THE EXPLORER INSTITUTIONAL TRUST
Semi-Annual Report
June 30, 1997
Active Core Fund
Limited Duration Fund
Table of Contents
Letter to Shareholders...................... 1
Active Core Fund
Portfolio of Investments.................. 4
Statement of Assets and Liabilities....... 6
Statement of Operation.................... 7
Statement of Changes in Net Assets........ 8
Financial Highlights...................... 9
Limited Duration Fund
Portfolio of Investments.................. 10
Statement of Assets and Liabilities....... 12
Statement of Operations................... 13
Statement of Changes in Net Assets........ 14
Financial Highlights...................... 15
Notes to Financial Statements............... 16
Letter to Shareholders
June 30, 1997
Dear Shareholder,
As you know, Van Kampen American Capital was recently acquired by Morgan
Stanley Group Inc., a world leader in asset management. On February 5, 1997,
Morgan Stanley Group Inc. and Dean Witter, Discover & Co. agreed to merge; the
merger was completed on May 31, creating the combined company of Morgan Stanley,
Dean Witter, Discover & Co. This preeminent global financial services firm
boasts a market capitalization of $21 billion and leading market positions in
securities, asset management, and credit services. Additionally, we are very
pleased to announce that Philip N. Duff, formerly the chief financial officer
of Morgan Stanley, has joined Van Kampen American Capital as president and
chief executive officer. Don G. Powell will continue as chairman of the firm.
As the financial industry continues to witness unprecedented consolidations
and new partnerships, we believe that those firms who are leaders in all facets
of their business will be able to offer investors the greatest opportunities and
services as we move into the next century. We are confident that these changes
will continue to work to the benefit of our institutional customers.
Economic Review
Growth, stability, and confidence continued to characterize the U.S.
economic environment during the past six months. In the first quarter, the
economy grew at its fastest pace since 1987. Meanwhile, consumer confidence
soared to its highest reading in 27 years, while unemployment fell as low as
4.8 percent, the lowest level since 1973. The upward momentum in economic
growth through the first quarter triggered inflation fears, prompting the
Federal Reserve Board to raise the federal funds rate from 5.25 percent to
5.50 percent late in March. Shortly after the Fed's action, the economy began
to slow and concern over inflation became less of a factor. During the second
quarter, retail sales declined in two of the three months and the Producer
Price Index reached a 45-year low.
Market Overview
The strong economy and tight labor market combined to put mild upward
pressure on bond yields during the first half of 1997. For several weeks during
the spring, it appeared that economic growth was too robust and that inflation
could reemerge. The Fed's quarter-point increase in short-term interest rates,
combined with inflation fears, pushed yields on long-term government bonds up to
7.17 percent in April. When subsequent data showed the economy to be
decelerating during the second quarter, bond yields gradually fell back to 6.78
percent at the end of June, slightly above their 6.64 percent level at the
beginning of the year.
The relative stability of interest rates over the course of the first six
months led to a strong performance in the mortgage-backed security sector. For
the six-month period, the mortgage-backed sector had the best total return among
the investment-grade sectors at 3.70 percent. The strong underlying fundamental
economic environment continued to benefit the corporate sector as its
performance placed second with a 3.11 percent return. The U.S. government agency
sector had the third-highest return of 2.96 percent.
The rate of bond issuance continued to be moderate, reflecting the
reduction in the federal budget deficit and the extensive use of equity capital
financing by many corporations. Overall, the shortage of new-debt issues
contributed to a general narrowing of yield spreads among various sectors of the
fixed-income market.
Outlook
We expect the pace of economic activity during the remainder of 1997 to
modestly accelerate from the sluggish rate that prevailed during the second
quarter. While we do not believe that economic growth will be rapid enough to
ignite inflation, some warning signs are present, including a tight labor market
and high consumer confidence. In this environment, at least one additional
Federal Reserve rate hike is possibility. We anticipate that long-term interest
rates will remain within a relatively narrow range for the remainder of the
year.
Active Core Fund - Portfolio Strategy and Overview
As of June 30, 1997, the Active Core Fund was structured with a portfolio
duration of 4.76 years, which was comparable to the Fund's benchmark, the
Lehman Brothers Aggregate Bond Index, with a duration of 4.62 years.
During the reporting period, the Fund's portfolio was overweighted in the
mortgage-backed security sector, and we anticipate maintaining this concentrated
position. However, if interest rates continue to sharply decline, premium-priced
mortgages may underperform as the risk of prepayment increases. We intend to
closely monitor the composition of our mortgage holdings (i.e., the mix of
premium, discount, and current coupon mortgages) over the remainder of the year.
The corporate bond sector has been buoyed by strong supply-and-demand
fundamentals during the year. However, as a result of near record-narrow levels
in the yield advantage (also known as "spread") for corporate bonds, we have
kept an underweighted position in this sector.
We anticipate maintaining the current portfolio posture. If the Federal
Reserve tightens monetary policy further, however, we believe corporate spreads
may be vulnerable to widening. This may create opportunities for increasing the
Fund's corporate weighting in the second half of 1997. In addition, volatility
may increase from its current low level and place pressure on the mortgage
sector, which might necessitate a reduced weighting in that sector.
The Active Core Fund generated a total return of 2.60 percent for the six
months and 7.28 percent for the 12 months ended June 30, 1997.
Limited Duration Fund - Portfolio Strategy and Overview
As of June 30, 1997, the Limited Duration Fund was structured with a portfolio
duration of 1.72 years, which was comparable to the Fund's benchmark, the Lehman
Brothers 1- to 3-Year Government Bond Index, with a duration of 1.69 years. This
index is comprised of U.S. Treasury and U.S. government agency securities.
During the reporting period, we slightly increased the Fund's weightings in the
corporate, mortgage, and asset-backed sectors. We intend to maintain a portfolio
comprised of modest positions diversified among various sectors. The short end
of the yield curve has remained relatively stable in the wake of the Federal
Reserve rate hike, and we expect this to continue in the absence of additional
Fed action.
The Limited Duration Fund generated a total return of 2.61 percent for the
six months and 6.10 percent for the 12 months ended June 30, 1997.
Summary
We believe 1997 will continue to be a challenging year, and we look forward
to meeting the challenge. We have provided additional details about the Funds in
the balance of the report. We appreciate your investment in the Explorer Trust
Funds and your confidence in our institutional asset management team.
Sincerely,
Edward A. Treichel
Director of Institutional Asset Management
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
PORTFOLIO OF INVESTMENTS
June 30, 1997 (Unaudited)
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities 1.3%
$125 Citibank Credit Card, 1996-1, Class A * 02/07/03 $ 98,843
------------
Corporate Bonds 14.2%
Consumer Distribution 1.4%
100 Wal-Mart Stores 5.500 % 03/01/98 99,740
------------
Consumer Durables 1.3%
100 Polaroid Corp. 6.750 01/15/02 99,230
------------
Consumer Services 1.3%
100 Walt Disney Global Bond 6.750 03/30/06 98,640
------------
Energy 1.3%
100 Union Pacific Resources Group 7.000 10/15/06 99,610
------------
Finance 5.7%
100 American Express Credit 6.500 08/01/00 99,860
125 Banc One Corp. 7.000 03/25/02 125,800
100 Commercial Credit Co. 6.625 11/15/06 97,450
100 First Chicago NBD 7.000 10/16/06 97,750
------------
420,860
------------
Pollution Control 0.3%
25 WMX Technologies, Inc. 6.375 12/01/03 24,188
------------
Utilities 2.9%
50 AT & T Corp. 7.750 03/01/07 52,605
15 Florida Power & Light 7.050 12/01/26 14,034
100 Pacific Gas & Electric, First Mortgage, Ser 1993C 6.250 08/01/03 97,120
50 Wisconsin Electric Power 6.625 11/15/06 48,870
------------
212,629
------------
Total Corporate Bonds 1,054,897
------------
United States Government Agency Obligations 41.2%
165 Federal Home Loan Mortgage Corp. 5.630 01/10/03 157,666
94 Federal Home Loan Mortgage Corp. Gold Convertible 15 Year
Pool #G10592 6.500 10/01/11 92,204
88 Federal Home Loan Mortgage Corp. Gold Convertible 15 Year
Pool #G10270 8.500 09/01/09 91,406
146 Federal Home Loan Mortgage Corp. Gold 30 Year
Pool #G00559 7.000 10/01/26 143,733
100 Federal National Mortgage Association Medium Term Note 5.280 03/01/99 98,688
350 Federal National Mortgage Association Medium Term Note 6.060 06/21/99 349,220
500 Federal National Mortgage Association Medium Term Note 6.625 05/21/01 502,695
47 Federal National Mortgage Association 15 Year Dwarf
Pool #250649 6.500 07/01/11 45,862
28 Federal National Mortgage Association 15 Year Dwarf
Pool #250589 7.000 12/31/23 27,446
100 Federal National Mortgage Association PAC 7.000 10/25/09 100,375
147 Federal National Mortgage Association Pool #250569 6.000 05/01/26 136,451
149 Federal National Mortgage Association Pool #358471 7.000 12/01/23 145,887
286 Federal National Mortgage Association Pools 7.500 11/01/22 to 12/01/23 286,219
142 Federal National Mortgage Association Pool #250737 8.000 10/01/26 145,158
United States Government Agency Obligations (Continued)
$91 Government National Mortgage Association Platinum 15 Year
Pool #780419 7.500 % 12/15/09 $ 92,943
135 Government National Mortgage Association Platinum
Pool #780440 8.500 11/15/17 142,639
146 Government National Mortgage Association Pool #398596 6.500 04/15/26 139,847
31 Government National Mortgage Association Pool #423826 8.500 06/15/26 32,677
93 Government National Mortgage Association Pool #423850 9.000 08/15/26 98,659
84 Government National Mortgage Association Pool #780157 9.500 08/15/22 90,943
150 Tennessee Valley Authority 6.375 06/15/05 145,910
------------
Total United States Government Agency Obligations 3,066,628
------------
United States Treasury Obligations 40.8%
300 United States Treasury Notes 5.875 11/30/01 294,282
350 United States Treasury Notes 6.375 01/15/99 to 08/15/02 350,547
1,455 United States Treasury Notes 6.500 05/31/01 to 10/15/06 1,453,952
300 United States Treasury Notes 6.875 05/15/06 306,423
100 United States Treasury Notes 7.500 02/15/05 105,859
1,025 United States Treasury Strips * 05/15/02 to 05/15/15 527,105
------------
Total United States Treasury Obligations 3,038,168
------------
Total Long-Term Investments 97.5%
(Cost $7,216,323) 7,258,536
Short-Term Investments 1.9%
(Cost $144,978) 144,978
------------
Total Investments 99.4%
(Cost $7,361,301) 7,403,514
Other Assets in Excess of Liabilities 0.6% 42,158
------------
Net Assets 100.0% $ 7,445,672
============
* Zero coupon bond
</TABLE>
The following table summarizes the portfolio composition at June 30, 1997, based
upon the highest credit as determined by Standard & Poor's or Moody's.
<TABLE>
Portfolio Composition by Credit Quality*
<CAPTION>
<S> <C>
U.S. Govt. and Agency Obligations 84.1 %
AAA 1.3
AA 6.1
A 7.1
BBB 1.4
-------
100.0 %
=======
</TABLE>
*As a Percentage of Long-Term Investments
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (Unaudited)
<CAPTION>
ASSETS:
<S> <C>
Total Investments (Cost $7,361,301) $ 7,403,514
Cash 1,659
Receivables:
Interest 72,171
Fund Shares Sold 33,479
Unamortized Organizational Costs 30,666
--------------
Total Assets 7,541,489
--------------
LIABILITIES:
Payables:
Investments Purchased 49,561
Income Distributions 33,737
Accrued Expenses 11,208
Deferred Compensation and Retirement Plans 1,311
--------------
Total Liabilities 95,817
--------------
NET ASSETS $ 7,445,672
==============
NET ASSETS CONSIST OF:
Capital $ 7,391,556
Net Unrealized Appreciation 42,213
Accumulated Net Realized Gain 12,508
Accumulated Distributions is Excess of Net Investment Income (605)
--------------
NET ASSETS $ 7,445,672
==============
Net Asset Value Per Share (Based on net assets of $7,445,672
and 742,007 shares of benefical interest issued and outstanding) $10.03
==============
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest $ 197,434
--------------
EXPENSES:
Shareholder Services 11,200
Legal 9,000
Investment Advisory Fee 8,735
Audit 8,500
Custody 6,009
Accounting 4,630
Amortization of Organizational Costs 3,966
Trustees Fees and Expenses 3,500
Registration and Filing Fees 1,775
Shareholder Reports 500
Other 250
--------------
Total Expenses 58,065
Less: Fees Deferred and Expenses Reimbursed ($8,735 and
$31,577, respectively) 40,312
Credits Earned on Cash Balances 6,009
--------------
Net Expenses 11,744
NET INVESTMENT INCOME $ 185,690
==============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain $ 10,469
--------------
Unrealized Appreciation/Depreciation:
Beginning of the Period 81,464
End of the Period 42,213
Net Unrealized Depreciation During the Period (39,251)
--------------
NET REALIZED AND UNREALIZED LOSS $ (28,782)
==============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 156,908
==============
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1997 and the Period April 23, 1996 (Commencement
of Investment Operations) to December 31, 1996
<CAPTION>
Six Months Ended Period Ended
June 30, 1997 December 31, 1996
---------------- -----------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 185,690 $ 208,898
Net Realized Gain 10,469 6,691
Net Unrealized Appreciation/Depreciation During the
Period (39,251) 81,464
---------------- -----------------
Change in Net Assets from Operations 156,908 297,053
---------------- -----------------
Distributions from Net Investment Income (185,690) (208,862)
Distributions in Excess of Net Investment Income (68) -0-
Distributions from Net Realized Gain -0- (5,225)
---------------- -----------------
Total Distributions (185,758) (214,087)
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES (28,850) 82,966
---------------- -----------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold 1,650,000 6,748,576
Net Asset Value of Shares Issued Through Dividend
Reinvestment 184,176 149,654
Cost of Shares Repurchased -0- (1,390,850)
---------------- -----------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS 1,834,176 5,507,380
---------------- -----------------
TOTAL INCREASE IN NET ASSETS 1,805,326 5,590,346
NET ASSETS:
Beginning of the Period 5,640,346 50,000
---------------- -----------------
End of the Period (Including accumulated distributions
in excess of net investment income of $605 and $537,
respectively) $ 7,445,672 $ 5,640,346
================ =================
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
<CAPTION>
April 23, 1996
Six Months (Commencement
Ended of Investment
June 30, Operations) to
1997 December 31, 1996
---------------- -----------------
<S> <C> <C>
Net Asset Value, Beginning of the Period $ 10.085 $ 10.000
---------------- -----------------
Net Investment Income 0.316 0.409
Net Realized and Unrealized Gain (0.051) 0.095
---------------- -----------------
Total from Investment Operations 0.265 0.504
---------------- -----------------
Less:
Distributions from and in Excess of Net Investment
Income 0.316 0.409
Distributions from Net Realized Gain -0- 0.010
---------------- -----------------
Total Distributions 0.316 0.419
---------------- -----------------
Net Asset Value, End of the Period $ 10.034 $ 10.085
================ =================
Total Return * 2.60%** 5.20%**
Net Assets at End of the Period (In millions) $7.4 $5.6
Ratio of Expenses to Average Net Assets* (a) 0.61% 0.40%
Ratio of Net Investment Income to Average Net Assets* 6.38% 5.98%
Portfolio Turnover 34%** 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 (a) 1.99% 1.81%
Ratio of Net Investment Income to Average Net Assets 4.99% 4.57%
** Non-Annualized
(a) The Ratios of Expenses to Average Net Assets do not reflect credits earned on overnight cash balances.
If these credits were reflected as a reduction of expenses, the ratios would decrease by .21% for the period
ended June 30, 1997.
</TABLE>
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
PORTFOLIO OF INVESTMENTS
June 30, 1997 (Unaudited)
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities 1.3%
$125 Citibank Credit Card, 1996-1, Class A * 02/07/03 $ 98,843
------------
Corporate Bonds 11.7%
Consumer Distribution 2.6%
200 Wal-Mart Stores 5.500 % 03/01/98 199,480
------------
Finance 4.2%
150 American Express Credit Co. 6.500 08/01/00 149,790
175 Ford Motor Credit Co. 5.750 01/25/01 169,785
------------
319,575
------------
Pollution Control 0.3%
25 WMX Technologies, Inc. 6.375 12/01/03 24,188
------------
Raw Materials/Processing Industries 2.0%
150 EI Dupont Nemour 6.750 10/15/02 150,105
------------
Technology 2.0%
150 Lucent Technologies, Inc. 6.900 07/15/01 151,305
------------
Utilities 0.6%
50 Pacific Gas & Electric Corp., First Mortgage, Ser 1993C 6.250 08/01/03 48,560
------------
Total Corporate Bonds 893,213
------------
United States Government Agency Obligations 17.8%
500 Federal Home Loan Mortgage Corp. 5.630 01/10/03 477,775
13 Federal Home Loan Mortgage Corp. Convertible 15 Year
Pool #G10270 8.500 09/01/09 13,766
20 Federal Home Loan Mortgage Corp. Gold 30 Year
Pool #G00559 7.000 10/01/26 19,166
94 Federal National Mortgage Association 15 Year Dwarf
Pool #250649 6.500 07/01/11 91,725
28 Federal National Mortgage Association 15 Year Dwarf
Pool #250589 7.000 12/31/23 27,446
100 Federal National Mortgage Association Medium Term Note 5.280 03/01/99 98,688
150 Federal National Mortgage Association Medium Term Note 6.060 06/21/99 149,666
48 Federal National Mortgage Association Pool #124561 7.500 11/01/22 47,948
19 Federal National Mortgage Association Pool #250737 8.000 10/01/26 19,354
14 Government National Mortgage Association 15 Year Platinum
Pool #780419 7.500 12/15/09 13,668
18 Government National Mortgage Association Platinum
Pool #780440 8.500 11/15/17 18,893
93 Government National Mortgage Association Pool #423850 9.000 08/15/26 98,659
290 Tennessee Valley Authority 6.375 06/15/05 282,092
------------
Total United States Government Agency Obligations 1,358,846
------------
United States Treasury Obligations 63.1%
500 United States Treasury Notes 4.750 08/31/98 493,595
1,925 United States Treasury Notes 5.125 02/28/98 to 11/30/98 1,910,410
100 United States Treasury Notes 5.375 11/30/97 99,906
300 United States Treasury Notes 5.625 08/31/97 299,951
700 United States Treasury Notes 5.875 04/30/98 to 11/30/01 697,657
700 United States Treasury Notes 6.000 08/31/97 700,329
500 United States Treasury Notes 7.375 11/15/97 503,045
150 United States Treasury STRIPS (a) * 05/15/02 110,459
------------
Total United States Treasury Obligations 4,815,352
------------
Total Long-Term Investments 93.9%
(Cost $7,133,991) 7,166,254
Short-Term Investments 4.7%
Federal Home Loan Bank Discount Note ($360,000 par, yielding 6.0%, 07/01/97 maturity)
(Cost $359,946) 359,946
------------
Total Investments 98.6%
(Cost $7,493,937) 7,526,200
Other Assets in Excess of Liabilities 1.4% 104,364
------------
Net Assets 100.0% $ 7,630,564
============
* Zero coupon bond
(a) U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are securities
issued by the U.S. Treasury department which evidence ownership in either the bond principal or interest
payments. These securities are used by the Fund to manage the portfolio's duration.
</TABLE>
The following table summarizes the portfolio composition at June 30, 1997,
based upon the higher of the quality ratings issued by Standard & Poor's
or Moody's.
<TABLE>
Portfolio Composition by Credit Quality *
<CAPTION>
<S> <C>
US Government and Government Agency Obligations 86.2 %
AAA 1.4
AA 4.9
A 7.5
-----
100.0 %
=====
* As a percentage of Long-Term Assets
</TABLE>
11 See Notes to Financial Statements
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (Unaudited)
<CAPTION>
ASSETS:
<S> <C>
Total Investments (Cost $7,493,937) $ 7,526,200
Cash 7,512
Receivables:
Interest 93,254
Fund Shares Sold 37,012
Unamortized Organizational Costs 30,666
--------------
Total Assets 7,694,644
--------------
LIABILITIES:
Income Distributions Payable 37,251
Accrued Expenses 25,518
Deferred Compensation and Retirement Plans 1,311
--------------
Total Liabilities 64,080
--------------
NET ASSETS $ 7,630,564
==============
NET ASSETS CONSIST OF:
Capital $ 7,591,226
Net Unrealized Appreciation 32,263
Accumulated Net Realized Gain 7,111
Accumulated Distributions in Excess of Net Investment Income (36)
--------------
NET ASSETS $ 7,630,564
==============
Net Asset Value Per Share (Based on net assets of $7,630,564
and 764,042 shares of beneficial interest issued and outstanding) $9.99
==============
</TABLE>
12 See Notes to Financial Statements
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest $ 263,407
--------------
EXPENSES:
Investment Advisory Fee 12,729
Shareholder Services 10,700
Legal 9,000
Audit 8,625
Custody 5,776
Accounting Services 5,100
Amortization of Organizational Costs 3,966
Trustees Fees and Expenses 3,500
Registration and Filing Fees 2,947
Other 787
--------------
Total Expenses 63,130
Less: Fees Deferred and Expenses Reimbursed ($12,729 and
$27,506, respectively) 40,235
Credits Earned on Cash Balances 5,776
--------------
Net Expenses 17,119
--------------
NET INVESTMENT INCOME $ 246,288
==============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain $ 19,104
--------------
Unrealized Appreciation/Depreciation:
Beginning of the Period 78,132
End of the Period 32,263
--------------
Net Unrealized Depreciation During the Period (45,869)
--------------
NET REALIZED AND UNREALIZED LOSS $ (26,765)
==============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 219,523
==============
</TABLE>
13 See Notes to Financial Statements
<TABLE>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1997 and the Period April 23, 1996 (Commencement
of Investment Operations) to December 31, 1996 (Unaudited)
<CAPTION>
Six Months Ended Period Ended
June 30, 1997 December 31, 1996
---------------- -----------------
FROM INVESTMENT ACTIVITIES:
<S> <C> <C>
Operations:
Net Investment Income $ 246,288 $ 327,591
Net Realized Gain/Loss 19,104 (11,993)
Net Unrealized Appreciation/Depreciation During the
Period (45,869) 78,132
---------------- -----------------
Change in Net Assets from Operations 219,523 393,730
---------------- -----------------
Distributions from Net Investment Income (246,350) (327,529)
Distributions in Excess of Net Investment Income (36) 0
---------------- -----------------
Distributions from and in Excess of Net Investment
Income (246,386) (327,529)
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES (26,863) 66,201
---------------- -----------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold 380,000 10,323,057
Net Asset Value of Shares Issued Through Dividend
Reinvestment 244,950 305,526
Cost of Shares Repurchased (2,720,307) (992,000)
---------------- -----------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS (2,095,357) 9,636,583
TOTAL INCREASE/DECREASE IN NET ASSETS (2,122,220) 9,702,784
NET ASSETS:
Beginning of the Period 9,752,784 50,000
---------------- -----------------
End of the Period (Including accumulated undistributed
net investment income of ($36) and $62, respectively) $ 7,630,564 $ 9,752,784
================ =================
</TABLE>
14 See Notes to Financial Statements
<TABLE>
<CAPTION>
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
April 23, 1996
Six Months (Commencement
Ended of Investment
June 30, Operations) to
1997 December 31, 1996
---------------- -----------------
<S> <C> <C>
Net Asset Value, Beginning of the Period $ 10.019 $ 10.000
---------------- -----------------
Net Investment Income .287 .386
Net Realized and Unrealized Gain (.032) .019
---------------- -----------------
Total from Investment Operations .255 .405
Less Distributions from and in Excess of Net Investment
Income .287 .386
---------------- -----------------
Net Asset Value, End of the Period $ 9.987 $ 10.019
================ =================
Total Return * 2.61%** 4.14%**
Net Assets at End of the Period (In millions) $7.6 $9.8
Ratio of Expenses to Average Net Assets* (a) 0.54% 0.40%
Ratio of Net Investment Income to Average Net Assets* 5.80% 5.68%
Portfolio Turnover 21%** 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 (a) 1.49% 1.40%
Ratio of Net Investment Income to Average Net Assets 4.85% 4.68%
** Non-Annualized
(a) The ratios of Expenses to Average Net Assets do not reflect credits earned on overnight cash balances.
If these credits were reflected as a reduction of expenses, the ratios would decrease by .14% for the period
ended June 30, 1997.
</TABLE>
15 See Notes to Financial Statements
THE EXPLORER INSTITUTIONAL TRUST
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
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 June 30, 1997, 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 Costs - 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 costs 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.
The following table presents the identified cost of investments at June 30,
1997 for federal income tax purposes with the associated gross unrealized
appreciation, gross unrealized depreciation and net unrealized appreciation/
depreciation.
<TABLE>
<CAPTION>
Limited
Active Core Duration
----------- -----------
<S> <C> <C>
Cost of long-term and short-term investments $ 7,361,301 $ 7,493,937
----------- -----------
Aggregate gross unrealized appreciation 59,129 35,800
Aggregate gross unrealized depreciation 16,916 3,537
----------- -----------
Net unrealized appreciation $ 42,213 $ 32,263
=========== ===========
</TABLE>
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.
G. Expense Reductions - During the year ended June 30, 1997, the custody fee for
Active Core Fund and Limited Duration Fund was reduced by $6,009 and $5,776,
respectively, as a result of credits earned on overnight cash balances.
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 investment facilities and advice to the Fund for an annual fee
payable monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- --------------------------- -----------
<S> <C>
First $1 billion .300 of 1%
Over $1 billion .250 of 1%
</TABLE>
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 funds' 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
expense subsidies totaling $40,312 and $97,762 for Active Core Fund and Limited
Duration Fund, respectively, could become liabilities of each respective Fund
at a future date.
For the six months ended June 30, 1997, Active Core Fund and Limited
Duration Fund recognized expenses of approximately $600 each, representing
legal expenses provided by Skadden, Arps, Slate, Meagher & Flom (Illinois),
counsel to the Funds, of which a trustee is an affiliated person. All of this
expense has been assumed by VKAC.
For the six months ended June 30, 1997, Active Core Fund and Limited
Duration Fund recognized expenses of approximately $4,600 and $5,100,
respectively, representing VKAC's cost of providing accounting 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 six months
ended June 30, 1997, Active Core Fund and Limited Duration Fund recognized
expenses of approximately $10,000 each, 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 provides deferred compensation and retirement plans for their
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Funds. The maximum annual
benefit per trustee under the plan is equal to the trustee's annual retainer,
which is currently $2,500. Due to the size of the Funds, the trustees are
currently waiving their retainer fee.
At June 30, 1997, 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 six months ended June 30, 1997, transactions in common shares
were as follows:
<TABLE>
<CAPTION>
Active Limited
Core Duration
Fund Fund
--------- ---------
<S> <C> <C>
Beginning Shares 559,271 973,451
Shares Sold 164,293 38,056
Shares Issued through Dividend Reinvestment 18,443 24,559
Shares Repurchased -0- (272,024)
--------- ---------
Ending Shares 742,007 764,042
========= =========
</TABLE>
For the period ended December 31, 1996, transactions in common shares were
as follows:
<TABLE>
<CAPTION>
Active Limited
Core Duration
Fund Fund
---------- -----------
<S> <C> <C>
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
========== ==========
Capital at 12/31/96 $5,557,380 $9,686,583
</TABLE>
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
$3,810,373 and $1,976,515 for Active Core Fund and $1,665,034 and $3,402,071
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).
A Collateralized Mortgage Obligation (CMO) is a bond which is
collateralized by a pool of MBS's. These MBS pools are divided into classes or
tranches with each class having its own characteristics. For instance, a PAC
(Planned Amortization Class) is a specific class of mortgages which over its
life will generally have the most stable cash flows and the lowest prepayment
risk.
RESULTS OF SHAREHOLDER VOTES
- --------------------------------------------------------------------------------
Explorer Institutional Active Core Fund
A Special Meeting of Shareholders of the Trust was held on May 28, 1997,
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 Trust, 384,835 shares voted for the
proposal, 0 shares voted against, 0 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, 384,835 shares voted for the
proposal, 0 shares voted against, 0 shares abstained and 0 shares represented
broker non-votes.
Explorer Institutional Limited Duration Fund
A Special Meeting of Shareholders of the Trust was held on May 28, 1997,
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 Trust, 729,645 shares voted
for the proposal, 0 shares voted against, 0 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, 729,645 shares voted
for the proposal, 0 shares voted against, 0 shares abstained and 0 shares
represented broker non-votes.
THE EXPLORER INSTITUTIONAL TRUST
- --------------------------------------------------------------------------------
Board of Trustees Investment Advisers
David C. Arch Van Kampen American Capital
Rod Dammeyer Management, Inc.
Howard J. Kerr One Parkview Plaza
Dennis J. McDonnell*--Chairman Oakbrook Terrace, Illinois 60181
Theodore A. Meyers
Hugo F. Sonnenschein Distributor
Wayne W. Whalen*
Van Kampen American Capital
Officers Distributors, Inc.
One Parkview Plaza
Dennis J. McDonnell* Oakbrook Terrace, Illinois 60181
President
Shareholder Servicing Agent
Ronald A. Nyberg*
Vice President and Secretary ACCESS Invester Services, Inc.
Explorer Institutional Funds
Edward C. Wood, III* P.O. Box 418256
Vice President and Chief Financial Kansas City, Missouri 64141-9256
Officer
Custodian
John L. Sullivan*
Treasurer State Street Bank and Trust Company
225 Franklin Street
Tanya M. Loden* P.O. Box 1713
Controller Boston, Massachusetts 02105
Attn: Explorer Institutional Funds
Peter W. Hegel*
Michael P. Kamradt* Legal Counsel
John M. McCareins*
Edward A. Treichel* Skadden, Arps, Slate, Meagher & Flom
Vice Presidents (Illinois)
333 West Wacher Drive
Chicago, Illinois 60606
Independent Accountants
KPMG Peat Marwick LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 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.
