<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2000
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. 20 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 21 [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)
A. Thomas Smith III
Executive Vice President, General Counsel and Secretary
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)
[ ] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
[X] ON JANUARY 28, 2000 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 the 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 regulator, and
neither the SEC nor any state regulator has
passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary
is a criminal offense.
This prospectus is dated JANUARY 28, 2000.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary............................... 3
Fees and Expenses of the Fund..................... 6
Investment Objective, Policies and Risks.......... 7
Investment Advisory Services...................... 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..... A-1
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 4
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the 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.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing primarily in a portfolio of medium-
and lower-grade 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 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).
The Fund buys and sells municipal securities with a view towards seeking a high
level of current income exempt from federal and Pennsylvania income taxes and,
where possible under local law, local income and personal property taxes. The
Fund's investment adviser selects securities which it believes offer higher
yields with reasonable credit risk considered in relation to the investment
policies of the Fund. In selecting securities for investment, the Fund's
investment adviser uses its research capabilities to assess potential
investments and considers a number of factors, including general market and
economic conditions and credit, interest rate and prepayment risks. Portfolio
securities are typically sold when the Fund's investment adviser's assessment of
any of these factors materially change.
Under normal market conditions, the Fund may invest up to 20% of its total
assets in municipal securities that are subject to federal alternative minimum
tax. The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. The Fund may purchase or sell certain derivative instruments
(such as options, futures, options on futures, and interest rate swaps or other
interest rate related transactions) for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. The Fund has no policy limiting the maturities of its
investments. To the extent the Fund invests in securities with longer
maturities, the Fund will be subject to greater market risk than a fund
investing solely in shorter term securities. Lower-grade securities may be more
volatile and decline more in price in response to negative issuer or general
economic news than higher-grade securities.
Market risk is often greater among certain types of debt securities, such as
zero-coupon bonds or pay-in-kind securities. As interest rates change, these
securities often fluctuate more in price than traditional debt securities and
may subject the Fund to greater market risk than a fund that does not own these
types of securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
3
<PAGE> 5
UNDERSTANDING
QUALITY RATINGS
Debt securities ratings are based on the issuer's ability to pay interest
and repay the principal. Debt securities with ratings above the line are
considered "investment grade," while those with ratings below the line are
regarded as "noninvestment grade." A detailed explanation of these and other
ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
Moody's S&P Meaning
--------------------------------------------------
<C> <S> <C>
Aaa
..................................................
AAA Highest quality
Aa AA High quality
..................................................
A A Above-average
quality
..................................................
Baa BBB Average quality
--------------------------------------------------
Ba BB Below-average
quality
..................................................
B B Marginal quality
..................................................
Caa CCC Poor quality
..................................................
Ca CC Highly speculative
..................................................
C C Lowest quality
..................................................
-- D In default
..................................................
</TABLE>
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest or principal. The Fund invests primarily in securities with medium
and lower-grade credit quality. Therefore, the Fund is subject to a higher level
of credit risk than a fund that invests solely in investment grade securities.
The credit quality of "noninvestment grade" securities is considered speculative
by recognized rating agencies with respect to the issuer's continuing ability to
pay interest and principal. Lower-grade securities may have less liquidity and a
higher incidence of default than investment in higher-grade securities. The Fund
may incur higher expenses to protect the Fund's interest in such securities. The
credit risks and market prices of lower-grade securities generally are more
sensitive to negative issuer developments, such as reduced revenues or increased
expenditures, or adverse economic conditions, such as a recession, than are the
prices of higher-grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest up to 20% of its total assets in municipal securities
subject to federal alternative minimum tax. In addition, there could be changes
in applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on municipal securities or otherwise adversely
affect the current federal or state tax status of municipal securities.
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investor's home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
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 Pennsylvania
municipal securities, the Fund is more susceptible to political, economic,
regulatory or other factors affecting issuers of Pennsylvania municipal
4
<PAGE> 6
securities than a fund that does not limit its investments to such issuers.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures, options on futures, and
interest rate swaps or other interest-rate related transactions are examples of
derivatives. Derivative instruments involve risks different from direct
investment in underlying securities. These risks include imperfect correlation
between the value of the instruments and the underlying assets; risks of default
by the other party to certain transactions; risks that the transactions may
result in losses that partially or completely offset gains in portfolio
positions; risks that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and stra-tegies, 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 increased risks of investing in 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
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.
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 has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the ten calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
BAR CHART
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
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
1999 -4.52
</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
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Lehman Brothers Municipal
Bond Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charges paid by investors. The index's
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing
5
<PAGE> 7
the securities represented by the index. Average annual total returns are shown
for the periods ended December 31, 1999 (the most recently completed calendar
year prior to the date of this prospectus). Remember that the past performance
of the Fund is not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual Past
Total Returns for 10 Years
the Periods Ended Past Past or Since
December 31, 1999 1 Year 5 Years Inception
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Van Kampen
Pennsylvania Tax Free
Income Fund -- Class
A Shares -9.05% 4.72% 5.90%
Lehman Brothers
Municipal Bond Index
-2.06% 6.91% 6.89%
......................................................................
Van Kampen
Pennsylvania Tax Free
Income Fund -- Class
B Shares -8.81% 4.70% 3.07% (1)
Lehman Brothers
Municipal Bond Index
-2.06% 6.91% 5.40% (2)
......................................................................
Van Kampen
Pennsylvania Tax Free
Income Fund -- Class
C Shares -6.09% 4.95% 3.27% (3)
Lehman Brothers
Municipal Bond Index
-2.06% 6.91% 5.23% (4)
......................................................................
</TABLE>
Inception dates: (1) 5/3/93, (2) 4/30/93, (3) 8/13/93, (4) 7/31/93.
* The Lehman Brothers Municipal Bond Index is an unmanaged, broad-based
statistical composite of municipal bonds.
The current yield for the thirty-day period ended September 30, 1999 is 4.56%
for Class A Shares, 4.04% for Class B Shares and 4.12% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of offering 4.75%(1) None None
price)
...............................................................
Maximum deferred sales
charge (load)(as a
percentage of the lesser
of original purchase
price or redemption
proceeds) None(2) 4.00%(3) 1.00%(4)
...............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
None None None
...............................................................
Redemption fees None None None
...............................................................
Exchange fee None None None
...............................................................
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------
Management fees 0.60% 0.60% 0.60%
...............................................................
Distribution and/or
service
(12b-1) fees(5)
0.25% 1.00%(6) 1.00%(6)
...............................................................
Other expenses 0.19% 0.20% 0.19%
...............................................................
Total annual fund
operating expenses
1.04% 1.80% 1.79%
...............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 4.00% in the first year after purchase,
declining thereafter as follows:
Year 1-4.00%
Year 2-3.75%
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
See "Purchase of Shares -- Class B Shares."
6
<PAGE> 8
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(6) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $576 $790 $1,022 $1,686
......................................................................
Class B Shares $583 $916 $1,125 $1,916*
......................................................................
Class C Shares $282 $563 $ 970 $2,105
......................................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $576 $790 $1,022 $1,686
......................................................................
Class B Shares $183 $566 $ 975 $1,916*
......................................................................
Class C Shares $182 $563 $ 970 $2,105
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVE,
POLICIES AND RISKS
The Fund's investment objective is to provide only 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 a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). There are risks
inherent in all investments in securities; accordingly there can be no assurance
that the Fund will achieve its investment objective.
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objective by investing primarily in medium- and
lower-grade Pennsylvania municipal securities. Lower-grade securities are
commonly referred to as "junk bonds" and involve special risks as compared to
investments in higher-grade securities. The Fund does not purchase securities
that are in default or rated in categories lower than B- by S&P or B3 by
Moody's. Under normal market conditions, the Fund may invest up to 20% of its
total assets in municipal securities that are subject to alternative minimum
tax. From time to time, the Fund temporarily may invest up to 10% of its total
assets in Pennsylvania tax exempt money market funds which are treated as
investments in municipal securities.
The Fund buys and sells municipal securities with a view towards seeking a high
level of current income exempt from federal and Pennsylvania income taxes and,
where possible under local law, local income and personal property taxes. The
Fund's investment adviser actively manages the Fund's portfolio and adjusts the
average maturity of portfolio investments based upon its expectations about the
direction of interest rates and other economic factors. The Fund's investment
adviser selects securities which it believes offer higher yields with reasonable
credit risk considered in relation to the investment policies of the Fund. In
selecting securities for investment, the Fund's investment adviser uses its
research capabili-
7
<PAGE> 9
ties to assess potential investments and considers a number of factors,
including general market and economic conditions and credit, interest rate and
prepayment risks. Portfolio securities are typically sold when the Fund's
investment adviser's assessment of any of these factors materially change. At
times, the market conditions in the Pennsylvania municipal securities markets
may be such that the Fund's investment adviser may invest in higher-grade
securities, particularly when the difference in returns between quality
classifications is narrow or when the Fund's investment adviser expects interest
rates to increase. These investments may lessen the decline in the net asset
value of the Fund but also may affect the amount of current income since yields
on higher-grade securities are usually lower than yields on medium- or
lower-grade securities. As a result, the Fund will not necessarily invest in the
highest yielding 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 or losses resulting
from possible changes in interest rates will not be a major consideration and
frequency of portfolio turnover generally will not be a limiting factor if the
Fund's investment adviser considers it advantageous to purchase or sell
securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax.
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 federal and 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 a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act. Under normal market conditions,
the Fund may invest up to 20% of its total assets in municipal securities that
are subject to the federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, maturity of the obligation and rating of the issue.
The ratings of S&P and Moody's represent their opinions of the quality of the
municipal securities they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
8
<PAGE> 10
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Fund's Statement of Additional Information.
The Fund's Statement of Additional Information may be obtained by investors free
of charge as described on the back cover of this prospectus.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund invests primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of nonpayment. The ability of issuers of municipal securities to make
timely payments of interest and principal may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such nonpayment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing nonpayment and a
potential decrease in the net asset value of the Fund. In addition, the Fund may
incur expenses to work out or restructure a distressed or defaulted security.
Securities rated
9
<PAGE> 11
below investment-grade involve special risks compared to high-grade securities.
See "Risks of Investing in Medium- and Lower-Grade Securities" below.
The Fund may invest up to 20% of its total assets in municipal securities that
are subject to federal alternative minimum tax. Accordingly, the Fund may not be
a suitable investment for investors who are already subject to the federal
alternative minimum tax or who could become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve increased risk
to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
RISKS OF INVESTING IN
MEDIUM- AND LOWER-GRADE SECURITIES
Securities which are in the medium- and lower-grade categories generally offer
higher yields than are offered by higher-grade securities of similar maturities,
but they also generally involve greater risks, such as greater credit risk,
greater market risk and volatility, greater liquidity concerns and potentially
greater manager risk. Investors should carefully consider the risks of owning
shares of a portfolio which invests in medium- and lower-grade securities before
investing in the Fund.
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Medium- and lower-grade securities are considered more
susceptible to nonpayment of interest and principal or default than higher-grade
securities. Increases in interest rates or changes in the economy may
significantly affect the ability of issuers of medium- and lower-grade
securities to pay interest and to repay principal, to meet projected financial
goals or to obtain additional financing. In the event that an issuer of
securities held by the Fund experiences difficulties in the timely payment of
principal and interest and such issuer seeks to restructure the terms of its
borrowings, the Fund may incur additional expenses and may determine to invest
additional assets with respect to such issuer or the project or projects to
which the Fund's securities relate. Further, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of interest or the repayment of principal on its portfolio holdings
and the Fund may be unable to obtain full recovery on such amounts. To minimize
the risks involved in investing in medium- and lower-grade securities, the Fund
does not purchase securities that are in default or rated in categories lower
than B- by S&P or B3 by Moody's.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in
10
<PAGE> 12
the debt securities market and as a result of real or perceived changes in
credit risk. The value of the Fund's investments can be expected to fluctuate
over time. The value of debt securities generally varies inversely with changes
in prevailing interest rates. When interest rates decline, the value of a
portfolio invested in debt securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in debt
securities generally can be expected to decline. Debt securities with longer
maturities, which may have higher yields, may increase or decrease in value more
than debt securities with shorter maturities. While the Fund has no policy
limiting the maturities of the individual debt securities in which it may
invest, the Fund's investment adviser seeks to manage fluctuations in net asset
value resulting from changes in interest rates by actively managing the
portfolio maturity structure. Secondary market prices of medium- and lower-grade
securities generally are less sensitive to changes in interest rate and are more
sensitive to general adverse economic changes or specific developments with
respect to the particular issuers than are the secondary market prices of
higher-grade securities. A significant increase in interest rates or a general
economic downturn could severely disrupt the market for medium- and lower-grade
securities and adversely affect the market value of such securities. Such events
also could lead to a higher incidence of default by issuers of medium- and
lower-grade securities as compared with higher-grade securities. In addition,
changes in credit risks, interest rates, the credit markets or periods of
general economic uncertainty can be expected to result in increased volatility
in the market price of the medium- and lower-grade securities in the Fund and
thus in the net asset value of the Fund. Adverse publicity and investor
perceptions, whether or not based on rational analysis, may affect the value,
volatility and liquidity of medium- and lower-grade securities.
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for medium- and lower-grade securities may
be less liquid than the markets for higher-grade securities. Liquidity relates
to the ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the medium- and lower-grade securities in which the
Fund may invest, trading in such securities may be relatively inactive. Prices
of medium- and lower-grade securities may decline rapidly in the event a
significant number of holders decide to sell. Changes in expectations regarding
an individual issuer of medium- and lower-grade securities generally could
reduce market liquidity for such securities and make their sale by the Fund more
difficult, at least in the absence of price concessions. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. An economic downturn or an
increase in interest rates could severely disrupt the market for such securities
and adversely affect the value of outstanding securities or the ability of the
issuers to repay principal and interest. Further, the Fund may have more
difficulty selling such securities in a timely manner and at their stated value
than would be the case for securities for which an established retail market
does exist. Certain municipal securities in which the Fund may invest, such as
special obligation bonds, lease obligations, participation certificates and
variable rate instruments, may be particularly less liquid. Although the issuer
of some such securities may be obligated to redeem such securities at face
value, such redemption could result in losses to the Fund to the extent such
municipal securities were purchased by the Fund at a premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for medium- and lower-grade securities held in the Fund's
portfolio, the ability of the Fund's investment adviser to value the Fund's
securities becomes more difficult and the judgment of the Fund's investment
adviser may play a greater role in the valuation of the Fund's securities due to
the reduced availability of reliable objective data.
The Fund may invest in securities not producing immediate cash income, including
zero-coupon securities or pay-in-kind securities, when their effective yield
over comparable instruments producing cash income make these investments
attractive. Prices on non-cash-paying instruments may be more sensitive to
changes in the issuer's financial condition, fluctuation in interest rates and
market demand/supply imbalances than cash-paying securi-
11
<PAGE> 13
ties with similar credit ratings, and thus may be more speculative. In addition,
the accrued interest income earned on such instruments is included in investment
company taxable income, thereby increasing the required minimum distributions to
shareholders without providing the corresponding cash flow with which to pay
such distributions. The Fund's investment adviser will weigh these concerns
against the expected total returns from such instruments. See "Additional
Information Regarding Certain Securities" below.
Many medium- and lower-grade securities are not listed for trading on any
national securities exchange, and many issuers of medium- and lower-grade
securities choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. As a result, the Fund's
portfolio may consist of a higher portion of unlisted or unrated securities as
compared with an investment company that invests solely in higher-grade
securities. Unrated securities are usually not as attractive to as many buyers
as are rated securities, a factor which may make unrated securities less
marketable. These factors may have the effect of limiting the availability of
the securities for purchase by the Fund and may also limit the ability of the
Fund to sell such securities at their fair value either to meet redemption
requests or in response to changes in the economy or the financial markets.
Further, to the extent the Fund owns or may acquire illiquid or restricted
medium-and lower-grade securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. The amount of available
information about the financial condition of certain medium- and lower-grade
issuers may be less extensive than other issuers. In its analysis, the Fund's
investment adviser may consider the credit ratings of recognized rating
organizations in evaluating securities although the investment adviser does not
rely primarily on these ratings. Ratings evaluate only the safety of principal
and interest payments, not the market value risk. In addition, ratings are
general and not absolute standards of quality, and credit ratings are subject to
the risk that the creditworthiness of an issuer may change and the rating
agencies may fail to change such ratings in a timely fashion. A rating downgrade
does not require the Fund to dispose of a security. The Fund's investment
adviser continuously monitors the issuers of securities held in the Fund.
Because of the number of investment considerations involved in investing in
medium- and lower-grade securities, to the extent the Fund invests in such
securities, achievement of the Fund's investment objective may be more dependent
upon the Fund's investment adviser's credit analysis than is the case with
investing in higher-grade securities.
New or proposed laws may have an impact on the market for medium- and
lower-grade securities. The Fund's investment adviser is unable at this time to
predict what effect, if any, legislation may have on the market for medium- and
lower-grade securities.
Special tax considerations are associated with investing in certain medium- and
lower-grade securities, such as zero-coupon or pay-in-kind securities. The Fund
accrues income on these securities prior to the receipt of cash payments. The
Fund must distribute substantially all of its income to its shareholders to
qualify for pass-through treatment under federal income tax law and may,
therefore, have to dispose of its portfolio securities to satisfy distribution
requirements.
The table below sets forth the percentage of the Fund's assets during the fiscal
year ended September 30, 1999 invested in the various ratings categories (based
on the higher of the Moody's or S&P ratings) and unrated securities determined
by the Fund's investment adviser to be of comparable quality. The percentages
are based on the dollar-weighted average of credit ratings of all municipal
securities held by the Fund during the fiscal year computed on a monthly basis.
<TABLE>
<CAPTION>
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 49.1% 2.1%
.......................................................................
AA/Aa 13.0% 0.0%
.......................................................................
A/A 10.4% 0.9%
.......................................................................
BBB/Baa 10.6% 3.9%
.......................................................................
BB/Ba 1.4% 7.8%
.......................................................................
B/B 0.0% 0.8%
.......................................................................
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 84.5% 15.5%
.......................................................................
</TABLE>
12
<PAGE> 14
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those listed above.
SPECIAL CONSIDERATIONS REGARDING
PENNSYLVANIA MUNICIPAL 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 as the industrial composition of Pennsylvania
diversified when the coal, steel and railroad industries began to decline. The
major 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 of its agencies or authorities 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 Aa3 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 Baa2
by Moody's and BBB by S&P.
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.
13
<PAGE> 15
More detailed information concerning Pennsylvania municipal securities and the
Commonwealth of Pennsylvania is set forth in the Statement of Additional
Information.
ADDITIONAL INFORMATION REGARDING
CERTAIN SECURITIES
The Fund may invest in certain securities not producing immediate cash income,
such as zero coupon and payment-in-kind securities, when the Fund's investment
adviser believes the effective yield on such securities over comparable
instruments paying cash income makes these investments attractive. Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest. They are issued and traded at a discount from
their face amounts or par value, which discount varies depending on the time
remaining until cash payments begin, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. Because such securities
do not entitle the holder to any periodic payments of interest prior to
maturity, this prevents any reinvestment of interest payments at prevailing
interest rates if prevailing interest rates rise. On the other hand, because
there are no periodic interest payments to be reinvested prior to maturity,
"zero-coupon" securities eliminate the reinvestment risk and may lock in a
favorable rate of return to maturity if interest rates drop.
Payment-in-kind securities are securities that pay interest through the issuance
of additional securities. Prices on non-cash-paying instruments may be more
sensitive to changes in the issuer's financial condition, fluctuations in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative than are
securities that pay interest periodically in cash.
The amount of non-cash interest income earned on 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.
DERIVATIVE INSTRUMENTS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, facilitate portfolio management and
mitigate risks. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that the use of these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and other interest rate indices and other financial instruments,
purchase and sell financial futures contracts and options on futures and enter
into various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of securities for investment purposes, to manage the effective maturity
or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used at
any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the investment
adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default by the other party to the transaction, illiquidity of the
derivative instrument and, to the extent the investment adviser's view as to
certain market movements is incorrect, the risk that the use
14
<PAGE> 16
of such Strategic Transactions could result in losses greater than if they had
not been used. Use of put and call options may result in losses to the Fund,
force the sale of portfolio securities at inopportune times or for prices other
than at current market values, limit the amount of appreciation the Fund can
realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the risk management
or hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis whereby the Fund buys or sells a security with payment and
delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on securities in connection with such transactions prior to
the date the Fund actually takes delivery of such securities. These transactions
are subject to market risk as the value or yield of a security at delivery may
be more or less than the purchase price or the yield generally available on
securities when delivery occurs. In addition, the Fund is subject to
counterparty risk because it relies on the buyer or seller, as the case may be,
to consummate the transaction, and failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring these
securities, but the Fund may sell these securities prior to settlement if it is
deemed advisable. No specific limitation exists as to the percentage of the
Fund's assets which may be used to acquire securities on a "when-issued" or
"delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
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.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities, or yield
15
<PAGE> 17
differentials, or for other reasons. The Fund's portfolio turnover is shown
under the heading "Financial Highlights." The portfolio turnover rate may vary
from year to year. A high portfolio turnover rate (100% or more) increases a
fund's transactions costs (including brokerage commissions or dealer costs) and
a high portfolio turnover rate may result in the realization of more short-term
capital gains than if a fund had a lower portfolio turnover rate. Increases in a
fund's transaction costs would adversely impact the fund's performance. The
turnover rate will not be a limiting factor, however, if the Fund's investment
adviser considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may invest on a temporary basis a portion or all
of its assets in high-quality, short-term Pennsylvania municipal obligations. If
such municipal obligations are not available or, in the Fund's investment
adviser's judgment, do not afford sufficient protection against adverse market
conditions, the Fund may invest in high-quality municipal securities of issuers
other than issuers of Pennsylvania municipal securities. Furthermore, if such
high-quality securities are not available or, in the Fund's investment adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in taxable obligations. Such taxable obligations may include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, other investment grade quality debt securities, prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million and
repurchase agreements. In taking such a defensive position, the Fund would not
be pursuing and may not achieve its investment objective.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $90 billion under management or supervision as of
December 31, 1999. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily net assets of
the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.60%
.....................................................
Over $500 million 0.50%
.....................................................
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.60% of the
Fund's average daily net assets for the Fund's fiscal year ended September 30,
1999.
The Fund's average daily net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month.
Under the Advisory Agreement the Adviser furnishes offices, necessary facilities
and equipment and provides administrative services to the Fund. The Fund pays
all charges and expenses of its day-to-day operations, including service fees,
distribution fees, custodial fees, legal and independent accountant fees, the
costs of reports and proxies to shareholders, compensation of trustees of the
Trust (other than those who are affiliated persons of the Adviser, Distributor
or Van Kampen Investments) and all other ordinary business expenses not
specifically assumed by the Adviser.
16
<PAGE> 18
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. 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 joining the Adviser in August 1995. Prior to such time, Mr. Pietrzak was
employed by Merrill Lynch for 20 years 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 $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) each class of shares
has exclusive voting rights with respect to approvals of the Rule 12b-1
distribution plan and service plan (each as described below) under which its
distribution fee and/or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B Shares and Class C Shares and
the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays or any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund's Board of Trustees reserves the right to
calculate the net asset value per share and adjust the offering price based
thereon more frequently than once daily if deemed desirable. Net asset value per
share for each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities for which market quotations are not readily available and other
assets are valued at their fair value
17
<PAGE> 19
as determined in good faith by the Adviser in accordance with procedures
established by the Board of Trustees of the Fund. Short-term investments with
remaining maturities of 60 days or less are valued at cost plus accrued interest
(amortized cost) which approximates market value.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the 1940 Act. The Fund
also has adopted a service plan (the "Service Plan") with respect to each class
of its shares. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders and the maintenance of such shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
such class of shares. To assist investors in comparing classes of shares, the
tables under the heading "Fees and Expenses of the Fund" provide a summary of
sales charges and expenses and an example of the sales charges and expenses of
the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the NASD who are acting as securities dealers ("dealers") and NASD
members or eligible non-NASD members who are acting as brokers or agents for
investors ("brokers"). "Dealers" and "brokers" are sometimes referred to herein
as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
18
<PAGE> 20
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and Service Plan, the Fund may spend up to a total
of 0.25% per year of the Fund's average daily net assets with respect to the
Class A Shares of the Fund. From such amount, under the Service Plan, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within six years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average
19
<PAGE> 21
daily net assets with respect to the Class B Shares of the Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan Class B Shares received on such shares, automatically convert to Class A
Shares eight years after the end of the calendar month in which the shares were
purchased. Class B Shares purchased before June 1, 1996, and any dividend
reinvestment plan Class B Shares received on such shares, automatically convert
to Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan Class C Shares received on such shares, automatically
convert to Class A Shares ten years after the end of the calendar month in which
such shares were purchased. Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. The conversion schedule applicable to a share of the Fund acquired
through the exchange privilege from another Van Kampen fund participating in the
exchange program is determined by reference to the Van Kampen fund from which
such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by
involuntary liquidation by the Fund of a shareholder's account as described
under the heading "Redemption of Shares." Subject to certain limitations, a
shareholder who has redeemed Class C Shares of the Fund may reinvest in Class C
Shares at net asset value with credit for any contingent deferred sales charge
if reinvestment is made within 180 days after the redemption. For a more
complete description of contingent deferred sales charge waivers, please refer
to the Fund's Statement of Additional Information or contact your authorized
dealer.
20
<PAGE> 22
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
also includes purchases of shares of the Participating Funds over a 13-month
period based on the total amount of intended purchases plus the value of all
shares of the Participating Funds previously purchased and still owned. An
investor may elect to compute the 13-month period starting up to 90 days before
the date of execution of a Letter of Intent. Each investment made during the
period receives the reduced sales charge applicable to the total amount of the
investment goal. The initial purchase must be for an amount equal to at least 5%
of the minimum total purchase amount of the level selected. If trades not
initially made under a Letter of Intent subsequently qualify for a lower sales
charge through the 90-day backdating provisions, an adjustment will be made at
the expiration of the Letter of Intent to give effect to the lower sales charge.
Such adjustment in sales charge will be used to purchase additional shares for
the shareholder with the applicable sales charge. The Fund initially will escrow
shares totaling 5% of the dollar amount of the Letter of Intent to be held by
Investor Services in the name of the shareholder. In the event the Letter of
Intent goal is not achieved within the specified period, the investor must pay
the difference between the sales charge applicable to the purchases made and the
reduced sales charges previously paid. Such payments may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit investment trust distributions will be 1.00% of the
offering price (1.01% of net asset value). Of this amount, the Distributor will
pay to the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the terms and conditions that apply to the
21
<PAGE> 23
program, should contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
In order to obtain these special benefits, all dividends and other distributions
by the Fund must be reinvested in additional shares and there cannot be any
systematic withdrawal program. There will be no minimum for reinvestments from
unit investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
1. Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
2. Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
3. Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
4. Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over a
12-month period.
5. Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
6. Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
7. Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
8. Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to 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 January 1, 2000, that (1) the
total plan assets are at least $1 million or (2) such shares are purchased by
an employer sponsored plan with more than 100 eligible employees. Such plans
that have been established with a Participating Fund or have received
22
<PAGE> 24
proposals from the Distributor prior to January 1, 2000 based on net asset
value purchase privileges previously in effect will be qualified to purchase
shares of the Participating Funds at net asset value. Section 403(b) and
similar accounts for which Van Kampen Trust Company serves as custodian will
not be eligible for net asset value purchases based on the aggregate
investment made by the plan or the number of eligible employees, except under
certain uniform criteria established by the Distributor from time to time.
For purchases on February 1, 1997 and thereafter, a commission will be paid
as follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million,
plus 0.50% on the next $47 million, plus 0.25% on the excess over $50
million.
9. Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement or
authorization, on behalf of the group, for purchase of shares of the Fund and
Participating Funds, (iv) has a membership that the authorized dealer can
certify as to the group's members and (v) satisfies other uniform criteria
established by the Distributor for the purpose of realizing economies of
scale in distributing such shares. A qualified group does not include one
whose sole organizational nexus, for example, is that its participants are
credit card holders of the same institution, policy holders of an insurance
company, customers of a bank or broker-dealer, clients of an investment
adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers who
initiate and are responsible for such sales to each individual as follows:
1.00% on sales to $2 million, plus 0.80% on the next $1 million and 0.50% on
the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian/trustee of a
retirement plan account may involve additional fees charged by the dealer or
custodian/trustee.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the request and any other necessary documents in
proper form as described below. Such payment may be postponed or the right of
redemption suspended as provided by the rules of the SEC. Such payment may,
under certain circumstances, be paid wholly or in part by a distribution-in-kind
of portfolio securities which may result in brokerage costs and a gain or loss
for federal income tax purposes when such securities are sold. If the shares to
be redeemed have been recently purchased by check, Investor Services may delay
the payment of redemption proceeds until it confirms the purchase check has
cleared, which may take up to 15 days. A taxable gain or loss will be recognized
by the shareholder upon redemption of shares.
23
<PAGE> 25
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares to be redeemed, the fund name and class
designation of such shares and the shareholder's account number. The redemption
request must be signed by all persons in whose names the shares are registered.
Signatures must conform exactly to the account registration. If the proceeds of
the redemption exceed $50,000, or if the proceeds are not to be paid to the
record owner at the record address, or if the record address has changed within
the previous 30 days, signature(s) must be guaranteed by one of the following: a
bank or trust company; a broker-dealer; a credit union; a national securities
exchange, registered securities association or clearing agency; a savings and
loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by and registered to
a corporation, partnership, trust, fiduciary, or other legal entity, a copy of
the corporate resolution or other legal documentation appointing the authorized
signer and certified within the prior 120 days must accompany the redemption
request. Retirement plan distribution requests should be sent to the
custodian/trustee to be forwarded to Investor Services. Contact the
custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the application form
accompanying the prospectus. For accounts that are not established with
telephone redemption privileges, a shareholder may call the Fund at (800)
341-2911 to request that a copy of the Telephone Redemption Authorization form
be sent to the shareholder for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. Shares may also be redeemed by
phone through FundInfo(R) (automated phone system) to the Shareholder's bank
account of record 24 hours a day, seven days a week at (800) 847-2424. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedure previously described.
Requests received by Investor Services 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 most accounts other than retirement accounts or
accounts with shares represented by certificates. If an account has multiple
owners, Investor Services may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the
24
<PAGE> 26
proceeds are to be paid by check and amounts of at least $1,000 up to $1 million
may be redeemed daily if the proceeds are to be paid by wire. The proceeds must
be payable to the shareholder(s) of record and sent to the address of record for
the account or wired directly to their predesignated bank account. This
privilege is not available if the address of record has been changed within 30
days prior to a telephone redemption request. If a redemption is requested
through FundInfo(R) transactions are sent to the predesignated bank account of
record only. Proceeds from redemptions payable by wire transfer are expected to
be wired on the next business day following the date of redemption. The Fund
reserves the right at any time to terminate, limit or otherwise modify this
redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare daily and distribute monthly all,
or substantially all of its net investment income, as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund, at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends and/or capital gains be paid in cash, be
reinvested in the Fund at net asset value, or be invested in another Van Kampen
Fund at net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's account
on a regular basis to invest predetermined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
25
<PAGE> 27
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may appoint
Investor Services as agent by completing the Authorization for Redemption by
Check form and the appropriate section of the application and returning the form
and the application to Investor Services. Once the form is properly completed,
signed and returned to the agent, a supply of checks drawn on State Street Bank
and Trust Company (the "Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A Share account by Investor Services at the next determined
net asset value per share. Check writing redemptions represent the sale of Class
A Shares. Any gain or loss realized on the redemption of shares is a taxable
event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or by
the Bank. Retirement plans and accounts that are subject to backup withholding
are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from any authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
telephone exchange privileges unless the shareholder indicates otherwise by
checking the applicable box on the application form accompanying the prospectus.
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be
26
<PAGE> 28
liable for following telephone instructions which it reasonably believes to be
genuine. If the exchanging shareholder does not have an account in the fund
whose shares are being acquired, a new account will be established with the same
registration, dividend and capital gain dividend options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund and other
Participating Funds may restrict exchanges by shareholders engaged in excessive
trading by limiting or disallowing the exchange privilege to such shareholders.
For further information on these restrictions, see the Fund's Statement of
Additional Information. The Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
PENNSYLVANIA
TAXATION
The following Pennsylvania tax discussion is based on the advice of Saul, Ewing,
Remick & Saul LLP, 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.
27
<PAGE> 29
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).
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. The constitutional validity of
personal property taxes in Pennsylvania is under judicial review. If these taxes
are sustained, however, the exemption would 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
28
<PAGE> 30
defined by applicable federal income tax law) of the facilities financed with
respect to any of the tax-exempt obligations held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its income (consisting generally
of tax-exempt interest, taxable income and net short-term capital gains) will
constitute tax-exempt interest, a significant portion of the Fund's income may
consist of investment company taxable income. Distributions of investment
company taxable income (generally taxable income and net short-term capital
gain) are taxable to shareholders as ordinary income to the extent of the Fund's
earnings and profits, whether paid in cash or reinvested in additional shares.
Distributions of the Fund's net capital gain (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Fund have been held by such shareholders. Distributions
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held as a capital
asset, the gain or loss will be a capital gain or loss. Any recognized capital
gains may be taxed at different rates depending on how long the shareholder held
such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income and at least
90% of its net tax-exempt interest, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on such undistributed amounts.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding, and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
29
<PAGE> 31
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this Prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31
1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........ $18.240 $18.038 $17.490 $17.737 $16.081 $18.062
------- ------- ------- ------- ------- -------
Net Investment Income.......................... .894 .684 .928 .919 .946 .965
Net Realized and Unrealized Gain/Loss.......... (1.343) .216 .528 (.263) 1.660 (1.985)
------- ------- ------- ------- ------- -------
Total from Investment Operations................ (.449) .900 1.456 .656 2.606 (1.020)
Less Distributions from and in Excess of Net
Investment Income.............................. .930 .698 .908 .903 .950 .961
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.............. $16.861 $18.240 $18.038 $17.490 $17.737 $16.081
======= ======= ======= ======= ======= =======
Total Return*(a)................................ (2.65%) 5.08%** 8.59% 3.86% 16.62% (5.72%)
Net Assets at End of the Period (In millions)... $205.4 $219.3 $223.9 $227.4 $226.7 $203.2
Ratio of Expenses to Average Net Assets*(b)..... 1.04% 1.03% 1.04% 1.09% 1.00% .90%
Ratio of Net Investment Income to
Average Net Assets*............................ 5.03% 5.06% 5.27% 5.32% 5.57% 5.73%
Portfolio Turnover.............................. 53% 29%** 46% 57% 28% 8%
* 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 N/A 1.09% 1.14% 1.17%
Ratio of Net Investment Income to Average Net
Assets......................................... N/A N/A N/A 5.31% 5.42% 5.46%
<CAPTION>
CLASS B SHARES
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31
1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........ $18.228 $18.031 $17.484 $17.731 $16.080 $18.055
------- ------- ------- ------- ------- -------
Net Investment Income.......................... .758 .579 .791 .788 .819 .841
Net Realized and Unrealized Gain/Loss.......... (1.341) .217 .531 (.264) 1.659 (1.985)
------- ------- ------- ------- ------- -------
Total from Investment Operations................ (.583) .796 1.322 .524 2.478 (1.144)
Less Distributions from and in Excess of Net
Investment Income.............................. .798 .599 .775 .771 .827 .831
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.............. $16.847 $18.228 $18.031 $17.484 $17.731 $16.080
======= ======= ======= ======= ======= =======
Total Return*(a)................................ (3.37%) 4.51%** 7.78% 3.07% 15.72% (6.39%)
Net Assets at End of the Period (In millions)... $50.9 $53.5 $51.9 $48.4 $46.8 $37.6
Ratio of Expenses to Average Net Assets*(b)..... 1.80% 1.79% 1.79% 1.85% 1.75% 1.64%
Ratio of Net Investment Income to
Average Net Assets*............................ 4.28% 4.28% 4.51% 4.56% 4.81% 4.98%
Portfolio Turnover.............................. 53% 29%** 46% 57% 28% 8%
* If certain expenses had not been assumed by th
been as follows:
Ratio of Expenses to Average Net Assets......... N/A N/A N/A 1.85% 1.89% 1.90%
Ratio of Net Investment Income to Average Net
Assets......................................... N/A N/A N/A 4.55% 4.66% 4.71%
<CAPTION>
CLASS C SHARES
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED DECEMBER 31
1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........ $18.229 $18.031 $17.482 $17.729 $16.079 $18.045
------- ------- ------- ------- ------- -------
Net Investment Income.......................... .759 .576 .795 .788 .812 .850
Net Realized and Unrealized Gain/Loss.......... (1.342) .221 .529 (.264) 1.665 (1.985)
------- ------- ------- ------- ------- -------
Total from Investment Operations................ (.583) .797 1.324 .524 2.477 (1.135)
Less Distributions from and in Excess of Net
Investment Income.............................. .798 .599 .775 .771 .827 .831
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.............. $16.848 $18.229 $18.031 $17.482 $17.729 $16.079
======= ======= ======= ======= ======= =======
Total Return*(a)................................ (3.37%) 4.51%** 7.78% 3.08% 15.72% (6.34%)
Net Assets at End of the Period (In millions)... $4.3 $3.3 $3.0 $3.4 $3.4 $2.2
Ratio of Expenses to Average Net Assets*(b)..... 1.79% 1.79% 1.79% 1.85% 1.75% 1.63%
Ratio of Net Investment Income to
Average Net Assets*............................ 4.27% 4.29% 4.52% 4.56% 4.76% 4.97%
Portfolio Turnover.............................. 53% 29%** 46% 57% 28% 8%
* If certain expenses had not been assumed by th
been as follows:
Ratio of Expenses to Average Net Assets......... N/A N/A N/A 1.85% 1.90% 1.90%
Ratio of Net Investment Income to Average Net
Assets......................................... N/A N/A N/A 4.55% 4.61% 4.70%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on overnight cash balances. If these credits were reflected as a reduction
of expenses, the ratio would decrease by .01% for the period ended September
30, 1999.
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 opinion of the
creditworthiness of an obligor with respect to a specific financial obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the obligor or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation:
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT -- INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
A- 1
<PAGE> 33
C: Debt rated "C" is currently highly vulnerable to nonpayment. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed or
similar action has been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
r: This symbol highlights derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns as a result of non credit risks. Examples include: obligations linked or
indexed to equities, currencies, or commodities; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong or strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse Financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the due date, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained from other sources it considers reliable. S&P does
not perform an audit in connection with any
A- 2
<PAGE> 34
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols for the
put option (for example, 'AAA/A-1+'). With short-term demand debt, S&P's note
rating symbols are used with the commercial paper rating symbols (for example,
'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
LONG-TERM DEBT
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
A- 3
<PAGE> 35
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date date to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as MIG 1 or
VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's assigns a MIG
or VMIG rating, all categories define an investment grade situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability for
repayment of short-term debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics:
- -- Leading market positions in well established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- -- Well established access to a ranges of financial markets and assured sources
of alternative liquidity.
A- 4
<PAGE> 36
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable ability for
repayment of short-term debt obligations. The effect of industry characteristics
and market compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection measurements
and may require relatively high financial leverage. Adequate alternate liquidity
is maintained.
Issuers rated Not Prime do not fall within any of the prime rating categories.
A- 5
<PAGE> 37
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson Paul G. Yovovich
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Dennis J. McDonnell*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
Edward C. Wood III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
Stephen L. Boyd*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer & Treasurer
Curtis W. Morell*
Vice President & Chief Accounting Officer
Tanya M. Loden*
Controller
* "Interested Persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time
Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN 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 218256
Kansas City, MO 64121-8256
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, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual report to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]), or by writing
the Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act
File No. is 811-4983.
PATF PRO 1/00
<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 the 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.
The Fund is organized as a series of the Van Kampen Pennsylvania Tax Free
Income Fund, an open-end management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective, Policies and Risks.................... B-3
Strategic Transactions...................................... B-14
Investment Restrictions..................................... B-19
Trustees and Officers....................................... B-20
Investment Advisory Agreement............................... B-28
Other Agreements............................................ B-29
Distribution and Service.................................... B-29
Transfer Agent.............................................. B-32
Portfolio Transactions and Brokerage Allocation............. B-32
Shareholder Services........................................ B-34
Redemption of Shares........................................ B-36
Contingent Deferred Sales Charge-Class A.................... B-36
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-37
Taxation.................................................... B-38
Fund Performance............................................ B-42
Other Information........................................... B-45
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-16
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 2000.
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 Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less than to holders of
Class A Shares.
The Trustees may amend the Declaration of Trust 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. ("Morgan Stanley Dean Witter"). 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 and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment Management Inc.,
an investment adviser, Morgan Stanley & Co.
B-2
<PAGE> 41
Incorporated, a registered broker-dealer and investment adviser, and Morgan
Stanley International, are engaged in a wide range of financial services. Their
principal businesses include securities underwriting, distribution and trading;
merger, acquisition, restructuring and other corporate finance advisory
activities; merchant banking; stock brokerage and research services; credit
services; asset management; trading of futures, options, foreign exchange,
commodities and swaps (involving foreign exchange, commodities, indices and
interest rates); real estate advice, financing and investing; and securities
lending.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of December 31, 1999, no person was known by the Fund to own
beneficially or to hold of record 5% or more of the outstanding Class A Shares,
Class B Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS DECEMBER 31, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
First Clearing Corporation.................................. 642,545 A 5.42%
A/C 5520-7985
Mary Alice Morrissey and James D. Morrissey
1328 Old Ford Road
Huntingdon Valley, PA 19006-8106
MLPF&S For the Sole Benefit of its Customers ............... 32,370 C 12.28%
Attn: Fund Administration
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Edward Jones & Co. ......................................... 19,252 C 7.30%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland HTS, MO 63043-3009
Jack L. Skinner and Diane L. Skinner JTTEN.................. 37,749 C 14.32%
1403 Foxwood Drive
Hermitage, PA 16148-3171
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities. The Fund may, however, invest in shorter term municipal
securities when yields are greater than yields available on longer term
municipal securities, for temporary defensive purposes or when redemption
requests are expected. The two principal classifications of municipal securities
are "general obligation" and "revenue" or "special obligation" securities, which
include "industrial revenue bonds." General obligation securities are secured by
the issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation securities are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source, such as from the user of the facility being financed. The Fund
may also invest in
B-3
<PAGE> 42
"moral obligation" bonds which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically
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would be authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund could be required to assert through the
custodian bank those rights as may exist against the underlying issuer. Thus, in
the event the underlying issuer fails to pay principal or interest when due, the
Fund may be subject to delays, expenses and risks that are greater than those
that would have been involved if the Fund had purchased a direct obligation of
the issuer. In addition, in the event that the trust or custodial account in
which the underlying security has been deposited is determined to be an
association taxable as a corporation, instead of a non-taxable entity, the yield
on the underlying security would be reduced in recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Municipal securities, like other debt obligations, are subject to the risk
of non-payment. The ability of issuers of municipal securities to make timely
payments of interest and principal may be adversely impacted in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal security experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
securities and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
SPECIAL 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
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to which such specific factors are applicable. However, the information set
forth below is intended only as a general summary and not as a discussion of any
specific factors that may affect any particular issuer of Pennsylvania municipal
securities.
Pennsylvania historically has been identified as a heavy industry state
although that reputation has changed as the industrial composition of the
Commonwealth diversified when the coal, steel and railroad industries began to
decline. The major 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 forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or of its agencies or authorities 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, 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 1994 through fiscal 1998, revenues
and other sources increased by an average 5.0 percent annually. Tax revenues
during this same period increased by an annual average of 4.2 percent.
Intergovernmental revenues, with a 6.7 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. Other revenues during this five-year period grew
at a 20.5 percent annual rate. Increases in changes for sales and services and
in investment income constitute the largest portion of other revenues.
Expenditures and other uses during the fiscal 1994 through fiscal 1998 period
rose at an average annual rate of 5.0 percent. Program costs for protection of
persons and property increased an average 11.8 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 5.8 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, 1998 totaled $1,958.9
million, an increase of $594 million over the $1,364.9 million balance at June
30, 1997. Of the $1,144 million unreserved-designated component of fund balance,
over one-half of that amount is represented by the balance in the Tax
Stabilization Reserve Fund. The fiscal 1998 year-end unreserved-undesignated
balance of $497.6 million is the largest such balance recorded since audited
GAAP reporting was instituted in 1984 for the Commonwealth.
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 transfers to the Tax Stabilization Reserve Fund).
Higher than estimated revenues, offset in part by increased reserves for tax
refunds, and by slightly lower expenditures than budgeted were responsible for
the increase. Transfers to the Tax Stabilization Reserve Fund for fiscal 1998
operations total $223.3 million consisting of $73.3 million representing the
required transfer of 15 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 exceeds $668 million and represents 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
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therefore understates the actual underlying rate of growth of the tax base
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 the
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. 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 helped eliminate the negative difference between the
budgetary basis unappropriated balance and the GAAP basis
unreserved-undesignated balance 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 appropriation
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 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 arose from the delay in implementation of the movement of the
final client group to the HealthChoices managed health care program resulting in
unanticipated fee-for-service costs.
The 1999 fiscal year ended with an unappropriated surplus (prior to the
transfer to the Tax Stabilization Reserve Fund) of $702.9 million, an increase
of $214.2 million from June 30, 1998. Transfers to the Tax Stabilization Reserve
Fund total $255.4 million for fiscal year 1999 consisting of $105.4 million
representing the statutory 15 percent of the fiscal year-end unappropriated
surplus and an additional $150 million from the unappropriated surplus
authorized by the General Assembly. The $447.5 million balance of the
unappropriated surplus was carried over to fiscal year 2000. The higher
unappropriated surplus was generated by tax revenues that were $712.0 million
(3.9 percent) above estimate and $61.0 million of non-tax revenue (18.4 percent)
above estimate. Higher than anticipated appropriation lapses also contributed to
the higher surplus. A portion of the higher revenues and appropriation lapses
were used for supplemental fiscal 1999 appropriations totaling $357.8 million.
Of this amount, $200 million was appropriated for general obligation debt
service above current needs; $59 million to accrue the fourth quarterly
Commonwealth contribution to the School Employees' Retirement System; and $90
million to the Public Welfare department to pay additional medical assistance
costs estimated to occur in the 1999 fiscal year. These supplemental
appropriations represent expected one-time obligations. Including the
supplemental appropriations and net of appropriation lapses, expenditures for
fiscal 1999 totaled $18,144.9 million, a 5.9 percent increase over expenditures
during fiscal 1998. Revenues from taxes for the fiscal year rose 3.9 percent
after tax reductions enacted with the 1999 fiscal year budget that were
estimated to be $241.0 million for the fiscal year. The sales and use tax
represented the largest portion of the above-estimate of revenues. Receipts from
this tax were $331.3 million, or 5.3 percent above the estimate and 7.4 percent
above the prior fiscal year's receipts. Personal income tax receipts, especially
those from estimated and final taxpayer filings, boosted receipts $299.5
million, or 4.7 percent above estimate for the fiscal year. Taxes paid through
employee withholding were slightly below estimate. For the fiscal year, personal
income tax receipts were 7.2 percent above those of the prior fiscal year. Among
the taxes paid by corporations, only capital stock and franchise tax receipts
exceeded estimates. Revenues from this tax were $144.5 million (15.1 percent)
over estimate. The corporate net income tax and the various selective business
taxes all recorded receipts below estimate. In aggregate, they were a net
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$68.5 million below estimate. Non-tax revenues, led by interest earnings due to
higher investable balances, were $61.0 million (18.4 percent) above estimate.
The major components of the enacted tax reductions and their estimated fiscal
1999 cost were: (i) reduce the capital stock and franchise tax rate from 12.75
mills to 11.99 mills ($72.5 million); (ii) increase the eligibility income limit
for qualification for personal income tax forgiveness ($57.1 million); (iii)
eliminate personal income tax on gains from the sale of an individual's
residence ($30.0 million); (iv) 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); (v) expand various sales tax exemptions ($40.4
million); and (vi) reduce various other miscellaneous items ($23.2 million).
Appropriations enacted for fiscal 1999 when the budget was originally adopted
were 4.1 percent ($713.2 million) above the appropriations enacted for fiscal
1998 (including supplemental appropriations). Major increases in expenditures
budgeted for fiscal 1999 at that time included: (i) $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); (ii) $60.4 million for higher education, including
scholarship grants; (iii) $56.5 million to fund the correctional system,
including $21 million to operate a new correctional facility; (iv) $121.1
million for long-term care medical assistance costs; (v) $14.4 million for
technology and Year 2000 investments; (vi) $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 (vii) $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. In May 1999,
along with the adoption of the fiscal 2000 budget, supplemental fiscal 1999
appropriations totaling $357.8 million were enacted. Of this amount, $200
million was appropriated for general obligation debt service that will be
available for possible use to retire outstanding debt; $59 million to accrue the
fourth quarter Commonwealth contribution to the School Employees' Retirement
System; and $90 million for the Public Welfare department to pay additional
medical assistance costs anticipated to occur in fiscal 1999. With these
additional amounts, total appropriations for fiscal 1999 represent a 6.2 percent
increase over fiscal 1998 appropriations. Appropriation lapses of $222.6 million
and additional Commonwealth revenues above budget estimates provided the funding
for the additional appropriations. Appropriation lapses in fiscal 1998 and 1997
were $161.8 million and $200.6 million respectively. Reserves for tax refunds
for fiscal 1999 were raised during the fiscal year to $644.0 million, a $39.2
million increase over the budget as enacted. Reserves for tax refunds for fiscal
1999 are $266.0 million below the reserve established for fiscal 1998. 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.
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.
The General Fund budget for the 2000 fiscal year was approved by the
General Assembly in May 1999. The adopted budget includes estimated spending
from Commonwealth revenues of $19,061.5 million and estimated revenues (net of
estimated tax refunds and enacted tax changes) of $18,699.9 million. Funds to
cover the $361.6 million difference between estimated revenues and projected
spending will be obtained from a draw down of the projected fiscal 1999 year-end
balance. The level of proposed spending represents an increase of 3.8 percent
over the spending authorized for fiscal 1999 of $18,367.5 million. Enacted tax
changes effective for fiscal 2000 total a net reduction of $380.2 million for
the General Fund. The estimate of Commonwealth revenues for fiscal 1999 is based
on an economic forecast for real gross domestic product to grow at a 1.4 percent
rate from the second quarter of 1999 to the second quarter of 2000. Growth of
real gross domestic product is expected to be restrained by a slowing of the
rate of consumer spending to a level consistent with personal income gains and
by smaller gains in business investment in response to falling capacity
utilization and profits. Slowing economic growth is expected to cause the
unemployment rate to rise through the fiscal year but inflation is expected to
remain quite moderate. Trends for the Pennsylvania economy are expected to
maintain their close association with national economic trends. Personal income
growth is anticipated to remain slightly below that of the U.S. while the
Pennsylvania unemployment rate is anticipated to be very close to the national
rate. Commonwealth revenues (excluding the estimate cost of enacted tax
reductions) are projected to increase by 2.8 percent over fiscal 1999 receipts.
Tax revenues are expected to rise by 3.2 percent, led by an 11 percent increase
in the gross receipts tax. This large increase
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represents the receipt of the revenue neutral reconciliation charge enacted as a
part of the electric deregulation legislation in 1996 that is intended to cover
tax revenue losses to Pennsylvania from electricity deregulation. The structure
of the revenue neutral reconciliation charge causes it to recover revenue losses
with an approximate one year lag. Projected increases for the sales and use tax
and the personal income tax are estimated at 3.2 percent and 3.3 percent
respectively. Non-tax Commonwealth revenues are estimated to total $324 million,
a 17.4 percent reduction from fiscal 1999. The largest items accounting for the
reduction are lower receipts from sale of state property and lower investment
earnings. Appropriations from Commonwealth funds increase by 3.8 percent over
fiscal 1999 appropriations. Program areas that have been proposed to receive
funding increases above the 2.9 percent average include corrections (4 percent),
basic education (3 percent), special education (6.2 percent), and medical
assistance (6.1 percent). The fiscal 2000 budget continues the Governor's
emphasis on tax cuts targeted to making Pennsylvania competitive for attracting
new employment opportunities and retaining existing jobs. Enacted tax cuts for
fiscal 2000 total an estimated $380.2 million in the General Fund. The major
components of the tax reductions and their estimated fiscal 2000 General Fund
cost are: (i) reduce the tax rate for the capital stock and franchise taxes by
one mill to 10.99 mills ($91.6 million); (ii) repeal the gross receipts tax on
regulated gas companies ($78.4 million); (iii) lower the current $300 minimum
capital stock and franchise tax to $200 ($16.2 million); (iv) raise the annual
cap on net operating loss credits per taxpayer from $1 million to $2 million
($35.5 million); (v) increase the weighting from 50 percent to 60 percent of the
sales factor used in the apportionment formula to calculate Pennsylvania taxable
income for corporate net income purposes ($31.5 million); (vi) restructure the
public utility realty tax ($54.6 million); and (vii) expand the income limit to
qualify for personal income tax forgiveness by $500 to $6,500 per dependent
($7.5 million). Most major changes are effective January 1, 1999 except for the
repeal of gross receipts tax on natural gas companies which is to be effective
when the state gas utility industry is deregulated. The retroactive nature of
tax reductions did not affect fiscal 1999 revenues, but is expected to result in
a fiscal 2000 revenue reduction that is expected to be higher than that
estimated to occur in fiscal 2001 from these tax changes.
All outstanding general obligation bonds of the Commonwealth are rated AA
by Standard and Poor's Corporation ("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 October 1, 1999 describing
General Obligation Bonds, Second Series of 1999 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 has 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 2000 is $20 million.
Dom Giordano v. Tom Ridge, Governor, et al.
In February 1999, Dom Giordano, a taxpayer of the Commonwealth of
Pennsylvania, filed a petition for review requesting that the Commonwealth Court
of Pennsylvania declare that Chapter 5 (relating to sports facilities financing)
of the Capital Facilities Debt Enabling Act (enacted by Act 1999-1) violates
Article VIII, sec.sec. 7 & 8, of the Pennsylvania Constitution. The Commonwealth
Court dismissed the petitioner's action with prejudice. The petitioner has
appealed the Commonwealth Court's ruling to the Supreme Court.
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Powell v. Ridge
In March 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. The plaintiffs claim that the Commonwealth's system for funding
public schools has the effect of discriminating on the basis of race and
violates Title VI of the Civil Rights Act of 1964. The plaintiffs have asked the
court to declare the funding system to be illegal, to enjoin the defendants from
violating the regulation in the future and to award counsel fees and costs. The
District Court allowed two petitioners 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 District Court found that the plaintiffs had failed to
state a claim under the Title VI regulation at issue or under 42 U.S.C.
sec. 1983 and dismissed the action in its entirety with prejudice. The
plaintiffs appealed. In August 1999, the U.S. Court of Appeals for the Third
Circuit reversed the District Court's dismissal of the action and remanded the
case for further proceedings including the filing of an answer. The defendants
and legislator intervenors have filed petitions for writ of certiorari with the
U.S. Supreme Court.
County of Allegheny v. Commonwealth of Pennsylvania
In December 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. The Court appointed
retired Justice Frank J. Montemuro, Jr. as special master to devise and submit a
plan for implementation. The Interim Report of the Master 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.
Phase I 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 165
people statewide, local court administrators are 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 Court of
approximately $12 million for funding county court administrators. This
appropriation was designed to enable the Commonwealth to implement Phase I.
Release of the funding was delayed until substantive legislation could be
enacted to facilitate the employees' transfer to State employment. A similar
appropriation was made by the General Appropriation Act of 1999. Thereafter, on
June 22, 1999, the Governor approved Act 1999-12 under which approximately 165
county-level court administrators are to become employees of the Commonwealth.
Act 12 also triggered the release of the appropriations that had been made for
this purpose in 1998 and 1999.
Bank Shares Tax Litigation
In November 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. In 1995 Fidelity and the
Commonwealth agreed to a settlement of the issues raised by Fidelity. Under a
separate Settlement Agreement 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 an appeal to the Pennsylvania Supreme
Court. Other banks have also filed petitions that are currently pending with the
Commonwealth Court. One of these banks, Royal Bank of Pennsylvania, has filed a
Stipulation of Facts with the Court and in effect is proceeding
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forward on behalf of all the other banks. These appeals raise the issues that
were advanced by Fidelity, although not brought to final resolution by the
Pennsylvania Supreme Court. In January 1998, a panel of the Commonwealth Court
ruled in favor of the Commonwealth, finding no constitutional violation. Royal
Bank filed exceptions. On July 30, 1998, the Commonwealth Court, en banc, denied
those exceptions. On May 25, 1999, the Pennsylvania Supreme Court affirmed per
curium the Commonwealth Court's decision and order. No petition for certiorari
was filed. Therefore, the Royal Bank litigation has ended. However, the vast
majority of the remaining banks have exceptions pending before the Commonwealth
Court or appeals pending before the Pennsylvania Supreme Court.
Pennsylvania Association of Rural and Small Schools (PARSS) v. Ridge
In 1991, an association of rural and small schools, several individual
school districts, and a group of parents and students, filed suit against the
Governor and the Secretary of Education. 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 stayed indefinitely,
pending resolution of the state court case. Commonwealth Court 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 October 1, 1999, the Supreme Court of Pennsylvania affirmed the
Commonwealth Court's decision. The parallel federal action remains pending.
Pennsylvania Human Relations Commission v. School District of Philadelphia, et
al. v. Commonwealth of Pennsylvania, et al.
In November 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." In February 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 remedial Orders of the Commonwealth Court. In addition,
a group of intervenors filed a third-party complaint against the Commonwealth of
Pennsylvania and the City of Philadelphia requesting Commonwealth Court 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. The Supreme Court of Pennsylvania assumed extraordinary plenary
jurisdiction. In May 1999, the Supreme Court of Pennsylvania directed that the
Commonwealth, the Governor, the City of Philadelphia and the Mayor of
Philadelphia be dismissed from the case. The Court then remanded the original
matter -- an enforcement action by the Pennsylvania Human Relations Commission
against the School District of Philadelphia to eliminate racial de facto
segregation in the public school system -- to Commonwealth Court for further
proceedings. No appeal has been filed or is expected. Thus, the Commonwealth and
the Governor are no longer parties to this case.
Ridge v. State Employee Retirement Board
In 1993 and 1995, Joseph H. Ridge, former judge of the Allegheny Court of
Common Pleas filed suit in the Commonwealth Court alleging that the State
Employees' Retirement Board's use of gender distinct
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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. In 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.
In February 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." In March 1998, Commonwealth Court dismissed the
case on the grounds that the issues presented are not justiciable. On October 1,
1999 the Supreme Court of Pennsylvania affirmed the Commonwealth Court's order.
Rite Aid of Pennsylvania, Inc. v. Houstoun
In March 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. In August 1998, the District 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 appealed
the District Court's orders. On March 22, 1999, the U.S. Court of Appeals for
the Third Circuit reversed the District Court's order and remanded for further
proceedings. The Court of Appeals held that the Secretary had not violated the
Medicaid Act in adopting rates in 1995, but the court remanded the case to allow
the plaintiffs to pursue any claim which they might have that the rates
substantively do not satisfy the statutory standard prescribed by 42 U.S.C.
sec.1396(a)(30)(A). The case is
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pending in the District Court. No substantial proceedings have occurred there
since the remand. In addition, a case raising State law issues is pending in
Commonwealth Court.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes securities that are not readily marketable, repurchase agreements
which have a maturity of longer than seven days and generally includes
securities that are restricted from sale to the public without registration
under the Securities Act of 1933, as amended (the "1933 Act"). The sale of such
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of liquid
securities trading on national securities exchanges or in the over-the-counter
markets. Restricted securities are often purchased at a discount from the market
price of unrestricted securities of the same issuer reflecting the fact that
such securities may not be readily marketable without some time delay.
Investments in securities for which market quotations are not readily available
are valued at fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Fund's Trustees. Ordinarily, the Fund
would invest in restricted securities only when it receives the issuer's
commitment to register the securities without expense to the Fund. However,
registration and underwriting expenses (which typically may range from 7% to 15%
of the gross proceeds of the securities sold) may be paid by the Fund.
Restricted securities which can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act ("144A Securities") and are determined
to be liquid under guidelines adopted by and subject to the supervision of the
Fund's Board of Trustees are not subject to the limitation on illiquid
securities. Such 144A Securities are subject to monitoring and may become
illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from
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time to time, (ii) the rules and regulations promulgated by the SEC under the
1940 Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act, as amended from time to time.
REVERSE REPURCHASE AGREEMENTS
The Fund may engage in reverse repurchase agreements with broker-dealers,
banks and other financial institutions 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.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various Strategic Transactions
(as defined in the Prospectus) to earn income, facilitate portfolio management
and mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Fund's Adviser seeks to use such transactions to further the Fund's
investment objective, no assurance can be given that the use of these
transactions will achieve this result.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index
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options and Eurodollar instruments are cash settled for the net amount, if any,
by which the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities 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
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must meet the asset segregation requirements described below as long as the call
is outstanding. Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold. In the
event of exercise of a call option sold by the Fund with respect to securities
not owned by the Fund, the Fund may be required to acquire the underlying
security at a disadvantageous price in order to satisfy its obligation with
respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other 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
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by cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
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
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currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash and liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash and
liquid securities equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash and liquid
securities equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out cash and liquid securities equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of cash and liquid securities equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash and liquid securities sufficient to meet its obligation to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of the Code for qualification as a regulated investment
company.
B-18
<PAGE> 57
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder approval by the vote of a majority
of its outstanding voting shares, which is defined by the 1940 Act as the lesser
of (i) 67% or more of the voting securities present at the meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitation on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. The Fund may
not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the U.S. government or by its agencies or instrumentalities), if as a
result more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer, except that 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
B-19
<PAGE> 58
amended from time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
9. Invest in securities issued by other investment companies, except as
part of a merger, reorganization or other acquisition, 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.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Trustee/Director of each of the
1632 Morning Mountain Road funds in the Fund Complex. Co-founder, and prior to
Raleigh, NC 27614 August 1996, Chairman, Chief Executive Officer and
Date of Birth: 07/14/32 President, MDT Corporation (now known as
Age: 67 Getinge/Castle, Inc., a subsidiary of Getinge
Industrier AB), a company which develops,
manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
Age: 61 January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
</TABLE>
B-20
<PAGE> 59
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in
233 South Wacker Drive the Fund Complex. Prior to 1997, Partner, Ray &
Suite 7000 Berndtson, Inc., an executive recruiting and
Chicago, IL 60606 management consulting firm. Formerly, Executive Vice
Date of Birth: 06/03/48 President of ABN AMRO, N.A., a Dutch bank holding
Age: 51 company. Prior to 1992, Executive Vice President of La
Salle National Bank. Trustee on the University of
Chicago Hospitals Board, Vice Chair of the Board of
The YMCA of Metropolitan Chicago and a member of the
Women's Board of the University of Chicago. Prior to
1996, Trustee of The International House Board.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created
Washington, D.C. 20016 to deepen understanding, promote collaboration and
Date of Birth: 02/29/52 stimulate exchanges of practical experience between
Age: 47 Americans and Europeans. Trustee/Director of each of
the funds in the Fund Complex. Formerly, advisor to
the Dennis Trading Group Inc., a managed futures and
option company that invests money for individuals and
institutions. Prior to 1992, President and Chief
Executive Officer, Director and Member of the
Investment Committee of the Joyce Foundation, a
private foundation.
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since April 1997
New York, NY 10048 and Chief Executive Officer since June 1998 of Morgan
Date of Birth: 08/13/53 Stanley Dean Witter Advisors Inc. and Morgan Stanley
Age: 46 Dean Witter Services Company Inc. Chairman, Chief
Executive Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998. Chairman and
Chief Executive Officer since June 1998, and Director
since January 1998, of Morgan Stanley Dean Witter
Trust FSB. Director of various Morgan Stanley Dean
Witter subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index Series
since May 1999. Trustee/Director of each of the funds
in the Fund Complex, and Vice President of other
investment companies advised by the Advisers and their
affiliates. Previously Chief Strategic Officer of
Morgan Stanley Dean Witter Advisors Inc. and Morgan
Stanley Dean Witter Services Company Inc. and
Executive Vice President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice President
of the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series May 1997-April 1999, and
Executive Vice President of Dean Witter, Discover &
Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company and
Winter Park, FL 32789 registered investment adviser in the State of Florida.
Date of Birth: 02/13/36 President and owner, Nelson Ivest Brokerage Services
Age: 63 Inc., a member of the National Association of
Securities Dealers, Inc. and Securities Investors
Protection Corp. Trustee/Director of each of the funds
in the Fund Complex.
</TABLE>
B-21
<PAGE> 60
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor,
Oakbrook Terrace, IL 60181-5555 Van Kampen Advisors Inc. and Van Kampen Management
Date of Birth: 02/02/46 Inc. Director and officer of certain other
Age: 53 subsidiaries of Van Kampen Investments.
Trustee/Director and President of each of the funds in
the Fund Complex. Trustee, President and Chairman of
the Board of other investment companies advised by the
Advisers and their affiliates, and Chief Executive
Officer of Van Kampen Exchange Fund. Prior to May
1998, Executive Vice President and Director of
Marketing at Morgan Stanley Dean Witter and Director
of Dean Witter Discover & Co. and Dean Witter Realty.
Prior to 1996, Director of Dean Witter Reynolds Inc.
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Age: 55 Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the Fund
Complex. Prior to 1998, Director of Stone Smurfit
Container Corp., a paper manufacturing company. From
May 1996 through February 1997 he was President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company,
and from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Age: 75 Dynalysis of Princeton, a firm engaged in engineering
research. Trustee/Director of each of the funds in the
Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate,
333 West Wacker Drive Meagher & Flom (Illinois), legal counsel to the funds
Chicago, IL 60606 in the Fund Complex, and other investment companies
Date of Birth: 08/22/39 advised by the Advisers or Van Kampen Management Inc.
Age: 60 Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
investment companies advised by the Advisers or Van
Kampen Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Age: 58 Marshall Fund of the United States, Trustee of
Colorado College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/Director
of each of the funds in the Fund Complex. Prior to
1993, Executive Director of the Commission on
Behavioral and Social Sciences and Education at the
National Academy of Sciences/National Research
Council. From 1980 through 1989, Partner of Coopers &
Lybrand.
</TABLE>
B-22
<PAGE> 61
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network
233 South Wacker Drive system solutions, COMARCO, Inc., a wireless
Suite 9700 communications products company and APAC Customer
Chicago, IL 60606 Services, Inc., a provider of outsourced customer
Date of Birth: 10/29/53 contact services. Trustee/Director of each of the
Age: 46 funds in the Fund Complex. Prior to May 1996,
President of Advance Ross Corporation, an
international transaction services and pollution
control equipment manufacturing company.
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-23
<PAGE> 62
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood are located at 1
Parkview Plaza, PO Box 5555, Oakbrook Terrace, IL 60181-5555. The Fund's other
officers are located at 2800 Post Oak Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and
Age: 57 Van Kampen Management Inc. Executive Vice President and
Chief Investment Officer of each of the funds in the Fund
Complex, since 1998. Chief Investment Officer, Executive
Vice President and Trustee/Managing General Partner of
other investment companies advised by the Advisers or Van
Kampen Management Inc. ("Management Inc."), since the
inception of funds advised by Advisory Corp. and
Management Inc. and since 1998 for funds advised by Asset
Management. Director of Global Decisions Group LLC, a
financial research firm, and its affiliates MCM Asia
Pacific and MCM Europe. Prior to 1998, President, Chief
Operating Officer and a Director of the Advisers, Van
Kampen American Capital Management, Inc.; Director of Van
Kampen American Capital, Inc.; and President, Chief
Executive Officer and Trustee of each of the funds advised
by Advisory Corp. Prior to July 1998, Director and
Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996,
Chief Executive Officer and Director of MCM Group, Inc.
and McCarthy, Crisanti & Maffei, Inc., a financial
research firm, and Chairman of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to December 1991,
Senior Vice President of Van Kampen Merritt Inc.
</TABLE>
B-24
<PAGE> 63
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van
Vice President and Secretary Kampen Advisors Inc., Van Kampen Management Inc., the
Age: 43 Distributor, American Capital Contractual Services, Inc.,
Van Kampen Exchange Corp., Van Kampen Recordkeeping
Services Inc., Investor Services, Van Kampen Insurance
Agency of Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal Legal
Officer and Secretary of other investment companies
advised by the Advisers or their affiliates. Vice
President and Secretary of each of the funds in the Fund
Complex. Prior to January 1999, Vice President and
Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission,
Division of Investment Management, Office of Chief
Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen
Age: 44 Management Inc. and Van Kampen Investor Services Inc., and
serves as a Director or Officer of certain other
subsidiaries of Van Kampen Investments. Vice President of
each of the funds in the Fund Complex and certain other
investment companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President and
Senior Planning Officer for Individual Asset Management of
Morgan Stanley Dean Witter and its predecessor since 1994.
From 1990-1994, First Vice President and Assistant
Controller in Dean Witter's Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice
Vice President President of each of the funds in the Fund Complex and
Age: 43 certain other investment companies advised by the Advisers
or their affiliates. Prior to September 1996, Director of
McCarthy, Crisanti & Maffei, Inc, a financial research
company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
Age: 59 companies advised by the Advisers or their affiliates.
Prior to October 1998, Vice President and Senior Portfolio
Manager with AIM Capital Management, Inc. Prior to
February 1998, Senior Vice President of Van Kampen
American Capital Asset Management, Inc., Van Kampen
American Capital Investment Advisory Corp. and Van Kampen
American Capital Management, Inc.
</TABLE>
B-25
<PAGE> 64
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
Age: 44 or their affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
Age: 53
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Age: 44 Vice President of each of the funds in the Fund Complex
and certain other investment companies advised by the
Advisers or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or
Age: 40 their affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows trustees/directors to defer receipt of their compensation
and earn a return on such deferred amounts. Deferring compensation has the
economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The compensation of each Non-Affiliated Trustee includes an annual retainer
in an amount equal to $50,000 per calendar year, due in four quarterly
installments on the first business day of each quarter. Payment of the annual
retainer is allocated among the funds in the Fund Complex on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred
B-26
<PAGE> 65
compensation plan is not funded and obligations thereunder represent general
unsecured claims against the general assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Fund Complex
-------------------------------------------
Aggregate
Aggregate Estimated
Pension or Maximum Total
Aggregate Retirement Annual Compensation
Year First Compensation Benefits Benefits from before
Appointed or before Deferral Accrued as the Fund Deferral from
Elected to from the Part of Upon Fund
Name(1) the Board Registrant(2) Expenses(3) Retirement(4) Complex(5)
------- ------------ ----------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan............... 1991 $1,785 $40,303 $60,000 $126,000
Jerry D. Choate(1).............. 1999 781 0 60,000 88,700
Linda Hutton Heagy.............. 1995 1,785 5,045 60,000 126,000
R. Craig Kennedy................ 1995 1,785 3,571 60,000 125,600
Jack E. Nelson.................. 1995 1,785 21,664 60,000 126,000
Phillip B. Rooney............... 1997 1,585 7,787 60,000 113,400
Fernando Sisto.................. 1978 1,785 72,060 60,000 126,000
Wayne W. Whalen................. 1995 1,785 15,189 60,000 126,000
Suzanne H. Woolsey(1)........... 1999 781 0 60,000 88,700
Paul G. Yovovich(1)............. 1998 1,585 2,845 60,000 126,000
</TABLE>
- ------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Yovovich became a member of the Board of Trustees for the Fund
and other funds in the Fund Complex on October 22, 1998 and therefore does
not have a full fiscal year of information to report. Mr. Choate and Ms.
Woolsey became members of the Board of Trustees for the Fund and other funds
in the Fund Complex on May 26, 1999 and therefore do not have a full year of
information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended September 30, 1999.
The following trustees deferred compensation from the Fund during the fiscal
year ended September 30, 1999: Mr. Branagan, $1,785; Mr. Choate, $487; Ms.
Heagy, $1,785; Mr. Kennedy, $893; Mr. Nelson, $1,785; Mr. Rooney, $1,585;
Mr. Sisto, $893; Mr. Whalen, $1,785; and Mr. Yovovich, $1,277. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The cumulative deferred compensation (including interest)
accrued with respect to each trustee, including former trustees, from
B-27
<PAGE> 66
the Fund as of September 30, 1999 is as follows: Mr. Branagan, $8,902; Mr.
Choate, $491; Mr. Gaughan, $899; Ms. Heagy, $10,491; Mr. Kennedy, $17,339;
Mr. Miller, $10,487; Mr. Nelson, $24,447; Mr. Robinson, $17,113; Mr. Rooney,
$5,151; Mr. Sisto, $3,504; Mr. Whalen, $19,926; and Mr. Yovovich, $1,324.
The deferred compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating investment companies in the Fund Complex
for each of the Trustees for the Funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
(4) For each Trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such Trustee's anticipated retirement. The
retirement plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all funds in the Fund Complex as of December 31, 1999 before deferral by
the trustees under the deferred compensation plan. Because the funds in the
Fund Complex have different fiscal year ends, the amounts shown in this
column are presented on a calendar year basis. Certain trustees deferred all
or a portion of their aggregate compensation from the Fund Complex during
the calendar year ended December 31, 1999. The deferred compensation earns a
rate of return determined by reference to the return on the shares of the
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those investment
companies selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The Advisers and their affiliates also
serve as investment adviser for other investment companies; however, with
the exception of Mr. Whalen, the Non-Affiliated Trustees were not trustees
of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
As of December 31, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the cost of its day-to-day operations, including the compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), the charges and expenses of
legal counsel and independent accountants, distribution fees, service fees,
custodian fees, the costs of providing reports to shareholders, and all other
ordinary business expenses not specifically assumed by the Adviser. The Advisory
Agreement also provides that the Adviser shall not be liable to the Fund for any
error of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the agreement relates, except a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in any jurisdiction where the Fund's shares are qualified for offer
and sale, the compensation due the Adviser will be reduced by the amount of such
excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Fund monthly an amount sufficient to make
up the deficiency, subject to readjustment during the fiscal year.
B-28
<PAGE> 67
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by a vote of a
majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreement provides that it shall terminate automatically
if assigned and that it may be terminated without penalty by either party on 60
days' written notice.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, the Adviser
received $1,634,800, $1,234,844 and $1,645,589 respectively, in advisory fees
from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such costs based proportionally on their respective net assets
per fund.
During the fiscal year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Advisory Corp.
received $101,700, $75,164 and $8,710 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 year ended September 30, 1999, the fiscal period ended
September 30, 1998 and the fiscal year ended December 31, 1997, Van Kampen
Investments received $10,600, $102 and $11,300 respectively, in legal services
fees from the Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by a vote of a majority of Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by
B-29
<PAGE> 68
votes cast in person at a meeting called for such purpose. The Distribution and
Service Agreement provides that it will terminate if assigned, and that it may
be terminated without penalty by either party on 90 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Year Ended September 30, 1999........................ $374,785 $38,285
Fiscal Period Ended September 30, 1998...................... $267,010 $32,468
Fiscal Year Ended December 31, 1997......................... $360,849 $50,901
</TABLE>
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
---------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ -------------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000......................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000............................ 3.75% 3.90% 3.25%
$250,000 but less than $500,000............................ 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000.......................... 2.00% 2.04% 1.75%
$1,000,000 or more......................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed on a percentage of the dollar value of such
shares sold as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent deferred sales charge and any distribution
fees on Class B Shares and Class C Shares of the Fund are paid to the
Distributor and are used by the Distributor to defray its distribution related
expenses in connection with the sale of the Fund's shares, such as the payment
to authorized dealers for selling such shares. With respect to Class C Shares,
the authorized dealers generally are paid the ongoing commission and transaction
fees of up to 0.75% of the average daily net assets of the Fund's Class C Shares
annually commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for
B-30
<PAGE> 69
certain services or activities which are primarily intended to result in sales
of shares of the Fund or other Van Kampen funds. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives for meetings or seminars of a business
nature. In some instances additional compensation or promotional incentives may
be offered to brokers, dealers or financial intermediaries that have sold or may
sell significant amounts of shares during specified periods of time. The
Distributor may provide additional compensation to Edward D. Jones & Co. or an
affiliate thereof based on a combination of its sales of shares and increases in
assets under management. All of the foregoing payments are made by the
Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
For shares sold prior to 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.
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary were
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a financial intermediary would result in any material adverse consequences
to the Fund.
The Distributor must submit quarterly reports to the Board of Trustees of
the 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.
B-31
<PAGE> 70
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share or Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
September 30, 1999, there were $1,162,538 and $17,811 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 2.28% and 0.42% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plan were terminated
or not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
For the fiscal year ended September 30, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $540,211 or 0.25% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended September 30, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $538,947 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $403,721 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $135,226
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended September 30,
1999, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$39,247 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $14,629 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $24,618 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas
City, MO 64121-8256. The transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase
B-32
<PAGE> 71
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 considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("Dean Witter") became an affiliate of the Adviser. The
trustees have adopted certain policies incorporating the standards of Rule 17e-1
issued by the SEC under the 1940 Act which requires that the commissions paid to
affiliates of the Fund must be reasonable and fair compared to the commissions,
fees or other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time. The rule and procedures also contain review
requirements and require the Adviser to furnish reports to the trustees and to
maintain records in connection with such reviews. After consideration of all
factors deemed
B-33
<PAGE> 72
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
The Fund paid the following commissions to all brokers and affiliated
brokers during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
------- ---------- ------
<S> <C> <C> <C>
Commission paid:
Fiscal year ended September 30, 1999...................... $1,920 -- --
Fiscal period ended September 30, 1998.................... $1,600 -- --
Fiscal year ended December 31, 1997....................... -- -- --
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions........... 0% 0%
Value of brokerage transactions with affiliate to total
transactions........................................... 0% 0%
</TABLE>
During the fiscal year ended September 30, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds (as defined in the prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gain dividends and systematic purchases or redemptions. Additional shares may be
purchased at any time through authorized dealers or by mailing a check directly
to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, requesting an
"Affidavit of Loss" and obtain a Surety Bond in a form acceptable to Investor
Services. On the date the letter is received, Investor Services will calculate
the fee for replacing the lost certificate equal to no more than 1.50% of the
net asset value of the issued shares, and bill the party to whom the replacement
certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or
B-34
<PAGE> 73
other pension or profit sharing plans. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
Trust Company serves as custodian under the IRA, 403(b)(7) and Money Purchase
and Profit Sharing Keogh plans. Details regarding fees, as well as full plan
administration for profit sharing, pension and 401(k) plans, are available from
the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds transferred to a
bank account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemption proceeds are to be deposited together with the
completed application. Once Investor Services has received the application and
the voided check or deposit slip, such shareholder's designated bank account,
following any redemption, will be credited with the proceeds of such redemption.
Once enrolled in the ACH plan, a shareholder may terminate participation at any
time by writing Investor Services or by calling (800) 341-2911 ((800) 421-2833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and capital gain dividends paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for monthly, quarterly,
semiannual or annual checks in any amount, not less than $25. Such a systematic
withdrawal plan may also be maintained by an investor purchasing shares for a
retirement plan established on a form made available by the Fund.
Class B Shareholders and Class C Shareholders who establish a systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawal plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales
B-35
<PAGE> 74
charges. Any gain or loss realized by the shareholder upon redemption of shares
is a taxable event. The Fund reserves the right to amend or terminate the
systematic withdrawal program on 30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made during a rolling 365-day period. If
exchange privileges are suspended, subsequent exchange requests for redemption
out of that Fund during the stated period will not be processed. Exchange
privileges will be restored when the account history shows fewer than eight
exchanges in the rolling 365-day period.
This policy does not apply to money market funds, systematic exchange plans
or employee-sponsored retirement plans.
REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class C Shares of the Fund with credit given for any contingent deferred sales
charge paid upon such redemption. Such reinstatement is made at the net asset
value per share (without sales charge) next determined after the order is
received, which must be made within 180 days after the date of the redemption.
Reinstatement at net asset value per share is also offered to participants in
those eligible retirement plans held or administered by Van Kampen Trust Company
for repayment of principal (and interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(the "Exchange") is closed. The right of redemption may be suspended and the
payment therefor may be postponed for more than seven days during any period
when (a) the Exchange is closed for other than customary weekends or holidays;
(b) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or 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 and a gain or loss for federal income tax purposes upon
the sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC -- Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares
B-36
<PAGE> 75
in the shareholder's account not subject to a contingent deferred sales charge
followed by shares held the longest in the shareholder's account. The contingent
deferred sales charge is assessed on an amount equal to the lesser of the then
current market value or the cost of the shares being redeemed. Accordingly, no
sales charge is imposed on increases in net asset value above the initial
purchase price. In addition, no sales charge is assessed on shares derived from
reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). The CDSC-Class B and C is waived on redemptions
of Class B Shares and Class C Shares in the circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Internal Revenue Code of 1986, as
amended (the "Code"), which in pertinent part defines a person as disabled if
such person "is unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or to be of long-continued and indefinite duration."
While the Fund does not specifically adopt the balance of the Code's definition
which pertains to furnishing the Secretary of Treasury with such proof as he or
she may require, the Distributor will require satisfactory proof of death or
disability before it determines to waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The CDSC-Class B and C will be waived upon the tax-free rollover or
transfer of assets to another retirement plan invested in one or more
Participating Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), the financial hardship of the
employee pursuant to United States Treasury Regulations Section 401(k)-1(d)(2)
or from the death or disability of the employee (see Code Section 72(m)(7) and
72(t)(2)(A)(ii)). In addition, the charge will be waived on any minimum
distribution required to be distributed in accordance with Code Section
401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
REDEMPTION PURSUANT TO THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal plan, a dollar amount of a participating share-
B-37
<PAGE> 76
holder's investment in the Fund will be redeemed systematically by the Fund on a
periodic basis, and the proceeds sent to the designated payee of record. The
amount to be redeemed and frequency of the systematic withdrawals will be
specified by the shareholder upon his or her election to participate in the
systematic withdrawal plan. The CDSC-Class B and C will be waived on redemptions
made under the systematic withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-Class B and C may not exceed a maximum of 12% annually of the shareholder's
initial account balance. The Fund reserves the right to change the terms and
conditions of the systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class B
and C upon such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION OF THE FUND
The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must comply with
certain requirements of the Code relating to, among other things, the source of
its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income (including taxable income and
net short-term capital gain but not net capital gain, which is the excess of net
long-term capital gain over net short-term capital loss), and at least 90% of
its net tax-exempt interest, and meets certain other requirements, it will not
be required to pay federal income taxes on any income it distributes to
shareholders. The Fund intends to distribute at least the minimum amount of
investment company taxable income and net tax-exempt interest necessary to
satisfy the 90% distribution
B-38
<PAGE> 77
requirement. The Fund will not be subject to federal income tax on any net
capital gain distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold. A
portion of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income when distributed to shareholders.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
B-39
<PAGE> 78
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its income will constitute
tax-exempt interest, a significant portion may consist of investment company
taxable income (generally taxable income and net short-term capital gain).
Distributions of the Fund's investment company taxable income are taxable to
shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gains as capital gain dividends, if any, are taxable
to shareholders as long-term capital gains regardless of the length of time
shares of the Fund have been held by such shareholders. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares are held as a
capital asset). For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see "Capital Gains Rates" below. Interest on
indebtedness which is incurred to purchase or carry shares of a mutual fund
which distributes exempt interest dividends during the year is not deductible
for federal income tax purposes. Tax-exempt shareholders not subject to federal
income tax on their income generally will not be taxed on distributions from the
Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction. The aggregate amount of dividends designated as exempt-interest
dividends cannot exceed the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period
B-40
<PAGE> 79
covered by the dividend. Fund distributions generally will not qualify for the
dividends received deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers investing in this Fund is (i) the
same as the maximum ordinary income tax rate for capital assets held for one
year or less or (ii) 20% for capital assets held for more than one year. The
maximum long-term capital gains rate for corporations is 35%.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with its correct taxpayer identification
number, (ii) the IRS notifies the Fund that the shareholder has failed to
properly report certain interest and dividend income to the IRS and to respond
to notices to that effect or (iii) when required to do so, the shareholder fails
to certify that he or she is not subject to backup withholding. Redemption
proceeds may be subject to withholding under the circumstances described in (i)
above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder the amount
of dividends paid to such shareholder and the amount, if any, of tax withheld
with respect to such dividends.
GENERAL
The federal, income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
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<PAGE> 80
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.
1999 FEDERAL AND PENNSYLVANIA STATE TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
COMBINED TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX --------------------------------------------------------------------------------
RETURN RETURN BRACKET* 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5%
- ---------------- ---------------- -------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,750 $ 0-43,050 17.40% 4.24% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08% 9.69% 10.29%
25,750-62,450 43,050-104,050 30.00% 5.00 5.71 6.43 7.14 7.86 8.57 9.29 10.00 10.71 11.43 12.14
62,450-130,250 104,050-158,550 32.90% 5.22 5.96 6.71 7.45 8.20 8.94 9.69 10.43 11.18 11.92 12.67
130,250-283,150 158,550-283,150 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 283,150 Over 283,150 41.30% 5.96 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.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge has been paid. The Fund's total return will vary depending
on market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and capital gain dividends
paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge imposed at the time of redemption were reflected, it would reduce the
performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in
B-42
<PAGE> 81
the advertisement), and dividing by the maximum offering price per share on the
last day of the period. A "bond equivalent" annualization method is used to
reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
of the class of shares will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings, and largest holdings and other Fund
information, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio. Materials may also mention how
the Distributor believes the Fund compares relative to other Van Kampen funds.
Materials may also discuss the Dalbar Financial Services study from 1984 to 1994
which studied investor cash flow into and out of all types of mutual funds. The
ten-year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless of whether shareholders purchased their funds shares
in direct or sales force distribution channels. The study showed that investors
working with a professional representative have tended over time to earn higher
returns than those who invested directly. The Fund may also be marketed on the
internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking or rating services and by nationally
recognized financial publications. Such comparative performance information will
be stated in the same terms in which the comparative data or indices are stated.
Such advertisements and sales material may also include a yield quotation as of
a current period. In each case, such total return and yield information, if any,
will be calculated
B-43
<PAGE> 82
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. For these purposes, the performance of the
Fund, as well as the performance of other mutual funds or indices, do not
reflect sales charges, the inclusion of which would reduce Fund performance. The
Fund will include performance data for each class of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
September 30, 1999 was -7.28%, (ii) the five-year period ended September 30,
1999 was 4.78% and (iii) the ten-year period ended September 30, 1999 was 6.49%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1999 was 4.56%. The Fund's current distribution rate with
respect to the Class A Shares for the month ending September 30, 1999 was 5.26%.
The Fund's taxable equivalent distribution rate with respect to the Class A
Shares for the month ending September 30, 1999 was 8.46%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to September 30, 1999 was 141.29%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to September 30, 1999 was 153.29%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -7.07%, (ii) the five-year period ended
September 30, 1999 was 4.78% and (iii) the approximately six-year, four month
period from May 3, 1993 (the commencement of distribution for Class B Shares of
the Fund) to September 30, 1999 was 4.26%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1999 was 4.04%. The Fund's current distribution rate with
respect to the Class B Shares for the month ending September 30, 1999 was 4.74%.
The Fund's taxable equivalent distribution rate with respect to the Class B
Shares for the month ending September 30, 1999 was 7.62%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
May 3, 1993 (the commencement for distribution of Class B Shares of the Fund) to
September 30, 1999 was 30.65%.
B-44
<PAGE> 83
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
May 3, 1993 (the commencement for distribution of Class B Shares of the Fund) to
September 30, 1999 was 30.65%.
CLASS C SHARES
The Fund's average annual total return assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended September 30, 1999 was -4.29%, (ii) the five-year period ended
September 30, 1999 was 5.01% and (iii) the approximately six-year, one month
period from August 13, 1993 (the commencement of distribution for Class C Shares
of the Fund) to September 30, 1999 was 3.74%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1999 was 4.12%. The Fund's current distribution rate with
respect to the Class C Shares for the month ending September 30, 1999 was 4.74%.
The Fund's taxable equivalent distribution rate with respect to the Class C
Shares for the month ending September 30, 1999 was 7.62%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
August 13, 1993 (the commencement of distribution for Class C Shares of the
Fund) to September 30, 1999 was 25.24%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
August 13, 1993 (the commencement of distribution for Class C Shares of the
Fund) to September 30, 1999 was 25.24%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in the Fund's investment practices.
OTHER INFORMATION
CUSTODY OF ASSETS
All securities owned by the Fund and all cash, including proceeds from the
sale of shares of the Fund and of securities in the Fund's investment portfolio,
are held by State Street Bank and Trust Company, 225 West Franklin Street,
Boston, Massachusetts 02110, as Custodian. The Custodian also provides
accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS
KPMG LLP, 303 East Wacker Drive, Chicago, Illinois 60601, the independent
accountants for the Fund, performs an annual audit of the Fund's financial
statements.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
Saul, Ewing, Remick & Saul LLP acts as special counsel to the Fund for
Pennsylvania disclosure, Pennsylvania tax matters and passes on the legality of
the Fund's shares.
B-45
<PAGE> 84
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, 1999, the related statement of operations
for the year then ended, the statement of changes in net assets for the year
then ended, for the nine-month period ended September 30, 1998, and for the year
ended December 31, 1997, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Pennsylvania Tax Free Income Fund as of September 30, 1999, the results
of its operations for the year then ended, the changes in its net assets for the
year then ended, for the nine-month period ended September 30, 1998, and for the
year ended December 31, 1997, and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
[KPMG LLP SIG]
Chicago, Illinois
November 11, 1999
F-1
<PAGE> 85
PORTFOLIO OF INVESTMENTS
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 101.6%
PENNSYLVANIA 101.2%
$ 2,845 Allegheny Cnty, PA Ser C-49 (MBIA
Insd) (a)............................ 5.000% 04/01/07 $ 2,830,860
3,500 Allegheny Cnty, PA Arpt Rev Gtr
Pittsburgh Intl Arpt Ser B (FSA
Insd)................................ 6.625 01/01/22 3,689,175
1,625 Allegheny Cnty, PA C-34 Conv Cap
Apprec............................... 8.625 02/15/04 1,880,905
5,000 Allegheny Cnty, PA Ctfs Partn (AMBAC
Insd)................................ 5.000 12/01/24 4,369,050
1,000 Allegheny Cnty, PA Higher Edl Bldg
Auth Univ Rev Duquesne Univ Proj
(AMBAC Insd)......................... 6.500 03/01/11 1,114,950
1,000 Allegheny Cnty, PA Hosp Dev Hlthcare
Fac Villa St Joseph.................. 5.875 08/15/18 913,270
2,140 Allegheny Cnty, PA Hosp Dev Auth Rev
Hlth Fac Allegheny Vly Sch........... 7.750 02/01/15 2,273,707
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev
Hosp Saint Francis Med Cent Proj..... 5.500 05/15/06 987,990
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev
Hosp Saint Francis Med Cent Proj..... 5.500 05/15/07 980,500
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev
Hosp Saint Francis Med Cent Proj..... 5.600 05/15/08 979,870
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev
Hosp Saint Francis Med Cent Proj..... 5.750 05/15/09 984,060
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev
Hosp Saint Francis Med Cent Proj..... 5.750 05/15/10 975,510
900 Allegheny Cnty, PA Indl Dev Auth Med
Cent Rev Presbyterian Med Cent Rfdg
(FHA Gtd)............................ 6.750 02/01/26 955,539
2,500 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt Ser A Rfdg........ 6.700 12/01/20 2,571,125
1,000 Allegheny Cnty, PA Industrial Dev
Auth Lease Rev....................... 6.625 09/01/24 986,730
1,945 Allegheny Cnty, PA Res Mtg Comp Int
Single Family Ser Z (GNMA
Collateralized)...................... 6.875 05/01/26 2,015,856
6,000 Berks Cnty, PA (Inverse Fltg) (FGIC
Insd)................................ 8.630 11/10/20 6,885,000
2,000 Berks Cnty, PA Muni Auth Rev Phoebe
Devitt Homes Proj A1 Rfdg............ 5.500 05/15/15 1,809,040
2,000 Berks Cnty, PA Muni Auth Rev
Highlands at Wyomissing Proj B....... 6.875 10/01/17 2,086,100
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 86
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 3,000 Berks Cnty, PA Muni Auth Rev Hlthcare
Pooled Fin Proj...................... 5.000% 03/01/28 $ 2,583,930
925 Berks Cnty, PA Muni Auth Rev Phoebe
Berks Vlg Inc Proj Rfdg (Prerefunded
@ 05/15/06).......................... 7.500 05/15/13 1,082,204
1,000 Berks Cnty, PA Muni Auth Rev Phoebe
Berks Vlg Inc Proj Rfdg (Prerefunded
@ 05/15/06).......................... 7.700 05/15/22 1,181,690
2,750 Bradford Cnty, PA Indl Dev Auth Solid
Waste Disp Rev Intl Paper Co Proj
A.................................... 6.600 03/01/19 2,856,617
1,100 Bucks Cnty, PA Indl Dev Auth Rev
First Mtg Hlth Care Fac Chandler..... 6.100 05/01/14 1,037,817
1,000 Cambria Cnty, PA Indl Dev Auth
Pollutn Ctl Rev Bethlehem Steel Corp
Proj Rfdg............................ 7.500 09/01/15 1,049,840
1,000 Chester Cnty, PA Hlth & Edl Fac Auth
Hlth Sys Rev (AMBAC Insd)............ 5.650 05/15/20 976,160
1,880 Chester Cnty, PA Hlth & Edl The
Chester Cnty Hosp (MBIA Insd)........ 5.625 07/01/08 1,959,392
760 Chichester Sch Dist PA Ser 1989 (MBIA
Insd)................................ * 06/01/01 707,340
860 Chichester Sch Dist PA Ser 1989 (MBIA
Insd)................................ * 06/01/02 763,869
1,130 Clearfield Cnty, PA Indl Dev Auth
Coml Dev Rev First Mtg K Mart Corp
Ser A Rfdg........................... 7.200 07/01/07 1,176,692
1,250 Crawford Cnty, PA Hosp Auth Senior
Living Fac Rev....................... 6.125 08/15/19 1,215,638
2,000 Dauphin Cnty, PA Genl Auth Rev Hotel
& Conf Cent Hyatt Regency............ 6.200 01/01/29 1,867,360
1,500 Dauphin Cnty, PA Genl Auth Rev Office
& Pkg Riverfront Office.............. 6.000 01/01/25 1,404,735
1,240 Delaware Cnty, PA Auth College
Cabrini College (a).................. 5.750 07/01/23 1,192,545
1,500 Delaware Cnty, PA Auth Rev First Mtg
Riddle Vlg Proj (Prerefunded @
06/01/02)............................ 9.250 06/01/22 1,704,225
500 Delaware Cnty, PA Auth Rev First Mtg
Riddle Vlg Proj Rfdg................. 6.200 06/01/05 509,845
3,000 Delaware Cnty, PA Auth Rev First Mtg
Riddle Vlg Proj Rfdg................. 7.000 06/01/26 3,025,770
3,000 Delaware Cnty, PA Pollutn Ctl Peco
Energy Co. Proj Ser A Rfdg........... 5.200 04/01/21 3,000,000
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 87
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 1,500 East Whiteland Twp, PA Ser A (FSA
Insd)................................ 5.250% 09/01/25 $ 1,385,280
2,000 Erie Cnty, PA Hosp Auth Rev Saint
Vincent Hlth Cent Proj Ser A (MBIA
Insd)................................ 6.375 07/01/22 2,101,880
4,780 Erie, PA Sch Dist Cap Apprec Rfdg
(FSA Insd)........................... * 09/01/24 1,093,712
790 Grove City, PA Area Hosp Auth Hlth
Fac Rev Grove Manor Proj............. 6.625 08/15/29 731,730
1,000 Harrisburg, PA Auth Office & Pkg Rev
Ser A................................ 6.000 05/01/19 948,690
3,000 Harrisburg, PA Auth Rev Pooled Univ
Pgm Ser 11 (MBIA Insd)............... 5.625 09/15/17 2,979,810
820 Hazleton, PA Hlth Svcs Auth Hosp
Rev.................................. 5.500 07/01/07 815,736
650 Hazleton, PA Hlth Svcs Auth Saint
Joseph Med Cent Rfdg................. 5.850 07/01/06 661,453
560 Indiana Cnty, PA Indl Dev Auth Rev
Cap Apprec Student Coop Assn B (AMBAC
Insd)................................ * 11/01/19 173,146
1,750 Indiana Cnty, PA Indl Dev Auth
Pollutn Ctl Rev Metropolitan Edison
Co Proj A (AMBAC Insd)............... 5.950 05/01/27 1,750,525
570 Indiana Cnty, PA Indl Dev Auth Rev
Cap Apprec Student Coop Assn B (AMBAC
Insd)................................ * 11/01/14 243,071
500 Indiana Cnty, PA Indl Dev Auth Rev
Cap Apprec Student Coop Assn B (AMBAC
Insd)................................ * 11/01/15 199,940
490 Indiana Cnty, PA Indl Dev Auth Rev
Cap Apprec Student Coop Assn B (AMBAC
Insd)................................ * 11/01/16 183,559
500 Indiana Cnty, PA Indl Dev Auth Rev
Cap Apprec Student Coop Assn B (AMBAC
Insd)................................ * 11/01/17 175,605
500 Indiana Cnty, PA Indl Dev Auth Rev
Cap Apprec Student Coop Assn B (AMBAC
Insd)................................ * 11/01/18 164,510
1,800 Kiski, PA Area Sch Dist (FGIC
Insd)................................ 5.300 03/01/17 1,719,702
1,000 Lancaster Cnty, PA Hosp Auth Str
Annes Home........................... 6.600 04/01/24 955,690
2,000 Lehigh Cnty, PA Genl Purp Auth Cedar
Crest College Rfdg................... 6.700 04/01/26 2,076,680
1,000 Lehigh Cnty, PA Genl Purp Auth Rev
First Mtg Bible Fellowship Proj A.... 6.000 12/15/23 918,830
1,760 Lehigh Cnty, PA Genl Purp Auth Rev
Kidspeace Oblig Group................ 6.000 11/01/23 1,635,568
1,085 Lehigh Cnty, PA Indl Dev Auth Hlth
Fac Rev Lifepath Inc Proj............ 6.300 06/01/28 960,551
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 88
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 1,000 Lehigh Cnty, PA Indl Dev Auth Pollutn
Ctl Rev PA Pwr & Lt Co Proj Ser A
Rfdg (MBIA Insd)..................... 6.400% 11/01/21 $ 1,055,670
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev
Divine Providence Sisters Ser A...... 6.500 07/01/22 2,054,160
2,000 McGuffey Sch Dist PA Ser B (AMBAC
Insd)................................ 4.750 08/01/28 1,666,120
1,000 McKean Cnty, PA Hosp Auth Hosp Rev
Bradford Hosp Proj (Crossover Rfdg @
10/01/00)............................ 8.875 10/01/20 1,065,690
2,000 McKeesport, PA Area Sch Dist Cap
Apprec............................... * 10/01/15 803,560
1,250 McKeesport, PA Area Sch Dist Cap
Apprec Ser A......................... * 10/01/13 572,900
750 McKeesport, PA Indl Dev Auth Rev The
Kroger Corp Allegheny Cnty Rfdg...... 8.650 06/01/11 802,268
1,000 Montgomery Cnty, PA Higher Edl & Hlth
Auth Rev............................. 6.625 07/01/19 945,770
2,000 Montgomery Cnty, PA Indl Dev Auth
Retirement Cmnty Rev................. 6.300 01/01/13 1,920,880
2,250 Montgomery Cnty, PA Indl Dev Auth
Retirement Cmnty Rev Adult Cmntys
Total Svcs Ser B..................... 5.625 11/15/12 2,192,850
2,500 Montgomery Cnty, PA Indl Dev Auth Rev
Pollutn Ctl Philadelphia Elec Co Ser
A Rfdg............................... 7.600 04/01/21 2,640,525
3,000 Montgomery Cnty, PA Indl Dev Auth Rev
Res Recov (LOC -Banque Paribas)...... 7.500 01/01/12 3,140,970
990 Montgomery Cnty, PA Indl Dev Auth Rev
Wordsworth Academy................... 7.750 09/01/24 1,047,826
3,300 New Kensington Arnold, PA Sch Dist
(FGIC Insd).......................... 5.500 05/15/26 3,168,462
800 North Penn, PA Wtr Auth Rev (FGIC
Insd)................................ 6.200 11/01/22 837,824
1,000 North Penn, PA Wtr Auth Rev
(Prerefunded @ 11/01/04) (FGIC
Insd)................................ 6.875 11/01/19 1,114,730
700 North Penn, PA Wtr Auth Rev
(Prerefunded @ 11/01/02) (FGIC
Insd)................................ 6.200 11/01/22 744,541
2,500 Northampton Cnty, PA Indl Dev Auth
Rev Pollutn Ctl Bethlehem Steel
Rfdg................................. 7.550 06/01/17 2,634,400
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 1,091,670
1,750 Northeastern PA Hosp & Edl Auth Sch
Rev WY Seminary Proj (MBIA Insd)..... 4.750 10/01/28 1,456,263
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 89
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 2,200 Oil City, PA Towne Tower Proj (FHA
Gtd)................................. 6.750% 05/01/20 $ 2,286,221
1,500 Penn Cambria Sch Dist PA Cap
Apprec............................... * 08/15/21 406,725
1,500 Penn Cambria Sch Dist PA Cap
Apprec............................... * 08/15/22 382,320
1,300 Penn Hills, PA (FGIC Insd)........... 5.850 12/01/14 1,329,250
300 Penn Hills, PA (Prerefunded
@12/01/07) (FGIC Insd)............... 5.850 12/01/14 321,375
75 Penn Hills, PA (FGIC Insd)........... 5.900 12/01/17 76,125
1,260 Penn Hills, PA (Prerefunded
@12/01/07) (FGIC Insd)............... 5.900 12/01/17 1,354,500
335 Penn Hills, PA (Prerefunded
@12/01/07) (FGIC Insd)............... 5.800 12/01/13 357,978
3,000 Pennsylvania Econ Dev Fin Auth Res
Recovery Rev Colver Proj Ser D....... 7.050 12/01/10 3,232,800
1,500 Pennsylvania Econ Dev Fin Auth Res
Recovery Rev Colver Proj Ser D....... 7.125 12/01/15 1,614,375
5,000 Pennsylvania Econ Dev Fin Auth Res
Recovery Rev Northampton Generating
Ser A................................ 6.600 01/01/19 5,144,750
4,000 Pennsylvania Hsg Fin Agy (Inverse
Fltg)................................ 9.761 10/03/23 4,350,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg
Rfdg (FNMA Collateralized)........... 6.500 07/01/23 1,048,360
1,000 Pennsylvania Hsg Fin Agy Single
Family Mtg Ser 40.................... 6.900 04/01/25 1,047,870
2,500 Pennsylvania Hsg Fin Agy Single
Family Mtg Ser 42.................... 6.850 04/01/25 2,620,050
850 Pennsylvania Infrastructure Invt Auth
Rev Pennvest Subser B (Prerefunded @
09/01/02)............................ 6.800 09/01/10 922,497
2,500 Pennsylvania Intergvtl Coop Auth Spl
Tax Rev (FGIC Insd).................. 4.750 06/15/19 2,155,650
4,000 Pennsylvania St Ctfs Partn (FSA Insd)
(b).................................. 6.250 05/01/16 4,176,400
4,700 Pennsylvania St Higher Edl Assistance
Agy Student Ln Rev Rfdg (Inverse
Fltg)(AMBAC Insd).................... 9.267 09/01/26 5,469,625
2,500 Pennsylvania St Higher Edl Assistance
Agy Student Ln Rev Ser B (Inverse
Fltg) (MBIA Insd).................... 10.808 03/01/20 2,959,375
4,000 Pennsylvania St Higher Edl Assistance
Agy Student Ln Rev Ser C (AMBAC
Insd)................................ 6.400 03/01/22 4,293,480
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 90
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 1,200 Pennsylvania St Higher Edl Fac Auth
College & Univ Rev Bryn Mawr College
(MBIA Insd).......................... 5.625% 12/01/27 $ 1,168,488
5,400 Pennsylvania St Higher Edl Fac Auth
Rev Drexel Univ Rfdg................. 6.375 05/01/17 5,607,198
5,075 Philadelphia, PA (FSA Insd).......... 5.000 03/15/28 4,445,548
1,000 Philadelphia, PA Auth for Indl Dev
Hlthcare Fac Rev..................... 5.750 05/15/18 900,650
600 Philadelphia, PA Auth For Indl Dev
Rev First Mtg Crime Prevention
Assn................................. 6.125 04/01/19 571,512
2,505 Philadelphia, PA Auth for Indl Dev
Rev Coml Dev RMK Rfdg................ 7.750 12/01/17 2,710,485
3,000 Philadelphia, PA Auth for Indl Dev
Rev Long-Term Care Maplewood......... 8.000 01/01/24 3,202,800
11,565 Philadelphia, PA Auth Indl Dev Lease
Rev Ser A (MBIA Insd) (b)............ 5.375 02/15/27 10,751,980
4,760 Philadelphia, PA Gas Wks Rev Second
Ser (FSA Insd)....................... 5.000 07/01/29 4,153,195
3,000 Philadelphia, PA Gas Wks Rev Ser 14
Rfdg (FSA Insd)...................... 6.250 07/01/08 3,218,070
2,800 Philadelphia, PA Hosp & Higher Edl
Fac Auth Hosp Rev Chestnut Hill
Hosp................................. 6.500 11/15/22 2,822,120
760 Philadelphia, PA Hosps & Higher Edl
Fac Auth Rev......................... 6.300 07/01/14 761,429
985 Philadelphia, PA Hosps & Higher Edl
Fac Auth Rev......................... 6.400 07/01/17 983,946
450 Philadelphia, PA Hosps & Higher Edl
Fac Auth Rev......................... 6.500 07/01/21 450,725
1,500 Philadelphia, PA Muni Auth Rev Muni
Svcs Bldg Lease Cap Apprec (FSA
Insd)................................ * 03/15/08 973,260
3,750 Philadelphia, PA Muni Auth Rev Muni
Svcs Bldg Lease Cap Apprec (FSA
Insd)................................ * 03/15/11 2,025,112
3,775 Philadelphia, PA Muni Auth Rev Muni
Svcs Bldg Lease Cap Apprec (FSA
Insd)................................ * 03/15/12 1,908,640
4,500 Philadelphia, PA Muni Auth Rev Muni
Svcs Bldg Lease Cap Apprec (FSA
Insd)................................ * 03/15/13 2,125,980
2,000 Philadelphia, PA Parking Auth Rev
Airport.............................. 5.250 09/01/22 1,862,600
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 91
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 2,000 Philadelphia, PA Wtr & Wastewtr Rev
Rfdg (MBIA Insd)..................... 5.625% 06/15/08 $ 2,086,500
2,500 Pittsburgh & Allegheny Cnty, PA Pub
Auditorium Auth Excise Tax Rev (AMBAC
Insd)................................ 5.000 02/01/24 2,215,500
1,500 Pittsburgh & Allegheny Cnty, PA Pub
Auditorium Auth Reg Asset Dist Sales
Tax Rev (AMBAC Insd)................. 5.250 02/01/31 1,351,515
1,470 Pittsburgh, PA Urban Redev Auth Mtg
Rev Ser C1........................... 6.800 10/01/25 1,516,114
1,475 Pittsburgh, PA Urban Redev Auth Mtg
Rev Ser D............................ 6.250 10/01/17 1,509,131
2,000 Pittsburgh, PA Urban Redev Mtg Amt
Series C............................. 5.600 04/01/20 1,904,080
2,825 Pittsburgh, PA Wtr & Swr Auth Wtr &
Swr Sys Rev (FGIC Insd).............. * 09/01/28 506,127
4,500 Pottsville, PA Hosp Auth Rev
Pottsville Hosp (ACA Insd)........... 5.500 07/01/18 4,231,440
2,665 Radnor Twp, PA Sch Dist.............. 5.750 03/15/19 2,660,283
3,000 Radnor Twp, PA Sch Dist.............. 5.750 03/15/26 2,989,800
8,500 Saint Mary Hosp Auth Bucks PA
Catholic Hlth Init A................. 5.000 12/01/28 7,340,430
1,000 Scranton-Lackawanna, PA Hlth &
Welfare Auth Rev Marian Cmnty Hosp
Proj Rfdg............................ 7.125 01/15/13 1,029,600
2,000 Shaler, PA Area Sch Dist Cap Apprec
Ser A (FGIC Insd).................... * 11/15/22 510,960
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 2,895,204
355 Somerset Cnty, PA Indl Dev Auth Coml
Dev Rev First Mtg K Mart Corp Ser A
Rfdg................................. 7.200 04/01/07 369,044
2,035 Southeast Delco Sch Dist PA Cap
Apprec (MBIA Insd)................... * 02/01/15 844,240
2,055 Southeast Delco Sch Dist PA Cap
Apprec (MBIA Insd)................... * 02/01/16 798,635
2,005 Southeast Delco Sch Dist PA Cap
Apprec (MBIA Insd)................... * 02/01/18 684,246
1,305 Southeast Delco Sch Dist PA Cap
Apprec (MBIA Insd)................... * 02/01/24 305,892
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 92
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 1,000 Southeast Delco Sch Dist PA Cap
Apprec (MBIA Insd)................... * 02/01/25 $ 220,290
1,580 Spring Ford Area Sch Dist PA......... 4.750% 03/01/25 1,330,328
650 Springfield Twp, PA Swr Auth Gtd..... 5.800 10/15/18 634,693
1,000 Springfield Twp, PA Swr Auth Gtd..... 6.000 10/15/27 985,950
1,210 State Pub Sch Bldg Auth PA College
Rev Montgomery Cnty Cmnty College
Rfdg................................. 5.500 05/01/13 1,231,405
1,275 State Pub Sch Bldg Auth PA College
Rev Montgomery Cnty Cmnty College
Rfdg................................. 5.500 05/01/14 1,289,624
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 2,371,164
1,750 West Mifflin, PA San Sewer Muni Auth
Sewer Rev (MBIA Insd)................ 5.000 08/01/28 1,531,740
3,000 Westmoreland Cnty, PA Muni Auth Svc
Rev Ser A (MBIA Insd)................ * 08/15/23 723,630
------------
263,678,682
------------
GUAM 0.4%
1,000 Guam Arpt Auth Rev Ser B............. 6.700 10/01/23 1,067,060
------------
TOTAL INVESTMENTS 101.6%
(Cost $258,798,839)................................................ 264,745,742
LIABILITIES IN EXCESS OF OTHER ASSETS (1.6%)........................ (4,051,603)
------------
NET ASSETS 100.0%................................................... $260,694,139
============
</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.
ACA--American Capital Access
AMBAC--AMBAC Indemnity Corporation
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Administration
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
LOC--Letter of Credit
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
F-9
<PAGE> 93
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $258,798,839)....................... $264,745,742
Cash........................................................ 445,821
Receivables:
Interest.................................................. 3,900,775
Investments Sold.......................................... 2,947,156
Fund Shares Sold.......................................... 115,908
Other....................................................... 29,336
------------
Total Assets.......................................... 272,184,738
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 10,169,742
Income Distributions...................................... 501,613
Fund Shares Repurchased................................... 240,040
Distributor and Affiliates................................ 196,053
Investment Advisory Fee................................... 129,370
Trustees' Deferred Compensation and Retirement Plans........ 175,477
Accrued Expenses............................................ 78,304
------------
Total Liabilities..................................... 11,490,599
------------
NET ASSETS.................................................. $260,694,139
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $256,224,121
Net Unrealized Appreciation................................. 5,946,903
Accumulated Distributions in Excess of Net Investment
Income.................................................... (209,849)
Accumulated Net Realized Loss............................... (1,267,036)
------------
NET ASSETS.................................................. $260,694,139
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $205,472,450 and 12,186,805 shares of
beneficial interest issued and outstanding)............. $ 16.86
Maximum sales charge (4.75%* of offering price)......... .84
------------
Maximum offering price to public........................ $ 17.70
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $50,940,397 and 3,023,719 shares of
beneficial interest issued and outstanding)............. $ 16.85
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $4,281,292 and 254,121 shares of
beneficial interest issued and outstanding)............. $ 16.85
============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-10
<PAGE> 94
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $16,489,086
Other....................................................... 37,500
-----------
Total Income............................................ 16,526,586
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,634,814
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $533,531, 537,168 and 40,096,
respectively)............................................. 1,110,795
Shareholder Services........................................ 230,307
Trustees' Fees and Related Expenses......................... 39,428
Legal....................................................... 30,504
Custody..................................................... 19,435
Other....................................................... 204,317
-----------
Total Expenses............................................ 3,269,600
Less Credits Earned on Cash Balances...................... 16,681
-----------
Net Expenses.............................................. 3,252,919
-----------
NET INVESTMENT INCOME....................................... $13,273,667
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 126,055
Futures................................................... (667,161)
-----------
Net Realized Loss........................................... (541,106)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 26,056,723
End of the Period:
Investments............................................. 5,946,903
-----------
Net Unrealized Depreciation During the Period............... (20,109,820)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(20,650,926)
============
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $ (7,377,259)
============
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 95
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1999, the Nine Months Ended
September 30, 1998 and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income........... $ 13,273,667 $ 10,088,914 $ 14,063,081
Net Realized Gain/Loss.......... (541,106) 2,263,231 1,048,949
Net Unrealized
Appreciation/Depreciation..... (20,109,820) 999,468 7,094,335
------------ ------------ ------------
Change in Net Assets from
Operations.................... (7,377,259) 13,351,613 22,206,365
------------ ------------ ------------
Distributions from Net
Investment Income............. (13,631,681) (10,332,838) (13,779,037)
Distribution in Excess of Net
Investment Income............. (209,849) -0- -0-
------------ ------------ ------------
Distributions from and in Excess
of Net Investment Income*..... (13,841,530) (10,332,838) (13,779,037)
------------ ------------ ------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES......... (21,218,789) 3,018,775 8,427,328
------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold....... 28,127,546 14,901,436 20,080,197
Net Asset Value of Shares Issued
Through Dividend
Reinvestment.................. 8,024,149 5,939,810 7,972,553
Cost of Shares Repurchased...... (30,301,078) (26,619,385) (36,874,447)
------------ ------------ ------------
CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS.......... 5,850,617 (5,778,139) (8,821,697)
------------ ------------ ------------
TOTAL DECREASE IN NET ASSETS.... (15,368,172) (2,759,364) (394,369)
NET ASSETS:
Beginning of the Period......... 276,062,311 278,821,675 279,216,044
------------ ------------ ------------
End of the Period (including
accumulated undistributed net
investment income of
$(209,849), $358,014 and
$601,938, respectively)....... $260,694,139 $276,062,311 $278,821,675
============ ============ ============
*Distributions by Class:
Distributions from and in Excess
of Net Investment Income:
Class A Shares................ $(11,244,939) $ (8,483,120) $(11,483,502)
Class B Shares................ (2,416,231) (1,740,891) (2,162,615)
Class C Shares................ (180,360) (108,827) (132,920)
------------ ------------ ------------
$(13,841,530) $(10,332,838) $(13,779,037)
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 96
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended December 31
September 30, Nine Months Ended -------------------------------------
Class A Shares 1999 September 30, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period................ $18.240 $18.038 $17.490 $17.737 $16.081 $18.062
------- ------- ------- ------- ------- -------
Net Investment Income... .894 .684 .928 .919 .946 .965
Net Realized and
Unrealized
Gain/Loss............. (1.343) .216 .528 (.263) 1.660 (1.985)
------- ------- ------- ------- ------- -------
Total from Investment
Operations............ (.449) .900 1.456 .656 2.606 (1.020)
Less Distributions from
and in Excess of Net
Investment Income..... .930 .698 .908 .903 .950 .961
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............ $16.861 $18.240 $18.038 $17.490 $17.737 $16.081
======= ======= ======= ======= ======= =======
Total Return* (a)....... (2.65%) 5.08%** 8.59% 3.86% 16.62% (5.72%)
Net Assets at End of the
Period (In
millions)............. $ 205.4 $ 219.3 $ 223.9 $ 227.4 $ 226.7 $ 203.2
Ratio of Expenses to
Average Net Assets*
(b)................... 1.04% 1.03% 1.04% 1.09% 1.00% .90%
Ratio of Net Investment
Income to Average Net
Assets*............... 5.03% 5.06% 5.27% 5.32% 5.57% 5.73%
Portfolio Turnover...... 53% 29%** 46% 57% 28% 8%
*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 N/A 1.09% 1.14% 1.17%
Ratio of Net Investment
Income to Average Net
Assets................ N/A N/A N/A 5.31% 5.42% 5.46%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on overnight cash balances. If these credits were reflected as a reduction
of expenses, the ratio would decrease by .01% for the period ended
September 30, 1999.
N/A = Not applicable
See Notes to Financial Statements
F-13
<PAGE> 97
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended December 31
September 30, September 30, -------------------------------------
Class B Shares 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period............... $18.228 $18.031 $17.484 $17.731 $16.080 $18.055
------- ------- ------- ------- ------- -------
Net Investment Income....... .758 .579 .791 .788 .819 .841
Net Realized and Unrealized
Gain/Loss................. (1.341) .217 .531 (.264) 1.659 (1.985)
------- ------- ------- ------- ------- -------
Total from Investment
Operations................ (.583) .796 1.322 .524 2.478 (1.144)
Less Distributions from and
in Excess of Net
Investment Income......... .798 .599 .775 .771 .827 .831
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period.................... $16.847 $18.228 $18.031 $17.484 $17.731 $16.080
======= ======= ======= ======= ======= =======
Total Return* (a)........... (3.37%) 4.51%** 7.78% 3.07% 15.72% (6.39%)
Net Assets at End of the
Period (In millions)...... $ 50.9 $ 53.5 $ 51.9 $ 48.4 $ 46.8 $ 37.6
Ratio of Expenses to Average
Net Assets* (b)........... 1.80% 1.79% 1.79% 1.85% 1.75% 1.64%
Ratio of Net Investment
Income to Average Net
Assets*................... 4.28% 4.28% 4.51% 4.56% 4.81% 4.98%
Portfolio Turnover.......... 53% 29%** 46% 57% 28% 8%
* 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 N/A 1.85% 1.89% 1.90%
Ratio of Net Investment
Income to Average Net
Assets.................... N/A N/A N/A 4.55% 4.66% 4.71%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on overnight cash balances. If these credits were reflected as a reduction
of expenses, the ratio would decrease by .01% for the period ended September
30, 1999.
N/A = Not Applicable
See Notes to Financial Statements
F-14
<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
Year Ended Ended Year Ended December 31
September 30, September 30, -------------------------------------
Class C Shares 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period............... $18.229 $18.031 $17.482 $17.729 $16.079 $18.045
------- ------- ------- ------- ------- -------
Net Investment Income....... .759 .576 .795 .788 .812 .850
Net Realized and Unrealized
Gain/Loss................. (1.342) .221 .529 (.264) 1.665 (1.985)
------- ------- ------- ------- ------- -------
Total from Investment
Operations................ (.583) .797 1.324 .524 2.477 (1.135)
Less Distributions from and
in Excess of Net
Investment Income......... .798 .599 .775 .771 .827 .831
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period.................... $16.848 $18.229 $18.031 $17.482 $17.729 $16.079
======= ======= ======= ======= ======= =======
Total Return* (a)........... (3.37%) 4.51%** 7.78% 3.08% 15.72% (6.34%)
Net Assets at End of the
Period (In millions)...... $ 4.3 $ 3.3 $ 3.0 $ 3.4 $ 3.4 $ 2.2
Ratio of Expenses to Average
Net Assets* (b)........... 1.79% 1.79% 1.79% 1.85% 1.75% 1.63%
Ratio of Net Investment
Income to Average Net
Assets*................... 4.27% 4.29% 4.52% 4.56% 4.76% 4.97%
Portfolio Turnover.......... 53% 29%** 46% 57% 28% 8%
*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 N/A 1.85% 1.90% 1.90%
Ratio of Net Investment
Income to Average Net
Assets.................... N/A N/A N/A 4.55% 4.61% 4.70%
</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.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on overnight cash balances. If these credits were reflected as a reduction
of expenses, the ratio would not decrease for the period ended September 30,
1999.
N/A = Not Applicable
See Notes to Financial Statements
F-15
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
- --------------------------------------------------------------------------------
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.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Municipal bonds are valued by independent pricing
services or dealers using the mean of the bid and asked prices or, in the
absence of market quotations, at fair value based upon yield data relating to
municipal bonds with similar characteristics and general market conditions.
Securities which are not valued by independent pricing services are valued at
fair value using procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
F-16
<PAGE> 100
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, if any, to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such losses against any future realized capital gains.
At September 30, 1999, the Fund had an accumulated capital loss carryforward for
tax purposes of 964,149 which will expire between September 30, 2003 and
September 30, 2007. Net realized gains or losses may differ for financial
reporting and tax purposes primarily as a result of post October losses which
may not be recognized for tax purposes until the first day of the following
fiscal year.
At September 30, 1999, for federal income tax purposes, the cost of
long-term investments is $258,798,839; the aggregate gross unrealized
appreciation is $10,844,465 and the aggregate gross unrealized depreciation is
$4,897,562, resulting in net unrealized appreciation on long-term investments of
$5,946,903.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
Due to inherent differences in the recognition of expenses under generally
accepted accounting principles and federal income tax purposes, the amount of
distributed net investment income may differ for a particular period. These
differences are temporary in nature, but may result in book basis distribution
in excess of net investment income for certain periods.
F. EXPENSE REDUCTIONS--During the year ended September 30, 1999, the Fund's
custody fee was reduced by $16,681 as a result of credits earned on overnight
cash balances.
F-17
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ---------------------------------------------------------------------
<S> <C>
First $500 million.................................... .600 of 1%
Over $500 million..................................... .500 of 1%
</TABLE>
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $16,600 representing legal services provided by Skadden, Arps,
Slate, Meagher, & Flom (Illinois), counsel to the Fund, of which a trustee of
the Fund is an affiliated person.
For the year ended September 30, 1999, the Fund recognized expenses of
approximately $112,300 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 year ended
September 30, 1999, the Fund recognized expenses of approximately $158,100.
Transfer agency fees are determined through negotiations with the Fund's Board
of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
F-18
<PAGE> 102
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
At September 30, 1999, capital aggregated $198,456,799, $53,226,486 and
$4,540,836 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 1,013,797 $ 17,885,630
Class B.......................................... 442,312 7,880,964
Class C.......................................... 132,516 2,360,952
----------- ------------
Total Sales........................................ 1,588,625 $ 28,127,546
=========== ============
Dividend Reinvestment:
Class A.......................................... 366,668 $ 6,492,879
Class B.......................................... 80,232 1,419,058
Class C.......................................... 6,374 112,212
----------- ------------
Total Dividend Reinvestment........................ 453,274 $ 8,024,149
=========== ============
Repurchases:
Class A.......................................... (1,215,422) $(21,535,502)
Class B.......................................... (433,752) (7,630,639)
Class C.......................................... (64,827) (1,134,937)
----------- ------------
Total Repurchases.................................. (1,714,001) $ 30,301,078
=========== ============
</TABLE>
F-19
<PAGE> 103
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
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-20
<PAGE> 104
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
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>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares purchased
on or after June 1, 1996 will automatically convert to Class A shares after the
eighth year following purchase. Class B shares purchased before June 1, 1996
automatically convert to Class A shares after the seventh year following
purchase. For the year ended September 30, 1999, 12,450 Class B shares
automatically converted to Class A shares. The CDSC will be imposed on most
redemptions made within six years of the purchase for Class B and one year of
the purchase for Class C as detailed in the following schedule.
F-21
<PAGE> 105
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- ------------------------------------------------------------------------------
<S> <C> <C>
First.............................................. 4.00% 1.00%
Second............................................. 3.75% None
Third.............................................. 3.50% None
Fourth............................................. 2.50% None
Fifth.............................................. 1.50% None
Sixth.............................................. 1.00% None
Seventh and Thereafter............................. None None
</TABLE>
For the year ended September 30, 1999, Van Kampen as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $38,400 and CDSC on redeemed shares of approximately $85,600.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $157,697,539 and $144,618,217,
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
that may be 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
F-22
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999
- --------------------------------------------------------------------------------
invests in futures on U.S. Treasury Bonds and the Municipal Bond Index and
typically closes the contract prior to the delivery date. These contracts are
generally used to manage the portfolio's effective maturity and duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin).
Transactions in futures contracts for the year ended September 30, 1999,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at September 30, 1998......................... 0
Futures Opened............................................ 120
Futures Closed............................................ (120)
----
Outstanding at September 30, 1997......................... 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 year ended September 30, 1999, are payments retained by Van Kampen of
approximately $438,400.
F-23
<PAGE> 107
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 Fully Disclosed Selling Agreement(1)
(4) Form of Bank Fully Disclosed Selling Agreement(1)
(5) Underwriting Agreement(4)
(6) Agreement Among Underwriters(4)
(7) Selected Dealer Agreement(4)
(f) (1) Form of Trustee Deferred Compensation Plan+
(2) Form of the Trustee Retirement Plan+
(g) (1) Custodian Contract(5)
(2) Transfer Agency and Service Agreement(3)
(h) (1) Fund Accounting Agreement(3)
(2) Legal Services Agreement(3)
(i) (1) Opinion and Consent of Saul, Ewing, Remick & Saul LLP+
(2) Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)+
(j) Consent of KPMG LLP+
(k) Not applicable
(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) Not applicable
(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.
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.
C-1
<PAGE> 108
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 or (iii) for a criminal proceeding,
not having a reasonable cause to believe that such conduct was unlawful
(collectively, "Disabling Conduct"). Absent a court determination that an
officer or trustee seeking indemnification was not liable on the merits or
guilty of Disabling Conduct in the conduct of his or her office, the decision by
the Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of Disabling
Conduct in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "1933 Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by the trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Pursuant to Section 7 of the Distribution and Service Agreement, the
Registrant agrees to indemnify and hold harmless Van Kampen Funds Inc. (the
"Distributor") and each of its trustees and officers and each person if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damages or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damages,
or expense and reasonable counsel fees) arising by reason of any person
acquiring any shares, based upon the ground that the Registration Statement,
prospectus, shareholder reports or other information filed or made public by the
Registrant (as from time to time amended) included an untrue statement of a
material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements not misleading under the 1933 Act, or
any other statute or the common law. The Registrant does not agree to indemnify
the Distributor or hold it harmless to the extent that the statement or omission
was made in reliance upon, and in conformity with, information furnished to the
Registrant by or on behalf of the Distributor. In no case is the indemnity of
the Registrant in favor of the Distributor or any person indemnified to be
deemed to protect the Distributor or any person against any liability to the
Fund or its security holders to which the Distributor or such person would
otherwise be subject by reason of willful
C-2
<PAGE> 109
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
agreement.
Pursuant to the agreement by which Van Kampen Investor Services Inc.
("Investor Services") is appointed transfer agent of the Fund, the Registrant
agrees to indemnify and hold Investor Services harmless against any losses,
damages, costs, charges, payments, liabilities and expenses (including
reasonable counsel fees) arising out of or attributable to:
(1) the performance of Investor Services under the agreement provided that
Investor Services acted in good faith with due diligence and without negligence
or willful misconduct.
(2) reliance by Investor Services on, or reasonable use by, Investor
Services of information, records and documents which have been prepared on
behalf of, or have been furnished by, the Fund, or the carrying out by Investor
Services of any instructions or requests of the Fund.
(3) the offer or sale of the Fund's shares in violation of any federal or
state law or regulation or ruling by any federal agency unless such violation
results from any failure by Investor Services to comply with written
instructions from the Fund that such offers or sales were not permitted under
such law, rule or regulation.
(4) the refusal of the Fund to comply with terms of the agreement, or the
Fund's lack of good faith, negligence or willful misconduct or breach of any
representation or warranty made by the Fund under the agreement provided that if
the reason for such failure is attributable to any action of the Fund's
investment adviser or distributor or any person providing accounting or legal
services to the Fund, Investor Services only will be entitled to indemnification
if such entity is otherwise entitled to the indemnification from the Fund.
See also "Investment Advisory Agreement" in the Statement of Additional
Information.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in the Prospectus and "Trustees and
Officers" and "Investment Advisory and Other Services" in the Statement of
Additional Information for information regarding the business of Van Kampen
Investment Advisory Corp. (the "Adviser"). For information as to the business,
profession, vocation or employment of a substantial nature of each of the
officers and directors of the Adviser, reference is made to the Adviser's
current Form ADV (File No. 801-18161) filed under the Investment Advisers Act of
1940, 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 the Registrant, is the only principal underwriter for the Registrant.
The name, principal business address and positions and offices with Van Kampen
Funds Inc. of each of its directors and officers are disclosed in Exhibit
(z)(2). Except as disclosed under the heading "Trustees and Officers" in Part B
of this Registration Statement, none of such persons has any position or office
with Registrant.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents of the Registrant required by
Section 31(a) of the Investment Company Act of 1940, as amended, 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,
or at 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 02171; (ii) by the Adviser, will be maintained
at its offices, located at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace,
Illinois 60181-5555 and (iii) all such accounts, books and other documents
required to be maintained by
C-3
<PAGE> 110
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.
Not applicable.
C-4
<PAGE> 111
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended, the Registrant,
VAN KAMPEN 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 1933 Act and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Oakbrook Terrace and the State of
Illinois, on the 27th day of January, 2000.
VAN KAMPEN
PENNSYLVANIA TAX FREE INCOME FUND
By: /s/ A. THOMAS SMITH III
---------------------------------------
A. Thomas Smith III, Secretary
Pursuant to the requirements of the 1933 Act, this Amendment to this
Registration Statement has been signed on January 27, 2000 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
Principal Executive Officer:
/s/ RICHARD F. POWERS, III* Trustee and President
- -----------------------------------------------------
Richard F. Powers, III
Principal Financial Officer:
/s/ JOHN L. SULLIVAN* Vice President, Chief Financial Officer and
- ----------------------------------------------------- Treasurer
John L. Sullivan
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ JERRY D. CHOATE* Trustee
- -----------------------------------------------------
Jerry D. Choate
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ MITCHELL M. MERIN* Trustee
- -----------------------------------------------------
Mitchell M. Merin
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
/s/ SUZANNE H. WOOLSEY* Trustee
- -----------------------------------------------------
Suzanne H. Woolsey
/s/ PAUL L. YOVOVICH* Trustee
- -----------------------------------------------------
Paul L. Yovovich
- ------------
* Signed by A. Thomas Smith III pursuant to a power of attorney filed herewith.
/s/ A. THOMAS SMITH III January 27, 2000
- -----------------------------------------------------
A. Thomas Smith III
Attorney-in-Fact
</TABLE>
<PAGE> 112
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT NO. 20 TO FORM N-1A
AS SUBMITTED TO THE SECURITIES AND
EXCHANGE COMMISSION
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S> <C>
(f) (1) Form of Trustee Deferred Compensation Plan
(2) Form of Trustee Retirement Plan
(i) (1) Opinion and Consent of Saul, Ewing, Remick & Saul LLP
(2) Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)
(j) Consent of KPMG LLP
(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 (f) (1)
FORM OF
DEFERRED COMPENSATION AGREEMENT
AGREEMENT, made on this ____ day of _______________, _________
by and between each of the funds listed on Schedule A attached hereto as may be
amended from time to time, each a registered investment company having its
principal offices at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois
60181-5555 (collectively the "Funds" or individually the "Fund"), and
Trustee/Director's Name, residing at Trustee/Director's Address (the "Trustee").
WHEREAS, the Fund and the Trustee desire to enter into an
agreement whereby the Fund will provide to the Trustee a vehicle under which the
Trustee can defer receipt of trustees' fees payable by the Fund.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth in this Agreement, the Fund and the Trustee hereby agree
as follows:
1. DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions. Unless a different meaning is plainly implied
by the context, the following terms as used in this Agreement shall have the
following meanings:
(a) "Beneficiary" shall mean such person or persons
designated pursuant to Section 4.3 hereof to receive benefits after the death of
the Trustee.
(b) "Board of Trustees" shall mean the Board of Trustees
or Board of Directors, as the case may be, of the Fund.
(c) "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time, or any successor statute.
(d) "Compensation" shall mean the amount of trustee's fees
paid by the Fund to the Trustee during a Deferral Year prior to reduction for
Compensation Deferrals made under this Agreement.
(e) "Compensation Deferral" shall mean the amount or
amounts of the Trustee's Compensation deferred under the provisions of Section 3
of this Agreement.
(f) "Deferral Account" shall mean the account maintained
to reflect the Trustee's Compensation Deferral made pursuant to Section 3 hereof
and any other credits or debits thereto.
<PAGE> 2
(g) "Deferral Year" shall mean each calendar year during
which the Trustee makes, or is entitled to make, a Compensation Deferral under
Section 3 hereof.
(h) "Valuation Date" shall mean any day upon which the
Fund makes a valuation of the Deferral Account and shall, at a minimum, be the
last business day of each calendar quarter.
1.2 Plurals and Gender. Where appearing in this Agreement the
singular shall include the plural and the masculine shall include the feminine,
and vice versa, unless the context clearly indicates a different meaning.
1.3 Headings. The headings and subheadings in this Agreement
are inserted for the convenience of reference only and are to be ignored in any
construction of the provisions hereof.
2. PERIOD DURING WHICH COMPENSATION DEFERRALS ARE PERMITTED
2.1 Commencement of Compensation Deferrals. The Trustee may
elect, on a form provided by, and submitted to, the President of the Fund, to
commence Compensation Deferrals under Section 3 hereof for the period beginning
on the later of (i) the date this Agreement is executed or (ii) the date such
form is submitted to the President of the Fund.
2.2 Termination of Deferrals. The Trustee shall not be
eligible to make Compensation Deferrals after the earlier of the following
dates:
(a) The date of which he ceases to serve as a Trustee of
the Fund; or
(b) The effective date of the termination of this
Agreement.
3. COMPENSATION DEFERRALS
3.1 Compensation Deferral Elections.
(a) The Trustee may elect, on the form described in
Section 2.1 hereof, to defer the receipt of all or a portion of the Compensation
for such Deferral Year. Such writing shall set forth the amount of such
Compensation Deferral (in whole percentage amounts). Such election shall
continue in effect for all subsequent Deferral Years unless it is canceled or
modified as provided below.
<PAGE> 3
(b) Compensation Deferrals shall be withheld from each
payment of Compensation by the Fund to the Trustee based upon the percentage
amount elected by the Trustee under Section 3.1(a) hereof.
(c) The Trustee may cancel or modify the amount of his
Compensation Deferrals on a prospective basis by submitting to the President of
the Fund a revised Compensation Deferral election form. Such change will be
effective as of the first day following the date such revision is submitted to
the President of the Fund.
3.2 Valuation of Deferral Account.
(a) The Fund shall establish a bookkeeping Deferral
Account to which will be credited an amount equal to the Trustee's Compensation
Deferrals under this Agreement. Compensation Deferrals shall be allocated to the
Deferral Account on the first business day following the date such Compensation
Deferrals are withheld from the Trustee's Compensation. The Deferral Account
shall be debited to reflect any distributions from such Account. Such debits
shall be debited to the Deferral Account as of the date such distributions are
made.
(b) Any Compensation Deferrals made into a Trustee's
Deferral Account will be valued as if such amounts are invested in the manner
set forth under Section 3.3 beginning as of the close of business on the last
day of the month in which such Compensation Deferrals were credited to such
Trustee's Deferral Account. As of each Valuation Date, income, gain and loss
equivalents (determined as if the Deferral Account is invested in the manner est
forth herein) attributable to the period following the next preceding Valuation
Date shall be credited to and/or deducted from the Trustee's Deferral Account.
3.3 Investment of Deferral Account Balance.
(a) (1) The Trustee may select, from various options made
available by the Fund, the investment media in which all or part of his Deferral
Account shall be deemed to be invested.
(2) The Trustee shall make an investment designation
on a form provided by the President of the Fund which shall remain effective
until another valid direction has been made by the Trustee as herein provided.
On the investment designation form, the Trustee may select from underlying
investment securities from the options made available to the Trustee pursuant to
Section 3.3(a)(1). The Trustee may amend the investment designation only once
each calendar quarter by giving written direction to the President of the Fund.
Unless otherwise specified, a Trustee's amendment to an investment designation
applies only to future compensation Deferrals. A Trustee may amend the
investment designation for existing amounts in the Trustee's Deferral Account
provided, however, that such changes in investment designation will only be
valid and applied to the existing amounts in the Trustee's Deferral Account if
the Trustee provides sufficient instruction regarding amounts to be exchanged. A
change in
<PAGE> 4
investment designation will be valid only if, after giving effect to such change
in investment designation, the Trustee has selected investment securities from
the options made available to the Trustee pursuant to Section 3.3(a)(1). A
timely, valid change in a Trustee's investment designation shall become
effective as of the close of business on the last day of the calendar quarter
following receipt by the President of the Fund.
(3) The investment media deemed to be made available
to the Trustee, and any limitation on the maximum or minimum percentages of the
Trustee's Deferral Account that may be invested in any particular medium, shall
be the same as from time to time communicated to the Trustee by the President of
the Fund.
(b) Except as provided below, the Trustee's Deferral
Account shall be deemed to be invested in accordance with the investment
designations, provided such designations conform to the provisions of this
Section. If:
(1) the Trustee does not furnish the President of the
Fund with written investment instructions,
(2) the written investment instructions from the
Trustee are unclear, or
(3) less than all of the Trustee's Deferral Account is
covered by such written investment instructions,
then the Trustee's Deferral Account shall be deemed to be invested in the Fund
until such time as the Trustee shall provide the President of the Fund with
complete investment instructions. Notwithstanding the above, the Board of
Trustees, in its sole discretion, may disregard the Trustee's election and
determine that all Compensation Deferrals shall be deemed to be invested in the
Fund.
The Fund shall provide an annual statement to the Trustee
showing such information as is appropriate, including the aggregate amount in
the Deferral Account, as of a reasonably current date.
4. DISTRIBUTIONS FROM DEFERRAL ACCOUNT
4.1 In General. Distributions from the Trustee's Deferral Account shall
be paid in cash, in generally equal annual installments over a period of five
(5) years beginning on the date of the Trustee's retirement or disability,
except that the Board of Trustees may, in its sole discretion, accelerate or,
with the consent of the Trustee, extend the distribution of such Deferral
Account. Notwithstanding the foregoing, in the event of the liquidation,
dissolution or winding up of the Fund or the distribution of all or
substantially all of the Fund's assets and property relating to one or more
series of its shares to the shareholders (for this purpose a sale, conveyance or
transfer of the Fund's assets to a trust, partnership, association or
corporation in exchange for cash, shares or other securities with the transfer
being made subject to, or with the assumption by the
<PAGE> 5
transferee of, the liabilities of the Fund shall not be deemed a termination of
the Fund or such a distribution), all unpaid amounts in the Deferral Account as
of the effective date thereof shall be paid in a lump sum on such effective
date.
4.2 Death Prior to Distribution of Deferral Account. Upon the death of
the Trustee prior to the commencement of the distribution of the amounts
credited to the Deferral Account, the Deferral Account shall be distributed to
the Beneficiary over a period of five (5) years beginning as soon as practicable
after the Trustee's death. In the event of the death of the Trustee after the
commencement of such distribution, but prior to the complete distribution of the
Deferral Account, the balance of the amounts in the Deferral Account shall be
distributed to the Beneficiary over the remaining period during which such
amounts were distributable to the Trustee under Section 4.1 hereof. In the event
the Trustee survives the designated Beneficiary, the balance of such Deferral
Account shall be paid in a lump sum to such Trustee's estate. Notwithstanding
the above, the Board of Trustees may, in its sole discretion, accelerate or,
with the consent of the Beneficiary or the Trustee's estate, as applicable,
extend the distribution of the Deferral Account.
4.3 Designation of Beneficiary. For purposes of Section 4.2 hereof, the
Trustee's Beneficiary shall be the person or persons so designated by the
Trustee in a written instrument submitted to the President of the Fund. In the
event the Trustee fails to properly designate a Beneficiary, the balance of such
Trustee's Deferred Account shall be paid in a lump sum to such Trustee's estate.
4.4 Payments Due Missing Persons. The Fund shall make a reasonable
effort to locate all persons entitled to benefits under this Agreement. However,
notwithstanding any provisions of this Agreement to the contrary, if, after a
period of five (5) years from the date such benefit shall be due, any such
persons entitled to benefits have not been located, their rights under this
Agreement shall stand suspended. Before this provision becomes operative, the
Fund shall send a certified letter to all such persons to their last known
address advising them that their benefits under this Agreement shall be
suspended. Any such suspended amounts shall be held by the Fund for a period of
three (3) additional years (or a total of eight (8) years from the time the
benefits first become payable) and thereafter, if unclaimed, such amounts shall
be forfeited.
5. AMENDMENTS AND TERMINATION
5.1 Amendments.
(a) The Fund and the Trustee may, by a written instrument
signed by both such parties, amend this Agreement at any time and in any manner.
(b) The Fund reserves the right to amend, in whole or in part,
and in any manner, any or all of the provisions of this Agreement by action of
its Board
<PAGE> 6
of Trustees for the purposes of complying with any provision of the Code or any
other technical or legal requirements, provided that:
(1) No such amendment shall make it possible for any
part of the Trustee's Deferral Account to be used for, or diverted to,
purposes other than for the exclusive benefit of the Trustee or the
Beneficiaries, except to the extent otherwise provided in this
Agreement; and
(2) No such amendment may reduce the amount of the
Trustee's Deferral Account as of the effective date of such amendment.
5.2 Termination. The Trustee and the Fund may, by written instrument
signed by both such parties, terminate this Agreement at any time. The rights of
the Trustee to the Deferral Account shall become payable as of the Valuation
Date next following the effective date of the termination of this Agreement.
6. MISCELLANEOUS.
6.1 Rights of Creditors.
(a) This Agreement is unfunded. Neither the Trustee nor any
other persons shall have any interest in any specific asset or assets of the
Fund by reason of any Deferral Account hereunder, nor any rights to receive
distribution of the Deferral Account except and as to the extent expressly
provided hereunder. The Fund shall not be required to purchase, hold or dispose
of any investments pursuant to this Agreement; however, if in order to cover its
obligations hereunder the Fund elects to purchase any investments the same shall
continue for all purposes to be a part of the general assets and property of the
Fund, subject to the claims of its general creditors and no person other than
the Fund shall by virtue of the provisions of this Agreement have any interest
in such assets other than an interest as a general creditor.
(b) The rights of the Trustee and the Beneficiaries to the
amounts held in the Deferral Account are unsecured and shall be subject to the
creditors of the Fund. With respect to the payment of amounts held under the
Deferral Account, the Trustee and the Beneficiaries have the status of unsecured
creditors of the Fund. This Agreement is executed on behalf of the Fund by an
officer of the Fund as such and not individually. Any obligation of the Fund
hereunder shall be an unsecured obligation of the Fund and not of any other
person.
6.2 Agents. The Fund may employ agents and provide for such clerical,
legal, actuarial, accounting, advisory or other services as it deems necessary
to perform its duties under this Agreement. The Fund shall bear the cost of such
services and all other expenses it incurs in connection with the administration
of this Agreement.
<PAGE> 7
6.3 Liability and Indemnification. Except for its own gross negligence,
willful misconduct or willful breach of the terms of this Agreement, the Fund
shall be indemnified and held harmless by the Trustee against liability or
losses occurring by reason of any act or omission of the Fund or any other
person.
6.4 Incapacity. If the Fund shall receive evidence satisfactory to it
that the Trustee or any Beneficiary entitled to receive any benefit under the
Agreement is, at the time when such benefit becomes payable, a minor, or is
physically or mentally incompetent to receive such benefit and to give a valid
release therefor, and that another person or an institution is then maintaining
or has custody of the Trustee or Beneficiary and that no guardian, committee or
other representative of the estate of the Trustee or Beneficiary shall have been
duly appointed, the Fund may make payment of such benefit otherwise payable to
the Trustee or Beneficiary to such other person or institution, including a
custodian under the Uniform Gifts to Minors Act or corresponding legislation
(such custodian shall be an adult, a guardian of the minor or a trust company),
and the release of such other person or institution shall be a valid and
complete discharge for the payment of such benefit.
6.5 Cooperation of Parties. All parties to this Agreement and any
person claiming any interest hereunder agree to perform any and all acts and
execute any and all documents and papers which are necessary or desirable for
carrying out this Agreement or any of its provisions.
6.6 Governing Law. This Agreement is made and entered into in the State
of Illinois, and all matters concerning its validity, construction and
administration shall be governed by the laws of the State of Illinois.
6.7 Nonguarantee of Trusteeship. Nothing contained in this Agreement
shall be construed as a contract or guarantee of the right of the Trustee to be,
or remain as, a trustee of the Fund or to receive any, or any particular rate
of, Compensation.
6.8 Counsel. The Fund may consult with legal counsel with respect to
the meaning or construction of this Agreement or its obligations or duties
hereunder or with respect to any action or proceeding or any question of law,
and it shall be fully protected with respect to any action taken or omitted by
it in good faith pursuant to the advice of legal counsel.
6.9 Spendthrift Provision. The Trustee's and Beneficiaries' interests
in the Deferral Account may not be anticipated, sold, encumbered, pledged,
mortgaged, charged, transferred, alienated, assigned nor become subject to
execution, garnishment or attachment, and any attempt to do so by any person
shall render the Deferral Amount immediately forfeitable.
6.10 Notices. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered personally or mailed by United
States
<PAGE> 8
registered or certified mail, return receipt requested, postage prepaid, or by
nationally recognized overnight delivery service providing for a signed return
receipt, addressed to the Trustee at the home address set forth in the Fund's
records and to the Fund at the address set forth on the first page of this
Agreement, provided that all notices to the Fund shall be directed to the
attention of the President of the Fund or to such other address as either party
may have furnished to the other in writing in accordance herewith, except that
notice of change of address shall be effective only upon receipt.
6.11 Entire Agreement. This Agreement contains the entire understanding
between the Fund and the Trustee with respect to the payment of non-qualified
elective deferred compensation by the Fund to the Trustee.
6.12 Interpretation of Agreement. Interpretations of, and
determinations related to, this Agreement made by the Fund in good faith,
including any determinations of the amounts of the Deferral Account, shall be
conclusive and binding upon all parties; and the Fund shall not incur any
liability to the Trustee for any such interpretation or determination so made or
for any other action taken by it in connection with this Agreement in good
faith.
6.13 Successors and Assigns. This Agreement shall be binding upon, and
shall inure to the benefit of, the Fund and its successors and assigns and to
the Trustee and such Trustee's heirs, executors, administrators and personal
representatives.
6.14 Severability. In the event any one or more provisions of this
Agreement are held to be invalid or unenforceable, such illegality or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof and such other provisions shall remain in full force and
effect unaffected by such invalidity or unenforceability.
6.15 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Deferred
Compensation Agreement to be executed as of the day and year first above
written.
On behalf of the Funds
listed on Schedule A
attached hereto:
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
On behalf of the
Trustee/Director listed on
page 1 hereto:
----------------------------------
Trustee/Director's Signature
<PAGE> 1
EXHIBIT (f) (2)
FORM OF
RETIREMENT PLAN FOR EACH FUND
Van Kampen (Fund Name), a registered investment company
having its principal offices at 1 Parkview Plaza, P.O. Box 5555,Oakbrook
Terrace, Illinois 60181-5555 (the "Fund"), has adopted this Retirement Plan,
effective (date shown on Annex A) (the "Plan"), for its Eligible Trustees (as
defined herein) in order to recognize and reward the valued services provided by
such trustees or directors, as the case may be, to the Fund.
1. DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions. Unless a different meaning is plainly implied
by the context, the following terms as used in this Plan shall have the
following meanings:
(a) "Beneficiary" shall mean such person or persons
designated pursuant to Section 6.4 hereof to receive benefits after the death of
the Eligible Trustee.
(b) "Board of Trustees" shall mean the Board of Trustees
or the Board of Directors, as the case may be, of the Fund.
(c) "Capped Retirement Benefit" shall have the meaning
described in Section 3.4.
(d) "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time, or any successor statute.
(e) "Compensation" shall mean an amount equal to $2,500.
(f) "Disability" shall have the meaning described in
Section 5.1.
(g) "Early Retirement Benefit" shall have the meaning
described in Section 3.3.
(h) "Effective Date" shall mean.
(i) "Effective Date Trustee" means a person who is a
trustee or director, as the case may be, of the Fund on the Effective Date.
<PAGE> 2
(j) "Eligible Retirement Age" shall have the meaning
described in Section 4.1.
(k) "Eligible Trustee" shall mean a person who: (i) is or
becomes a trustee or director, as the case may be, of the Fund on or after the
Effective Date, and (ii) is, prior to the time of such trustee's or director's,
as the case may be, termination of service, receiving trustee's or director's
fees from the Fund.
(l) "Fund Complex" shall mean the funds listed on Schedule
A attached hereto as may be amended from time to time.
(m) "Mandatory Retirement Age" shall have the meaning
described in Section 4.1.
(n) "Normal Distribution" shall have the meaning described
in Section 6.1.
(o) "Normal Retirement Benefit" shall have the meaning
described in Section 3.2.
(p) "Plan Committee" shall have the meaning described in
Section 8.2.
(q) "Retirement Benefit" shall mean the applicable normal
Retirement Benefit, Early Retirement Benefit or Capped Retirement Benefit due to
such trustee or director, as the case may be.
(r) "Retirement Benefit Cap" shall mean the amount listed
on Schedule A attached hereto as may be amended from time to time.
(s) "Service Requirement" shall have the meaning described
in Section 2.1.
(t) "Years of Service" shall be counted using January 1st
of the year such trustee or director, as the case may be, begins service as a
trustee or director of the Fund and include all completed calendar years of
service prior to such trustee's or director's, as the case may be, termination
of service, including such service performed prior to the adoption of the plan.
2
<PAGE> 3
1.2 Plurals and Gender. Where appearing in this Plan the
singular shall include the plural and the masculine shall include the feminine,
and vice versa, unless the context clearly indicates a different meaning.
References herein to "trustees" shall include trustees of a fund organized as a
trust or directors of a fund organized as a corporation, as the case may be.
1.3 Headings. The headings and subheadings in this Plan are
inserted for the convenience of reference only and are to be ignored in any
construction of the provisions hereof.
2. SERVICE REQUIREMENT
2.1 Service Requirement. Each Eligible Trustee that has
completed five (5) Years of Service as a trustee for the Fund shall be entitled
to receive retirement benefits from the Fund. An Eligible Trustee is not
entitled to benefits pursuant to the Plan merely because such trustee is an
Eligible Trustee; a trustee must meet the Years of Service requirement.
3. RETIREMENT BENEFIT
3.1 In General. The retirement benefit amount for an Eligible
Trustee meeting the Service Requirement is determined at the time of such
trustee's termination of service as a trustee. Subject to Sections 3.4 and 5.1,
an Eligible Trustee terminating service as a trustee to the Fund prior to
attaining the Eligible Retirement Age is eligible for the Early Retirement
Benefit as described in Section 3.3. Subject to Section 3.4, an Eligible Trustee
terminating service as a trustee to the fund after attaining the Eligible
Retirement Age is eligible for the Normal Retirement Benefit as described in
Section 3.2. An Eligible Trustee terminating service as a trustee to the Fund
after the Mandatory Retirement Age forfeits and is not entitled to any
retirement benefit under the Plan.
3.2 Normal Retirement Benefit. The Normal Retirement Benefit
shall be 50% of the Compensation and such benefit shall increase by 10% for each
Year of Service by such trustee in excess of five (5) Years of Service up to a
maximum amount of 100% of the Compensation for any trustee who has completed ten
(10) or more Years of Service.
3
<PAGE> 4
<TABLE>
<CAPTION>
=======================================================================
Years of Service Percentage Of Compensation
- -----------------------------------------------------------------------
<S> <C> <C>
Less than 5 0%
- -----------------------------------------------------------------------
5 50%
- -----------------------------------------------------------------------
6 60%
- -----------------------------------------------------------------------
7 70%
- -----------------------------------------------------------------------
8 80%
- -----------------------------------------------------------------------
9 90%
- -----------------------------------------------------------------------
10 or more 100%
- -----------------------------------------------------------------------
</TABLE>
3.3 Early Retirement Benefit. The Early Retirement Benefit
shall be the Normal Retirement Benefit for such trustee based upon such
trustee's Years of Service at the time of such trustee's termination of service
reduced by 3% for each year prior to the Eligible Retirement Age.
3.4 Retirement Benefit Cap. A trustee shall not receive
aggregate retirement benefits per calendar year from the Fund Complex in excess
of the Retirement Benefit Cap in effect at the time of such trustee's
termination of service. When a trustee would otherwise be entitled to aggregate
retirement benefits from the Fund Complex in excess of the Retirement Benefit
Cap but for this provision, the Fund shall only pay a Capped Retirement Benefit
to such trustee based on its pro rata portion of the retirement benefit the Fund
would have paid relative to the aggregate retirement benefits from the Fund
Complex absent such Retirement Benefit Cap.
4. RETIREMENT AGE
4.1 Retirement Age. The Eligible Retirement Age shall be upon
attaining the age of 60. A trustee may elect to continue to serve as a trustee
beyond the Eligible Retirement Age to a Mandatory Retirement Age of December
31st in the year such trustee reaches the age of 72; provided, however, that the
Mandatory Retirement Age shall be the later of the Mandatory Retirement Age as
set forth herein or as set forth in the by-laws of the Fund as may be amended
from time to time.
4
<PAGE> 5
5. DISABILITY
5.1 Disability. Disability shall have the meaning as set forth
in the Code under Section 22(e)(3). An Eligible Trustee who becomes disabled, as
defined herein, prior to reaching the Eligible Retirement Age is not subject to
the Early Retirement Benefit provision in section 3.3 but is instead eligible to
receive the lesser of the Normal Retirement Benefit or Capped Retirement Benefit
calculated as described in Section 3 using the Disability date as the date of
such trustee's termination of service.
6. PAYMENT OF RETIREMENT BENEFITS
6.1 Retirement or Disability Terminating Trustee's Service.
Subject to Sections 6.2 and 6.3, an Eligible Trustee shall receive the amount of
the applicable Retirement Benefit calculated pursuant to Section 3 for each of
the ten (10) years commencing in the fiscal year of such trustee's termination
of service (the "Normal Distribution"). Payment of benefits to an Eligible
Trustee shall commence, and be paid annually thereafter, at the end of the
Fund's fiscal year. In the event of such Eligible Trustee's death prior to
complete distribution under the Plan, such trustee's Beneficiary shall receive
the remaining retirement benefits based upon the Normal Distribution. In the
event the Eligible Trustee survives the Beneficiary or no Beneficiary has been
named, the Fund shall pay a lump sum amount equal to the actuarial present value
of the remaining retirement benefits to the Eligible Trustee's estate.
6.2 Death Terminating Trustee's Service. Subject to Section
6.3, in the event an Eligible Trustee's death causes the termination of service,
the Eligible Trustee's Beneficiary shall receive the amount of the applicable
Retirement Benefit calculated pursuant to Section 3 for each of the ten (10)
years commencing in the fiscal year of such trustee's death. Payment of benefits
to such Beneficiary shall commence, and be paid annually thereafter, at the end
of the Fund's fiscal year. In the event the Eligible Trustee survived the
Beneficiary or no Beneficiary was named, the Fund shall pay a lump sum amount
equal to the actuarial present value of the applicable retirement benefits to
the Eligible Trustee's estate.
6.3 Liquidation, Dissolution, Winding Up or Distribution of
Substantially All of the Assets of the Fund. Notwithstanding Sections 6.1 or
6.2, in the event of a liquidation, dissolution or winding up of the Fund or
distribution of all or substantially all of the Fund's assets and property, the
Fund shall pay to each Eligible Trustee serving as a trustee of the Fund on the
effective date of such liquidation, dissolution, winding up or distribution a
lump sum amount equal to the actuarial present value of the applicable Normal
Retirement Benefit or Early Retirement Benefit calculated pursuant to Section 3
using the effective date of such liquidation, dissolution, winding up or
distribution as the date of such trustee's termination
5
<PAGE> 6
of services. In the event an Eligible Trustee terminates services prior to such
liquidation, dissolution, winding up or distribution and such trustee (or such
trustee's Beneficiary) is then receiving payment of benefits pursuant to either
Section 6.1 or 6.2 at the time of such liquidation, dissolution, winding up or
distribution, the Fund shall pay to such trustee (or Beneficiary) on the
effective date of such liquidation, dissolution, winding up or distribution a
lump sum amount equal to the actuarial present value of the remaining retirement
benefits due to such trustee (or Beneficiary).
6.4 Designation of Beneficiary. The Eligible Trustee's
Beneficiary shall be the person or persons so designated by such trustee in a
written instrument submitted to the President of the Fund. In the event the
Eligible Trustee fails to properly designate a Beneficiary, the Fund shall pay a
lump sum amount equal to the actuarial present value of the applicable
retirement benefits to the Eligible Trustee's estate.
6.5 Payments Due Missing Persons. The Fund shall make a
reasonable effort to locate all persons entitled to benefits under this Plan.
However, notwithstanding any provisions of this Plan to the contrary, if, after
a period of five (5) years from the date such benefit shall be due, any such
persons entitled to benefits have not been located, their rights under this Plan
shall stand suspended. Before this provision becomes operative, the Fund shall
send a certified letter to all such persons to their last known address advising
them that their benefits under this Plan shall be suspended. Any such suspended
amounts shall be held by the Fund for a period of three (3) additional years (or
a total of eight (8) years from the time the benefits first become payable) and
thereafter, if unclaimed, such amounts shall be forfeited.
6.6 Actuarial Present Value Calculations. For purposes of this
Plan, the "actuarial present value" of any benefits shall be computed using
interest factors and other reasonable assumptions chosen by the Plan Committee.
The Plan Committee shall have sole and uncontrolled discretion with respect to
the application of the provisions of this paragraph and such exercise of
discretion shall be conclusive and binding on the Eligible Trustee, any
Beneficiary or other person.
7. AMENDMENTS AND TERMINATION
7.1 Amendments. The Fund anticipates the Plan to be permanent
but the Fund reserves the right to amend any or all of the provisions of this
Plan by action of its Board of Trustees or Board of Directors, as the case may
be, when, in the sole opinion of the Board of Trustees or Board of Directors, as
the case may be, such amendment is advisable, including for the purposes of
complying with any provision of the Code or any other technical or legal
requirements.
6
<PAGE> 7
7.2 Termination. The Fund may by action of its Board of
Trustees or Board of Directors, as the case may be, terminate this Plan at any
time.
8. MISCELLANEOUS.
8.1 Forfeiture of Benefits. Notwithstanding any other
provision of the Plan, future payment of any retirement benefit hereunder to an
Eligible Trustee, Beneficiary or other person will, at the discretion of the
Plan Committee, be discontinued and forfeited, and the Fund will have no further
obligation hereunder to such Eligible Trustee, Beneficiary or other person, if
any of the following circumstances occur:
(a) The Eligible Trustee is discharged from the Fund's
Board of Trustees or Board of Directors, as the case may be, for cause;
(b) The Eligible Trustee engages in competition with the
Fund or other acts considered detrimental or not in the best interests of the
Fund or its shareholders following such trustee's termination of service; or
(c) The Eligible Trustee performs an act or acts of wilful
malfeasance or reckless disregard of duties in connection with the service as a
trustee for the Fund.
The Plan Committee shall have the sole and uncontrolled discretion with respect
to the application of the provisions of this paragraph and such exercise of
discretion shall be conclusive and binding on the Eligible Trustee, any
Beneficiary or other person.
8.2 Administration. The Plan shall be administered by a Plan
Committee which shall be composed of three non-affiliated trustees and the
principal financial or accounting officer as designated by the Board of Trustees
or Board of Directors, as the case may be, of the Fund.
8.3 Agents. The Fund may employ agents and provide for such
clerical, legal, actuarial, accounting, advisory or other services as it deems
necessary to perform its duties under this Plan. The Fund shall bear the cost of
such services and all other expenses it incurs in connection with the
administration of this Plan.
8.4 Funding and Rights of Creditors. The obligations of the
Fund under this Agreement are unfunded. Neither the Eligible Trustees, the
Beneficiaries nor any other persons shall have any interest in any specific
asset or assets of the Fund for the benefits hereunder, nor any rights to
receive distribution of the benefits except and as to the extent expressly
provided hereunder. The rights of the Eligible Trustees, the Beneficiaries or
any other person to the benefits hereunder are unsecured and shall have no
priority over the
7
<PAGE> 8
other creditors of the Fund. Any obligation of the Fund hereunder shall be an
unsecured obligation of the Fund and not of any other person in relation to this
Plan.
8.5 Liability and Indemnification. Except for its own gross
negligence, willful misconduct or willful breach of the terms of this Plan, the
Fund shall be indemnified and held harmless by the Eligible Trustee against
liability or losses occurring by reason of any act or omission of the Fund or
any other person.
8.6 Incapacity. If the Fund shall receive evidence
satisfactory to it that the Eligible Trustee or any Beneficiary entitled to
receive any benefit under the Plan is, at the time when such benefit becomes
payable, a minor, or is physically or mentally incompetent to receive such
benefit and to give a valid release therefor, and that another person or an
institution is then maintaining or has custody of the Eligible Trustee or
Beneficiary and that no guardian, committee or other representative of the
estate of the Eligible Trustee or Beneficiary shall have been duly appointed,
the Fund may make payment of such benefit otherwise payable to the Trustee or
Beneficiary to such other person or institution, including a custodian under the
Uniform Gifts to Minors Act or corresponding legislation (such custodian shall
be an adult, a guardian of the minor or a trust company), and the release of
such other person or institution shall be a valid and complete discharge for the
payment of such benefit.
8.7 Governing Law. This Plan is established under laws of the
State of Illinois, and all matters concerning its validity, construction and
administration shall be governed by the laws of the State of Illinois.
8.8 Nonguarantee of Trusteeship. Nothing contained in this
Plan shall be construed as a contract or guarantee of the right of the Eligible
Trustee to be, or remain as, a trustee of the Fund or to receive any, or any
particular rate of, Compensation.
8.9 Spendthrift Provision. The Eligible Trustee's and
Beneficiaries' interests in the benefits hereunder may not be anticipated, sold,
encumbered, pledged, mortgaged, charged, transferred, alienated, assigned nor
become subject to execution, garnishment or attachment, and any attempt to do so
by any person shall render the benefits immediately forfeitable.
8.10 Disclosure and Notices. The rights and benefits of
Eligible Trustees under the Plan shall not be represented or evidenced by any
form of certificate or other instrument. Each Eligible Trustee shall receive a
copy of the Plan and the Plan Committee will make available for inspection by
any Eligible Trustee a copy of the rules and regulations used by the Plan
Committee in administering the Plan. For purposes of this Plan, all notices and
other communications provided for in this Plan shall be in writing and shall be
deemed
8
<PAGE> 9
to have been duly given when delivered personally or mailed by United States
registered or certified mail, return receipt requested, postage prepaid, or by
nationally recognized overnight delivery service providing for a signed return
receipt, addressed to the Eligible Trustee at the home address set forth in the
Fund's records and to the Fund at the address set forth on the first page of
this Plan, provided that all notices to the Fund shall be directed to the
attention of the President of the Fund or to such other address as either party
may have furnished to the other in writing in accordance herewith, except that
notice of change of address shall be effective only upon receipt.
8.11 Interpretation of Plan. Interpretations of, and
determinations related to, this Plan made by the Plan Committee in good faith,
including any determinations of the amounts of the benefits, shall be conclusive
and binding upon all parties; and the Fund shall not incur any liability to the
Eligible Trustee for any such interpretation or determination so made or for any
other action taken by it in connection with this Plan in good faith.
8.12 Successors and Assigns. This Agreement shall be binding
upon, and shall inure to the benefit of, the Fund and its successors and assigns
and to the Eligible Trustees and such trustees' heirs, executors, administrators
and personal representatives.
9
<PAGE> 1
[Saul, Ewing, Remick & Saul LLP Letterhead]
Exhibit (i)(1)
January 26, 2000
Van Kampen Pennsylvania Tax Free
Income Fund
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Gentlemen:
We have acted as special counsel to Van Kampen Pennsylvania Tax Free
Income Fund (the "Fund"), a common law trust organized under the laws of the
Commonwealth of Pennsylvania under an Agreement and Declaration of Trust, as
amended, in connection with the preparation of Post-Effective Amendment No. 20
under the Securities Act of 1933, as amended (the "1933 Act"), to the Fund's
Registration Statement on Form N-1A (the "Registration Statement"), which will
be filed by the Fund with the Securities and Exchange Commission (the
"Commission") on or about January 26, 2000. The Registration Statement relates
to the registration under the 1933 Act and the Investment Company Act of 1940,
as amended (the "Investment Company Act"), of an indefinite number of each of
Class A Shares of beneficial interest, without par value, Class B Shares of
beneficial interest, without par value, and Class C Shares of beneficial
interest, without par value, of the Fund (collectively, the "Shares"). The
Shares are to be sold pursuant to a Distribution and Service Agreement, as
amended, by and between the Fund and Van Kampen American Capital Distributors,
Inc. (the "Distribution Agreement").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) Post-Effective
Amendment No. 20 to the Registration Statement, (ii) the Agreement and
Declaration of Trust and By-Laws of the Fund, as amended to date (the
"Declaration of Trust" and "By-Laws", respectively), (iii) copies of certain
resolutions adopted by the Board of Trustees of the Fund relating to the
authorization, issuance and sale of the Shares, the filing of the Registration
Statement and any amendments or supplements thereto and related matters,
(iv) the Distribution Agreement, and (v) such other documents as
we have deemed necessary or appropriate as a basis for the opinions set forth
herein. In such examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or
<PAGE> 2
photostatic copies and the authenticity of the originals of such copies. As to
any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representations of the Fund and others.
We are admitted to the practice of law in the Commonwealth of Pennsylvania,
and we express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that when
(i) Post-Effective Amendment No. 20 to the Registration Statement shall have
become effective and (ii) certificates representing the shares have been duly
executed, countersigned, registered and duly delivered and paid for in
accordance with the provisions set forth in the Registration Statement, the
Shares will have been validly issued, fully paid and nonassessable except that,
with respect to assessability, shareholders of an unincorporated trust
established under Pennsylvania law may, under certain limited circumstances, be
held personally liable for obligations of the trust, as disclosed under the
caption "General Information" in the Registration Statement.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under the heading "Other Information -- Legal Counsel" in the
Registration Statement. In giving this consent, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
1933 Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Saul, Ewing, Remick & Saul LLP
<PAGE> 1
Exhibit(i)(2)
[Letterhead of Skadden, Arps, Slate, Meagher & Flom (Illinois)]
January 27, 2000
Van Kampen Pennsylvania Tax Free Income Fund
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
Re: Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A for
the Van Kampen Pennsylvania Tax Free Income
Fund (the "Registration Statement")
(File Nos. 33-11384 and 811-4983)
--------------------------------
We hereby consent to the reference to our firm under the heading "Legal
Counsel" in the Registration Statement. In giving this consent, we do not
hereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom (Illinois)
<PAGE> 1
EXHIBIT (j)
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 27, 2000
<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 trust, and
being Officers and Directors of Van Kampen Series Fund, Inc. (the
"Corporation"), a Maryland corporation, do hereby, in the capacities shown
below, appoint Richard F. Powers, III, Dennis J. McDonnell and A. Thomas Smith
III, each of Oakbrook Terrace, Illinois, as agents and attorneys-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: December 15, 1999
Signature Title
--------- -----
/s/ Richard F. Powers, III President, Trustee/Director
- ------------------------------------
Richard F. Powers, III
/s/ John L. Sullivan Vice President, Chief Financial
- ------------------------------------ Officer and Treasurer
John L. Sullivan
/s/ J. Miles Branagan Trustee/Director
- ------------------------------------
J. Miles Branagan
/s/ Jerry D. Choate Trustee/Director
- ------------------------------------
Jerry D. Choate
/s/ Linda Hutton Heagy Trustee/Director
- ------------------------------------
Linda Hutton Heagy
/s/ R. Craig Kennedy Trustee/Director
- ------------------------------------
R. Craig Kennedy
/s/ Mitchell M. Merin Trustee/Director
- ------------------------------------
Mitchell M. Merin
/s/ Jack E. Nelson Trustee/Director
- ------------------------------------
Jack E. Nelson
/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
- ------------------------------------
Wayne W. Whalen
/s/ Suzanne H. Woolsey Trustee/Director
- ------------------------------------
Suzanne H. Woolsey
/s/ Paul G. Yovovich Trustee/Director
- ------------------------------------
Paul G. Yovovich
<PAGE> 2
SCHEDULE 1
VAN KAMPEN U.S. GOVERNMENT TRUST
VAN KAMPEN TAX FREE TRUST
VAN KAMPEN TRUST
VAN KAMPEN EQUITY TRUST
VAN KAMPEN EQUITY TRUST II
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 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 LIMITED MATURITY GOVERNMENT FUND
VAN KAMPEN PACE FUND
VAN KAMPEN REAL ESTATE SECURITIES FUND
VAN KAMPEN RESERVE 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 U.S. Government Trust
Van Kampen U.S. Government Fund
Van Kampen Tax Free Trust
Van Kampen Insured Tax Free Income Fund
Van Kampen Tax Free High Income Fund
Van Kampen California Insured Tax Free Fund
Van Kampen Municipal Income Fund
Van Kampen Intermediate Term Municipal Income Fund
Van Kampen Florida Insured Tax Free Income Fund
Van Kampen New York Tax Free Income Fund
Van Kampen California Tax Free Income Fund*
Van Kampen Michigan Tax Free Income Fund*
Van Kampen Missouri Tax Free Income Fund*
Van Kampen Ohio Tax Free Income Fund*
Van Kampen Trust
Van Kampen High Yield Fund
Van Kampen Strategic Income Fund
Van Kampen Equity Trust
Van Kampen Aggressive Growth Fund
Van Kampen Great American Companies Fund
Van Kampen Growth Fund
Van Kampen Mid Cap Value Fund
Van Kampen Prospector Fund
Van Kampen Small Cap Value Fund
Van Kampen Utility Fund
Van Kampen Equity Trust II
Van Kampen Technology Fund
Van Kampen Pennsylvania Tax Free Income Fund
Van Kampen Tax Free Money Fund
Van Kampen Prime Rate Income Trust
Van Kampen Senior Floating Rate Fund
Van Kampen Comstock Fund
Van Kampen Corporate Bond Fund
Van Kampen Emerging Growth Fund
Van Kampen Enterprise Fund
Van Kampen Equity Income Fund
Van Kampen Exchange Fund
The Explorer Institutional Trust
Explorer Institutional Active Core Fund
Explorer Institutional Limited Duration Fund
<PAGE> 2
Van Kampen Limited Maturity Government Fund
Van Kampen Global Managed Assets Fund
Van Kampen Government Securities Fund
Van Kampen Growth and Income Fund
Van Kampen Harbor Fund
Van Kampen High Income Corporate Bond Fund
Van Kampen Life Investment Trust on behalf of its series
Asset Allocation Portfolio
Comstock Portfolio
Domestic Income Portfolio
Emerging Growth Portfolio
Enterprise Portfolio
Global Equity Portfolio
Government Portfolio
Growth and Income Portfolio
Money Market Portfolio
Strategic Stock Portfolio
Morgan Stanley Real Estate Securities Portfolio
Van Kampen Pace Fund
Van Kampen Real Estate Securities Fund
Van Kampen Reserve Fund
Van Kampen Tax Exempt Trust
Van Kampen High Yield Municipal Fund
Van Kampen U.S. Government Trust for Income
Van Kampen World Portfolio Series Trust
Van Kampen Global Government Securities Fund
Van Kampen Series Fund, Inc.
Van Kampen American Value Fund
Van Kampen Asian Growth Fund
Van Kampen Emerging Markets Debt Fund*
Van Kampen Emerging Markets Fund
Van Kampen Equity Growth Fund
Van Kampen European Equity Fund
Van Kampen Focus Equity Fund
Van Kampen Global Equity Allocation Fund
Van Kampen Global Equity Fund
Van Kampen Global Fixed Income Fund
Van Kampen Global Franchise Fund
Van Kampen Growth and Income Fund II*
Van Kampen High Yield & Total Return Fund
Van Kampen International Magnum Fund
Van Kampen Japanese Equity Fund*
Van Kampen Latin American Fund
Van Kampen Mid Cap Growth Fund
Van Kampen Value Fund
Van Kampen Worldwide High Income Fund
* Funds that have not commenced investment operations.
<PAGE> 3
<TABLE>
<S> <C>
Insured Municipals Income Trust Series 417
California Insured Municipals Income Trust Series 182
FLORIDA INSURED MUNICIPALS INCOME TRUST SERIES 128
MICHIGAN INSURED MUNICIPALS INCOME TRUST SERIES 159
New York Insured Municipals Income Trust Series 149
PENNSYLVANIA INSURED MUNICIPALS INCOME TRUST SERIES 246
Van Kampen Focus Portfolios, Insured Income Trust Series 75
THE DOW(SM) STRATEGIC 10 TRUST January 2000
SERIES
THE DOW(SM) STRATEGIC 10 TRUST January 2000
TRADITIONAL
SERIES
THE DOW(SM) STRATEGIC 5 TRUST January 2000
SERIES
THE DOW(SM) STRATEGIC 5 TRUST January 2000
TRADITIONAL
SERIES
EAFE STRATEGIC 20 TRUST January 2000
SERIES
STRATEGIC PICKS OPPORTUNITY TRUST January 2000
SERIES
NASDAQ Strategic 10 Trust January 2000 Series
Dow 30 Index Trust Series 9
Dow & Tech Strategic 10 Trust Series 1299a
Dow & Tech Strategic 10 Trust Series 1299b
Global Energy Trust Series 12
Financial Institutions Trust Series 3a
Financial Institutions Trust Series 3b
Edward Jones Select Growth Trust November 1999
Series
Internet Trust Series 18A
Internet Trust Series 18B
Morgan Stanley High-Technology 35 Index Trust Series 9A
Morgan Stanley High-Technology 35 Index Trust Series 9B
Pharmaceutical Trust Series 8A
Pharmaceutical Trust Series 8B
Telecommunications & Bandwidth Trust Series 8A
Telecommunications and Bandwidth Trust Series 8B
New Frontier Utility Trust Series 8A
New Frontier Utility Trust Series 8B
Roaring 2000s Trust Series 4a
Roaring 2000s Trust Series 4b
Roaring 2000s Trust Traditional Series 4
Morgan Stanley Multinational Index Trust Series 2A
Morgan Stanley Multinational Index Trust Series 2B
Software Trust Series 2A
Software Trust Series 2B
Natcity - Great American Equities Trust Series 3
Natcity - Great American Value Trust Series 1
Josephthal - The New Millennium Consumer Trust, Retail.com Portfolio 1
</TABLE>
<PAGE> 1
EXHIBIT (z)(2)
Item 27(b)
- ----------
<TABLE>
<S> <C> <C>
Richard F. Powers III Chairman & Chief Executive Officer Oakbrook Terrace, IL
John H. Zimmerman III President Oakbrook Terrace, IL
A. Thomas Smith III Executive Vice President, General Oakbrook Terrace, IL
Counsel & Secretary;
Vice President and Secretary of the Funds
William R. Rybak Executive Vice President, Chief
Financial Officer & Treasurer Oakbrook Terrace, IL
Michael H. Santo Executive Vice President & Chief
Operations & Technology Officer Oakbrook Terrace, IL
Colette M. Saucedo Executive Vice President & Houston, TX
Chief Administrative Officer
A. Thomas Smith III Executive Vice President, General Oakbrook Terrace, IL
Counsel & Secretary; Vice President
and Secretary of the Funds
Steven M. Massoni Executive Vice President Oakbrook Terrace, IL
David Swanson Executive Vice President and Chief
Marketing Officer Oakbrook Terrace, IL
Laurence J. Althoff Sr. Vice President & Controller Oakbrook Terrace, IL
Don J. Andrews Sr. Vice President & Chief Compliance Oakbrook Terrace, IL
Officer
Sara L. Badler Sr. Vice President, Deputy Oakbrook Terrace, IL
General Counsel & Assistant Secretary;
Assistant Secretary of the Funds
James J. Boyne Sr. Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Assistant Secretary
Glenn M. Cackovic Senior Vice President Laguna Niguel, CA
Gary R. DeMoss Sr. Vice President Oakbrook Terrace, IL
John E. Doyle Sr. Vice President Oakbrook Terrace, IL
Richard G. Golod Sr. Vice President Annapolis, MD
Eric J. Hargens Senior Vice President Orlando, FL
Carl Mayfield Senior Vice President Lakewood, CO
Mark R. McClure Senior Vice President Oakbrook Terrace, IL
Robert F. Muller, Jr. Senior Vice President Oakbrook Terrace, IL
Walter E. Rein Sr. Vice President Oakbrook Terrace, IL
James J. Ryan Sr. Vice President Oakbrook Terrace, IL
Frederick Shepherd Sr. Vice President Houston, TX
Weston B. Wetherell Senior Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Asst. Secretary;
Assistant Secretary of the Funds
Robert S. West Sr. Vice President Oakbrook Terrace, IL
Edward G. Wood, III Sr. Vice President,
Chief Operating Officer; Oakbrook Terrace. IL
Vice President of the Funds
James R. Yount Senior Vice President Mercer Island, WA
Patricia A. Bettlach 1st Vice President Chesterfield, MO
Gregory Heffington 1st Vice President Ft. Collins, CO
David S. Hogaboom 1st Vice President Oakbrook Terrace, IL
Dominic C. Martellaro 1st Vice President Danville, CA
Maura A. McGrath 1st Vice President New York, NY
Thomas Rowley 1st Vice President St. Louis, MO
Andrew J. Scherer 1st Vice President Oakbrook Terrace, IL
James D. Stevens 1st Vice President North Andover, MA
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
James K. Ambrosio Vice President Massapequa, NY
Brian P. Arcara Vice President Buffalo, NY
Timothy R. Armstrong Vice President Wellington, FL
Matthew Baker Vice President Oakbrook Terrace, IL
Shakeel Anwar Barkat Vice President Annapolis, MD
Scott C. Bernstiel Vice President Plainsboro, NJ
Carol S. Biegel Vice President Oakbrook Terrace, IL
Christopher M. Bisaillon Vice President Oakbrook Terrace, IL
William Edwin Bond Vice President New York, NY
Michael P. Boos Vice President Oakbrook Terrace, IL
Robert C. Brooks Vice President Oakbrook Terrace, IL
Elizabeth M. Brown Vice President Houston, TX
William F. Burke, Jr. Vice President Mendham, NJ
Loren Burket Vice President Plymouth, MN
Juanita E. Buss Vice President Kennesaw, GA
Christine Cleary Byrum Vice President Tampa, FL
Richard J. Charlino Vice President Oakbrook Terrace, IL
Deanne Margaret Chiaro Vice President Oakbrook Terrace, IL
Scott A. Chriske Vice President Plano, TX
German Clavijo Vice President Atlanta, GA
Eleanor M. Cloud Vice President Oakbrook Terrace, IL
Dominick Cogliandro Vice President & Asst. Treasurer New York, NY
Michael Colston Vice President Louisville, KY
Kevin J. Connors Vice President Oakbrook Terrace, IL
Gina Costello Vice President Oakbrook Terrace, IL
Suzanne Cummings Vice President Oakbrook Terrace, IL
Michael E. Eccleston Vice President Oakbrook Terrace, IL
William J. Fow Vice President Redding, CT
Nicholas J. Foxhoven Vice President Englewood, CO
Charles Friday Vice President Gibsonia, PA
Sarah Kessler Gieser Vice President Oakbrook Terrace, IL
Kyle D. Haas Vice President Oakbrook Terrace, IL
Daniel Hamilton Vice President Austin, TX
John G. Hansen Vice President Oakbrook Terrace, IL
Joseph Hays Vice President Cherry Hill, NJ
Michael D. Hibsch Vice President Oakbrook Terrace, IL
Susan J. Hill Vice President Oakbrook Terrace, IL
Thomas R. Hindelang Vice President Gilbert, AZ
Bryn M. Hoggard Vice President Houston, TX
Michelle Huber Vice President Oakbrook Terrace, IL
Michael B. Hughes Vice President Oakbrook Terrace, IL
Lowell Jackson Vice President Norcross, GA
Kevin G. Jajuga Vice President Baltimore, MD
Laurie L. Jones Vice President Oakbrook Terrace, IL
Robert Daniel Kendall Vice President Oakbrook Terrace, IL
Dana R. Klein Vice President Oakbrook Terrace, IL
Frederick Kohly Vice President Miami, FL
Anne Kochevar Vice President Oakbrook Terrace, IL
Richard D. Kozlowski Vice President Atlanta, GA
Patricia D. Lathrop Vice President Tampa, FL
Brian Laux Vice President Staten Island, NY
Tony E. Leal Vice President Daphne, AL
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
S. William Lehew III Vice President Charlotte, NC
Jonathan Linstra Vice President Oakbrook Terrace, IL
Ivan R. Lowe Vice President Houston, TX
Richard M. Lundgren Vice President Oakbrook Terrace, IL
Linda S. MacAyeal Vice President Oakbrook Terrace, IL
Kevin S. Marsh Vice President Bellevue, WA
Brooks D. McCartney Vice President Puyallup, WA
Anne Therese McGrath Vice President Los Gatos, CA
John Mills Vice President Kenner, LA
Stuart R. Moehlman Vice President Houston, TX
Carin Elizabeth Morgan Vice President Oakbrook Terrace, IL
Ted Morrow Vice President Plano, TX
Peter Nicholas Vice President Beverly, MA
Steven R. Norvid Vice President Oakbrook Terrace, IL
Allyn O' Connor Vice President & Assoc. General Counsel Oakbrook Terrace, IL
Gregory S. Parker Vice President Houston, TX
Christopher Petrungaro Vice President Oakbrook Terrace, IL
Richard J. Poli Vice President Philadelphia, PA
Ronald E. Pratt Vice President Marietta, GA
Daniel D. Reams Vice President Royal Oak, MI
Theresa Marie Renn Vice President Oakbrook Terrace, IL
Kevin Wayne Reszel Vice President Oakbrook Terrace, IL
Michael W. Rohr Vice President Oakbrook Terrace, IL
Jeffrey L. Rose Vice President Houston, TX
Suzette N. Rothberg Vice President Plymouth, MN
Jeffrey Rourke Vice President Oakbrook Terrace, IL
Heather R. Sabo Vice President Richmond, VA
Brett Van Bortel Vice President Oakbrook Terrace, IL
Larry Brian Vickery Vice President Oakbrook Terrace, IL
Diane Saxon Vice President & Assistant Treasurer Oakbrook Terrace, IL
Stephanie Scarlata Vice President Bedford Corners, NY
Christina L. Schmieder Vice President Oakbrook Terrace, IL
Timothy M. Scholten Vice President Oakbrook Terrace, IL
Ronald J. Schuster Vice President Tampa, FL
Jeffrey M. Scott Vice President Oakbrook Terrace, IL
Gwen L. Shaneyfelt Vice President Oakbrook Terrace, IL
Jeffrey C. Shirk Vice President Swampscott, MA
Traci T. Sorenson Vice President Oakbrook Terrace, IL
Darren D. Stabler Vice President Phoenix, AZ
Christopher J. Staniforth Vice President Leawood, KS
Richard Stefanec Vice President Los Angles, CA
William C. Strafford Vice President Granger, IN
Mark A. Syswerda Vice President Oakbrook Terrace, IL
Charles S. Thompson Vice President Oakbrook Terrace, IL
John F. Tierney Vice President Oakbrook Terrace, IL
Curtis L. Ulvestad Vice President Red Wing, MN
Thomas J. Sauerborn Vice President New York, NY
Daniel B. Waldron Vice President Oakbrook Terrace, IL
Jeff Warland Vice President Oakbrook Terrace, IL
Robert A. Watson Vice President Oakbrook Terrace, IL
Sharon Wells Coicou Vice President Oakbrook Terrace, IL
Frank L. Wheeler Vice President Oakbrook Terrace, IL
Harold Whitworth, III Vice President Oakbrook Terrace, IL
Joel John Wilczewski Vice President Oakbrook Terrace, IL
Thomas M. Wilson Vice President Oakbrook Terrace, IL
Barbara A. Withers Vice President Oakbrook Terrace, IL
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
David M. Wynn Vice President Phoenix, AZ
Patrick M. Zacchea Vice President Oakbrook Terrace, IL
Scott F. Becker Asst. Vice President Oakbrook Terrace, IL
Brian E. Binder Asst. Vice President Oakbrook Terrace, IL
Billie J. Bronaugh Asst. Vice President Houston, TX
Lynn Chadderton Asst. Vice President Oakbrook Terrace, IL
Phillip Ciulla Asst. Vice President Oakbrook Terrace, IL
Amy Cooper Asst. Vice President Oakbrook Terrace, IL
Paula Duerr Asst. Vice President Oakbrook Terrace, IL
Tammy Echevarria-Davis Asst. Vice President Oakbrook Terrace, IL
Walter C. Gray Asst. Vice President Oakbrook Terrace, IL
Nancy Johannsen Asst. Vice President Oakbrook Terrace, IL
Thomas Johnson Asst. Vice President New York NY
Tara Jones Asst. Vice President Oakbrook Terrace, IL
Robin R. Jordan Asst. Vice President Oakbrook Terrace, IL
Holly Lieberman Asst. Vice President Oakbrook Terrace, IL
Gregory Mino Asst. Vice President Oakbrook Terrace, IL
Christopher Perozek Asst. Vice President Oakbrook Terrace, IL
Christine K. Putong Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Leah Richardson Asst. Vice President Oakbrook Terrace, IL
David P. Robbins Asst. Vice President Oakbrook Terrace, IL
Regina Rosen Asst. Vice President Oakbrook Terrace, IL
Pamela S. Salley Asst. Vice President Houston, TX
David T. Saylor Asst. Vice President Oakbrook Terrace, IL
Katherine Scherer Asst. Vice President Oakbrook Terrace, IL
Heather Schmitt Asst. Vice President Oakbrook Terrace, IL
Lisa Schultz Asst. Vice President Oakbrook Terrace, IL
Laurel Shipes Asst. Vice President Oakbrook Terrace, IL
Lauren B. Sinai Asst. Vice President Oakbrook Terrace, IL
Scott Stevens Asst. Vice President Oakbrook Terrace, IL
Kristen L. Transier Asst. Vice President Houston, TX
Michael Trizil Asst. Vice President Oakbrook Terrace, IL
Damienne Trippiedi Asst. Vice President Oakbrook Terrace, IL
David H. Villarreal Asst. Vice President Oakbrook Terrace, IL
Judy Wooley Asst. Vice President Houston, TX
Cathy Napoli Assistant Secretary Oakbrook Terrace, IL
William R. Rybak Treasurer Oakbrook Terrace, IL
John Browning Officer Oakbrook Terrace, IL
Leticia George Officer Houston, TX
William D. McLaughlin Officer Houston, TX
Rebecca Newman Officer Houston, TX
Theresa M. Renn Officer Oakbrook Terrace, IL
Larry Vickrey Officer Houston, TX
John Yovanovic Officer Houston, TX
Richard F. Powers III Director Oakbrook Terrace, IL
Michael H. Santo Director Oakbrook Terrace, IL
A. Thomas Smith III Director Oakbrook Terrace, IL
William R. Rybak Director Oakbrook Terrace, IL
John H. Zimmerman III Director Oakbrook Terrace, IL
</TABLE>
