THE EXPLORER
INSTITUTIONAL
TRUST sm
Annual Report
December 31, 1996
Active Core Fund
Limited Duration Fund
Table of Contents
Letter to Shareholders 1
Putting Your Fund's Performance in Perspective 4
Active Core Fund
Portfolio of Investments 6
Statement of Assets and Liabilities 8
Statement of Operations 9
Statement of Changes in Net Assets 10
Financial Highlights 11
Limited Duration Fund
Portfolio of Investments 12
Statement of Assets and Liabilities 14
Statement of Operations 15
Statement of Changes in Net Assets 16
Financial Highlights 17
Notes to Financial Statements 18
Report of Independent Accountants 20
Letter to Shareholders
December 31, 1996
Dear Shareholder,
We are pleased to report the first year-end results for the
Explorer Institutional Funds. As noted in the previous
shareholder report, VK/AC Holding Inc., the parent company of
Van Kampen American Capital Management Inc., was acquired by
Morgan Stanley Group Inc., a world leader in asset management
and investment banking. The transaction was completed in
October, and we are excited about the opportunities that this
affiliation will offer our institutional customers.
Economic Review
The U.S. economy experienced moderate growth and low inflation
during the reporting period. At the beginning of 1996,
economists were concerned that the tepid economic pace of late
1995 might continue and possibly lead to a recession by year
end. That concern lessened, however, when non-farm payrolls
increased by a stunning 705,000 in February, the biggest monthly
increase in 13 years. In the second quarter, the nation's real
GDP (gross domestic product, adjusted for inflation) increased
by 4.7 percent and confirmed that the economy was back in a strong
growth mode. However, by summer, earlier talk of recession and
rate cuts was replaced by concerns about an overheating economy
and the possibility of interest rate increases.
Despite mounting evidence of inflation, the Federal Reserve
Board maintained a stable monetary policy, believing that supply
and demand imbalances in the commodity markets were temporary
and that burdensome consumer debt levels would eventually slow
the economy without the need for a rate increase.
Events during the second half of 1996 proved the wisdom of
Federal Reserve policy. Real GDP growth moderated to 2.0 percent
in the third quarter, and commodity prices receded. For the
year, core producer prices only rose by 0.6 percent, the second
lowest annual increase on record.
Sector Review
Among the primary market sectors, asset-backed and
mortgage-backed securities had the strongest performance during
the past year. Both sectors benefited from the defensive nature
of their securities, which typically have short durations and
high coupon rates.
Despite a slowdown in corporate earnings growth, yield spreads
between corporate bonds and Treasuries tightened. However,
corporates continued to be buoyed by solid fundamental and
technical factors. Looking ahead, corporate spreads should
remain relatively stable with the greatest potential downside
risks coming from events related to merger activity or
company-specific credit surprises.
1 Continued on page two
Meanwhile, yield spreads on U.S. government agency securities
were relatively stable compared to the narrow spreads of other
sectors, which helped the performance of these government
securities.
Outlook
Despite numerous cross-currents influencing the U.S. economy,
we expect interest rates to remain within a relatively narrow
trading range in 1997. Stronger- than-expected economic growth
and faint rumblings of inflationary pressures during the first
half of the year could prompt a series of moderate credit
tightenings by the Fed. We anticipate that by the fourth quarter
the economy will moderate enough to discourage any lingering
concerns about inflation and allow interest rates to begin to
decline across the maturity spectrum.
While domestic economic fundamentals may help keep bond prices
relatively stable, we cannot look at the U.S. economy in
isolation. Monetary policy has been unusually accommodative in
many foreign countries, but if these economies gain significant
strength in 1997, the resulting demand for capital could divert
buying power from the U.S. credit market. Since foreign
investors have become the marginal buyers of U.S. bonds,
increased competition for the global fixed-income dollar could
exert mild upward pressure on domestic interest rates over the
year.
Active Core Fund - Overview
As of December 31, 1996, the Active Core Fund was structured
with a portfolio duration of 4.62 years, which was comparable to
the Fund's benchmark, the Lehman Brothers Aggregate Bond Index.
Relative to the benchmark, the Fund had overweight positions in
the agency, asset-backed and mortgage sectors and an underweight
position in the corporate and Treasury sectors.
The Active Core Fund generated a cumulative total return of
5.20 percent since its inception on April 23, 1996 through
December 31, 1996.
Limited Duration Fund _ Overview
We believe it is very difficult to add value consistently
through timing the market or predicting interest rate changes.
As such, we concentrate on optimal sector weightings, security
selection, and yield curve posturing. As of December 31, 1996,
the Limited Duration Fund was structured with a portfolio
duration of approximately 1.87 years, which was comparable to
the Fund's benchmark, the Lehman Brothers 1- to 3-year
Government Bond Index. Relative to the Lehman index, the Fund
had a modest overweight position in agency, corporate,
mortgage-backed and asset-backed securities and an
underweighted position in Treasury securities.
The Limited Duration Fund generated a cumulative total return
of 4.14 percent since its inception on April 23, 1996 through
December 31, 1996.
2 Continued on page three
Summary
While the economy continues to grow at a reasonable pace and
inflationary pressures remain relatively subdued, we believe the
current environment offers substantial opportunities across most
fixed-income market sectors. In particular, we believe
fixed-income securities with short to intermediate maturities
are currently attractive, due in part to the relatively steep
slope of the yield curve out to about the five-year maturity
range.
Finally, we look forward to communicating with you on a regular
basis, providing information about your Fund's performance and
new investment opportunities. If you have any questions or would
like additional information, please feel free to contact your
institutional asset management representative.
Sincerely,
Edward A. Treichel
Director of Institutional Asset Management
3
Putting Your Fund's Performance in Perspective
As you evaluate your progress toward achieving your financial
goals, it is important to track your investment portfolio's
performance at regular intervals. A good starting point is a
comparison of your investment holdings to an applicable
benchmark, such as a broad-based market index. Such a
comparison can:
- - Illustrate the general market environment in which your
investments are being managed
- - Reflect the impact of favorable market trends or difficult
market conditions
- - Help you evaluate the extent to which your Fund's management
team has responded to the opportunities and challenges
presented to them over the period measured
For these reasons, you may find it helpful to review the chart
below, which compares your fund's performance to that of the
Lehman Brothers Aggregate Bond Index over time. This index is
an unmanaged statistical composite and does not reflect any
commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its
performance does not reflect any sales charges or other costs
which would be applicable to an actively managed portfolio, such
as that of the Fund.
<TABLE>
Growth of a Hypothetical $10,000 Investment
Explorer Institutional Active Core Fund vs. Lehman Brothers
Aggregate Bond Index
(April 23, 1996 through December 31, 1996)
<CAPTION>
Lehman Aggregate Explorer Institutional
Bond Index Active Core Fund
<S> <C> <C>
23-Apr-96 10,000 10,000
31-May-96 9,939 9,950
30-Jun-96 10,073 10,061
31-Jul-96 10,100 10,080
31-Aug-96 10,083 10,040
30-Sep-96 10,259 10,214
31-Oct-96 10,486 10,432
30-Nov-96 10,666 10,610
31-Dec-96 10,567 10,520
</TABLE>
1 Since the Fund has been in existence for less than a year, the
total return shown above reflects the Fund's cumulative
performance since inception.
While past performance is not indicative of future performance,
the above information provides a broader vantage point from
which to evaluate the discussion of the Fund's performance found
in the following pages.
4
Putting Your Fund's Performance in Perspective
As you evaluate your progress toward achieving your financial
goals, it is important to track your investment portfolio's
performance at regular intervals. A good starting point is a
comparison of your investment holdings to an applicable
benchmark, such as a broad-based market index. Such a
comparison can:
- - Illustrate the general market environment in which your
investments are being managed
- - Reflect the impact of favorable market trends or difficult
market conditions
- - Help you evaluate the extent to which your Fund's management
team has responded to the opportunities and challenges
presented to them over the period measured
For these reasons, you may find it helpful to review the chart
below, which compares your fund's performance to that of the
Lehman Brothers 1- to 3-year Government Bond Index over time.
This index is an unmanaged statistical composite and does not
reflect any commissions or fees which would be incurred by an
investor purchasing the securities it represents. Similarly,
its performance does not reflect any sales charges or other
costs which would be applicable to an actively managed
portfolio, such as that of the Fund.
<TABLE>
Growth of a Hypothetical $10,000 Investment
Explorer Institutional Limited Duration Fund vs. Lehman
Brothers 1- to 3-year Government Bond Index (April 23, 1996
through December 31, 1996)
<CAPTION>
Lehman 1 to 3 Year Explorer Institutional
Government Bond Index Limited Duration Fund
<S> <C> <C>
23-Apr-96 10,000 10,000
31-May-96 10,016 9,993
30-Jun-96 10,089 10,071
31-Jul-96 10,128 10,109
31-Aug-96 10,165 10,117
30-Sep-96 10,258 10,215
31-Oct-96 10,373 10,337
30-Nov-96 10,450 10,426
31-Dec-96 10,452 10,414
</TABLE>
1 Since the Fund has been in existence for less than a year, the
total return shown above reflects the Fund's cumulative
performance since inception.
While past performance is not indicative of future performance,
the above information provides a broader vantage point from
which to evaluate the discussion of the Fund's performance found
in the following pages.
5
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
PORTFOLIO OF INVESTMENTS
December 31, 1996
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities 4.4%
$150 American Express Credit, 1996-1, Class A 6.800% 12/15/03 $151,875
125 Citibank Credit Card, 1996-1, Class A * 02/07/03 96,016
--------
Total Asset Backed Securities 247,891
--------
Corporate Bonds 11.7%
Consumer Services 1.8%
100 Walt Disney Global Bond 6.750 03/30/06 99,170
--------
Energy 1.8%
100 Union Pacific Resources Group 7.000 10/15/06 100,760
--------
Finance 3.5%
100 First Chicago NBD 7.000 10/16/06 97,920
100 Ford Motor Credit Co. 5.750 01/25/01 96,880
--------
194,800
--------
Pollution Control 0.4%
25 WMX Technologies, Inc. 6.375 12/01/03 24,475
--------
Producer Manufacturing 2.5%
125 Deere & Co. 8.950 06/15/19 141,538
--------
Utilities 1.7%
100 Pacific Gas & Electric, First Mortgage, Ser 1993C 6.250 08/01/03 97,420
--------
Total Corporate Bonds 658,163
--------
United States Government Agency Obligations 47.8%
98 Federal Home Loan Mortgage Corp. Gold Convertible 15 Year
Pool #G10592 6.500 09/01/11 96,239
99 Federal Home Loan Mortgage Corp. Gold Convertible 15 Year
Pool #G10270 8.500 09/01/09 103,598
149 Federal Home Loan Mortgage Corp. Gold 30 Year
Pool #G00559 7.000 10/01/26 146,460
165 Federal Home Loan Mortgage Corp. 5.630 01/10/03 158,174
100 Federal National Mortgage Association Medium Term Note 5.280 03/01/99 98,500
500 Federal National Mortgage Association Medium Term Note 6.625 05/21/01 505,480
48 Federal National Mortgage Association 15 Year Dwarf
Pool #250649 6.500 08/01/11 47,607
29 Federal National Mortgage Association 15 Year Dwarf
Pool #250589 7.000 06/01/11 28,661
150 Federal National Mortgage Association Pool #250569 6.000 05/01/26 138,926
150 Federal National Mortgage Association Pool #358471 7.000 10/01/26 146,404
294 Federal National Mortgage Association Pools 7.500 11/01/22 to 11/01/26 293,970
147 Federal National Mortgage Association Pool #250737 8.000 10/01/26 150,153
97 Government National Mortgage Association Platinum 15 Year
Pool #780419 7.500 12/15/09 99,325
145 Government National Mortgage Association Platinum
Pool #780440 8.500 11/15/17 152,980
147 Government National Mortgage Association Pool #398596 6.500 04/15/26 140,302
33 Government National Mortgage Association Pool #423826 8.500 06/15/26 34,114
98 Government National Mortgage Association Pool #423850 9.000 08/15/26 103,317
96 Government National Mortgage Association Pool #780157 9.500 08/15/22 104,211
150 Tennessee Valley Authority 6.375 06/15/05 147,470
---------
Total United States Government Agency Obligations 2,695,891
---------
6 See Notes to Financial Statements
Explorer Institutional Active Core Fund
Portfolio of Investments (continued)
December 31, 1996
Par Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------
United States Treasury Obligations 32.7%
$250 United States Treasury Bonds 8.125% 08/15/19 $289,103
100 United States Treasury Notes 5.125 11/30/98 98,688
600 United States Treasury Notes 6.375 01/15/99 to 08/15/02 605,224
305 United States Treasury Notes 6.500 05/31/01 308,575
200 United States Treasury Notes 6.750 04/30/00 203,968
225 United States Treasury Notes 6.875 05/15/06 232,137
100 United States Treasury Notes 7.500 02/15/05 107,047
---------
Total United States Treasury Obligations 1,844,742
---------
Total Long-Term Investments 96.6%
(Cost $5,365,223) (a) 5,446,687
Short-Term Investments at Amortized Cost 1.8% 99,967
Other Assets in Excess of Liabilities 1.6% 93,692
----------
Net Assets 100.0% $5,640,346
==========
* Zero coupon bond
(a) At December 31, 1996, for federal income tax purposes, cost is $5,365,223, the aggregate gross
unrealized appreciation is $85,641 and the aggregate gross unrealized depreciation is $4,177,
resulting in net unrealized appreciation of $81,464.
The following table summarizes the portfolio composition at December 31, 1996, based upon quality ratings
issued by Standard & Poor's. For securities not rated by Standard & Poor's, the Moody's rating is used.
</TABLE>
<TABLE>
<CAPTION>
Portfolio Composition by Credit Quality
<S> <C>
U.S. Govt. and Agency Obligations 83.4%
AAA 4.5
A 12.1
------
100.0%
======
7 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<CAPTION>
ASSETS:
<S> <C>
Long-Term Investments, at Market Value (Cost $5,365,223) (Note 1) $ 5,446,687
Short-Term Investments (Note 1) 99,967
Cash 4,378
Receivables:
Interest 63,596
Fund Shares Sold 34,679
Unamortized Organizational Expenses (Note 1) 34,632
---------
Total Assets 5,683,939
---------
LIABILITIES:
Income and Capital Gain Distributions Payable 34,995
Accrued Expenses 7,537
Deferred Compensation and Retirement Plans (Note 2) 1,061
---------
Total Liabilities 43,593
---------
NET ASSETS $ 5,640,346
=========
NET ASSETS CONSIST OF:
Capital (Note 3) $ 5,557,380
Net Unrealized Appreciation on Investments 81,464
Accumulated Net Realized Gain on Investments 2,039
Accumulated Distributions is Excess of Net Investment Income (Note 1) (537)
---------
NET ASSETS $ 5,640,346
=========
Net Asset Value Per Share (Based on net assets of $5,640,346 and
559,271 shares of benefical interest issued and outstanding) $10.09
=========
8 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
<CAPTION>
STATEMENT OF OPERATIONS
For the Period April 23, 1996 (Commencement of Investment
Operations) to December 31, 1996
<S> <C>
INVESTMENT INCOME:
Interest $ 222,864
-------------
EXPENSES:
Audit 18,500
Accounting (Note 2) 11,660
Investment Advisory Fee (Note 2) 10,365
Legal (Note 2) 9,596
Amortization of Organizational Expenses (Note 1) 5,368
Shareholder Services (Note 2) 2,800
Registration and Filing Fees 1,700
Printing 1,600
Trustees Fees and Expenses (Note 2) 1,561
-------------
Total Expenses 63,150
Less Fees Waived and Expenses Reimbursed ($10,365 and
$38,819, respectively) (Note 2) 49,184
-------------
Net Expenses 13,966
-------------
NET INVESTMENT INCOME $ 208,898
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Gain on Investments $ 6,691
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period 0
End of the Period 81,464
-------------
Net Unrealized Appreciation on Investments During the Period 81,464
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS $ 88,155
=============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 297,053
=============
9 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period April 23, 1996 (Commencement of Investment
Operations) to December 31, 1996
<S> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 208,898
Net Realized Gain on Investments 6,691
Net Unrealized Appreciation on Investments During the Period 81,464
--------------
Change in Net Assets from Operations 297,053
--------------
Distributions from Net Investment Income (208,862)
Distributions from Net Realized Gain on Investments (Note 1) (5,225)
--------------
Total Distributions (214,087)
--------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES 82,966
--------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 6,748,576
Net Asset Value of Shares Issued Through Dividend Reinvestment 149,654
Cost of Shares Repurchased (1,390,850)
--------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS 5,507,380
--------------
TOTAL INCREASE IN NET ASSETS 5,590,346
NET ASSETS:
Beginning of the Period 50,000
--------------
End of the Period (Including accumulated distributions in excess
of net investment income of $537) $ 5,640,346
==============
10 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the period indicated.
<CAPTION>
April 23, 1996
(Commencement
of Investment
Operations) to
December 31, 1996
====================================================================================
<S> <C>
Net Asset Value, Beginning of the Period $ 10.000
------------
Net Investment Income 0.409
Net Realized and Unrealized Gain on Investments 0.095
------------
Total from Investment Operations 0.504
------------
Less:
Distributions from Net Investment Income 0.409
Distributions from Net Realized Gain on Investments 0.010
------------
Total Distributions 0.419
------------
Net Asset Value, End of the Period $ 10.085
============
Total Return * 5.20% **
Net Assets at End of the Period (In millions) $5.6
Ratio of Expenses to Average Net Assets* 0.40%
Ratio of Net Investment Income to Average Net Assets* 5.98%
Portfolio Turnover 84% **
*If certain expenses had not been assumed by VKAC, Total Return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets 1.81%
Ratio of Net Investment Income to Average Net Assets 4.57%
** Non-Annualized
11 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
PORTFOLIO OF INVESTMENTS
December 31, 1996
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities 2.1%
$110 American Express Credit,1996-1, Class A 6.800 % 12/15/03 $111,375
125 Citibank Credit Card, 1996-1, Class A * 02/07/03 96,016
--------
Total Asset Backed Securities 207,391
--------
Corporate Bonds 2.5%
Finance 1.7%
175 Ford Motor Credit Co. 5.750 01/25/01 169,540
--------
Pollution Control 0.3%
25 WMX Technologies, Inc. 6.375 12/01/03 24,475
--------
Utilities 0.5%
50 Pacific Gas & Electric, First Mortgage, Ser 1993C 6.250 08/01/03 48,710
--------
Total Corporate Bonds 242,725
--------
United States Government Agency Obligations 12.6%
500 Federal Home Loan Mortgage Corp. 5.630 01/10/03 479,315
15 Federal Home Loan Mortgage Corp. Convertible 15 Year
Pool #G10270 8.500 09/01/09 15,602
20 Federal Home Loan Mortgage Corp. Gold 30 Year
Pool #G00559 7.000 10/01/26 19,529
97 Federal National Mortgage Association 15 Year Dwarf
Pool #250649 6.500 07/01/11 95,214
29 Federal National Mortgage Association 15 Year Dwarf
Pool #250589 7.000 12/31/23 28,661
100 Federal National Mortgage Association Medium Term Note 5.280 03/01/99 98,500
49 Federal National Mortgage Association Pool 7.500 11/01/22 to 12/01/23 49,243
20 Federal National Mortgage Association Pool #250737 8.000 10/01/26 20,020
14 Government National Mortgage Association Platinum 15 Year
Pool #780419 7.500 12/15/09 14,607
19 Government National Mortgage Association Platinum
Pool #780440 8.500 11/15/17 20,262
98 Government National Mortgage Association Pool #423850 9.000 08/15/26 103,317
290 Tennessee Valley Authority 6.375 06/15/05 285,108
---------
Total United States Government Agency Obligations 1,229,378
---------
United States Treasury Obligations 74.2%
500 United States Treasury Notes 4.750 08/31/98 491,485
150 United States Treasury Notes 5.000 01/31/98 148,922
1,925 United States Treasury Notes 5.125 02/28/98 to 11/30/98 1,906,160
100 United States Treasury Notes 5.375 11/30/97 99,797
300 United States Treasury Notes 5.500 12/31/00 293,343
300 United States Treasury Notes 5.625 08/31/97 300,093
550 United States Treasury Notes 5.875 04/30/98 550,946
700 United States Treasury Notes 6.000 08/31/97 701,750
600 United States Treasury Notes 6.250 01/31/97 600,282
1,100 United States Treasury Notes 6.375 01/15/99 to 07/15/99 1,110,579
500 United States Treasury Notes 7.375 11/15/97 507,110
500 United States Treasury Notes 7.750 12/31/99 523,045
---------
Total United States Treasury Obligations 7,233,512
---------
12 Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<CAPTION>
Description Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C>
Total Long-Term Investments 91.4%
(Cost $8,834,970) (a) $8,913,006
----------
Short-Term Investments 7.1%
Federal Farm Credit Bank Discount Note ($195,000 par, yielding 6.0%, 01/02/97 maturity) 194,935
Federal National Mortgage Association Discount Note ($500,000 par, yielding 5.3%,
03/27/97 maturity) 493,705
----------
Total Short-Term Investments
(Cost $688,544) (a) 688,640
Other Assets in Excess of Liabilities 1.5% 151,138
----------
Net Assets 100.0% $9,752,784
==========
* Zero coupon bond
(a) At December 31, 1996, for federal income tax purposes cost, including short-term investments, is $9,523,514,
the aggregate gross unrealized appreciation is $79,816 and the aggregate gross unrealized depreciation is
$1,684, resulting in net unrealized appreciation of $78,132.
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes the portfolio composition at December 31, 1996, based upon quality ratings issued by
Standard & Poor's. For securities not rated by Standard & Poor's, the Moody's rating is used.
<S> <C>
Portfolio Composition by Credit Quality
US Government and Agency Obligations 95.0 %
AAA 2.3
A 2.7
-----
100.0 %
=====
13 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $8,834,970) (Note 1) $ 8,913,006
Short-Term Investments (Cost $688,544) (Note 1) 688,640
Cash 3,926
Receivables:
Interest 130,533
Fund Shares Sold 46,477
Unamortized Organizational Expenses (Note 1) 34,632
------------
Total Assets 9,817,214
------------
LIABILITIES:
Income Distributions Payable 46,718
Accrued Expense 16,651
Deferred Compensation and Retirement Plans (Note 2) 1,061
------------
Total Liabilities 64,430
------------
NET ASSETS $ 9,752,784
============
NET ASSETS CONSIST OF:
Capital (Note 3) $ 9,686,583
Net Unrealized Appreciation on Investments 78,132
Accumulated Undistributed Net Investment Income 62
Accumulated Net Realized Loss on Investments (11,993)
------------
NET ASSETS $ 9,752,784
============
Net Asset Value Per Share (Based on net assets of $9,752,784
and 973,451 shares of beneficial interest issued and outstanding) $10.02
============
14 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
<CAPTION>
STATEMENT OF OPERATIONS
For the Period April 23, 1996 (Commencement of Investment
Operations) to December 31, 1996
<S> <C>
INVESTMENT INCOME:
Interest $ 350,669
-------------
EXPENSES:
Accounting (Note 2) 19,500
Audit 18,375
Investment Advisory Fee (Note 2) 17,245
Legal (Note 2) 11,211
Amortization of Organizational Expenses (Note 1) 5,368
Shareholder Services (Note 2) 2,800
Registration and Filing Fees 2,947
Printing 1,598
Trustees Fees and Expenses (Note 2) 1,561
-------------
Total Expenses 80,605
Less Fees Waived and Expenses Reimbursed ($17,245 and
$40,282, respectively) (Note 2) 57,527
-------------
Net Expenses 23,078
-------------
NET INVESTMENT INCOME $ 327,591
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Loss on Investments $ (11,993)
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period 0
End of the Period 78,132
-------------
Net Unrealized Appreciation on Investments During the Period 78,132
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS $ 66,139
=============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 393,730
=============
15 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period April 23, 1996 (Commencement of Investment
Operations) to December 31, 1996
<S> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 327,591
Net Realized Loss on Investments (11,993)
Net Unrealized Appreciation on Investments During the Period 78,132
--------------
Change in Net Assets from Operations 393,730
Distributions from Net Investment Income (327,529)
--------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES 66,201
--------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 10,323,057
Net Asset Value of Shares Issued Through Dividend Reinvestment 305,526
Cost of Shares Repurchased (992,000)
--------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS 9,636,583
--------------
TOTAL INCREASE IN NET ASSETS 9,702,784
NET ASSETS:
Beginning of the Period 50,000
--------------
End of the Period (Including accumulated undistributed net investment income of $62) $ 9,752,784
==============
16 See Notes to Financial Statements
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the period indicated.
<CAPTION>
April 23, 1996
(Commencement
of Investment
Operations) to
December 31, 1996
- -------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of the Period $ 10.000
------------
Net Investment Income .386
Net Realized and Unrealized Gain on Investments .019
------------
Total from Investment Operations .405
Less Distributions from Net Investment Investment Income .386
------------
Net Asset Value, End of the Period $ 10.019
============
Total Return * 4.14% **
Net Assets at End of the Period (In millions) $9.8
Ratio of Expenses to Average Net Assets* 0.40%
Ratio of Net Investment Income to Average Net Assets* 5.68%
Portfolio Turnover 16% **
*If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets 1.40%
Ratio of Net Investment Income to Average Net Assets 4.68%
** Non-Annualized
17 See Notes to Financial Statements
</TABLE>
THE EXLPORER INSTITUTIONAL TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Significant Accounting Policies
The Explorer Institutional Trust (the "Trust") is registered under
the Investment Company Act of 1940, as amended, as an open-end
management investment company comprised of two funds: Explorer
Institutional Active Core Fund ("Active Core Fund") and Explorer
Institutional Limited Duration Fund ("Limited Duration Fund").
Each Fund is accounted for as a separate entity.
Active Core Fund's investment objective is to provide an
enhanced level of total return as compared to an investment in
an unmanaged portfolio consisting primarily of investment grade
intermediate- and long-term income securities of U.S. issuers.
Limited Duration Fund's investment objective is to provide an
enhanced level of total return as compared to an investment in
an unmanaged portfolio consisting primarily of investment grade
short- and intermediate-term income securities of U.S. issuers,
consistent with the preservation of capital. The Funds
commenced investment operations on April 23, 1996.
The following is a summary of significant accounting policies
consistently followed by the Trust in the preparation of its
financial statements. The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
A. Security Valuation - Investments are stated at value using
market quotations or, if such valuations are not available,
estimates obtained from yield data relating to instruments or
securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or
less are valued at amortized cost.
B. Security Transactions - Security transactions are recorded
on a trade date basis. Realized gains and losses are determined
on an identified cost basis. The Funds may purchase and sell
securities on a "when issued" or "delayed delivery" basis, with
settlement to occur at a later date. The value of the security
so purchased is subject to market fluctuations during this
period. The Funds will maintain, in a segregated account with
its custodian, assets having an aggregate value at least equal
to the amount of the when issued or delayed delivery purchase
commitments until payment is made. At December 31, 1996, there
were no when issued or delayed delivery purchase commitments.
C. Investment Income - Interest income is recorded on an
accrual basis. Bond discount and premium are amortized over the
life of each applicable security.
D. Organizational Expenses - The Funds will reimburse Van
Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC") for costs incurred in connection with the
Funds' organization in the amount of $40,000 for each Fund.
These costs are being amortized on a straight line basis over
the 60 month period ending April 22, 2001. Van Kampen American
Capital Management, Inc. (the "Adviser") has agreed that in the
event any of the initial shares of the Funds originally
purchased by VKAC are redeemed during the amortization period,
the Funds will be reimbursed for any unamortized organizational
expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of
redemption.
E. Federal Income Taxes - It is the Funds' policy to comply
with the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially
all of its taxable income and gains to its shareholders.
Therefore, no provision for federal income taxes is required.
Limited Duration Fund intends to utilize provisions of the
federal income tax laws which allow it to carry a realized
capital loss forward for eight years following the year of the
loss and offset such losses against any future realized capital
gains. At December 31, 1996, Limited Duration Fund had an
accumulated capital loss carryforward for tax purposes of
$11,993, which will expire on December 31, 2004.
F. Distribution of Income and Gains - Each Fund declares
dividends daily and pays dividends monthly from net investment
income. Net realized gains, if any, are distributed annually.
Distributions from net realized gains for book purposes may
include short-term capital gains which are included in ordinary
income for tax purposes.
Due to inherent differences in the recognition of income,
expenses and realized gains/losses under generally accepted
accounting principles and federal income tax purposes, the
amount of distributable net investment income may differ between
book and federal income tax purposes causing book basis
distributions in excess of net investment income for a
particular period. Additionally, permanent book and tax basis
differences for Active Core Fund relating to the recognition of
net realized losses on paydowns of mortgage backed obligations
totaling $573 have been reclassified from accumulated net
realized gain on investments to accumulated undistributed net
investment income.
18
2. Investment Advisory Agreement and Other Transactions with
Affiliates
Under the terms of each of the Fund's Investment Advisory
Agreement, the Adviser will provide facilities and investment
advice to the Fund for an annual fee payable monthly as follows:
Average Net Assets % Per Annum
- ----------------------------- -------------
First $1 billion .300 of 1%
Over $1 billion .250 of 1%
VKAC has agreed to waive fees or reimburse certain
expenses such that the net expenses of each Fund will not exceed
0.40% of average net assets. Should the assets of a particular
fund increase sufficiently to allow for reimbursement of prior
year's excess expenses to VKAC without causing that fund's
expense ratio to exceed 0.40%, that fund may be required to
reimburse VKAC for fees waived and/or expenses assumed within
the previous four years. Therefore, these expenses totaling
$49,184 and $57,527 for Active Core Fund and Limited Duration
Fund, respectively, could become liabilities of each respective
Fund at a future date.
Certain legal expenses are paid to Skadden, Arps, Slate,
Meagher & Flom (Illinois), counsel to the Funds, of which a
trustee of the Funds is an affiliated person.
For the period ended December 31, 1996, Active Core Fund
and Limited Duration Fund recognized expenses of approximately
$20,700 and $30,100, respectively, representing VKAC's cost of
providing accounting and legal services to the Funds. These
services are provided by VKAC at cost. All of this expense has
been assumed by VKAC.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate
of the Adviser, serves as the shareholder servicing agent for
the Funds. For the period ended December 31, 1996, Active Core
Fund and Limited Duration Fund recognized expenses of
approximately $2,500 and $2,500, respectively, representing
ACCESS' cost of providing transfer agency and shareholder
services plus a profit. All of this expense has been assumed by
VKAC.
Certain officers and trustees of the Funds are also
officers and directors of VKAC. The Funds do not compensate
their officers or trustees who are officers of VKAC.
The Funds have implemented deferred compensation and
retirement plans for their trustees. Under the deferred
compensation plan, trustees may elect to defer all or a portion
of their compensation to a later date. The retirement plan
covers those trustees who are not officers of VKAC.
At December 31, 1996, VKAC owned 5,000 shares of each
of the Funds.
3. Capital Transactions
There are an unlimited number of shares of beneficial interest
of each Fund without par value authorized.
For the period ended December 31, 1996, transactions in
common shares were as follows:
Active Limited
Core Duration
Fund Fund
-------- ---------
Beginning Shares 5,000 5,000
Shares Sold 680,125 1,037,883
Shares Issued through
Dividend Reinvestment 14,916 30,568
Shares Repurchased (140,770) (100,000)
-------- ---------
Ending Shares 559,271 973,451
======== =========
4. Investment Transactions
During the period, the cost of purchases and proceeds from sales
of investments, excluding forward commitment transactions and
short-term investments, were $9,354,955 and $3,997,735 for
Active Core Fund and $9,964,256 and $1,132,758 for Limited
Duration Fund.
5. Mortgage Backed Securities
A Mortgage Backed Security (MBS) is a pass-through security
created by pooling mortgages and selling participations in the
principal and interest payments received from borrowers. Most
of these securities are guaranteed by federally sponsored
agencies, such as Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA) or Federal
Home Loan Mortgage Corporation (FHLMC).
19
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
The Explorer Institutional Trust:
We have audited the accompanying statements of assets and liabilities
of The Explorer Institutional Trust (comprising the Active Core Fund
and Limited Duration Fund, collectively referred to as the "Funds"),
including the portfolios of investments, as of December 31, 1996,
and the related statements of operations, the statements of changes in
net assets, and the financial highlights for the period from April 23,
1996 (commencement of investment operations) to December 31, 1996. These
financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of each of the respective funds constituting The Explorer Institutional Trust
as of December 31, 1996, the results of its operations, the changes in
its net assets, and the financial highlights for the period from April 23,
1996 (commencement of investment operations) to December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
February 12, 1997
20
RESULTS OF SHAREHOLDER VOTES
- ----------------------------------------------------------------
Explorer Institutional Active Core Fund
A Special Meeting of Shareholders of the Fund was held on
October 23, 1996, where shareholders voted on a new investment
advisory agreement and the ratification of KPMG Peat Marwick LLP
as independent public accountants. With regard to the approval
of a new investment advisory agreement between Van Kampen
American Capital Management, Inc. and the Fund, 105,000 shares
voted for the proposal, 0 shares voted against, 351,131 shares
abstained and 0 shares represented broker non-votes. With
regard to the ratification of KPMG Peat Marwick LLP as
independent public accountants for the Fund, 105,000 shares
voted for the proposal, 0 shares voted against, 351,131 shares
abstained and 0 shares represented broker non-votes.
Explorer Institutional Limited Duration Fund
A Special Meeting of Shareholders of the Fund was held on
October 23, 1996, where shareholders voted on a new investment
advisory agreement and the ratification of KPMG Peat Marwick LLP
as independent public accountants. With regard to the approval
of a new investment advisory agreement between Van Kampen
American Capital Management, Inc. and the Fund, 105,000 shares
voted for the proposal, 0 shares voted against, 851,055 shares
abstained and 0 shares represented broker non-votes. With
regard to the ratification of KPMG Peat Marwick LLP as
independent public accountants for the Fund, 105,000 shares
voted for the proposal, 0 shares voted against, 851,055 shares
abstained and 0 shares represented broker non-votes.
21
THE EXPLORER INSTITUTIONAL TRUST
Board of Trustees
David C. Arch
Rod Dammeyer
Howard J Kerr
Dennis J. McDonnell*--Chairman
Theodore A. Meyers
Hugo F. Sonnenschein
Wayne W. Whalen*
Officers
Dennis J. McDonnell*
President
Ronald A. Nyberg*
Vice President and Secretary
Edward C. Wood, III*
Vice President and Chief Financial Officer
Curtis W. Morell*
Vice President and Chief Accounting Officer
John L. Sullivan*
Treasurer
Tanya M. Loden*
Controller
Peter W. Hegel*
Michael P. Kamradt*
John M. McCareins*
Edward A. Treichel*
Vice Presidents
Investment Adviser
Van Kampen American Capital
Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Distributor
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Shareholder Servicing Agent
ACCESS Investor Services, Inc.
Explorer Institutional Funds
P.O. Box 418256
Kansas City, Missouri 64141-9256
Custodian
State Street Bank and Trust Company
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
Attn: Explorer Institutional Funds
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
Independent Accountants
KPMG Peat Marwick LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IIlinois 60601
*"Interested" persons of the Trust as defined in the Investment
Company Act of 1940
Van Kampen American Capital Distributors, Inc., 1997
All rights reserved.
sm denotes a service mark of Van Kampen American Capital
Distributors, Inc.
22
