<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1999
REGISTRATION NOS. 33-11384
811-4983
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 19 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 20 [X]
</TABLE>
VAN KAMPEN
PENNSYLVANIA TAX FREE INCOME FUND
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, IL 60181-5555
(Address of Principal Executive Offices)
(630) 684-6000
(Registrant's Telephone Number including Area Code)
Dennis J. McDonnell
Executive Vice President
Van Kampen Investments Inc.
1 Parkview Plaza, PO 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
VAN KAMPEN
PENNSYLVANIA TAX FREE
INCOME FUND
Van Kampen Pennsylvania Tax Free Income Fund
is a mutual fund with an investment objective
to provide only Pennsylvania investors with a
high level of current income exempt from
federal and Pennsylvania state income taxes
and, where possible under local law, local
income and personal property taxes, through
investment primarily in a varied portfolio of
medium and lower grade municipal securities.
The Fund is designed for investors who are
residents of Pennsylvania for tax purposes.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulators, and
neither the SEC nor any state regulator has
ruled on the accuracy or adequacy of this
prospectus. It is a criminal offense to state
otherwise.
This prospectus is dated JANUARY 28, 1999.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 6
Investment Objective and Policies.................. 7
Investment Advisory Services....................... 16
Purchase of Shares................................. 17
Redemption of Shares............................... 23
Distributions from the Fund........................ 25
Shareholder Services............................... 25
Pennsylvania Taxation.............................. 27
Federal Income Taxation............................ 28
Financial Highlights............................... 30
Appendix -- Description of Securities Ratings...... 31
</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> 4
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with an investment objective to provide only
Pennsylvania investors with a high level of current income exempt from federal
and Pennsylvania state income taxes and, where possible under local law, local
income and personal property taxes, through investment primarily in a varied
portfolio of medium and lower grade municipal securities. The Fund is designed
for investors who are residents of Pennsylvania for tax purposes. There can be
no assurance that the Fund will achieve its investment objective.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing primarily in medium and lower grade
Pennsylvania municipal securities that are rated at the time of purchase between
BBB and B- (inclusive) by Standard and Poor's ("S&P") or between Baa and B3
(inclusive) by Moody's Investors Service, Inc. ("Moody's") or an equivalent
rating by another nationally recognized statistical rating organization
("NRSRO") or comparably rated short term securities and unrated Pennsylvania
municipal securities believed by the Fund's investment adviser to be of
comparable quality at the time of purchase. Securities rated BB or below by S&P,
Ba or below by Moody's or unrated securities of comparable quality are commonly
referred to as "junk bonds" and involve special risks as compared to investments
in higher grade securities (see sidebar for an explanation of quality ratings).
Under normal market conditions, up to 20% of the Fund's net assets may be
invested in municipal securities that are subject to federal alternative minimum
tax. The Fund may purchase or sell certain derivative instruments (such as
options, futures and options on futures, and interest rate swaps or other
interest rate related transactions) for various risk management and hedging
purposes. The Fund may purchase or sell securities on a when-issued or delayed
delivery basis.
INVESTMENT RISKS
With its portfolio of medium and lower grade securities, the Fund has greater
risks than a fund owning higher grade securities. Because of the following
risks, you could lose money on your investment in the Fund over the short or
long term:
MARKET RISK. The prices of income securities tend to fall as interest rates
rise. This "market risk" is usually greater among securities with longer
maturities. Because the Fund does not have a policy limiting the maturities of
its investments and the Fund may own securities with longer maturities, the Fund
will be subject to greater market risk than a fund that owns shorter-term
securities.
Market risk is often greater among certain types of income securities, such as
zero-coupon bonds, which do not make regular interest payments but are instead
bought at a discount to their face values and paid in full upon maturity. As
interest rates change, these bonds often fluctuate more in price than bonds that
make regular interest payments. Because the Fund invests in zero-coupon bonds,
it may be subject to greater market risk than a fund that does not own this type
of bond.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
UNDERSTANDING
QUALITY RATINGS
Bond ratings are based on the issuer's ability to pay interest and repay the
principal. Bonds with ratings above the line are considered "investment
grade," while those with ratings below the line are regarded as
"noninvestment grade," or "junk bonds." A detailed explanation of these
ratings can be found in the appendix to this prospectus.
Moody's S&P Meaning
- --------------------------------------------------------------------------------
Aaa AAA Highest quality
................................................................................
Aa AA High quality
................................................................................
A A Above-average quality
................................................................................
Baa BBB Average quality
- --------------------------------------------------------------------------------
Ba BB Below-average quality
................................................................................
B B Marginal quality
................................................................................
Caa CCC Poor quality
................................................................................
Ca CC Highly speculative
................................................................................
C C Lowest quality
................................................................................
-- D In default
................................................................................
3
<PAGE> 5
Lower grade securities, especially those with long maturities or that do not
make regular interestpayments, may fluctuate more in price in response to
negative issuer or general economic news than higher grade securities.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest or principal. Because the Fund invests primarily in securities with
medium and lower grade credit quality, it is subject to a higher level of credit
risk than a fund that buys only investment grade securities. The credit quality
of "noninvestment grade" securities is considered speculative by recognized
rating agencies with respect to the issuer's continuing ability to pay interest
and principal. Lower grade securities may have less liquidity and a higher
incidence of default than investment in higher grade securities. The Fund may
incur higher expenditures to protect the Fund's interest in such securities. The
credit risks and market prices of lower grade securities are more sensitive to
negative issuer developments, such as reduced revenues or increased
expenditures, or adverse economic conditions, such as a recession, than are
higher grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would be reinvested by the Fund in securities with the new, lower
interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest up to 20% of its 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
Pennsylvania municipal securities, the Fund is more susceptible to political,
economic, regulatory or other factors affecting issuers of Pennsylvania
municipal securities than a fund that does not limit its investments to such
issuers.
RISKS OF USING DERIVATIVE INVESTMENTS. In general terms, a derivative investment
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures, interest
rate swaps and other interest-rate related transactions are examples of
derivatives. Such transactions involve risks different from the direct
investment in underlying securities such as imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may incur
losses that partially or completely offset gains in portfolio positions; risks
that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any fund, the Fund's management may not be successful in
selecting the best-performing securities and the Fund's performance may lag
behind that of similar funds.
-
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental authorities
to raise money for their daily operations or special projects. The interest
received from municipal securities generally is exempt from federal income tax.
In addition, the interest may be exempt from certain state or local taxes when
received from issuers who are located in the investors' home state,
municipality or region. The interest from certain municipal securities is a
preference item subject to federal alternative minimum tax.
4
<PAGE> 6
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
INVESTOR PROFILE
In light of its objective and investment strategies, the Fund may be appropriate
for investors who:
- - Seek current income.
- - Are in a high federal income tax bracket.
- - Are subject to Pennsylvania income taxes.
- - Are willing to take on the substantially increased risks of medium and lower
grade securities in exchange for potentially higher income.
- - Wish to add to their personal investment portfolios a fund that invests
primarily in medium and lower grade Pennsylvania municipal securities.
Investors should carefully consider the additional risks associated with an
investment in medium or lower grade municipal securities. An investment in the
Fund may not be appropriate for all investors. The Fund is not intended to be a
complete investment program, and investors should consider their long-term
investment goals and financial needs when making an investment decision about
the Fund. An investment in the Fund is intended to be a long-term investment,
and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance varies from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the past ten calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
BAR CHART
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1989' 10.84
'1990' 7.33
'1991' 11.64
'1992' 10.09
'1993' 13.25
'1994' -5.72
'1995' 16.62
'1996' 3.86
'1997' 8.59
'1998' 5.27
</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 6.91% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -6.13% (for the quarter ended March 31, 1994).
COMPARATIVE PERFORMANCE
This table shows how the Fund's performance compares with the Lehman Brothers
Municipal Bond Index, a broad-based market index that the Fund's management
believes is an applicable benchmark for the Fund. Average annual total returns,
assuming payment of the maximum sales charges, are shown for the one-, five-,
and ten-year periods ended December 31, 1998 (the most recently completed
calendar year prior to the date of this prospectus). Remember that the past
performance of the Fund is not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past 10
for the Years
Periods Ended Past Past or Since
December 31, 1998 1 Year 5 Years Inception
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen
Pennsylvania Tax
Free Income Fund
.......................................................
Class A Shares 0.27% 4.46% 7.49%
.......................................................
Class B Shares 0.46% 4.43% 5.20%(1)
.......................................................
Class C Shares 3.46% 4.70% 4.93%(2)
.......................................................
Lehman Brothers
Municipal Bond
Index 6.48% 6.22% 8.22%
.......................................................
</TABLE>
Inception dates: (1) 5/1/93, (2) 8/13/93.
The current yield for the thirty-day period ended September 30, 1998 is 3.74%
for Class A Shares, 3.18% for Class B Shares and 3.22% 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> 7
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 4.75%(1) None None
..............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) Year 1-4.00% Year 1-1.00%
Year 2-3.75% After-None
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
..............................................................
Redemption fees (as a
percentage of amount None None None
redeemed)
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
ANNUAL FUND
OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.60% 0.60% 0.60%
..............................................................
Distribution and/or 0.25% 1.00%(2) 1.00%(2)
Service (12b-1)
Fees(1)
..............................................................
Other Expenses 0.18% 0.19% 0.19%
..............................................................
Total Annual Fund 1.03% 1.79% 1.79%
Operating Expenses
..............................................................
</TABLE>
(1) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(2) Because Distribution and/or Service (12b-1) Fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by National Association of
Securities Dealers, Inc. rules.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return each year and
that the Fund's operating expenses remain the same each year (except for the
ten-year amounts for Class B Shares which reflect the conversion of Class B
Shares to Class A Shares after eight years). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $575 $787 $1,017 $1,675
......................................................................
Class B Shares $222 $598 $ 985 $1,905*
......................................................................
Class C Shares $192 $563 $ 970 $2,105
......................................................................
</TABLE>
6
-
<PAGE> 8
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 $575 $787 $1,017 $1,675
......................................................................
Class B Shares $182 $563 $ 970 $1,905*
......................................................................
Class C Shares $182 $563 $ 970 $2,105
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
To simplify comparison among funds, all funds are required by the SEC to assume
a 5% annual return. Class B Shares of the Fund acquired through the exchange
privilege are subject to the contingent deferred sales charge schedule of the
fund from which the shareholder's purchase of Class B Shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B Shares were exchanged
from a fund with a higher contingent deferred sales charge. The Fund's actual
annual return and actual expenses for future periods may be greater or less than
those shown.
INVESTMENT OBJECTIVE
AND POLICIES
The Fund's investment objective is to provide only Pennsylvania investors with a
high level of current income exempt from federal and Pennsylvania state income
taxes and, where possible under local law, local income and personal property
taxes, through investment primarily in a varied portfolio of medium and lower
grade municipal securities. The Fund is designed for investors who are residents
of Pennsylvania for tax purposes. The Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"). There are risks
inherent in all investments in securities; accordingly there can be no assurance
the Fund will achieve its investment objective.
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing primarily in medium and lower grade
Pennsylvania municipal securities that are rated at the time of purchase between
BBB and B- (inclusive) by S&P or between Baa or B3 (inclusive) by Moody's or an
equivalent rating by another NRSRO or comparably rated short term securities and
unrated Pennsylvania municipal securities believed by the Fund's investment
adviser to be of comparable quality at the time of purchase. Securities rated BB
or below by S&P, Ba or below by Moody's or unrated securities of comparable
quality are commonly referred to as "junk bonds" and involve special risks as
compared to investments in higher-grade securities. Under normal market
conditions, up to 20% of the Fund's total assets may be invested in municipal
securities that are subject to alternative minimum tax. From time to time, the
Fund temporarily may invest up to 10% of its total assets in Pennsylvania tax
exempt money market funds that invest in securities rated comparable to those in
which the Fund may invest and such instruments will be treated as investments in
municipal securities.
Pennsylvania 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 Pennsylvania
state income taxes.
The Fund's investment adviser will buy and sell securities for the Fund's
portfolio with a view to seeking a high level of current income exempt from
federal and Pennsylvania state income taxes and will select securities which the
Fund's investment adviser believes entail reasonable credit risk considered in
relation to the investment policies of the Fund. At times the Fund's investment
adviser may judge that conditions in the markets for medium and lower grade
municipal securities make pursuing the Fund's basic investment strategy of
investing primarily in such municipal securities inconsistent with the best
interests of shareholders. At such times, the Fund may invest all or a portion
of its assets in higher grade municipal securities and in municipal securities
determined by the Fund's investment adviser to be of comparable quality. As a
result, the Fund will not necessarily invest in the highest yielding
Pennsylvania municipal securities permitted by its investment policies if the
Fund's investment adviser determines that market risks or credit risks
associated with such investments would subject the Fund's portfolio to undue
risk. The potential for realization of capital gains resulting from possible
changes in interest rates will not be a major consideration. Other than for tax
purposes, frequency of portfolio turnover generally will not be a limiting
factor if the Fund's investment
7
-
<PAGE> 9
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.
Pennsylvania 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 Pennsylvania state income
tax. Under normal market conditions, at least 80% of the Fund's net assets will
be invested in Pennsylvania municipal securities. The policy stated in the
foregoing sentence is a fundamental policy of the Fund and may not be changed
without shareholder approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. Under normal market
conditions, up to 20% of the Fund's total assets may be invested in municipal
securities that are subject to federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar in to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund may also invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for
8
-
<PAGE> 10
payment of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Statement of Additional Information.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
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 "Medium and Lower Grade Municipal Securities"
below.
The Fund may invest up to 20% of its total assets in municipal securities that
are subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities
9
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<PAGE> 11
as a group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve increased risk
to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
MEDIUM AND LOWER GRADE MUNICIPAL SECURITIES
Under normal market conditions, the Fund invests primarily in medium and lower
grade municipal securities that are rated at the time of purchase between BBB
and B- (inclusive) by S&P or between Baa and B3 (inclusive) by Moody's or an
equivalent rating by another NRSRO or comparably rated short term securities and
unrated municipal securities considered by the Fund's investment adviser to be
of comparable quality at the time of purchase. With respect to such investments,
the Fund has not established any limit on the percentage of its portfolio which
may be invested in securities in any one rating category. Securities rated BB or
below by S&P, Ba or below by Moody's or unrated securities of comparable quality
are commonly referred to as "junk bonds". Generally, medium and lower grade
securities provide higher yields than higher grade securities of similar
maturity but are subject to greater risks, such as greater credit risk, greater
market risk and volatility, greater liquidity concerns and potentially greater
manager risk. Investors should carefully consider the risks of owning shares of
a fund which invests in medium and lower grade municipal securities before
making an investment in the Fund.
The higher yield on such securities held by the Fund reflects the greater credit
risk that the financial condition of the issuer or adverse changes in general
economic conditions, or both, may impair the ability of the issuer to make
payments of income and principal. Lower grade securities are considered
speculative by the rating agencies with respect to the capacity of the issuer to
make interest and principal payments and both medium and lower grade securities
are more susceptible to nonpayment or default than higher grade securities. An
economic downturn or increase in interest rates could severely impact the
ability of such issuers to pay principal and interest or obtain other financing.
The ratings of S&P and Moody's represent their opinions of the quality of the
securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Credit ratings are also subject to a risk
that the rating agencies may fail to change such ratings to reflect subsequent
events in a timely fashion. See the Appendix for a description of security
ratings.
The values of all debt securities fluctuate in response to changes in interest
rates, but medium and lower grade securities generally are subject to more
market risk and volatility than higher grade securities. Medium and lower grade
securities tend to react to short-term issuer or economic developments to a
greater extent than higher grade securities, which fluctuate primarily in
response to the general level of interest rates, assuming that there has been no
change in the fundamental quality of such securities. Yields on the Fund's
portfolio securities can be expected to fluctuate over time. A significant
increase in interest rates or a general economic downturn could severely disrupt
the market for medium and lower grade municipal securities and adversely affect
the market value of such securities. Such events also could lead to a higher
incidence of default by issuers of medium and lower grade municipal securities
compared to higher grade securities. In addition, changes in credit risks,
changes in interest rates, the credit markets or periods of general economic
uncertainty can be
10
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<PAGE> 12
expected to result in increased volatility in the market price of the Fund's
medium and lower grade municipal securities and thus in the net asset value of
the Fund. Medium and lower grade securities may be more susceptible to real or
perceived adverse economic conditions than higher grade securities. A projection
of an economic downturn, for example, could cause a decline in prices of medium
and lower grade securities because the advent of a recession could lessen the
ability of a such issuer to make principal and interest payments on its
securities or obtain additional financing when necessary. In addition, recent
and proposed legislation may have an adverse impact on the market prices or
liquidity for medium and lower grade municipal securities.
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for medium and lower grade securities may
be less liquid than the markets for higher grade securities. Liquidity relates
to the ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the medium and lower grade municipal securities in
which the Fund may invest, trading in such securities may be relatively
inactive. Prices of medium and lower grade debt securities may decline rapidly
in the event a significant number of holders decide to sell. Changes in
expectations regarding an individual issuer or medium or lower grade debt
securities generally could reduce market liquidity for such securities and make
their sale by the Fund more difficult, at least in the absence of price
concessions. The effects of adverse publicity and investor perceptions may be
more pronounced for securities for which no established retail market exists as
compared with the effects on securities for which such a market does exist. An
economic downturn or an increase in interest rates could severely disrupt the
market for such securities and adversely affect the value of outstanding bonds
or the ability of the issuers to repay principal and interest. Further, the Fund
may have more difficulty selling such securities in a timely manner and at their
stated value than would be the case for securities for which an established
retail market does exist. Certain municipal securities in which the Fund may
invest, such as special obligation bonds, lease obligations, participation
certificates and variable rate instruments, may be particularly less liquid.
Although the issuer of some such municipal securities may be obligated to redeem
such securities at face value, such redemption could result in capital losses to
the Fund to the extent such municipal securities were purchased by the Fund at a
premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for medium or lower grade municipal securities held in the
Fund's portfolio, the ability of the Fund's investment adviser to value the
Fund's securities becomes more difficult and the judgment of the Fund's
investment adviser may play a greater role in the valuation of the Fund's
securities due to the reduced availability of reliable objective data.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal or interest and such issuer
seeks to restructure the terms of its borrowings, the Fund may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Fund's portfolio securities
relate. Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings, and the Fund may be unable to
obtain full recovery thereof.
The Fund's investment adviser seeks to minimize the risks involved in investing
in medium and lower grade municipal securities through diversification, careful
investment analysis and attention to current developments and trends in the
economy and financial and credit markets. In purchasing and selling securities,
the Fund's investment adviser evaluates the issuers of such securities based on
a number of factors, including but not limited to the issuer's financial
strength, its sensitivity to economic conditions and trends, its revenues or
earnings potential, its operating history and management skills. Municipal
securities generally are not listed for trading on any national securities
exchange, and many issuers of medium and lower grade municipal securities choose
not to have a rating assigned to their obligations by any nationally recognized
statistical rating organization. The amount of information available about the
financial condition of an issuer of unlisted or unrated securities generally is
not as extensive as that which is
11
-
<PAGE> 13
available with respect to issuers of listed or rated securities. Thus,
investment results of the Fund's medium and lower grade securities may be more
dependent upon the investment adviser's credit analysis, judgment and experience
than a fund investing solely in higher grade securities.
Certain of the medium and lower grade municipal securities in which the Fund may
invest may be, subsequent to the Fund's investment in such securities,
downgraded or have their rating withdrawn by Moody's or S&P or may be deemed by
the Fund's investment adviser to be of a lower quality as a result of impairment
of the creditworthiness of the issuer of such securities or of the project the
revenues from which are the source of payment of interest and repayment of
principal with respect to such securities. The Fund may, if deemed appropriate
by the Fund's investment adviser, retain a security whose rating has been
downgraded or whose rating has been withdrawn. In such instances, the secondary
market for such municipal securities may become less liquid, with the
possibility that more than 15% of the Fund's net assets would be invested in
securities which are not readily marketable. In such event, the Fund will take
reasonable and appropriate steps to reduce the percentage of the Fund's
portfolio represented by securities that are not readily marketable to less than
15% of the Fund's net assets as soon as is reasonably practicable.
The table below sets forth the percentages of the Fund's assets invested during
the fiscal period ended September 30, 1998 in the various S&P's and Moody's
rating categories and in unrated securities determined by the Fund's investment
adviser to be of comparable quality. The percentages are based on the
dollar-weighted average of credit ratings of all municipal securities held by
the Fund during the 1998 fiscal period computed on a monthly basis.
<TABLE>
<CAPTION>
Period Ended September 30, 1998
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 49.2% 0.0%
.......................................................................
AA/Aa 10.6% 0.0%
.......................................................................
A/A 13.2% 0.9%
.......................................................................
BBB/Baa 12.7% 4.8%
.......................................................................
BB/Ba 1.7% 6.9%
.......................................................................
B/B 0.0% 0.0%
.......................................................................
CCC/Caa 0.0% 0.0%
.......................................................................
CC/Ca 0.0% 0.0%
.......................................................................
C/C 0.0% 0.0%
.......................................................................
D 0.0% 0.0%
.......................................................................
Percentage of
Rated and
Unrated
Securities 87.4% 12.6%
.......................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those set forth above.
SPECIAL CONSIDERATIONS REGARDING CERTAIN SECURITIES
The Fund may invest in certain securities not producing immediate cash income,
such as zero coupon and payment-in-kind securities, when the Fund's investment
adviser believes the effective yield on such securities over comparable
instruments paying cash income makes these investments attractive. Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest. They are issued and traded at a discount from
their face amounts or par value, which discount varies depending on the time
remaining until cash payments begin, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. Payment-in-kind
securities are securities that pay interest through the issuance of additional
securities. Prices on non-cash-paying instruments may be more sensitive to
changes in the issuer's financial condition, fluctuations in interest rates and
market demand/supply imbalances than cash-paying securities with similar credit
ratings, and thus may be more
12
-
<PAGE> 14
speculative than are securities that pay interest periodically in cash. In
addition, the amount of non-cash interest income earned on such instruments is
included, for federal income tax purposes, in the Fund's calculation of income
that is required to be distributed to shareholders for the Fund to maintain its
desired federal income tax status (even though such non-cash paying securities
do not provide the Fund with the cash flow with which to pay such
distributions). Accordingly, the Fund may be required to borrow or to liquidate
portfolio securities at a time that it otherwise would not have done so in order
to make such distributions. The Fund's investment adviser will weigh these
concerns against the expected total returns from such instruments.
SPECIAL CONSIDERATIONS REGARDING
MUNICIPAL PENNSYLVANIA SECURITIES
The Fund invests substantially all of its assets in a portfolio of Pennsylvania
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 Pennsylvania state income
taxes. Because the Fund invests substantially all of its assets in a portfolio
of Pennsylvania municipal securities, the Fund is more susceptible to political,
economic, regulatory or other factors affecting issuers of Pennsylvania
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 Pennsylvania 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
Commonwealth of Pennsylvania published in connection with the issuance of
specific Pennsylvania 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 Pennsylvania municipal securities acquired by the
Fund. The Fund assumes no responsibility for the completeness or accuracy of
such information.
Pennsylvania historically has been identified as a heavy industry state although
that reputation has changed recently as the industrial composition of
Pennsylvania diversified when the coal, steel and railroad industries began to
decline. The major new sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, accounting for
more than $3.6 billion in crop and livestock products annually, while
agribusiness and food related industries support $39 billion in economic
activity annually.
Pennsylvania operates under an annual budget which is formulated and submitted
for legislative approval by the Governor each February. The Pennsylvania
Constitution requires that the Governor's budget proposal consist of three
parts: (i) a balanced operating budget setting forth proposed expenditures and
estimated revenues from all sources and, if estimated revenues and available
surplus are less than proposed expenditures, recommending specific additional
sources of revenue sufficient to pay the deficiency; (ii) a capital budget
setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
All outstanding general obligation bonds of the Commonwealth of Pennsylvania are
rated AA- by S&P and A1 by Moody's. Local municipalities issuing Pennsylvania
municipal securities, although impacted in general by the economic condition of
the Commonwealth, have credit ratings that are determined with reference to the
economic condition of such local municipalities. For example, as of the date
hereof, the ratings on the long-term obligations of the City of Philadelphia
(the "City") supported by payments from the City's General Fund are rated Baa by
Moody's and BBB- by S&P.
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<PAGE> 15
Although revenue obligations of the Commonwealth 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 Commonwealth 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 Pennsylvania municipal securities and the
Commonwealth of Pennsylvania is set forth in the Statement of Additional
Information.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and enter into various interest rate transactions
such as swaps, caps, floors or collars. Collectively, all of the above are
referred to as "Strategic Transactions." Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the investment adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the investment adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the risk management or hedging instrument may be greater than gains in the
value of the Fund's position. In addition, futures and options markets may not
be liquid in all circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
The Fund may purchase and sell municipal securities on a "when-issued" or
"delayed delivery" basis whereby the Fund buys or sells a security with payment
and delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities. These
transactions are subject to market risk as the value or yield of a municipal
security at delivery may be more or less than the purchase price or the yield
generally available on municipal securities when delivery occurs. In addition,
the Fund is subject to counterparty risk because it relies on the buyer or
14
-
<PAGE> 16
seller, as the case may be, to consummate the transaction, and failure by the
other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. The
Fund will only make commitments to purchase such securities with the intention
of actually acquiring these securities, but the Fund may sell these securities
prior to settlement if it is deemed advisable. No specific limitation exists as
to the percentage of the Fund's assets which may be used to acquire securities
on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid and certain
restricted securities. Such securities may be difficult or impossible to sell at
the time and the price that the Fund would like. Thus, the Fund may have to sell
such securities at a lower price, sell other securities instead to obtain cash
or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
The Fund intends to invest its assets in a broadly varied portfolio in order to
reduce the impact on the Fund of any loss on a particular portfolio security.
However, in order to attain economies of scale at relatively low asset size, the
Fund intends to invest more than 5% of its assets in at least five issuers and
may invest as much as 50% of its assets in as few as two issuers. With respect
to the remaining 50% of its assets, it may invest no more than 5% in the
securities of one issuer. Thus, the Fund's investments may be more concentrated
in fewer issuers than if it were a diversified fund and the Fund's net asset
value may increase or decrease more than a diversified fund because of changes
in the financial condition or market assessment of a single issuer.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information which can be obtained by investors free of charge as
described on the back cover of this prospectus.
Although the Fund does not intend to engage in substantial short-term trading,
it may sell securities without regard to the length of time they have been held
in order to take advantage of new investment opportunities or yield
differentials or otherwise. The Fund's portfolio turnover is shown under the
heading "Financial Highlights". The portfolio turnover rate may be expected to
vary from year to year. A high portfolio turnover rate (100% or more) increases
the Fund's transactions costs, including brokerage commissions or dealer costs,
and may result in the realization of more short-term capital gains than if the
Fund had a lower portfolio turnover. The turnover rate will not be a limiting
factor, however, if the Fund's investment adviser considers portfolio changes
appropriate.
When market conditions dictate a more "defensive" investment strategy, the Fund
may invest on a temporary basis a portion or all of its assets in high-quality,
short-term Pennsylvania 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 Pennsylvania
municipal securities. Furthermore, if such high-quality securities are not
available or, in the investment adviser's judgment, do not afford sufficient
protection against adverse market conditions, the Fund may invest in taxable
obligations. Such taxable obligations may include in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, other
investment grade quality income securities, prime commercial paper, certificates
of deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The effect of
taking such a defensive position may be that the Fund does not achieve its
investment objective.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's investment adviser and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund's investment adviser is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Fund's other major service providers. At this time, there
can be no assurances that these steps will be sufficient to avoid any adverse
impact to the Fund. In addition, the Year 2000 Problem may adversely affect the
markets and
15
-
<PAGE> 17
the issuers of securities in which the Fund may invest which, in turn, may
adversely affect the net asset value of the Fund. Improperly functioning trading
systems may result in settlement problems and liquidity issues. In addition,
corporate and governmental data processing errors may result in production
problems for individual companies or issuers and overall economic uncertainty.
Earnings of individual issuers will be affected by remediation costs, which may
be substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected. The
statements above are subject to the Year 2000 Information and Readiness
Disclosure Act which Act may limit the legal rights regarding the use of such
statements in the case of a dispute.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen Investments' more than 50 open-end and 39 closed-end funds and more than
2,500 unit investment trusts are professionally distributed by leading financial
advisers nationwide. Van Kampen Funds Inc., the distributor of the Fund (the
"Distributor") and the sponsor of the funds mentioned above, is also a wholly
owned subsidiary of Van Kampen Investments. Van Kampen Investments is an
indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.60%
.....................................................
Over $500 million 0.50%
.....................................................
</TABLE>
Applying this fee schedule, the Fund paid the Adviser an advisory fee at the
effective rate of 0.60% of the Fund's average net assets for the Fund's fiscal
period ended September 30, 1998.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Other operating expenses
paid by the Fund include service fees, distribution fees, custodial fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other business expenses not specifically assumed
by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. 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.
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<PAGE> 18
Prior to joining the Adviser, Mr. Pietrzak was employed by Merrill Lynch where
he was in charge of municipal underwriting and trading in Merrill Lynch's
Midwest region.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares. Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan (described below) pursuant to which its
distribution fee or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The price of the Fund's shares is based upon the Fund's net asset value per
share. The net asset values per share of the Class A Shares, Class B Shares and
Class C Shares are generally expected to be substantially the same. In certain
circumstances, however, the per share net asset values of the classes of shares
may differ from one another, reflecting the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B Shares and
Class C Shares and the differential in the dividends that may be paid on each
class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on:
customary business holidays, any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value per share and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Fund to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund also has adopted a service
plan (the "Service Plan") with respect to each class of its shares. The
Distribution Plan and the Service Plan provide that the Fund may pay
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class.
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,
17
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<PAGE> 19
you may pay more over time than on a class of shares with other types of sales
charge arrangements. The net income attributable to a class of shares and the
dividends payable on such class of shares will be reduced by the amount of the
distribution fees and other expenses associated with such class of shares. To
assist investors in comparing classes of shares, the tables under the heading
"Fees and Expenses of the Fund" provide a summary of sales charges and expenses
and an example of the sales charges and expenses applicable to each class of
shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the National Association of Securities Dealers, Inc. ("NASD") who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents or investors ("brokers"). "Dealers"
and "brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The price paid for shares purchased is based on the next calculation of net
asset value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner. Orders of less than $500 generally are
mailed by the authorized dealer and processed at the offering price next
calculated after receipt by Investor Services.
Shares of the Fund may be sold in foreign countries where permissible. The Fund
and the Distributor reserve the right to refuse any order for the purchase of
shares. The Fund also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gains
distributions, unless the investor instructs the Fund otherwise. Investors
wishing to receive cash instead of additional shares should contact the Fund at
(800) 341-2911 or by writing to the Fund, c/o Van Kampen Investors Services
Inc., PO Box 418256, Kansas City, MO 64141-9256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on certain redemptions made within one year of
the purchase. The contingent deferred sales charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price.
The Fund may spend an aggregate amount up to 0.25% per year of the average daily
net assets
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<PAGE> 20
attributable to the Class A Shares of the Fund pursuant to the Distribution Plan
and Service Plan. From such amount, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets attributable to the Class A Shares pursuant
to the Service Plan in connection with the ongoing provision of services to
holders of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge if redeemed within six years of purchase as shown in the
table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of any payment for the purchase of shares, all
payments during a month are aggregated and deemed to have been made on the last
day of the month.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class B Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class B Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge of 1.00% of the dollar amount subject to charge if
redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
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<PAGE> 21
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class C Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class C Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan shares received thereon, automatically convert to Class A Shares eight
years after the end of the calendar month in which the shares were purchased.
Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares seven years
after the end of the calendar month in which the shares were purchased. Class C
Shares purchased before January 1, 1997, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares ten years after
the end of the calendar month in which such shares were purchased. Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales load, fee or other charge. The conversion
schedule applicable to a share of the Fund acquired through the exchange
privilege from another Van Kampen fund is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the federal income tax law and (ii) the
conversion of shares does not constitute a taxable event under federal income
tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) in
connection with required minimum distributions from an individual retirement
account ("IRA") or certain other retirement plan distributions, (iii) pursuant
to the Fund's systematic withdrawal plan but limited to 12% annually of the
initial value of the account, (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares and (v) effected pursuant to the right of the Fund to involuntarily
liquidate a shareholder's account as described under the heading "Redemption of
Shares." The contingent deferred sales charge also is waived on redemptions of
Class C Shares as it relates to the reinvestment of redemption proceeds in
shares of the same class of the Fund within 180 days after redemption. For a
more complete description of contingent deferred sales charge waivers, please
refer to the Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced sales charges. Investors, or their authorized
dealers, must notify the Fund at the time of the purchase order whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of
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<PAGE> 22
the Fund and shares of other Participating Funds, although other Participating
Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as out-lined in the Class A Shares sales
charge table. The size of investment shown in the Class A Shares sales charge
table also includes purchases of shares of the Participating Funds over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The initial purchase must be for an amount equal to at
least 5% of the minimum total purchase amount of the level selected. If trades
not initially made under a Letter of Intent subsequently qualify for a lower
sales charge through the 90-day back-dating provisions, an adjustment will be
made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. The Fund
initially will escrow shares totaling 5% of the dollar amount of the Letter of
Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the sales charges previously paid. Such payments may be made directly
to the Distributor or, if not paid, the Distributor will liquidate sufficient
escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges in
connection with the unit investment trust reinvestment program and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund, at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each participating investor in a computerized format fully
compatible with Investor Services' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a quarterly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for
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<PAGE> 23
investment purposes and that the shares will not be resold except through
redemption by the Fund, by:
1. Current or retired trustees or directors of funds advised by Asset Management
or Advisory Corp. and such persons' families and their beneficial accounts.
2. Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
3. Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
4. Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over a
12-month period.
5. Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
6. Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
7. Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
8. Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Code, or custodial accounts held by a
bank created pursuant to Section 403(b) of the Code and sponsored by
non-profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible deferred
compensation plan under Section 457 of the Code. Such plans will qualify for
purchases at net asset value provided, for plans initially establishing
accounts with the Distributor in the Participating Funds after February 1,
1997, that (1) the initial amount invested in the Participating Funds is at
least $500,000 or (2) such shares are purchased by an employer sponsored plan
with more than 100 eligible employees. Such plans that have been established
with a Participating Fund or have received proposals from the Distributor
prior to February 1, 1997 based on net asset value purchase privileges
previously in effect will be qualified to purchase shares of the
Participating Funds at net asset value for accounts established on or before
May 1, 1997. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves as custodian will not be eligible for net asset value
purchases based on the aggregate investment made by the plan or the number of
eligible employees, except under certain uniform criteria established by the
Distributor from time to time. Prior to February 1, 1997, a commission will
be paid to authorized dealers who initiate and are responsible for such
purchases within a rolling twelve-month period as follows: 1.00% on sales to
$5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million. For purchases on February 1, 1997 and thereafter, a commission
will be paid as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million, plus 0.50% on the next $47 million, plus 0.25% on the excess over
$50 million.
9. Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its
22
-
<PAGE> 24
endorsement or authorization, on behalf of the group, for purchase of shares
of the Fund and Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased in
each group's participants account in connection with this privilege will be
subject to a contingent deferred sales charge of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian of a
retirement plan account may involve additional fees charged by the dealer or
custodian.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
acceptance by Investor Services of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the redemption until it confirms the purchase check
has cleared, which may take up to 15 days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 418256, Kansas City, MO 64141-9256. The request for redemption
should indicate the number of shares to be redeemed, the class designation of
such shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. In the case of shareholders holding
certificates, the certificates for
23
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<PAGE> 25
the shares being redeemed properly endorsed for transfer must accompany the
redemption request. In the event the redemption is requested by a corporation,
partnership, trust, fiduciary, executor or administrator, and the name and title
of the individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 120 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to Investor Services. Contact the IRA custodian
for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. Orders sent through authorized dealers
must be at least $500 (unless transmitted by your authorized dealer via the
FUNDSERV network). The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this prospectus or call the Fund at (800) 341-2911
to request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Van Kampen Investments, Investor Services and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
Telephone redemptions may not be available if the shareholder cannot reach
Investor Services by telephone, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
other redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., Pennsylvania time, will be processed at the next
determined net asset value per share. These privileges are available for all
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account with a
value on the date of the notice of redemption less than the minimum initial
investment as specified in this prospectus. At least 60 days advance written
notice of any such involuntary redemption will be given and the shareholder will
be given an opportunity to purchase the required value of additional shares at
the next determined net asset value without sales charge. Any involuntary
redemption may only occur if the shareholder account is less than the minimum
initial investment due to shareholder redemptions.
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<PAGE> 26
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions. Investors will be entitled to begin receiving
dividends on their shares on the business day after Investor Services receives
payment for such shares. However, shares become entitled to dividends on the day
Investor Services receives payment for the shares either through a fed wire or
NSCC settlement. Shares remain entitled to dividends through the day such shares
are processed for payment on redemption.
DIVIDENDS. Interest earned from investments is the Fund's main source of income.
Under the Fund's present policy, which may be changed at any time by the Board
of Trustees, distributions of all or substantially all of this income, less
expenses, are declared daily and paid monthly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than purchase prices. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including losses carried forward from prior years. The Fund distributes any
taxable net realized capital gains to shareholders at least annually. As in the
case of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value unless the shareholder
instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gains
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to charge a bank account on a
regular basis to invest pre-determined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint Investor Services as agent by completing the Authorization for
Redemption by Check form and the appropriate section of the application and
returning the form and the application to Investor Services. Once the form is
properly completed, signed and returned to the agent, a supply of checks drawn
on State Street Bank and Trust Company (the "Bank") will be sent to the Class A
shareholder. These checks may be made payable by the Class A shareholder to the
order of any person in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover
25
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<PAGE> 27
the amount of the check are redeemed from the shareholder's Class A account by
Investor Services at the next determined net asset value per share. Check
writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or the
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
When Class B Shares and Class C Shares are exchanged among Participating Funds,
the holding period for purposes of computing the contingent deferred sales
charge is based upon the date of the initial purchase of such shares from a
Participating Fund. If such Class B Shares or Class C Shares are redeemed and
not exchanged for shares of another Participating Fund, Class B Shares and Class
C Shares are subject to the contingent deferred sales charge schedule imposed by
the Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying the prospectus. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen Investments, Investor Services nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
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
26
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<PAGE> 28
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments, Investor
Services and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated through the internet are genuine. Such
procedures include requiring use of a personal identification number prior to
acting upon internet instructions and providing written confirmation of
instructions communicated through the internet. If reasonable procedures are
employed, neither Van Kampen Investments, Investor Services nor the Fund will be
liable for following instructions through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
PENNSYLVANIA
TAXATION
The following Pennsylvania tax discussion is based on the advice of Saul, Ewing,
Remick & Saul, special counsel to the Fund for Pennsylvania tax matters.
The discussion under this heading applies only to shareholders of the Fund that
are residents of Pennsylvania for Pennsylvania income tax purposes. Under
existing Pennsylvania law, since the Fund intends to invest primarily in
Pennsylvania municipal securities, in the opinion of special Pennsylvania
counsel to the Fund, interest income of the Fund derived from these investments
and distributed to the shareholders will be exempt from Pennsylvania Personal
Income Tax and (for residents of Philadelphia) from Philadelphia School District
Income Tax. To the extent the Fund invests in other permitted investments,
distributions to shareholders of income from these investments may be subject to
Pennsylvania Personal Income Tax and (for residents of Philadelphia) to
Philadelphia School District Income Tax. Shareholders of the Fund will receive
annual notification from the Fund as to the taxability of such distributions in
Pennsylvania.
Income of the Fund derived from Pennsylvania municipal securities and
distributed to corporate shareholders will be exempt from Pennsylvania Corporate
Net Income Tax as well as Pennsylvania Mutual Thrift Institutions Tax. Gains
realized by a corporate shareholder on a sale or disposition of shares will be
subject to Pennsylvania Corporate Net Income Tax or Pennsylvania Mutual Thrift
Institutions Tax, whichever is applicable. To the extent the Fund invests in
other permitted investments, distributions to corporate shareholders of income
from these investments may be subject to Pennsylvania Corporate Net Income Tax
or Pennsylvania Mutual Thrift Institutions Tax, whichever is applicable.
Shareholders of the Fund will receive annual notification from the Fund as to
the taxability of such distributions in Pennsylvania.
Gains realized by a shareholder on a sale or disposition of shares of the Fund
will be subject to Pennsylvania Personal Income Tax as well as Philadelphia
School District Income Tax (but under the Philadelphia School District Tax, only
as to sales occurring within six months of purchase).
27
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<PAGE> 29
In the opinion of special Pennsylvania counsel to the Fund, shares of the Fund
will be exempt from Pennsylvania County Personal Property Taxes and (as to
residents of Pittsburgh) from personal property taxes imposed by the City of
Pittsburgh and School District of Pittsburgh. This exemption, however, will not
apply to that portion of the Fund represented by each shareholder's shares that
is not invested in Pennsylvania municipal securities (or other securities exempt
from personal property taxes in Pennsylvania).
Shares of the Fund are subject to Pennsylvania Inheritance and Estate Tax.
Gains derived by the Fund from the sale, exchange or other disposition of
Pennsylvania municipal securities may be subject to Pennsylvania personal or
corporate income taxes. Those gains which are distributed by the Fund to
shareholders who are individuals will be subject to Pennsylvania Personal Income
Tax and, for residents of Philadelphia, to Philadelphia School District
Investment Income Tax. For shareholders which are corporations, the distributed
gains will be subject to Pennsylvania Corporate Net Income Tax or Pennsylvania
Mutual Thrift Institutions Tax, whichever is applicable. Gains which are not
distributed by the Fund will nevertheless be taxable to shareholders if derived
by the Fund from the sale, exchange or other disposition of Pennsylvania
municipal securities issued on or after February 1, 1994. Gains which are not
distributed by the Fund will not be taxable to shareholders if derived by the
Fund from the sale, exchange or other disposition of Pennsylvania municipal
securities issued prior to February 1, 1994.
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 net investment income
(consisting generally of tax-exempt interest, taxable income and net short-term
capital gains) will constitute tax-exempt interest, a significant portion of the
Fund's net investment income may consist of taxable income. Distributions of
such taxable income are taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains (which are the
excess of net long-term capital gains over net short-term capital losses) as
28
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<PAGE> 30
capital gain dividends, if any, are taxable to shareholders as long-term capital
gains, whether paid in cash or reinvested in additional shares, and regardless
of how long the shares of the Fund have been held by such shareholders. Such
capital gain dividends may be taxed at different rates depending on how long the
Fund held the securities. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming such shares are held as a capital asset). Although
distributions generally are treated as taxable in the year they are paid,
distributions declared in October, November or December, payable to shareholders
of record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt interest dividends cannot exceed,
however, the excess of the amount of interest exempt from tax under Section 103
of the Code received by the Fund during the year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Since the percentage of
dividends which are exempt-interest dividends is determined on an average annual
method for the taxable year, the percentage of income designated as tax-exempt
for any particular dividend may be substantially different from the percentage
of the Fund's income that was tax exempt during the period covered by the
dividend. Fund distributions generally will not qualify for the dividends
received deduction for corporations.
The sale or exchange of shares is a taxable transaction for federal income tax
purposes. Shareholders who sell their shares will generally recognize gain or
loss in an amount equal to the difference between their adjusted tax basis in
the shares and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss. Any capital gains may be taxed
at different rates depending on how long the shareholder held its shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under the federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its net investment income, the Fund will not be
required to pay federal income taxes on any income it distributed to
shareholders. If the Fund distributes less than the sum of 98% of its ordinary
income and 98% of its capital gain net income, then the Fund will be subject to
a 4% excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only.
Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding, exchanging or selling
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
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<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 Class B Shares
Year
Nine Months Nine Months Ended
Ended Ended December
September 30, Year Ended December 31 September 30, 31
1998 1997 1996 1995 1994 1993 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $18.038 $17.490 $17.737 $16.081 $18.062 $16.899 $18.031 $17.484
------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income............ .684 .928 .919 .946 .965 1.027 .579 .791
Net Realized and Unrealized
Gain/Loss...................... .216 .528 (.263) 1.660 (1.985) 1.164 .217 .531
------- ------- ------- ------- ------- ------- ------- -------
Total from Investment
Operations....................... .900 1.456 .656 2.606 (1.020) 2.191 .796 1.322
Less Distributions from and in
Excess of Net Investment
Income........................... .698 .908 .903 .950 .961 1.028 .599 .775
------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $18.240 $18.038 $17.490 $17.737 $16.081 $18.062 $18.228 $18.031
======= ======= ======= ======= ======= ======= ======= =======
Total Return*(a).................. 5.08%** 8.59% 3.86% 16.62% (5.72%) 13.25% 4.51%** 7.78%
Net Assets at End of the Period
(In millions).................... $219.3 $223.9 $227.4 $226.7 $203.2 $221.7 $53.5 $51.9
Ratio of Expenses to Average Net
Assets*.......................... 1.03% 1.04% 1.09% 1.00% .90% .71% 1.79% 1.79%
Ratio of Net Investment Income to
Average Net Assets*.............. 5.06% 5.27% 5.32% 5.57% 5.73% 5.80% 4.29% 4.51%
Portfolio Turnover................ 29%** 46% 57% 28% 8% 1% 29%** 46%
* 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.......................... N/A N/A 1.09% 1.14% 1.17% 1.09% N/A N/A
Ratio of Net Investment Income to
Average Net Assets............... N/A N/A 5.31% 5.42% 5.46% 5.41% N/A N/A
<CAPTION>
Class B Shares
May 1, 1993
(Commencement Nine Months
of Distributions) Ended
to September 30,
1996 1995 1994 December 31, 1993 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $17.731 $16.080 $18.055 $17.460 $18.031
------- ------- ------- ------- -------
Net Investment Income............ .788 .819 .841 .586 .576
Net Realized and Unrealized
Gain/Loss...................... (.264) 1.659 (1.985) .603 .221
------- ------- ------- ------- -------
Total from Investment
Operations....................... .524 2.478 (1.144) 1.189 .797
Less Distributions from and in
Excess of Net Investment
Income........................... .771 .827 .831 .594 .599
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $17.484 $17.731 $16.080 $18.055 $18.229
======= ======= ======= ======= =======
Total Return*(a).................. 3.07% 15.72% (6.39%) 6.81%** 4.51%**
Net Assets at End of the Period
(In millions).................... $48.4 $46.8 $37.6 $27.7 $3.3
Ratio of Expenses to Average Net
Assets*.......................... 1.85% 1.75% 1.64% 1.48% 1.79%
Ratio of Net Investment Income to
Average Net Assets*.............. 4.56% 4.81% 4.98% 4.47% 4.29%
Portfolio Turnover................ 57% 28% 8% 1%** 29%**
* If certain expenses had not been
as follows:
Ratio of Expenses to Average Net
Assets.......................... 1.85% 1.89% 1.90% 1.82% N/A
Ratio of Net Investment Income to
Average Net Assets............... 4.55% 4.66% 4.71% 4.13% N/A
<CAPTION>
Class C Shares
August 13, 1993
(Commencement
Year Ended December 31 of Distributions) to
1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $17.482 $17.729 $16.079 $18.045 $17.850
------- ------- ------- ------- -------
Net Investment Income............ .795 .788 .812 .850 .325
Net Realized and Unrealized
Gain/Loss...................... .529 (.264) 1.665 (1.985) .208
------- ------- ------- ------- -------
Total from Investment
Operations....................... 1.324 .524 2.477 (1.135) .533
Less Distributions from and in
Excess of Net Investment
Income........................... .775 .771 .827 .831 .338
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $18.031 $17.482 $17.729 $16.079 $18.045
======= ======= ======= ======= =======
Total Return*(a).................. 7.78% 3.08% 15.72% (6.34%) 2.98%**
Net Assets at End of the Period
(In millions).................... $3.0 $3.4 $3.4 $2.2 $2.1
Ratio of Expenses to Average Net
Assets*.......................... 1.79% 1.85% 1.75% 1.63% 1.54%
Ratio of Net Investment Income to
Average Net Assets*.............. 4.52% 4.56% 4.76% 4.97% 4.08%
Portfolio Turnover................ 46% 57% 28% 8% 1%**
* If certain expenses had not been
as follows:
Ratio of Expenses to Average Net
Assets.......................... N/A 1.85% 1.90% 1.90% 1.89%
Ratio of Net Investment Income to
Average Net Assets............... N/A 4.55% 4.61% 4.70% 3.73%
</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
30
<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 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.
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<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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong or strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse Financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1: A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B: A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent on
32
-
<PAGE> 34
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example, 'AAA/A-1+').
With short-term demand debt, S&P's note rating symbols are used with the
commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as
33
-
<PAGE> 35
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date date to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as MIG 1 or
VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's assigns a MIG
or VMIG rating, all categories define an investment grade situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability for
repayment of short-term debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics:
- -- Leading market positions in well established industries.
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<PAGE> 36
- -- 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.
35
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<PAGE> 37
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or redemptions, call
the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUND INFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen Pennsylvania 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 Pennsylvania 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> 38
VAN KAMPEN
PENNSYLVANIA TAX FREE
INCOME FUND
PROSPECTUS
JANUARY 28, 1999
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports,
which explain the market conditions and
investment strategies affecting the Fund's
recent performance.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC Public
Reference Room in Washington, DC or online at
the SEC's web site (http://www.sec.gov). For
more information, please call the SEC at (800)
SEC-0330. You can also request these materials
by writing the Public Reference Section of the
SEC, Washington DC, 20549-6009, and paying a
duplication fee.
[VAN KAMPEN FUNDS LOGO]
Investment Company Act File No.
811-4983.
PATF PRO 1/99
<PAGE> 39
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
Van Kampen Pennsylvania Tax Free Income Fund (the "Fund") is a mutual fund
with an investment objective to provide only Pennsylvania investors with a high
level of current income exempt from federal and Pennsylvania state income taxes
and, where possible under local law, local income and personal property taxes,
through investment primarily in a varied portfolio of medium and lower grade
municipal securities. The Fund is designed for investors who are residents of
Pennsylvania for tax purposes.
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective and Policies........................... B-3
Investment Restrictions..................................... B-23
Trustees and Officers....................................... B-24
Investment Advisory and Other Services...................... B-31
Distribution and Service.................................... B-33
Transfer Agent.............................................. B-35
Portfolio Transactions and Brokerage Allocation............. B-36
Shareholder Services........................................ B-37
Redemption of Shares........................................ B-39
Contingent Deferred Sales Charge-Class A.................... B-39
Waiver of Class B and Class C Contingent Deferred Sales
Charge.................................................... B-40
Taxation.................................................... B-41
Fund Performance............................................ B-45
Other Information........................................... B-48
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-14
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 1999.
B-1
<PAGE> 40
GENERAL INFORMATION
The Fund is organized as an unincorporated trust established under the laws
of the Commonwealth of Pennsylvania by a Declaration of Trust dated January 28,
1987. The Declaration of Trust was amended and restated as of July 21, 1995 and
the Fund was renamed Van Kampen American Capital Pennsylvania Tax Free Income
Fund. On July 13, 1998, the Fund adopted its current name. The Fund is a
non-diversified open-end management investment company.
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest, par value $0.01 per share,
which may be divided into classes. Each share represents an equal proportionate
interest in the assets of the Fund with each other share in the Fund. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Fund and requires inclusion of a clause to that effect in
every agreement entered into by the Fund and indemnifies shareholders against
any such liability. Although shareholders of an unincorporated trust established
under Pennsylvania law may, under certain limited circumstances, be held
personally liable for the obligations of the trust as though they were general
partners in a partnership, the provisions of the Declaration of Trust described
in the foregoing sentence make the likelihood of such personal liability remote.
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 Fund entitle their holders to one vote per share; however,
separate votes are taken by each by each class on matters affecting an
individual class. For example, a change in the distribution fee for a class
would be voted upon by shareholders of only the class 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 Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be lower than to holders of
Class A Shares.
The Trustees may amend the Declaration of Trust in any manner without
shareholder approval, except that the Trustees may not adopt any amendment
adversely affecting the rights of shareholders without approval by a majority of
the shares 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.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Fund, the Adviser,
the Distributor and Van Kampen Investments is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated,
B-2
<PAGE> 41
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.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of January 4, 1999, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
First Union Brokerage Services.............................. 642,544.58 A 5.30%
A/C 5520-7985
Mary Alice Morrissey
James D. Morrissey
1328 Old Ford Road
Huntingdon Valley, PA 19006-8106
Merrill Lynch Pierce Fenner & Smith Inc. ................... 25,837.21 C 12.95%
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette Securities Corporation Inc. ...... 10,892.49 C 5.46%
PO Box 2052
Jersey City, NJ 07303-2052
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
securities are "general obligation" and "revenue" or "special obligation"
securities, which include "industrial revenue bonds." General obligation
securities are secured by the issuer's pledge of its faith, credit, and taxing
power for the payment of principal and interest. Revenue or special obligation
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source, such as from the user of the facility
being financed. The Fund may also invest in "moral obligation" bonds which are
normally issued by special purpose public authorities. If an issuer of moral
B-3
<PAGE> 42
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could
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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 CONSIDERATION REGARDING PENNSYLVANIA MUNICIPAL SECURITIES. As
described in the Prospectus, the Fund will invest primarily in Pennsylvania
municipal securities. In addition, the specific Pennsylvania 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 Pennsylvania municipal securities. The following
information constitutes only a brief summary of a number of the complex factors
which may impact issuers of Pennsylvania municipal securities and does not
purport to be a complete or exhaustive description of all adverse conditions to
which issuers of Pennsylvania municipal securities may be subject. Such
information is derived from official statements utilized in connection with the
issuance of Pennsylvania 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 Pennsylvania 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 Pennsylvania issuers may be unrelated to the creditworthiness of
obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth of Pennsylvania 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 Pennsylvania, 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
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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 Pennsylvania municipal
securities.
Pennsylvania historically has been identified as a heavy industry state
although that reputation has changed recently as the industrial composition of
the Commonwealth diversified when the coal, steel and railroad industries began
to decline. The major new sources of growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions. Pennsylvania's agricultural industries are also an
important component of the Commonwealth's economic structure, accounting for
more than $3.6 billion in crop and livestock products annually, while
agribusiness and food related industries support $39 billion in economic
activity annually.
The Commonwealth operates under an annual budget which is formulated and
submitted for legislative approval by the Governor each February. The
Pennsylvania Constitution requires that the Governor's budget proposal consist
of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting fourth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, which
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
During the five year period from fiscal 1993 through fiscal 1997, revenues
and other sources increased by an average 4.7 percent annually. Tax revenues
during this same period increased by an annual average of 4.1 percent.
Intergovernmental revenues, at an 8.5 percent annual average rate of increase,
were the revenue source with the largest rate of growth over the five-year
period. An accounting change in fiscal 1996 that made food stamp coupon revenue
from the federal government an item of intergovernmental revenue is largely
responsible for this increase. Expenditures and other uses during the fiscal
1993 through fiscal 1997 period rose at an average annual rate of 4.9 percent.
Program costs for protection of persons and property increased an average 13.8
percent annually, the largest growth rate of all programs. This high rate of
increase reflects the costs to acquire, staff and operate expanded prison
facilities to house a larger prison population. Public health and welfare
program costs increased at a 5.7 percent annual average rate during the period.
Efforts to control costs for various social programs and the presence of
favorable economic conditions have helped restrain these costs. The fund balance
at June 30, 1997 totaled $1,364.9 million, an increase of $729.7 million over
the $635.2 million balance at June 30, 1996. Of the $832.4 million
unreserved-designated component of fund balance, almost one-half of that amount
is represented by the balance in the Tax Stabilization Reserve Fund. The
increase in the fund balance at June 30, 1997 also includes a return of an
unreserved-undesignated balance. The last such balance was recorded at the end
of fiscal 1994. The fiscal 1997 year-end unreserved-undesignated balance of
$187.3 million is the largest balance recorded since fiscal 1987.
The unappropriated balance of Commonwealth revenues increased during the
1997 fiscal year by $432.9 million. Higher than estimated revenues and slightly
lower expenditures than budgeted caused the increase. The unappropriated balance
rose from an adjusted amount of $158.5 million at the beginning of fiscal 1997,
to $591.4 million (prior to reserves for transfer to the Tax Stabilization
Reserve Fund) at the close of the fiscal year. Transfers to the Tax
Stabilization Reserve Fund for fiscal 1997 operations were $88.7 million
representing the normal fifteen percent of the ending unappropriated balance,
plus an additional $100 million authorized by the General Assembly when it
enacted the fiscal 1998 budget. Commonwealth revenues (prior to tax refunds)
during the fiscal year totaled $17,320.6 million, $576.1 million (3.4 percent)
above the estimate made at the time the budget was enacted. Revenue from taxes
was the largest contributor to higher than estimated receipts. Tax revenue in
fiscal 1997 grew 6.1 percent over tax revenues in fiscal 1996. This rate of
increase was not adjusted for legislated tax reductions that affected receipts
during both of those fiscal years and therefore understates the actual
underlying rate of tax revenue growth during fiscal 1997. Receipts from the
personal income tax produced the largest single component of higher revenues for
the fiscal year. Personal income collections were $236.3 million over estimate
representing a 6.9 percent increase over fiscal 1996
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receipts. Receipts of the sales and use tax were $185.6 million over estimate
representing a 6.2 percent increase. Collections of corporate taxes, led by the
capital stock and franchise and the gross receipts taxes, also exceeded their
estimates for the fiscal year. Non-tax revenues were $19.8 million (5.8 percent)
over estimate mostly due to higher than anticipated interest earnings.
Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to the
estimate made in February 1997 with the presentation of the Governor's fiscal
1998 budget request. Total expenditures represent an increase over fiscal 1996
expenditures of 1.7 percent. Lapses of appropriation authority during the fiscal
year totaled $200.6 million compared to an estimate of $100 million. The higher
amount of appropriation lapses was used to support $79.8 million in fiscal 1997
supplemental appropriations over the February 1997 estimate. Supplemental
appropriations for fiscal 1997 totaled $169.3 million. The largest supplemental
appropriations included $100.1 million for medical assistance costs due to
implementation of managed medical care for a portion of the medical assistance
caseload, and an additional $50 million for bond debt service for potential use
to produce present value savings.
Operations during the 1998 fiscal year increased the unappropriated balance
of Commonwealth revenues during that period by $86.4 million to $488.7 million
at June 30, 1998 (prior to reserves for transfer to the Tax Stabilization
Reserve Fund). Higher than estimated revenues, offset in part by increased
reserves for tax refunds, and slightly lower expenditures than budgeted were
responsible for the increase. Transfers to the Tax Stabilization Reserve Fund
for fiscal 1998 operations will total $223.3 million consisting of $73.3 million
representing the required transfer of fifteen percent of the ending
unappropriated surplus balance, plus an additional $150 million authorized by
the General Assembly when it enacted the fiscal 1999 budget. With these
transfers, the balance in the Tax Stabilization Reserve Fund will exceed $664
million and represent 3.7 percent of fiscal 1998 revenues. Commonwealth revenues
(prior to tax refunds) during the fiscal year totaled $18,123.2 million, $676.1
million (3.9 percent) above the estimate made at the time the budget was
enacted. Tax revenue received in fiscal 1998 grew 4.8 percent over tax revenues
received during fiscal 1997. This rate of increase includes the effect of
legislated tax reductions that affected receipts during both fiscal years and
therefore understates the actual underlying rate of growth of tax revenue during
fiscal 1998. Receipts from the personal income tax produced the largest single
component of higher revenues during fiscal 1998. Personal income tax collections
were $416.6 million over estimate representing an 8.5 percent increase over
fiscal 1997 receipts. Receipts of the sales and use tax were $6.2 million over
estimate representing a 1.9 percent increase although receipts from non-motor
vehicle sales were 0.7 percent below estimate. Sales tax receipts on motor
vehicle sales were above estimate and offset the shortfall in non-motor vehicle
sales tax receipts. Collections of all corporate taxes exceeded their estimate
for the fiscal year, led by the capital stock and franchise tax and the
corporate net income tax, which were over estimate by 7.8 percent and 2.7
percent respectively. Receipts from the utility property tax, a state corporate
tax, were below estimate by $102.3 million or 30.8 percent. This shortfall was
due in large part to the recent deregulation of the electric industry in
Pennsylvania. Utility property revenues support in lieu of property tax payments
to school districts and local municipalities in Pennsylvania. The amount of the
payments to these entities is established by an appropriation by the General
Assembly. If sufficient revenues for the payment are not generated by the 30
mill tax rate, the Department of Revenue must levy an additional assessment on
the tax base sufficient to provide the funds to be paid. Such additional
assessments were levied during previous fiscal years. Non-tax revenues were
$27.5 million (8.6 percent) over estimate, mostly due to greater than
anticipated interest earnings for the fiscal year. Reserves established during
fiscal 1998 for tax refunds totaled $910 million. This amount is a $370 million
increase over tax refund reserves for fiscal 1997 representing an increase of
68.5 percent. The fiscal 1998 amount includes a one-time addition intended to
fund all fiscal 1998 tax refund liabilities, including that portion to be paid
during fiscal 1999. In prior fiscal years, tax refunds generally were budgeted
for the year in which the disbursement was anticipated to occur. This change in
the recognition of tax refund liabilities on a budgetary basis is expected to
reduce the difference between the budgetary basis unappropriated balance and the
GAAP basis unreserved -- undesignated balance (when computed) for the 1998
fiscal year. Expenditures from all fiscal 1998 appropriations of Commonwealth
revenues totaled $17,229.8 million (excluding pooled financing expenditures and
net of current year lapses). This amount represents an increase of 4.5 percent
over fiscal 1997 appropriation expenditures. Lapses of appropriation authority
during the fiscal year totaled $161.8 million including $58.8 million from
fiscal 1998 appropriations. These appropriation lapses were used to
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fund $120.5 million of supplemental fiscal 1998 appropriations. Of the total
fiscal 1998 supplemental appropriations, an amount of $111.6 million was made to
the Department of Public Welfare, mostly for the medical assistance program. The
need for supplemental appropriations in the delay in implementation of the
movement of the final client group to the HealthChoices managed health care
resulting in unanticipated fee for service costs.
The budget for fiscal 1999 was enacted in April 1998 at which time the
official revenue estimate for the 1999 fiscal year was established at $18,456.6
million. The estimate was reduced by $1.1 million in November 1998 due to
passage of tax legislation. Only Commonwealth funds are included in the official
revenue estimate. The official revenue estimate is based on an economic forecast
for national gross domestic product, on a year-over-year basis, to slow from an
estimated annualized 3.9 percent rate in the fourth quarter of 1997 to a
projected 1.8 percent annualized growth rate by the second quarter of 1999. The
forecast of slowing economic activity is based on the expectation that consumers
will reduce their pace of spending, particularly on motor vehicles, housing and
other durable goods. Business is also expected to trim its spending on fixed
investments. Foreign demand for domestic goods is expected to decline in
reaction to economic difficulties in Asia and Latin America, while an economic
recovery in Europe is expected to proceed slowly. The underlying growth rate,
excluding any effect of scheduled or proposed tax changes, for the General Fund
fiscal 1999 official revenue estimate is 3.0 percent over actual fiscal 1998
revenues. When adjusted to include the estimated effect of enacted tax changes,
fiscal 1999 Commonwealth revenues are projected to increase by 1.66 percent over
actual Commonwealth revenues for fiscal 1998. Tax reductions included in the
enacted 1999 fiscal year budget totaled an estimated $241.0 million for fiscal
1999. The major components of the enacted tax reductions and their estimated
fiscal 1999 cost are: (a) reduce the capital stock and franchise tax rate from
12.75 mills to 11.99 mills ($72.5 million); (b) increase the eligibility income
limit for qualification for personal income tax forgiveness ($57.1 million); (c)
eliminate personal income tax on gains from the sale of and individual's
residence ($30.0 million); (d) extend the time period from three to ten years
over which net operating loss deductions may be taken for the corporate net
income tax ($17.8 million); (e) expand various sales tax exemptions ($40.4
million); and (f) reduce various other miscellaneous items ($23.2 million). The
major tax changes were enacted with January 1, 1998 effective dates.
Consequently, the cost of these changes during fiscal 1999 may be above the
expected annualized cost of the changes. Reserves for tax refunds for fiscal
1999 total $603.9 million. This amount includes $33.1 million of tax refunds
anticipated to be due to the enacted fiscal 1999 tax changes and included in the
estimated cost of those changes. Reserves for tax refunds for fiscal 1999 are
$306.1 million below the reserve established for fiscal 1998. The fiscal 1998
amount, as described above, includes a one-time addition intended to fund all
fiscal 1998 tax refund liabilities, including that portion to be paid during
fiscal 1999. Without the necessity to pay fiscal 1998 tax refund liabilities
from fiscal 1999 reserves, the fiscal 1999 reserve need only be in an amount
equal to the estimated fiscal 1999 estimate for tax refund liabilities.
Appropriations enacted for fiscal 1999 are 4.1 percent ($705.1 million) above
the appropriations enacted for fiscal 1998 (including supplemental
appropriations). Major increases in expenditures budgeted for fiscal 1999
include: (a) $249.5 million in direct support of local school district education
costs (local school districts will also benefit from an estimated $104 million
of reduced contributions by school districts to their worker's retirement costs
from a reduced employer contribution rate); (b) $60.4 million for higher
education, including scholarship grants; (c) $56.5 million to fund the
correctional system, including $21 million to operate a new correctional
facility; (d) $121.1 million for long-term care medical assistance costs; (e)
$14.4 million for technology and Year 2000 investments; (f) $55.9 million to
fund the first year's cost of a July 1, 1998 annuitant cost of living increase
for state and school district employees; and (g) $20 million to replace bond
funding for equipment loans for volunteer fire and rescue companies. The balance
of the increase is spread over many departments and program operations. The
enacted fiscal 1999 budget assumes the draw down of the $265.4 million beginning
budgetary balance by $143.9 million to an estimated closing balance, prior to
transfer of the required portion to the Tax Stabilization Reserve Fund, of
$124.3 million. The amount of the anticipated draw down does not consider the
availability of appropriation lapses normally occurring during a fiscal year and
used to fund supplemental appropriations or increase unappropriated surplus. For
the fiscal year through October 1998, Commonwealth revenues are $69.2 million,
or 1.3 percent above estimate for the period. Sales and use tax receipts account
for $45.5 million while personal income tax receipts account for $28.1 million
of the additional revenues through October 1998. These
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amounts represent 2.1 percent and 1.5 percent respectively of the estimated
revenues budgeted for this period. Corporation taxes for this same period were
one percent, or $7.1 million below their estimate. The Commonwealth has not
revised its fiscal year estimate of Commonwealth revenues.
All outstanding general obligation bonds of the Commonwealth are rated AA
by Standard & Poor's ("S&P") and Aa3 by Moody's Investors Service, Inc.
("Moody's"). The City of Philadelphia's long-term obligations supported by
payments from the City's General Fund are rated Baa2 by Moody's and BBB+ by S&P.
Any explanation concerning the significance of such ratings must be obtained
from the rating agencies. There is no assurance that any ratings will continue
for any period of time or that they will not be revised or withdrawn.
According to the Official Statement dated December 1, 1998 describing
General Obligation Bonds, Third Series of 1998 of the Commonwealth of
Pennsylvania, the Office of Attorney General and the Office of General Counsel
have reviewed the status of pending litigation against the Commonwealth, its
officers and employees, and have identified the following cases as ones where an
adverse decision may have a material effect on governmental operations of the
Commonwealth and consequently, the Commonwealth's ability to pay debt service on
its obligations. Under Act No. 1978-152 approved September 28, 1978, as amended,
the General Assembly approved a limited waiver of sovereign immunity. Damages
for any loss are limited to $250,000 for each person and $1 million for each
accident. The Supreme Court of Pennsylvania held that this limitation is
constitutional. Approximately 3,500 suits against the Commonwealth remain open.
Tort claim payments for the departments and agencies, other than the Department
of Transportation, are paid from departmental and agency operating and program
appropriations. Tort claim payments for the Department of Transportation are
paid from an appropriation from the Motor License Fund. The Motor License Fund
tort claim appropriation for fiscal 1999 is $20 million.
Powell v. Ridge
On March 9, 1998, several residents of the City of Philadelphia on behalf
of themselves and their school-aged children, along with the School District of
Philadelphia, the Philadelphia Superintendent of Schools, the chairman of the
Philadelphia Board of Education, the City of Philadelphia, the Mayor of
Philadelphia, and several membership organizations interested in the
Philadelphia public schools, brought suit in the United States District Court
for the Eastern District of Pennsylvania against the Governor, the Secretary of
Education, the chairman of the State Board of Education, and the State
Treasurer. In their suit, the plaintiffs claimed that the defendants are
violating a regulation of the U.S. Department of Education promulgated under
Title VI of the Civil Rights Act of 1964 in that the Commonwealth's system for
funding public schools has the effect of discriminating on the basis of race.
The plaintiffs asked the court to declare the funding system to be illegal, to
enjoin the defendants from violating the regulation in the future, to award
counsel fees and costs, and to grant such other relief as the court might find
just and proper. The district court allowed two petitions to intervene. The
Philadelphia Federation of Teachers intervened on the side of the plaintiffs,
while several leaders of the Pennsylvania General Assembly intervened on the
side of the defendants. In addition, the U.S. Department of Justice intervened
to defend against a claim made by the legislator intervenors that a statute
waiving states' immunity under the Eleventh Amendment to the U.S. Constitution
for Title VI claims is unconstitutional. The defendants filed a motion to
dismiss the complaint, arguing that the plaintiffs sued the wrong parties, that
some of the plaintiffs lack standing or the capacity to sue the Commonwealth
officials, that the plaintiffs' claims are barred by the doctrines of claim
preclusion and issue preclusion, and that Congress has not authorized private
parties to bring actions in court to enforce the regulations of federal
administrative agencies issued under section 602 of the Civil Rights Act of
1964. The legislator intervenors filed a motion to dismiss or, in the
alternative, a motion for judgment on the pleadings. The legislator intervenors
claimed that the defendants are immune from suit under the Eleventh Amendment,
that the statute purporting to waive Eleventh Amendment immunity for Title VI
claims is not applicable or, in the alternative, is unconstitutional, and that
the plaintiffs have otherwise failed to state a claim. On November 18, 1998, the
district court granted in part and denied in part the various motions by the
parties. However, because the court found ultimately that the plaintiffs had
failed to state a claim under the Title VI regulation at issue or under 42
U.S.C. sec.1983, the court dismissed the action in its entirety with prejudice.
An appeal is expected.
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Baby Neal v. Commonwealth, et al.
In April of 1990, the American Civil Liberties Union ("ACLU") and various
named plaintiffs filed a lawsuit against the Commonwealth, the City of
Philadelphia, and others in federal court seeking an order that among other
things, would require the Commonwealth to provide additional funding for child
welfare services. No figures for the amount of funding sought are available. A
similar lawsuit filed in the Commonwealth Court of Pennsylvania ("Commonwealth
Court"), captioned as the City of Philadelphia, Hon. Wilson Goode, et al. v.
Commonwealth of Pennsylvania, Hon. Robert P. Casey, et al., was resolved through
a court approved settlement that provides, inter alia, for more Commonwealth
funding for these services for fiscal year 1991 as well as a commitment to pay
to counties $30 million over five years. The Commonwealth sought dismissal of
the federal action based, among other things, on the settlement of the
Commonwealth Court case. In January of 1992, the U.S. District Court for the
Eastern District of Pennsylvania, per Judge Robert Kelly, denied the ACLU's
motion for class certification and held that the "next friends" seeking to
represent the interests of the 16 minor plaintiffs in the case were inadequate
representatives. The Commonwealth filed a motion for summary judgment on most of
the counts in the ACLU's complaint on the basis of, among other things, Suter v.
Artist M. After the motion for summary judgment was filed, the ACLU filed a
renewed motion to certify sub-classes. In December of 1994, the U.S. Court of
Appeals for the Third Circuit reversed Judge Robert Kelly's ruling, finding that
he erred in refusing to certify the class. Consistent with the Third Circuit's
ruling, the District Court recently certified the class, and the parties have
resumed discovery. In July 1998, the plaintiffs entered into a settlement
agreement with the City of Philadelphia and related parties and submitted the
agreement to the district court for approval. The district court has
preliminarily approved the settlement. Recently, the remaining parties,
including the Commonwealth, have agreed to settle the claims made against them.
The Commonwealth has agreed to pay $100,000 to settle plaintiffs' $1.4 million
claim for attorneys' fees and to take other actions in exchange for a full and
final release and dismissal of the case against the Commonwealth parties. The
settlement has been presented to the court for approval, and the court has
scheduled a hearing for February 1999.
County of Allegheny v. Commonwealth of Pennsylvania
On December 7, 1987, the Supreme Court of Pennsylvania held in County of
Allegheny v. Commonwealth of Pennsylvania, that the statutory scheme for county
funding of the judicial system is in conflict with the Pennsylvania
Constitution. However, the Supreme Court of Pennsylvania stayed its judgment to
afford the General Assembly an opportunity to enact appropriate funding
legislation consistent with its opinion and ordered that the prior system of
county funding shall remain in place until this is done. On December 7, 1992,
the State Association of County Commissioners filed an action in mandamus
seeking to compel the Commonwealth to comply with the decision in County of
Allegheny. The Court in Pennsylvania State Association of County Commissioners
v. Commonwealth of Pennsylvania issued the writ on July 26, 1996, and appointed
retired Justice and Senior Judge Frank J. Montemuro, Jr. as special master to
devise and submit a plan for implementation no later than January 1997. The
Court indicated in its order that it intended to require implementation by
January 1, 1998. Following issuance of the writ, the President Pro Tempore of
the Senate and the Speaker of the House filed a petition seeking reconsideration
from the Court. The Court has not acted on the petition. On January 28, 1997,
the Supreme Court granted Justice Montemuro's request for a 90-day extension of
time within to file his report. The Court also announced the establishment of a
tripartite committee, including representatives of the Executive Department, the
Legislative Department and Justice Montemuro, to develop an implementation plan.
On July 26, 1997, Justice Montemuro filed the Interim Report of the Master
wherein he recommended a four phase transition to state funding of a unified
Judicial system, during each of which specified court employees would transfer
into the state payroll system. Justice Montemuro recommended implementation of
Phase I effective July 1, 1998 with completion of the final phase early next
century. Numerous objections to the report were filed by September 1, 1997, but
the Court has taken no action on them. As Phase I of his proposed plan, Justice
Montemuro recommended that the General Assembly provide for an administrative
structure of local court administrators to be employed by the Administrative
Office of Pennsylvania Courts, a state agency. Numbering approximately 150
people statewide, local court administrators are currently employees of the
counties in which they work. On April 22, 1998, the General Assembly enacted the
General Appropriation Act of 1998, including an appropriation to the Supreme
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Court of approximately $12 million for the purpose of funding county court
administrators. This appropriation was designed to enable the Commonwealth to
implement Phase I of Justice Montemuro's plan. However, the act also provides
that no funds from the appropriation may be expended until legislation has been
approved by the General Assembly providing for the payment of Commonwealth
compensation of county court administrators. Because no such legislation has yet
been enacted, the $12 million appropriated to the Judicial Department cannot be
used. On May 11, 1998, the Administrative Governing Board of the First Judicial
District (comprising the Court of Common Pleas of Philadelphia, the Philadelphia
Municipal Court, and the Traffic Court of Philadelphia) filed an action in
mandamus in the Commonwealth Court of Pennsylvania against the City of
Philadelphia and several City officials, claiming that the City government had
failed to provide adequate funds for the operation of the courts of the First
Judicial District. The petitioners in that case have demanded that the court
order the City of Philadelphia to disburse all funds reasonably necessary for
the continued operation of the courts during fiscal year 1998-99 in an amount
totaling at least $110 million. The case is captioned Alex Bonavitacola, et at
v. Edward G. Rendell, et al. Also, on May 11, 1998, the City of Philadelphia and
related respondents in Bonavitacola filed a complaint joining the Commonwealth
of Pennsylvania, the General Assembly and its elected leadership as additional
respondents. In their complaint, the City respondents assert that under the
Supreme Court's order issued July 26, 1996 in Pa. State Ass'n of County of
Commissioners v. Commonwealth of Pennsylvania, the General Assembly was
obligated to enact a funding scheme for a unified court system no later than
January 1, 1998. Because the General Assembly has not done so, the City
respondents allege, the Commonwealth has failed to comply with the Supreme
Court's order. Thus, the City respondents have requested Commonwealth Court to
require the General Assembly to comply with the Supreme Court's mandamus order
and to order the Commonwealth to pay whatever sums are necessary to fund the
cost of operating the courts in fiscal year 1998-99. The First Judicial District
Governing Board joined in the City respondents' request as an alternative to its
demanded relief against the City defendants. On June 15, 1998, upon motion of
the First Judicial District Governing Board, the Supreme Court of Pennsylvania
assumed extraordinary jurisdiction over the case and directed Commonwealth
Court, on an expedited basis, to prepare proposed findings of fact and
conclusions of law. Acting pursuant to the Supreme Court's June 15, 1998 order,
President Judge James Gardner Colins of Commonwealth Court on June 17, 1998
issued findings of fact, conclusions of law and a proposed order. In his
proposed order, President Judge Colins recommended that the Supreme Court order
the President of the Philadelphia City Council immediately to introduce
legislation to fund the courts of the First Judicial District for fiscal year
1998-99 and to take all necessary steps to ensure its passage. President Judge
Colins also recommended that the Supreme Court order the General Assembly to
pass legislation, prior to June 30, 1999, to fund the entire state judicial
system. By order entered June 23, 1998, Commonwealth Court forwarded its
findings of fact and conclusions of law and proposed order to the Supreme Court
for final disposition. The Commonwealth and the General Assembly have objected
to President Judge Colins' proposed order. Subsequent to Commonwealth Court's
issuance of its findings of fact, conclusions of law and proposed order, the
City Council and Mayor of Philadelphia acceded partially to President Judge
Colins' proposed mandate that the City fund the First Judicial District's courts
for fiscal year 1998-99. In June 1998, the City enacted an ordinance
transferring to the First Judicial District funds sufficient to enable the
Philadelphia Court system to operate through December 31, 1998, thus obviating
the First Judicial District's request for emergency relief. However, the First
Judicial District petitioners and the City of Philadelphia respondents continue
to press their demands that the General Assembly be required to enact
legislation providing for state funding of the courts. In addition, the County
of Allegheny has petitioned the Supreme Court for leave to intervene in the
Bonavitacola case to secure the same relief against the Commonwealth -- an order
requiring the Commonwealth to fund its courts. The Bonavitacola case remains
pending before the Supreme Court for disposition. On November 25, 1998, the
First Judicial District Governing Board filed with the Supreme Court a renewed
motion for entry of an order providing emergency relief. In their renewed
motion, the Bonavitacola plaintiffs asked the court to order the City of
Philadelphia to provide funds to the First Judicial District's courts sufficient
to maintain necessary judicial operations through the end of the fiscal year.
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Bank Shares Tax Litigation
On November 30, 1989, Fidelity Bank, N.A. ("Fidelity") filed a declaratory
judgment action in the Commonwealth Court of Pennsylvania in which Fidelity
raised various challenges to the constitutional validity of the Amended Bank
Shares Act (Act No. 1989-21) and related legislation. After the Commonwealth
Court ruled in favor of the Commonwealth, finding no constitutional
deficiencies, Fidelity, the Commonwealth, and certain intervenor banks filed
Notices of Appeal to the Pennsylvania Supreme Court on August 5, 1994. Pursuant
to a Settlement Agreement dated as of April 21, 1995, the Commonwealth agreed to
enter a credit in favor of Fidelity in the amount of $4,100,000 in settlement of
the constitutional and non-constitutional issues, including interest. This
credit represents approximately five percent (5%) of the potential claim of
Fidelity, had the constitutional issues been resolved in favor of Fidelity.
Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth settled with the intervening banks, referred to as "New Banks," in
connection with issues concerning the New Bank Tax Credit law which were raised
in the above-referenced Pennsylvania Supreme Court appeal. As part of the
settlement, the Commonwealth agreed neither to assess nor attempt to recoup any
new bank tax credits which had been granted or taken by any of the intervening
banks. No expenditure of the Commonwealth funds is required in order to
implement this aspect of the settlement with the intervening banks, since the
credits have already been claimed by said banks. Although the described
settlements have eliminated the Commonwealth's exposure to Fidelity and the
intervening banks, other banks have filed petitions that are currently pending
with the Commonwealth Court. One of these banks, Royal Bank of Pennsylvania, is
proceeding forward on behalf of all the other banks. These appeals raise the
issues which were advanced by Fidelity, although not brought to final resolution
by the Pennsylvania Supreme Court. By decision dated January 8, 1998, a panel of
the Commonwealth Court ruled in favor of the Commonwealth, finding no
constitutional violation. Royal Bank has filed exceptions. On July 30, 1998, the
Commonwealth Court, en banc, denied those exceptions. Royal Bank has appealed to
the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools (PARSS) v. Ridge
This litigation was filed in January 1991, by an association of rural and
small schools, several individual school districts, and a group of parents and
students, against former Governor Robert P. Casey and former Secretary of
Education Donald M. Carroll, Jr. The litigation challenges the constitutionality
of the Commonwealth's system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court, and one in the
United States District Court for the Middle District of Pennsylvania. The
federal court case has been indefinitely stayed, pending resolution of the state
court case. After a lengthy trial, Judge Dan Pellegrini on July 9, 1998, issued
an opinion and decree nisi dismissing the petitioners' claim in its entirety.
Judge Pellegrini held that Pennsylvania's system for funding public schools is
constitutional under both the education clause and the equal protection clause
of the Pennsylvania Constitution. On July 20, 1998, the petitioners filed a
timely motion for post-trial relief, taking exception to many of Judge
Pellegrini's findings of fact and conclusions of law, and again asking
Commonwealth Court to declare Pennsylvania's public school funding system to be
unconstitutional. Also, the petitioners on July 21, 1998, filed an application
asking the Supreme Court of Pennsylvania to assume extraordinary, plenary
jurisdiction over the case to decide one legal issue -- whether the petitioners'
constitutional claims are justiciable in the courts of the Commonwealth. The
petitioners have asked the court to consider the issue in conjunction with a
separate appeal pending in another case, Marrero v. Commonwealth of
Pennsylvania, involving the same provisions of the Constitution and a similar
issue of justiciability. On September 2, 1998, the Supreme Court granted the
petitioners' application and directed the filing of briefs. Recently, the
respondents asked the Supreme Court to clarify its assumption of jurisdiction.
Specifically, the respondents have asked the Court to state expressly that it
will consider only the issue of justiciability, as requested in the petitioners'
application and not other issues presented in petitioners' motion for post-trial
relief pending in the Commonwealth Court.
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Pennsylvania Human Relations Commission v. School District of Philadelphia,
et. al. v. Commonwealth of Pennsylvania, et. al.
On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of Philadelphia,
were joined as additional respondents in an enforcement action commenced in
Commonwealth Court in 1973 by the Pennsylvania Human Relations Commission
against the School District of Philadelphia pursuant to the Pennsylvania Human
Relations Act. The enforcement action was pursued to remedy unintentional
conditions of segregation in the public schools of Philadelphia. The
Commonwealth and the City were joined in the "remedial phase" of the proceeding
"to determine their liability, if any, to pay additional costs necessary to
remedy the unlawful conditions found to exist in the Philadelphia public
schools." On February 28, 1996, the School District of Philadelphia filed a
third-party complaint against the Commonwealth of Pennsylvania asking
Commonwealth Court to require the Commonwealth to "supply such funding as is
necessary for full compliance with the November 28, 1994 and other remedial
Orders of the Commonwealth Court." In addition, a group of intervenors (led by
ASPIRA of Pennsylvania) on March 4, 1996 filed a third-party complaint against
the Commonwealth of Pennsylvania and the City of Philadelphia requesting
Commonwealth Court to declare that "it is the obligation of the Commonwealth and
the City to supply the additional funds identified as necessary for the District
to fully comply with the orders of the Commonwealth Court," and to require the
Commonwealth and the City to supply such additional funding as is necessary for
the District to comply with the orders. By order dated April 30, 1996, Judge
Doris A. Smith of Commonwealth Court overruled the Commonwealth's and the City's
preliminary objections seeking dismissal of the claims against them. The
Commonwealth and the City thereafter filed answers to the complaints, asserting
numerous defenses. The Commonwealth also asserted a cross-claim against the City
of Philadelphia claiming that if any party is liable, sole liability rests with
the City; in the alternative, the Commonwealth argued that if it is held to be
liable, it has a right of indemnity or contribution against the City. Trial
commenced on May 30, 1996. During the course of the trial, upon motion of the
Commonwealth, the Supreme Court of Pennsylvania on July 3, 1996, assumed
extraordinary plenary jurisdiction and directed Judge Smith to conclude the
proceedings within 60 days and to file with the Supreme Court findings of fact,
conclusions of law and a final opinion. The Supreme Court retained jurisdiction.
The evidence in the trial was concluded on July 11, 1996, after 19 days of
trial. On August 20, 1996, Judge Smith issued an Opinion and Order. The Order
stated, in relevant part, as follows: 1. Judgment is entered in favor of the
School District of Philadelphia and ASPIRA and against the Commonwealth of
Pennsylvania and Governor of Pennsylvania. 2. Judgment is entered in favor of
the City of Philadelphia and the Mayor of Philadelphia on the ASPIRA claim and
on the cross-claim filed by the Commonwealth and Governor. 3. The Commonwealth
and Governor shall submit a plan to the Court within thirty days from the date
of this order detailing the means by which the Commonwealth will effectuate the
transfer of additional funds payable to the School District to enable it to
comply with the remedial order during fiscal 1997 and any future years during
which the School District of Philadelphia establishes its fiscal incapacity to
fund the remedial programs. Judge Smith specifically found that "[b]ecause of
the lack of adequate funds to comply with the remedial order, the School
District [of Philadelphia] is entitled to additional resources for 1996-1997 of
$45.1 million." On August 30, 1996, the Commonwealth filed with the Supreme
Court of Pennsylvania the following documents: 1. Exceptions to the Findings of
Fact, Conclusions of Law, Opinion and "Order" of the Honorable Doris A. Smith;
2. Motion to Vacate Purported "Order" of the Honorable Doris A. Smith; and 3.
Notice of Appeal and Jurisdictional Statement. In their filings, the
Commonwealth requested the Supreme Court to enter judgments in favor of the
Commonwealth and the Governor on all claims. On September 10, 1996, the Supreme
Court of Pennsylvania issued an order granting the Commonwealth's Motion to
Vacate. The Court directed its Prothonotary to establish a briefing schedule and
a date for oral argument and indicated that it would issue a further order
limiting the issues to be addressed. Finally, the Supreme Court stated that
Commonwealth Court "is divested of jurisdiction of th[e] matter..., and all
further proceedings in the Commonwealth Court are stayed pending further order
of th[e Supreme] Court." The Supreme Court again retained jurisdiction. On
January 28, 1997, the Supreme court issued an order directing the parties to
brief the following issues: 1. Whether the lower court erred in its order of
November 3, 1995, joining the Commonwealth and Governor, the City of
Philadelphia and Mayor, as additional respondents? 2. Whether the lower court
exceeded its authority in fashioning remedies to redress de facto segregation in
the Philadelphia School
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District? 3. Whether an enforcement action is to be treated in the lower court's
original or appellate jurisdiction? Briefing has been completed, and the Supreme
Court has said that it will hear oral argument sometime in the future. The
Supreme Court heard oral argument on the three issues on February 3, 1998, and
took the matter under advisement.
Ridge v. State Employee's Retirement Board
On August 1, 1983, the United States Supreme Court in Arizona Governing
Committee v. Norris, 463 U.S. 1073 (1983) held that the use of gender distinct
actuarial factors to calculate pension benefits violated federal civil rights
laws. Norris and the subsequent Florida v. Long, 487 U.S. 223 (1988) limited
required application of gender neutral actuarial factors to benefits based on
service credited on or after August 1, 1983. Benefits based upon service
credited before August 1, 1983, could continue to be calculated using gender
distinct actuarial factors. The State Employee's Retirement Board and its sister
agency, the Public School Employee's Retirement Board, have been in full
compliance with Norris, using gender neutral factors for benefits based upon
post-July 31, 1983, service and gender distinct actuarial factors for benefits
based upon pre-August 1, 1983 service. On December 29, 1993, Joseph H. Ridge,
former judge of the Allegheny Court of Common Pleas filed in the Commonwealth
Court a Petition for Review in the Nature of Complaint in Mandamus and for a
Declaratory Judgment against the State Employees' Retirement Board. Judge Ridge
filed an amended Petition for Review on February 7, 1995. Judge Ridge alleges
that the State Employees' Retirement Board's use of gender distinct actuarial
factors for benefits based upon his pre-August 1, 1983 service violates Article
I, Section 26 (equal protection) and Article I, Section 28 (equal rights) of the
Pennsylvania Constitution. He seeks "topped up" benefits equal to those that a
similarly situated female would be receiving. Due to the constitutional nature
of the claim, it is possible that a decision adverse to the State Employees'
Retirement Board would be applicable to other members of the State Employees'
Retirement System and Public School Employees' Retirement System who accrued
service between the effective date of the state constitutional provisions and
before August 1, 1983, and who have received, are receiving, or will receive
benefits less than those received by other members of the systems because of
their sex or the sex of their survivors annuitants. The Commonwealth Court
granted the State Employees' Retirement Board's preliminary objections to Judge
Ridge's claims for punitive damages, attorneys fees and compensatory damages
other than a recalculation of his pension benefits should he prevail. The
Commonwealth Court also denied Judge Ridge's preliminary objections to the State
Employees' Retirement Board's New Matter. On November 20, 1996, the Commonwealth
Court heard oral argument en banc on Judge Ridge's motion for judgment of the
pleadings. On February 13, 1997, the Commonwealth Court, after oral argument en
banc, denied Judge Ridge's motion for judgment on the pleadings. The case is
currently in discovery.
Yesenia Marrero, et al. v. Commonwealth, et al.
On February 24, 1997, five residents of the City of Philadelphia, on their
own behalf and on behalf of their school-aged children, joined by the City of
Philadelphia, the School District of Philadelphia, and two non-profit
organizations, ASPIRA, Inc. of Pennsylvania and the Philadelphia Branch of the
NAACP, filed in the Commonwealth Court of Pennsylvania a civil action for
declaratory judgment against the Commonwealth of Pennsylvania, the General
Assembly of Pennsylvania, the presiding officers of the General Assembly, the
Governor of Pennsylvania, the State Board of Education, the Department of
Education, and the Secretary of Education. Citing the Education Clause of the
Constitution of Pennsylvania, as well as provisions of the Declaration of Rights
under the Pennsylvania Constitution, the petitioners claim, inter alia, that
Pennsylvania's "statutory education financing system is unconstitutional as
applied to the School District [of Philadelphia]"; that "[t]he system of funding
public education violates the constitutional mandate to provide a thorough and
efficient system of public education in the City [of Philadelphia]"; that "[t]he
scheme for financing public education precludes the Commonwealth from providing
the constitutionally required 'thorough and efficient system of public
education' in the circumstances faced by the School District [of Philadelphia]";
and that "Defendants have failed to provide the School District [of
Philadelphia] with the resources and other assistance necessary to provide all
of its students with the quality of education to which they are
[c]onstitutionally entitled." Petitioners seek an order that provides, inter
alia, as follows: 1. A declaration "that the Commonwealth has failed to fulfill
its obligations to provide for an adequate system of
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public schools in the School District [of Philadelphia]." 2. A declaration "that
the present statutory scheme employed for funding public education in the
Commonwealth as applied to the School District [of Philadelphia] violates
Article 3, Section 14 of the Pennsylvania Constitution." 3. A declaration "that
the [l]egislature must amend the present or enact new education legislation so
as to assure that education funding for the School District [of Philadelphia]
accounts and makes adequate provision for the greater and special educational
challenges and needs of students in the School District in order to redress
their disadvantage." The respondents filed preliminary objections seeking
dismissal of the action. On March 2, 1998, Commonwealth Court sustained the
respondents' preliminary objections and dismissed the case on the grounds that
the issues presented are not justiciable. An appeal to the Supreme Court of
Pennsylvania is pending and briefing is complete, but the Court has not
scheduled oral argument.
Rite Aid of Pennsylvania, Inc. v. Houston
On March 24, 1997, Rite Aid of Pennsylvania, Inc. (Rite Aid) filed in the
U.S. District Court for the Eastern District of Pennsylvania a civil action
against the Secretary of Public Welfare (Secretary). In its complaint, Rite Aid
alleged that in promulgating regulations on October 1, 1995 governing payment
rates for prescription drugs and related services provided to recipients of
benefits under the Pennsylvania Medical Assistance Program (Medicaid), the
Secretary violated various provisions of Title XIX of the Social Security Act
(commonly known as the Medicaid Act) and regulations of the U.S. Department of
Health and Human Services, as well as provisions of state law and federal
constitutional due process. On November 3, 1997, the district court granted in
part and denied in part the parties' cross-motions for judgment on the
pleadings. The court granted judgment in favor of the Secretary on Rite Aid's
federal due process claim and Rite Aid's claim that the Secretary had violated a
federal regulation (42 CFR sec.447.205) requiring public notice 60 days prior to
revising the reimbursement rates. However, the court denied the Secretary's
motion for judgment on the pleadings regarding Rite Aid's procedural claim under
42 U.S.C. sec.1396(a)(30)(A). The court also granted judgment on the pleadings
in favor of Rite Aid on its claim that the Secretary violated a federal
regulation (42 CFR sec.447.205(c)(4)) requiring the Secretary to identify a
local agency where the proposed reimbursement changes were available for public
view. After allowing the Pennsylvania Pharmacists Association (PPA) to intervene
as a plaintiff, the district court on May 8, 1998 granted a motion filed by Rite
Aid and PPA to limit its review of the Secretary's compliance with 42 U.S.C.
sec.1396(a)(30)(A) "to the information before [the Secretary] at the time [she]
made [her] decision to lower" the reimbursement rates. On August 31, 1998, the
district court granted the motions of Rite Aid and PPA for summary judgment and
denied the cross-motion of the Secretary. The court declared that the pharmacy
reimbursement rates made effective after October 1, 1995, were adopted by the
Secretary in violation of section 1396(a)(30)(A) of the Medicaid Act and
enjoined the Secretary from using those rates to reimburse for any prescription
drugs and related services provided to Medicaid recipients on and after October
1, 1998. The court held that the Secretary acted arbitrarily and capriciously by
failing to consider whether the revised rates were consistent with the statutory
standards of efficiency, economy, and quality of care. The Secretary timely
appealed the district court's orders, and Rite Aid and PPA filed cross-appeals.
The Secretary filed motions to stay the district court's injunction order
pending appeal. However, the district court denied the motion on September 18,
1998, and the court of appeals denied the application for stay on October 26,
1998. However, the court of appeals did grant the Secretary's motion for
expedited appeal, and briefing should be concluded by early January. The court
has not scheduled oral argument. In the meantime, the Department of Public
Welfare has altered its reimbursement rates consistent with the district court's
ruling. The estimated annualized cost of paying the higher reimbursement rates
is $106 million.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
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In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, financial futures, interest
rate indices and other financial instruments, purchase and sell financial
futures contracts and options thereon, or enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of futures and options transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized. Income earned or deemed to
be earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security,
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<PAGE> 55
financial future, index, or other instrument might be intended to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
such instrument. An American style put or call option may be exercised at any
time during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently
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takes the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on illiquid securities described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
B-18
<PAGE> 57
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the
B-19
<PAGE> 58
time of entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least "A" by
S&P or Moody's or has an equivalent equity rating from an NRSRO or is determined
to be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate cash and
liquid securities with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid securities at least
equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash and
liquid securities sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities which correlate with the index or to segregate cash
and liquid securities equal to the excess of the index value over the exercise
price on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash and liquid
securities equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out cash and liquid securities equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of cash and liquid securities equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash and liquid securities sufficient to meet its obligation to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same
B-20
<PAGE> 59
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash and liquid securities equal to any remaining obligation would
need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of the Code for qualification as a regulated investment
company.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate (the lesser of
the value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown in the table of
"Financial Highlights" in the Prospectus. A high portfolio turnover rate (100%
or more) increases the Fund's transaction costs, including brokerage
commissions, and may result in the realization of more short-term capital gains
than if the Fund had a lower portfolio turnover. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes securities that are not readily marketable, repurchase agreements
which have a maturity of longer than seven days and generally includes
securities that are restricted from sale to the public without registration
under the Securities Act of 1933, as amended (the "1933 Act"). The sale of such
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of liquid
securities trading on national securities exchanges or in the over-the-counter
markets. Restricted securities are often purchased at a discount from the market
price of unrestricted securities of the same issuer reflecting the fact that
such securities may not be readily marketable without some time delay.
Investments in securities which have no ready market are valued at fair value as
determined in good faith by the Adviser in accordance with procedures approved
by the Fund's Trustees. Ordinarily, the Fund would invest in restricted
securities only when it receives the issuer's commitment to register the
securities without expense to the Fund. However,
B-21
<PAGE> 60
registration and underwriting expenses (which may range from 7% to 15% of the
gross proceeds of the securities sold) may be paid by the Fund. Restricted
securities which can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("144A Securities") and are determined to be liquid
under guidelines adopted by and subject to the supervision of the Fund's Board
of Trustees are not subject to the limitation on illiquid securities. Such 144A
Securities are subject to monitoring and may become illiquid to the extent
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Factors used to determine whether 144A Securities are liquid
include, among other things, a security's trading history, the availability of
reliable pricing information, the number of dealers making quotes or making a
market in such security and the number of potential purchasers in the market for
such security. For purposes hereof, investments by the Fund in securities of
other investment companies will not be considered investments in restricted
securities to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with selected
commercial banks or broker-dealers, under which the Fund sells securities and
agrees to repurchase them at an agreed upon time and at an agreed upon price.
The difference between the amount the Fund receives for the securities and the
amount it pays on repurchase is deemed to be a payment of interest by the Fund.
The Fund will maintain, in a segregated account having an aggregate value with
its custodian, cash or other readily marketable portfolio securities having an
aggregate value equal to the amount of such commitment to repurchase, including
accrued interest, until payment is made. Reverse repurchase agreements are
treated as a borrowing by the Fund and will be used by it as a source of funds
on a short-term basis, in an amount not exceeding 5% of the total assets of the
Fund at the time of entering into any such agreement. The Fund will enter into
reverse repurchase agreements only with commercial banks whose deposits are
insured by the Federal Deposit Insurance Corporation and whose assets exceed
$500 million or broker-dealers who are registered with the SEC. In determining
whether to enter into a reverse repurchase agreement with a bank or
broker-dealer, the Fund will take into account the creditworthiness of such
party and will monitor such creditworthiness on an ongoing basis.
B-22
<PAGE> 61
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without approval by the vote of a majority of its
outstanding voting shares, which is defined by the 1940 Act as the lesser of (i)
67% or more of the voting securities present in person or by proxy at the
meeting, if the holders of more than 50% of the outstanding voting securities
are present in person or by proxy; or (ii) more than 50% of the outstanding
voting securities. The Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities),
if as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer, except that with respect to 50% of the
Fund's total assets up to 25% may be invested in one issuer 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. Invest more than 25% of its assets in a single industry, except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act. (As described in the Prospectus or
herein, 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.
3. Borrow money, except for temporary purposes from banks or in reverse
repurchase transactions as described in the Statement of Additional
Information 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 maintenance
margin in connection with municipal bond index and interest rate futures
contracts or related options transactions 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
described from time to time in the Prospectus or herein.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
8. Make investments for the purpose of exercising control or participation
in management, except to the extent that exercise by the Fund of its
rights under agreements related to securities owned by the Fund would be
deemed to constitute such control or participation and except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
B-23
<PAGE> 62
9. Invest in securities issued by other investment companies, except as
part of a merger, reorganization or other acquisition, except that the
Fund may temporarily invest up to 10% of the value of its assets in
Pennsylvania tax exempt money market funds and except that the Fund may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
10. Invest in equity, interests in oil, gas or other mineral exploration or
development programs.
11. Purchase or sell real estate, commodities or commodity contracts,
except to the extent the securities the Fund may invest in are
considered to be interest in real estate, commodities or commodity
contracts or to the extent the Fund exercises its rights under
agreements relating to such securities (in which case the Fund may own,
hold, foreclose, liquidate or otherwise dispose of real estate acquired
as a result of a default on a mortgage), and except to the extent the
options and futures and index contracts in which such Funds may invest
for hedging and risk management purposes are considered to be
commodities or commodities contracts.
As long as the percentage restrictions described above are satisfied at the
time of the investment or borrowing, the Fund will be considered to have abided
by those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-24
<PAGE> 63
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... Chairman and Chief Executive Officer of International
Two World Trade Center Private Client Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Chairman of Dean Witter Futures & Currency
New York, NY 10048 Management Inc. and Demeter Management Corporation.
Date of Birth: 10/12/52 Director of Dean Witter Reynolds Inc. Chairman and
Director of Dean Witter Capital Corporation. Chairman,
Chief Executive Officer, President and a Director of Dean
Witter Alliance Capital Corporation, Director of the
National Healthcare Resources, Inc., Morgan Stanley Dean
Witter Distributors, Inc., Dean Witter Realty Inc., Dean
Witter Reynolds Venture Equities Inc., DW Window Covering
Holding, Inc., and is a member of the Morgan Stanley Dean
Witter Management Committee. Prior to December of 1998,
Mr. DeMartini was President and Chief Operating Officer
of Morgan Stanley Dean Witter Individual Asset Management
and a Director of Morgan Stanley Dean Witter Trust FSB.
Formerly Vice Chairman of the Board of the National
Association of Securities Dealers, Inc. and Chairman of
the Board of the Nasdaq Stock Market, Inc. Trustee of the
TCW/DW Funds, Director of the Morgan Stanley Dean Witter
Funds and Trustee/Director of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board. Trustee/Director of each of
the funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
</TABLE>
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<PAGE> 64
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*............................ Currently a member of the board of governors and
3 Wexford Court executive committee for the Investment Company Institute,
Houston, TX 77024 and a member of the Board of Trustees of the Houston
Date of Birth: 10/19/39 Museum of Natural Science. Immediate past chairman of the
Investment Company Institute. Prior to January 1999,
Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and
Director or officer of certain other subsidiaries of Van
Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to November 1996,
President, Chief Executive Officer and a Director of
VK/AC Holding, Inc. Trustee/Director of each of the funds
in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company and
Date of Birth: 07/08/44 the Urban Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame. Prior to
1998, Director of Stone Smurfit Container Corp., a paper
manufacturing company. Formerly, President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company.
Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen Management Inc.
Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
open-end and closed-end funds advised by the Advisers or
Van Kampen Management Inc.
Paul G. Yovovich.......................... Private investor. Prior to April 1996, President of
Sears Tower Advance Ross Corporation. Director of 3Com Corporation,
233 South Wacker Drive APAC Teleservices, Inc., and COMARCO, Inc.
Suite 9700 Trustee/Director of each of the Funds in the Fund
Chicago, IL 60606 Complex.
Date of Birth: 10/29/53
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
current or former positions with Morgan Stanley Dean Witter & Co. or its
affiliates.
B-26
<PAGE> 65
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Sullivan, Wood, Dalmaso, Martin,
Wetherell and Hill are located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, IL 60181-5555. The Fund's other officers are located at 2800 Post Oak
Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Executive Vice President and a Director of Van Kampen
Date of Birth: 05/20/42 Investments. President, Chief Operating Officer and a
President Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Prior to July of 1998, Director and
Executive Vice President of VK/AC Holding, Inc. Prior to
April of 1998, President and a Director of Van Kampen
Merritt Equity Advisors Corp. Prior to April of 1997, Mr.
McDonnell was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director
of MCM Asia Pacific Company, Limited and MCM (Europe)
Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
President of each of the funds in the Fund Complex.
President, Chairman of the Board and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or their affiliates.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Prior to July
Vice President of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of McCarthy, Crisanti &
Maffei, Inc. Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by
the Advisers or their affiliates.
John L. Sullivan..................... First Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Treasurer, Vice President and Chief Financial
Treasurer, Vice President and Chief Officer of each of the funds in the Fund Complex and certain
Financial Officer other investment companies advised by the Advisers or their
affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
</TABLE>
B-27
<PAGE> 66
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Ronald A. Nyberg..................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 07/29/53 Director of Van Kampen Investments. Mr. Nyberg is Executive
Vice President and Secretary Vice President, General Counsel, Assistant Secretary and a
Director of the Advisers and the Distributor, Van Kampen
Advisors Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., American Capital Contractual Services, Inc.
and Van Kampen Trust Company. Executive Vice President,
General Counsel and Assistant Secretary of Investor Services
and River View International Inc. Director or officer of
certain other subsidiaries of Van Kampen Investments.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.
Prior to July of 1998, Director and Executive Vice
President, General Counsel and Secretary of VK/AC Holding,
Inc. Prior to April of 1998, Executive Vice President,
General Counsel and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he was Executive Vice
President, General Counsel and a Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc.
Prior to July of 1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Vice President and
Secretary of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Paul R. Wolkenberg................... Executive Vice President and Director of Van Kampen
Date of Birth: 11/10/44 Investments. Executive Vice President of Asset Management
Vice President and the Distributor. President and a Director of Investor
Services. President and Chief Operating Officer of Van
Kampen Recordkeeping Services Inc. Prior to July of 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
Nicholas Dalmaso..................... Associate General Counsel and Assistant Secretary of Van
Date of Birth: 03/01/65 Kampen Investments. Vice President, Associate General
Assistant Secretary Counsel and Assistant Secretary of the Advisers, the
Distributor, Van Kampen Advisors Inc. and Van Kampen
Management Inc. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Advisers or their affiliates.
</TABLE>
B-28
<PAGE> 67
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Scott E. Martin...................... Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of Van Kampen Investments. Senior Vice President,
Assistant Secretary Deputy General Counsel and Secretary of the Advisers, the
Distributor, Investor Services, American Capital Contractual
Services, Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., Van Kampen Advisors Inc., Van Kampen
Insurance Agency of Illinois Inc., Van Kampen System Inc.
and Van Kampen Recordkeeping Services Inc. Prior to July of
1998, Senior Vice President, Deputy General Counsel and
Assistant Secretary of VK/AC Holding, Inc. Prior to April of
1998, Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel
and Secretary of Van Kampen American Capital Services, Inc.
and Van Kampen Merritt Holdings Corp. Prior to September of
1996, Mr. Martin was Deputy General Counsel and Secretary of
McCarthy, Crisanti & Maffei, Inc., and prior to July of
1996, he was Senior Vice President, Deputy General Counsel
and Secretary of VSM Inc. and VCJ Inc. Assistant Secretary
of each of the funds in the Fund Complex and other
investment companies advised by the Advisers or their
affiliates.
Weston B. Wetherell.................. Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of Van Kampen Investments, the Advisers, the
Assistant Secretary Distributor, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, Mr. Wetherell was
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Advisers or
their affiliates.
Steven M. Hill....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in the Fund Complex
Assistant Treasurer and other investment companies advised by the Advisers or
their affiliates.
Michael Robert Sullivan.............. Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex and
Assistant Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) provides a deferred compensation plan to its Non-Affiliated Trustees that
allows trustees/directors to defer receipt of their compensation and earn a
return on such deferred amounts. Deferring compensation has the economic effect
as if the Non-Affiliated Trustee reinvested his or her compensation into the
funds. Each fund in the Fund Complex (except the money market series of the Van
Kampen Series Fund, Inc.) provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
Effective January 1, 1998, the trustees adopted a standardized compensation
and benefits program for each fund in the Fund Complex. The compensation of each
Non-Affiliated Trustee includes an annual retainer in an amount equal to $50,000
per calendar year, due in four quarterly installments on the first business day
of each quarter. Payment of the annual retainer is allocated among the funds in
the Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) on the basis of the relative
B-29
<PAGE> 68
net assets of each fund as of the last business day of the preceding calendar
quarter. The compensation of each Non-Affiliated Trustee includes a per meeting
fee from each fund in the Fund Complex (except the money market series of the
Van Kampen Series Fund, Inc.) in the amount of $200 per quarterly or special
meeting attended by the Non-Affiliated Trustee, due on the date of the meeting,
plus reasonable expenses incurred by the Non-Affiliated Trustee in connection
with his or her services as a trustee, provided that no compensation will be
paid in connection with certain telephonic special meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
AGGREGATE ----------------------------------------------------------
YEAR FIRST COMPENSATION AGGREGATE AGGREGATE TOTAL
APPOINTED BEFORE PENSION OR ESTIMATED MAXIMUM COMPENSATION
OR DEFERRAL RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) THE BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ---------- ------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1995 $1,116 $35,691 $60,000 $125,200
Linda Hutton Heagy 1995 916 3,861 60,000 112,800
R. Craig Kennedy 1993 1,116 2,652 60,000 125,200
Jack E. Nelson 1987 1,116 18,385 60,000 125,200
Phillip B. Rooney 1997 1,116 6,002 60,000 125,200
Dr. Fernando Sisto 1995 1,116 68,615 60,000 125,200
Wayne W. Whalen 1987 1,116 12,658 60,000 125,200
Paul G. Yovovich(1) 1998 0 0 60,000 $ 25,300
</TABLE>
- ---------------
(1) Mr. Paul G. Yovovich became a member of the Board of Trustees effective
October 22, 1998 and thus does not have a full fiscal year of information to
report. Trustees not eligible for compensation or retirement benefits are
not shown in the table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal period ended September 30, 1998.
The following trustees deferred compensation from the Fund during the fiscal
period ended September 30, 1998: Mr. Branagan $1,116; Ms. Heagy $916; Mr.
Kennedy $558; Mr. Nelson $1,116; Mr. Rooney $1,116; Dr. Sisto $558; and Mr.
Whalen $1,116. 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
B-30
<PAGE> 69
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 cumulative deferred
compensation (including interest) accrued with respect to each trustee,
including former trustees, from the Fund as of September 30, 1998 is as
follows: Mr. Branagan $5,424; Mr. Gaughan $7,099; Ms. Heagy $7,499; Mr.
Kennedy $11,497; Mr. Miller $9,164; Mr. Nelson $16,615; Mr. Robinson
$13,380; Mr. Rooney $2,596; Dr. Sisto $2,085; and Mr. Whalen $14,171. The
deferred compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1998. The retirement
plan is described above the Compensation Table.
(4) This is the sum of the estimated maximum annual benefits payable by the
operating investment companies in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1998. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $285,825 during the
calendar year ended December 31, 1998.
As of January 4, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment objectives. The Adviser also furnishes the
services of the Fund's President and such other executive and clerical personnel
as are necessary to prepare the various reports and statements and conduct the
Fund's day-to-day operations. The Fund, however, bears the cost of its
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of the Fund's Treasurer and the
personnel operating under his direction. Charges are allocated among the
investment companies advised or subadvised by the Adviser or its affiliates. A
portion of these amounts is paid to the Adviser or its affiliates in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. See
"Accounting Services Agreement" below. The Fund also pays distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgment or of law, or for any loss
B-31
<PAGE> 70
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows: 0.60% on the first $500 million of
average daily net assets and 0.50% on the average daily net assets over $500
million.
The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month.
The Advisory Agreement also provides that, in the event the annual expenses
of the Fund for any fiscal year exceed the most stringent limit in any state in
which the Fund's shares are offered for sale, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, the Adviser received $1,234,844, $1,645,589
and $1,665,021, respectively, in advisory fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Advisory Corp. received $75,164, $8,710 and
$9,900, respectively, in accounting services fees from the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel, as well as overhead and the expenses related to
the office space and the equipment necessary to render the legal services. Other
funds distributed by the Distributor also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributor, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Van Kampen Investments received $102, $11,300
and $12,300, respectively, in legal services fees from the Fund.
B-32
<PAGE> 71
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Trustees who
are not parties to the Distribution and Service Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Period Ended September 30, 1998...................... $267,010 $32,468
Fiscal Year Ended December 31, 1997......................... $360,849 $50,901
Fiscal Year Ended December 31, 1996......................... $580,225 $69,263
</TABLE>
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ ------------------ ----------- --------------
<S> <C> <C> <C>
Less than $100,000..................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000........................ 3.75% 3.90% 3.25%
$250,000 but less than $500,000........................ 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000...................... 2.00% 2.04% 1.75%
$1,000,000 or more..................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a deferred
sales charge of 1.00% on certain redemptions made within one year of the
purchase. A commission or transaction fee will be paid by the Distributor at
the time of purchase directly out of the Distributor's assets (and not out of
the Fund's assets) to authorized dealers who initiate and are responsible for
purchases of $1 million or more computed based on a percentage of the dollar
value of such shares sold as follows: 1.00% on sales to $2 million, plus 0.80%
on the next $1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any deferred sales charge and any distribution fees on Class
B Shares and Class C Shares of the Fund are paid to the Distributor and are used
by the Distributor to defray its distribution related expenses in connection
with the sale of the Fund's shares, such as the payment to authorized dealers
for selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission
B-33
<PAGE> 72
and transaction fees of up to 0.75% of the average daily net assets of the
Fund's Class C Shares annually commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund. Fees may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or seminars
of a business nature. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
For shares sold prior to July 1, 1987 the "Implementation Date," the
financial intermediary was not eligible to receive compensation pursuant to such
Distribution and Service Agreement or sub-agreements. 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.
B-34
<PAGE> 73
The Distributor must submit quarterly reports to the Board of Trustees of
the Fund setting forth separately by class of shares all amounts paid under the
Distribution Plan and the purposes for which such expenditures were made,
together with such other information as from time to time is reasonably
requested by the Trustees. The Plans provide that they will continue in full
force and effect from year to year so long as such continuance is specifically
approved by a vote of the Trustees, and also by a vote of the disinterested
Trustees, cast in person at a meeting called for the purpose of voting on the
Plans. Each of the Plans may not be amended to increase materially the amount to
be spent for the services described therein with respect to any class of shares
without approval by a vote of a majority of the outstanding voting shares of
such class, and all material amendments to either of the Plans must be approved
by the Trustees and also by the disinterested Trustees. Each of the Plans may be
terminated with respect to any class of shares at any time by a vote of a
majority of the disinterested Trustees or by a vote of a majority of the
outstanding voting shares of such class.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share of Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
September 30, 1998, there were $1,191,721 and $1,678 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 2.23% and 0.05% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plan were terminated
or not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through deferred sales charge.
For the fiscal period ended September 30, 1998, the Fund's aggregate
expenses under the Plans for Class A Shares were $407,027 or 0.25% of the Class
A Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Fund
shareholders and for administering the Plans. For the fiscal period ended
September 30, 1998, the Fund's aggregate expenses under the Class B Plan were
$392,267 or 1.00% of the Class B Shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $261,569 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class B Shares of the Fund and $97,827 for fees paid to financial
intermediaries for servicing Class B shareholders and administering the Plans.
For the fiscal period ended September 30, 1998, the Fund's aggregate expenses
under the Plans for Class C Shares were $24,549 or 1.00% of the Class C Shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments; $4,471 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class C Shares of the Fund and
$17,330 for fees paid to financial intermediaries for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
The Fund's transfer agent is Van Kampen Investor Services Inc., PO Box
418256, Kansas City, MO 64141-9256. During the fiscal period ended September 30,
1998 and the fiscal years ended December 31, 1997 and 1996, Investor Services,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $102,466, $171,000 and $250,100, respectively for these
services. Prior to 1998, these services were provided at cost plus a profit.
Beginning in 1998, the transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
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<PAGE> 74
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.
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
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<PAGE> 75
considered by the Adviser are the respective sizes of the Fund and other
advisory accounts, the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and
opinions of the persons responsible for recommending the investment.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The trustees have
adopted certain policies incorporating the standards of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
The Fund paid the following commissions to all brokers and affiliated
brokers during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
------- ---------- ------
<S> <C> <C> <C>
Commission paid:
Fiscal period ended September 30, 1998.................... $ 1,600 -- --
Fiscal year ended December 31, 1997....................... -- -- --
Fiscal year ended December 31, 1996....................... -- -- --
Fiscal period 1998 Percentages:
Commissions with affiliate to total commissions........... -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- --
</TABLE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive statements quarterly from Investor Services
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized dealers or by mailing a
check directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if
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<PAGE> 76
such certificates are lost the shareholder must write to Van Kampen Funds, c/o
Investor Services, PO Box 418256, Kansas City, MO 64141-9256, requesting an
"affidavit of loss" and obtain a Surety Bond in a form acceptable to Investor
Services. On the date the letter is received, Investor Services will calculate a
fee for replacing the lost certificate equal to no more than 2.00% of the net
asset value of the issued shares, and bill the party to whom the replacement
certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or other pension or profit
sharing plans. Documents and forms containing detailed information regarding
these plans are available from the Distributor. Van Kampen Trust Company serves
as custodian under the IRA, 403(b)(7) and Keogh plans. Details regarding fees,
as well as full plan administration for profit sharing, pension and 401(k)
plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Holders of Class A Shares can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once Investor Services has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing Investor Services.
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
Any investor whose shares in a single account total $10,000 or more at the
offering price next computed after receipt of instructions may establish a
monthly, quarterly, semi-annual or annual withdrawal plan. Any investor whose
shares in a single account total $5,000 or more at the offering price next
computed after receipt of instructions may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
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<PAGE> 77
Class B shareholders and Class C shareholders who establish a withdrawal
plan may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Withdrawals made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund reserves the right to amend or terminate
the systematic withdrawal program on 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A shareholder or Class B shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class C Shares of the Fund with credit given for any CDSC paid upon such
redemption. Such reinstatement is made at the net asset value per share (without
sales charge) next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value per
share is also offered to participants in those eligible retirement plans held or
administered by Van Kampen Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or in
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. Shareholders may
incur brokerage charges upon the sale of portfolio securities so received in
payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For purposes of the CDSC-Class A, when shares of one fund are exchanged for
shares of another fund, the purchase date for the shares of the fund exchanged
into will be assumed to be the date on which shares were purchased in the fund
from which the exchange was made. If the exchanged shares themselves are
acquired through an exchange, the purchase date is assumed to carry over from
the date of the original election to purchase shares subject to a CDSC-Class A
rather than a front-end load sales charge. In determining whether a CDSC-Class A
is payable, it is assumed that shares held the longest are the first to be
redeemed.
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<PAGE> 78
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGE ("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a CDSC. The CDSC-Class B
and C is waived on redemptions of Class B Shares and Class C Shares in the
circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more Participating Funds;
in such event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
REDEMPTION PURSUANT TO A FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from the Fund without the imposition of a CDSC-Class B
and C may not exceed
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<PAGE> 79
a maximum of 12% annually of the shareholder's initial account balance. The Fund
reserves the right to change the terms and conditions of the Plan and the
ability to offer the Plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION. The Fund has elected and qualified, and intends to
continue to qualify each year, to be treated as a regulated investment company
under Subchapter M of the Code. To qualify as a regulated investment company,
the Fund must comply with certain requirements of the Code relating to, among
other things, the source of its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits
B-41
<PAGE> 80
attributable to non-regulated investment company years and would be required to
distribute such earnings and profits to shareholders (less any interest charge).
In addition, if the Fund failed to qualify as a regulated investment company for
its first taxable year or, if immediately after qualifying as a regulated
investment company for any taxable year, it failed to qualify for a period
greater than one taxable year, the Fund would be required to recognize any net
built-in gains (the excess of aggregate gains, including items of income, over
aggregate losses that would have been realized if it had been liquidated) in
order to qualify as a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold. A
portion of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income when distributed to shareholders.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt
municipal securities to permit payment of "exempt-interest dividends" (as
defined in the Code). Dividends paid by the Fund from the net tax-exempt
interest earned from municipal securities qualify as exempt-interest dividends
if, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
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.
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<PAGE> 81
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its net investment income
will constitute tax-exempt interest, a significant portion may consist of
investment company taxable income. Distributions of the Fund's net investment
company taxable income are taxable to shareholders as ordinary income to the
extent of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Interest on indebtedness which is incurred to
purchase or carry shares of a mutual fund which distributes exempt interest
dividends during the year is not deductible for federal income tax purposes.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are exempt-interest dividends is determined on an average annual method
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES. The sale of shares (including transfers in connection with
a redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains Rates" below. Any loss recognized upon a taxable disposition of shares
held for six months or
B-43
<PAGE> 82
less will be treated as a long-term capital loss to the extent of any capital
gain dividends received with respect to such shares. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.
CAPITAL GAINS RATES. The maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less or (ii) 20% for capital assets held for more than one year. A special 28%
tax rate may apply to a portion of the capital gain dividends paid by the Fund
with respect to its taxable year ended September 30, 1998. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends if
(i) the shareholder fails to furnish the Fund with its correct taxpayer
identification number, (ii) the IRS notifies the Fund that the shareholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect or (iii) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
GENERAL. The federal, income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
The table does not reflect the effect of the exemption of the Fund from
local personal property taxes and from the Philadelphia School District
Investment Net Income Tax; accordingly, residents of Pennsylvania subject to
such taxes would need a higher taxable equivalent estimated current return than
those shown to equal the tax-exempt estimated current return of the Fund.
1998 FEDERAL AND PENNSYLVANIA STATE TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX --------------------------------------------------------------------------------
RETURN RETURN BRACKET* 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5%
- ---------------- ---------------- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,350 $ 0-42,350 17.40% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08% 9.69% 10.29%
25,350-61,400 42,350-102,300 30.00% 5.00 5.71 6.43 7.14 7.86 8.57 9.29 10.00 10.71 11.43 12.14
61,400-128,100 102,300-155,950 32.90% 5.22 5.96 6.71 7.45 8.20 8.94 9.69 10.43 11.18 11.92 12.67
128,100-278,450 155,950-278,450 37.80% 5.63 6.43 7.23 8.04 8.84 9.65 10.45 11.25 12.06 12.86 13.67
Over 278,450 Over 278,450 41.30% 5.98 6.81 7.67 8.52 9.37 10.22 11.07 11.93 12.78 13.63 14.48
</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.
B-44
<PAGE> 83
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gains distributions during the period are
reinvested in Fund shares at net asset value; and that any applicable CDSC has
been paid. The Fund's total return will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
unrealized net capital gains or losses during the period. Total return is based
on historical earnings and asset value fluctuations and is not intended to
indicate future performance. No adjustments are made to reflect any income taxes
payable by shareholders on dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Class A Shares total return figures include the
maximum sales charge; Class B Shares and Class C Shares
B-45
<PAGE> 84
total return figures include any applicable CDSC. Because of the differences in
sales charges and distribution fees, the total returns for each of the classes
will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an adviser update or discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top five sectors, ten largest holdings and other Fund asset
structures, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio. Materials may also mention how
the Distributor believes the Fund compares relative to other Van Kampen funds.
Materials may also discuss the Dalbar Financial Services study from 1984 to 1994
which studied investor cash flow into and out of all types of mutual funds. The
ten year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless of if shareholders purchased their funds in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking services and by nationally recognized
financial publications. Such comparative performance information will be stated
in the same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
of different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
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.
B-46
<PAGE> 85
The Fund's Annual Report and Semi-Annual Report contain additional
performance information. A copy of the Annual Report or Semi-Annual Report may
be obtained without charge by calling or writing the Fund at the telephone
number and address printed on the back cover of the Prospectus.
CLASS A SHARES
The average annualized total return, including payment of the sales charge,
with respect to the Class A Shares for (i) the one year period ended September
30, 1998 was 2.79%, (ii) the five year period ended September 30, 1998 was 4.64%
and (iii) the ten year period ended September 30, 1998 was 7.83%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.74%. The Fund's current distribution
rate with respect to the Class A Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.86%. The Fund's taxable equivalent distribution rate with
respect to the Class A Shares for the month ending September 30, 1998 was 7.81%.
The Class A Shares cumulative non-standardized total return, including
payment of the maximum sales charge, with respect to the Class A Shares from its
inception to September 30, 1998 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 147.86%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to September 30, 1998 was 160.20%.
CLASS B SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class B Shares for (i) the one year period ended September 30,
1998 was 3.15%, (ii) the five year period ended September 30, 1998 was 4.63% and
(iii) the approximately five year, four month period of May 3, 1993
(commencement of investment operations of the Fund) through September 30, 1998
was 5.46%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.18%. The Fund's current distribution
rate with respect to the Class B Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.38%. The Fund's taxable equivalent distribution rate with
respect to the Class B Shares for the month ending September 30, 1998 was 7.04%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class B Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 33.35%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class B Shares from its inception to September 30,
1998 was 34.35%.
CLASS C SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class C Shares for (i) the one year period ended September 30,
1998 was 6.15%, (ii) the five year period ended September 30, 1998 was 4.89% and
(iii) the approximately five year, one month period from August 13, 1993 (the
commencement of investment operations of the Fund) through September 30, 1998
was 5.18%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.22%. The Fund's current distribution
rate with respect to the Class C Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.38%. The Fund's taxable equivalent distribution rate with
respect to the Class C Shares for the month ending September 30, 1998 was 7.04%.
B-47
<PAGE> 86
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class C Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 29.60%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class C Shares from its inception to September 30,
1998 was 29.60%.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 West Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to
shareholders, and annually such statements are audited by the independent
accountants.
INDEPENDENT ACCOUNTANTS -- KPMG LLP, 303 East Wacker Drive, Chicago,
Illinois 60601, the independent accountants for the Fund, performs an annual
audit of the Fund's financial statements.
LEGAL COUNSEL -- Counsel to the Fund is Skadden, Arps, Slate, Meagher &
Flom (Illinois). Saul, Ewing, Remick & Saul acts as special counsel to the Fund
for Pennsylvania disclosure, Pennsylvania tax matters and passes on the legality
of the Fund's shares.
B-48
<PAGE> 87
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Pennsylvania Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Pennsylvania Tax Free Income Fund (the "Fund"), including the portfolio
of investments, as of September 30, 1998, and the related statement of
operations for the nine-month period ended September 30, 1998 and the year ended
December 31, 1997, the statement of changes in net assets for the nine-month
period ended September 30, 1998 and for each of the two years in the period
ended December 31, 1997, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Pennsylvania Tax Free Income Fund as of September 30, 1998, the results
of its operations for the nine-month period ended September 30, 1998 and the
year ended December 31, 1997, the changes in its net assets for the nine-month
period ended September 30, 1998 and for each of the two years in the period
ended December 31, 1997, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
November 6, 1998
F-1
<PAGE> 88
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 98.1%
PENNSYLVANIA 97.7%
$3,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser B (FSA Insd)........................... 6.625% 01/01/22 $ 3,811,360
1,625 Allegheny Cnty, PA C-34 Conv Cap Apprec......... 8.625 02/15/04 1,989,991
1,000 Allegheny Cnty, PA Higher Edl Bldg Auth Univ Rev
Duquesne Univ Proj (AMBAC Insd)................. 6.500 03/01/11 1,206,190
2,140 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Fac
Allegheny Vly Sch............................... 7.750 02/01/15 2,395,452
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.500 05/15/06 1,076,920
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.500 05/15/07 1,080,050
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.600 05/15/08 1,089,590
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/09 1,098,710
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/10 1,092,690
1,160 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/17 1,233,428
925 Allegheny Cnty, PA Indl Dev Auth Med Cent Rev
Presbyterian Med Cent Rfdg (FHA Gtd)............ 6.750 02/01/26 1,033,475
2,500 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt Ser A Rfdg................... 6.700 12/01/20 2,766,075
315 Allegheny Cnty, PA Res Fin Auth Mtg Rev 1983 Ser
B............................................... * 10/01/15 53,317
1,945 Allegheny Cnty, PA Res Mtg Comp Int Single
Family Ser Z (GNMA Collateralized).............. 6.875 05/01/26 2,095,951
2,000 Beaver Cnty, PA Hosp Auth Rev Med Cent Beaver PA
Inc Ser A (Prerefunded @ 07/01/02) (AMBAC
Insd)........................................... 6.250 07/01/22 2,210,040
4,500 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Collateral Toledo Edison Co Proj Ser A Rfdg..... 7.750 09/01/24 4,713,300
6,000 Berks Cnty, PA (Inverse Fltg) (FGIC Insd)....... 8.672 11/10/20 7,305,000
2,000 Berks Cnty, PA Muni Auth Rev Highlands at
Wyomissing Proj B............................... 6.875 10/01/17 2,184,840
3,000 Berks Cnty, PA Muni Auth Rev Hlth Care Pooled
Fin Proj........................................ 5.000 03/01/28 2,970,210
965 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.500 05/15/13 1,082,730
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.700 05/15/22 1,129,910
2,750 Bradford Cnty, PA Indl Dev Auth Solid Waste Disp
Rev Intl Paper Co Proj A........................ 6.600 03/01/19 3,053,847
1,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Bethlehem Steel Corp Proj Rfdg.................. 7.500 09/01/15 1,120,530
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 89
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys
Rev (AMBAC Insd)................................ 5.650% 05/15/20 $ 1,052,300
1,880 Chester Cnty, PA Hlth & Edl The Chester Cnty
Hosp (MBIA Insd)................................ 5.625 07/01/08 2,075,106
760 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/01 687,162
860 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/02 746,626
915 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj (Prerefunded @ 07/01/01)................... 8.500 07/01/13 1,032,989
1,000 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj (Prerefunded @ 07/01/01)................... 8.500 07/01/21 1,140,960
1,130 Clearfield Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg K Mart Corp Ser A Rfdg................ 7.200 07/01/07 1,217,033
2,230 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle Hosp & Hlth............................ 6.800 11/15/23 2,456,167
2,000 Dauphin Cnty, PA Genl Auth Rev Hotel & Conf Cent
Hyatt Regency................................... 6.200 01/01/29 2,019,000
1,000 Dauphin Cnty, PA Genl Auth Rev Office & Pkg
Riverfront Office............................... 6.000 01/01/25 1,013,520
2,475 Delaware Cnty, PA Auth Rev Elwyn Inc Proj
(Prerefunded @ 06/01/00)........................ 8.350 06/01/15 2,707,378
1,500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj (Prerefunded @ 06/01/02)................... 9.250 06/01/22 1,799,580
500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 6.200 06/01/05 529,015
3,000 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 7.000 06/01/26 3,187,590
2,000 Erie Cnty, PA Hosp Auth Rev Saint Vincent Hlth
Cent Proj Ser A (MBIA Insd)..................... 6.375 07/01/22 2,191,340
4,780 Erie, PA Sch Dist Cap Apprec Rfdg (FSA Insd).... * 09/01/24 1,351,019
3,500 Geisinger, PA Auth Hlth Sys Rev PA St Geisinger
Hlth Sys Ser A.................................. 5.000 08/15/28 3,480,960
1,985 Greene Cnty, PA Unlimited Tax (Prerefunded @
08/01/00)....................................... 8.500 08/01/10 2,135,165
1,000 Harrisburg, PA Auth Office & Pkg Rev Ser A...... 6.000 05/01/19 1,017,060
3,000 Harrisburg, PA Auth Rev Pooled Univ Pgm Ser 11
(MBIA Insd)..................................... 5.625 09/15/17 3,236,190
900 Hazleton, PA Hlth Svcs Auth Hosp Rev............ 5.500 07/01/07 968,499
650 Hazleton, PA Hlth Svcs Auth Saint Joseph Med
Cent Rfdg....................................... 5.850 07/01/06 701,766
1,750 Indiana Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Metro Edison Co Proj A (AMBAC Insd)............. 5.950 05/01/27 1,920,607
570 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/13 281,985
570 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/14 266,606
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 90
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 500 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/15 $ 221,220
490 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/16 204,511
500 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/17 197,735
500 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/18 187,620
560 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/19 199,713
2,500 Jim Thorpe, PA Area Sch Dist Ser A (MBIA
Insd)........................................... 5.375% 03/15/22 2,604,525
1,800 Kiski, PA Area Sch Dist (FGIC Insd)............. 5.300 03/01/17 1,881,306
2,000 Lehigh Cnty, PA Genl Purp Auth Cedar Crest
College Rfdg.................................... 6.700 04/01/26 2,205,700
1,760 Lehigh Cnty, PA Genl Purp Auth Rev Kidspeace
Oblig Group..................................... 6.000 11/01/23 1,779,501
1,085 Lehigh Cnty, PA Indl Dev Auth Hlth Fac Rev
Lifepath Inc Proj............................... 6.300 06/01/28 1,071,958
1,000 Lehigh Cnty, PA Indl Dev Auth Pollutn Ctl Rev PA
Pwr & Lt Co Proj Ser A Rfdg (MBIA Insd)......... 6.400 11/01/21 1,106,820
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A........................ 6.500 07/01/22 2,184,020
2,500 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A (Prerefunded @
07/01/00)....................................... 7.750 07/01/16 2,716,300
1,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp
Proj (Crossover Rfdg @ 10/01/00)................ 8.875 10/01/20 1,113,980
750 McKeesport, PA Indl Dev Auth Rev The Kroger Corp
Allegheny Cnty Rfdg............................. 8.650 06/01/11 842,190
3,000 Monroeville, PA Hosp Auth Hosp Rev Forbes Hlth
Sys Rfdg........................................ 6.250 10/01/15 2,820,000
500 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Suburban Genl Hosp Bonds (AMBAC Insd)....... 7.250 05/01/16 506,445
2,000 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev....................................... 6.300 01/01/13 2,047,620
2,250 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev Adult Cmntys Total Svcs Ser B......... 5.625 11/15/12 2,381,602
2,500 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Philadelphia Elec Co Ser A Rfdg............. 7.600 04/01/21 2,708,575
3,000 Montgomery Cnty, PA Indl Dev Auth Rev Res Recov
(LOC -- Banque Paribas)......................... 7.500 01/01/12 3,294,270
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Wordsworth
Academy (LOC -- Summit Bank).................... 7.750 09/01/24 1,125,320
1,415 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/17 1,508,376
3,300 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/26 3,488,826
1,500 North Penn, PA Wtr Auth Wtr Rev (FGIC Insd)..... 6.200 11/01/22 1,635,660
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 91
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,000 North Penn, PA Wtr Auth Wtr Rev (Prerefunded @
11/01/04) (FGIC Insd)........................... 6.875% 11/01/19 $ 1,170,620
2,500 Northampton Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Bethlehem Steel Rfdg........................ 7.550 06/01/17 2,798,150
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd
Luzerne Cnty Cmnty College (Prerefunded @
02/15/05) (AMBAC Insd).......................... 6.625 08/15/15 1,150,920
2,247 Oil City, PA Towne Tower Proj................... 6.750 05/01/20 2,499,049
1,335 Penn Hills, PA (FGIC Insd)...................... 5.800 12/01/13 1,481,490
1,600 Penn Hills, PA (FGIC Insd)...................... 5.850 12/01/14 1,774,800
1,335 Penn Hills, PA (FGIC Insd)...................... 5.900 12/01/17 1,475,642
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.050 12/01/10 3,361,890
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.125 12/01/15 1,684,290
5,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Northampton Generating Ser A.................... 6.600 01/01/19 5,386,800
4,000 Pennsylvania Hsg Fin Agy (Inverse Fltg)......... 9.914 10/03/23 4,565,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg Rfdg (FNMA
Collateralized)................................. 6.500 07/01/23 1,073,680
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
40.............................................. 6.900 04/01/25 1,090,500
2,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
42.............................................. 6.850 04/01/25 2,733,550
850 Pennsylvania Infrastructure Invt Auth Rev
Pennvest Subser B (Prerefunded @ 09/01/02)...... 6.800 09/01/10 943,738
2,000 Pennsylvania Intergvtl Coop Auth Spl Tax Rev
City of Philadelphia (MBIA Insd)................ 5.600 06/15/15 2,111,800
4,000 Pennsylvania St Ctfs Partn (FSA Insd)........... 6.250 05/01/16 4,330,080
2,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Rfdg (Inverse Fltg) (AMBAC
Insd)........................................... 9.672 09/01/26 2,337,500
2,500 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser B (Inverse Fltg) (MBIA
Insd)........................................... 10.941 03/01/20 2,815,625
4,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser C (AMBAC Insd)............... 6.400 03/01/22 4,207,360
1,200 Pennsylvania St Higher Edl Fac Auth College &
Univ Rev Bryn Mawr College (MBIA Insd).......... 5.625 12/01/27 1,301,136
5,400 Pennsylvania St Higher Edl Fac Auth Rev Drexel
Univ Rfdg....................................... 6.375 05/01/17 5,909,058
1,000 Philadelphia, PA Auth For Indl Dev Hlth Care Fac
Rev............................................. 5.750 05/15/18 1,010,150
2,505 Philadelphia, PA Auth For Indl Dev Rev Coml Dev
RMK Rfdg........................................ 7.750 12/01/17 2,846,181
3,000 Philadelphia, PA Auth For Indl Dev Rev Long-Term
Care Maplewood.................................. 8.000 01/01/24 3,354,240
11,565 Philadelphia, PA Auth Indl Dev Lease Rev Ser A
(MBIA Insd)..................................... 5.375 02/15/27 12,117,229
3,000 Philadelphia, PA Gas Wks Rev Ser 14 Rfdg (FSA
Insd)........................................... 6.250 07/01/08 3,337,620
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 92
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 250 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Albert Einstein Med Cent (Prerefunded @
10/01/01)....................................... 7.000% 10/01/21 $ 277,913
2,800 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Chestnut Hill Hosp.......................... 6.500 11/15/22 3,021,536
4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Temple Univ Hosp Ser A...................... 6.625 11/15/23 4,328,840
760 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev............................................. 6.300 07/01/14 776,158
985 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev............................................. 6.400 07/01/17 1,005,892
450 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev............................................. 6.500 07/01/21 460,282
1,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/08 1,003,065
3,750 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/11 2,127,975
3,775 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/12 2,033,479
4,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/13 2,292,345
2,155 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded
@ 04/01/00) (FGIC Insd)......................... 7.800 04/01/18 2,287,058
1,800 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.500 08/01/10 2,018,088
2,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (MBIA
Insd) (b)....................................... 5.625 06/15/08 2,217,600
1,470 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser
C1.............................................. 6.800 10/01/25 1,573,209
1,475 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser D... 6.250 10/01/17 1,587,690
795 Pittsburgh, PA Urban Redev Auth Single Family
Mtg Rev Ser A (GNMA Collateralized)............. 8.000 12/01/20 821,124
4,500 Pottsville, PA Hosp Auth Rev Pottsville Hosp
(ACA CBI Insd).................................. 5.500 07/01/18 4,620,915
2,665 Radnor Twp, PA Sch Dist......................... 5.750 03/15/19 2,868,979
3,000 Radnor Twp, PA Sch Dist......................... 5.750 03/15/26 3,218,790
8,500 Saint Mary Hosp Auth Bucks PA Catholic Hlth Init
A............................................... 5.000 12/01/28 8,453,505
1,000 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Marian Cmnty Hosp Proj Rfdg..................... 7.125 01/15/13 1,096,840
2,000 Shaler, PA Area Sch Dist Cap Apprec Ser A (FGIC
Insd)........................................... * 11/15/22 618,120
2,650 Sharon, PA Regl Hlth Sys Auth Hosp Rev Sharon
Regl Hlth Sys Proj A Rfdg (Prerefunded @
12/01/02)....................................... 6.875 12/01/09 3,013,447
355 Somerset Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg K Mart Corp Ser A Rfdg................ 7.200 04/01/07 380,958
650 Springfield Twp, PA Swr Auth Gtd................ 5.800 10/15/18 666,529
1,000 Springfield Twp, PA Swr Auth Gtd................ 6.000 10/15/27 1,028,980
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 93
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$2,180 State Pub Sch Bldg Auth PA Sch Rev Burgettstown
Sch Dist Ser D (Prerefunded @ 02/01/05) (MBIA
Insd)........................................... 6.500% 02/01/14 $ 2,496,013
1,300 State Pub Sch Bldg Auth PA Sch Rev Pittson Area
Sch Dist Ser P (FSA Insd) (a)................... 5.000 07/15/21 1,303,393
1,500 Washington Cnty, PA Auth Lease Rev Muni Fac Pool
Cap Ser C Subser C-1D (Prerefunded @ 06/15/00)
(AMBAC Insd).................................... 7.450 12/15/18 1,637,100
2,935 West Shore, PA Area Auth Hlth Cent Rev United
Methodist Homes Aging Inc (Prerefunded @
06/01/01) (LOC -- Bank of Scotland)............. 7.400 06/01/16 3,263,397
1,000 West Shore, PA Area Hosp Auth Hosp Rev Holy
Spirit Hosp Proj (MBIA Insd).................... 5.700 01/01/22 1,066,940
350 Westmoreland Cnty, PA Indl Dev Auth Rev Citizens
Genl Hosp Proj A Rfdg........................... 8.250 07/01/13 355,380
------------
269,832,660
------------
GUAM 0.4%
1,000 Guam Arpt Auth Rev Ser B........................ 6.700 10/01/23 1,104,800
------------
TOTAL LONG-TERM INVESTMENTS 98.1%
(Cost $244,880,737)........................................................ 270,937,460
SHORT-TERM INVESTMENTS 0.2%
(Cost $400,000)............................................................ 400,000
------------
TOTAL INVESTMENTS 98.3%
(Cost $245,280,737)........................................................ 271,337,460
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%.................................. 4,724,851
------------
NET ASSETS 100.0%........................................................... $276,062,311
============
</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.
See Notes to Financial Statements
F-7
<PAGE> 94
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $245,280,737)....................... $271,337,460
Cash........................................................ 277,202
Receivables:
Interest.................................................. 4,178,992
Investments Sold.......................................... 2,561,263
Fund Shares Sold.......................................... 122,038
Other....................................................... 18,800
------------
Total Assets.......................................... 278,495,755
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 1,280,155
Income Distributions...................................... 478,378
Distributor and Affiliates................................ 174,123
Investment Advisory Fee................................... 134,912
Fund Shares Repurchased................................... 109,183
Trustees' Deferred Compensation and Retirement Plans........ 149,560
Accrued Expenses............................................ 107,133
------------
Total Liabilities..................................... 2,433,444
------------
NET ASSETS.................................................. $276,062,311
============
NET ASSETS CONSIST OF:
Capital..................................................... $250,373,504
Net Unrealized Appreciation................................. 26,056,723
Accumulated Undistributed Net Investment Income............. 358,014
Accumulated Net Realized Loss............................... (725,930)
------------
NET ASSETS.................................................. $276,062,311
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $219,282,152 and 12,021,762 shares of
beneficial interest issued and outstanding)............. $ 18.24
Maximum sales charge (4.75%* of offering price)......... .91
------------
Maximum offering price to public........................ $ 19.15
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $53,497,854 and 2,934,927 shares of
beneficial interest issued and outstanding)............. $ 18.23
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,282,305 and 180,058 shares of
beneficial interest issued and outstanding)............. $ 18.23
============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-8
<PAGE> 95
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998 and the
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest........................................ $12,528,072 $17,301,880
----------- -----------
EXPENSES:
Investment Advisory Fee......................... 1,234,844 1,645,589
Distribution (12b-1) and Service Fees
(Attributed to Classes A, B and C of $407,027,
$392,267 and $24,549, respectively, for the
nine months ended 9/30/98 and $551,201,
$490,120 and $30,079, respectively, for the
year ended 12/31/97).......................... 823,843 1,071,400
Shareholder Services............................ 149,608 266,800
Trustees' Fees and Expenses..................... 29,487 36,431
Legal........................................... 5,707 27,200
Custody......................................... 1,209 8,362
Other........................................... 194,460 183,017
----------- -----------
Total Expenses.............................. 2,439,158 3,238,799
----------- -----------
NET INVESTMENT INCOME........................... $10,088,914 $14,063,081
=========== ===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments................................... $ 2,314,845 $ 1,516,339
Futures....................................... (51,614) (467,390)
----------- -----------
Net Realized Gain............................... 2,263,231 1,048,949
----------- -----------
Unrealized Appreciation/Depreciation:
Beginning of the Period....................... 25,057,255 17,962,920
End of the Period:
Investments................................. 26,056,723 25,057,255
----------- -----------
Net Unrealized Appreciation During the Period... 999,468 7,094,335
----------- -----------
NET REALIZED AND UNREALIZED GAIN................ $ 3,262,699 $ 8,143,284
=========== ===========
NET INCREASE IN NET ASSETS FROM OPERATIONS...... $13,351,613 $22,206,365
=========== ===========
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 96
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998 and the
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............. $10,088,914 $ 14,063,081 $ 14,364,732
Net Realized Gain................. 2,263,231 1,048,949 1,606,502
Net Unrealized
Appreciation/Depreciation....... 999,468 7,094,335 (5,619,309)
------------ ------------ ------------
Change in Net Assets from
Operations...................... 13,351,613 22,206,365 10,351,925
------------ ------------ ------------
Distributions from Net Investment
Income:
Class A Shares.................. (8,483,120) (11,483,502) (11,821,553)
Class B Shares.................. (1,740,891) (2,162,615) (2,128,485)
Class C Shares.................. (108,827) (132,920) (151,397)
------------ ------------ ------------
Total Distributions........... (10,332,838) (13,779,037) (14,101,435)
------------ ------------ ------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES........... 3,018,775 8,427,328 (3,749,510)
------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold......... 14,901,436 20,080,197 35,010,881
Net Asset Value of Shares Issued
Through Dividend Reinvestment... 5,939,810 7,972,553 8,324,756
Cost of Shares Repurchased........ (26,619,385) (36,874,447) (37,239,983)
------------ ------------ ------------
CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................... (5,778,139) (8,821,697) 6,095,654
------------ ------------ ------------
TOTAL INCREASE/DECREASE IN NET
ASSETS.......................... (2,759,364) (394,369) 2,346,144
NET ASSETS:
Beginning of the Period........... 278,821,675 279,216,044 276,869,900
------------ ------------ ------------
End of the Period (including
accumulated undistributed net
investment income of $358,014,
$601,938 and $317,894,
respectively)................... $276,062,311 $278,821,675 $279,216,044
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 97
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
Nine Months Ended -----------------------------------------------
Class A Shares September 30, 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............. $18.038 $17.490 $17.737 $16.081 $18.062 $16.899
------- ------- ------- ------- ------- -------
Net Investment
Income............. .684 .928 .919 .946 .965 1.027
Net Realized and
Unrealized
Gain/Loss.......... .216 .528 (.263) 1.660 (1.985) 1.164
------- ------- ------- ------- ------- -------
Total from Investment
Operations......... .900 1.456 .656 2.606 (1.020) 2.191
Less Distributions
from and in Excess
of Net Investment
Income............. .698 .908 .903 .950 .961 1.028
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period...... $18.240 $18.038 $17.490 $17.737 $16.081 $18.062
======= ======= ======= ======= ======= =======
Total Return* (a).... 5.08%** 8.59% 3.86% 16.62% (5.72%) 13.25%
Net Assets at End of
the Period (In
millions).......... $ 219.3 $ 223.9 $ 227.4 $ 226.7 $ 203.2 $ 221.7
Ratio of Expenses to
Average Net
Assets*............ 1.03% 1.04% 1.09% 1.00% .90% .71%
Ratio of Net
Investment Income
to Average Net
Assets*............ 5.06% 5.27% 5.32% 5.57% 5.73% 5.80%
Portfolio Turnover... 29%** 46% 57% 28% 8% 1%
*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............. N/A N/A 1.09% 1.14% 1.17% 1.09%
Ratio of Net
Investment Income
to Average Net
Assets............. N/A N/A 5.31% 5.42% 5.46% 5.41%
</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-11
<PAGE> 98
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months May 1, 1993
Ended Year Ended December 31 (Commencement
September 30, ------------------------------------- of Distributions) to
Class B Shares 1998 1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period............ $18.031 $17.484 $17.731 $16.080 $18.055 $17.460
------- ------- ------- ------- ------- -------
Net Investment Income...... .579 .791 .788 .819 .841 .586
Net Realized and Unrealized
Gain/Loss................ .217 .531 (.264) 1.659 (1.985) .603
------- ------- ------- ------- ------- -------
Total from Investment
Operations............... .796 1.322 .524 2.478 (1.144) 1.189
Less Distributions from and
in Excess of Net
Investment Income........ .599 .775 .771 .827 .831 .594
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period................... $18.228 $18.031 $17.484 $17.731 $16.080 $18.055
======= ======= ======= ======= ======= =======
Total Return* (a).......... 4.51%** 7.78% 3.07% 15.72% (6.39%) 6.81%**
Net Assets at End of the
Period (In millions)..... $ 53.5 $ 51.9 $ 48.4 $ 46.8 $ 37.6 $ 27.7
Ratio of Expenses to
Average Net Assets*...... 1.79% 1.79% 1.85% 1.75% 1.64% 1.48%
Ratio of Net Investment
Income to Average Net
Assets*.................. 4.29% 4.51% 4.56% 4.81% 4.98% 4.47%
Portfolio Turnover......... 29%** 46% 57% 28% 8% 1%**
* 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....... N/A N/A 1.85% 1.89% 1.90% 1.82%
Ratio of Net Investment
Income to Average Net
Assets................... N/A N/A 4.55% 4.66% 4.71% 4.13%
</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> 99
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 13, 1993
Year Ended December 31 (Commencement
Nine Months Ended ------------------------------------- of Distributions) to
Class C Shares September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............. $18.031 $17.482 $17.729 $16.079 $18.045 $ 17.850
------- ------- ------- ------- ------- -----------
Net Investment
Income............. .576 .795 .788 .812 .850 .325
Net Realized and
Unrealized
Gain/Loss.......... .221 .529 (.264) 1.665 (1.985) .208
------- ------- ------- ------- ------- -----------
Total from Investment
Operations......... .797 1.324 .524 2.477 (1.135) .533
Less Distributions
from and in Excess
of Net Investment
Income............. .599 .775 .771 .827 .831 .338
------- ------- ------- ------- ------- -----------
Net Asset Value, End
of the Period...... $18.229 $18.031 $17.482 $17.729 $16.079 $ 18.045
======= ======= ======= ======= ======= ===========
Total Return* (a).... 4.51%** 7.78% 3.08% 15.72% (6.34%) 2.98%**
Net Assets at End of
the Period (In
millions).......... $ 3.3 $ 3.0 $ 3.4 $ 3.4 $ 2.2 $ 2.1
Ratio of Expenses to
Average Net
Assets*............ 1.79% 1.79% 1.85% 1.75% 1.63% 1.54%
Ratio of Net
Investment Income
to Average Net
Assets*............ 4.29% 4.52% 4.56% 4.76% 4.97% 4.08%
Portfolio Turnover... 29%** 46% 57% 28% 8% 1%**
*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............. N/A N/A 1.85% 1.90% 1.90% 1.89%
Ratio of Net
Investment Income
to Average Net
Assets............. N/A N/A 4.55% 4.61% 4.70% 3.73%
</TABLE>
** Non-Annualized
(a) Total Return is based upon the 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> 100
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Pennsylvania Tax Free Income Fund (the "Fund") is organized as a
Pennsylvania 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 Pennsylvania investors a high level of
current income exempt from federal and Pennsylvania state income taxes and,
where possible under local law, local income and personal property taxes,
through investment primarily in a varied portfolio of medium and lower grade
municipal securities. The Fund commenced investment operations on May 1, 1987.
The distribution of the Fund's Class B and Class C shares commenced on May 1,
1993, and August 13, 1993, respectively. In July, 1998, the Fund's Board of
Trustees approved a change in the Fund's fiscal year end from December 31 to
September 30. As a result, this financial report reflects the nine-month period
commencing on January 1, 1998, and ending on September 30, 1998.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security. Expenses of the Fund are allocated on a pro rata basis to
each class
F-14
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 loss and offset such losses against any future realized capital gains.
At September 30, 1998, the Fund had an accumulated capital loss carryforward for
tax purposes of $725,930 which expires on September 30, 2003.
At September 30, 1998, for federal income tax purposes, the cost of long-
and short-term investments is $245,280,737; the aggregate gross unrealized
appreciation is $26,134,852 and the aggregate gross unrealized depreciation is
$78,129, resulting in net unrealized appreciation of $26,056,723.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
For the nine months ended September 30, 1998, 100% of the income
distributions made by the Fund were exempt from federal income taxes. In
January, 1999 the Fund will provide tax information to shareholders for the 1998
calendar year.
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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $5,600 and $15,000,
respectively, representing legal services provided by Skadden, Arps, Slate,
Meagher, & Flom (Illinois), counsel to the Fund, of which a trustee of the Fund
is an affiliated person.
For the nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $75,300 and $92,600,
respectively,
F-15
<PAGE> 102
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
representing Van Kampen Funds Inc.'s or its affiliates' (collectively "Van
Kampen") cost of providing accounting and legal services to the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the nine months
ended September 30, 1998 and the year ended December 31, 1997, the Fund
recognized expenses of approximately $102,500 and $171,000, respectively.
Beginning in 1998, the transfer agency fees are determined through negotiations
with the Fund's Board of Trustees and are based on competitive market
benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
F-16
<PAGE> 103
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C. There are an unlimited number of shares of each class without par
value authorized.
At September 30, 1998, capital aggregated $195,613,792, $51,557,103 and
$3,202,609 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.......................................... 520,818 $ 9,392,200
Class B.......................................... 265,723 4,794,537
Class C.......................................... 39,580 714,699
---------- ------------
Total Sales........................................ 826,121 $ 14,901,436
========== ============
Dividend Reinvestment:
Class A.......................................... 268,259 $ 4,841,424
Class B.......................................... 56,752 1,023,605
Class C.......................................... 4,146 74,781
---------- ------------
Total Dividend Reinvestment........................ 329,157 $ 5,939,810
========== ============
Repurchases:
Class A.......................................... (1,181,685) $(21,304,126)
Class B.......................................... (266,552) (4,793,744)
Class C.......................................... (28,889) (521,515)
---------- ------------
Total Repurchases.................................. (1,477,126) $(26,619,385)
========== ============
</TABLE>
F-17
<PAGE> 104
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $202,684,294, $50,532,705 and
$2,934,644 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.......................................... 692,357 $ 12,191,057
Class B.......................................... 417,052 7,341,964
Class C.......................................... 31,224 547,176
---------- ------------
Total Sales........................................ 1,140,633 $ 20,080,197
========== ============
Dividend Reinvestment:
Class A.......................................... 377,505 $ 6,642,967
Class B.......................................... 70,331 1,237,722
Class C.......................................... 5,226 91,864
---------- ------------
Total Dividend Reinvestment........................ 453,062 $ 7,972,553
========== ============
Repurchases:
Class A.......................................... (1,659,697) $(29,155,783)
Class B.......................................... (377,046) (6,611,488)
Class C.......................................... (63,577) (1,107,176)
---------- ------------
Total Repurchases.................................. (2,100,320) $(36,874,447)
========== ============
</TABLE>
F-18
<PAGE> 105
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $213,006,053, $48,564,507 and
$3,402,780 for Classes A, B and C, respectively. For the year ended December 31,
1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 1,590,112 $ 27,397,512
Class B.......................................... 406,876 7,067,219
Class C.......................................... 31,825 546,150
---------- ------------
Total Sales........................................ 2,028,813 $ 35,010,881
========== ============
Dividend Reinvestment:
Class A.......................................... 402,847 $ 6,971,101
Class B.......................................... 72,020 1,245,925
Class C.......................................... 6,228 107,730
---------- ------------
Total Dividend Reinvestment........................ 481,095 $ 8,324,756
========== ============
Repurchases:
Class A.......................................... (1,768,713) $(30,558,627)
Class B.......................................... (349,466) (6,031,703)
Class C.......................................... (37,401) (649,653)
---------- ------------
Total Repurchases.................................. (2,155,580) $(37,239,983)
========== ============
</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-19
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
For the nine months ended September 30, 1998 and the year ended December 31,
1997, Van Kampen as Distributor for the Fund, received commissions on sales of
the Fund's Class A shares of approximately $33,100 and $50,300, respectively and
CDSC on redeemed shares of approximately $46,900 and $99,300, respectively.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the nine month period ending September 30, 1998, the cost of purchases
and proceeds from sales of investments, excluding short-term investments were
$80,333,053 and $89,194,145, respectively. For the year ended December 31, 1997,
the cost of purchases and proceeds from sales of investments, excluding
short-term investments were $124,610,146 and $129,034,925, 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 on securities. 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. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or
F-20
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
made to the broker based upon changes in the value of the contract (the
variation margin).
Transactions in futures contracts, for the nine months ended September 30,
1998 and the year ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996.......................... -0-
Futures Opened............................................ 900
Futures Closed............................................ (900)
----
Outstanding at December 31, 1997.......................... -0-
Futures Opened............................................ 100
Futures Closed............................................ (100)
----
Outstanding at September 30, 1998......................... -0-
====
</TABLE>
B. INVERSE FLOATING SECURITY--These instruments, which are identified in the
portfolio of investments, have a coupon which 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. The price of these securities may be more
volatile than the price of a comparable fixed rate security. These instruments
are typically used by the Fund to enhance the yield of the portfolio.
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the nine months ended September 30, 1998 and the year ended December 31,
1997, are payments retained by Van Kampen of approximately $280,778 and
$353,100, respectively.
7. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire
operation relying on both internal software systems as well as external software
systems provided by third parties. In 1996 Van Kampen initiated a CountDown 2000
Project to review both the
F-21
<PAGE> 108
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
internal systems and external vendor connections. The goal of this project is to
position its business to continue unaffected as a result of the century change.
At this time, there can be no assurance that the steps taken will be sufficient
to avoid any adverse impact to the Fund, but Van Kampen does not anticipate that
the move to Year 2000 will have a material impact on its ability to continue to
provide the Fund with service at current levels. In addition, it is possible
that the securities markets in which the Fund invests may be detrimentally
affected by computer failures throughout the financial services industry
beginning January 1, 2000. Improperly functioning trading systems may result in
settlement problems and liquidity issues.
F-22
<PAGE> 109
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS:
(a) (1) First Amended and Restated Agreement and Declaration of Trust(1)
(2) Second Certificate of Amendment(8)
(b) Amended and Restated By-Laws(2)
(c) (1) Specimen Class A Shares Certificate(2)
(2) Specimen Class B Shares Certificate(2)
(3) Specimen Class C Shares Certificate(2)
(d) Investment Advisory Agreement(3)
(e) (1) Distribution and Service Agreement(3)
(2) Form of Dealer Agreement(1)
(3) Form of Broker Agreement(1)
(4) Form of Bank Agreement(1)
(5) Underwriting Agreement(4)
(6) Agreement Among Underwriters(4)
(7) Selected Dealer Agreement(4)
(f) Not Applicable
(g) (1) Custodian Contract(5)
(2) Transfer Agency and Service Agreement(3)
(h) (1) Fund Accounting Agreement(3)
(2) Legal Services Agreement(3)
(i) Opinion and Consent of Saul, Ewing, Remick & Saul(6)
(j) Consent of KPMG LLP+
(k) Computation of Performance Quotations+
(l) Letter of Understanding relating to initial capital(4)
(m) (1) Distribution Plan Pursuant to Rule 12b-1(2)
(2) Form of Shareholder Assistance Agreement(1)
(3) Form of Administrative Services Agreement(1)
(4) Service Plan(2)
(n) Financial Data Schedules+
(o) Amended Multi-Class Plan(7)
(p) Power of Attorney+
(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)+
- ---------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on August 24, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on April 26, 1996.
(3) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A) File No. 33-11384, filed
on April 30, 1998.
(4) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-11384,
filed March 4, 1987.
(5) Incorporated herein by reference to Post-Effective Amendment No. 75 to Van
Kampen American Capital Growth and Income Fund's Registration Statement on
Form N-1A, File No. 2-21657 and 811-1228, filed on March 27, 1998.
(6) Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on February 25, 1994.
(7) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on April 30, 1998.
(8) Incorporated herein by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A, File No. 33-11384, filed
on November 25, 1998.
+ Filed herewith.
C-1
<PAGE> 110
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See the Statement of Additional Information.
ITEM 25. INDEMNIFICATION.
Reference is made to Article 8, Section 8.4 of the Registrant's Amended and
Restated Agreement and Declaration of Trust.
Article 8, Section 8.4 of the Amended and Restated Agreement and Declaration
of Trust provides that each officer and trustee of the Registrant shall be
indemnified by the Registrant against all liabilities incurred in connection
with the defense or disposition of any action, suit or other proceeding, whether
civil or criminal, in which the officer or trustee may be or may have been
involved by reason of being or having been an officer or trustee, except that
such indemnity shall not protect any such person against a liability to the
Registrant or any shareholder thereof to which such person would otherwise be
subject by reason of (i) not acting in good faith in the reasonable belief that
such person's actions were not in the best interests of the Trust, (ii) willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office (iii) for a criminal proceeding,
not having a reasonable cause to believe that such conduct was unlawful
(collectively, "Disabling Conduct"). Absent a court determination that an
officer or trustee seeking indemnification was not liable on the merits or
guilty of Disabling Conduct in the conduct of his or her office, the decision by
the Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of Disabling
Conduct in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in the Prospectus and "Trustees and
Officers" and "Investment Advisory and Other Services" in the Statement of
Additional Information for information regarding the business of the Adviser.
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and Directors of Van Kampen
Investment Advisory Corp., reference
C-2
<PAGE> 111
is made to the Adviser's current Form ADV filed under the Investment Advisers
Act of 1940, incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) The 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 Registrant, is the sole principal underwriter for Registrant. The
name, principal business address and positions and offices with Van Kampen Funds
Inc. of each of the directors and officers are disclosed in Exhibit (z)(2).
Except as disclosed under the heading "Trustees and Officers" in Part B of this
Registration Statement, none of such persons has any position or office with
Registrant.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i) by
Registrant will be maintained at its offices, located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555, Van Kampen Investor Services
Inc., 7501 Tiffany Springs Parkway, Kansas City, Missouri 64153, or at the State
Street Bank and Trust Company, 1776 Heritage Drive, North Quincy, MA 02105; (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 Van Kampen Funds Inc.,
the principal underwriter, will be maintained at its offices located at 1
Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered with a copy of its latest annual report, upon request and without
charge.
C-3
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, VAN KAMPEN PENNSYLVANIA TAX FREE INCOME
FUND, certifies that it meets all of the requirements for effectiveness of this
Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Oakbrook Terrace and the State of Illinois, on the
28th day of January, 1999.
VAN KAMPEN
PENNSYLVANIA TAX FREE INCOME FUND
By: /s/ DENNIS J. McDONNELL
---------------------------------------
Dennis J. McDonnell, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
this Registration Statement has been signed on January 28, 1999 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
Principal Executive Officer:
/s/ DENNIS J. McDONNELL President
- -----------------------------------------------------
Dennis J. McDonnell
Principal Financial Officer:
/s/ JOHN L. SULLIVAN* Vice President, Chief Financial Officer and
- ----------------------------------------------------- Treasurer
John L. Sullivan
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ RICHARD M. DEMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
/s/ DON G. POWELL* Trustee
- -----------------------------------------------------
Don G. Powell
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
/s/ PAUL L. YOVOVICH* Trustee
- -----------------------------------------------------
Paul L. Yovovich
- ------------
* Signed by Dennis J. McDonnell pursuant to a power of attorney.
/s/ DENNIS J. McDONNELL January 28, 1999
- -----------------------------------------------------
Dennis J. McDonnell
Attorney-in-Fact
</TABLE>
<PAGE> 113
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 19 TO FORM N-1A
SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION ON JANUARY 28, 1999
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S> <C>
(j) Consent of KPMG LLP
(k) Computation of Performance Quotations
(n) Financial Data Schedules
(p) Power of Attorney
(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>
<PAGE> 1
EXHIBIT (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Pennsylvania Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 25, 1999
<PAGE> 1
EXHIBIT (k)
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED SEPTEMBER 30, 1998
Current Annual Income Per Share
-------------------------------
Current Offering Price
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Shares
$.9300
------
$19.15 = 4.86%
Class B Shares
$.7980
------
$18.23 = 4.38%
Class C Shares
$.7980
------
$18.23 = 4.38%
</TABLE>
<PAGE> 2
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS A SHARES
TOTAL RETURN CALCULATION NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,000.90 = ERV
Nine month period ended 09/30/98 = (9 Mos.) .75 = n
TOTAL RETURN FOR THE PERIOD .12% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,050.82 = ERV
Nine month period ended 09/30/98 = (9 Mos.) .75 = n
TOTAL RETURN FOR THE PERIOD 6.83% = T
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,027.90 = ERV
One year period ended 09/30/98 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 2.79% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,079.30 = ERV
One year period ended 09/30/98 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 7.93% = T
</TABLE>
<PAGE> 3
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS A SHARES
TOTAL RETURN CALCULATION FIVE YEARS ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,254.80 = ERV
Five years ended 09/30/98 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 4.64% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,317.07 = ERV
Five years ended 09/30/98 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 5.66% = T
TOTAL RETURN CALCULATION TEN YEARS ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,125.93 = ERV
Ten Years Ended 09/30/98 = (120 Mos.) 10 = n
TOTAL RETURN FOR THE PERIOD 7.83% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,231.83 = ERV
Ten Years Ended 09/30/98 = (120 Mos.) 10 = n
TOTAL RETURN FOR THE PERIOD 8.36% = T
</TABLE>
<PAGE> 4
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS A SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,478.60 = ERV
Inception through 09/30/98 = (137 Mos.) 11.42 = n
TOTAL RETURN FOR THE PERIOD 8.27% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,602.01 = ERV
Inception through 09/30/98 = (137 Mos.) 11.42 = n
TOTAL RETURN FOR THE PERIOD 8.73% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------
P = T
Including Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,478.60 = ER
TOTAL RETURN FOR THE PERIOD 147.86% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.24
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,602.01 = ER
TOTAL RETURN FOR THE PERIOD 160.20% = T
</TABLE>
<PAGE> 5
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS B SHARES
TOTAL RETURN CALCULATION NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,005.14 = ERV
Nine month period ended 09/30/98 = (9 Mos.) .75 = n
TOTAL RETURN FOR THE PERIOD .69% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,045.14 = ERV
Nine month period ended 09/30/98 = (9 Mos.) .75 = n
TOTAL RETURN FOR THE PERIOD 6.06% = T
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,031.52 = ERV
One year period ended 09/30/98 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 3.15% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,071.52 = ERV
One year period ended 09/30/98 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 7.15% = T
</TABLE>
<PAGE> 6
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS B SHARES
TOTAL RETURN CALCULATION FIVE YEARS ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,254.04 = ERV
Five years ended 09/30/98 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 4.63% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,269.04 = ERV
Five years ended 09/30/98 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 4.88% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,333.50 = ERV
Inception through 09/30/98 = (65 Mos.) 5.41 = n
TOTAL RETURN FOR THE PERIOD 5.46% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,343.50 = ERV
Inception through 09/30/98 = (65 Mos.) 5.41 = n
TOTAL RETURN FOR THE PERIOD 5.61% = T
</TABLE>
<PAGE> 7
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,333.50 = ERV
TOTAL RETURN FOR THE PERIOD 33.35% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,343.50 = ERV
TOTAL RETURN FOR THE PERIOD 34.35% = T
</TABLE>
<PAGE> 8
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS C SHARES
TOTAL RETURN CALCULATION NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,035.14 = ERV
Nine month period ended 09/30/98 = (9 Mos.) .75 = n
TOTAL RETURN FOR THE PERIOD 4.71% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,045.14 = ERV
Nine month period ended 09/30/98 = (9 Mos.) .75 = n
TOTAL RETURN FOR THE PERIOD 6.06% = T
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,061.52 = ERV
One year period ended 09/30/98 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 6.15% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,071.52 = ERV
One year period ended 09/30/98 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 7.15% = T
</TABLE>
<PAGE> 9
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS C SHARES
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,269.79 = ERV
Five year period ended 09/30/98 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 4.89% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,269.79 = ERV
Five year period ended 09/30/98 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 4.89% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,296.04 = ERV
Inception through 09/30/98 = (62 Mos.) 5.13 = n
TOTAL RETURN FOR THE PERIOD 5.18% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,296.04 = ERV
Inception through 09/30/98 = (62 Mos.) 5.13 = n
TOTAL RETURN FOR THE PERIOD 5.18% = T
</TABLE>
<PAGE> 10
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
- CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,296.04 = ERV
TOTAL RETURN FOR THE PERIOD 29.60% = T
Excluding Payment of the CDSC
Net Asset Value $18.23
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,296.04 = ERV
TOTAL RETURN FOR THE PERIOD 29.60% = T
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 011
[NAME] PA TAX FREE CLASS A
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998<F1>
[PERIOD-START] JAN-01-1998<F1>
[PERIOD-END] SEP-30-1998<F1>
[INVESTMENTS-AT-COST] 245,280,737<F1>
[INVESTMENTS-AT-VALUE] 271,337,460<F1>
[RECEIVABLES] 6,862,293<F1>
[ASSETS-OTHER] 0<F1>
[OTHER-ITEMS-ASSETS] 296,002<F1>
[TOTAL-ASSETS] 278,495,755<F1>
[PAYABLE-FOR-SECURITIES] 1,280,155<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 1,153,289<F1>
[TOTAL-LIABILITIES] 2,433,444<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 195,613,792
[SHARES-COMMON-STOCK] 12,021,762
[SHARES-COMMON-PRIOR] 12,414,370
[ACCUMULATED-NII-CURRENT] 358,014<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (725,930)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 26,056,723<F1>
[NET-ASSETS] 219,282,152
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 12,528,072<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (2,439,158)<F1>
[NET-INVESTMENT-INCOME] 10,088,914<F1>
[REALIZED-GAINS-CURRENT] 2,263,231<F1>
[APPREC-INCREASE-CURRENT] 999,468<F1>
[NET-CHANGE-FROM-OPS] 13,351,613<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (8,483,120)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 520,818
[NUMBER-OF-SHARES-REDEEMED] (1,181,685)
[SHARES-REINVESTED] 268,259
[NET-CHANGE-IN-ASSETS] (4,650,328)
[ACCUMULATED-NII-PRIOR] 601,938<F1>
[ACCUMULATED-GAINS-PRIOR] (2,989,161)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 1,234,844<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 2,439,158<F1>
[AVERAGE-NET-ASSETS] 219,460,847
[PER-SHARE-NAV-BEGIN] 18.038
[PER-SHARE-NII] 0.684
[PER-SHARE-GAIN-APPREC] 0.216
[PER-SHARE-DIVIDEND] (0.698)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 18.240
[EXPENSE-RATIO] 1.03
[AVG-DEBT-OUTSTANDING] 0<F1>
[AVG-DEBT-PER-SHARE] 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<PAGE> 2
[ARTICLE] 6
[SERIES]
[NUMBER] 012
[NAME] PA TAX FREE CLASS B
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998<F1>
[PERIOD-START] JAN-01-1998<F1>
[PERIOD-END] SEP-30-1998<F1>
[INVESTMENTS-AT-COST] 245,280,737<F1>
[INVESTMENTS-AT-VALUE] 271,337,460<F1>
[RECEIVABLES] 6,862,293<F1>
[ASSETS-OTHER] 0<F1>
[OTHER-ITEMS-ASSETS] 296,002<F1>
[TOTAL-ASSETS] 278,495,755<F1>
[PAYABLE-FOR-SECURITIES] 1,280,155<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 1,153,289<F1>
[TOTAL-LIABILITIES] 2,433,444<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 51,557,103
[SHARES-COMMON-STOCK] 2,934,927
[SHARES-COMMON-PRIOR] 2,879,004
[ACCUMULATED-NII-CURRENT] 358,014<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (725,930)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 26,056,723<F1>
[NET-ASSETS] 53,497,854
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 12,528,072<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (2,439,158)<F1>
[NET-INVESTMENT-INCOME] 10,088,914<F1>
[REALIZED-GAINS-CURRENT] 2,263,231<F1>
[APPREC-INCREASE-CURRENT] 999,468<F1>
[NET-CHANGE-FROM-OPS] 13,351,613<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (1,740,891)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 265,723
[NUMBER-OF-SHARES-REDEEMED] (266,552)
[SHARES-REINVESTED] 56,752
[NET-CHANGE-IN-ASSETS] 1,587,828
[ACCUMULATED-NII-PRIOR] 601,938<F1>
[ACCUMULATED-GAINS-PRIOR] (2,989,161)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 1,234,844<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 2,439,158<F1>
[AVERAGE-NET-ASSETS] 52,455,867
[PER-SHARE-NAV-BEGIN] 18.031
[PER-SHARE-NII] 0.579
[PER-SHARE-GAIN-APPREC] 0.217
[PER-SHARE-DIVIDEND] (0.599)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 18.228
[EXPENSE-RATIO] 1.79
[AVG-DEBT-OUTSTANDING] 0<F1>
[AVG-DEBT-PER-SHARE] 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not a class basis
</FN>
</TABLE>
<PAGE> 3
[ARTICLE] 6
[SERIES]
[NUMBER] 013
[NAME] PA TAX FREE CLASS C
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998<F1>
[PERIOD-START] JAN-01-1998<F1>
[PERIOD-END] SEP-30-1998<F1>
[INVESTMENTS-AT-COST] 245,280,737<F1>
[INVESTMENTS-AT-VALUE] 271,337,460<F1>
[RECEIVABLES] 6,862,293<F1>
[ASSETS-OTHER] 0<F1>
[OTHER-ITEMS-ASSETS] 296,002<F1>
[TOTAL-ASSETS] 278,495,755<F1>
[PAYABLE-FOR-SECURITIES] 1,280,155<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 1,153,289<F1>
[TOTAL-LIABILITIES] 2,433,444<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 3,202,609
[SHARES-COMMON-STOCK] 180,058
[SHARES-COMMON-PRIOR] 165,221
[ACCUMULATED-NII-CURRENT] 358,014<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (725,930)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 26,056,723<F1>
[NET-ASSETS] 3,282,305
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 12,528,072<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (2,439,158)<F1>
[NET-INVESTMENT-INCOME] 10,088,914<F1>
[REALIZED-GAINS-CURRENT] 2,263,231<F1>
[APPREC-INCREASE-CURRENT] 999,468<F1>
[NET-CHANGE-FROM-OPS] 13,351,613<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (108,827)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 39,580
[NUMBER-OF-SHARES-REDEEMED] (28,889)
[SHARES-REINVESTED] 4,146
[NET-CHANGE-IN-ASSETS] 303,136
[ACCUMULATED-NII-PRIOR] 601,938<F1>
[ACCUMULATED-GAINS-PRIOR] (2,989,161)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 1,234,844<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 2,439,158<F1>
[AVERAGE-NET-ASSETS] 3,282,656
[PER-SHARE-NAV-BEGIN] 18.031
[PER-SHARE-NII] 0.576
[PER-SHARE-GAIN-APPREC] 0.221
[PER-SHARE-DIVIDEND] (0.599)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 18.229
[EXPENSE-RATIO] 1.79
[AVG-DEBT-OUTSTANDING] 0<F1>
[AVG-DEBT-PER-SHARE] 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<PAGE> 1
EXHIBIT (p)
POWER OF ATTORNEY
The undersigned, being officers and trustees of each of the Van Kampen
Open End Trusts (individually, a "Trust") as indicated on Schedule 1 attached
hereto and incorporated by reference, each a Delaware business trust except for
the Van Kampen Pennsylvania Tax Free Income Fund being a Pennsylvania business
trust (individually, a "Trust"), and being officers and directors of the Van
Kampen Series Fund, Inc. (the "Corporation"), a Maryland corporation, do hereby,
in the capacities shown below, appoint Dennis J. McDonnell of Oakbrook Terrace,
Illinois, as agent and attorney-in-fact with full power of substitution and
resubstitution, for each of the undersigned, to execute and deliver, for and on
behalf of the undersigned, any and all amendments to the Registration Statement
filed by each Trust or the Corporation with the Securities and Exchange
Commission pursuant to the provisions of the Securities Act of 1933 and the
Investment Company Act of 1940.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original, but which taken together shall constitute
one instrument.
Dated: January 12, 1999
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DENNIS J. MCDONNELL President
----------------------------------
Dennis J. McDonnell
/s/ JOHN L. SULLIVAN Vice President, Chief Financial Officer
---------------------------------- and Treasurer
John L. Sullivan
/s/ J. MILES BRANAGAN Trustee/Director
----------------------------------
J. Miles Branagan
/s/ RICHARD M. DEMARTINI Trustee/Director
----------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY Trustee/Director
----------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY Trustee/Director
----------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON Trustee/Director
----------------------------------
Jack E. Nelson
/s/ DON G. POWELL Trustee/Director
----------------------------------
Don G. Powell
/s/ PHILLIP B. ROONEY Trustee/Director
----------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO, SC.D. Trustee/Director
----------------------------------
Fernando Sisto, Sc. D.
/s/ WAYNE W. WHALEN Trustee/Director and Chairman
----------------------------------
Wayne W. Whalen
/s/ PAUL G. YOVOVICH Trustee/Director
----------------------------------
Paul G. Yovovich
</TABLE>
<PAGE> 2
SCHEDULE 1
VAN KAMPEN U.S. GOVERNMENT TRUST
VAN KAMPEN TAX FREE TRUST
VAN KAMPEN TRUST
VAN KAMPEN EQUITY TRUST
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
VAN KAMPEN TAX FREE MONEY FUND
VAN KAMPEN COMSTOCK FUND
VAN KAMPEN CORPORATE BOND FUND
VAN KAMPEN EMERGING GROWTH FUND
VAN KAMPEN ENTERPRISE FUND
VAN KAMPEN EQUITY INCOME FUND
VAN KAMPEN LIMITED MATURITY GOVERNMENT FUND
VAN KAMPEN GLOBAL MANAGED ASSETS FUND
VAN KAMPEN GOVERNMENT SECURITIES FUND
VAN KAMPEN GROWTH AND INCOME FUND
VAN KAMPEN HARBOR FUND
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
VAN KAMPEN LIFE INVESTMENT TRUST
VAN KAMPEN PACE FUND
VAN KAMPEN REAL ESTATE SECURITIES FUND
VAN KAMPEN RESERVE FUND
VAN KAMPEN SMALL CAPITALIZATION FUND
VAN KAMPEN TAX-EXEMPT TRUST
VAN KAMPEN U.S. GOVERNMENT TRUST FOR INCOME
VAN KAMPEN WORLD PORTFOLIO SERIES TRUST
<PAGE> 1
EXHIBIT(z)(1)
Item 27(a)
- ----------
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST II
VAN KAMPEN ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME TRUST
VAN KAMPEN BOND FUND
VAN KAMPEN CALIFORNIA MUNICIPAL TRUST
VAN KAMPEN CALIFORNIA QUALITY MUNICIPAL TRUST
VAN KAMPEN CALIFORNIA VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN COMSTOCK FUND
VAN KAMPEN CONVERTIBLE SECURITIES FUND
VAN KAMPEN CORPORATE BOND FUND
VAN KAMPEN EMERGING GROWTH FUND
VAN KAMPEN ENTERPRISE FUND
VAN KAMPEN EQUITY TRUST
VAN KAMPEN AGGRESSIVE GROWTH FUND
VAN KAMPEN GREAT AMERICAN COMPANIES FUND
VAN KAMPEN GROWTH FUND
VAN KAMPEN MID CAP VALUE FUND
VAN KAMPEN PROSPECTOR FUND
VAN KAMPEN UTILITY FUND
VAN KAMPEN EQUITY INCOME FUND
THE EXPLORER INSTITUTIONAL TRUST
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
VAN KAMPEN AMERICAN CAPITAL EXCHANGE FUND
VAN KAMPEN FLORIDA MUNICIPAL OPPORTUNITY TRUST
VAN KAMPEN FLORIDA QUALITY MUNICIPAL TRUST
VAN KAMPEN GLOBAL MANAGED ASSETS FUND
VAN KAMPEN GOVERNMENT SECURITIES FUND
VAN KAMPEN GROWTH AND INCOME FUND
VAN KAMPEN HARBOR FUND
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
VAN KAMPEN HIGH INCOME TRUST
VAN KAMPEN HIGH INCOME TRUST II
VAN KAMPEN INCOME TRUST
VAN KAMPEN INVESTMENT GRADE MUNICIPAL TRUST
VAN KAMPEN LIFE INVESTMENT TRUST
on behalf of its Series
ASSET ALLOCATION PORTFOLIO
COMSTOCK PORTFOLIO
DOMESTIC INCOME PORTFOLIO
EMERGING GROWTH PORTFOLIO
ENTERPRISE PORTFOLIO
GLOBAL EQUITY PORTFOLIO
GOVERNMENT PORTFOLIO
GROWTH AND INCOME PORTFOLIO
MONEY MARKET PORTFOLIO
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
STRATEGIC STOCK PORTFOLIO
VAN KAMPEN LIMITED MATURITY GOVERNMENT FUND
VAN KAMPEN MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN MUNICIPAL INCOME TRUST
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
<PAGE> 2
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST II
VAN KAMPEN MUNICIPAL TRUST
VAN KAMPEN NEW JERSEY VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN NEW YORK QUALITY MUNICIPAL TRUST
VAN KAMPEN NEW YORK VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN OHIO QUALITY MUNICIPAL TRUST
VAN KAMPEN OHIO VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN PACE FUND
VAN KAMPEN PENNSYLVANIA QUALITY MUNICIPAL TRUST
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
VAN KAMPEN PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN PRIME RATE INCOME TRUST
VAN KAMPEN REAL ESTATE SECURITIES FUND
VAN KAMPEN RESERVE FUND
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST
VAN KAMPEN SENIOR FLOATING RATE FUND
VAN KAMPEN SENIOR INCOME TRUST
VAN KAMPEN SERIES FUND, INC.
VAN KAMPEN AGGRESSIVE EQUITY FUND
VAN KAMPEN AMERICAN VALUE FUND
VAN KAMPEN ASIAN GROWTH FUND
VAN KAMPEN EMERGING MARKETS DEBT FUND*
VAN KAMPEN EMERGING MARKETS FUND
VAN KAMPEN EQUITY GROWTH FUND*
VAN KAMPEN EUROPEAN EQUITY FUND*
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
VAN KAMPEN GLOBAL EQUITY FUND
VAN KAMPEN GLOBAL FIXED INCOME FUND
VAN KAMPEN GLOBAL FRANCHISE FUND*
MORGAN STANLEY GOVERNMENT OBLIGATIONS MONEY MARKET FUND
VAN KAMPEN GROWTH AND INCOME FUND II*
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
VAN KAMPEN INTERNATIONAL MAGNUM FUND
VAN KAMPEN JAPANESE EQUITY FUND*
VAN KAMPEN LATIN AMERICAN FUND
VAN KAMPEN MID CAP GROWTH FUND*
MORGAN STANLEY MONEY MARKET FUND
MORGAN STANLEY TAX-FREE MONEY MARKET FUND*
VAN KAMPEN U.S. REAL ESTATE FUND
VAN KAMPEN VALUE FUND
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
VAN KAMPEN SMALL CAPITALIZATION FUND
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
VAN KAMPEN TAX-EXEMPT TRUST
on behalf of its Series
HIGH YIELD MUNICIPAL FUND
VAN KAMPEN TAX FREE TRUST
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
VAN KAMPEN CALIFORNIA TAX FREE INCOME FUND*
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND
VAN KAMPEN INSURED TAX FREE INCOME FUND
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
<PAGE> 3
VAN KAMPEN MICHIGAN TAX FREE INCOME FUND*
VAN KAMPEN MISSOURI TAX FREE INCOME FUND*
VAN KAMPEN MUNICIPAL INCOME FUND
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
VAN KAMPEN OHIO TAX FREE INCOME FUND*
VAN KAMPEN TAX FREE HIGH INCOME FUND
VAN KAMPEN TAX FREE MONEY FUND
VAN KAMPEN TRUST
VAN KAMPEN HIGH YIELD FUND
VAN KAMPEN SHORT-TERM GLOBAL INCOME FUND
VAN KAMPEN STRATEGIC INCOME FUND
VAN KAMPEN TRUST FOR INSURED MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE CALIFORNIA MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE FLORIDA MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE NEW JERSEY MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE NEW YORK MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE PENNSYLVANIA MUNICIPALS
VAN KAMPEN U.S. GOVERNMENT TRUST
VAN KAMPEN U.S. GOVERNMENT FUND
VAN KAMPEN U.S. GOVERNMENT TRUST FOR INCOME
VAN KAMPEN VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN WORLD PORTFOLIO SERIES TRUST
on behalf of its Series
VAN KAMPEN GLOBAL GOVERNMENT SECURITIES FUND
* Funds have not commenced investment operations.
<PAGE> 4
<TABLE>
<S> <C>
Insured Municipals Income Trust Series 404
California Insured Municipals Income Trust Series 177
Colorado Insured Municipals Income Trust Series 87
Connecticut Insured Municipals Income Trust Series 38
Florida Insured Municipals Income Trust Series 123
Georgia Insured Municipals Income Trust Series 88
Maryland Investors' Quality Tax-Exempt Trust Series 87
Michigan Insured Municipals Income Trust Series 152
Minnesota Insured Municipals Income Trust Series 62
Missouri Insured Municipals Income Trust Series 108
New Jersey Insured Municipals Income Trust Series 124
New York Insured Municipals Income Trust Series 147
North Carolina Investors' Quality Tax-Exempt Trust Series 96
Ohio Insured Municipals Income Trust Series 110
Pennsylvania Insured Municipals Income Trust Series 239
South Carolina Investors' Quality Tax-Exempt Trust Series 86
Tennessee Insured Municipals Income Trust Series 41
Virginia Investors' Quality Tax-Exempt Trust Series 82
Van Kampen American Capital Insured Income Trust Series 72
Internet Trust Series 12
The Dow SM Strategic 10 Trust November 1998
Series
The Dow SM Strategic 10 Trust November 1998
Traditional
Series
The Dow SM Strategic 5 Trust November 1998
Series
The Dow SM Strategic 5 Trust November 1998
Traditional
Series
EAFE Strategic 20 Trust November 1998
Series
EURO Strategic 20 Trust November 1998
Series
Strategic Picks Opportunity Trust November 1998
Series
Great International Firms Trust Series 5
Dow 30 Index Trust Series 5
Dow 30 Index and Treasury Trust Series 7
Baby Boomer Opportunity Trust Series 5
Global Energy Trust Series 7
Brand Name Equity Trust Series 7
Edward Jones Select Growth Trust July 1998
Series
Banking Trust Series 4
Morgan Stanley High-Technology 35 Index Trust Series 4
Health Care Trust Series 4
Telecommunications Trust Series 4
Utility Trust Series 4
Financial Services Trust Series 4
Morgan Stanley Euro Tec Trust Series 1
Natcity Investments, Inc. Great American Equities Trust Series 1
Gruntal Global Transport Trust Series 1
Josepthal Financial Institutions Growth & Consolidation Trust Series 2001
Northern Illinois Equity Value Trust Series
Euro/Pacific Strategy Series 1
</TABLE>
<PAGE> 1
EXHIBIT (z)(2)
Item 27(b)
- ----------
<TABLE>
<S> <C> <C>
Powers, Richard F. III Chief Executive Officer Oakbrook Terrace, IL
Zimmermann, III, John H. President Oakbrook Terrace, IL
Gehman, Douglas B. Executive Vice President Houston, TX
Nyberg, Ronald A. Executive Vice President, Gen. Coun., Asst. Sec. Oakbrook Terrace, IL
Rybak, William R. Executive Vice President & Chief Financial Officer Oakbrook Terrace, IL
Wolkenberg, Paul R. Executive Vice President Oakbrook Terrace, IL
Althoff, Laurence Joseph Senior Vice President & Controller Oakbrook Terrace, IL
DeMoss, Gary R. Senior Vice President Oakbrook Terrace, IL
Doyle, John E. Senior Vice President Oakbrook Terrace, IL
Golod, Richard G. Senior Vice President Annapolis, MD
Martin, Scott Evan Sen. V.P., Deputy Gen. Coun. and Sec. Oakbrook Terrace, IL
McGannon, Mark T. Senior Vice President Oakbrook Terrace, IL
Millington, Charles G. Senior Vice President and Treasurer Oakbrook Terrace, IL
Rein, Walter E. Senior Vice President Oakbrook Terrace, IL
Saucedo, Colette M. Senior Vice President Houston, TX
Shepherd, Frederick Senior Vice President Houston, TX
Sorenson, Steven P. Senior Vice President Oakbrook Terrace, IL
Stallard, Michael L. Senior Vice President Oakbrook Terrace, IL
West, Robert Scott Senior Vice President Oakbrook Terrace, IL
Wood, Edward C, III Senior Vice President & Chief Operating Officer Oakbrook Terrace, IL
Cackovic, Glenn M. First Vice President Laguna Nigel, CA
Hargens, Eric J. First Vice President Orlando, FL
Hogaboom, David S. First Vice President Oakbrook Terrace, IL
Martellaro, Dominic C. First Vice President Danville, CA
Mayfield, Carl First Vice President Lakewood, CO
McClure, Mark R. First Vice President Oakbrook Terrace, IL
Ryan, James J. First Vice President Oakbrook Terrace, IL
Vogel, George J. First Vice President Oakbrook Terrace, IL
Woelfel, Patrick J. First Vice President Oakbrook Terrace, IL
Abreu, Robert J. Vice President New York, NY
Ambrosio, James K. Vice President Massapequa, NY
Arcara, Brian P. Vice President Buffalo, NY
Bart, Louis P Vice President
Bettlach, Patricia A. Vice President Chesterfield, Mo
Biegel, Carol S. Vice President Oakbrook Terrace, IL
Bisaillon, Chistopher M. Vice President Oakbrook Terrace, IL
Boos, Michal P. Vice President Oakbrook Terrace, IL
Boyne, James Joseph V.P., Associate Gen. Coun. & Asst. Sec. Oakbrook Terrace, IL
Brooks, Robert C. Vice President Oakbrook Terrace, IL
Burke, Jr., William F. Vice President Mendham, NJ
Burket, Loren Vice President Plymouth, MN
Byrum, Christine Cleary Vice President Tampa, FL
Caggiano, Joseph N. Vice President New York, NY
Chambers, Daniel R. Vice President Austin, TX
</TABLE>
<PAGE> 2
[CAPTION]
<TABLE>
<S> <C> <C>
Charlino, Richard J. Vice President Houston, TX
Chiaro, Deanne Margaret Vice President Oakbrook Terrace, IL
Chriske, Scott A. Vice President Plano, TX
Clavijo, German Vice President Atlanta, GA
Cloud, Eleanor M. Vice President Oakbrook Terrace, IL
Cogliandro, Dominick Vice President and Assistant Treasurer New York, NY
Colston, Michael Vice President Louisville, KY
Cummings, Suzanne Vice President Oakbrook Terrace, IL
Dalmaso, Nicholas V.P., Associate Gen. Coun. & Asst. Sec. Oakbrook Terrace, IL
Eccleston, Michael E. Vice President Oakbrook Terrace, IL
Eckhard, Jonathan Vice President Tampa, FL
Fisher, Charles Edward Vice President Naperville, IL
Fow, William J. Vice President Redding, CT
Foxhoven, Nicholas J. Vice President Englewood, CO
Friday, Charles Vice President Gibsonia, PA
Griffith, Timothy D. Vice President Kirkland, WA
Haas, Kyle D. Vice President Oakbrook Terrace, IL
Hamilton, Daniel Vice President Austin, TX
Hansen, John G. Vice President Oakbrook Terrace, IL
Hays, Joseph Vice President Cherry Hill, NJ
Heffington, Gregory Vice President Ft. Collins, CO
Hill, Susan Jean Vice President and Senior Attorney Oakbrook Terrace, IL
Hindelang, Thomas R. Vice President Gilbert, AZ
Hoggard, Bryn M. Vice President Houston, TX
Hughes, Michael B. Vice President Oakbrook Terrace, IL
Hunt, Robert S. Vice President Phoenix, MD
Jackson, Lowell Vice President Norcross, GA
Jajuga, Kevin G. Vice President Baltimore, MD
Johnson, Steven T. Vice President Oakbrook Terrace, IL
Klein, Dana R. Vice President Oakbrook Terrace, IL
Kohly, Frederick Vice President Miami, FL
Kowalski, David Richard Vice President & Director of Compliance Oakbrook Terrace, IL
Kozlowski, Richard D. Vice President Atlanta, GA
Langs, Bradford N. Vice President Oakbrook Terrace, IL
Lathrop, Patricia D. Vice President Tampa, FL
Laux, Brian Vice President Staten Island, NY
Leal, Tony E. Vice President Daphne, AL
Lehew III, S. William Vice President Charlotte, NC
Levinson, Eric Vice President San Francisco, CA
Linstra, Jonathan Vice President Oakbrook Terrace, IL
Lundgren, Richard M. Vice President Oakbrook Terrace, IL
Lynn, Walter Vice President Flower Mound, TX
MacAyeal, Linda S. Vice President and Senior Attorney Oakbrook Terrace, IL
Marsh, Kevin S. Vice President Bellevue, WA
</TABLE>
<PAGE> 3
[CAPTION]
<TABLE>
<S> <C> <C>
McCartney, Brooks D. Vice President Puyallup, WA
McGrath, Anne Therese Vice President Los Gatos, CA
McGrath, Maura A. Vice President New York, NY
Mills, John Vice President Kenner, LA
Morrow, Ted Vice President Dallas, TX
Muller, Jr. Robert F. Vice President Cypress, TX
Nicolas, Peter Vice President Beverly, MA
Page, Todd W. Vice President Oakbrook Terrace, IL
Parker, Gregory S. Vice President Houston, TX
Petrungaro, Christopher Vice President Oakbrook Terrace, IL
Poli, Richard J. Vice President Philadelphia, PA
Pratt, Ronald E. Vice President Marletta, GA
Prichard, Craig S. Vice President Fairlawn, OH
Reams, Daniel D. Vice President Royal Oak, MI
Rohr, Michael W. Vice President Oakbrook Terrace, IL
Rose, Jeffrey L. Vice President Houston, TX
Rothberg, Suzette N. Vice President Plymouth, MN
Rourke, Jeffrey Vice President Oakbrook Terrace, IL
Rowley, Thomas Vice President St. Louis, MO
Sabo, Heather R. Vice President Richmond, VA
Scarlata, Stephanie Vice President Bedford Corners, NY
Scherer, Andrew J. Vice President Oakbrook Terrace, IL
Schuster, Ronald J. Vice President Tampa, FL
Shaneyfelt, Gwen L. Vice President Oakbrook Terrace, IL
Shirk, Jefferey C. Vice President Swampscott, MA
Sorensen, Traci T. Vice President Oakbrook Terrace, IL
Spangler, Kimberly M. Vice President Fairfax, VA
Stabler, Darren D. Vice President Phoenix, AZ
Staniforth, Christopher Vice President Leawood, KS
Stefanec, Richard Vice President Los Angeles, CA
Stevens, James D. Vice President North Andover, MA
Strafford, William C. Vice President Granger, IN
Syswerda, Mark A. Vice President Oakbrook Terrace, IL
Tabone, David A. Vice President Scottsdale, AZ
Tierney, John F. Vice President Oakbrook Terrace, IL
Ulvestad, Curtis L. Vice President Red Wing, MN
Volkman, Todd A. Vice President Austin, TX
Waldron, Daniel B. Vice President Oakbrook Terrace, IL
Warland, Jeff Vice President Oakbrook Terrace, IL
Wetherell, Weston B. V.P., Associate Gen. Coun. & Asst. Sec Oakbrook Terrace, IL
Whitworth III, Harold Vice President Oakbrook Terrace, IL
Wilson, Thomas M. Vice President Oakbrook Terrace, IL
Withers, Barbara A. Vice President Oakbrook Terrace, IL
Wynn, David M. Vice President Phoenix, AZ
Yount, James R. Vice President Mercer Island, WA
</TABLE>
<PAGE> 4
[CAPTION]
<TABLE>
<S> <C> <C>
Zacchea, Patrick M. Vice President Oakbrook Terrace, IL
Becker, Scott F. Assistant Vice President Oakbrook Terrace, IL
Binder, Brian E. Assistant Vice President Oakbrook Terrace, IL
Blackwood, Joan E. Assistant Vice President Oakbrook Terrace, IL
Bronaugh, Billie J. Assistant Vice President Houston, TX
Brunk, Gregory T. Assistant Vice President Oakbrook Terrace, IL
Costello, Gina Assistant Vice President & Assistant Secretary Oakbrook Terrace, IL
Gieser, Sarah K. Assistant Vice President Oakbrook Terrace, IL
Gray, Walter C. Assistant Vice President Houston, TX
Jones, Laurie L. Assistant Vice President Houston, TX
Jordan, Robin R. Assistant Vice President Oakbrook Terrace, IL
Lowe, Ivan R. Assistant Vice President Houston, TX
Moehlman, Stuart R. Assistant Vice President Houston, TX
Norvid, Steven R. Assistant Vice President Oakbrook Terrace, IL
Putong, Christine K. Assistant Vice President & Assistant Secretary Oakbrook Terrace, IL
Robbins, David P. Assistant Vice President Oakbrook Terrace, IL
Rosen, Regina Assistant Vice President Oakbrook Terrace, IL
Salley, Pamela S. Assistant Vice President Houston, TX
Sanchez, Vanessa M. Assistant Vice President Oakbrook Terrace, IL
Sauerborn, Thomas J. Assistant Vice President New York, NY
Saxon, Bruce Assistant Vice President Oakbrook Terrace, IL
Saylor, David T. Assistant Vice President Oakbrook Terrace, IL
Schmieder, Christina L. Assistant Vice President Oakbrook Terrace, IL
Sinai, Lauren B. Assistant Vice President Oakbrook Terrace, IL
Transier, Kristen L. Assistant Vice President Houston, TX
Villarreal, David H. Assistant Vice President Oakbrook Terrace, IL
Wells, Sharon M.C. Assistant Vice President Oakbrook Terrace, IL
Napoli, Cathy Assistant Secretary Oakbrook Terrace, IL
Brown, Elizabeth M. Officer Houston, TX
Browning, John Officer Oakbrook Terrace, IL
George, Leticia Officer Houston, TX
McLaughlin, William D. Officer Houston, TX
Newman, Rebecca Officer Houston, TX
Renn, Theresa M. Officer Oakbrook Terrace, IL
Vickrey, Larry Officer Houston, TX
Yovanovic, John Officer Houston, TX
Powers, Richard F. III Director
Nyberg, Ronald A. Director
Rybak, William R. Director
Zimmermann, III, John H. Director
</TABLE>
