Telecommunications & Bandwidth Trust Series 8A
Telecommunications and Bandwidth Trust Series 8B
New Frontier Utility Trust Series 8A
New Frontier Utility Trust Series 8B
Roaring 2000s Trust Series 4a
Roaring 2000s Trust Series 4b
Roaring 2000s Trust Traditional Series 4
Morgan Stanley Multinational Index Trust Series 2A
Morgan Stanley Multinational Index Trust Series 2B
Software Trust Series 2A
Software Trust Series 2B
Natcity - Great American Equities Trust Series 3
Natcity - Great American Value Trust Series 1
Josephthal - The New Millennium Consumer Trust, Retail.com Portfolio 1
</TABLE>
<PAGE> 1
EXHIBIT (z)(2)
Item 27(b)
- ----------
<TABLE>
<S> <C> <C>
Richard F. Powers III Chairman & Chief Executive Officer Oakbrook Terrace, IL
John H. Zimmerman III President Oakbrook Terrace, IL
A. Thomas Smith III Executive Vice President, General Oakbrook Terrace, IL
Counsel & Secretary;
Vice President and Secretary of the Funds
William R. Rybak Executive Vice President, Chief
Financial Officer & Treasurer Oakbrook Terrace, IL
Michael H. Santo Executive Vice President & Chief
Operations & Technology Officer Oakbrook Terrace, IL
Colette M. Saucedo Executive Vice President & Houston, TX
Chief Administrative Officer
A. Thomas Smith III Executive Vice President, General Oakbrook Terrace, IL
Counsel & Secretary; Vice President
and Secretary of the Funds
Steven M. Massoni Executive Vice President Oakbrook Terrace, IL
David Swanson Executive Vice President and Chief
Marketing Officer Oakbrook Terrace, IL
Laurence J. Althoff Sr. Vice President & Controller Oakbrook Terrace, IL
Don J. Andrews Sr. Vice President & Chief Compliance Oakbrook Terrace, IL
Officer
Sara L. Badler Sr. Vice President, Deputy Oakbrook Terrace, IL
General Counsel & Assistant Secretary;
Assistant Secretary of the Funds
James J. Boyne Sr. Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Assistant Secretary
Glenn M. Cackovic Senior Vice President Laguna Niguel, CA
Gary R. DeMoss Sr. Vice President Oakbrook Terrace, IL
John E. Doyle Sr. Vice President Oakbrook Terrace, IL
Richard G. Golod Sr. Vice President Annapolis, MD
Eric J. Hargens Senior Vice President Orlando, FL
Carl Mayfield Senior Vice President Lakewood, CO
Mark R. McClure Senior Vice President Oakbrook Terrace, IL
Robert F. Muller, Jr. Senior Vice President Oakbrook Terrace, IL
Walter E. Rein Sr. Vice President Oakbrook Terrace, IL
James J. Ryan Sr. Vice President Oakbrook Terrace, IL
Frederick Shepherd Sr. Vice President Houston, TX
Weston B. Wetherell Senior Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Asst. Secretary;
Assistant Secretary of the Funds
Robert S. West Sr. Vice President Oakbrook Terrace, IL
Edward G. Wood, III Sr. Vice President,
Chief Operating Officer; Oakbrook Terrace. IL
Vice President of the Funds
James R. Yount Senior Vice President Mercer Island, WA
Patricia A. Bettlach 1st Vice President Chesterfield, MO
Gregory Heffington 1st Vice President Ft. Collins, CO
David S. Hogaboom 1st Vice President Oakbrook Terrace, IL
Dominic C. Martellaro 1st Vice President Danville, CA
Maura A. McGrath 1st Vice President New York, NY
Thomas Rowley 1st Vice President St. Louis, MO
Andrew J. Scherer 1st Vice President Oakbrook Terrace, IL
James D. Stevens 1st Vice President North Andover, MA
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
James K. Ambrosio Vice President Massapequa, NY
Brian P. Arcara Vice President Buffalo, NY
Timothy R. Armstrong Vice President Wellington, FL
Matthew Baker Vice President Oakbrook Terrace, IL
Shakeel Anwar Barkat Vice President Annapolis, MD
Scott C. Bernstiel Vice President Plainsboro, NJ
Carol S. Biegel Vice President Oakbrook Terrace, IL
Christopher M. Bisaillon Vice President Oakbrook Terrace, IL
William Edwin Bond Vice President New York, NY
Michael P. Boos Vice President Oakbrook Terrace, IL
Robert C. Brooks Vice President Oakbrook Terrace, IL
Elizabeth M. Brown Vice President Houston, TX
William F. Burke, Jr. Vice President Mendham, NJ
Loren Burket Vice President Plymouth, MN
Juanita E. Buss Vice President Kennesaw, GA
Christine Cleary Byrum Vice President Tampa, FL
Richard J. Charlino Vice President Oakbrook Terrace, IL
Deanne Margaret Chiaro Vice President Oakbrook Terrace, IL
Scott A. Chriske Vice President Plano, TX
German Clavijo Vice President Atlanta, GA
Eleanor M. Cloud Vice President Oakbrook Terrace, IL
Dominick Cogliandro Vice President & Asst. Treasurer New York, NY
Michael Colston Vice President Louisville, KY
Kevin J. Connors Vice President Oakbrook Terrace, IL
Gina Costello Vice President Oakbrook Terrace, IL
Suzanne Cummings Vice President Oakbrook Terrace, IL
Michael E. Eccleston Vice President Oakbrook Terrace, IL
William J. Fow Vice President Redding, CT
Nicholas J. Foxhoven Vice President Englewood, CO
Charles Friday Vice President Gibsonia, PA
Sarah Kessler Gieser Vice President Oakbrook Terrace, IL
Timothy D. Griffith Vice President Kirkland, WA
Kyle D. Haas Vice President Oakbrook Terrace, IL
Daniel Hamilton Vice President Austin, TX
John G. Hansen Vice President Oakbrook Terrace, IL
Joseph Hays Vice President Cherry Hill, NJ
Michael D. Hibsch Vice President Oakbrook Terrace, IL
Susan J. Hill Vice President Oakbrook Terrace, IL
Thomas R. Hindelang Vice President Gilbert, AZ
Bryn M. Hoggard Vice President Houston, TX
Michelle Huber Vice President Oakbrook Terrace, IL
Michael B. Hughes Vice President Oakbrook Terrace, IL
Lowell Jackson Vice President Norcross, GA
Kevin G. Jajuga Vice President Baltimore, MD
Laurie L. Jones Vice President Oakbrook Terrace, IL
Robert Daniel Kendall Vice President Oakbrook Terrace, IL
Dana R. Klein Vice President Oakbrook Terrace, IL
Frederick Kohly Vice President Miami, FL
Anne Kochevar Vice President Oakbrook Terrace, IL
Richard D. Kozlowski Vice President Atlanta, GA
Patricia D. Lathrop Vice President Tampa, FL
Brian Laux Vice President Staten Island, NY
Tony E. Leal Vice President Daphne, AL
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
S. William Lehew III Vice President Charlotte, NC
Jonathan Linstra Vice President Oakbrook Terrace, IL
Ivan R. Lowe Vice President Houston, TX
Richard M. Lundgren Vice President Oakbrook Terrace, IL
Linda S. MacAyeal Vice President Oakbrook Terrace, IL
Kevin S. Marsh Vice President Bellevue, WA
Brooks D. McCartney Vice President Puyallup, WA
Anne Therese McGrath Vice President Los Gatos, CA
John Mills Vice President Kenner, LA
Stuart R. Moehlman Vice President Houston, TX
Carin Elizabeth Morgan Vice President Oakbrook Terrace, IL
Ted Morrow Vice President Plano, TX
Peter Nicholas Vice President Beverly, MA
Steven R. Norvid Vice President Oakbrook Terrace, IL
Allyn O' Connor Vice President & Assoc. General Counsel Oakbrook Terrace, IL
Gregory S. Parker Vice President Houston, TX
Christopher Petrungaro Vice President Oakbrook Terrace, IL
Richard J. Poli Vice President Philadelphia, PA
Ronald E. Pratt Vice President Marietta, GA
Daniel D. Reams Vice President Royal Oak, MI
Theresa Marie Renn Vice President Oakbrook Terrace, IL
Kevin Wayne Reszel Vice President Oakbrook Terrace, IL
Michael W. Rohr Vice President Oakbrook Terrace, IL
Jeffrey L. Rose Vice President Houston, TX
Suzette N. Rothberg Vice President Plymouth, MN
Jeffrey Rourke Vice President Oakbrook Terrace, IL
Heather R. Sabo Vice President Richmond, VA
Brett Van Bortel Vice President Oakbrook Terrace, IL
Larry Brian Vickery Vice President Oakbrook Terrace, IL
Diane Saxon Vice President & Assistant Treasurer Oakbrook Terrace, IL
Stephanie Scarlata Vice President Bedford Corners, NY
Christina L. Schmieder Vice President Oakbrook Terrace, IL
Timothy M. Scholten Vice President Oakbrook Terrace, IL
Ronald J. Schuster Vice President Tampa, FL
Jeffrey M. Scott Vice President Oakbrook Terrace, IL
Gwen L. Shaneyfelt Vice President Oakbrook Terrace, IL
Jeffrey C. Shirk Vice President Swampscott, MA
Traci T. Sorenson Vice President Oakbrook Terrace, IL
Darren D. Stabler Vice President Phoenix, AZ
Christopher J. Staniforth Vice President Leawood, KS
Richard Stefanec Vice President Los Angles, CA
William C. Strafford Vice President Granger, IN
Mark A. Syswerda Vice President Oakbrook Terrace, IL
Charles S. Thompson Vice President Oakbrook Terrace, IL
John F. Tierney Vice President Oakbrook Terrace, IL
Curtis L. Ulvestad Vice President Red Wing, MN
Thomas J. Sauerborn Vice President New York, NY
Daniel B. Waldron Vice President Oakbrook Terrace, IL
Jeff Warland Vice President Oakbrook Terrace, IL
Robert A. Watson Vice President Oakbrook Terrace, IL
Sharon Wells Coicou Vice President Oakbrook Terrace, IL
Frank L. Wheeler Vice President Oakbrook Terrace, IL
Harold Whitworth, III Vice President Oakbrook Terrace, IL
Joel John Wilczewski Vice President Oakbrook Terrace, IL
Thomas M. Wilson Vice President Oakbrook Terrace, IL
Barbara A. Withers Vice President Oakbrook Terrace, IL
</TABLE>
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<TABLE>
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David M. Wynn Vice President Phoenix, AZ
Patrick M. Zacchea Vice President Oakbrook Terrace, IL
Scott F. Becker Asst. Vice President Oakbrook Terrace, IL
Brian E. Binder Asst. Vice President Oakbrook Terrace, IL
Billie J. Bronaugh Asst. Vice President Houston, TX
Lynn Chadderton Asst. Vice President Oakbrook Terrace, IL
Phillip Ciulla Asst. Vice President Oakbrook Terrace, IL
Amy Cooper Asst. Vice President Oakbrook Terrace, IL
Paula Duerr Asst. Vice President Oakbrook Terrace, IL
Tammy Echevarria-Davis Asst. Vice President Oakbrook Terrace, IL
Walter C. Gray Asst. Vice President Oakbrook Terrace, IL
Nancy Johannsen Asst. Vice President Oakbrook Terrace, IL
Thomas Johnson Asst. Vice President New York NY
Tara Jones Asst. Vice President Oakbrook Terrace, IL
Robin R. Jordan Asst. Vice President Oakbrook Terrace, IL
Holly Lieberman Asst. Vice President Oakbrook Terrace, IL
Gregory Mino Asst. Vice President Oakbrook Terrace, IL
Christopher Perozek Asst. Vice President Oakbrook Terrace, IL
Christine K. Putong Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Leah Richardson Asst. Vice President Oakbrook Terrace, IL
David P. Robbins Asst. Vice President Oakbrook Terrace, IL
Regina Rosen Asst. Vice President Oakbrook Terrace, IL
Pamela S. Salley Asst. Vice President Houston, TX
David T. Saylor Asst. Vice President Oakbrook Terrace, IL
Lisa Schultz Asst. Vice President Oakbrook Terrace, IL
Katherine Scherer Asst. Vice President Oakbrook Terrace, IL
Heather Schmitt Asst. Vice President Oakbrook Terrace, IL
Laurel Shipes Asst. Vice President Oakbrook Terrace, IL
Lauren B. Sinai Asst. Vice President Oakbrook Terrace, IL
Scott Stevens Asst. Vice President Oakbrook Terrace, IL
Kristen L. Transier Asst. Vice President Houston, TX
Damienne Trippiedi Asst. Vice President Oakbrook Terrace, IL
Michael Trizil Asst. Vice President Oakbrook Terrace, IL
David H. Villarreal Asst. Vice President Oakbrook Terrace, IL
Judy Wooley Asst. Vice President Houston, TX
Cathy Napoli Assistant Secretary Oakbrook Terrace, IL
William R. Rybak Treasurer Oakbrook Terrace, IL
John Browning Officer Oakbrook Terrace, IL
Leticia George Officer Houston, TX
William D. McLaughlin Officer Houston, TX
Rebecca Newman Officer Houston, TX
Theresa M. Renn Officer Oakbrook Terrace, IL
Larry Vickrey Officer Houston, TX
John Yovanovic Officer Houston, TX
Richard F. Powers III Director Oakbrook Terrace, IL
Michael H. Santo Director Oakbrook Terrace, IL
A. Thomas Smith III Director Oakbrook Terrace, IL
William R. Rybak Director Oakbrook Terrace, IL
John H. Zimmerman III Director Oakbrook Terrace, IL
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