<PAGE> 1
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VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Texas Tax Free Income Fund, formerly known as
American Capital Texas Municipal Securities, Inc. (the "Fund"), is a mutual fund
whose objective is to provide as high a level of interest income exempt from
federal income tax and Texas state income tax, if any, as is consistent with the
Fund's investment policies. The Fund invests principally in Texas state,
municipal and local government obligations and obligations of other qualifying
issuers which are tax-exempt. The Fund currently is available for sale only in
Texas and other selected states specified under "Shareholder
Services -- Exchange Privilege." There can be no assurance that the objective of
the Fund will be achieved.
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth certain information that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is 2800
Post Oak Blvd., Houston, Texas 77056, and its telephone number is
(800) 421-5666.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated August 28, 1995, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission (the "SEC") and is hereby incorporated by reference into
this Prospectus. A copy of the Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or, for Telecommunications
Device For the Deaf, (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED AUGUST 28, 1995.
<PAGE> 2
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary............................................... 3
Shareholder Transaction Expenses................................. 5
Annual Fund Operating Expenses and Example....................... 6
Financial Highlights............................................. 8
The Fund......................................................... 10
Investment Objective and Policies................................ 10
Municipal Securities............................................. 15
Investment Practices............................................. 16
Investment Advisory Services..................................... 21
Alternative Sales Arrangements................................... 23
Purchase of Shares............................................... 26
Shareholder Services............................................. 35
Redemption of Shares............................................. 40
Distribution Plans............................................... 43
Distributions from the Fund...................................... 45
Tax Status....................................................... 46
Fund Performance................................................. 48
Description of Shares of the Fund................................ 51
Additional Information........................................... 52
</TABLE>
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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 ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE 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.
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2
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PROSPECTUS SUMMARY
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THE FUND. Van Kampen American Capital Texas Tax Free Income Fund (the "Fund") is
a diversified open-end management investment company organized as a Delaware
business trust.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
INVESTMENT OBJECTIVE. Interest income exempt from federal income taxes and Texas
state income taxes.
INVESTMENT POLICIES. The Fund invests principally in Texas state, municipal and
local government obligations and obligations of other qualifying issuers which
are tax-exempt.
INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights." See also "Fund Performance."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Alternative
Sales Arrangements -- Factors for Consideration." Each class of shares
represents an interest in the same portfolio of investments of the Fund. The per
share dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Alternative Sales Arrangements." For
information on redeeming shares see "Redemption of Shares."
Class A Shares. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. The Fund pays an annual
service fee of up to 0.25% of its average daily net assets attributable to such
class of shares. See "Purchase of Shares -- Class A Shares" and "Distribution
Plans."
Class B Shares. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first and second years, declining each year thereafter to
zero after the fifth year. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class B
Shares" and "Distribution Plans." Class B shares will convert automatically to
Class A shares six years after the end of the calendar month in which the
shareholder's order
3
<PAGE> 4
to purchase was accepted. See "Alternative Sales Arrangements -- Conversion
Feature."
Class C Shares. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of 1% on redemptions made within
one year of purchase. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution Plans." Class C shares will convert automatically to
Class A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
DISTRIBUTIONS FROM THE FUND. The Fund declares dividends from net investment
income on each business day. Such dividends are distributed monthly. The daily
dividend is a fixed amount determined at least monthly which is not expected to
exceed the net income of the Fund for the month divided by the number of
business days during the month. Capital gains, if any, are distributed at least
annually. All dividends and distributions are automatically reinvested in shares
of the Fund at net asset value per share, without sales charge, unless payment
in cash is requested. See "Distributions from the Fund."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser to the Fund.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
is the distributor to the Fund.
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
4
<PAGE> 5
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SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- ----------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)............... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering
price)........................ None None None
Deferred sales charge (as a
percentage of the lesser of
original purchase price or
redemption proceeds).......... None(2) Year 1--4.00% Year 1--1.00%
Year 2--4.00%
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fee.................... None None None
</TABLE>
- ---------------
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of one percent may
be imposed on certain redemptions made within one year of the purchase.
5
<PAGE> 6
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ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C>
Management fees (as a percentage of
average daily net assets)............. .60% .60% .60%
12b-1 Fees(3) (as a percentage of
average daily net assets)............. .24% 1.00%(5) 1.00%(5)
Other Expenses(4) (as a percentage of
average daily net assets)............. .86% .87% .86%
Total Fund Operating Expenses (as a
percentage of average daily net
assets)............................... 1.70% 2.47% 2.46%
</TABLE>
- ---------------
(3) Up to 0.25% for Class A shares and one percent for Class B and C shares. See
"Distribution Plans."
(4) See "Investment Advisory Services."
(5) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
6
<PAGE> 7
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 1.70% for
Class A shares, 2.47% for Class B shares
and 2.46% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $64 $ 99 $135 $239
Class B............................... $66 $109 $149 $244*
Class C............................... $35 $ 77 $131 $280
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each time
period:
Class A............................... $64 $ 99 $135 $239
Class B............................... $25 $ 77 $132 $244*
Class C............................... $25 $ 77 $131 $280
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A shares after six years.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and are
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required to utilize a five percent annual return
assumption. Class B shares acquired through the exchange privilege are subject
to the deferred sales charge schedule relating to the Class B shares of the fund
from which the purchase of Class B shares was originally made. Accordingly,
future expenses as projected could be higher than those determined in the above
table if the investor's Class B shares were exchanged from a fund with a higher
contingent deferred sales charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services" and "Redemption of Shares."
7
<PAGE> 8
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FINANCIAL HIGHLIGHTS
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(Selected data for a share of beneficial interest outstanding throughout the
period indicated)
The following financial highlights have been audited by the Fund's independent
accountants, Price Waterhouse LLP, whose report thereon was unqualified. The
information presented below for the six months ended March 31, 1995 is
unaudited. This information should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
SIX MONTHS YEAR ENDED MARCH 2, 1992(1)
ENDED SEPTEMBER 30 THROUGH
MARCH 31, ---------------------- SEPTEMBER 30,
1995 1994 1993(2) 1992(2)
----------- -------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................................ $ 9.64 $10.36 $ 9.74 $ 9.45
----------- -------- -------- --------------
INCOME FROM OPERATIONS
Investment income................................................... .33 .64 .63 .42
Expenses............................................................ (.08) (.17) (.19) (.09)
Expense reimbursement............................................... .01 .07 .13 .03
----------- -------- -------- --------------
Net investment income............................................... .26 .54 .57 .36
Net realized and unrealized gains or losses on securities........... .27 (.7025) .65 .23
----------- -------- -------- --------------
Total from investment operations.................................... .53 (.1625) 1.22 .59
----------- -------- -------- --------------
LESS DISTRIBUTIONS FROM
Net investment income............................................... (.27) (.545) (.5875) (.30)
Net realized gains on securities.................................... -- (.0125) (.0125) --
----------- -------- -------- --------------
Total distributions................................................. (.27) (.5575) (.60) (.30)
----------- -------- -------- --------------
Net asset value, end of period...................................... $ 9.90 $ 9.64 $10.36 $ 9.74
=========== ======== ======== ==============
TOTAL RETURN(3)..................................................... 5.63% (1.62%) 12.94% 6.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................ $11.8 $12.8 $18.0 $ 14.1
Ratios to average net assets (annualized)
Expenses.......................................................... 1.53% 1.03% .61% .93%
Expenses, without expense reimbursement........................... 1.73% 1.70% 1.86% 1.41%
Net investment income............................................. 5.46% 5.41% 5.74% 5.94%
Net investment income, without expense reimbursement.............. 5.26% 4.74% 4.49% 5.45%
Portfolio turnover rate............................................. 0% 10% 5% 4%
</TABLE>
(Table continued on following page)
8
<PAGE> 9
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FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------------------------------- -----------
JULY 27,
YEAR ENDED 1992(1)
SIX MONTHS SEPTEMBER 30 THROUGH SIX MONTHS
ENDED MARCH --------------------- SEPTEMBER 30, ENDED MARCH
31, 1995 1994 1993(2) 1992(2) 31, 1995
----------- -------- ------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $ 9.64 $10.35 $ 9.74 $ 9.91 $ 9.65
----------- -------- ------- ------------- -----------
INCOME FROM OPERATIONS
Investment income....................................... .33 .65 .63 .09 .33
Expenses................................................ (.12) (.25) (.26) (.04) (.12)
Expense reimbursement................................... .01 .07 .13 .015 .01
----------- -------- ------- ------------- -----------
Net investment income................................... .22 .47 .50 .065 .22
Net realized and unrealized gains or losses on
securities............................................. .272 (.7065) .633 (.103) .272
----------- -------- ------- ------------- -----------
Total from investment operations........................ .492 (.2365) 1.133 (.038) .492
----------- -------- ------- ------------- -----------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.232) (.461) (.5105) (.132) (.232)
Net realized gains on securities........................ -- (.0125) (.0125) -- --
----------- -------- ------- ------------- -----------
Total distributions..................................... (.232) (.4735) (.523) (.132) (.232)
----------- -------- ------- ------------- -----------
Net asset value, end of period.......................... $ 9.90 $ 9.64 $10.35 $ 9.74 $ 9.91
=========== ======== ======== ============= ===========
TOTAL RETURN(3)......................................... 5.21% (2.35%) 11.97% (.73%) 5.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $ 7.7 $ 8.6 $ 7.1 $ 0.9 $ 1.3
Ratios to average net assets (annualized)
Expenses............................................... 2.33% 1.80% 1.30% 1.41% 2.31%
Expenses, without expense reimbursement................ 2.53% 2.47% 2.55% 2.15% 2.51%
Net investment income.................................. 4.68% 4.66% 4.92% 3.83% 4.65%
Net investment income, without expense reimbursement... 4.48% 3.99% 3.67% 3.07% 4.45%
Portfolio turnover rate................................. 0% 10% 5% 4% 0%
<CAPTION>
CLASS C
-----------------------------
AUGUST 30,
1993(1)
YEAR ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1994(2) 1993(2)
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $10.36 $10.28
------------- -------------
INCOME FROM OPERATIONS
Investment income....................................... .64 .05
Expenses................................................ (.25) (.02)
Expense reimbursement................................... .07 .01
------------- -------------
Net investment income................................... .46 .04
Net realized and unrealized gains or losses on
securities............................................. (.6965) .121
------------- -------------
Total from investment operations........................ (.2365) .161
------------- -------------
LESS DISTRIBUTIONS FROM
Net investment income................................... (.461) (.081)
Net realized gains on securities........................ (.0125) --
------------- -------------
Total distributions..................................... (.4735) (.081)
------------- -------------
Net asset value, end of period.......................... $ 9.65 $10.36
============= =============
TOTAL RETURN(3)......................................... (2.35%) 1.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $ 1.2 $ 0.1
Ratios to average net assets (annualized)
Expenses............................................... 1.79% .66%
Expenses, without expense reimbursement................ 2.46% 1.89%
Net investment income.................................. 4.59% 4.17%
Net investment income, without expense reimbursement... 3.92% 2.92%
Portfolio turnover rate................................. 10% 5%
</TABLE>
(1) Commencement of operations.
(2) Based on the average month-end outstanding.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
9
<PAGE> 10
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THE FUND
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The Fund is an open-end, diversified management investment company. This type
of company is commonly known as a mutual fund. A mutual fund provides, for those
who have similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
Fourteen Trustees have the responsibility for overseeing the affairs of the
Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines the
investment of the Fund's assets, provides administrative services and manages
the Fund's business and affairs. The Adviser together with its predecessors, has
been in the investment advisory business since 1926.
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INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The Fund is a non-diversified, open-end management investment company,
generally known as a mutual fund, originally organized as a Maryland corporation
on September 6, 1991 and reorganized on August 26, 1995, under the laws of the
State of Delaware as a business entity commonly known as a "Delaware business
trust," with an investment objective of providing as high a level of interest
income exempt from federal income tax and Texas state income tax, if any, as is
consistent with its investment policies. However, there can be no assurance that
the objective of the Fund will be achieved. The Fund invests primarily in
obligations issued by or on behalf of states, territories or possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest from which, in the opinion of bond
counsel for the issuer, is exempt from federal income tax ("Municipal
Securities").
Among the various types of Municipal Securities are general obligation bonds,
revenue or special obligation bonds, industrial development bonds, pollution
control bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes. General obligations are backed by
the taxing power of the issuing municipality. Revenue obligations are backed by
the revenues of a project or facility -tolls from a toll-bridge, for example.
Industrial development revenue obligations are a specific type of revenue
obligation backed by the credit and security of a private user. Variable rate
demand notes and the risks thereof are described under "Investment Practices --
Variable Rate Demand Notes."
The Fund maintains at least 80% of its net assets invested in Municipal
Securities except as a temporary defensive measure during periods of adverse
market conditions. At least 65% of the Fund's total assets will be invested in
securities issued by the State of Texas, its political subdivisions, agencies
and instrumentalities ("Texas Securities"). This is a fundamental policy and may
not be changed without the
10
<PAGE> 11
approval of at least a majority of the outstanding shares of the Fund. The Fund
does not invest in any securities except Municipal Securities and Temporary
Investments as defined below, except that the Fund may seek to hedge against
changes in interest rates through transactions in listed futures contracts
related to U.S. Government securities or based upon the Bond Buyers Municipal
Bond Index and options thereon. See "Investment Practices -- Futures Contracts
and Related Options."
On a temporary basis, to provide cash reserves or pending investment in
Municipal Securities, the Fund may invest up to 20% of its net assets in taxable
securities rated at the time of purchase by either Moody's Investor Service
("Moody's") as follows: Aaa through A by Moody's for bonds, MIG 1 through MIG 4,
or VMIG 1 through VMIG 4 for notes and Prime-1 through Prime-3 for commercial
paper; or by Standard & Poor's Corporation ("S&P") as follows: AAA through A for
bonds, SP-1 or SP-2 for notes and A-1 through A-3 for commercial paper; or, if
non-rated, are in the opinion of the Adviser, of comparable quality ("Temporary
Investments"). The Fund also may invest temporarily a greater proportion of its
assets in Temporary Investments for defensive purposes, when, in the judgment of
the Adviser, market conditions warrant. Temporary Investments include but are
not limited to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; corporate bonds and debentures; certificates of
deposit and bankers' acceptances of domestic banks with assets of $500 million
or more and having deposits insured by the Federal Deposit Insurance
Corporation; commercial paper; repurchase agreements; and shares of tax-exempt
money market investment companies. See "Investment Practices -- Money Market
Investment Companies."
Interest received on certain otherwise tax-exempt securities which are
classified as "private activity bonds" (in general bonds that benefit
non-governmental entities) may be subject to an alternative minimum tax. The
percentage of the Fund's assets invested in "private activity bonds" will vary
during the year, but will not exceed 20%. See "Distributions from the
Fund -- Federal Income Taxes" for further discussion.
The Fund may invest up to ten percent of its net assets in illiquid securities
which include Municipal Securities issued in limited placements under which the
Fund represents that it is purchasing for investment purposes only, repurchase
agreements maturing in more than seven days and other securities subject to
legal or contractual restrictions on resale. Municipal Securities acquired in
limited placements generally may be resold only in a privately negotiated
transaction to one or more other institutional investors. Such limitation could
result in the Fund's inability to realize a favorable price upon disposition,
and in some cases might make disposition of such securities at the time desired
by the Fund impossible. The ten percent limitation applies at the time the
purchase commitments are made. See "Investment Practices -- Repurchase
Agreements."
11
<PAGE> 12
Differences with respect to the quality and maturity of portfolio investments
can be expected to affect the yield on the Fund and the degree of market and
financial risk to which the Fund is subject. Generally, Municipal Securities
with longer maturities tend to produce higher yields and are subject to greater
market fluctuations as a result of changes in interest rates than Municipal
Securities with shorter maturities and lower yields. In general, market prices
of Municipal Securities vary inversely with interest rates. Lower-rated
Municipal Securities generally provide a higher yield than higher-rated
Municipal Securities of similar maturity but are subject to greater market and
financial risk. The Fund may purchase short-term or long-term Municipal
Securities (with remaining maturities of up to 30 years or more). There is no
limitation on the average maturity of the Municipal Securities in the Fund and
such average maturity is likely to change from time to time based on the
Adviser's view of market conditions. The average maturity of the Municipal
Securities owned by the Fund on September 30, 1994, was 19.86 years. Municipal
Securities ratings of Moody's and of S&P are described in the Statement of
Additional Information. See also "Municipal Securities" herein.
At least 80% of the Municipal Securities purchased by the Fund are rated at
the time of purchase as determined by Moody's in the following quality grades:
Aaa through Baa for bonds, MIG 1 through MIG 4, or VMIG 1 through VMIG 4 for
notes and Prime-1 through Prime-3 for commercial paper; or as determined by S&P
in the following grades: AAA through BBB for bonds, SP-1 or SP-2 for notes and
A-1 through A-3 for commercial paper; or, if non-rated, are in the opinion of
the Adviser of comparable quality. The lowest rating in each category described
above is considered by the rating agency to be of adequate quality.
During the fiscal period ended September 30, 1994, the average percentage of
the Fund's assets invested in Municipal Securities within the various rating
categories (based on the higher of the S&P or Moody's ratings), and the
non-rated debt securities, determined on a dollar weighted average, were as
follows:
<TABLE>
<S> <C>
AAA/Aaa...................................... 25.00%
AA/Aa........................................ 15.96%
A/A.......................................... 17.11%
BBB/Baa...................................... 19.74%
BB/Ba........................................ 1.46%
*Non-rated................................... 17.39%
Other Net Assets............................. 3.34%
--------
Total Net Assets.................... 100.00%
</TABLE>
- ------------
* The non-rated debt securities as a percentage of total net assets were
considered by the Adviser to be comparable to securities rated by Moody's as
follows: BBB - 17.39%.
12
<PAGE> 13
Up to 20% of the Municipal Securities purchased by the Fund may be obligations
rated BB or lower by S&P and Moody's or non-rated obligations which in the
opinion of the Adviser are of comparable quality. Such securities, (sometimes
referred to as high-yield, lower rated securities) are predominantly speculative
with respect to the capacity to pay interest and repay principal in accordance
with the terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. The market prices of
high-yielding, lower-rated securities may fluctuate more than higher-rated
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. In purchasing
such securities, the Fund will rely on the Adviser's judgment, analysis and
experience in evaluating the creditworthiness of the issuer of such securities.
The Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of its management and regulatory matters. The
Adviser has extensive experience in high-yield tax-exempt asset management. See
in the Statement of Additional Information "Municipal Securities -- Additional
Risks of Lower Rated Municipal Securities" and in the Appendix "Ratings of
Investments" for additional information regarding ratings of debt securities.
The Fund does not invest in obligations which are not currently paying interest
or which are rated C (lowest grade by Moody's) or which are rated C or D by S&P
or which are non-rated obligations considered by the Adviser to be of comparable
quality.
The Fund is registered as a "non-diversified" company under the 1940 Act. The
Fund intends to comply with Subchapter M of the Code which limits the aggregate
value of all holdings (except U.S. Government and cash items, as defined in the
Code), each of which exceeds 5% of the Fund's total assets, to an aggregate
amount of 50% of such assets. Also, holdings of a single issuer (with the same
exceptions) may not exceed 25% of the Fund's total assets. These limits are
measured at the end of each quarter. Under the Subchapter M limits,
"non-diversification" allows up to 50% of the total assets to be invested in as
few as two single issuers. In the event of a decline in the creditworthiness of
or default upon, the obligations of one or more such issuers exceeding five
percent, an investment in the Fund will entail greater risk than in funds which
have a policy of "diversification" because a high percentage of the Fund assets
may be invested in Municipal Securities of one or two issuers. Furthermore, a
high percentage of investments among few issuers may result in a greater degree
of fluctuation in the market value of the assets of the Fund because the Fund
will be more susceptible to economic, political, or regulatory developments
affecting these securities than would be the case with a fund composed of more
varied obligations of issuers. Also, the net asset value per share of the Fund
will tend to increase more when, for example, the assets invested in a limited
number of single issuers increase in value, and decrease more when such assets
decrease in value.
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The Fund ordinarily will invest at least 65% of its total assets in Texas
Securities, and, therefore, it is more susceptible to factors adversely
affecting issuers of Texas Securities than is a municipal bond mutual fund that
is not concentrated in issuers of Texas Securities to this degree. Such factors
include the economic condition of the State of Texas (the "State") and its
regions, pressures on the State budget, and litigation affecting issuers of
Texas Securities. Any circumstances that adversely affect the State's credit
standing may also affect the market value of securities of other issuers in the
State, either directly or indirectly, as a result of a dependency of local
governments and other authorities upon State aid and reimbursement programs.
Texas' economy continues to recover from the recession that began in the mid-
1980s due to declining oil prices and a collapse in the real estate industry.
The economy has become more stable due to increased diversification, with the
oil and gas industry diminishing in relative importance and the
service-producing sectors providing the major sources of job growth. Based on
information from the Texas Employment Commission, the unemployment rate averaged
6.4% in 1994. The Comptroller of Public Accounts predicts that the overall Texas
economy will outpace national economic growth in the long term by an annual
average of one-half percentage point.
The 73rd State Legislature passed a balanced 1994-95 biennial State budget in
May of 1993 without increasing State taxes. This was accomplished by
implementing savings proposals, cutting spending and increasing federal funding.
The 74th State Legislature has just begun the process of establishing the
1996-97 biennial State budget. The Comptroller of Public Accounts has estimated
that the State will have 19.9% more revenues available for general purpose
spending in 1996-97 than it had in 1994-95, including a surplus of $3 billion
from the 1994-95 biennium.
On May 31, 1993, the Texas Governor signed a comprehensive legislative
revision to the school finance provisions of the Texas Education Code. The
legislative revisions resulted from a series of court decisions commonly
referred to as Edgewood v. Kirby, in which Texas courts have declared the Texas
school finance system unconstitutional under Texas law. Previous legislative
efforts to correct the school finance system were declared unconstitutional. The
Texas Supreme Court has ruled that the legislative revision is constitutional,
but suggested that further changes may be needed in the near future to provide
equal access to funding for facility needs. The legislative revision and further
efforts to equalize school funding may affect the financial condition of the
Texas State Government and certain Texas school districts.
The Adviser does not believe that the factors described above will have a
significant adverse effect on the Fund's investment in investment grade Texas
Securities or Municipal Securities. Because the Fund's portfolio will consist
primarily of investment grade securities, the Fund is expected to be less
subject to
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<PAGE> 15
market and credit risks than a fund that invests in lower quality Texas
Securities or Municipal Securities. See the Statement of Additional Information.
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MUNICIPAL SECURITIES
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Municipal Securities include debt obligations of a state, territory or
possession of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities issued to 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.
Many new issues of Municipal Securities are sold on a "when-issued" basis.
While the Fund has ownership rights to such Municipal Securities, the Fund does
not have to pay for them until they are delivered, normally 15 to 45 days later.
To meet that payment obligation, the Fund sets aside with the Custodian
sufficient cash or liquid securities equal to the amount that will be due. See
"Investment Practices -- Delayed Delivery and When-Issued Securities."
The yields of Municipal Securities depend on, among other things, general
market conditions, general conditions of the Municipal Securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the Municipal Securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, Municipal Securities with the same maturity, coupon and rating may
have different yields while Municipal Securities of the same maturity and coupon
with different ratings may have the same yield.
The Fund considers investments in Municipal Securities not to be subject to
concentration policies and may invest a relatively high percentage of the assets
of the Fund 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, 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 per share net asset value also increases. The Fund may
invest more than 25% of its total assets in Municipal Securities with similar
characteristics, such as industrial development revenue
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<PAGE> 16
bonds, including pollution control revenue bonds, housing finance agency bonds,
or hospital bonds. In such circumstances, economic, business, political or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project; shortages or price increases of needed materials; or declining
markets or needs for the projects) may also affect other bonds in the same
segment, thereby potentially increasing market risk. The Fund may not, however,
invest more than 25% of its total assets in industrial development revenue
bonds, including pollution control bonds, issued for companies in the same
industry. See restriction 4 under "Investment Practices -- Investment
Restrictions." Sizeable investments in such obligations could involve an
increased risk to the Fund should any of such issuers or any such related
projects or facilities experience financial difficulties.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. It may be expected that similar proposals may
be introduced in the future. If any such proposal were to be enacted, the
ability of the Fund to pay "exempt-interest" dividends may be adversely affected
and the Fund would re-evaluate its investment objective and policies and
consider changes in its structure.
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INVESTMENT PRACTICES
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REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of default by the other party. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by the Fund,
exceeds ten percent of the value of its net assets. In the event of the
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in
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<PAGE> 17
the net revenue generated. The Adviser believes that the joint account produces
greater efficiencies and economies of scale that may contribute to reduced
transaction costs, higher returns, higher quality investments and greater
diversity of investments for the Fund than would be available to the Fund
investing separately. The manner in which the joint account is managed is
subject to conditions set forth in the SEC order obtained by the Fund
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that account.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes ("VRDNs") are tax-
exempt obligations which contain a floating or variable interest rate adjustment
formula and which are subject to an unconditional right of demand on the part of
the holder thereof to receive payment of the principal balance plus accrued
interest upon a specified notice period (usually seven to 30 days). There is,
however, the possibility that because of default or insolvency, the demand
feature of VRDNs or Participating VRDNs, described below, may not be honored.
The interest rates are adjustable at intervals ranging from daily ("floating
rate") to up to one year to some prevailing market rate for similar investments,
such adjustment formula being calculated to maintain the market value of the
VRDN at approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically set at a rate determined by the remarketing agent or
based upon the prime rate of a bank or some other appropriate interest rate
adjustment index.
Investments by the Fund in VRDNs may also be made in the form of participation
interests ("Participating VRDNs") in variable rate tax-exempt obligations held
by a financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days.
The Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.
STAND-BY COMMITMENTS. The Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a bank or
dealer from which Municipal Securities are acquired agrees to purchase from the
Fund, at the Fund's option, the Municipal Securities at a specified price. Such
commitments are sometimes called "liquidity puts."
The amount payable to the Fund upon its exercise of a "stand-by commitment" is
normally (i) the Fund's acquisition cost of the Municipal Securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the
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<PAGE> 18
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period. "Stand-by
commitments" generally can be acquired when the remaining maturity of the
underlying Municipal Securities is not greater than one year, and are
exercisable by the Fund at any time before the maturity of such obligations.
The Fund's right to exercise "stand-by commitments" is unconditional and
unqualified. A "stand-by commitment" generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Securities to a third party
at any time.
The Fund expects that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield-to-maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding "stand-by commitments" held in the Fund will not exceed
1/2 of 1% of the value of the Fund's total assets calculated immediately after
each "stand-by commitment" is acquired. The Fund intends to enter into "stand-by
commitments" only with banks and dealers which, in the Adviser's opinion,
present minimal credit risks.
The Fund would acquire "stand-by commitments" solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a "stand-by commitment" would not affect the
valuation of the underlying Municipal Securities which would continue to be
valued in accordance with the method of valuation employed for the Fund in which
they are held. "Stand-by commitments" acquired by the Fund would be valued at
zero in determining net asset value. Where the Fund paid any consideration
directly or indirectly for a "stand-by commitment," its costs would be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.
DELAYED DELIVERY AND WHEN-ISSUED SECURITIES. Municipal Securities may at times
be purchased or sold on a delayed delivery or a when-issued basis. These
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future, often a month or more after the
purchase. The payment obligation and the interest rate are each fixed at the
time the Fund enters into the commitment. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to settlement date if
it is deemed advisable. Purchasing Municipal Securities on a when-issued basis
involves the risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself; if yields so increase, the value of the when-issued obligation will
generally decrease. The Fund maintains a separate account at its custodian bank
consisting of cash or liquid high grade debt
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<PAGE> 19
obligations, valued on a daily basis, equal at all times to the amount of any
when-issued commitment.
MONEY MARKET INVESTMENT COMPANIES. The Fund may invest in shares of open-end
investment companies which are tax-exempt money market funds. Such investment
would not exceed 3% of the total outstanding voting stock of the acquired
company; 5% of the value of the total assets of the Fund; or 10% of the total
assets of the acquired company as held by the Fund and all Van Kampen American
Capital funds. When the Fund invests in a tax-exempt money market fund, the
Adviser will reduce its advisory fee by the amount of any investment advisory
and administrative services fees paid to the investment adviser of the money
market fund.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may engage in transactions in
listed futures contracts and related options. Such transactions may be in listed
futures contracts based upon The Bond Buyer Municipal Bond Index, a price
weighted measure of the market value of 40 large sized, recent issues of
tax-exempt bonds or in listed contracts based on U.S. Government securities.
Futures contracts and options thereon may be used for defensive hedging or
anticipatory hedging purposes, depending upon the composition of the Fund and
the Adviser's expectations concerning the securities markets. See the Statement
of Additional Information for discussion of futures contracts and related
options.
Potential Risks of Futures Contracts and Related Options. The purchase and
sale of futures contracts and related options involve risks different from those
involved with direct investments in securities. While utilization of futures
contracts and related options may be advantageous to the Fund, if the Adviser is
not successful in employing such instruments in managing the Fund's investments,
the Fund's performance will be worse than if the Fund did not make such
investments. In addition, the Fund would pay commissions and other costs in
connection with such investments, which may increase the Fund's expenses and
reduce its return. The Fund may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceed five
percent of the fair market value of the Fund's assets. In order to prevent
leverage in connection with the purchase of futures contracts or call options
thereon by the Fund, an amount of cash, cash equivalent or liquid high grade
debt securities equal to the market value of the obligation under the futures
contracts or options (less any related margin deposits) will be maintained in a
segregated account with the custodian.
PORTFOLIO TURNOVER. The Fund may purchase or sell securities without regard to
the length of time the security has been held to take advantage of short-term
differentials in bond yields consistent with its objective of seeking tax-exempt
interest income. The Fund may engage in short-term trading if the anticipated
benefits are expected by the Adviser to exceed the transaction costs. The annual
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<PAGE> 20
turnover rate for the Fund is expected to vary from year to year depending on
market conditions. The annual turnover rate for the Fund is not expected to
exceed 100%. A 100% turnover rate would occur, for example, if all the
securities in the Fund were replaced in a period of one year. Municipal
Securities with remaining maturities of less than one year are excluded in the
computation of the portfolio turnover rate. Higher portfolio turnover involves
higher transaction costs and may result in realization of short-term capital
gains if securities are held for one year. Such gains are taxable to
shareholders as ordinary income except to the extent such gains are offset by
any capital losses. Portfolio turnover is not a limiting factor in making
portfolio decisions, except as limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company. See "Federal
Tax Information" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund. The Municipal Securities and other obligations in which the Fund
invests are traded primarily in the over-the-counter market. Such securities are
generally traded on a net basis with dealers acting as principal for their own
accounts without a stated commission, although the prices of the securities
usually include a profit to the dealers. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
It is the policy of the Fund to obtain the best net results taking into account
such factors as price (including the applicable dealer spread), the size, type
and difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While the Fund generally seeks reasonably competitive spreads or commissions,
the Fund will not necessarily be paying the lowest spread or commission
available. Brokerage commissions are paid on transactions in futures contracts
and options thereon. The Adviser is authorized to place portfolio transactions
with broker-dealers participating in the distribution of shares of the Fund and
other Van Kampen American Capital funds if it reasonably believes that the
quality of the execution and any commission are comparable to that available
from other qualified firms. 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.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
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<PAGE> 21
majority (as defined in the 1940 Act) vote of the shareholders of the Fund.
These restrictions provide, among other things, the Fund may not:
1. Invest in securities other than Municipal Securities, Temporary
Investments (as defined herein), stand-by commitments, futures contracts
described in the next paragraph, and options on such contracts;
2. Purchase or sell commodities or commodity contracts except that the Fund
may purchase, hold and sell listed futures contracts related to U.S.
Government securities, Municipal Securities or to an index of
Municipal Securities;
3. Borrow money, except the Fund may borrow from banks to meet redemptions
or for other temporary or emergency purposes, with such borrowing not to
exceed five percent of the total assets of the Fund at market value at
the time of borrowing. Any such borrowing may be secured provided that
not more than ten percent of the total assets of the Fund at market value
at the time of pledging may be used as security for such borrowings; or
4. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry; provided that this limitation shall not
apply to tax-exempt securities issued by governmental bodies or agencies
or instrumentalities thereof; so that industrial development bonds that
are considered to be issued by non-governmental users are subject to this
industry limitation.
Each state and each political subdivision, agency or instrumentality of such
state, and each multi-state agency of which a state is a member is a separate
"issuer" as that term is used in this Prospectus. The non-government user of
facilities financed by industrial development or pollution control securities is
also considered as a separate issuer. In certain circumstances, the guarantor of
a guaranteed security may also be considered to be an issuer in connection with
such guarantee.
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INVESTMENT ADVISORY SERVICES
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THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and
nearly $50 billion under management or supervision. Van Kampen American
Capital's more than 40 open-end and 38 closed-end funds and more than 2,700 unit
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<PAGE> 22
investment trusts are professionally distributed by leading financial advisers
nationwide.
Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital. Van Kampen American Capital is a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York based private investment firm. The General Partner of C&D L.P. is
Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The General Partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital own, in the aggregate, not more than seven percent
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own five percent or
more of the common stock of VK/AC Holding, Inc.
ADVISORY AGREEMENTS. 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 an annual fee of
0.60% of the first $300 million of the average net assets of the Fund; 0.55% of
the next $300 million of the average net assets of the Fund; and 0.50% of the
average net assets in excess of $600 million. The fees are payable monthly.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the costs
of the Fund's accounting services, which include maintaining its financial books
and records and calculating the daily net asset value of the Fund. Operating
expenses paid by the Fund include shareholder service agency fees, service fees,
distribution fees, custodial fees, legal and accounting fees, the costs of
reports and proxies to shareholders, trustees' fees, and all other business
expenses not specifically assumed by the Adviser. Advisory (management) fees and
total operating expense ratios are shown under the caption "Annual Fund
Operating Expenses and Example" herein.
From time to time as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
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The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp.
PERSONAL INVESTING 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 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
interests.
PORTFOLIO MANAGEMENT. Joseph A. Piraro has been primarily responsible for the
day-to-day management of the Fund's investment portfolio since April 3, 1995.
Mr. Piraro is Vice President of the Fund and an agent of the Adviser. Mr. Piraro
has been employed by Van Kampen American Capital Investment Advisory Corp., an
affiliate of the Adviser, since 1992. Prior to that time, Mr. Piraro was
employed by First Chicago Capital Markets.
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ALTERNATIVE SALES ARRANGEMENTS
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The Alternative Sales Arrangements permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. Class A shares are subject to
an ongoing service fee at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Certain purchases
of Class A shares qualify for reduced initial sales charges. See "Purchase of
Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of Shares --
Class B Shares." Class B shares will automatically convert to Class A shares six
years after the end of the
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<PAGE> 24
calendar month in which the shareholder's order to purchase was accepted. See
"Conversion Feature" herein for discussion on applicability of the conversion
feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will convert automatically to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. 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 purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding for
a period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares as the case may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C 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 distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer
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<PAGE> 25
available. In that event, no further conversions of Class B shares or Class C
shares would occur, and shares might continue to be subject to the distribution
fee for an indefinite period which may extend beyond the period ending six years
or ten years, respectively, after the end of the calendar month in which the
shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share on Class A
shares. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares. In this regard, Class A shares may
be more beneficial to the investor who qualifies for a reduced initial sales
charges or purchases at net asset value, as described herein under "Purchase of
Shares -- Class A Shares." For these reasons, the Distributor will reject any
order of more than $500,000 for Class B shares or any order of more than $1
million for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to a contingent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds. For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class A
or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (see "Shareholder Services -- Shareholder Services Applicable to Class A
Shareholders Only -- Check Writing Privilege"). Class B shares may be
appropriate for investors
25
<PAGE> 26
who wish to avoid a front-end shares charge, put 100% of their investment
dollars to work immediately, and/or have a longer-term investment horizon. Class
C shares may be appropriate for investors who wish to avoid a front-end sales
charge, put 100% of their investment dollars to work immediately, have a
shorter-term investment horizon and/or desire a short contingent deferred sales
charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
"Distributions from the Fund." Shares of the Fund may be exchanged, subject to
certain limitations, for shares of the same class of other mutual funds advised
by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the Trustees
of the Fund, pursuant to their fiduciary duties under the Investment Company Act
of 1940 (the "1940 Act") and state laws, will seek to ensure that no such
conflict arises.
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The term "dealers" and "brokers" are sometimes referred to herein as "authorized
dealers."
26
<PAGE> 27
Class A shares are sold with an initial sales charge; Class B and Class C shares
are sold without an initial sales charge and are subject to a contingent
deferred sales charge upon certain redemptions. See "Alternative Sales
Arrangements" for a discussion of factors to consider in selecting which class
of shares to purchase. Contact the Investor Services Department at (800)
421-5666 for further information and appropriate forms.
Initial investments in the Fund must be at least $500 and subsequent
investments must be at least $25. Both minimums may be waived by the Distributor
for shares involving periodic investments. Shares of the Fund may be sold in
foreign countries where permissible. The Fund and the Distributor reserve the
right to refuse any order for the purchase of shares. The Fund also reserves the
right to suspend the sale of the Fund's shares in response to conditions in the
securities markets or for other reasons.
Shares of the Fund may be purchased on any business day through authorized
dealers. Shares may also be purchased by completing the application accompanied
by this Prospectus and forwarding the application, through the designated
dealer, to ACCESS Investor Services, Inc. ("ACCESS"), a wholly-owned subsidiary
of Van Kampen American Capital. When purchasing shares of the Fund, investors
must specify whether the purchase is for Class A, Class B or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is computed as of the close of trading (currently 4:00
p.m. New York time) on the New York Stock Exchange (the "Exchange") on each day
such exchange is open for trading. Net asset value per share for each class is
determined by dividing the value of all portfolio securities held by the Fund,
cash and other assets (including accrued interest), attributable to such class
less all liabilities (including accrued expenses) by the total number of shares
of the class outstanding. The Fund's investments are valued by an independent
pricing service.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the net asset
value next computed (plus applicable Class A sales charges) after an order is
received by a dealer provided such order is transmitted to the Distributor prior
to the Distributor's close of business on such day. Orders received by dealers
after the close of the Exchange are priced based on the next close provided they
are received by the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of
27
<PAGE> 28
dealers to transmit orders received by them to the Distributor so they will be
received prior to such time. Orders of less than $500 are mailed by the dealer
and processed at the offering price next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
generally, each class has exclusive voting rights with respect to approvals of
the Rule 12b-1 distribution plan pursuant to which its distribution fee and/or
service fee is paid which relate to a specific class, and (iii) Class B and
Class C shares are subject to a conversion feature. Each class has different
exchange privileges and certain different shareholder service options available.
See "Distribution Plans" and "Shareholder Services -- Exchange Privilege." The
net income attributable to Class B and Class C shares and the dividends payable
on Class B and Class C shares will be reduced by the amount of the distribution
fee and incremental expenses associated with such distribution fees. Sales
personnel of broker-dealers distributing the Fund's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund, with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary 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
broker, dealer or financial intermediaries 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 brokers, dealers or financial intermediaries
for certain services or activities which are primarily intended to result in
sales of shares of the Fund. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. 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
28
<PAGE> 29
the Fund on an annual basis. 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. These programs will
not change the price an investor will pay for shares or the amount that a Fund
will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
REALLOWED
TO DEALERS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000................ 4.99% 4.75% 4.25%
$100,000 but less than $250,000... 3.90% 3.75% 3.25%
$250,000 but less than $500,000... 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000...................... 2.04% 2.00% 1.75%
$1,000,000 and over............... * * *
- --------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one
year of the purchase. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for purchases of $1 million or more as follows:
1% on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the
next $2 million and 0.08% on the excess over $5 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Dealers which are
reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions, which may include banks,
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described in the preceding table.
Such financial institutions, other industry professionals and dealers are
hereinafter referred to as "Service Organizations." Banks are currently
prohibited under the Glass-Steagall Act from providing certain underwriting or
distribution services. If banking firms were prohibited from acting in any
capacity or providing any of the described services, the Distributor would
consider what action, if any, would be appropriate. The
29
<PAGE> 30
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretation of federal law expressed herein and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and minor children 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 fiduciary
account, or a "company" as defined in Section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Money Market Fund ("VK Money Market"), Van Kampen American Capital Tax Free
Money Fund ("VK Tax Free"), Van Kampen American Capital Reserve Fund ("Reserve")
and The Govett Funds, Inc.
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the
indicated Fund, or in any combination of shares of such Funds 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 preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Letter of Intent. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the
30
<PAGE> 31
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. If the goal is not achieved within
the period, the investor must pay the difference between the charges applicable
to the purchases made and the charges previously paid. The initial purchase must
be for an amount equal to at least five percent of the minimum total purchase
amount of the level selected. If trades not initially made under a Letter of
Intent subsequently qualify for a lower sales charge through the 90-day
back-dating provisions, an adjustment will be made at the expiration of the
Letter of Intent to give effect to the lower charge. Such adjustment in sales
charge will be used to purchase additional shares for the shareholder at the
applicable discount category. Additional information is contained in the
application accompanied by this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs 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 Trust Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A shares
of the Fund, other Participating Funds, VK Money Market, VK Tax Free or Reserve
with no minimum initial or subsequent investment requirement, and with a lower
sales charge 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 investments made from unit trust
distributions will be one percent of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their securities broker or 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 ACCESS with appropriate backup data
for
31
<PAGE> 32
each participating investor in a computerized format fully compatible with
ACCESS's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV 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/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
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 registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children 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.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of other Participating Funds as described
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts,"
during the 13-month period commencing with the first investment pursuant
hereto equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made an amount up to 0.50% of
the amount invested, over a twelve-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to one percent for such purchases.
(6) 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.
32
<PAGE> 33
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
The term "families" includes a person's spouse, minor children 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 ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
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.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (7) 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.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The 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 charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
33
<PAGE> 34
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES
CHARGE
AS A
PERCENTAGE
OF
DOLLAR
AMOUNT
SUBJECT
TO
YEAR SINCE PURCHASE CHARGE
- ------------------------------------------------------------------------------
<S> <C>
First.............................................. 4%
Second............................................. 4%
Third.............................................. 3%
Fourth............................................. 2.5%
Fifth.............................................. 1.5%
Sixth.............................................. None
- ------------------------------------------------------------------------------
</TABLE>
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first, of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, second, of shares held for over five years or shares acquired pursuant
to reinvestment of dividends or distributions and third, of shares held longest
during the five-year period. The charge is not applied to dollar amounts
representing an increase in the net asset value since the time of purchase.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4% (the applicable rate in the second year after purchase).
A commission or transaction fee of 4% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
34
<PAGE> 35
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1%. The charge is assessed on an amount
equal to the lower 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 charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and second of shares held for more than one year or shares acquired
pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of 1% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase. Broker-
dealers and other Service Organizations will also be paid ongoing commissions
and transaction fees of up to 0.75% of the average daily net assets of the
Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." A contingent deferred sales
charge is waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
- ------------------------------------------------------------------------------
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.
35
<PAGE> 36
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Except as described herein, 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 certain of the
Participating Funds or Reserve may receive statements quarterly from ACCESS
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized investment dealers or
by mailing a check directly to ACCESS.
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received,
ACCESS will calculate no more than two percent of the net asset value of the
issued shares, and bill the party to whom the certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share, without sales
charge, on the record date. The reinvestment privilege is automatic unless the
shareholder instructs otherwise. This instruction may be made by telephone by
calling (800) 421-5666 ((800) 772-8889 for the hearing impaired). The investor
may, on the initial application or prior to any declaration, instruct that
dividends be paid in cash and capital gains distributions be reinvested at net
asset value, or that both dividends and capital gains distributions be paid in
cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in shares of the Fund. Additional
information is available from the Distributor or authorized investment dealers.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of
36
<PAGE> 37
Automated Clearing House. In addition, the shareholder must fill out the
appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS 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 ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application accompanied by this
Prospectus, or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a Class
A, Class B or Class C account in the Fund invested into a pre-existing Class A,
Class B or Class C account in any of the Participating Funds, VK Money Market,
VK Tax Free or Reserve.
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 as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund, other
than Van Kampen American Capital Government Target Fund ("Government Target"),
may be exchanged for shares of the same class of shares of any other fund
without sales charge, provided that shares of certain other Van Kampen American
Capital fixed-income funds may not be exchanged within 30 days of acquisition
without Adviser approval. Shares of Government Target may be exchanged for Class
A shares of the Fund without sales charge. Class A shares of VK Money Market, VK
Tax Free or Reserve that were not acquired in exchange for Class B or Class C
shares of a Participating Fund may be exchanged for Class A shares of the Fund
upon payment of the excess, if any, of the sales charge rate applicable to the
shares being acquired over the sales charge rate previously paid. Shares of VK
Money Market, VK Tax Free or Reserve acquired through an exchange of Class B or
Class C shares may be exchanged only for the same class of shares of a
Participating Fund without incurring a contingent deferred sales charge. Shares
of any Participating Fund, VK Money Market, VK Tax Free or Reserve may be
exchanged for shares of any other Participating Fund 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.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other Van
Kampen American Capital fund that offers such shares ("new shares") in an amount
equal to the aggregate net asset value of the original shares, without the
payment of any
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contingent deferred sales charge otherwise due upon redemption of the original
shares. For purposes of computing the contingent deferred sales charge payable
upon a disposition of the new shares, the holding period for the original shares
is added to the holding period of the new shares. Class B or Class C
shareholders remain subject to the contingent deferred sales charge imposed by
the fund initially purchased by the shareholder upon their redemption from the
Van Kampen American Capital complex of funds. The contingent deferred sales
charge is based on the holding period requirements of the original fund.
Shares of the fund to be acquired must be registered for sale in the
investor's state. Exchanges of shares are sales and may result in a gain or loss
for federal income tax purposes, although if the shares exchanged have been held
for less than 91 days, the sales charge paid on such shares is not included in
the tax basis of the exchanged shares, but is carried over and included in the
tax basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application accompanied by this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither VKAC nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine.
VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. See both
"Purchase of Shares" and "Redemption of Shares." If the exchanging shareholder
does not have an account in the fund whose shares are being acquired, a new
account will be established with the same registration, dividend and capital
gains options (except dividend diversification) and 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 file a specific written request. The Fund
reserves the right to reject any order to acquire its shares through exchange.
In addition, the Fund may modify, restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
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A prospectus of any of the Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25.
Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchase of additional shares ordinarily will
be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon the
redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS 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 ACCESS. Once the form is properly completed, signed and
returned to ACCESS, a supply of checks drawn on State Street Bank and Trust
Company ("State Street 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 State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the shareholder's Class A account by ACCESS at the next determined net
asset value.
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Check writing redemptions represent the sale of Class A shares. Any gain or loss
realized on the sale of shares is a taxable event. Since the net asset value per
share of the Fund is likely to fluctuate daily, check writing redemptions can
result in such a taxable event. See "Redemption of Shares."
Checks will not be honored for redemption of Class A shares held less than 15
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 value 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
State Street Bank. Accounts that are subject to backup withholding are not
eligible for the privilege. A "stop payment" system is not available on these
checks. See the Statement of Additional Information for further information
regarding the establishment of the privilege.
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REDEMPTION OF SHARES
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REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized investment
dealer. Orders received from dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by a 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 dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B or
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of 1% may be imposed on certain redemptions of
Class A shares made within one year of purchase for investments of $1 million or
more. The contingent deferred sales charge incurred upon redemption is paid to
the Distributor in reimbursement for distribution-related expenses. See
"Purchase of Shares." A custodian of a retirement plan account may charge fees
based on the custodian's fee schedule.
The request for redemption 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
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the previous 30 days, signature(s) must be guaranteed by one of the following: a
bank or trust company; a broker-dealer; a credit union; a national securities
exchange, registered securities association or clearing agency; a savings and
loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian and forwarded to ACCESS. Where Van Kampen American Capital Trust
Company serves as IRA custodian, special IRA, 403(b)(7) or Keogh distribution
forms must be obtained from and be forwarded to Van Kampen American Capital
Trust Company, P.O. Box 944, Houston, Texas 77001-0944. Contact the custodian
for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share of the Fund next determined after the
request is received in proper form. Payment for shares redeemed is made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until the purchase check has cleared, usually a period of up to
15 days. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum investment as specified by the
Trustees. At least 60 days advance written notice of any such involuntary
redemption is required and the shareholder is given an opportunity to purchase
the required value of additional shares at the next determined net asset value
without sales charge. Any applicable contingent deferred sales charge will be
deducted from the proceeds of this redemption. Any involuntary redemption may
only occur if the shareholder account is less than the minimum initial
investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, 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
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<PAGE> 42
record as described below. To establish such privilege, a shareholder must
complete the appropriate section of the application accompanied by this
Prospectus or call the Fund at (800) 421-5666 to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares contact the telephone transaction line at (800) 421-5684. VKAC and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. VKAC and the
Fund may be liable for any losses due to unauthorized or fraudulent instructions
if reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS 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 regular redemption procedure previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If an account has multiple owners, ACCESS
may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions 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.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of a Class B and Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability
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<PAGE> 43
before it determines to waive the contingent deferred sales charge on Class B
and Class C shares.
In cases of disability, the contingent deferred sales charge on Class B and
Class C shares will be waived where the 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 initial determination of disability.
This waiver of the contingent deferred sales charge on Class B and Class C
shares applies to a total or partial redemption, but only to redemptions of
shares held at the time of the initial determination of disability.
REINSTATEMENT PRIVILEGE. A Class A 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 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 (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by Van
Kampen American Capital Trust Company for repayment of principal (and interest)
on their borrowings on such plans.
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DISTRIBUTION PLANS
- ------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company board of directors and approved by
its shareholders. Pursuant to such Rule, the Trustees of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
NASD ("NASD Rules") applicable to mutual fund sales charges. The NASD Rules
limit the annual distribution charges and service fees that a mutual fund may
impose on a class of shares. The NASD Rules also limit the aggregate amount
which the Fund may pay for such distribution costs. Under the Class A Plan, the
Fund pays a service fee to the Distributor at an annual rate of up to 0.25% of
the Fund's aggregate average
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<PAGE> 44
daily net assets attributable to the Class A shares. Under the Class B Plan and
the Class C Plan, the Fund pays a service fee to the Distributor at an annual
rate of up to 0.25% and a distribution fee at an annual rate of up to 0.75% of
the Fund's aggregate average daily net assets attributable to the Class B shares
or Class C shares to reimburse the Distributor for service fees paid by it to
Service Organizations and for its distribution costs.
The Distribution Plans provide that the Distributor shall use the Class A,
Class B and Class C service fees to compensate Service Organizations for
personal services and/or the maintenance of shareholder accounts. Under the
Class B Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class B shares as reimbursement for (i) upfront commissions and
transaction fees of up to 4% of the purchase price of Class B shares purchased
by the clients of broker-dealers and other Service Organizations, and (ii) other
distribution expenses as described in the Statement of Additional Information.
Under the Class C Plan, the Distributor receives additional payments from the
Fund at the annual rate of up to 0.75% of the net assets of the Class C shares
as reimbursements for (i) upfront commissions and transaction fees of up to
0.75% of the purchase price of Class C shares purchased by the clients of
broker-dealers and other Service Organizations and ongoing commissions and
transaction fees of up to 0.75% of the average daily net assets of the Fund's
Class C shares and (ii) other distribution expenses as described in the
Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that such
Plans would benefit the Fund and its shareholders. Information with respect to
distribution and service revenues and expenses is presented to the Trustees each
year for their consideration in connection with their deliberations as to the
continuance of the Distribution Plans. In their review of the Distribution
Plans, the Trustees are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B shares or Class C shares is
designed to permit an investor to purchase such shares without the assessment of
a front-end sales load and at the same time permit the Distributor to compensate
Service Organizations with respect to such shares. In this regard, the purpose
and function
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<PAGE> 45
of the combined contingent deferred sales charge and distribution fee are the
same as those of the initial sales charge with respect to the Class A shares of
the Fund in that in both cases such charges provide for the financing of the
distribution of the Fund's shares.
Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward and may
be reimbursed by the Fund or its shareholders from payments received through
contingent deferred sales charges in future years and from payments under the
Class B Plan and Class C Plan so long as such Plans are in effect. For example,
if in a fiscal year the Distributor incurred distribution expenses under the
Class B Plan of $1 million, of which $500,000 was recovered in the form of
contingent deferred sales charges paid by investors and $400,000 was reimbursed
in the form of payments made by the Fund to the Distributor under the Class B
Plan, the balance of $100,000 would be subject to recovery in future fiscal
years from such sources. For the plan year ended June 30, 1994, the unreimbursed
expenses incurred by the Distributor under the Class B Plan and carried forward
were approximately $377,000 or 4.29% of the Class B shares' average daily net
assets. For the plan year ended June 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class C Plan and carried forward were
approximately $20,000 or 1.75% of the Class C shares' average daily net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
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DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
DIVIDEND POLICY. The Fund declares dividends from net investment income on
each business day. Such dividends are distributed monthly. The daily dividend is
a fixed amount determined at least monthly which is not expected to exceed the
net income of the Fund for the month divided by the number of business days
during the month. The Fund intends to distribute after the end of a fiscal year
the net capital gains, if any, realized during the fiscal year except to the
extent that such gains are offset by capital loss carryovers. Unless the
shareholder instructs otherwise, dividends and distributions are automatically
reinvested in additional shares of the Fund. See "Shareholder Services --
Reinvestment Plan."
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<PAGE> 46
Shares (other than shares acquired through an exchange) become entitled to
dividends declared on the day ACCESS receives payment for the shares, and remain
entitled to dividends through the day such shares are priced for redemption.
With respect to shares acquired through an exchange, such shares become entitled
to dividends on the day after ACCESS receives payment for the shares, and
remains entitled to dividends through the day such shares are purchased for
payment on redemption. Therefore, if a dealer delays forwarding to ACCESS
payment for shares which an investor has made to the dealer, this will in effect
cost the investor money because it will delay the date upon which he or she
becomes entitled to dividends.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
incremental transfer agency fees applicable to such classes of shares.
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TAX STATUS
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FEDERAL INCOME TAXES. The Fund has qualified and intends to be taxed as a
"regulated investment company" under the Code by meeting certain requirements of
the Code. In addition, the Fund intends to invest in sufficient 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 the fiscal year, at least 50% of the value of the total assets
of the Fund consists of Municipal Securities. See "Federal Tax Information" in
the Statement of Additional Information.
Exempt-interest dividends paid to shareholders 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. Shareholders not subject to tax on their
income will not be required to pay tax on amounts distributed to them.
Interest on certain "private-activity bonds" issued after August 7, 1986, 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 will be an item of tax preference to the extent such dividends
represent interest received from these private-activity bonds. For the fiscal
period ending September 30, 1993, approximately 12.23% of the Fund's income
consisted of interest on private-activity bonds. The Tax Reform Act also imposes
per capita volume limitations on certain
46
<PAGE> 47
private-activity bonds which could limit the amount of such bonds available for
investment by the Fund.
The Omnibus Budget Reconciliation Act of 1993, which was signed into law on
August 10, 1993, included certain provisions intended to prevent the conversion
of ordinary income into capital gains. One such provision affects tax-exempt
securities by requiring that gains on such securities purchased at a market
discount be treated as ordinary income to the extent of the accrued market
discount, if the securities are acquired after April 30, 1993. Such securities
were exempt from the market discount rules under prior law.
The Fund is subject to the requirement that at least 80% of its assets be
invested in securities the income from which is exempt from both regular federal
income tax and the federal alternative minimum tax.
Distributions of net investment income received by the Fund from investments
in debt securities other than Municipal Securities, and any net realized
short-term capital gains distributed by the Fund are taxable to shareholders as
ordinary income. Any distribution of net long-term capital gains by the Fund is
subject to capital gains tax rates. 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.
Shareholders are notified annually of the federal tax status of dividends and
any distributions paid by the Fund during the fiscal year.
Individuals whose modified income exceeds a base amount are subject to federal
income tax on up to one-half of their Social Security benefits. Modified income
includes adjusted gross income, one-half of Social Security benefits and
tax-exempt interest, including tax-exempt interest dividends from the Fund.
To avoid being subject to a 31% federal back-up withholding tax on dividends
(except exempt-interest dividends), capital gains distributions and redemption
payments, shareholders must furnish the Fund with a certification of their
correct taxpayer identification number.
The foregoing is a brief summary of some of the important tax considerations
generally affecting the Fund and its investors who are U.S. residents or U.S.
corporations. Additional tax information of relevance to particular investors,
including corporations and investors who may be "substantial users" of
facilities financed by Municipal Securities, is contained in the Statement of
Additional Information. Investors are urged to consult their tax advisers with
specific reference to their own tax situation. Foreign investors should consult
their own counsel for further information as to the U.S. and their country of
residence or citizenship tax consequences of receipt of dividends and
distributions from the Fund.
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<PAGE> 48
FEDERAL INCOME TAX ASPECTS OF FUTURES AND OPTIONS. The Fund's ability to
engage in transactions in listed futures contracts and related options may be
limited by provisions of the Code, including the requirement that the Fund
derive less than 30% of its gross income from the sale or other disposition of
securities held for less than three months. Gains and losses recognized by the
Fund from transactions in futures contracts and options thereon constitute
capital gains and losses for federal income tax purposes. See "Federal Tax
Information" in the Statement of Additional Information. To the extent such
activities result in net realized short-term capital gains which are distributed
to shareholders, such distributions constitute taxable ordinary income. To the
extent such activities result in net realized long-term capital gains which are
distributed to shareholders, such distributions constitute taxable long-term
capital gains.
STATE AND LOCAL TAXES. The exemption of interest income for federal income tax
purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that investors consult their tax advisers for information in this
regard. Dividends and distributions paid by the Fund from sources other than
tax-exempt interest are generally subject to taxation at the state and local
levels. Dividends or distributions paid by the Fund to Texas residents are not
subject to taxation by Texas, because Texas does not impose a personal income
tax at this time.
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FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one-year, five-year and ten-year periods or for the life of the
Fund. Other total return quotations, aggregate or average, over other time
periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the
48
<PAGE> 49
Fund's portfolio, the Fund's operating expenses and unrealized net capital gains
or losses during the period. Total return is based on historical earnings and
asset value fluctuations and is not intended to indicate future performance. No
adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%. Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution and other fees, the total returns for each of the classes will
differ.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semi-annual compounding. The Fund's "tax-equivalent
yield" is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after-tax equivalent of
the Fund's yield, assuming certain tax brackets for a Fund shareholder.
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.
49
<PAGE> 50
To increase the Fund's yield the Adviser may, from time to time, absorb a
certain amount of the future ordinary business expenses. The Adviser may stop
absorbing these expenses at any time without prior notice.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions.
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. It 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, 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.
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 ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds; or with municipal bond indices, such as Lehman
Brothers Municipal Bond Index or Bond Buyer's Index of 25 Revenue Securities or
with the Consumer Price Index, Dow Jones Industrial Average, Standard & Poor's,
NASDAQ, other appropriate indices of investment securities, or with investment
or savings vehicles. The performance information may also include evaluations of
the Fund published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Business Week, Forbes,
Fortune, Institutional Investor, Investor's Business Daily, Kiplinger's Personal
Finance Magazine, Money, Mutual Fund Forecaster, Stanger's Investment Advisor,
USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. For these purposes, the performance of the
Fund, as well as the performance of other mutual funds or
50
<PAGE> 51
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for Class A, Class B and
Class C 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 provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund was originally incorporated in the State of Maryland on September 6,
1991 and reorganized on August 26, 1995, under the laws of the state of Delaware
as a business entity commonly known as a "Delaware business trust." It is
authorized to issue an unlimited number of Class A, Class B and Class C shares
of beneficial interest of $0.01 par value. Other classes of shares may be
established from time to time in accordance with provisions of the Fund's
Declaration of Trust. Shares issued by the Fund are fully paid, non-assessable
and have no pre-emptive or conversion rights.
The Fund currently offers three classes, designated Class A shares, Class B
shares and Class C shares. Each class of shares represents an interest in the
same assets of the Fund and 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. See "Distribution Plans."
The Fund is permitted to issue an unlimited number of classes. Each class of
shares is equal as to earnings, assets and voting privileges, except as noted
above, and each class bears the expenses related to the distribution of its
shares. There are no conversion, pre-emptive or other subscription rights,
except with respect to the conversion of Class B shares and Class C shares into
Class A shares as described above. 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 debt and expenses of the Fund have been paid. Since Class B shares and
Class C shares pay higher distribution expenses, the liquidation proceeds to
Class B shareholders and Class C shareholders are likely to be lower than to
other shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Fund is
set forth in the Statement of Additional Information.
51
<PAGE> 52
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
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 with respect to the Fund.
An investment in the Fund is intended to be a long-term investment, and should
not be used as a trading vehicle.
52
<PAGE> 53
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
------------------
2800 Post Oak Blvd.
Houston, TX 77056
------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.
Houston, TX 77056
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR ACCESS INVESTOR SERVICES, INC.
EXISTING ACCOUNT PLEASE CALL P.O. Box 418256
THE FUND'S TOLL-FREE Kansas City, MO 64141-9256
NUMBER--(800) 421-5666
Custodian
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666 STATE STREET BANK AND
TRUST COMPANY
DEALERS--FOR DEALER 225 Franklin Street, P.O. Box 1713
INFORMATION, SELLING Boston, MA 02105-1713
AGREEMENTS, WIRE ORDERS, Attn: Van Kampen American Capital Funds
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE Legal Counsel
NUMBER--(800) 421-5666
O'MELVENY & MYERS
FOR SHAREHOLDER AND 400 South Hope Street
DEALER INQUIRIES THROUGH Los Angeles, CA 90071
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD) Independent Accountants
DIAL (800) 772-8889
PRICE WATERHOUSE LLP
FOR TELEPHONE TRANSACTIONS 1201 Louisiana, Suite 2900
DIAL (800) 421-5684 Houston, TX 77002
<PAGE> 54
TEXAS TAX FREE
INCOME FUND
------------------------------------------------------------------------------
P R O S P E C T U S
AUGUST 28, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 55
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
AUGUST 28, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated August 28,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, IL 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
MUNICIPAL SECURITIES.................................................................. 2
TEMPORARY INVESTMENTS................................................................. 8
REPURCHASE AGREEMENTS................................................................. 8
FUTURES CONTRACTS AND RELATED OPTIONS................................................. 8
INVESTMENT RESTRICTIONS............................................................... 11
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 13
INVESTMENT ADVISORY AGREEMENT......................................................... 17
DISTRIBUTOR........................................................................... 18
DISTRIBUTION PLANS.................................................................... 18
TRANSFER AGENT........................................................................ 20
PORTFOLIO TURNOVER.................................................................... 20
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 20
DETERMINATION OF NET ASSET VALUE...................................................... 21
PURCHASE AND REDEMPTION OF SHARES..................................................... 21
EXCHANGE PRIVILEGE.................................................................... 25
CHECK WRITING PRIVILEGE............................................................... 26
FEDERAL TAX INFORMATION............................................................... 26
TEXAS TAX INFORMATION................................................................. 29
FUND PERFORMANCE...................................................................... 29
OTHER INFORMATION..................................................................... 30
FINANCIAL STATEMENTS.................................................................. 30
APPENDIX.............................................................................. 31
</TABLE>
<PAGE> 56
GENERAL INFORMATION
Van Kampen American Capital Texas Tax Free Income Fund (the "Fund") was
originally organized as a Maryland corporation on September 6, 1991 as American
Capital Texas Municipal Bond Fund, Inc. On February 18, 1992, the name of the
Fund was changed to American Capital Texas Municipal Securities, Inc. and
reorganized under the laws of Delaware on August 26, 1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly-owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly-owned subsidiary of VK/AC Holding, Inc.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight, July 1995. VKAC's roots in money
management extend back to 1926. Today, VKAC manages or supervises more than $50
billion in mutual funds, closed-end funds and unit investment trusts -- assets
which have been entrusted to VKAC in more than 2 million investor accounts. VKAC
has one of the largest research teams (outside of the rating agencies) in the
country, with 86 analysts devoted to various specializations.
As of August 11, 1995, no person was known by management to own
beneficially or of record as much as five percent of the outstanding shares of
any portfolio except the following:
<TABLE>
<CAPTION>
CLASS PERCENTAGE
NAME AND ADDRESS AMOUNT AND NATURE OF OF
OF HOLDER OF OWNERSHIP SHARES OWNERSHIP
- ---------------------------------- ------------------------- -------- ----------
<S> <C> <C> <C>
Van Kampen American Capital Asset 66,139 shares of record Class A 5.68%
Management, Inc. and beneficially
2800 Post Oak Blvd.
Houston, TX 77056
Donaldson Lufkin Jenrette Secs. 218,716 shares of record Class B 30.08%
P.O. Box 2052
Jersey City, NJ 07303-2052
Merrill Lynch Pierce Fenner 45,775 shares of record Class B 6.30%
4800 Deer Lake Dr. East, 3rd Floor 12,335 shares of record Class C 13.32%
Jacksonville, FL 32246-6484
Smith Barney Inc. 219,303 shares of record Class A 18.84%
388 Greenwich Street, 11th Floor 86,177 shares of record Class B 11.85%
New York, NY 10013-2375 67,532 shares of record Class C 72.92%
</TABLE>
MUNICIPAL SECURITIES
The Fund invests, under normal market conditions, at least 80% of its net
assets in obligations issued by or on behalf of the states, territories or
possessions of the United States and the District of Columbia and their
2
<PAGE> 57
political subdivisions, agencies and instrumentalities, the interest from which
is exempt from federal income tax ("Municipal Securities").
Municipal Securities include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for general
operating expenses and loans to other public institutions and facilities. In
addition, certain types of industrial development obligations are issued by or
on behalf of public authorities to finance various privately-operated
facilities. Such obligations are included within the term Municipal Securities
if the interest paid thereon is exempt from federal income tax. Municipal
Securities also include short-term tax-exempt municipal obligations such as tax
anticipation notes, bond anticipation notes, revenue anticipation notes, and
variable rate demand notes.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations 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. Industrial
development bonds, including pollution control bonds, are revenue bonds and do
not constitute the pledge of the credit or taxing power of the issuer of such
bonds. The payment of the principal and interest on such industrial revenue
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. The Fund may also
include "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.
When the Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the trade.
Failure of the buyer or seller to do so may result in the Fund's missing the
opportunity of obtaining a price considered to be advantageous.
The Fund may invest in Municipal Notes which include demand notes and
short-term municipal obligations (such as tax anticipation notes, revenue
anticipation notes, construction loan notes and short-term discount notes) and
tax-exempt commercial paper provided that such obligations have the ratings
described in the Prospectus or if non-rated are of comparable quality as
determined by the Adviser. Demand notes are obligations which normally have a
stated maturity in excess of one year, but permit any holder to demand payment
of principal plus accrued interest upon a specified number of days' notice.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal of the note plus accrued interest upon a specified number
of days' notice to the noteholders. Demand notes may also include Municipal
Securities subject to a Stand-By Commitment as described in the Prospectus. The
interest rate on a 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 on a demand note may be a market rate that is adjusted at specified
intervals. Participation interests in variable rate demand notes will be
purchased only if in the opinion of counsel interest income on such interests
will be tax-exempt when distributed as dividends to shareholders.
Yields on Municipal Securities are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities in which the Fund invests to meet their obligations for the
payment of interest and principal when due. There are variations in the risks
involved in holding Municipal Securities, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of holders of Municipal Securities and the obligations
of the issuers of such Municipal Securities may be subject to applicable
bankruptcy, insolvency and similar laws and court decisions affecting the rights
of creditors generally, and such laws, if any, which may be enacted
3
<PAGE> 58
by Congress or state legislatures imposing a moratorium on the payment of
principal and interest or imposing other constraints or conditions on the
payments of principal of and interest on Municipal Securities.
ADDITIONAL RISKS OF LOWER RATED MUNICIPAL SECURITIES
Up to 20% of the Municipal Securities purchased by the Fund may be
obligations rated BB or lower by Standard & Poor's Corporation ("S&P") and
Moody's Investor Service ("Moody's") or non-rated obligations which in the
opinion of the Adviser are of comparable quality ("high yield securities"). See
Appendix -- "Ratings of Investments" for additional information regarding
ratings of debt securities.
High yield securities are considered by S&P and Moody's to have varying
degrees of speculative characteristics. Consequently, although high yield
securities can be expected to provide higher yields, such securities may be
subject to greater market price fluctuations and risk of loss of principal than
lower yielding, higher rated debt securities. Investments in high yield
securities will be made only when, in the judgment of the Adviser, such
securities provide attractive total return potential relative to the risk of
such securities, as compared to higher quality debt securities. The Fund will
not invest in obligations which are not currently paying interest or which are
rated C (lowest grade by Moody's) or which are rated C or D by S&P or which are
non-rated obligations considered by the Adviser to be of comparable quality. The
Fund does not intend to purchase debt securities that are in default or which
the Adviser believes will be in default.
Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers or obligors
generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers or obligors of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors are highly
leveraged. In addition, the market for high yield municipal securities is
relatively new and has not weathered a major economic recession, and it is
unknown what effects such a recession might have on such securities. During such
periods, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it is generally not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and, therefore, have the
opportunity to participate in structuring the terms of the offering. Although
this may enable the Fund to seek to protect itself against certain of such
risks, the considerations discussed herein would nevertheless remain applicable.
4
<PAGE> 59
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
The Fund will take such actions as it considers appropriate in the event of
anticipated financial difficulties, default or bankruptcy of either the issuer
or any Municipal Securities owned by the Fund or the underlying source of funds
for debt service. Such action may include retaining the services of various
persons and firms to evaluate or protect any real estate, facilities or other
assets securing any such obligation or acquired by the Fund as a result of any
such event. The Fund incurs additional expenditures in taking protective action
with respect to Fund obligations in default and assets securing such
obligations. Investment in lower rated Municipal Securities are not generally
meant for short-term investment.
TEXAS SECURITIES
At least 65% of the Fund's total assets will be invested in Municipal
Securities issued by the State of Texas (the "State"), its agencies,
instrumentalities, and political subdivisions, and local governments of the
State ("Texas Securities"). Texas Securities could include general obligation
bonds of the State, counties, cities, towns, etc., revenue bonds of utility
systems, highways, bridges, port and airport facilities, colleges, hospitals,
etc. and industrial development and pollution control bonds.
The following information is from reports of state officials included in
official statements prepared in connection with Texas Securities and other
public records that are believed to be accurate. The Fund has not independently
verified this information.
The State is the second largest by size among the states of the United
States, covering approximately 266,807 square miles. It contains Houston,
Dallas, and San Antonio, which are respectively, the fourth, eighth, and tenth
largest cities by population in the United States. Texas' gross state product
accounts for more than 7% of the total economy of the United States. Because the
economic bases differ from region to region, economic developments, such as the
strength of the U.S. economy, a decline in oil prices, or changes in defense
spending, can be expected to affect the economy of each region differently.
Employment in the State increased steadily through the 1970s and the early
1980s. In 1986, the Texas economy was battered by a recession induced by
declining oil prices and a collapse in its real estate industry. By the summer
of 1988, the State had replaced all the jobs lost during this recession,
although many were in lower-paying occupations. The Texas economy was slowed by
the nation's 1990-91 recession, but it did not fall into recession itself.
Employment growth sped up in 1992 and 1993, and the Texas Employment Commission
estimates that employment increased by 276,000 persons in 1994. The Comptroller
of Public Accounts predicts that the overall Texas economy will outpace national
economic growth in the long term by an annual average of one-half percentage
point.
Most of Texas' new jobs have been in services. The services sector added
87,000 jobs in 1993. Employment in wholesale and retail trade advanced by
62,000, while the government sector added 30,000 jobs. Other service-producing
sectors (finance, insurance and real estate, transportation, communications and
public utilities) all showed increases.
Wholesale and retail trade play a significant part in the State's economy.
Houston has the third busiest port in the United States and ranks second in
export trade. Dallas is a major regional distribution center, serving Texas and
a number of surrounding states. Because of the State's proximity to Mexico,
international trade plays an important role in the Texas economy. Several major
U.S. corporations have established "sister plant" operations along the
Texas-Mexico border in which goods are partly manufactured in a plant in Mexico
and partly in a plant in the United States. The U.S. free trade agreement with
Mexico and Canada, the North American Free Trade Agreement ("NAFTA") took effect
in 1994. NAFTA's effect on Texas will be greater than the effect on the U.S. at
large.
5
<PAGE> 60
Manufacturing added 33,400 jobs, or 2.2% in 1993, despite a weak oil and
gas sector and the loss of 8,000 defense-related jobs in aircrafts and parts.
Most jobs were added in electronics, plastics, the apparel industry along the
border, and construction-related industries.
Construction, responding to an 18% increase in housing starts in 1993,
added 18,000 jobs. Residential building permits throughout the state and its
major metropolitan areas have risen at double-digit annual rates since 1990 and
have increased 23% in 1993, with most of the increase in single-family
residential building. Multi-family building activity has not increased markedly
and totaled about 8,900 units started in 1993. Even non-residential real estate
markets have seen some growth in recent years, although at a slower pace than
residential construction.
For Texas banks, the 1980s was a decade of sharp contrasts -- from
unrivaled profits to unprecedented failures. The 1990s are a decade for
reorganization and consolidation, along with a renewal of profitability.
Employment in finance, insurance, and real estate mushroomed from 335,000 in
1980 to 450,000 in 1986, only to fall back to 418,000 in June 1992. A recovery
since then resulted in employment of 439,000 by April, 1994. Texas bank failures
peaked in 1989, reaching 134, or two-thirds of all bank closings in the nation.
Texas bank failures declined to 103 in 1990 and 31 in 1991. Another 31 failures
occurred in 1992, and 10 banks failed in 1993. The profitability of Texas'
banking industry is expected to improve throughout the 1990s, although the
number of banking organizations in the State is expected to shrink.
No industry, other than the real estate industry itself, was more severely
affected by the decline in Texas real estate values than the savings and loan
industry. There were 267 Texas savings and loans in 1984. By the end of 1993,
Texas had 62 institutions with assets of $42.9 billion. In terms of profits,
Texas savings and loans lost money each year from 1986 through 1991. But after a
nearly flat year in 1991, the State's thrifts posted a record $705 million
profit for 1992, the second highest in the nation. Unlike much of the nation,
Texas' savings and loans problems of recent years mostly have been resolved, and
steady progress is being made in increasing capital levels.
The State of Texas has long been identified with the oil and gas industry,
but the Texas economy has diversified. In 1981, drilling, production, refining,
chemicals, and energy-related manufacturing accounted for 27% of the State's
total output of goods and services. By 1992, these businesses accounted for 12%
of the State's economy. Job losses were experienced in oil and gas (down 19,000
jobs in 1991 and 1992) due to a shift in drilling activities overseas. In 1993,
jobs declined by 2,000.
In 1993, agriculture output increased 6% over 1992 and contributed $5.9
billion, or 1.3%, to Texas' gross state product. The Comptroller of Public
Accounts forecasted that agriculture would contribute $6.2 billion in 1994, an
increase of 4% over the previous year. While the percent of total output is
relatively small, the State is second in agricultural income in the nation and
agriculture's economic impact affects all regions of the State. Estimated gross
receipts from all agricultural enterprises totaled over $12 billion in 1993 and
have averaged over $11 billion annually during the last ten years. The State
typically leads the nation in the production of livestock and cotton, in
addition to being a major producer of peanuts and rice.
NAFTA is expected to enhance Texas' exports of beef, corn, cotton, rice,
sorghum and wheat, as well as consumer oriented food products. In the global
marketplace, Texas ranks first in agricultural exports to Mexico and is third
among other states in total agricultural exports.
Per capita personal income in Texas in 1993 stood at $19,189, compared to a
national average of $20,790. The rate of growth in personal income in Texas
exceeded the national average in 1990, 1991, and 1992. The Comptroller of Public
Accounts estimates that net migration into Texas was negative from 1987 to 1989,
but turned positive in 1990. Net migration in 1991 was over 100,000, almost
140,000 in 1992, and 160,000 in 1993. The median age of the State's population
was 30.8 years in the 1990 census, as compared to 32.9 years for the United
States. According to a 1991 survey by the U.S. Bureau of the Census, 76.6% of
the State's population 25 years of age and older has completed four or more
years of high school, as compared to an average of 78.4% for the nation. Only
one other state, California, has a larger Hispanic population than Texas.
Due to the state's expansion in Medicaid spending and other Health and
Human Services programs requiring federal matching revenues, federal receipts
became the state's number one source of income in fiscal
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<PAGE> 61
1993, accounting for 29.2% of total revenues. Sales tax, which had been the main
source of revenue for the previous 12 years, dropped to second. Sales tax
accounted for 27% of total revenue in fiscal 1993. Interest and investment
income is now the third largest revenue source to the state, contributing 6.4%
of total revenues in fiscal 1993. Motor fuels taxes, the state's fourth largest
revenue source and second largest tax, accounted for 6.2% of total collections
in fiscal 1993. Licenses, fees and permits are a close fifth, accounting for
6.1%. The remainder of the state's revenues are derived primarily from the motor
vehicle, cigarette and tobacco, franchise, oil and gas severance, and other
taxes. The state has no personal or corporate income tax, although the state
does impose a corporate franchise tax based on the amount of a corporation's
capital and "earned surplus," which includes corporate net income and officers'
and trustees' compensation.
The 73rd Legislature convened for its regular session on January 12, 1993,
and adjourned on May 31, 1993. During the session, the Legislature passed the
1994-95 biennial all funds budget of $71.2 billion without increasing State
taxes. This was accomplished by incorporating savings proposals in the budget,
cutting spending in certain areas, and increasing federal funding. The State
finished fiscal year 1993 with a $1,623 million positive cash balance in the
General Revenue Fund. This was the sixth consecutive year that Texas had ended a
fiscal year with a positive balance.
The 74th Legislature convened for its regular session on January 11, 1995.
The Legislature must adopt a budget for the 1996-97 biennium by the end of the
session. The Comptroller of Public Accounts has estimated that the State will
have 19.9% more revenues available for general purpose spending in 1996-97 than
it had in 1994-95, including a surplus of $3 billion from the 1994-95 biennium.
Major issues facing the Legislature include funding of school facilities, as
mandated by district court, funding of Medicaid, welfare and tort reform. The
legislature will also decide whether to permit concealed weapons and whether to
forward to the voters a constitutional amendment permitting casino gambling.
On May 31, 1993, the Texas governor signed a comprehensive legislative
revision to the school finance provisions of the Texas Education Code. The
legislative revisions resulted from a series of court decisions commonly
referred to as Edgewood v. Kirby, in which Texas courts have declared the Texas
school finance system unconstitutional under Texas law. Generally, the courts
declared the school finance system unconstitutional because there must be a
"direct and close correlation between a district's tax effort and the
educational resources available to it," and because districts must have
"substantially equal access to similar revenues per pupil at similar levels of
tax effort." Previous legislative efforts to correct the school finance system
were declared unconstitutional.
The Texas school finance system is funded from a combination of local
school district ad valorem taxes, State funds from the Permanent School Fund
endowment and certain designated tax revenues, and State appropriation. "Tier
one" funding guarantees a school district a basic allotment per pupil; "tier
two" funding guarantees a school district a certain amount of "enrichment"
revenue per student to the extent the local school district levies property
taxes above $0.86 per $100 assessed valuation.
As under prior law, the reform legislation retains a two tier system of
finance; however, revenue levels guaranteed by the State under each tier are
lower than in previous legislative efforts to correct the school finance system.
Under the reform legislation, if a district's adjusted taxable property wealth
per student exceeds $280,000, the district must exercise one of five options to
reduce its wealth per student to that level: consolidate the district with a
property-poor district for all purposes; consolidate the district with a
property-poor district solely for purposes of levying and distributing either
maintenance taxes or both maintenance and debt service taxes; detach property
from the district for annexation by a property-poor district; purchase an
attendance credit by paying tax revenues to the State for redistribution to
property-poor districts; or contract to educate students in a property-poor
district at the wealthy district's expense. If a district fails to exercise a
permitted option, the Commissioner of Education must detach mineral, utility,
industrial, or commercial property from the district and annex the property to a
property-poor district or, if necessary, consolidate the district with a
property-poor district.
On December 10, 1993, a state district court upheld the constitutionality
of the reform legislation. The court ruled, however, that the Legislature has
still not met its constitutional responsibility "to provide efficiently for
facilities." Accordingly, the court ruled that school districts may not issue
bonds utilizing
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<PAGE> 62
unequalized tax efforts after September 1, 1995, unless the Legislature has
provided for the efficient, equitable funding of facilities by that date.
The judge also ruled that the plaintiffs may seek relief in the future if
the Legislature does any of the following: (1) repeals the reform legislation
without a substitution that produces "substantial equity"; (2) amends the reform
legislation in a way that reduced equity; (3) does not fund the reform
legislation sufficiently in future years to produce substantial equity; or (4)
abandons or raises the $1.50 tax cap on the local maintenance tax rate in the
reform legislation without a corresponding increase in the guaranteed yield.
The case has been appealed to the State Supreme Court.
TEMPORARY INVESTMENTS
The taxable securities in which the Fund may invest as temporary
investments include United States Government securities, corporate bonds and
debentures, domestic bank certificates of deposit and bankers' acceptances of
domestic banks with assets of $500 million or more and having deposits insured
by the Federal Deposit Insurance Corporation, commercial paper and repurchase
agreements. The Fund may also invest, as temporary investments, in shares of
tax-exempt money market investment companies.
United States Government securities include obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies and instrumentalities which are supported by any of the following: (a)
the full faith and credit of the United States Government, (b) the right of the
issuer to borrow an amount limited to a specific line of credit from the United
States Government, (c) discretionary authority of the United States Government
agency or instrumentality, or (d) the credit of the instrumentality. Such
agencies or instrumentalities include, but are not limited to, the Federal
National Mortgage Association, the Government National Mortgage Association,
Federal Land Banks, and the Farmer's Home Administration. A Fund may not invest
in any security issued by a commercial bank unless the bank is organized and
operating in the United States and has total assets of at least $500 million and
is a member of the Federal Deposit Insurance Corporation.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement is required to maintain the value of the underlying
securities marked to market daily at not less than the repurchase price. The
underlying securities (securities of the United States Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid security owned by the Fund, exceeds
ten percent of the value of its net assets. See "Investment
Practices -- Repurchase Agreements" in the Prospectus for further information.
FUTURES CONTRACTS AND RELATED OPTIONS
FUTURES CONTRACTS
A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index (the "Index") value at the close of the last trading day of the
contract and the
8
<PAGE> 63
price at which the futures contract is originally struck. The Index is a
price-weighted measure of the market value of 40 large sized, recent issues of
tax-exempt bonds.
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or related options, the Fund could experience delays
and/or losses in liquidating open positions purchased and/or incur a loss of all
or part of its margin deposits with the broker. Transactions are entered into by
the Fund only with brokers or financial institutions deemed creditworthy by the
Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities
9
<PAGE> 64
being hedged is greater than the historical volatility of the securities
underlying the futures contract. Conversely, the Fund could buy or sell futures
contracts in a lesser dollar amount than the dollar amount of securities being
hedged if the historical volatility of the securities being hedged is less then
the historical volatility of the securities underlying the futures contract. It
is also possible that the value of futures contracts held by the Fund could
decline at the same time as portfolio securities being hedged; if this occurred,
the Fund would lose money on the futures contract in addition to suffering a
decline in value in the portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities, or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction judged over a very short time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movements, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in future contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool." CFTC regulations require, among
other things, (i) that futures and related options be used solely for bona fide
hedging purposes (or meet certain conditions as specified in CFTC regulations)
and (ii) that the Fund not enter into futures and related options for which the
aggregate initial margin and premiums exceed five percent of the fair market
value of the Fund's assets. In order to minimize leverage in connection with the
purchase of futures contracts by the Fund, an amount of cash, cash equivalents
or liquid high grade debt securities equal to the market value of the obligation
under the futures contracts (less any related margin deposits) will be
maintained in a segregated account with the Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. 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 (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any
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<PAGE> 65
time during the option period. As a writer of an option on a futures contract,
the Fund would be subject to initial margin and maintenance requirements similar
to those applicable to futures contracts. In addition, net option premiums
received by the Fund are required to be included in initial margin deposits.
When an option on a futures contract is exercised, delivery of the futures
position is accompanied by cash representing the difference between the current
market price of the futures contract and the exercise price of the option. The
Fund could purchase put options on futures contracts in lieu of, and for the
same purpose as, it could sell a futures contract. The purchase of call options
on futures contracts would be intended to serve the same purpose as the actual
purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the level of the index or in the price of the underlying
security, when the use of an option on a future would result in a loss to the
Fund when the use of a future would not.
ADDITIONAL RISKS TO FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most United States futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in a futures contract and thus provide an offset to
losses on the futures contract.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of the outstanding shares of the Fund. Such majority is defined by the
1940 Act as the lesser of (i) 67% or more of the voting securities present in
person or by proxy at the meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. In addition to the fundamental
investment limitations set forth in the Prospectus, the Fund shall not:
1. Purchase or hold securities of any issuer if, to the knowledge of the
Fund, any of the Fund's officers or trustees, or officers or directors
of its investment adviser, owns more than 1/2 of 1% of the outstanding
securities of that issuer, and such officers and trustees/directors who
individually own
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<PAGE> 66
more than such amount together own more than five percent of the
outstanding securities of such issuer.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Fund of an
initial or maintenance margin in connection with futures contracts or
related option transactions is not considered the purchase of a security
on margin.
3. Sell securities short, except to the extent that the Fund
contemporaneously owns or has the right to acquire an equal amount of
such securities; provided that this prohibition does not apply to the
writing of options or the sale of futures or related options.
4. Make loans of money or securities to other persons except that the Fund
may purchase or hold debt instruments and enter into repurchase
agreements in accordance with its investment objective and policies.
5. Purchase or sell real estate or invest in mortgage loans (but this shall
not prevent the Fund from investing in Municipal Securities or Temporary
Investments secured by real estate or interests therein); or in
interests in oil, gas, or other mineral exploration or development
programs; or in any security not payable in United States currency.
6. Invest more than ten percent of the value of its net assets in
securities which are illiquid, including securities restricted as to
disposition under the Securities Act of 1933, and including repurchase
agreements maturing in more than seven days.
7. Invest in securities of any one issuer with a record of less than three
years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or its
agencies or Municipal Securities (except that in the case of industrial
revenue bonds, this restriction shall apply to the entity supplying the
revenues from which the issue is to be paid), if such investments by the
Fund would exceed five percent of the value of its total assets (taken
at market value).
8. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 by virtue
of disposing of portfolio securities.
9. Invest in securities other than Municipal Securities, Temporary
Investments (as defined in the Prospectus), stand-by commitments,
futures contracts described in the next paragraph, and options on such
contracts.
10. Purchase or sell commodities or commodity contracts except that the
Fund may purchase, hold and sell listed futures contracts related to
U.S. Government securities, Municipal Securities or to an index of
Municipal Securities.
11. Borrow money, except that the Fund may borrow from banks to meet
redemptions or for other temporary or emergency purposes, with such
borrowing not to exceed five percent of the total assets of the Fund at
market value at the time of borrowing. Any such borrowing may be
secured provided that not more than ten percent of the total assets of
the Fund at market value at the time of pledging may be used as
security for such borrowings.
12. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry; provided that this limitation shall
not apply to tax-exempt securities issued by governmental bodies or
agencies or instrumentalities thereof; so that industrial development
bonds that are considered to be issued by non-governmental users are
subject to this industry limitation.
13. Issue senior securities as defined in the 1940 Act.
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<PAGE> 67
Because of the nature of the securities in which the Fund may invest, the
Fund may not invest in voting securities, or invest for the purpose of
exercising control or management, or invest in securities of other investment
companies. If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
will not constitute a violation of such restriction.
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and Executive Officers and their principal occupations
for the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital funds.
Age: 63
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Radnor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art. Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and a member of the Investment
Committee of the Joyce Foundation, a private foundation.
A Trustee of each of the Van Kampen American Capital
funds.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital funds and Chairman of each Van Kampen American
Capital fund advised by Van Kampen American Capital
Investment Advisory Corp.
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner of
each of the Van Kampen American Capital funds and other
open-end investment companies and closed-end investment
companies advised by the Adviser and its affiliates.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital. A Director and the Second
Vice President of International Institute of Los Angeles.
A Trustee of each of the Van Kampen American Capital
funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A trustee of each
of the Van Kampen American Capital funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund. Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A Trustee of each of the Van Kampen American Capital
funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 71 Capital funds and Chairman of the Van Kampen American
Capital funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital funds. A Trustee of each of the Van
Age: 56 Kampen American Capital funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital funds.
</TABLE>
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Fund by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.
The Fund's officers other than Messrs. McDonnell and Nyberg are located at
2800 Post Oak Blvd., Houston, TX 77056. Messrs. McDonnell and Nyberg are
located at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 42 Secretary and Corporate Secretary of the Adviser.
Tanya M. Loden........... Vice President and Vice President and Controller of most of
Age: 35 Controller the investment companies advised by the
Adviser, formerly Tax Manager/Assistant
Controller.
Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a
Age: 53 Director of the Adviser; Director of VK/AC
Holding, Inc. and Van Kampen American
Capital.
Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the
Age: 49 Treasurer investment companies advised by the
Adviser.
Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 42 and Secretary of Van Kampen American
Capital. Executive Vice President and a
Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI
Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute.
Robert C. Peck, Jr....... Vice President Senior Vice President and Director of the
Age: 48 Adviser.
Joseph A. Piraro......... Vice President Agent of the Adviser. Employed since 1992
Age: 47 with Van Kampen American Capital Investment
Advisory Corp., an affiliate of the
Adviser. Prior to that time he was employed
by First Chicago Capital Markets.
</TABLE>
15
<PAGE> 70
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
J. David Wise............ Vice President and Vice President, Associate General Counsel
Age: 51 Assistant Secretary and Assistant Corporate Secretary of the
Adviser.
Paul R. Wolkenberg....... Vice President Senior Vice President of the Adviser.
Age: 50 President, Chief Operating Officer and
Director of Van Kampen American Capital
Services, Inc. Executive Vice President,
Chief Operating Officer and Director of Van
Kampen American Capital Trust Company.
Executive Vice President and Director of
ACCESS.
</TABLE>
The Trustees and Officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto and Woodside served as Trustees of the Fund during
its last fiscal year. During the fiscal year ended September 30, 1994, the
trustees who were not affiliated with the Adviser or its parent received as a
group $8,167 in trustees' fees from the Fund in addition to certain
out-of-pocket expenses. Such trustees also received compensation for serving as
directors or trustees of other investment companies advised by the Adviser as
identified in the notes to the foregoing table. For legal services rendered
during the fiscal year ended September 30, 1994, the Fund paid legal fees of
$8,956 to the law firm of O'Melveny & Myers of which Mr. Sheehan is Of Counsel.
The Firm also serves as legal counsel to other Van Kampen American Capital
funds.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve is set forth below. The
compensation shown for the Fund is for the most recent fiscal year and the total
compensation shown for the Fund and other related mutual funds is for the
calendar year ended December 31, 1994. Mr. Powell is not compensated for his
service as Trustee, because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION
OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM
ACCRUED REGISTRANT
AS AND
AGGREGATE PART FUND
COMPENSATION OF COMPLEX
FROM FUND PAID TO
NAME OF PERSON REGISTRANT EXPENSES TRUSTEES(1)(5)
- --------------------------------------------------------- ------ ----- -------
<S> <C> <C> <C>
J. Miles Branagan........................................ $1,250 -0- $64,000
Dr. Richard E. Caruso(3)................................. 1,270(2) -0- 64,000
Dr. Roger Hilsman........................................ 1,290 -0- 66,000
David Rees............................................... 1,250 -0- 64,000
Lawrence J. Sheehan...................................... 1,310 -0- 67,000
Dr. Fernando Sisto(3).................................... 1,620 -0- 82,000
William S. Woodside(4)................................... -0- -0- 18,000
</TABLE>
- ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $1,230 for Mr. Caruso.
(3) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation accrued by the Fund is as follows: Caruso,
$2,410; Sisto, $1,301.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Registrant's adviser. With respect to columns 2 and 4, $1,010 and $36,000,
respectively, was paid by the Adviser directly.
(5) Includes the following amounts for which the various Portfolios were
reimbursed by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman,
$1,000; Rees, $2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr.
Woodside was paid $36,000 directly by the Adviser as discussed in footnote 4
above.
16
<PAGE> 71
Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $629 and a
meeting fee of $18 per Board meeting plus expenses. No additional fees are paid
for committee meetings or to the chairman of the board. In order to alleviate an
additional expense that might be caused by the new compensation arrangement, the
trustees have approved a reduction in the compensation per trustee and have
agreed to an aggregate annual compensation cap with respect to the combined fund
complex of $84,000 per trustee until December 31, 1996, based upon the net
assets and the number of Van Kampen American Capital funds as of July 21, 1995
(except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an
affiliate of the Adviser, would receive an additional $119,000 for serving as a
trustee of such funds). In addition, the Adviser has agreed to reimburse the
Fund through December 31, 1996 for any increase in the aggregate trustees'
compensation paid by the Fund over their 1994 fiscal year aggregate
compensation.
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 its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objectives. The Adviser also furnishes at no cost to the Fund (except
as noted herein) the services of sufficient executive and clerical personnel for
the Fund as are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation materials. In addition,
the Adviser furnishes at no cost to the Fund the services of a President of the
Fund, one or more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of the Fund. The costs of such accounting
services include the salaries and overhead expenses of a Treasurer or other
principal financial officer and the personnel operating under his direction. The
services are provided at cost which is allocated among the investment companies
advised by the Adviser. The Fund also pays transfer agency fees, distribution
fees, service fees, custodial fees, legal fees, the costs of reports to
shareholders and all other ordinary expenses not specifically assumed by the
Adviser.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets at an annual rate of 0.60%
of the first $300 million of the Fund's average net assets, 0.55% of the next
$300 million of the Fund's average net assets and 0.50% of the Fund's average
net assets in excess of $600 million.
The average daily net assets is determined by taking the average of all of
the determinations of the net assets for each business day during a given
calendar month. Such fees are payable for each calendar month as soon as
practicable after the end of that month. The Adviser shall use its best efforts
to recapture all available tender solicitation fees and exchange offer fees in
connection with each of the Fund's transactions and shall advise the Trustees of
the Fund of any other commissions, fees, brokerage or similar payments which may
be possible under applicable laws for the Adviser or any other direct or
indirect majority owned subsidiary of VK/AC Holding, Inc. to receive in
connection with the Fund's portfolio transactions or other arrangements which
may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, the Adviser's monthly compensation 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 an amount sufficient to make up
the deficiency, subject to readjustment during the year. Ordinary business
expenses do not include (1) interest and taxes, (2) brokerage commissions, (3)
payments made pursuant to distribution plans (described herein), and (4) certain
litigation and indemnification expenses as described in the Advisory Agreement.
The Advisory Agreement also provides that the Adviser shall not be liable to the
Fund for any actions or omissions if it acted in good faith without negligence
or misconduct.
17
<PAGE> 72
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities, and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 30 days' written notice.
During the fiscal years ended September 30, 1992, 1993 and 1994, the
Adviser received $7,692, $-0- and $-0- in advisory fees from the Fund. For such
period the Fund paid $5,288, $67,451 and $67,241 for accounting services.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the Fund
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. 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 Underwriting Agreement is
renewable from year to year if approved (a) by the Fund's Trustees or by a vote
of a majority of the Fund's outstanding voting securities, and (b) by the
affirmative vote of a majority of Trustees who are not parties to the
Underwriting Agreement or interested persons of any party, by votes cast in
person at a meeting called for such purpose. The Underwriting Agreement provides
that it will terminate if assigned, and that it may be terminated without
penalty by either party on 60 days' written notice.
During the fiscal years ended September 30, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $176,863,
$205,498 and $52,218. Of such total, the amount retained by the Distributor was
$4,899, $30,599 and $7,912. The remainder was reallowed to dealers. Of such
dealer reallowances, $10,564, $8,835 and $3,346 were received by Advantage
Capital Corporation, an affiliated dealer of the Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan," "Class B Plan" and "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, Class B Plan and
Class C Plan are sometimes referred to herein collectively as "Plans" and
individually as a "Plan").
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of Class B shares
purchased by the clients of broker-dealers and other Service Organizations, (2)
out-of-pocket expenses of printing and distributing prospectuses and annual and
semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and
18
<PAGE> 73
distributing advertising material and sales literature, (4) expenses for
promotional incentives to broker-dealers and financial and industry
professionals, (5) advertising and promotion expenses, including conducting and
organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses, and (6) interest expense at the three-month LIBOR rate
plus 1 1/2% compounded quarterly on the unreimbursed distribution expenses. With
respect to the Class C Plan, authorized payments by the Fund also include
payments at an annual rate of up to 0.75% of the net assets of the Class C
shares to reimburse the Distributor for (1) upfront commissions and transaction
fees of up to 0.75% of the purchase price of Class C shares purchased by the
clients of broker-dealers and other Service Organizations and ongoing
commissions and transaction fees paid to broker-dealers and other Service
Organizations in an amount up to 0.75% of the average daily net assets of the
Fund's Class C shares, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, (5) advertising and promotion expenses, including seminars,
marketing support salaries and bonuses, and travel-related expenses, and (6)
interest expense at the three-month LIBOR rate plus 1 1/2% compounded quarterly
on the unreimbursed distribution expenses. Such reimbursements are subject to
the maximum sales charge limits specified by the NASD.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreement and selling group agreement were approved by the Trustees,
including a majority of the Trustees who are not affiliated persons (as defined
in the 1940 Act) of the Fund and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
each Plan ("Independent Trustees"). In approving each Plan in accordance with
the requirements of Rule 12b-1, the Trustees determined that there is a
reasonable likelihood that each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Fund's Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
the Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by a vote of a majority of the outstanding voting shares of the
respective class. Any change in any of the Plans that would materially increase
the distribution or service expenses borne by the Fund requires shareholder
approval voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as the Plan is in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $37,620 or 0.24% of the Class A shares' average net
assets. Such expenses were paid to reimburse the Distributor for payments made
to Service Organizations for servicing Fund shareholders and for administering
the Class A Plan. The Fund's aggregate expenses under the Class B Plan were
$83,663 or 1.00% of the Class B shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $62,747 for
commissions and transaction fees paid to broker-dealers and other Service
Organizations in respect of sales of Class B shares of the Fund and $20,916 for
fees paid to Service Organizations for servicing Class B shareholders and
administering the Class B Plan. For the fiscal year ended September 30, 1994,
the
19
<PAGE> 74
Fund's aggregate expenses under the Class C Plan were $9,075 or 1.00% of the
Class C shares' average daily net assets. Such expenses were paid to reimburse
the Distributor for the following payments: $6,806 for commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class C shares of the Fund and $2,269 for fees paid to
Service Organizations for servicing Class C shareholders and administering the
Class C Plan.
TRANSFER AGENT
During the fiscal year ended September 30, 1994, ACCESS, shareholder
service agent and dividend disbursing agent for the Fund, received fees
aggregating $27,023 for these services. The services of ACCESS are provided at
cost plus a profit.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate for the fiscal
period ended September 30, 1993 is shown under "Financial Highlights" in the
Prospectus. The annual turnover rate is not expected to exceed 100%. A 100%
turnover rate would occur if all the Fund's portfolio securities were replaced
during one year.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of any
commissions, if any, paid on such transactions. As most transactions made by the
Fund are principal transactions at net prices, the Fund incurs little or no
brokerage costs except for commissions paid with respect to transactions in
future contracts and options. Portfolio securities are normally purchased
directly from the issuer or 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 the spread between the bid and
asked price. Sales to dealers are effected at bid prices.
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 commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, consideration may be given to firms which also provide research
services to the Fund or the Adviser. No specific value can be assigned to such
research services which are furnished without cost to the Adviser. 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 the 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 the 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.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution of such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Fund and of the other Van Kampen
American Capital mutual funds as a factor in the selection of firms to execute
portfolio transactions for the Fund.
20
<PAGE> 75
The Adviser places portfolio transactions 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 by 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
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.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons (as defined in the 1940 Act) of the Adviser. During the fiscal years
ended September 30, 1992, 1993 and 1994, the Fund paid no brokerage commissions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is computed by dividing the
value of all securities held by the Fund plus other assets, less liabilities
(including accrued expenses), by the number of shares outstanding. Such
computation is made as of the close of the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York time) on each business day on which
the Exchange is open. The Exchange is currently closed on weekends and on the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's investments are valued by an independent pricing service
("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at such quoted bid prices (as obtained by
the Service from dealers in such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. Any assets which are not valued
by the Service would be valued at fair value using methods determined in good
faith by the Trustees. Expenses and fees, including the management fee are
accrued daily and taken into account for the purpose of determining the net
asset value of Fund shares. Short-term instruments having remaining maturities
of 60 days or less are valued at amortized cost.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
The Fund's shares are sold in a continuous offering and may be purchased on
any business day through authorized dealers, including Advantage Capital
Corporation.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the
21
<PAGE> 76
deferred sales arrangements, distribution fees, and any expenses (including
higher transfer agency costs) resulting from such sales arrangements, and have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the distribution fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the Securities Act of 1933.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more in the Fund, in the form
of a check payable to the Fund, must accompany the application. This minimum may
be waived by the Distributor for plans involving continuing investments.
Subsequent investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of the Fund's shares next
computed following receipt of payment by ACCESS. Confirmations of the opening of
an account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same capacity
so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to the purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single purchaser, as is a trustee or other fiduciary purchasing for a
single fiduciary account. An aggregate investment includes all shares of the
Fund and all shares of certain other participating Van Kampen American Capital
mutual funds described in the Prospectus (the "Participating Funds"), which have
been previously purchased and are still owned, plus the shares being purchased.
The current offering price is used to determine the value of all such shares.
If, for example, an investor has previously purchased and still holds Class A
shares of the Fund and/or shares of other Participating Funds having a current
offering price of $50,000 and that person purchases $60,000 of additional Class
A shares of the Fund, the charge applicable to the $60,000 purchase would be
3.75% of the offering price. The same reduction is applicable to purchases under
a Letter of Intent as described in the next paragraph. THE DEALER MUST NOTIFY
THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD
QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR
NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. The
reduced sales charge will not be applied if such notification is not furnished
at the time of the order. The reduced sales charge will also not be applied
should a review of the records of the Distributor or ACCESS fail to confirm the
investor's represented holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
still owned, are also included in determining the applicable quantity discount.
A Letter of Intent permits an investor to establish a total investment goal to
be achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can become subject to the
Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated
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<PAGE> 77
amount. If the Letter of Intent goal is not achieved within the 13-month period,
the investor is required to pay the difference between sales charges otherwise
applicable to the purchases made during this period and sales charges actually
paid. Such payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrow shares to obtain such difference.
If the goal is exceeded in an amount which qualifies for a lower sales charge, a
price adjustment is made by refunding to the investor in shares of the Fund, the
amount of excess sales charges, if any, paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefore may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practical for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For investments of $1,000,000 or more of Class A shares of the Fund
("Qualified Purchaser"), the front-end sales charge will be waived and a
contingent deferred sales charge ("CDSC -- Class A") of one percent is imposed
in the event of certain redemptions within one year of the purchase. If a
CDSC -- Class A is imposed upon redemption, the amount of the CDSC -- Class A
will be equal to the lesser of one percent of the net asset value of the shares
at the time of purchase, or one percent of the net asset value of the shares at
the time of redemption.
The CDSC -- Class A will only be imposed if a Qualified Purchaser redeems
an amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one-year period prior to the redemption. The CDSC --
Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., in retirement plans qualified under Section 401(a) of the
Internal Revenue Code (the "Code") and deferred compensation plans under Section
457 of the Code) required to obtain funds to pay distributions to beneficiaries
pursuant to the terms of the plans. Such payments include, but are not limited
to, death, disability, retirement, or separation from service. No CDSC -- Class
A will be imposed on exchanges between funds. For purposes of the CDSC -- Class
A, when shares of one fund are exchanged for shares of another fund, the
purchase date for the shares of the fund exchanged into will be assumed to be
the date on which shares were purchased in the fund from which the exchange was
made. If the exchanged shares themselves are acquired through an exchange, the
purchase date is assumed to carry over from the date of the original election to
purchase shares subject to a CDSC -- Class A rather than a front-end load sales
charge. In determining whether a CDSC -- Class A is payable, it is assumed that
shares held the longest are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of Van Kampen American Capital Reserve
Fund, Van Kampen American Capital Money Market Fund and Van Kampen American
Capital Tax Free Money Fund with shares of certain other participating funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
23
<PAGE> 78
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
The CDSC -- Class B and C is waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of Van Kampen American
Capital funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held onto the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC -- Class B and C is applicable in the event that such acquired shares
are redeemed following the transfer or rollover. The charge also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge also 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.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC -- Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
24
<PAGE> 79
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC -- Class B and Class C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
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 120 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.
(f) 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.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
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<PAGE> 80
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the Prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
FEDERAL TAX INFORMATION
The following is only a summary of certain additional federal, state and
local tax considerations generally affecting the Fund and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.
General. By maintaining its qualification as a "regulated investment
company" under the Code, the Fund will not incur any liability for federal
income taxes to the extent its taxable ordinary income and any capital gain net
income is distributed in accordance with Subchapter M of the Code.
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable (net
investment) income for the twelve-months ended December 31, plus 98% of its
capital gain net income for the twelve-months ended October 31 of such calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax. The per share dividends on Class B and Class C shares will be
lower than the per share dividends on Class A shares as a result of the
distribution fee and higher transfer agency fees applicable to the Class B and
Class C shares. By qualifying as a regulated investment company, the Fund is not
subject to federal income taxes to the extent it distributes its taxable net
investment income and taxable net realized capital gains. If for any taxable
year the Fund does not qualify for the special tax treatment afforded regulated
investment companies, all of its taxable income, including any net realized
capital gains, would be subject to tax at regular corporate rates (without any
deduction for distributions to shareholders).
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized on
the basis of the subsequent shares.
The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Securities to pass through to its investors,
tax-exempt, net Municipal Securities interest income. In order for the Fund to
be eligible to pay exempt-interest dividends during any taxable year, at the
close of each fiscal quarter, at least 50% of the aggregate value of the Fund's
assets must consist of exempt-interest obligations. In addition, the Fund must
distribute at least (i) 90% of the excess of its exempt-interest income over
certain disallowed deductions, and (ii) 90% of its "investment company taxable
income" (i.e., its ordinary taxable income and the excess, if any, of its net
short-term capital gains over any net long-term capital losses) recognized by
the Fund during the taxable year (the "Distribution Requirements").
26
<PAGE> 81
Not later than 60 days after the close of its taxable year, the Fund will
notify its shareholders of the portion of the dividends paid by the Fund to the
shareholders for the taxable year which constitutes exempt-interest dividends.
The aggregate amount of dividends so designated cannot exceed, however, 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
fiscal 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.
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 or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the purchaser would be
treated as a "substantial user" or a "related person" with respect to any of the
tax-exempt obligations held the Fund if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury Regulations to include a non-exempt person who regularly uses in his or
her trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed five
percent of the total revenues derived from the facilities by all users, or who
occupies more than five percent 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.
Interest on indebtedness incurred 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 short-term capital loss on
the sale or exchange of the shares will be disallowed to the extent of the
amount of such exempt-interest dividend.
If, during any taxable year, the Fund realizes net capital gains (the
excess of net long-term capital gains over net short-term capital losses) from
the sale or other disposition of Municipal Securities or other assets, the Fund
will have no tax liability with respect to such gains if they are distributed to
shareholders. Distributions designated as capital gains dividends are taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held his shares. Not later than 60 days after the close of the Fund's
taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during the year which
constitute capital gain.
A capital gain dividend received after the purchase of the shares of the
Fund reduces the net asset value of the shares by the amount of the distribution
and will be subject to income taxes. A loss on the sale of shares held for less
than six months (to the extent not disallowed on account of the receipt of
exempt-interest dividends) attributable to a capital gain dividend is treated as
a long-term capital loss for federal income tax purposes.
Tax Treatment of Futures Contracts and Related Options. In connection with
its operations, the Fund may effect transactions in U.S. Government securities
and municipal bond futures contracts ("Futures Contracts") and in options
thereon ("Futures Options"). Gains or losses recognized by the Fund from
transactions in such Futures Contracts and Futures Options constitute capital
gains and losses for federal income tax purposes and do not therefore qualify as
exempt-interest income.
With respect to a Futures Contract closed out by the Fund, any realized
gain or loss will be treated as long-term capital gain or loss to the extent of
60% thereof and short-term capital gain or loss to the extent of 40% thereof
(hereinafter "60/40 gain or loss"). Open Futures Contracts held by the Fund at
the end of any fiscal year will be required to be treated as sold at market
value on the last day of such fiscal year for federal income tax purposes (i.e.
"marked-to-market"). Gain or loss recognized under this marked-to-market rule is
60/40 gain or loss. The federal income tax treatment accorded to Futures Options
will be the same as that accorded Futures Contracts. The Distribution
Requirements may limit the Fund's ability to hold Futures Contracts and Futures
Options at the end of a year.
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<PAGE> 82
A portion of the Fund's transactions in Futures Contracts and Futures
Options, particularly its hedging transactions, may constitute "straddles" with
respect to the Fund's holdings of Municipal Securities. Straddles are defined in
Section 1092 of the Code as offsetting positions with respect to personal
property. A straddle in which at least one (but not all) of the positions are
Section 1256 contracts is a "mixed straddle" under the Code if certain
identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone a recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period, and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been made whether the Fund
will make any of these elections.
The Fund may acquire an option to "put" specified portfolio securities to
banks or municipal bond dealers from whom the securities are purchased. See
"Stand-By Commitments," in the Prospectus. The Fund has been advised by its
legal counsel that it will be treated for federal income tax purposes as the
owner of the Municipal Securities acquired subject to the put; and the interest
on the Municipal Securities will be tax-exempt to the Fund. Counsel has pointed
out that although the Internal Revenue Service has issued a favorable published
ruling on a similar but not identical situation, it could reach a different
conclusion from that of counsel. Counsel has also advised the Fund that the
Internal Revenue Service presently will not ordinarily issue private letter
rulings regarding the ownership of securities subject to stand-by commitments.
Restrictions on Futures Contracts and Related Options. Among the
requirements for qualification as a regulated investment company under the Code,
the Fund must derive less than 30% of its gross income each year from sales of
securities held for less than three months. This requirement and the
marked-to-market rule may restrict the Fund's ability to: (i) effect closing
purchase transactions in futures contracts and futures options which have been
held for less than three months and (ii) enter into various other short-term
transactions.
In addition, the Code requires that the Fund satisfy certain portfolio
diversification requirements at the end of each fiscal quarter of its taxable
year in order to maintain its qualification as a regulated investment company.
In general, no more than 25% of the value of the Fund's assets may be invested
in the securities of any one issuer and at least 50% of the value of the Fund's
assets must be represented by securities of issuers each of which separately
represents not more than five percent of the value of the total assets of the
Fund. Consequently, the Fund's ability to invest in futures contracts and
futures options may be limited.
Treatment of Dividends. While the Fund expects that a major portion of its
investment income will constitute tax-exempt interest, a significant portion may
consist of "investment company taxable income" and "net capital gains." As
pointed out above, a Fund will be subject to tax for any year on its
undistributed investment company taxable income and net capital gains.
It is anticipated that substantially all of the Fund's taxable income and
capital gain net income will be distributed by the Fund in order to meet the
Distribution Requirements and to avoid taxation at the Fund level. Distributions
that are not designated as capital gain dividends will be taxable to
shareholders as ordinary income. Dividends and distributions declared payable to
shareholders of record after September 30 of any year and paid before February 1
of the following year, are considered taxable income to shareholders on the
record date even though paid in the next year.
Since none of the Fund's net investment income will arise from dividends on
common or preferred stock, none of its distributions will be eligible for the
70% dividends received deduction available to corporations. To
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<PAGE> 83
qualify for the dividends received deduction, a corporate shareholder must hold
the shares on which the dividend is paid for more than 45 days.
The Tax Reform Act of 1986 (the "Tax Reform Act") added a provision that,
for taxable years beginning after December 31, 1989, 75% of the excess of a
corporation's adjusted current earnings (generally, earning and profits, with
adjustments) over its other alternative minimum taxable income is an item of tax
preference for corporations. All tax-exempt interest is included in the
definition of "adjusted current earnings" so a portion of such interest is
included in computing the alternative minimum tax on corporations. For
shareholders that are financial institutions, the Tax Reform Act eliminated
their ability to deduct interest payments to the extent allocated on a pro rata
basis to the purchase of Fund shares.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TEXAS TAX INFORMATION
Dividends and distributions paid by the Fund to Texas residents are not
taxable by Texas because Texas presently has no personal income tax. Therefore,
at the present time, Texas residents enjoy no special State income tax benefits
by investing in the Fund.
The State of Texas does not have a corporate income tax. Under present
laws, the Fund will not be subject to the Texas franchise tax.
The foregoing are only summaries of the applicable provisions of the Code,
Treasury regulations and Texas tax laws presently in effect. For complete
provisions, reference should be made to the pertinent Code sections, Treasury
regulations promulgated thereunder and the Texas tax laws. The Code, Treasury
regulations and Texas tax laws are subject to change by legislative or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisers with specific
reference to their own tax situation.
FUND PERFORMANCE
The average annual total return (computed in the manner described in the
Prospectus) for Class A shares of the Fund for the one-year and three-year
periods ended March 31, 1995 was 1.82% and 5.76%, respectively. The average
annual total return (computed in the manner described in the Prospectus) for
Class B shares of the Fund for the one-year and two-years-and-eight-months
periods ended March 31, 1995 was 2.04% and 4.04%, respectively. The average
annual total return (computed in the manner described in the Prospectus) for
Class C shares of the Fund for the one-year and one-year-and-seven-months period
ended March 31, 1995 was 5.03% and 2.71%, respectively. These results are based
on historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objective and policies as well as the risks incurred by
the Fund's investment practices.
The annualized current yield for Class A, Class B and Class C shares of the
Fund for the 30-day period ending September 30, 1994 was 4.98%, 4.40%, and
4.40%, respectively. The tax equivalent yield is based on an assumption of a tax
rate of 36% for the same period for Class A, Class B and Class C shares of the
Fund was 7.79%, 6.87% and 6.87%, respectively. The yield for Class A, Class B
and Class C shares are 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.
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<PAGE> 84
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time VKAC will announce the results of its monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
Intentions(SM) and the Van Kampen American Capital Mutual Fund
Index(SM) -- which polls measure how Americans plan to use their money.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Funds' transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by Van Kampen American Capital in 1994.
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. Such illustrations may be in the
form of charts or graphs and will not be based on historical returns experienced
by the Fund.
OTHER INFORMATION
DIVIDENDS AND DISTRIBUTIONS -- Shareholders are informed as to the sources of
distributions at the time of payment. Any capital gain distribution paid shortly
after a purchase of shares by an investor will have the effect of reducing the
per share net asset value of the shares owned by the amount of the distribution.
See "Distributions from the Fund" in the Prospectus for further 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
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual and Semi-Annual Reports to Shareholders, including the related Report of
Independent Accountants on the September 30, 1994 financial statements, are
included in the Statement of Additional Information.
The following information is not included in the Annual or Semi-Annual
Reports. This example assumes a purchase of Class A shares of the Fund
aggregating less than $100,000 subject to the schedule of sales charges set
forth in the Prospectus at a price based upon the net asset value of Class A
shares of the Fund on September 30, 1994.
<TABLE>
<CAPTION>
MARCH SEPTEMBER
31, 30,
1995 1994
------ ------
<S> <C> <C>
Net Asset Value per Class A Share $ 9.90 $ 9.64
Class A Per Share Sales Charge -- 4.75% of offering price
(4.99% of net asset value per share) $ 0.49 $ 0.49
------ ------
Class A Per Share Offering Price to the Public $10.39 $10.12
</TABLE>
30
<PAGE> 85
APPENDIX
RATINGS OF INVESTMENTS
RATINGS OF MUNICIPAL SECURITIES
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE ("MOODY'S") MUNICIPAL BOND RATINGS
Aaa -- Securities 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 edge." 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 -- Securities 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 in Aaa securities.
A -- Securities which are rated A possess many favorable investment
attributes and are to be considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Securities which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments 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 -- Securities 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 -- Securities 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 -- Securities 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 -- Securities which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Securities 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.
Conditional Rating: Securities for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3
in each generic rating classification from Aa through B in its municipal
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and a modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
31
<PAGE> 86
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable
quality . . . but lacking the undeniable strength of the preceding grades";
MIG 4 notes are of "adequate quality, carrying specific risk but having
protection . . . and not distinctly or predominantly speculative."
Beginning on February 5, 1985, Moody's started new rating categories
for variable rate demand obligations ("VRDO's"). VRDO's receive two
ratings. The first rating, depending on the maturity of the VRDO, is
assigned either a bond or MIG rating which represents an evaluation of the
risk associated with scheduled principal and interest payments. The second
rating, designated as "VMIG," represents an evaluation of the degree of
risk associated with the demand feature. The new VRDO's demand feature
ratings and symbols are:
VMIG 1: strong protection by established cash flows, superior
liquidity support, demonstrated access to the market for
refinancing.
VMIG 2: ample margins of protection, high quality.
VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well
established.
VMIG 4: adequate quality, not predominantly speculative but there is
risk.
DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper 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 employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL ("S&P") DEBT RATINGS
A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources S&P 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 for other
reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default -- capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
32
<PAGE> 87
III. 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.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
<TABLE>
<S> <C>
BB Debt rated "BB", "B", "CCC" or "CC" is regarded, on balance, as predominantly
B speculative with respect to capacity to pay interest and repay principal in
CCC accordance with the terms of the obligation. "BB" indicates the lowest degree of
CC speculation and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
</TABLE>
C This rating is reserved for income bonds on which no interest is
being paid.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Ratings are applicable to both
taxable and tax-exempt commercial paper. The four categories are as follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designation 1, 2 and 3 to indicate the
relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
33
<PAGE> 88
B Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer and obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
S&P may continue to rate note issues with a maturity greater than three years in
accordance with the same rating scale currently employed for municipal bond
ratings.
S&P assigns dual ratings to all long-term debt issues that have a demand or
put feature. The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses the demand feature alone.
Long-term debt rating symbols are used for the long-term maturity and commercial
paper rating symbols are used for the put option (for example, AAA/A-1+). For
demand notes, S&P's note rating symbols are used with the commercial paper
symbols (for example, SP-1+/a-1+).
Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split rated
securities (i.e. different ratings by Moody's and S&P) and dual rated securities
as described above.
34
<PAGE> 89
INVESTMENT PORTFOLIO
September 30, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS 98.4%
EDUCATION 7.1%
$ 375,000 Clear Creek, Texas, Independent School District, G.O., 6.25%, 2/1/11 . . . . . . . $ 392,494
500,000 Houston, Texas, Higher Education Finance Corp., Rev. (University of St. Thomas
Project), 7.25%, 12/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . 502,370
500,000 North Texas Higher Education Authority Inc., Texas Student Loan Rev., Refunding,
Series D, 6.30%, 4/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . 485,680
500,000 Victoria, Texas, Independent School District, Refunding, Zero Coupon, 2/15/08 . . 217,540
-----------
TOTAL EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,598,084
-----------
HOSPITALS 25.1%
105,000 Abilene, Texas, Health Facilities Development Corp. (Hendrick Medical Center
Project), FGIC, 9.50%, 9/1/13 . . . . . . . . . . . . . . . . . . . . . . . . 111,321
170,000 Bell County, Texas, Health Facilities Development Corp. (King's Daughters,
Hospital), 9.25%, 7/1/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,355
500,000 Bexar County, Texas, Health Facilities Development Corp., Rev. Southwest Texas
Methodist Hospital, AMBAC, 6.75%,11/1/21 . . . . . . . . . . . . . . . . . . . 507,410
750,000 Denton, Texas, Health Facilities Development Corp., Refunding (Lutheran Good
Samaritan Hospitals), AMBAC, 6.00%, 6/1/18 . . . . . . . . . . . . . . . . . . 698,940
500,000 Ector County, Texas, Hospital District, Medical Center Hospital, 7.125%, 4/15/02 . 506,360
175,000 Edinburg, Texas, Hospital Authority, Rev. (Edinburg General Hospital Project
86), 10.00%, 7/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,297
Harris County, Texas, Health Facilities Development Corp., Health Care System rev.
250,000 Memorial Hospital System Project, 7.125%, 6/1/15 . . . . . . . . . . . . . . . 259,875
375,000 Sisters of Charity, 7.10%, 7/1/21 . . . . . . . . . . . . . . . . . . . . . . 394,125
90,000 Jefferson County, Texas, Health Facility Authority (Baptist Health Care Project),
8.30%, 10/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,933
185,000 Lubbock, Texas, Health Facilities Development Corp., Rev. (Methodist Hospital),
AMBAC, 7.25%, 12/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,745
155,000 Montgomery County, Texas, Health Facilities Development Corp., Hospital Mortgage
Rev. (Woodlands Medical Center Project), 8.85%, 8/15/14 . . . . . . . . . . . 166,410
500,000 Richardson, Texas, Hospital Authority, Refunding & Improvement Rev. (Richardson
Medical Center), 6.75%, 12/1/23 . . . . . . . . . . . . . . . . . . . . . . . 472,075
300,000 Rusk County, Texas, Health Facility Corp., Refunding, Hospital Rev. (Henderson
Memorial Hospital Project), 7.75%, 4/1/13 . . . . . . . . . . . . . . . . . . 290,298
500,000 Tarrant County, Texas, Health Facilities Development Corp., Refunding &
Improvement, Hospital Rev. (Fort Worth Osteopathic Hospital), 7.00%, 5/15/28 . 481,235
250,000 Texas Health Facilities Development Corp., Hospital Rev., (Fort Worth Childrens
Center), FGIC, 6.25%, 12/1/12 . . . . . . . . . . . . . . . . . . . . . . . . 246,243
Tyler, Texas, Health Facilities Development Corp., Refunding Rev. (East Texas
Medical Center - Regional Health)
150,000 Series A, 8.25%, 11/1/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,139
500,000 Series B, 6.75%, 11/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . 457,435
210,000 Weslaco, Texas, Health Facilities Development Corp., Hospital Rev. (Weslaco
Health Facility), 10.375%, 6/1/16 . . . . . . . . . . . . . . . . . . . . . . 248,949
-----------
TOTAL HOSPITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,684,145
-----------
</TABLE>
F-1
<PAGE> 90
INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING 11.7%
$ 500,000 Austin, Texas, Housing Finance Corp., Multi-family Mtg., 6.50%,
10/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 487,880
500,000 Baytown, Texas, Property Management & Development Corp., Series A
(Baytown Terrace Project), 6.10%, 8/15/21 . . . . . . . . . . . . . . . . . 457,015
355,000 Bexar County, Texas, Housing Finance Corp., Rev., Series B, 9.25%, 4/1/16 . . . . 371,887
115,000 East Texas Housing Finance Corp., Single Family Mtg. Rev., 7.20%, 1/1/26 . . . . . 116,700
250,000 El Paso, Texas, Housing Authority, Multi-Family Mtg. Rev., Series A, 6.25%,
12/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,560
150,000 El Paso, Texas, Property Finance Authority, Inc., Single Family Mtg. Rev.,
Series A, 8.70%, 12/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,304
165,000 Galveston, Texas, Property Finance Authority, Inc., Single Family Mtg. Rev.,
Series A, 8.50%, 9/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,335
Harris County, Texas, Housing Financing Corp., Single Family Mtg. Rev.,
30,000 Series 1983-A, 10.125%, 7/15/03 . . . . . . . . . . . . . . . . . . . . . . . 30,097
110,000 Series 1983-A, 10.375%, 7/15/14 . . . . . . . . . . . . . . . . . . . . . . . 110,265
15,000 11.25%, 4/15/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,309
25,000 Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev., 10.00%, 9/15/14 . 25,711
240,000 Texas Housing Agency, Single Family Mtg. Rev., Refunding, Series A, 7.15%,
9/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248,124
190,000 Travis County, Texas, Housing Finance Corp., Single Family Mtg. Rev., 8.20%,
4/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,485
-----------
TOTAL HOUSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,651,672
-----------
MISCELLANEOUS 16.3%
60,000 Fort Bend County, Texas, Levee Improvement, District No. 11, G.O., 8.70%, 3/1/10 . 65,378
250,000 Lockhart, Texas, Correctional Facilities Rev., Financing Corp., MBIA, 6.625%,
4/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253,418
250,000 Garland, Texas, Economic Development Authority, IDR (Yellow Freight System,
Inc. Project), 8.00%, 12/1/16 . . . . . . . . . . . . . . . . . . . . . . . . 259,227
Sabine River Authority, Texas, Refunding, PCR (Texas Utilities Co.)
60,000 Series 1986, 9.00%, 9/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . . 65,692
500,000 7.75%, 4/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522,940
295,000 Texas General Services Community Partner Interests, (Office Building and Land
Acquisition Project), 7.00%, 8/1/09 . . . . . . . . . . . . . . . . . . . . . 289,371
Texas State, G.O.,
250,000 National Research Lab Commission, 7.125%, 4/1/20 . . . . . . . . . . . . . . . 275,600
1,000,000 Public Financing Authorities, Series A, 5.60%, 10/1/06 . . . . . . . . . . . . 978,650
500,000 Refunding (Superconducting Project), Series C, 6.00%, 4/1/12 . . . . . . . . . 481,155
250,000 Refunding, Veterans Land, 6.50%, 12/1/21 . . . . . . . . . . . . . . . . . . . 249,655
250,000 Travis County, Texas, G.O., Refunding, Series A, MBIA, 5.50%, 3/1/03 . . . . . . . 248,990
-----------
TOTAL MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,690,076
-----------
MUNICIPAL UTILITY DISTRICT (MUD) 12.4%
250,000 Brazoria County, Texas, MUD No. 2, Refunding, 7.00%, 9/1/08 . . . . . . . . . . . 248,010
60,000 Fort Bend County, Texas, MUD No. 25, Refunding, 8.00%, 10/1/15 . . . . . . . . . 62,691
250,000 Harris County, Texas, MUD No. 120, Refunding, 8.00%, 8/1/14 . . . . . . . . . . . 271,117
</TABLE>
F-2
<PAGE> 91
INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
MUNICIPAL UTILITY DISTRICT (MUD) - CONTINUED
$ 500,000 Harris County, Texas, MUD No. 322, 6.25%, 5/1/18 . . . . . . . . . . . . . . . . . $ 440,790
500,000 Mills Road, Texas, MUD, Refunding, 6.50%, 9/1/14 . . . . . . . . . . . . . . . . . 463,725
125,000 Mission Bend, Texas, MUD No. 2, 10.00%, 9/1/00 . . . . . . . . . . . . . . . . . . 144,294
Montgomery County, Texas, MUD,
250,000 MBIA,,6.25%, 3/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,250
50,000 No. 4 (Water Works System), 8.90%, 9/1/02 . . . . . . . . . . . . . . . . . . 56,822
250,000 6.00%, 9/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,225
250,000 6.00%, 9/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,933
100,000 West Harris County, Texas, MUD No. 1, Refunding, 7.00%, 4/1/05 . . . . . . . . . . 101,298
300,000 Woodlands, Texas, Metro Center, MUD, Refunding, Series B, 7.10%, 4/1/07 . . . . . 329,763
-----------
TOTAL MUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,795,918
-----------
NURSING HOMES 1.1%
250,000 San Antonio, Texas, Health Facilities Development Corp., Rev. (Encore Nursing
Center Partner), 8.25%, 12/1/19 . . . . . . . . . . . . . . . . . . . . . . . 256,930
-----------
TRANSPORTATION 3.0%
Dallas-Fort Worth, Texas, International Airport Facility, Inc., Rev.
60,000 American Airlines Inc., 7.50%, 11/1/25 . . . . . . . . . . . . . . . . . . . . 59,071
140,000 Delta Airlines, Inc., 7.60%, 11/1/11 . . . . . . . . . . . . . . . . . . . . . 140,076
250,000 Harris County, Texas, Toll Road Rev., 6.75%, 8/1/94 . . . . . . . . . . . . . . . 254,795
250,000 Texas State Turnpike Authority, Dallas North Toll Road, Tollway
Rev., 6.00%, 1/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,940
-----------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685,882
-----------
UTILITIES - COMBINATION ELECTRIC, GAS AND/OR WATER 13.0%
Austin, Texas, Utility System Rev.
500,000 Refunding, 6.00%, 5/15/15 . . . . . . . . . . . . . . . . . . . . . . . . . . 467,475
220,000 Series B, 7.80%, 11/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . . 241,089
435,000 City of Brownsville, Texas, Utilities System Priority Rev., Series 1990,
AMBAC, 6.50%, 9/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436,035
250,000 Colorado River, Texas, Municipal Water District (Water
Transmission Facilities Project - A), AMBAC, 6.625%, 1/1/21 . . . . . . . . . 266,385
250,000 Guadalupe Blanco River Authority, Texas, IDR, 6.35%, 7/1/22 . . . . . . . . . . . 248,355
Port of Corpus Christi, Texas, IDR (Valero Refining & Marketing Co.)
385,000 Series A, 10.25%, 6/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . 432,367
100,000 Series B, 10.625%, 6/1/08 . . . . . . . . . . . . . . . . . . . . . . . . . . 113,279
220,000 San Antonio, Texas, Electric and Gas Rev., Series A, 6.50%, 2/1/12 . . . . . . . . 221,247
500,000 Williow Fork, Texas, Drainage District, 7.00%, 3/1/11 . . . . . . . . . . . . . . 502,825
-----------
TOTAL UTILITIES - COMBINATION ELECTRIC, GAS AND/OR WATER . . . . . . . . . . . 2,929,057
-----------
UTILITIES - ELECTRIC 2.8%
125,000 Brazos River Authority Texas, PCR (Texas Utilities Electric Co.
Project A), 9.875%, 10/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . 141,201
100,000 Matagorda County, Texas, Navigation District 1, Control Rev.
(Central Power & Light Co. Project), 7.875%, 12/1/16 . . . . . . . . . . . . . 107,253
435,000 Texas Municipal Power Agency, Rev., 5.50%, 9/1/13 . . . . . . . . . . . . . . . . 387,102
-----------
TOTAL UTILITIES - ELECTRIC . . . . . . . . . . . . . . . . . . . . . . . . . . 635,556
-----------
</TABLE>
F-3
<PAGE> 92
INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - WATER AND SEWER 5.9%
$ 250,000 Coastal Water Authority, Texas Water Rev., AMBAC, 6.25%, 12/15/17 . . . . . . . . $ 243,700
250,000 Dallas, Texas, Waterworks and Sewer System, Rev., Series A, 5.50%, 10/1/06 . . . . 240,387
100,000 Harris County, Texas, Water Control and Improvement District No. 75, 7.00%, 3/1/14 100,853
500,000 Houston, Texas, Water and Sewer System, Refunding Rev., Series B, 6.375%, 12/1/14 487,765
250,000 Tarrant County, Texas, Water Control and Improvement Rev., 6.00%, 3/1/10 . . . . 258,445
-----------
TOTAL UTILITIES - WATER AND SEWER . . . . . . . . . . . . . . . . . . . . . . 1,331,150
-----------
TOTAL MUNICIPAL BONDS (COST $22,332,788) 98.4% . . . . . . . . . . . . . . . . . 22,258,470
-----------
Other assets and liabilities, net 1.6% . . . . . . . . . . . . . . . . . . . . . 358,124
-----------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,616,594
===========
</TABLE>
G.O. - General Obligation bond
IDR - Industrial Development Revenue bond
PCR - Pollution Control Revenue bond
Rev. - Revenue bond
Insurers:
AMBAC - AMBAC Indemnity Corp.
FGIC - Financial Guaranty Insurance Co.
MBIA - Municipal Bond Investor's Assurance Corp.
See Notes to Financial Statements
F-4
<PAGE> 93
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $22,332,788) . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,258,470
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,317
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483,611
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,161
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,275
-----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,787,834
-----------
LIABILITIES
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,967
Payable for Fund shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,764
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,671
Due to Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,423
Accrued expenses and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,415
-----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,240
-----------
NET ASSETS, equivalent to $9.64 per share for Class A and Class B shares and $9.65
per share for Class C shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,616,594
===========
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 1,331,569 Class A, 888,816 Class B and 126,223 Class C shares outstanding . . $ 23,466
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,707,690
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45,872)
Unrealized depreciation of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (74,318)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,628
-----------
NET ASSETS at September 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,616,594
===========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 94
STATEMENT OF OPERATIONS
Year ended September 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,607,291
-----------
EXPENSES
Management fees (net of expense reimbursement of $149,614) . . . . . . . . . . . . . . . . . . . . . -
Service fees - Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,620
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,663
Distribution and service fees - Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,075
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,241
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,213
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,109
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,470
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,985
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,488
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,254
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,626
Organization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,031
Expense reimbursement in excess of management fees . . . . . . . . . . . . . . . . . . . . . . . . . (17,205)
-----------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327,570
-----------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,279,721
-----------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,911)
Net unrealized depreciation of securities during the year . . . . . . . . . . . . . . . . . . . . . . (1,799,595)
-----------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . . . . . . . . . . (1,839,506)
-----------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . $ (559,785)
===========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 95
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended September 30
------------------------------------
1994 1993
-------------- -------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,210,015 $ 15,068,044
-------------- -------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,279,721 1,192,038
Net realized gain (loss) on securities . . . . . . . . . . . . . . . . . . . (39,911) 28,665
Net unrealized appreciation (depreciation) of securities during the year . . (1,799,595) 1,436,229
------------- -------------
Increase (decrease) in net assets resulting from operations . . . . . . . (559,785) 2,656,932
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (849,857) (983,493)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (383,566) (227,534)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,808) (62)
------------- -------------
(1,274,231) (1,211,089)
------------- -------------
In excess of book-basis net realized gain on securities (Note 1D)
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,198) (19,809)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,656) (4,038)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (729) -
------------- -------------
(31,583) (23,847)
------------- -------------
Total dividends and distributions . . . . . . . . . . . . . . . . . . . (1,305,814) (1,234,936)
------------- -------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,892,676 8,560,619
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,691,555 6,093,282
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,309,798 50,606
------------- -------------
5,894,029 14,704,507
------------- -------------
Proceeds from shares issued for dividends and distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428,301 657,117
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,947 113,795
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,051 62
------------- -------------
636,299 770,974
------------- -------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,308,560) (6,442,441)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (872,378) (313,065)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,212) -
------------- -------------
(7,258,150) (6,755,506)
------------- -------------
Increase (decrease) in net assets from Fund share transactions . . . . . . (727,822) 8,719,975
------------- -------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . (2,593,421) 10,141,971
------------- -------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,616,594 $ 25,210,015
============= =============
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE> 96
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
American Capital Texas Municipal Securities, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
open-end management investment company. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
A. INVESTMENT VALUATIONS
Investments in municipal bonds are valued at the most recently quoted
bid prices or at bid prices based on a matrix system (which considers
such factors as security prices, yields, maturities and ratings)
furnished by dealers and an independent pricing service.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days
when purchased are valued based on market quotations until the
remaining days to maturity becomes less than 61 days. From such time,
until maturity, the investments are valued at amortized cost.
Issuers of certain securities owned by the Fund have obtained
insurance guaranteeing their timely payment of principal at maturity
and interest. Such insurance reduces financial risk but not market
risk of the security.
Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment
grade holdings. These securities are often subordinated to the prior
claims of other senior lenders and uncertainties exist as to an
issuer's ability to meet principal and interest payments. At
September 30, 1994, debt securities rated below investment grade and
comparable unrated securities represented approximately 20% of the
investment portfolio.
B. FEDERAL INCOME TAXES
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no further distributions of capital gains will be
made until tax basis capital loss carryforwards expire or are offset
by net realized capital gains.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Interest income is accrued daily.
D. DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from net investment income each business
day. Dividends and distributions to shareholders are recorded on the
record dates. The Fund distributes tax basis earnings in accordance
with the minimum distribution requirements of the Internal Revenue
Code, which may differ from generally accepted accounting principals.
Such dividends and distributions may exceed financial statement
earnings.
The Fund intends to continue to invest principally in tax-exempt
obligations sufficient in amount to qualify the Fund to pay
"exempt-interest dividends" as defined in the Internal Revenue Code.
However, a portion of such dividends may represent tax preference
items subject to alternative minimum tax.
E. DEBT DISCOUNT OR PREMIUM
The Fund accounts for discounts and premiums on the same basis as
isused for federal income tax reporting. Accordingly, original issue
debt discounts and all premiums are amortized over the life of a
security. Market discounts are accounted for at the time of sale as
realized gains for book purposes, and ordinary income for tax
purposes.
F. WHEN-ISSUED SECURITIES
Delivery and payment for securities purchased on a when-issued basis
may take place up to 45 days after the date of the transaction. The
securities purchased are subject to market fluctuations during this
period. To meet the payment obligation, sufficient cash or liquid
securities, equal to the amount that will be due, are set aside with
the custodian.
G. ORGANIZATION COSTS
Organization expenses of approximately $15,000 were deferred and are
being amortized over a five year period ending April 1997.
F-8
<PAGE> 97
NOTE 2 - MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
American Capital Assets Management, Inc. (the "Adviser") serves as investment
manager of the Fund. Management fees are paid monthly, based on the average
daily net assets of its at an annual rate of .60% of the first $300 million,
.55% of the next $300 million, and .50% of the amount in excess of $600
million. From time to time, the Adviser may voluntarily elect to reimburse the
Fund a portion of the Fund's expenses. This reimbursement may be discontinued
at any time without prior notice. For the year ended September 30, 1994, such
reimbursement was $166,819.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the year ended September 30, 1994, these charges included $6,222 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expenses was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended September 30, 1994, such
fees aggregated $27,023.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $7,912 and $3,346, respectively, as their
portion of the commissions charged on sales of Fund shares during the year.
Under the Distribution Plans, each class of shares pays up to .25% per annum of
its average net assets to reimburse the Distributor for expenses and service
fees incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At September 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B and Class C plans aggregated
approximately $361,000 and $21,000, respectively, and may be carried forward
and reimbursed through either the collection of the contingent deferred sales
charges from share redemptions or, subject to the annual renewal of the plans,
future Fund reimbursements of distribution fees.
Legal fees of $8,956 were for services rendered by O'Melveny & Myers, counsel
for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of
the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 3 - INVESTMENT ACTIVITY
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $2,265,775 and $2,257,277, respectively.
For federal income tax purposes, the identified cost of investments owned at
September 30, 1994 was $22,332,842, gross unrealized appreciation of
investments aggregated $353,808, and gross unrealized depreciation of
investments aggregated $428,180. Approximately $38,000 of financial statement
losses are deferred for tax purposes to the following fiscal year.
NOTE 4 - DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $780 plus a fee of $20 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at an annual rate of $290. During the year, such fees aggregated $8,167.
The directors may participate in a voluntary deferred compensation plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At September 30, 1994, the liability for the Plan aggregated
$4,049. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
F-9
<PAGE> 98
NOTE 5 - CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
The Fund has 200 million of each class of shares of $.01 par value capital
stock authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended September 30
----------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,834 860,989
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265,842 614,869
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,146 4,892
----------- -----------
581,822 1,480,750
----------- -----------
Shares issued for dividends and distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,661 65,896
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,840 11,322
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010 6
----------- -----------
63,511 77,224
----------- -----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (637,534) (639,988)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (87,755) (30,920)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,831) -
----------- -----------
(733,120) (670,908)
----------- -----------
Increase (decrease) in shares outstanding . . . . . . . . . . . . . (87,787) 887,066
=========== ===========
</TABLE>
F-10
<PAGE> 99
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class A
----------------------------------------------
Year Ended March 2, 1992(1)
September 30 through
--------------------------- September 30,
1994 1993(2) 1992(2)
--------- ---------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . . . . $ 10.36 $ 9.74 $ 9.45
--------- ---------- ----------
INCOME FROM OPERATIONS
Investment income. . . . . . . . . . . . . . . . . . . . .64 .63 .42
Expenses . . . . . . . . . . . . . . . . . . . . . . . . (.17) (.19) (.09)
Expense reimbursement(3) . . . . . . . . . . . . . . . . .07 .13 .03
--------- ---------- ----------
Net investment income . . . . . . . . . . . . . . . . . . .54 .57 .36
Net realized and unrealized gains or losses
on securities . . . . . . . . . . . . . . . . . . . . . (.7025) .65 .23
--------- ---------- ----------
Total from investment operations . . . . . . . . . . . . (.1625) 1.22 .59
--------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . . . . (.545) (.5875) (.30)
Distributions from net realized gains on securities . . . (.0125) (.0125) -
--------- ---------- ----------
Total distributions . . . . . . . . . . . . . . . . . . . (.5575) (.60) (.30)
--------- ---------- ----------
Net asset value, end of period . . . . . . . . . . . . . $ 9.64 $ 10.36 $ 9.74
========= ========== ==========
TOTAL RETURN(4) . . . . . . . . . . . . . . . . . . . . . (1.62%) 12.94% 6.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . $ 12.8 $ 18.0 $ 14.1
Average net assets (millions) . . . . . . . . . . . . . . $ 15.7 $ 16.8 $ 11.7
Ratios to average net assets(3)
Expenses . . . . . . . . . . . . . . . . . . . . . . . 1.03% 0.61% 0.93%(5)
Expenses, without expense reimbursement . . . . . . . . 1.70% 1.86% 1.41%(5)
Net investment income . . . . . . . . . . . . . . . . . 5.41% 5.74% 5.94%(5)
Net investment income, without expense reimbursement . 4.74% 4.49% 5.45%(5)
Portfolio turnover rate . . . . . . . . . . . . . . . . . 10% 5% 4%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for periods of less than one full year are not
annualized. Total return does not consider the effect of sales
charges.
(5) Annualized
See Notes to Financial Statements.
F-11
<PAGE> 100
FINANCIAL HIGHLIGHTS, continued
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class B Class C
----------------------------------- ----------------------------
Year July 27, August 30,
Ended 1992(1) Year 1993(1)
September 30 through Ended through
--------------------- September 30, September 30, September 30,
1994 1993 (2) 1992 (2) 1994 (2) 1993 (2)
--------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . $ 10.35 $ 9.74 $ 9.91 $ 10.36 $ 10.28
--------- --------- ---------- --------- ---------
INCOME FROM OPERATIONS
Investment income. . . . . . . . . . . . . . . . . .65 .63 .09 .64 .05
Expenses . . . . . . . . . . . . . . . . . . . . . (.25) (.26) (.04) (.25) (.02)
Expense reimbursement(3) . . . . . . . . . . . . . .07 .13 .015 .07 .01
--------- --------- ---------- --------- ---------
Net investment income . . . . . . . . . . . . . . . .47 .50 .065 .46 .04
Net realized and unrealized gains or losses
on securities . . . . . . . . . . . . . . . . . . (.7065) .633 (.103) (.6965) .121
--------- --------- ---------- --------- ---------
Total from investment operations . . . . . . . . . (.2365) 1.133 (.038) (.2365) .161
--------- --------- ---------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . (.461) (.5105) (.132) (.461) (.081)
Distributions from net realized gains on
securities . . . . . . . . . . . . . . . . . . . (.0125) (.0125) - (.0125) -
--------- --------- ---------- --------- ---------
Total distributions . . . . . . . . . . . . . . . . (.4735) (.523) (.132) (.4735) (.081)
--------- --------- ---------- --------- ---------
Net asset value, end of period . . . . . . . . . . $ 9.64 $ 10.35 $ 9.74 $ 9.65 $ 10.36
========= ========= ========== ========= =========
TOTAL RETURN(4) . . . . . . . . . . . . . . . . . . (2.35%) 11.97% (.73%) (2.35%) 1.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . $ 8.6 $ 7.1 $ 0.9 $ 1.2 $ 0.1
Average net assets (millions) . . . . . . . . . . . $ 8.4 $ 4.6 $ 0.5 $ 0.9 $ .02
Ratios to average net assets(3)
Expenses . . . . . . . . . . . . . . . . . . . . 1.80% 1.30% 1.41%(5) 1.79% 0.66%(5)
Expenses, without expense reimbursement . . . . 2.47% 2.55% 2.15%(5) 2.46% 1.89%(5)
Net investment income . . . . . . . . . . . . . 4.66% 4.92% 3.83%(5) 4.59% 4.17%(5)
Net investment income, without expense
reimbursement . . . . . . . . . . . . . . . . 3.99% 3.67% 3.07%(5) 3.92% 2.92%(5)
Portfolio turnover rate . . . . . . . . . . . . . . 10% 5% 4% 10% 5%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for periods of less than one full year are not
annualized. Total return does not consider the effect of sales
charges.
(5) Annualized
See Notes to Financial Statements.
F-12
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL TEXAS MUNICIPAL SECURITIES, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Texas Municipal
Securities, Inc. at September 30, 1994, and the results of its operations, the
changes in its net assets and the selected per share data and ratios for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share data
and ratios (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at September 30, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
November 11, 1994
F-13
<PAGE> 102
PORTFOLIO OF INVESTMENTS
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 97.6%
EDUCATION 7.9%
$375 Clear Creek, Texas, Independent
School District, G.O............... 6.250% 02/01/11 $ 396,105
500 Houston, Texas, Higher Education
Finance Corp., Rev. (University of
St. Thomas Project)................ 7.250 12/01/07 513,805
500 North Texas Higher Education
Authority, Inc., Texas Student Loan
Rev., Refunding, Series D.......... 6.300 04/01/09 505,540
500 Victoria, Texas, Independent School
District, Refunding................ * 02/15/08 236,210
---------------
TOTAL EDUCATION.................. 1,651,660
---------------
HOSPITALS 23.2%
105 Abilene, Texas, Health Facilities
Development Corp. (Hendrick Medical
Center Project), FGIC.............. 9.500 90/01/13 109,202
170 Bell County, Texas, Health
Facilities Development Corp.
(King's Daughters Hospital)........ 9.250 07/01/08 188,757
750 Denton, Texas, Health Facilities
Development Corp., Refunding
(Lutheran Good Samaritan
Hospitals), AMBAC.................. 6.000 06/01/18 733,410
175 Edinburg, Texas, Hospital
Authority, Rev., (Edinburg General
Hospital Project 86)............... 10.000 07/01/11 181,063
Harris County, Texas, Health
Facilities Development Corp.,
Health Care System Rev.
250 Memorial Hospital System Project. 7.125 06/01/15 264,438
375 Sisters of Charity............... 7.100 07/01/21 396,986
90 Jefferson County, Texas, Health
Facility Authority (Baptist Health
Care Project)...................... 8.300 10/01/14 98,024
185 Lubbock, Texas, Health Facilities
Development Corp., Rev. (Methodist
Hospital), AMBAC................... 7.250 12/01/19 207,416
155 Montgomery County, Texas, Health
Facilities Development Corp.,
Hospital Mortgage Rev. (Woodlands
Medical Center Project)............ 8.850 08/15/14 168,036
500 Richardson, Texas, Hospital
Authority, Refunding & Improvement
Rev. (Richardson Medical Center)... 6.750 12/01/23 502,580
300 Rusk County, Texas, Health Facility
Corp., Refunding, Hospital Rev.
(Henderson Memorial Hospital
Project)........................... 7.750 04/01/13 308,820
500 Tarrant County, Texas, Health
Facilities Development Corp.,
Refunding & Improvement, Hospital
Rev. (Fort Worth Osteopathic
Hospital).......................... 7.000 05/15/28 509,740
250 Texas Health Facilities Development
Corp., Hospital Rev., (Fort Worth
Children's Center), FGIC........... 6.250 12/01/12 254,874
Tyler Texas, Health Facilities
Development Corp., Refunding Rev.
(East Texas Medical Center--
Regional Health)
150 Series A......................... 8.250 11/01/06 169,002
500 Series B......................... 6.750 11/01/25 482,155
210 Weslaco, Texas, Health Facilities
Development Corp., Hospital Rev.
(Weslaco Health Facility).......... 10.375 06/01/16 245,293
---------------
TOTAL HOSPITALS.................. 4,819,796
---------------
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE> 103
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOUSING 12.6%
$500 Austin, Texas, Housing Finance
Corp., Multi-Family Mtg............ 6.500% 10/01/10 $ 493,765
500 Baytown, Texas, Property Management
& Development Corp., Series A
(Baytown Terrace Project).......... 6.100 08/15/21 490,325
340 Bexar County, Texas, Housing
Finance Corp., Rev., Series B...... 9.250 04/01/16 356,622
115 East Texas Housing Finance Corp.,
Single Family Mtg. Rev............. 7.200 01/01/26 117,657
250 El Paso, Texas, Housing Authority,
Multi-Family Mtg. Rev., Series A... 6.250 12/01/09 250,382
135 El Paso, Texas, Property Finance
Authority, Inc., Single Family Mtg.
Rev., Series A..................... 8.700 12/01/18 145,064
150 Galveston, Texas, Property Finance
Authority, Inc., Single Family Mtg.
Rev., Series A..................... 8.500 09/01/11 170,808
30 Harris County, Texas, Housing
Financing Corp., Single Family Mtg.
Rev., Series 1983-A................ 10.125 07/15/03 30,112
100 Harris County, Texas, Housing
Financing Corp., Single Family Mtg.
Rev., Series 1983-A................ 10.375 07/15/14 100,311
10 Harris County, Texas, Housing
Financing Corp., Single Family Mtg.
Rev................................ 11.250 04/15/06 10,266
50 Houston, Texas, Housing Finance
Corp., Single Family Mtg. Rev...... 10.000 09/15/14 51,441
190 Texas Housing Agency, Single Family
Mtg. Rev., Refunding, Series A..... 7.150 09/01/12 198,145
190 Travis County, Texas, Housing
Finance Corp., Single Family Mtg.
Rev................................ 8.200 04/01/22 196,308
---------------
TOTAL HOUSING.................... 2,611,206
---------------
MISCELLANEOUS 13.3%
60 Fort Bend County, Texas, Levee
Improvement, District No. 11, G.O.. 8.700 03/01/10 65,728
250 Garland, Texas, Economic
Development Authority, IDR (Yellow
Freight System, Inc. Project)...... 8.000 12/01/16 263,463
250 Lockhart, Texas, Correctional
Facilities Rev., Financing Corp.,
MBIA............................... 6.625 04/01/12 258,603
60 Sabine River Authority, Texas,
Refunding, PCR (Texas Utilities
Co.), Series 1986.................. 9.000 09/01/07 65,740
500 Sabine River Authority, Texas,
Refunding, PCR (Texas Utilities
Co.)............................... 7.750 04/01/16 520,125
295 Texas General Services Community
Partner Interests, (Office Building
and Land Acquisition Project)...... 7.000 08/01/09 302,859
Texas State, G.O.,
250 National Research Lab Commission.. 7.125 04/01/20 276,280
500 Refunding (Superconducting
Project), Series C................ 6.000 04/01/12 503,105
250 Refunding, Veterans Land.......... 6.500 12/01/21 259,008
250 Travis County, Texas, G.O.,
Refunding, Series A, MBIA.......... 5.500 03/01/03 253,350
---------------
TOTAL MISCELLANEOUS.............. 2,768,261
---------------
</TABLE>
See Notes to Financial Statements.
F-15
<PAGE> 104
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL UTILITY DISTRICT
(MUD) 13.9%
$250 Brazoria County, Texas, MUD No. 2,
Refunding.......................... 7.000% 09/01/08 $ 253,840
60 Fort Bend County, Texas, MUD No.
25, Refunding...................... 8.000 10/01/15 63,737
250 Harris County, Texas, MUD No. 120,
Refunding.......................... 8.000 08/01/14 275,578
500 Harris County, Texas, MUD No. 322.. 6.250 05/01/18 463,785
500 Mills Road, Texas, MUD, Refunding.. 6.500 09/01/14 486,545
125 Mission Bend, Texas, MUD No. 2..... 10.000 09/01/00 145,293
250 Montgomery County, Texas, MUD,
MBIA............................... 6.250 03/01/10 258,043
50 Montgomery County, Texas, MUD,
No. 4.............................. 8.900 09/01/02 56,269
250 Montgomery County, Texas, MUD...... 6.000 09/01/16 225,515
250 Montgomery County, Texas, MUD...... 6.000 09/01/19 225,495
100 West Harris County, Texas, MUD No.
1, Refunding....................... 7.000 04/01/05 103,806
300 Woodlands, Texas, Metro Center,
MUD, Refunding, Series B........... 7.100 04/01/07 333,648
---------------
TOTAL MUD........................ 2,891,554
---------------
NURSING HOMES 1.3%
250 San Antonio, Texas, Health
Facilities Development Corp., Rev.
(Encore Nursing Center Partner).... 8.250 12/01/19 263,935
---------------
TRANSPORTATION 2.5%
250 Harris County, Texas, Toll Road
Rev. .............................. 6.750 08/01/14 263,635
250 Texas State Turnpike Authority,
Dallas North Toll Road, Tollway
Rev. .............................. 6.000 01/01/20 243,378
---------------
TOTAL TRANSPORTATION............. 507,013
---------------
UTILITIES--COMBINATION ELECTRIC,
GAS AND/OR WATER 14.4%
Austin, Texas, Utility System Rev.
500 Refunding........................ 6.000 05/15/15 495,350
220 Series B......................... 7.800 11/15/12 243,221
435 City of Brownsville, Texas,
Utilities System Priority Rev.,
Series 1990, AMBAC................. 6.500 09/01/17 449,677
250 Colorado River, Texas, Municipal
Water District (Water Transmission
Facilities Project A), AMBAC....... 6.625 01/01/21 268,450
250 Guadalupe Blanco River Authority,
Texas, IDR......................... 6.350 07/01/22 254,190
Port of Corpus Christi, Texas, IDR
(Valero Refining & Marketing Co.)
385 Series A......................... 10.250 06/01/17 429,306
100 Series B......................... 10.625 06/01/08 112,250
220 San Antonio, Texas, Electric and
Gas Rev., Series A................. 6.500 02/01/12 228,008
500 Willow Fork, Texas, Drainage
District........................... 7.000 03/01/11 517,080
---------------
TOTAL UTILITIES--COMBINATION
ELECTRIC, GAS AND/OR WATER....... 2,997,532
---------------
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE> 105
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES--ELECTRIC 3.1%
$125 Brazos River Authority Texas, PCR
(Texas Utilities Electric Co.,
Project A)......................... 9.875% 10/01/17 $ 138,572
100 Matagorda County, Texas, Navigation
District 1, Control Rev. (Central
Power & Light Co. Project)......... 7.875 12/01/16 106,732
435 Texas Municipal Power Agency, Rev.. 5.500 09/01/13 405,812
--------------
TOTAL UTILITIES--ELECTRIC........ 651,116
--------------
UTILITIES--WATER AND SEWER 5.4%
250 Coastal Water Authority, Texas
Water Rev., AMBAC.................. 6.250 12/15/17 254,345
100 Harris County, Texas, Water Control
And Improvement District No. 75.... 7.000 03/01/14 103,416
500 Houston, Texas, Water and Sewer
System, Refunding Rev., Series B... 6.375 12/01/14 509,330
250 Tarrant County, Texas, Water
Control and Improvement Rev........ 6.000 03/01/10 261,095
--------------
TOTAL UTILITIES--WATER AND
SEWER............................ 1,128,186
--------------
TOTAL MUNICIPAL BONDS (Cost
$19,812,112)..................... 20,290,259
--------------
REPURCHASE AGREEMENT 1.1%
225 Salomon Brothers, Inc., dated
3/31/95 (Collaterized by U.S.
Government obligations in a pooled
cash account), repurchase proceeds
$225,118 (Cost $225,000)........... 6.270 04/03/95 225,000
--------------
TOTAL INVESTMENTS (Cost $20,037,112)
98.7% .................................... 20,515,259
OTHER ASSETS AND LIABILITIES, NET 1.3%.... 278,350
--------------
NET ASSETS 100%........................... $ 20,793,609
==============
</TABLE>
*Zero Coupon
G.O.--General Obligation bond
IDR--Industrial Development Revenue bond
PCR--Pollution Control Revenue bond
Rev.--Revenue bond
Insurers:
AMBAC--AMBAC Indemnity Corp.
FGIC--Financial Guaranty Insurance Co.
MBIA--Municipal Bond Investor's Assurance Corp.
See Notes to Financial Statements.
F-17
<PAGE> 106
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $20,037,112).............. $ 20,515,259
Cash......................................................... 3,065
Interest receivable.......................................... 406,137
Receivable for investments sold.............................. 15,030
Receivable for Fund shares sold.............................. 6,774
Other assets................................................. 5,775
----------------
Total Assets............................................... 20,952,040
----------------
LIABILITIES
Dividends payable............................................ 48,413
Payable for Fund shares purchased............................ 20,020
Due to Distributor........................................... 16,922
Deferred directors' compensation............................. 4,647
Due to shareholder service agent............................. 2,076
Accrued expenses and other payables.......................... 66,353
----------------
Total Liabilities.......................................... 158,431
----------------
NET ASSETS, equivalent to $9.90 per share for Class A and
Class B shares and $9.91 per share for Class C shares...... $ 20,793,609
================
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 1,193,994 Class A, 771,709 Class B
and 133,643 Class C shares outstanding..................... $ 20,993
Capital surplus.............................................. 20,346,447
Accumulated net realized loss on securities.................. (35,698)
Net unrealized appreciation of securities.................... 478,147
Accumulated deficit.......................................... (16,280)
----------------
NET ASSETS at March 31, 1995................................. $ 20,793,609
================
</TABLE>
See Notes to Financial Statements.
F-18
<PAGE> 107
STATEMENT OF OPERATIONS
Six Months Ended March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest..................................................... $ 733,813
----------------
EXPENSES
Management fees.............................................. 63,095
Service fees--Class A........................................ 12,831
Distribution and service fees--Class B....................... 39,344
Distribution and service fees--Class C....................... 5,905
Accounting services.......................................... 33,147
Registration and filing fees................................. 15,985
Audit fees................................................... 13,550
Reports to shareholders...................................... 13,235
Shareholder service agent's fees and expenses................ 9,075
Directors' fees and expenses................................. 5,435
Custodian fees............................................... 2,200
Legal fees................................................... 1,740
Organization expenses........................................ 1,500
Miscellaneous................................................ 640
Expense reimbursement (see Note 2) .......................... (21,032)
----------------
Total expenses............................................. 196,650
----------------
NET INVESTMENT INCOME...................................... 537,163
----------------
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities.............................. 10,174
Net unrealized appreciation of securities during the period.. 552,465
----------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............. 562,639
----------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 1,099,802
================
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE> 108
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1995 September 30, 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period.......... $22,616,594 $25,210,015
----------- -----------
Operations
Net investment income................... 537,163 1,279,721
Net realized gain (loss) on securities.. 10,174 (39,911)
Net unrealized appreciation
(depreciation) of securities during the
period................................. 552,465 (1,799,595)
----------- -----------
Increase (decrease) in net assets
resulting from operations............ 1,099,802 (559,785)
----------- -----------
Distributions to shareholders from
net investment income
Class A................................ (338,950) (849,857)
Class B................................ (191,546) (383,566)
Class C................................ (28,575) (40,808)
----------- -----------
(559,071) (1,274,231)
----------- -----------
Excess of book-basis net realized gain
on securities (Note 1D)
Class A................................. -- (21,198)
Class B................................. -- (9,656)
Class C................................. -- (729)
----------- -----------
-- (31,583)
----------- -----------
Total distributions..................... (559,071) (1,305,814)
----------- -----------
Capital transactions
Proceeds from shares sold
Class A................................. 232,294 1,892,676
Class B................................. 255,582 2,691,555
Class C................................. 138,913 1,309,798
----------- -----------
626,789 5,894,029
----------- -----------
Proceeds from shares issued for
distributions reinvested
Class A................................. 155,448 428,301
Class B................................. 93,251 197,947
Class C................................. 5,224 10,051
----------- -----------
253,923 636,299
----------- -----------
Cost of shares redeemed
Class A................................. (1,708,080) (6,308,560)
Class B................................. (1,467,212) (872,378)
Class C................................. (69,136) (77,212)
----------- -----------
(3,244,428) (7,258,150)
----------- -----------
Decrease in net assets from capital
transactions.......................... (2,363,716) (727,822)
----------- -----------
DECREASE IN NET ASSETS................... (1,822,985) (2,593,421)
----------- -----------
NET ASSETS, end of period................ $20,793,609 $22,616,594
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE> 109
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------------
Six Months Year Ended March 2, 1992(1)
Ended September 30 through
March 31, ------------------ September 30,
1995 1994 1993(2) 1992(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period................ $9.64 $10.36 $ 9.74 $9.45
----- ------ ------ -----
Income from operations
Investment income........ .33 .64 .63 .42
Expenses................. (.08) (.17) (.19) (.09)
Expense reimbursement(3). .01 .07 .13 .03
----- ------ ------ -----
Net investment income...... .26 .54 .57 .36
Net realized and unrealized
gains or losses on
securities............... .27 (.7025) .65 .23
----- ------ ------ -----
Total from investment
operations............... .53 (.1625) 1.22 .59
----- ------ ------ -----
Less distributions from
Net investment income.... (.27) (.545) (.5875) (.30)
Net realized gains on
securities............... -- (.0125) (.0125) --
----- ------ ------ -----
Total distributions........ (.27) (.5575) (.60) (.30)
----- ------ ------ -----
Net asset value, end of
period................... $9.90 $ 9.64 $10.36 $9.74
===== ====== ====== =====
TOTAL RETURN(4)............ 5.63% (1.62%) 12.94% 6.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............... $11.8 $ 12.8 $ 18.0 $14.1
Average net assets
(millions)............... $12.0 $ 15.7 $ 16.8 $11.7
Ratios to average net
assets (annualized)(3)
Expenses.................. 1.53% 1.03% 0.61% 0.93%
Expenses, without expense
reimbursement........... 1.73% 1.70% 1.86% 1.41%
Net investment income..... 5.46% 5.41% 5.74% 5.94%
Net investment income,
without expense
reimbursement........... 5.26% 4.74% 4.49% 5.45%
Portfolio turnover rate.... 0% 10% 5% 4%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-21
<PAGE> 110
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------
July 27,
Six Months Year Ended 1992(1)
Ended September 30 through
March 31, ------------------- September 30,
1995 1994 1993(2) 1992(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period...................... $9.64 $ 10.35 $ 9.74 $ 9.91
----- ------- ------- ------
Income from operations
Investment income........... .33 .65 .63 .09
Expenses.................... (.12) (.25) (.26) (.04)
Expense reimbursement(3).... .01 .07 .13 .015
----- ------- ------- ------
Net investment income......... .22 .47 .50 .065
Net realized and unrealized
gains or losses on
securities.................. .272 (.7065) .633 (.103)
----- ------- ------- ------
Total from investment
operations.................. .492 (.2365) 1.133 (.038)
----- ------- ------- ------
Less distributions from
Net investment income....... (.232) (.461) (.5105) (.132)
Net realized gains on
securities................ -- (.0125) (.0125) --
----- ------- ------- ------
Total distributions........... (.232) (.4735) (.523) (.132)
----- ------- ------- ------
Net asset value, end of
period...................... $9.90 $ 9.64 $ 10.35 $ 9.74
===== ======= ======= ======
TOTAL RETURN(4)............... 5.21% (2.35%) 11.97% (.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions).................. $ 7.7 $ 8.6 $ 7.1 $ 0.9
Average net assets
(millions).................. $ 7.9 $ 8.4 $ 4.6 $ 0.5
Ratios to average net assets
(annualized)(3)
Expenses.................... 2.33% 1.80% 1.30% 1.41%
Expenses, without expense
reimbursement............. 2.53% 2.47% 2.55% 2.15%
Net investment income....... 4.68% 4.66% 4.92% 3.83%
Net investment income,
without expense
reimbursement............. 4.48% 3.99% 3.67% 3.07%
Portfolio turnover rate....... 0% 10% 5% 4%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-22
<PAGE> 111
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
----------------------------------------
August 30,
Six Months 1993(1)
Ended Year Ended through
March 31, September 30 September 30,
1995 1994(2) 1993(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period. $9.65 $10.36 $10.28
----- ------ ------
Income from operations
Investment income.................. .33 .64 .05
Expenses........................... (.12) (.25) (.02)
Expense reimbursement(3)........... .01 .07 .01
----- ------ ------
Net investment income................ .22 .46 .04
Net realized and unrealized gains or
losses on securities............... .272 (.6965) .121
----- ------ ------
Total from investment operations..... .492 (.2365) .161
----- ------ ------
Less distributions from
Net investment income.............. (.232) (.461) (.081)
Net realized gains on securities... -- (.0125) --
----- ------ ------
Total distributions.................. (.232) (.4735) (.081)
----- ------ ------
Net asset value, end of period....... $9.91 $ 9.65 $10.36
===== ====== ======
TOTAL RETURN(4)...................... 5.20% (2.35%) 1.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions). $ 1.3 $ 1.2 $ 0.1
Average net assets (millions)........ $ 1.2 $ 0.9 $ .02
Ratios to average net assets
(annualized)(3)
Expenses........................... 2.31% 1.79% 0.66%
Expenses, without expense
reimbursement.................... 2.51% 2.46% 1.89%
Net investment income............... 4.65% 4.59% 4.17%
Net investment income, without
expense reimbursement............ 4.45% 3.92% 2.92%
Portfolio turnover rate.............. 0% 10% 5%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-23
<PAGE> 112
NOTES TO FINANCIAL STATEMENTS
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
American Capital Texas Municipal Securities, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
open-end management investment company. The following is a summary of signifi-
cant accounting policies consistently followed by the Fund in the preparation
of its financial statements.
A. INVESTMENT VALUATIONS-Investments in municipal bonds are valued at the most
recently quoted bid prices or at bid prices based on a matrix system (which
considers such factors as security prices, yields, maturities and ratings)
furnished by dealers and an independent pricing service.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal at maturity and interest. Such
insurance reduces financial risk but not market risk of the security.
Fund investments include lower rated debt securities which may be more sus-
ceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal
and interest payments. At March 31, 1995, debt securities rated below invest-
ment grade and comparable unrated securities represented approximately 21% of
the investment portfolio.
B. FEDERAL INCOME TAXES--No provision for federal income taxes is required
because the Fund has elected to be taxed as a "regulated investment company"
under the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders. It is anticipated that no further
distributions of capital gains will be made until tax basis capital loss
carryforwards expire or are offset by net realized capital gains.
Approximately $38,000 of financial statement losses are deferred for tax
purposes to the 1995 fiscal year.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on
investments are determined on the basis of identified cost. Interest income is
accrued daily.
F-24
<PAGE> 113
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
D. DIVIDENDS AND DISTRIBUTIONS-The Fund declares dividends from net investment
income each business day. Dividends and distributions to shareholders are
recorded on the record dates. The Fund distributes tax basis earnings in
accordance with the minimum distribution requirements of the Internal Revenue
Code, which may differ from generally accepted accounting principals. Such
dividends and distributions may exceed financial statement earnings.
The Fund intends to continue to invest principally in tax-exempt obligations
sufficient in amount to qualify the Fund to pay "exempt-interest dividends" as
defined in the Internal Revenue Code. However, a portion of such dividends may
represent tax preference items subject to alternative minimum tax.
E. DEBT DISCOUNT OR PREMIUM-The Fund accounts for debt discounts and premiums
on the same basis as is followed for federal income tax reporting. Accord-
ingly, original issue debt discounts and all premiums are amortized over the
life of a security. Market discounts are recognized at the time of sale as
realized gains for book purposes and ordinary income for tax purposes.
F. WHEN-ISSUED SECURITIES-Delivery and payment for securities purchased on a
when- issued basis may take place up to 45 days after the date of the transac-
tion. The securities purchased are subject to market fluctuations during this
period. To meet the payment obligation, sufficient cash or liquid securities,
equal to the amount that will be due, are set aside with the custodian.
G. ORGANIZATION COSTS-Organization expenses of approximately $15,000 were
deferred and are being amortized over a five year period ending April 1997.
NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Van Kampen American Capital Assets Management, Inc. (the "Adviser") serves as
investment manager of the Fund. Management fees are paid monthly, based on the
average daily net assets of the Fund at an annual rate of .60% of the first
$300 million, .55% of the next $300 million, and .50% of the amount in excess
of $600 million. From time to time, the Adviser may voluntarily elect to reim-
burse the Fund a portion of the Fund's expenses. This reimbursement may be
discontinued at any time without prior notice. For the period ended March 31,
1995, such reimbursement was $21,032.
F-25
<PAGE> 114
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among investment companies advised or sub-advised by the Adviser. For
the period ended March 31, 1995, these charges included $3,112 as the Fund's
share of the employee costs attributable to the Fund's accounting officers. A
portion of the accounting services expenses was paid to the Adviser in reim-
bursement of personnel, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period ended March 31, 1995, such fees aggregated $6,181.
The Fund has been advised that Van Kampen American Capital Distributors,
Inc. (the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"),
both affiliates of the Adviser, received $1,235 and $90, respectively, as
their portion of the commissions charged on sales of Fund shares during the
period.
Under the Distribution Plans, each class of shares pays up to .25% per annum
of its average net assets to reimburse the Distributor for expenses and serv-
ice fees incurred. Class B shares and Class C shares pay an additional fee of
up to .75% per annum of their average net assets to reimburse the Distributor
for its distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts reim-
bursed to the Distributor by the Fund. At March 31, 1995, the unreimbursed
expenses incurred by the Distributor under the Class B and Class C plans
aggregated approximately $314,000 and $18,000, respectively, and may be
carried forward and reimbursed through either the collection of the contingent
deferred sales charges from shares redemptions or, subject to the annual
renewal of the plans, future Fund reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $30,000 and $2,566,049,
respectively.
For federal income tax purposes, the identified cost of investments owned at
March 31, 1995 was $20,037,155. Net unrealized appreciation of investments
aggregated $478,104, gross unrealized appreciation of investments aggregated
$627,673, and gross unrealized depreciation of investments aggregated
$149,569.
F-26
<PAGE> 115
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 4--DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $720 plus a fee of $15 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the Fund
at an annual rate of $270. During the period, such fees aggregated $4,334.
The directors may participate in a voluntary deferred compensation plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each director covered under the Plan elects to be credited
with an earnings component on amounts deferred equal to the income earned by
the Fund on its short-term investments or equal to the total return of the
Fund.
NOTE 5--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
F-27
<PAGE> 116
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
The Fund has 200 million of each class of shares of $.01 par value capital
stock authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
MARCH 31, SEPTEMBER 30,
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A......................................... 24,316 187,834
Class B......................................... 26,896 265,842
Class C......................................... 14,099 128,146
-------- --------
65,311 581,822
-------- --------
Shares issued for distributions reinvested
Class A......................................... 16,234 42,661
Class B......................................... 9,743 19,840
Class C......................................... 545 1,010
-------- --------
26,522 63,511
-------- --------
Shares redeemed
Class A......................................... (178,125) (637,534)
Class B......................................... (153,746) (87,755)
Class C......................................... (7,224) (7,831)
-------- --------
(339,095) (733,120)
-------- --------
Decrease in shares outstanding.................... (247,262) (87,787)
======== ========
</TABLE>
F-28
