-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LM6B4POWcVkGiTY9Fh+OzwkUPOSZLKPD7lQOmoIksMpjhLkqe0Hj5+2Hml7hM1wx WDfzp5g+MVFdcFwRahqD7g== 0000950137-03-006309.txt : 20031215 0000950137-03-006309.hdr.sgml : 20031215 20031215144436 ACCESSION NUMBER: 0000950137-03-006309 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031215 EFFECTIVENESS DATE: 20031215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VAN KAMPEN TAX FREE TRUST CENTRAL INDEX KEY: 0000774556 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSR/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-04386 FILM NUMBER: 031054197 BUSINESS ADDRESS: STREET 1: VAN KAMPEN INVESTMENTS INC STREET 2: ONE PARKVIEW PLAZA CITY: OAKBROOK TERRACE STATE: IL ZIP: 60181 BUSINESS PHONE: 6306846774 MAIL ADDRESS: STREET 1: VAN KAMPEN INVESTMENTS INC STREET 2: ONE PARKVIEW PLZ CITY: OAKBROOK TERRACE STATE: IL ZIP: 60181 FORMER COMPANY: FORMER CONFORMED NAME: VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST DATE OF NAME CHANGE: 19951219 FORMER COMPANY: FORMER CONFORMED NAME: VAN KAMPEN MERRITT TAX FREE FUND /IL/ DATE OF NAME CHANGE: 19920703 N-CSR/A 1 c81502a1nvcsrza.txt AMENDMENT TO ANNUAL REPORT ------------------------- OMB APPROVAL ------------------------- OMB Number: 3235-0570 Expires: Nov. 30, 2005 Estimated average burden hours per response: 5.0 ------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-4386 Van Kampen Tax Free Trust ----------------------------------------------------------------------- (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 ----------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Ronald Robinson 1221 Avenue of the Americas, New York, New York 10020 ----------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: 9/30 Date of reporting period: 9/30/03 Item 1. Report to Shareholders Welcome, Shareholder In this report, you'll learn about how your investment in Van Kampen Insured Tax Free Income Fund performed during the annual period. The portfolio management team will provide an overview of the market conditions and discuss some of the factors that affected investment performance during the reporting period. In addition, this report includes the fund's financial statements and a list of fund investments as of September 30, 2003. This material must be preceded or accompanied by a prospectus for the fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the fund will achieve its investment objective. The fund is subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and, therefore, the value of the fund shares may be less than what you paid for them. Accordingly, you can lose money investing in this fund. Please see the prospectus for more complete information on investment risks. Income may subject certain individuals to the federal Alternative Minimum Tax (AMT). NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Performance Summary PERFORMANCE OF A $10,000 INVESTMENT This chart compares your fund's performance to that of the Lehman Brothers Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for sales charges. (LINE GRAPH)
VAN KAMPEN INSURED TAX FREE LEHMAN BROTHERS MUNICIPAL BOND INCOME FUND INDEX --------------------------- ------------------------------ 9/93 9523.00 10000.00 12/93 9602.00 10140.70 9019.00 9583.91 9114.00 9689.41 9124.00 9755.81 12/94 8997.00 9616.39 9657.00 10295.80 9843.00 10543.80 10042.00 10847.00 12/95 10571.00 11294.80 10335.00 11158.80 10396.00 11244.10 10672.00 11501.80 12/96 10956.00 11794.80 10863.00 11766.60 11215.00 12171.80 11538.00 12538.80 12/97 11853.00 12878.90 11953.00 13027.10 12125.00 13225.60 12518.00 13631.40 12/98 12522.00 13713.40 12585.00 13835.00 12243.00 13590.60 12042.00 13536.50 12/99 11893.00 13431.40 12329.00 13823.90 12501.00 14032.70 12781.00 14372.30 12/00 13461.00 15000.70 13686.00 15333.50 13711.00 15433.10 14094.00 15866.50 12/01 13980.00 15769.60 14058.00 15918.30 14588.00 16500.70 15402.00 17284.40 12/02 15348.00 17284.30 15484.00 17492.10 15852.00 17943.30 9/03 15849.00 17957.30
Index data source: Bloomberg
A SHARES B SHARES C SHARES since 12/14/84 since 5/03/93 since 8/13/93 - ------------------------------------------------------------------------------------------------ AVERAGE ANNUAL W/O SALES W/ SALES W/O SALES W/ SALES W/O SALES W/ SALES TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES Since Inception 8.09% 7.81% 5.01% 5.01% 4.57% 4.57% 10-year 5.23 4.71 4.65 4.65 4.40 4.40 5-year 4.83 3.82 4.00 3.75 4.00 4.00 1-year 2.90 -1.99 2.08 -1.85 2.08 1.10 - ------------------------------------------------------------------------------------------------ 30-Day SEC Yield 3.53% 2.96% 2.96%
Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and fund shares, when redeemed, may be worth more or less than their original cost. The returns shown in this report do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. As a result of recent market activity, current performance may vary from the figures shown. For more up-to-date information, please visit vankampen.com or speak with your financial advisor. Average annual total return with sales charges includes payment of the maximum sales charge of 4.75 percent for Class A shares, a contingent deferred sales charge of 4.00 percent for Class B shares (in year one and declining to zero after year six), a contingent deferred sales charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1 fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent for Class B and C shares. The since inception and 10-year returns for Class B and C shares reflect their conversion into Class A shares seven and 10 years after purchase, respectively. See footnote 3 in the Notes to Financial Statements for additional information. Figures shown above assume reinvestment of all dividends and capital gains. SEC yield is a calculation for determining the amount of portfolio income, excluding non-income items as prescribed by the SEC. Yields are subject to change. Distribution rate represents the monthly annualized distributions of the fund at the end of the period and not the earnings of the fund. The Lehman Brothers Municipal Bond Index is generally representative of investment-grade, tax-exempt bonds. Index is unmanaged and does not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. 1 Fund Report FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003 Van Kampen Insured Tax Free Income Fund is managed by the Adviser's Municipal Fixed-Income team.(1) Members of the team include James F. Willison, Managing Director; Joseph R. Arcieri, Executive Director; and Joseph A. Piraro, Vice President. The following discussion reflects their views on the fund's performance. Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE OVERALL MARKET ENVIRONMENT. A. The economic backdrop for the 12 months ended September 30 was largely characterized by the persistent weakness of the U.S. economy. One of the most closely watched economic indicators, employment strength, was in negative territory for much of the period. Repeated comments from government and Wall Street officials suggesting that the U.S. economy might be entering a deflationary period also seemed to weigh heavily on the minds of investors over the course of the year. At the same time, ongoing budgetary and fiscal difficulties at the state and local levels contributed to ratings downgrades for many municipal bonds. The Federal Reserve Board (the Fed) attempted to allay these fears and keep the economy moving in the right direction by cutting the Fed Funds target rate twice during the period for a total reduction of 0.75 percent. The uncertain climate had a definite effect on the municipal bond market. While yields on intermediate- and long-term bonds ended the period approximately where they began, the road between those two points was decidedly bumpy. The 12-month period can be divided into two distinct market environments. The first of these, which lasted from October 2002 to mid-June 2003, saw municipal yields fall by roughly 80 basis points to levels not seen since the late 1960s. These plummeting yields led to a surge in issuance as municipalities moved to lock in low financing rates and, in the case of older bonds, low refinancing costs. These record levels of supply met with record levels of demand as investors in search of relative investment stability poured cash into municipal bond funds. Demand for municipal bonds was also strong from so-called "cross-over" buyers--investors who traditionally favor taxable investments but were drawn to municipal bonds because of their relatively attractive yields. The municipal market reversed abruptly in mid-June, when yields began to climb from their lows and investors shifted their attention to the rising equity market. Interest from cross-over investors also evaporated as the relative attractiveness of the taxable market grew. Issuance remained strong throughout this leg of the period, though it abated somewhat in the last three months. These forces combined to drive municipal-bond yields off of their historic lows, ending the period where they began. (1)Team members may change at any time without notice. 2 Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD? A. The fund underperformed its benchmark index. -- The fund returned 2.90 percent for the 12 months that ended September 30, 2003. Performance figures are for Class A shares, and assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. If sales charges were included, performance would be lower. Past performance is no guarantee of future results. -- The fund's benchmark, the Lehman Brothers Municipal Bond Index, returned 3.89 percent for the same period. -- The fund's monthly dividend of $0.0605 translated to a distribution rate of 3.59 percent based on the fund's maximum offering price (as of September 30, 2003, Class A shares adjusted for sales charges). See Performance Summary for additional information and index definition. Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD? A. With interest rates at low levels early in the period, we moved to attempt to protect the fund from any sudden rate increases. One of our primary tactics was to reduce the fund's duration (a measure of interest-rate sensitivity) below that of its benchmark index. This defensive positioning, which benefited the fund later in the fiscal year, was a drag on performance during the bond market rally that occurred last winter and spring. TOP 5 SECTORS AS OF 9/30/03 TOP 5 STATES AS OF 9/30/03 Public Education 13.7% Illinois 16.4% Water & Sewer 13.2 Texas 10.9 Wholesale Electric 11.1 California 10.6 Public Building 9.5 Florida 8.5 Transportation 9.0 Washington 7.2
Subject to change daily. All percentages are as a percentage of long-term investments. Provided for informational purposes only and should not be deemed as a recommendation to buy securities in the sectors shown above. Securities are classified by sectors that represent broad groupings of related industries. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. 3 Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD? A. The majority of the fund's holdings are concentrated in essential-services bonds. Because these securities are backed by specific projects rather than tax receipts, they tend to provide a more reliable income stream than other municipal issues in weak economic environments such as that of the past year. Sectors within essential services that contributed positively to the fund's performance during the period included transportation, public education, and water and sewer bonds. Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY ISSUES. A. Over the past year we increased the fund's exposure to bonds with structural characteristics designed to withstand interest-rate volatility relatively well. Many of those purchases were concentrated in bonds that feature the premium coupons of longer maturities while trading to a shorter, more intermediate call date. In an environment of rising interest rates, these bonds offer the dual cushion of high income (to offset capital losses) and moderate interest-rate vulnerability. In our opinion, their income stream alone makes them an appealing investment, regardless of interest-rate considerations. In terms of sector composition, the two largest weightings in the portfolio at the end of September were water and sewer bonds and education bonds. We maintained a very low percentage of assets in the health-care sector because of our concerns about financial difficulties in that area. Another area of concern was zero-coupon bonds, which were underperforming other types of securities. Consequently, we made efforts to eliminate some of the portfolio's zero-coupon holdings during the period. At the security level, we took advantage of relative-value opportunities created by the volatile interest-rate environment during the period. For example, the rapid increase in yields during June and July allowed us to invest in newer securities carrying higher yields. We funded many of these purchases through carefully managed selling of lower-coupon holdings that allowed the portfolio to benefit from targeted tax losses that offset capital gains elsewhere in the portfolio. Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY CLOSING THOUGHTS? A. We believe that the economy has lately shown clear signs of improvement, though the employment picture remains soft and the likelihood of a sustained rebound is questionable. In this environment, we believe the Fed is likely to maintain a neutral stance in the absence of stronger economic growth. We will continue to monitor the market closely for compelling investment opportunities. 4 ANNUAL HOUSEHOLDING NOTICE To reduce expenses, the fund attempts to eliminate duplicate mailings to the same address. The fund delivers a single copy of certain shareholder documents to investors who share an address, even if the accounts are registered under different names. The fund's prospectus and shareholder reports (including annual privacy notices) will be delivered to you in this manner indefinitely unless you instruct us otherwise. You can request multiple copies of these documents by either calling (800) 341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has received your instructions, we will begin sending individual copies for each account within 30 days. PROXY VOTING POLICIES AND PROCEDURES A description of the fund's policies and procedures with respect to the voting of proxies relating to the fund's portfolio securities is available without charge, upon request, by calling 1-800-847-2424. This information is also available on the Securities and Exchange Commission's website at http://www.sec.gov. 5 BY THE NUMBERS YOUR FUND'S INVESTMENTS September 30, 2003 THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF THE REPORTING PERIOD.
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MUNICIPAL BONDS 98.2% ALABAMA 2.1% $1,760 Alabama St Brd Ed Rev Shelton St Cmnty College Rfdg (AMBAC Insd).............................. 5.500% 10/01/10 $ 2,030,354 4,035 Alabama St Brd Ed Tuit Rev John C Calhoun Cmty College A (FGIC Insd).......................... 5.250 05/01/23 4,266,770 1,525 Alabama Wtr Pollutn Ctl Auth (AMBAC Insd)...... 5.500 08/15/13 1,731,332 1,955 Alabama Wtr Pollutn Ctl Auth Revolving Fd Ln Ser A (AMBAC Insd)............................. 6.750 08/15/17 2,147,079 3,120 Huntsville, AL Hlthcare Auth Ser A (MBIA Insd).......................................... 5.400 06/01/22 3,339,367 3,000 Huntsville, AL Hlthcare Auth Ser A (MBIA Insd).......................................... 5.500 06/01/27 3,204,150 1,030 Jefferson Cnty, AL Swr Rev Cap Impt Wt (Prerefunded @ 08/01/12) (FGIC Insd)........... 5.000 02/01/41 1,150,077 1,000 Mobile, AL Wtr & Swr Commr Wt (FGIC Insd)...... 5.250 01/01/20 1,071,450 5,500 Morgan Cnty Decatur, AL Hlthcare Auth Hosp Rev Decatur Gen Hosp Rfdg (Connie Lee Insd)........ 6.250 03/01/13 5,725,445 2,400 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd).......................................... 6.500 04/01/16 2,511,912 -------------- 27,177,936 -------------- ALASKA 0.5% 4,130 Anchorage, AK Ser A (FGIC Insd)................ 5.500 06/01/17 4,634,810 1,425 Anchorage, AK Wtr Rev Rfdg (AMBAC Insd)........ 6.000 09/01/19 1,644,550 -------------- 6,279,360 -------------- ARIZONA 0.7% 1,000 Arizona Sch Fac Brd Ctf Part Ser A (MBIA Insd).......................................... 5.250 09/01/17 1,109,280 2,900 Arizona Tourism & Sports Auth Multi Purp Stad Fac Ser A (MBIA Insd).......................... 5.375 07/01/22 3,132,812 1,000 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig Irvington Proj Tucson Elec Pwr Co Ser A Rfdg (FSA Insd)................................ 7.250 07/15/10 1,052,600 1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg (AMBAC Insd)................... 6.000 09/01/12 2,141,906 1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg (AMBAC Insd)................... 6.125 09/01/17 2,009,332 -------------- 9,445,930 -------------- ARKANSAS 0.5% 6,265 Little Rock, AR Sch Dist Ser B Rfdg (FSA Insd).......................................... 5.500 02/01/25 6,688,451 --------------
6 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA 10.4% $3,270 Alhambra, CA Redev Agy Tax A Indl Redev Proj Rfdg (FSA Insd)................................ 5.000% 05/01/19 $ 3,460,020 2,835 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool Rev Ser A (FSA Insd).................. 6.000 12/15/14 3,054,656 2,060 Burbank, CA Pub Fin Auth Golden State Redev Proj Ser A (AMBAC Insd)........................ 5.250 12/01/21 2,210,050 5,000 California St (XLCA Insd)...................... 5.000 10/01/28 5,063,300 3,000 California St (CIFG Insd)...................... 5.000 02/01/29 3,035,490 10,000 California St Dept Wtr Res Pwr Ser A (AMBAC Insd) (a)...................................... 5.500 05/01/16 11,194,400 5,000 California St Dept Wtr Res Pwr Ser A (XLCA Insd).......................................... 5.375 05/01/17 5,483,050 5,000 California St Dept Wtr Res Pwr Ser A (AMBAC Insd).......................................... 5.375 05/01/18 5,483,050 3,000 California St Pub Wks Brd UCLA Replacement Hosp Ser A (FSA Insd)............................... 5.375 10/01/20 3,242,130 3,000 California St Pub Wks Brd UCLA Replacement Hosp Ser A (FSA Insd)............................... 5.000 10/01/22 3,086,520 425 Earlimart, CA Elem Sch Dist Ser 1 (AMBAC Insd).......................................... 6.700 08/01/21 545,215 3,500 Golden St Tob Sec Enhanced Asset Bkd B (AMBAC Insd).......................................... 5.000 06/01/38 3,496,885 10,000 Golden St Tob Sec Enhanced Asset Bkd B (AMBAC Insd).......................................... 5.000 06/01/43 9,939,500 265 Golden West Sch Fin Auth CA Rev Ser A Rfdg (MBIA Insd).................................... 5.750 08/01/19 314,009 6,500 Grossmont, CA Uni High Sch Dist Ctf Part (MBIA Insd).......................................... * 11/15/21 2,092,090 5,000 Los Angeles, CA Wtr & Pwr Rev Pwr Sys Ser B (FSA Insd)..................................... 5.000 07/01/26 5,090,450 8,265 Los Angeles, CA Wtr & Pwr Rev Pwr Sys Ser B (FSA Insd)..................................... 5.000 07/01/27 8,408,067 3,580 Los Angeles, CA Wtr & Pwr Rev Pwr Sys Ser B (FSA Insd)..................................... 5.000 07/01/28 3,639,177 2,000 Metropolitan Wtr Dist South CA Auth Ser B 1 (FGIC Insd).................................... 5.000 10/01/29 2,032,280 6,500 Metropolitan Wtr Dist South CA Auth Ser B 1 (FGIC Insd).................................... 5.000 10/01/36 6,589,440 5,000 Metropolitan Wtr Dist South CA Auth Ser B 2 (FGIC Insd).................................... 5.000 10/01/27 5,088,650 1,250 Pomona, CA Ctf Part Gen Fd Lease Fin (AMBAC Insd).......................................... 5.500 06/01/21 1,393,650 1,465 Pomona, CA Ctf Part Gen Fd Lease Fin (AMBAC Insd).......................................... 5.500 06/01/24 1,600,014
See Notes to Financial Statements 7 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA (CONTINUED) $1,365 Pomona, CA Ctf Part Gen Fd Lease Fin (AMBAC Insd).......................................... 5.500% 06/01/28 $ 1,483,919 3,005 Poway, CA Ctf Part City Office Bldg Proj (AMBAC Insd).......................................... 5.000 01/01/23 3,082,018 5,000 Poway, CA Redev Agy Tax Paguay Redev Proj Ser A (MBIA Insd) (b)................................ 5.000 06/15/33 5,062,950 9,285 San Jose, CA Arpt Rev Ser A Rfdg (FSA Insd).... 5.375 03/01/18 10,223,528 2,000 Santa Rosa, CA Wastewtr Rev Cap Apprec Ser B (AMBAC Insd)................................... * 09/01/19 934,820 3,500 University, CA Rev Gen Ser A (AMBAC Insd)...... 5.000 05/15/27 3,560,025 8,560 University, CA Rev Gen Ser A (AMBAC Insd)...... 5.000 05/15/33 8,680,354 1,660 Upland, CA Pub Fin Auth Rev Lease Wtr Sys Impt Proj (AMBAC Insd).............................. 5.000 10/01/27 1,689,432 1,250 Vallejo City, CA Uni Sch Ser A Rfdg (MBIA Insd).......................................... 5.900 02/01/17 1,493,400 3,000 Vallejo City, CA Uni Sch Ser A Rfdg (MBIA Insd).......................................... 5.900 08/01/25 3,510,210 2,000 William S Hart CA Jt Sch Fin Auth Spl Tax Rev Cmnty Fac Rfdg (FSA Insd)...................... 6.500 09/01/14 2,227,340 -------------- 137,490,089 -------------- COLORADO 5.9% 2,000 Arapahoe, CO Pk & Rec Dist (FGIC Insd)......... 5.250 12/01/22 2,132,460 1,365 Colorado St Brd Governors Univ & Impt Ser A Rfdg (AMBAC Insd).............................. 5.250 03/01/16 1,524,459 1,035 Colorado St Colleges Brd Ser B Rfdg (MBIA Insd).......................................... 5.000 05/15/22 1,076,245 11,850 Denver, CO City & Cnty Arpt Rev Ser A (MBIA Insd).......................................... 5.700 11/15/25 12,754,866 3,605 Denver, CO City & Cnty Arpt Rev Ser B (XLCA Insd).......................................... 5.750 11/15/16 4,173,040 4,310 Denver, CO City & Cnty Arpt Rev Ser B (XLCA Insd).......................................... 5.750 11/15/17 4,961,758 4,505 Denver, CO City & Cnty Arpt Rev Ser B (XLCA Insd).......................................... 5.750 11/15/18 5,157,865 5,345 Denver, CO City & Cnty Arpt Rev Ser B (XLCA Insd).......................................... 5.750 11/15/20 6,057,702 8,525 Denver, CO City & Cnty Arpt Rev Ser B (XLCA Insd).......................................... 5.000 11/15/33 8,588,511 3,265 Denver, CO Convention Ctr Sr Ser A (XLCA Insd).......................................... 5.000 12/01/17 3,531,163 2,000 Denver, CO Convention Ctr Sr Ser A (XLCA Insd).......................................... 5.000 12/01/22 2,070,020 9,265 Denver, CO Convention Ctr Sr Ser A (XLCA Insd).......................................... 5.000 12/01/28 9,386,835 2,200 Denver, CO Convention Ctr Sr Ser A (XLCA Insd).......................................... 5.000 12/01/33 2,193,048 2,000 Fremont Cnty, CO Ctf Part & Impt Ser A Rfdg (MBIA Insd).................................... 5.250 12/15/26 2,083,000 1,175 Thornton, CO Ctf Part (AMBAC Insd)............. 5.375 12/01/19 1,294,615 2,825 Thornton, CO Ctf Part (AMBAC Insd)............. 5.375 12/01/20 3,087,668
8 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE COLORADO (CONTINUED) $3,080 Thornton, CO Ctf Part (AMBAC Insd)............. 5.375% 12/01/21 $ 3,339,459 1,650 Thornton, CO Ctf Part (AMBAC Insd)............. 5.375 12/01/22 1,777,297 2,000 Westminster, CO Wtr & Wastewtr Util Enterprise Rev (Prerefunded @ 12/01/04) (AMBAC Insd)...... 6.250 12/01/14 2,115,700 -------------- 77,305,711 -------------- DISTRICT OF COLUMBIA 0.3% 1,000 District Columbia Ctf Part Dist Pub Safety & Emergency (AMBAC Insd)......................... 5.500 01/01/19 1,105,130 2,000 District Columbia Ctf Part Dist Pub Safety & Emergency (AMBAC Insd)......................... 5.500 01/01/20 2,192,820 -------------- 3,297,950 -------------- FLORIDA 8.4% 1,000 Brevard Cnty, FL Sch Brd Ctf Part Ser A (AMBAC Insd).......................................... 5.400 07/01/12 1,148,060 2,000 Brevard Cnty, FL Util Rev Rfdg (FGIC Insd)..... 5.250 03/01/12 2,271,220 7,055 Broward Cnty, FL Sch Brd Ctf (MBIA Insd)....... 5.250 07/01/17 7,824,066 500 Dade Cnty, FL Aviation Rev Ser B (MBIA Insd)... 5.600 10/01/26 533,215 1,000 Dade Cnty, FL Ed Fac Auth Rev Exchanged From Univ of Miami Ser B (MBIA Insd)................ 5.750 04/01/20 1,099,740 500 Dade Cnty, FL Sch Dist (MBIA Insd)............. 5.000 02/15/13 545,175 750 Dade Cnty, FL Wtr & Swr Sys Rev (FGIC Insd).... 5.375 10/01/16 839,017 1,250 Escambia Cnty, FL Hlth Fac Auth Rev (AMBAC Insd).......................................... 5.950 07/01/20 1,346,012 1,000 Escambia Cnty, FL Util Auth Util Sys Rev (FGIC Insd).......................................... 5.250 01/01/24 1,045,680 1,000 Florida Intergovnmtl Fin Ser C1 (AMBAC Insd)... 5.125 02/01/31 1,018,900 575 Florida Muni Ln Council Rev Ser B (MBIA Insd).......................................... 5.750 11/01/14 663,964 1,185 Florida St Brd of Ed Cap Outlay Pub Ed Ser C (FGIC Insd).................................... 5.000 06/01/23 1,221,486 2,000 Florida St Brd of Ed Cap Outlay Pub Ed Ser C (FGIC Insd).................................... 5.750 06/01/29 2,170,880 1,250 Florida St Brd of Ed Lottery Rev Ser A (FGIC Insd).......................................... 6.000 07/01/12 1,470,975 1,000 Florida St Brd of Ed Lottery Rev Ser A (FGIC Insd).......................................... 6.000 07/01/14 1,172,720 2,750 Florida St Brd of Ed Lottery Rev Ser B (FGIC Insd).......................................... 5.250 07/01/13 3,061,822 750 Florida St Brd of Regt Hsg Rev (MBIA Insd)..... 5.750 07/01/14 863,437 1,365 Florida St Correctional Privatization Commn Ctf Part (MBIA Insd)............................... 5.375 08/01/14 1,528,977 1,750 Florida St Div Bd Fin Dept Gen Svc Rev Dept Environmental Prot Presvtn 2000 Ser A (AMBAC Insd).......................................... 5.000 07/01/12 1,918,630 1,500 Florida St Div Bd Fin Dept Gen Svc Rev Dept Environmental Prot Presvtn 2000 Ser B (FSA Insd).......................................... 5.250 07/01/11 1,679,325 1,000 Florida St Muni Pwr Agy Rev Stanton Proj Rfdg (FSA Insd)..................................... 5.500 10/01/14 1,137,990
See Notes to Financial Statements 9 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE FLORIDA (CONTINUED) $2,080 Florida St Muni Pwr Agy Rev Stanton Proj Rfdg (FSA Insd)..................................... 5.500% 10/01/15 $ 2,363,608 500 Gulf Breeze, FL Rev Loc Govt (FGIC Insd)....... 5.650 12/01/20 554,290 1,340 Gulf Breeze, FL Rev Venice Loc Govt (FGIC Insd).......................................... 5.150 12/01/20 1,462,087 1,480 Hillsborough Cnty, FL Sch Brd (AMBAC Insd)..... 5.375 10/01/16 1,656,890 1,300 Hillsborough Cnty, FL Util Jr Lien Rfdg (AMBAC Insd).......................................... 5.500 08/01/11 1,504,061 1,000 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd).......................................... 6.100 10/01/18 1,131,140 1,000 Jacksonville, FL Cap Impt Rev Crossover Ser B Rfdg (AMBAC Insd).............................. 5.250 10/01/14 1,120,610 3,210 Jacksonville, FL Cap Impt Rev Crossover Ser B Rfdg (AMBAC Insd).............................. 5.250 10/01/15 3,589,326 1,750 Jea, FL Wtr & Swr Sys Rev Ser A (MBIA Insd).... 5.375 10/01/30 1,837,132 1,000 Key West, FL Util Brd Elec Rev Cap Apprec Ser D (Escrowed to Maturity) (AMBAC Insd)............ * 10/01/13 682,540 1,500 Lee Cnty, FL Trans Fac Ser A Rfdg (AMBAC Insd).......................................... 5.500 10/01/14 1,697,760 835 Martin Cnty, FL Cons Util Sys Rev (Prerefunded @ 10/01/04) (FGIC Insd)........................ 5.750 10/01/08 887,471 1,000 Miami-Dade Cnty, FL Hlth Fac Miami Childrens Hosp Ser A Rfdg (AMBAC Insd)................... 5.125 08/15/26 1,025,750 1,000 Miami-Dade Cnty, FL Sch Dist Rfdg (FSA Insd)... 5.375 08/01/13 1,150,530 1,000 Orange Cnty, FL Sch Brd Ctf Part Ser A (AMBAC Insd).......................................... 5.250 08/01/14 1,124,310 1,000 Orlando, FL Cmnty Redev Agy Tax Rep Drive Universal Blvd Rfdg (AMBAC Insd)............... 5.125 04/01/19 1,066,670 1,000 Orlando, FL Cmnty Redev Agy Tax Rep Drive Universal Blvd Rfdg (AMBAC Insd)............... 5.125 04/01/20 1,059,330 1,000 Palm Beach Cnty, FL Pub Impt Rev Convention Ctr Proj (FGIC Insd)............................... 5.125 11/01/30 1,023,880 1,000 Palm Beach Cnty, FL Sch Brd Ctf Ser A (AMBAC Insd).......................................... 5.500 08/01/16 1,123,480 4,180 Palm Beach Cnty, FL Sch Brd Ctf Ser A (AMBAC Insd).......................................... 5.000 08/01/18 4,494,043 800 Palm Beach Cnty, FL Sch Brd Ctf Ser A (AMBAC Insd).......................................... 5.125 08/01/26 822,264 4,000 Palm Beach Cnty, FL Sch Brd Ctf Ser C (FSA Insd).......................................... 5.000 08/01/21 4,172,400 4,000 Palm Beach Cnty, FL Sch Brd Ctf Ser C (FSA Insd).......................................... 5.000 08/01/22 4,145,720 1,000 Pembroke Pines, FL Charter Sch Ser A (MBIA Insd).......................................... 5.000 07/01/26 1,017,300 750 Polk Cnty, FL Sch Brd Ctf Part Master Lease Ser A (FSA Insd)................................... 5.500 01/01/16 836,077 1,700 Port Palm Beach Dist FL Rev Impt Rfdg (XLCA Insd).......................................... * 09/01/25 545,326
10 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE FLORIDA (CONTINUED) $ 290 Port Palm Beach Dist FL Rev Impt Rfdg (XLCA Insd).......................................... * 09/01/26 $ 87,342 1,000 Port Saint Lucie, FL Spl Assmt Rev Util Svc Area No 3 & 4A (MBIA Insd)..................... 5.000% 10/01/18 1,065,170 1,000 Reedy Creek, FL Impt Dist FL Ser 2 Rfdg (MBIA Insd).......................................... 5.500 10/01/13 1,137,380 1,000 Reedy Creek, FL Impt Dist FL Ser A Rfdg (AMBAC Insd).......................................... 5.500 06/01/12 1,139,950 535 Saint Johns Cnty, FL Indl Dev Auth Professional Golf Proj Rfdg (MBIA Insd)..................... 5.250 09/01/12 606,695 1,000 Saint Lucie Cnty, FL Sch Brd Ctf Ser A (FSA Insd).......................................... 5.000 07/01/21 1,042,760 3,525 Santa Rosa Bay Brdg Auth FL Rev Cap Apprec (MBIA Insd).................................... * 07/01/18 1,803,390 1,515 Seminole Cnty, FL Sales Tax Rev (FGIC Insd).... 5.375 10/01/16 1,693,437 4,000 Sunrise, FL Util Sys Rev Rfdg (AMBAC Insd)..... 5.200 10/01/22 4,296,280 10,000 Tallahassee, FL Hlth Fac Rev Tallahassee Mem Regl Med Ser A Rfdg (MBIA Insd) (a)............ 6.625 12/01/13 10,811,200 1,890 Tampa Bay, FL Sales Tax Rev Ser A (AMBAC Insd).......................................... 5.375 10/01/17 2,101,510 1,000 Tampa Bay, FL Wtr Util Sys Rev (Prerefunded @ 10/01/11) (FGIC Insd).......................... 5.500 10/01/12 1,166,630 1,000 Village Ctr Cmnty Dev Dist FL Ser A (MBIA Insd).......................................... 5.200 11/01/25 1,040,570 3,735 Volusia Cnty, FL Ed Fac Auth Rev Ed Fac Embry Riddle Ser B Rfdg (AMBAC Insd)................. 5.250 10/15/19 4,047,844 1,000 Volusia Cnty, FL Ed Fac Auth Rev Ed Fac Embry Riddle Ser B Rfdg (AMBAC Insd)................. 5.250 10/15/22 1,062,160 500 Volusia Cnty, FL Hlth Fac Auth Rev Hosp Fac Mem Hlth Impt & Rfdg (AMBAC Insd).................. 5.750 11/15/13 534,085 -------------- 110,291,689 -------------- GEORGIA 3.1% 1,600 Athens, GA Hsg Auth Student East Campus Hsg Rfdg (AMBAC Insd).............................. 5.250 12/01/18 1,751,520 4,150 Georgia Muni Elec Auth Pwr Rev Cap Apprec Gen Ser B (BIGI Insd).............................. * 01/01/08 3,735,456 4,000 Georgia Muni Elec Auth Pwr Rev Gen Ser A (MBIA Insd).......................................... 6.500 01/01/12 4,768,640 14,690 Georgia Muni Elec Auth Pwr Rev Ser Y (AMBAC Insd).......................................... 6.400 01/01/13 17,727,892 9,590 Georgia Muni Elec Auth Pwr Rev Ser Y (MBIA Insd).......................................... 6.500 01/01/17 11,771,629
See Notes to Financial Statements 11 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE GEORGIA (CONTINUED) $ 860 Georgia Muni Elec Auth Pwr Rev Ser Y (Escrowed to Maturity) (AMBAC Insd)...................... 6.400% 01/01/13 $ 1,039,878 410 Georgia Muni Elec Auth Pwr Rev Ser Y (Escrowed to Maturity) (MBIA Insd)....................... 6.500 01/01/17 510,192 -------------- 41,305,207 -------------- ILLINOIS 16.1% 2,215 Bolingbrook, IL Cap Apprec Ser C Rfdg (MBIA Insd).......................................... * 01/01/19 1,060,099 2,595 Bolingbrook, IL Cap Apprec Ser C Rfdg (MBIA Insd).......................................... * 01/01/20 1,164,766 6,225 Chicago, IL Brd of Ed Cap Apprec Sch Reform B 1 (FGIC Insd).................................... * 12/01/15 3,647,912 2,845 Chicago, IL Brd of Ed Cap Apprec Sch Reform B 1 (FGIC Insd).................................... * 12/01/19 1,302,640 1,500 Chicago, IL Brd of Ed Cap Apprec Sch Reform Ser A (FGIC Insd).................................. * 12/01/19 686,805 1,020 Chicago, IL Brd of Ed Cap Apprec Sch Reform Ser A (FGIC Insd).................................. * 12/01/25 313,701 8,000 Chicago, IL Brd of Ed Cap Apprec Sch Reform Ser A (FGIC Insd).................................. * 12/01/29 1,958,720 3,250 Chicago, IL Brd of Ed Cap Apprec Sch Reform Ser A (FGIC Insd).................................. * 12/01/30 752,082 5,000 Chicago, IL Cap Apprec City Colleges (FGIC Insd).......................................... * 01/01/27 1,456,250 2,000 Chicago, IL Lakefront Millenium Pkg Fac (MBIA Insd) (c)...................................... 0/5.700 01/01/25 1,819,200 2,000 Chicago, IL Lakefront Millenium Pkg Fac (MBIA Insd) (c)...................................... 0/5.750 01/01/29 1,808,040 3,000 Chicago, IL O'Hare Intl Arpt Rev Gen Arpt 3rd Lien B 2 (MBIA Insd)........................... 5.250 01/01/27 3,041,310 3,000 Chicago, IL O'Hare Intl Arpt Rev Gen Arpt 3rd Lien C 2 Rfdg (FSA Insd)....................... 5.250 01/01/30 3,031,740 8,750 Chicago, IL O'Hare Intl Arpt Rev Rols RR II 239-2 (FSA Insd)............................... 5.750 01/01/20 10,386,512 10,000 Chicago, IL O'Hare Intl Arpt Rev Rols RR II 239-3 (FSA Insd)............................... 5.750 01/01/21 11,716,900 2,500 Chicago, IL Park Dist Ser C (FGIC Insd)........ 5.500 01/01/19 2,753,825 10,000 Chicago, IL Proj Ser A Rfdg (FGIC Insd)........ 5.375 01/01/34 10,447,700 5,000 Chicago, IL Proj Ser A Rfdg (MBIA Insd)........ 5.500 01/01/38 5,265,400 5,000 Chicago, IL Proj Ser A Rfdg (AMBAC Insd)....... 5.625 01/01/39 5,326,500 5,000 Chicago, IL Sales Tax Rev (Prerefunded @ 01/01/09) (FGIC Insd).......................... 5.375 01/01/30 5,743,200 2,300 Chicago, IL Wtr Rev (FGIC Insd)................ 5.250 11/01/27 2,369,253 3,270 Chicago, IL Wtr Rev Cap Apprec (FGIC Insd)..... * 11/01/10 2,562,568
12 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE ILLINOIS (CONTINUED) $2,055 Cook Cnty, IL Cmnty Cons Sch Dist No 015 Palatine Cap Apprec (FSA Insd)................. * 12/01/10 $ 1,610,339 2,895 Cook Cnty, IL Cmnty Sch Dist Ser B (FGIC Insd).......................................... 9.000% 12/01/14 4,283,095 3,155 Cook Cnty, IL Cmnty Sch Dist Ser B (FGIC Insd).......................................... 9.000 12/01/15 4,676,530 1,505 Cook Cnty, IL Sch Dist No 100 Berwyn South (FSA Insd).......................................... 8.200 12/01/14 2,117,369 1,775 Cook Cnty, IL Sch Dist No 100 Berwyn South (FSA Insd).......................................... 8.100 12/01/16 2,503,691 2,605 Cook Cnty, IL Sch Dist No 122 Cap Apprec (FGIC Insd).......................................... * 12/01/17 1,355,850 2,995 Cook Cnty, IL Sch Dist No 122 Cap Apprec (FGIC Insd).......................................... * 12/01/18 1,465,004 4,210 Cook Cnty, IL Sch Dist No 122 Cap Apprec (FGIC Insd).......................................... * 12/01/19 1,930,664 4,050 Cook Cnty, IL Sch Dist No 122 Cap Apprec (FGIC Insd).......................................... * 12/01/20 1,737,531 3,000 Du Page Cnty, IL Cmnty High Sch (FSA Insd)..... 5.600 01/01/22 3,294,690 2,045 Grundy Kendall & Will Cntys (AMBAC Insd)....... 5.500 05/01/17 2,284,899 1,860 Grundy Kendall & Will Cntys (AMBAC Insd)....... 5.500 05/01/20 2,036,998 1,180 Grundy Kendall & Will Cntys (AMBAC Insd)....... 5.500 05/01/21 1,283,285 10,000 Illinois Dev Fin Auth Pollutn Ctl Rev Comwlth Edison Co Proj Ser D Rfdg (AMBAC Insd)......... 6.750 03/01/15 10,936,200 35,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser B First Mtg Rfdg (MBIA Insd).......... 7.400 12/01/24 38,011,400 2,000 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 (FSA Insd)............................. 6.650 02/01/11 2,436,780 5,025 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 (FSA Insd)............................. 6.650 02/01/12 5,803,272 2,000 Illinois Ed Fac Auth Rev DePaul Univ (AMBAC Insd).......................................... 5.625 10/01/14 2,278,960 2,000 Illinois Med Dist (MBIA Insd).................. 5.250 06/01/32 2,070,400 3,500 Illinois Muni Elec Agy Pwr Supply Sys Rev Rfdg (FSA Insd)..................................... 5.000 02/01/21 3,614,170 2,000 Kane Cook & Du Page Cntys IL Ser A (FGIC Insd).......................................... 7.000 12/15/11 2,514,900 1,000 Kane Cook & Du Page Cntys IL Ser A (FGIC Insd).......................................... 7.000 12/15/12 1,268,630 2,700 Lake Cnty, IL Cmnty Cons Sch Dist No 50 Woodland Cap Apprec Ser B (FGIC Insd).......... * 12/01/13 1,781,622 1,200 Lake Cnty, IL Cmnty Cons Sch Dist No 50 Woodland Cap Apprec Ser B (FGIC Insd).......... * 12/01/14 748,572 2,500 Lake Cnty, IL Cmnty Cons Sch Dist No 50 Woodland Ser A (FGIC Insd)..................... 6.000 12/01/20 2,855,250 3,440 Lake Cnty, IL Cmnty High Sch Dist No 117 Antioch Cap Apprec Ser B (FGIC Insd)........... * 12/01/10 2,688,085
See Notes to Financial Statements 13 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE ILLINOIS (CONTINUED) $6,790 Lake Cnty, IL Cmnty Unit Sch Dist No 60 Waukegan Cap Apprec Ser A (FSA Insd)........... * 12/01/17 $ 3,525,300 3,175 Lake Cnty, IL Cmnty Unit Sch Dist No 95 Lake Zurich Cap Apprec (FGIC Insd).................. * 12/01/15 1,867,249 3,000 McHenry & Kane Cnty, IL Cmnty Cons Sch Dist No 158 Cap Apprec (FGIC Insd)..................... * 01/01/17 1,631,370 4,000 McHenry & Kane Cnty, IL Cmnty Cons Sch Dist No 158 Cap Apprec (FGIC Insd)..................... * 01/01/18 2,043,000 2,080 McHenry Cnty, IL Cmnty High Sch Dist No 154 Cap Apprec (FGIC Insd)............................. * 01/01/16 1,197,123 1,000 McHenry Cnty, IL Consv Dist Ser A (FGIC Insd).......................................... 5.500% 02/01/16 1,118,760 1,330 McHenry Cnty, IL Consv Dist Ser A (FGIC Insd).......................................... 5.500 02/01/17 1,483,868 6,000 Metropolitan Pier & Expo Auth IL Dedicated St Tax Rev McCormick Pl Expansion Ser A (MBIA Insd).......................................... 5.250 06/15/42 6,185,520 4,000 Rosemont, IL Ser A Rfdg (FGIC Insd)............ 5.000 12/01/19 4,264,120 2,000 Southern IL Univ Rev Cap Apprec Hsg & Aux Ser A (MBIA Insd).................................... * 04/01/20 886,720 1,495 Will Cnty, IL Sch Dist No 017 (AMBAC Insd)..... 5.000 12/01/16 1,617,171 -------------- 212,023,510 -------------- INDIANA 3.3% 2,000 Brownsburg, IN Sch Bldg First Mtg 1999 Ser A (FSA Insd)..................................... 5.250 09/15/22 2,123,420 1,785 Center Grove, IN 2000 Bldg First Mtg (AMBAC Insd).......................................... 5.500 07/15/17 2,000,664 1,885 Center Grove, IN 2000 Bldg First Mtg (AMBAC Insd).......................................... 5.500 07/15/18 2,100,324 2,500 Evansville Vanderburgh, IN Pub Lease Corp First Mtg (MBIA Insd)................................ 5.750 07/15/18 2,790,100 3,900 Evansville Vanderburgh, IN Sch First Mtg (FSA Insd).......................................... 5.000 07/15/19 4,111,263 1,855 Hamilton Southeastern, IN Cons First Mtg (FSA Insd).......................................... 5.500 07/15/16 2,086,467 1,075 Hamilton Southeastern, IN Cons First Mtg (FSA Insd).......................................... 5.500 01/15/19 1,190,616 1,515 Indiana Bd Bk Spl Pgm Ser A (Escrowed to Maturity) (AMBAC Insd)......................... 9.750 08/01/09 1,882,039 5,000 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosp Proj Impt & Rfdg (MBIA Insd)................... 6.400 05/01/12 5,072,600 500 Indiana St Dev Fin Auth Pollutn South IN B Rmkt Rfdg (AMBAC Insd).............................. 5.000 03/01/30 500,940 2,265 Indianapolis, IN Loc Pub Impt Ser B (FSA Insd).......................................... 5.000 01/15/20 2,370,232 2,335 Lake Cnty, IN Bldg Corp First Mtg (MBIA Insd).......................................... 5.750 08/01/11 2,677,358 2,670 Marion Cnty, IN Convention & Rec Lease Rent Ser A Rfdg (AMBAC Insd)............................ 5.000 06/01/20 2,798,133
14 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE INDIANA (CONTINUED) $1,550 Marion Cnty, IN Convention & Rec Lease Rent Ser A Rfdg (AMBAC Insd)............................ 5.000% 06/01/21 $ 1,609,505 1,605 Mount Vernon of Hancock Cnty First Mtg Ser B (AMBAC Insd)................................... 5.500 07/15/16 1,805,272 1,695 Mount Vernon of Hancock Cnty First Mtg Ser B (AMBAC Insd)................................... 5.500 07/15/17 1,899,790 4,000 New Albany Floyd Cnty, IN Sch First Mtg (FGIC Insd).......................................... 5.750 07/15/20 4,493,800 2,130 Northwest Allen Cnty, IN First Mtg (MBIA Insd).......................................... 5.250 07/15/19 2,317,717 -------------- 43,830,240 -------------- IOWA 0.2% 2,375 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp Proj (FSA Insd)................................ 5.750 07/01/17 2,642,401 -------------- KANSAS 1.4% 16,750 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg (MBIA Insd).......................... 7.000 06/01/31 17,488,675 450 Dodge, KS Uni Sch Dist No 443 Rfdg (FGIC Insd).......................................... 5.000 09/01/12 503,955 -------------- 17,992,630 -------------- KENTUCKY 0.2% 3,000 Kentucky St Ppty & Bldgs Commn Proj No 79 (MBIA Insd) (b)...................................... 5.125 10/01/19 3,244,350 -------------- LOUISIANA 2.2% 4,065 Calcasieu Parish, LA Mem Hosp Svc Dist Hosp Rev Lake Charles Mem Hosp Proj Ser A (Connie Lee Insd).......................................... 6.375 12/01/12 4,879,260 5,530 Calcasieu Parish, LA Mem Hosp Svc Dist Hosp Rev Lake Charles Mem Hosp Proj Ser A (Connie Lee Insd).......................................... 6.500 12/01/18 6,864,444 1,375 Greater New Orleans Expwy Impt Rfdg (AMBAC Insd).......................................... 5.250 11/01/15 1,553,626 1,450 Greater New Orleans Expwy Impt Rfdg (AMBAC Insd).......................................... 5.250 11/01/16 1,626,683 1,525 Greater New Orleans Expwy Impt Rfdg (AMBAC Insd).......................................... 5.250 11/01/17 1,699,979 1,930 Louisiana Loc Govt Environment BRCC Fac Corp Proj (MBIA Insd)............................... 5.375 12/01/16 2,162,604 2,035 Louisiana Loc Govt Environment BRCC Fac Corp Proj (MBIA Insd)............................... 5.375 12/01/17 2,265,260 2,150 Louisiana Loc Govt Environment BRCC Fac Corp Proj (MBIA Insd)............................... 5.375 12/01/18 2,375,793 2,265 Louisiana Loc Govt Environment BRCC Fac Corp Proj (MBIA Insd)............................... 5.375 12/01/19 2,486,472
See Notes to Financial Statements 15 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE LOUISIANA (CONTINUED) $2,395 Louisiana Loc Govt Environment BRCC Fac Corp Proj (MBIA Insd)............................... 5.375% 12/01/20 $ 2,606,239 2,635 New Orleans, LA Home Mtg Auth Single Family Mtg Rev 1985 Ser A (MBIA Insd)..................... * 09/15/16 690,897 -------------- 29,211,257 -------------- MASSACHUSETTS 0.7% 3,700 Massachusetts Muni Whsl Elec Co Nuclear Mix 1- A (MBIA Insd).................................. 5.250 07/01/13 4,133,196 2,500 Massachusetts Muni Whsl Elec Co Proj No 6-A (MBIA Insd).................................... 5.250 07/01/16 2,751,425 1,010 Massachusetts St Cons Ln Ser D (MBIA Insd)..... 5.250 11/01/19 1,097,476 1,700 Massachusetts St Hlth & Ed Fac Auth Rev Mt Auburn Hosp Ser B1 (MBIA Insd)................. 6.250 08/15/14 1,810,466 -------------- 9,792,563 -------------- MICHIGAN 1.1% 2,455 Detroit, MI Wtr Supply Sys Rev Sr Lien Ser C Rfdg (MBIA Insd)............................... 5.250 07/01/17 2,728,953 1,400 Huron, MI Sch Dist (FSA Insd).................. 5.250 05/01/21 1,493,282 1,150 Kalamazoo, MI City Sch Dist Bldg & Site (FSA Insd).......................................... 5.250 05/01/16 1,268,692 500 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (AMBAC Insd)................................... 5.000 04/01/04 507,655 2,500 Michigan St Strategic Fd Ltd Oblig Rev Detroit Ed Conv Rfdg (AMBAC Insd)...................... 4.850 09/01/30 2,731,600 2,675 Wayne Charter Cnty, MI Arpt Rev Ser C Rfdg (FGIC Insd).................................... 5.375 12/01/17 2,960,262 2,990 Wayne Charter Cnty, MI Arpt Rev Ser C Rfdg (FGIC Insd).................................... 5.375 12/01/20 3,237,153 -------------- 14,927,597 -------------- MINNESOTA 0.1% 1,000 Brainerd, MN Rev Evangelical Lutheran Ser B Rfdg (FSA Insd)................................ 6.650 03/01/17 1,014,400 -------------- MISSISSIPPI 0.5% 1,450 Harrison Cnty, MS Wastewtr Mgmt & Solid Wastewtr Treatment Fac Ser A Rfdg (FGIC Insd).......................................... 5.500 02/01/08 1,649,709 1,675 Harrison Cnty, MS Wastewtr Mgmt & Solid Wastewtr Treatment Fac Ser A Rfdg (FGIC Insd).......................................... 5.500 02/01/09 1,920,187 1,265 Harrison Cnty, MS Wastewtr Mgmt & Solid Wastewtr Treatment Fac Ser A Rfdg (FGIC Insd).......................................... 5.500 02/01/10 1,452,018 1,000 Harrison Cnty, MS Wastewtr Mgmt Dist Rev Wastewtr Treatment Fac Ser A Rfdg (FGIC Insd).......................................... 8.500 02/01/13 1,381,970 -------------- 6,403,884 --------------
16 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MISSOURI 0.4% $1,170 Mehlville, MO Sch Dist No R-9 Ctf Part Ser A (FSA Insd)..................................... 5.500% 03/01/16 $ 1,312,775 1,225 Mehlville, MO Sch Dist No R-9 Ctf Part Ser A (FSA Insd)..................................... 5.500 03/01/17 1,372,711 1,990 Saint Louis, MO Arpt Rev Cap Impt Pgm Ser A (MBIA Insd).................................... 5.375 07/01/17 2,186,413 -------------- 4,871,899 -------------- NEVADA 1.1% 10,000 Director St, NV Dept Business & Ind Las Vegas Monorail Proj First Tier (AMBAC Insd).......... 5.625 01/01/32 10,823,500 2,500 Reno, NV Cap Impt Rev (FGIC Insd).............. 5.125 06/01/26 2,553,175 1,000 Washoe County, NV Ctf Part Pub Safety Training Fac Proj (AMBAC Insd).......................... 4.800 09/01/09 1,071,120 -------------- 14,447,795 -------------- NEW HAMPSHIRE 0.2% 2,500 New Hampshire St Tpk Sys Rev Ser C Rfdg (Inverse Fltg) (FGIC Insd)..................... 12.618 11/01/17 3,293,225 -------------- NEW JERSEY 3.2% 3,625 Morristown, NJ Rfdg (FSA Insd)................. 6.400 08/01/14 4,018,784 10,000 New Jersey St Trans Corp Ctf Fed Trans Admin Grants Ser A (AMBAC Insd)...................... 5.500 09/15/13 11,527,400 6,800 New Jersey St Trans Corp Ctf Fed Trans Admin Grants Ser A (Prerefunded @ 09/15/09) (AMBAC Insd).......................................... 5.875 09/15/12 8,038,280 6,040 New Jersey St Trans Tr Fd Trans Sys Ser A (FSA Insd).......................................... 5.500 06/15/12 6,974,992 5,000 New Jersey St Trans Tr Fd Trans Sys Ser A (AMBAC Insd)................................... 5.500 12/15/14 5,821,800 1,000 New Jersey St Trans Tr Fd Trans Sys Ser B (Prerefunded @ 12/15/11) (MBIA Insd)........... 6.000 12/15/17 1,205,160 4,000 New Jersey St Trans Tr Fd Trans Sys Ser C (FSA Insd).......................................... 5.500 06/15/20 4,453,000 -------------- 42,039,416 -------------- NEW YORK 3.4% 5,000 Long Island Pwr Auth NY Elec Gen Ser C (CIFG Insd).......................................... 5.000 09/01/33 5,072,100 5,000 Metropolitan Trans Auth NY Svc Contract Ser A Rfdg (FGIC Insd)............................... 5.000 07/01/25 5,100,850 5,470 New York City Hlth & Hosp Hlth Sys Ser A (FSA Insd).......................................... 5.000 02/15/21 5,676,219 4,350 New York City Indl Dev Agy Civic Fac Rev USTA Natl Tennis Cent Proj (FSA Insd)............... 6.375 11/15/14 4,680,122
See Notes to Financial Statements 17 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW YORK (CONTINUED) $14,000 New York City Muni Wtr Fin Auth Ser B (MBIA Insd).......................................... 5.500% 06/15/27 $ 14,972,020 5,250 New York City Transitional Future Tax Secd Ser A Rfdg (FGIC Insd)............................. 5.500 11/01/14 5,962,583 3,105 New York St Dorm Auth Rev Insd Brooklyn Law Sch Ser B (XLCA Insd).............................. 5.375 07/01/21 3,369,701 15 New York St Med Care Fac Fin Agy Rev (Prerefunded @ 08/15/04) (FSA Insd)............ 6.500 08/15/15 16,011 -------------- 44,849,606 -------------- NORTH CAROLINA 1.4% 2,350 Dare Cnty, NC Ctf Part (AMBAC Insd)............ 5.000 06/01/23 2,423,978 1,690 North Carolina Cap Fac Fin Johnson & Wales Univ Proj Ser A (XLCA Insd)......................... 5.000 04/01/20 1,782,156 10,000 North Carolina Muni Pwr Agy Ser A (MBIA Insd).......................................... 5.250 01/01/18 10,954,100 2,935 North Carolina Muni Pwr Agy Ser A (MBIA Insd).......................................... 5.250 01/01/19 3,191,372 -------------- 18,351,606 -------------- NORTH DAKOTA 0.9% 5,000 Mercer Cnty, ND Pollutn Ctl Rev Antelope Vly Station Rfdg (AMBAC Insd)...................... 7.200 06/30/13 6,248,700 5,000 Oliver Cnty, ND Pollutn Ctl Rev Square Butte Elec Coop Ser A Rfdg (AMBAC Insd).............. 5.300 01/01/27 5,146,600 -------------- 11,395,300 -------------- OHIO 0.1% 1,595 Toledo, OH City Sch Dist Sch Fac Impt (FSA Insd).......................................... 5.000 12/01/25 1,633,870 -------------- OKLAHOMA 2.3% 1,355 Jenks, OK Aquarium Auth Rev First Mtg (MBIA Insd).......................................... 6.000 07/01/20 1,568,765 1,000 McAlester, OK Pub Wks Auth Util Cap Apprec (FSA Insd).......................................... * 02/01/34 210,260 8,320 McAlester, OK Pub Wks Auth Util Cap Apprec Ser A (FSA Insd)................................... * 02/01/30 1,944,301 2,680 McAlester, OK Pub Wks Auth Util Cap Apprec Ser A (Prerefunded @ 02/01/09) (FSA Insd).......... * 02/01/30 710,468 2,100 Midwest City, OK Muni Auth (Prerefunded @ 06/01/10) (FSA Insd)........................... 5.150 06/01/15 2,305,800 5,660 Mustang, OK Impt Auth Util Rev (FSA Insd)...... 5.800 10/01/30 6,243,716 2,020 Oklahoma City, OK Arpt Tr Jr Lien 27th Ser A (FSA Insd)..................................... 5.000 07/01/17 2,129,221 4,000 Sapulpa, OK Muni Auth Cap Impt Rev Rfdg (FSA Insd).......................................... 5.750 07/01/30 4,735,400
18 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE OKLAHOMA (CONTINUED) $2,000 Tulsa, OK Cmnty College Rev (AMBAC Insd)....... 5.500% 07/01/22 $ 2,194,000 8,260 Tulsa, OK Tulsa Indl Auth Rev Univ Tulsa Ser A (MBIA Insd).................................... 5.375 10/01/31 8,695,632 -------------- 30,737,563 -------------- OREGON 0.6% 1,000 Emerald Peoples Util Dist Ser A Rfdg (FSA Insd).......................................... 5.250 11/01/21 1,081,730 4,835 Oregon St Dept Admin Ser B Rfdg (MBIA Insd).... 5.250 05/01/17 5,312,746 1,300 Portland, OR Arpt Rev Ser 15 Intl Arpt Ser A Rfdg (FGIC Insd)............................... 5.000 07/01/13 1,424,098 -------------- 7,818,574 -------------- PENNSYLVANIA 4.0% 5,000 Allegheny Cnty, PA Hosp Dev Auth Rev Insd Hlth Sys Ser A (MBIA Insd).......................... 6.500 11/15/30 5,824,450 4,875 Allegheny Cnty, PA Hosp Dev Auth Rev Pittsburgh Mercy Hlth Sys Inc (Escrowed to Maturity) (AMBAC Insd)................................... 5.625 08/15/26 5,391,116 2,065 Gateway, PA Sch Dist Alleghany (FGIC Insd)..... 5.000 10/15/28 2,098,866 3,000 Lycoming Cnty, PA Auth College Rev PA College of Technology (AMBAC Insd)..................... 5.350 07/01/26 3,132,510 1,375 Pennsylvania St Higher Ed Fac Auth Rev St Sys Higher Ed Ser P (AMBAC Insd)................... 5.000 12/15/16 1,485,371 12,440 Philadelphia, PA Gas Wks Rev 1975 Gen Ordinance 17th Ser (FSA Insd)............................ 5.375 07/01/17 14,213,820 2,990 Philadelphia, PA Gas Wks Rev 1998 Gen Ordinance 4th Ser (FSA Insd)............................. 5.250 08/01/18 3,287,475 4,655 Philadelphia, PA Gas Wks Rev 1998 Gen Ordinance 4th Ser (FSA Insd)............................. 5.250 08/01/21 4,988,996 2,000 Philadelphia, PA Sch Dist Ser A (FSA Insd)..... 5.500 02/01/26 2,125,460 5,000 State Pub Sch Bldg Auth PA Sch Lease Philadelphia Sch Dist Proj (FSA Insd).......... 5.250 06/01/26 5,205,450 5,000 State Pub Sch Bldg Auth PA Sch Lease Philadelphia Sch Dist Proj (FSA Insd).......... 5.000 06/01/33 5,066,650 -------------- 52,820,164 -------------- SOUTH CAROLINA 0.7% 2,430 Columbia, SC Ctf Part Tourism Dev Fee Pledge (AMBAC Insd)................................... 5.250 06/01/19 2,650,085 6,500 South Carolina Jobs Econ Elec & Gas Co Proj Ser A (AMBAC Insd)................................. 5.200 11/01/27 6,734,910 -------------- 9,384,995 --------------
See Notes to Financial Statements 19 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE SOUTH DAKOTA 1.0% $1,585 Rapid City, SD Sales Tax Rev Rfdg (AMBAC Insd).......................................... 5.500% 06/01/12 $ 1,800,861 5,205 South Dakota St Lease Rev Tr Ctf Ser A (FSA Insd).......................................... 6.625 09/01/12 6,404,961 4,000 South Dakota St Lease Rev Tr Ctf Ser A (FSA Insd).......................................... 6.700 09/01/17 5,112,840 -------------- 13,318,662 -------------- TEXAS 10.7% 1,165 Alamo, TX Cmnty College Dist Combined Fee Rfdg (FSA Insd)..................................... 5.000 11/01/22 1,198,902 2,150 Austin, TX Cft Oblig (MBIA Insd)............... 5.375 09/01/18 2,369,021 2,250 Austin, TX Ctf Oblig (MBIA Insd)............... 5.375 09/01/19 2,461,545 295 Austin, TX Rev Sub Lien Rfdg (MBIA Insd)....... 5.250 05/15/15 333,843 8,865 Austin, TX Util Sys Rev Rfdg (FSA Insd)........ 5.000 11/15/11 9,774,372 12,500 Austin, TX Util Sys Rev Ser A Rfdg (MBIA Insd).......................................... * 11/15/10 9,817,000 5,000 Brazos River Auth, TX Rev Houston Ind Inc Proj Ser C (AMBAC Insd)............................. 5.125 05/01/19 5,301,200 2,000 Colorado River, TX Muni Wtr Dist Sys Rfdg (AMBAC Insd)................................... 5.375 01/01/19 2,193,780 1,400 Corpus Christi, TX Util Sys Rev Impt & Rfdg (FSA Insd)..................................... 5.250 07/15/17 1,537,802 15,400 Dallas Cnty, TX Util & Reclamation Dist Ser B Rfdg (AMBAC Insd).............................. 5.875 02/15/29 16,155,524 5,000 El Paso, TX Ctf Oblig (FSA Insd)............... 5.750 08/15/25 5,449,750 4,500 Harris Cnty, TX Toll Rd Sr Lien Rfdg (MBIA Insd).......................................... 5.125 08/15/17 4,844,070 4,605 Houston, TX Arpt Sys Rev Sub Lien (FSA Insd)... 5.500 07/01/17 5,133,976 2,000 Houston, TX Arpt Sys Rev Sub Lien (FSA Insd)... 5.500 07/01/18 2,215,680 5,000 Houston, TX Hotel Occupancy Convention & Entmt Ser A Rfdg (AMBAC Insd)........................ 5.375 09/01/14 5,562,950 2,000 Houston, TX Pub Impt Ser B Rfdg (FSA Insd)..... 5.500 03/01/18 2,210,880 12,400 Houston, TX Wtr & Swr Sys Rev Cap Apprec Ser A Rfdg (FSA Insd)................................ * 12/01/20 5,319,848 1,790 Laredo, TX Cmnty College Dist Combined Fee Rev Bldg Rfdg (AMBAC Insd)......................... 5.300 08/01/26 1,855,228 4,335 North Harris Cnty, TX Regl Wtr Sr Lien (FGIC Insd) (b)...................................... 5.250 12/15/19 4,730,135 5,000 North Harris Cnty, TX Regl Wtr Sr Lien (FGIC Insd) (b)...................................... 5.000 12/15/33 5,029,450 1,000 San Antonio, TX Indpt Sch Dist Pub Fac Corp Lease Rev (AMBAC Insd)......................... 5.850 10/15/10 1,139,260 2,080 San Antonio, TX Muni Drain Util (MBIA Insd).... 5.000 02/01/21 2,165,696 1,750 Tarrant Cnty, TX Hlth Fac Dev Corp Hlth Sys Rev Ser B (Escrowed to Maturity) (FGIC Insd)....... 5.000 09/01/15 1,950,095 1,060 Tarrant Regl Wtr Dist TX Impt Rfdg (FSA Insd).......................................... 5.250 03/01/18 1,160,923 2,000 Tarrant Regl Wtr Dist TX Impt Rfdg (FSA Insd).......................................... 5.250 03/01/20 2,156,260
20 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE TEXAS (CONTINUED) $10,000 Texas St Tpk Auth Cent TX Tpk First Tier Ser A (AMBAC Insd)................................... 5.500% 08/15/39 $ 10,571,500 26,905 Texas St Tpk Auth Dallas Northtwy Rev George Bush Tpk (FGIC Insd)........................... 5.250 01/01/23 28,741,266 -------------- 141,379,956 -------------- UTAH 0.5% 660 Provo, UT Elec Rev 1984 Ser A Rfdg (Escrowed to Maturity) (AMBAC Insd)......................... 10.375 09/15/15 949,720 6,835 Utah St Muni Fin Coop Loc Govt Rev Pool Cap Salt Lake (FSA Insd)........................... * 03/01/09 5,816,380 -------------- 6,766,100 -------------- VIRGINIA 0.2% 1,950 Virginia St Hsg Dev Auth Comwlth Mtg Ser J Subser J-1 (MBIA Insd)......................... 5.200 07/01/19 2,028,137 -------------- WASHINGTON 7.1% 4,115 Chelan Cnty, WA Sch Dist No 246 (FSA Insd)..... 5.000 12/01/21 4,283,592 1,930 Clark Cnty, WA Pub Util Dist No 001 Elec Rev Rfdg (AMBAC Insd).............................. 5.500 01/01/12 2,206,723 2,990 Clark Cnty, WA Pub Util Dist No 001 Wtr Rev (FSA Insd)..................................... 5.125 01/01/20 3,161,387 11,340 Energy Northwest WA Elec Rev Columbia Generating Ser A Rfdg (FSA Insd)............... 5.500 07/01/17 12,615,070 4,040 Energy Northwest WA Elec Rev Columbia Generating Ser F (MBIA Insd)................... 5.250 07/01/16 4,490,824 4,500 Energy Northwest WA Elec Rev Proj No 3 Ser A Rfdg (FSA Insd)................................ 5.500 07/01/17 5,005,980 10,000 Energy Northwest WA Elec Rev Proj No 3 Ser A Rfdg (XLCA Insd)............................... 5.500 07/01/17 11,274,100 14,500 Energy Northwest WA Elec Rev Proj No 3 Ser A Rfdg (FSA Insd)................................ 5.500 07/01/18 16,038,160 5,000 Energy Northwest WA Elec Rev Proj No 3 Ser B Rfdg (FSA Insd)................................ 6.000 07/01/16 5,814,250 1,865 Energy Northwest WA Wind Proj (AMBAC Insd)..... 5.000 07/01/23 1,903,960 2,335 Grant Cnty, WA Pub Util Dist No 2 Rev Second Ser C Rfdg (AMBAC Insd)........................ 6.000 01/01/17 2,610,997 1,025 Grant Cnty, WA Pub Util Dist No 2 Rev Second Ser C Rfdg (AMBAC Insd)........................ 6.000 01/01/17 1,146,155 350 Pierce Cnty, WA Swr Rev Ser A (Escrowed to Maturity) (MBIA Insd).......................... 9.000 02/01/05 386,540 2,000 Seattle, WA Muni Lt & Pwr Rev Impt & Rfdg (FSA Insd).......................................... 5.500 03/01/18 2,213,060 2,565 Snohomish Cnty, WA Pub Util 1 (FSA Insd)....... 5.500 12/01/23 2,764,788 145 Snohomish Cnty, WA Pub Util 1 (FSA Insd)....... 5.000 12/01/24 147,390
See Notes to Financial Statements 21 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE WASHINGTON (CONTINUED) $2,000 Spokane, WA Pub Fac Dist Hotel (MBIA Insd)..... 5.750% 12/01/25 $ 2,215,000 2,420 Spokane, WA Pub Fac Dist Hotel (MBIA Insd)..... 5.750 12/01/26 2,673,882 3,000 Spokane, WA Pub Fac Dist Hotel (MBIA Insd)..... 5.250 09/01/33 3,120,900 1,965 Tacoma, WA Solid Waste Util Rev Rfdg (AMBAC Insd).......................................... 5.375 12/01/18 2,159,790 2,075 Tacoma, WA Solid Waste Util Rev Rfdg (AMBAC Insd).......................................... 5.375 12/01/19 2,267,353 3,090 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser A Rfdg (AMBAC Insd)............... 5.700 07/01/09 3,489,815 1,600 Washington St Ser R 99A Rfdg (FGIC Insd)....... 5.000 01/01/17 1,700,416 -------------- 93,690,132 -------------- WEST VIRGINIA 0.4% 1,530 West Virginia Econ Dev Auth Lease Rev Correctional Juvenile & Pub-A (MBIA Insd)...... 5.500 06/01/19 1,705,721 2,750 West Virginia St Wtr Dev Auth Ser A 1 (AMBAC Insd).......................................... 5.250 11/01/23 2,929,603 -------------- 4,635,324 -------------- WISCONSIN 1.4% 1,505 Oak Creek Franklin, WI Jt Sch Dist Rfdg (FGIC Insd).......................................... 5.500 04/01/17 1,687,346 1,635 Oak Creek Franklin, WI Jt Sch Dist Rfdg (FGIC Insd).......................................... 5.500 04/01/19 1,812,496 1,350 Plover, WI Wtr Sys Rev (AMBAC Insd)............ 5.400 12/01/16 1,515,591 1,500 Plover, WI Wtr Sys Rev (AMBAC Insd)............ 5.500 12/01/18 1,684,635 1,270 Racine, WI Wtrwks Rev Sys Mtg (MBIA Insd)...... 5.250 09/01/14 1,407,706 1,405 Racine, WI Wtrwks Rev Sys Mtg (MBIA Insd)...... 5.250 09/01/16 1,552,975 3,950 Two Rivers, WI Pub Sch Dist Rfdg (Prerefunded @ 03/01/10) (FSA Insd)........................... 6.000 03/01/18 4,675,141 3,920 University of WI Hosp & Clinics Auth Rev (FSA Insd).......................................... 6.200 04/01/29 4,409,138 -------------- 18,745,028 -------------- WYOMING 0.2% 2,000 Laramie Cnty, WY Hosp Rev Mem Hosp Proj (AMBAC Insd).......................................... 6.700 05/01/12 2,049,520 --------------
22 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE PUERTO RICO 0.7% $5,000 Puerto Rico Comwlth Hwy & Tran Sub (FGIC Insd).......................................... 5.250% 07/01/18 $ 5,566,550 3,000 Puerto Rico Indl Tourist Ed Med & Environmental Ctl Fac Hosp Aux (MBIA Insd)................... 6.250 07/01/16 3,229,500 -------------- 8,796,050 -------------- TOTAL LONG-TERM INVESTMENTS 98.2% (Cost $1,200,887,389)..................................................... 1,293,418,077 SHORT-TERM INVESTMENTS 2.2% (Cost $28,300,000)........................................................ 28,300,000 -------------- TOTAL INVESTMENTS 100.4% (Cost $1,229,187,389)..................................................... 1,321,718,077 LIABILITIES IN EXCESS OF OTHER ASSETS (0.4%)............................... (5,193,426) -------------- NET ASSETS 100.0%.......................................................... $1,316,524,651 ==============
* Zero coupon bond (a) All or a portion of these securities have been physically segregated in connection with open futures contracts. (b) Securities purchased on a when-issued or delayed delivery basis. (c) Security is a "step-up" bond where the coupon increases or steps up at a predetermined date. AMBAC--AMBAC Indemnity Corp. BIGI--Bond Investor Guaranty Inc. CIFG--CDC IXIS Financial Guaranty Connie Lee--Connie Lee Insurance Co. FGIC--Financial Guaranty Insurance Co. FSA--Financial Security Assurance Inc. MBIA--Municipal Bond Investors Assurance Corp. XLCA--XL Capital Assurance Inc. See Notes to Financial Statements 23 FINANCIAL STATEMENTS Statement of Assets and Liabilities September 30, 2003 ASSETS: Total Investments (Cost $1,229,187,389)..................... $1,321,718,077 Receivables: Interest.................................................. 15,848,173 Investments Sold.......................................... 3,903,908 Fund Shares Sold.......................................... 704,668 Other....................................................... 243,533 -------------- Total Assets............................................ 1,342,418,359 -------------- LIABILITIES: Payables: Investments Purchased..................................... 20,430,579 Variation Margin on Futures............................... 1,483,719 Fund Shares Repurchased................................... 1,126,834 Income Distributions...................................... 1,061,546 Distributor and Affiliates................................ 654,865 Investment Advisory Fee................................... 537,861 Custodian Bank.............................................. 134,596 Trustees' Deferred Compensation and Retirement Plans........ 285,483 Accrued Expenses............................................ 178,225 -------------- Total Liabilities....................................... 25,893,708 -------------- NET ASSETS.................................................. $1,316,524,651 ============== NET ASSETS CONSIST OF: Capital (Par value of $.01 per share with an unlimited number of shares authorized).............................. $1,210,175,498 Net Unrealized Appreciation................................. 85,171,911 Accumulated Net Realized Gain............................... 19,906,082 Accumulated Undistributed Net Investment Income............. 1,271,160 -------------- NET ASSETS.................................................. $1,316,524,651 ============== MAXIMUM OFFERING PRICE PER SHARE: Class A Shares: Net asset value and redemption price per share (Based on net assets of $1,209,885,135 and 62,801,126 shares of beneficial interest issued and outstanding)............. $ 19.27 Maximum sales charge (4.75%* of offering price)......... .96 -------------- Maximum offering price to public........................ $ 20.23 ============== Class B Shares: Net asset value and offering price per share (Based on net assets of $82,557,110 and 4,290,657 shares of beneficial interest issued and outstanding)............. $ 19.24 ============== Class C Shares: Net asset value and offering price per share (Based on net assets of $24,082,406 and 1,252,479 shares of beneficial interest issued and outstanding)............. $ 19.23 ==============
* On sales of $100,000 or more, the sales charge will be reduced. 24 See Notes to Financial Statements Statement of Operations For the Year Ended September 30, 2003 INVESTMENT INCOME: Interest.................................................... $ 64,363,646 ------------ EXPENSES: Investment Advisory Fee..................................... 6,642,253 Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $2,919,931, $849,653 and $242,618, respectively)............................................. 4,012,202 Shareholder Services........................................ 802,115 Custody..................................................... 111,219 Legal....................................................... 94,842 Trustees' Fees and Related Expenses......................... 30,917 Other....................................................... 512,882 ------------ Total Expenses............................................ 12,206,430 Less Credits Earned on Cash Balances...................... 22,964 ------------ Net Expenses.............................................. 12,183,466 ------------ NET INVESTMENT INCOME....................................... $ 52,180,180 ============ REALIZED AND UNREALIZED GAIN/LOSS: Realized Gain/Loss: Investments............................................... $ 25,836,638 Futures................................................... (4,881,398) ------------ Net Realized Gain........................................... 20,955,240 ------------ Unrealized Appreciation/Depreciation: Beginning of the Period................................... $122,207,697 ------------ End of the Period: Investments............................................. 92,530,688 Futures................................................. (7,358,777) ------------ 85,171,911 ------------ Net Unrealized Depreciation During the Period............... (37,035,786) ------------ NET REALIZED AND UNREALIZED LOSS............................ $(16,080,546) ============ NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 36,099,634 ============
See Notes to Financial Statements 25 Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 ---------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income.............................. $ 52,180,180 $ 51,420,856 Net Realized Gain.................................. 20,955,240 13,448,439 Net Unrealized Appreciation/Depreciation During the Period........................................... (37,035,786) 50,316,254 -------------- -------------- Change in Net Assets from Operations............... 36,099,634 115,185,549 -------------- -------------- Distributions from Net Investment Income: Class A Shares................................... (47,030,700) (49,103,481) Class B Shares................................... (2,660,042) (1,848,687) Class C Shares................................... (760,360) (491,695) -------------- -------------- (50,451,102) (51,443,863) -------------- -------------- Distributions from Net Realized Gain: Class A Shares................................... (11,285,930) (26,330,149) Class B Shares................................... (786,390) (1,162,430) Class C Shares................................... (214,972) (298,526) -------------- -------------- (12,287,292) (27,791,105) -------------- -------------- Total Distributions................................ (62,738,394) (79,234,968) -------------- -------------- NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....................................... (26,638,760) 35,950,581 -------------- -------------- FROM CAPITAL TRANSACTIONS: Proceeds from Shares Sold.......................... 323,995,612 278,755,452 Net Asset Value of Shares Issued Through Dividend Reinvestment..................................... 47,057,129 60,225,964 Cost of Shares Repurchased......................... (381,484,901) (211,381,640) -------------- -------------- NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS..................................... (10,432,160) 127,599,776 -------------- -------------- TOTAL INCREASE/DECREASE IN NET ASSETS.............. (37,070,920) 163,550,357 NET ASSETS: Beginning of the Period............................ 1,353,595,571 1,190,045,214 -------------- -------------- End of the Period (Including accumulated undistributed net investment income of $1,271,160 and $143,367, respectively)...................... $1,316,524,651 $1,353,595,571 ============== ==============
26 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS A SHARES -------------------------------------------------------- 2003 2002 (a) 2001 2000 1999 -------------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD............................ $ 19.65 $ 19.22 $ 18.27 $ 18.08 $ 19.96 -------- -------- -------- -------- -------- Net Investment Income............. .77 .81 .86 .91 .91 Net Realized and Unrealized Gain/Loss....................... (.23) .87 .98 .17 (1.64) -------- -------- -------- -------- -------- Total from Investment Operations.... .54 1.68 1.84 1.08 (.73) -------- -------- -------- -------- -------- Less: Distributions from Net Investment Income.......................... .74 .81 .89 .88 .92 Distributions from Net Realized Gain............................ .18 .44 -0- .01 .23 -------- -------- -------- -------- -------- Total Distributions................. .92 1.25 .89 .89 1.15 -------- -------- -------- -------- -------- NET ASSET VALUE, END OF THE PERIOD............................ $ 19.27 $ 19.65 $ 19.22 $ 18.27 $ 18.08 ======== ======== ======== ======== ======== Total Return (b).................... 2.90% 9.28% 10.28% 6.13% -3.80% Net Assets at End of the Period (In millions)......................... $1,209.9 $1,244.3 $1,129.6 $1,086.6 $1,178.3 Ratio of Expenses to Average Net Assets............................ .86% .87% .90% .90% .92% Ratio of Net Investment Income to Average Net Assets................ 4.02% 4.30% 4.55% 5.10% 4.77% Portfolio Turnover.................. 61% 54% 80% 69% 92%
(a) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01, and increase the ratio of net investment income to average net assets from 4.27% to 4.30%. Per share, ratios and supplemental data for the periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum sales charge of 4.75% or contingent deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be imposed on certain redemptions made within one year of purchase. If the sales charges were included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of up to .25% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. See Notes to Financial Statements 27 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS B SHARES ------------------------------------------------ 2003 2002 (a) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD... $19.63 $19.20 $18.26 $18.08 $19.96 ------ ------ ------ ------ ------ Net Investment Income.................... .63 .66 .70 .78 .76 Net Realized and Unrealized Gain/Loss.... (.24) .88 .99 .15 (1.64) ------ ------ ------ ------ ------ Total from Investment Operations........... .39 1.54 1.69 .93 (.88) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income................................. .60 .67 .75 .74 .77 Distributions from Net Realized Gain..... .18 .44 -0- .01 .23 ------ ------ ------ ------ ------ Total Distributions........................ .78 1.11 .75 .75 1.00 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD......... $19.24 $19.63 $19.20 $18.26 $18.08 ====== ====== ====== ====== ====== Total Return (b)........................... 2.08% 8.47% 9.42% 5.25% -4.60%* Net Assets at End of the Period (In millions)................................ $ 82.6 $ 87.2 $ 49.2 $ 43.0 $ 56.8 Ratio of Expenses to Average Net Assets.... 1.62% 1.63% 1.69% 1.68% 1.68% Ratio of Net Investment Income to Average Net Assets............................... 3.26% 3.53% 3.76% 4.34% 3.99% Portfolio Turnover......................... 61% 54% 80% 69% 92%*
(a) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01, and increase the ratio of net investment income to average net assets from 3.50% to 3.53%. Per share, ratios and supplemental data for the periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 4%, charged on certain redemptions made within one year of purchase and declining to 0% after the sixth year. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. 28 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS C SHARES ------------------------------------------------ 2003 2002 (a) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD... $19.62 $19.19 $18.25 $18.08 $19.95 ------ ------ ------ ------ ------ Net Investment Income.................... .63 .67 .69 .79 .76 Net Realized and Unrealized Gain/Loss.... (.24) .87 1.00 .13 (1.63) ------ ------ ------ ------ ------ Total from Investment Operations........... .39 1.54 1.69 .92 (.87) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income................................. .60 .67 .75 .74 .77 Distributions from Net Realized Gain..... .18 .44 -0- .01 .23 ------ ------ ------ ------ ------ Total Distributions........................ .78 1.11 .75 .75 1.00 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD......... $19.23 $19.62 $19.19 $18.25 $18.08 ====== ====== ====== ====== ====== Total Return (b)........................... 2.08% 8.48% 9.42% 5.19% -4.55%* Net Assets at End of the Period (In millions)................................ $ 24.1 $ 22.1 $ 11.2 $ 5.4 $ 8.3 Ratio of Expenses to Average Net Assets.... 1.62% 1.63% 1.65% 1.68% 1.68% Ratio of Net Investment Income to Average Net Assets............................... 3.25% 3.53% 3.80% 4.35% 3.99% Portfolio Turnover......................... 61% 54% 80% 69% 92%*
(a) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01, and increase the ratio of net investment income to average net assets from 3.50% to 3.53%. Per share, ratios and supplemental data for the periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 1%, charged on certain redemptions made within one year of purchase. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. See Notes to Financial Statements 29 NOTES TO FINANCIAL STATEMENTS September 30, 2003 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Insured Tax Free Income Fund (the "Fund") is organized as a series of the Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a diversified open-end management investment company under the Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to provide investors a high level of current income exempt from federal income taxes, with liquidity and safety of principal, primarily through investment in a diversified portfolio of insured municipal securities. The Fund commenced investment operations on December 14, 1984. The distribution of the Fund's Class B and Class C Shares commenced on May 3, 1993 and August 13, 1993, respectively. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION Municipal bonds are valued by independent pricing services or dealers using the mean of the bid and asked prices or, in the absence of market quotations, at fair value based upon yield data relating to municipal bonds with similar characteristics and general market conditions. Securities which are not valued by independent pricing services or dealers are valued at fair value using procedures established in good faith by the Board of Trustees. Futures contracts are valued at the settlement price established each day on the exchange on which they are traded. Short-term securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. The Fund may purchase and sell securities on a "when-issued" or "delayed delivery" basis, with settlement to occur at a later date. The value of the security so purchased is subject to market fluctuations during this period. The Fund will segregate assets with the custodian having an aggregate value at least equal to the amount of the when-issued or delayed delivery purchase commitments until payment is made. At September 30, 2003, the Fund had $17,702,361 of when-issued and delayed delivery purchase commitments. C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond premium is amortized and discount is accreted over the expected life of each applicable security. Income and expenses of the Fund are allocated on a pro rata basis to each class of shares, except for distribution and service fees and transfer agency costs which are unique to each class of shares. D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute 30 NOTES TO FINANCIAL STATEMENTS September 30, 2003 substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. At September 30, 2003, the cost and related gross unrealized appreciation and depreciation were as follows: Cost of investments for tax purposes........................ $1,228,311,298 ============== Gross tax unrealized appreciation........................... $ 93,933,455 Gross tax unrealized depreciation........................... (526,676) -------------- Net tax unrealized appreciation on investments.............. $ 93,406,779 ==============
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly dividends from net investment income. Net realized gains, if any, are distributed annually. Distributions from net realized gains for book purposes may include short-term capital gains and a portion of futures gains, which are included as ordinary income for tax purposes. The tax character of distributions paid during the years ended September 30, 2003 and 2002 was as follows:
2003 2002 Distributions paid from: Ordinary Income........................................... $ 4,974,664 $14,184,819 Long-term capital gain.................................... 7,723,917 13,744,102 ----------- ----------- $12,698,581 $27,928,921 =========== ===========
Due to inherent differences in the recognition of income, expenses, and realized gain/losses under accounting principles generally accepted in the United States of America and federal income tax purposes, permanent differences between book and tax basis reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. A permanent difference relating to book to tax accretion differences totaling $619,542 was reclassified from accumulated undistributed net investment income to accumulated net realized gain. Additionally, a permanent difference relating to the Fund's investments in other regulated investment companies totaling $32,138 was reclassified from accumulated undistributed net investment income to accumulated net realized gain. As of September 30, 2003, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income............................... $ 264,854 Undistributed long-term capital gain........................ 11,838,027
Net realized gains or losses may differ for financial and tax reporting purposes primarily as a result of gains or losses recognized for tax purposes on open futures transactions on September 30, 2003. 31 NOTES TO FINANCIAL STATEMENTS September 30, 2003 F. INSURANCE EXPENSES The Fund typically invests in insured bonds. Any portfolio securities not specifically covered by a primary insurance policy are insured secondarily through the Fund's portfolio insurance policy. Insurance premiums are based on the daily balances of uninsured bonds in the portfolio of investments and are charged to expense on an accrual basis. The insurance policy guarantees the timely payment of principal and interest on the securities in the Fund's portfolio. G. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's custody fee was reduced by $22,964 as a result of credits earned on cash balances. 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE DAILY NET ASSETS % PER ANNUM First $500 million.......................................... .525% Next $500 million........................................... .500% Next $500 million........................................... .475% Over $1.5 billion........................................... .450%
For the year ended September 30, 2003, the Fund recognized expenses of approximately $53,200 representing legal expenses provided by Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the Fund is an affiliated person. Under separate Accounting Services and Legal Services agreements, the Adviser provides accounting and legal services to the Fund. The Adviser allocates the cost of such services to each fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $157,200 representing Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen") cost of providing accounting and legal services to the Fund, which are reported as part of "Other" and "Legal" expenses, respectively, in the Statement of Operations. Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser, serves as the shareholder servicing agent for the Fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $634,200, representing transfer agency fees paid to VKIS. Transfer agency fees are determined through negotiations with the Fund's Board of Trustees. Certain officers and trustees of the Fund are also officers and directors of Van Kampen. The Fund does not compensate its officers or trustees who are officers of Van Kampen. The Fund provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Fund and to the extent permitted by the 1940 Act, as amended, may be invested in the common shares of those funds selected by the trustees. Investments in such funds of $199,311 are included in "Other" assets on the Statement of Assets and Liabilities at September 30, 2003. Appreciation/depreciation and distributions received from these investments are recorded with 32 NOTES TO FINANCIAL STATEMENTS September 30, 2003 an offsetting increase/decrease in the deferred compensation obligations and do not affect the net asset value of the Fund. Benefits under the retirement plan are payable upon retirement for a ten-year period and are based upon each trustee's years of service to the Fund. The maximum annual benefit per trustee under the plan is $2,500. 3. CAPITAL TRANSACTIONS At September 30, 2003, capital aggregated $1,105,797,284, $80,244,698 and $24,133,516 for Classes A, B and C, respectively. For the year ended September 30, 2003, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 15,358,941 $ 294,205,218 Class B................................................... 997,166 19,179,849 Class C................................................... 552,551 10,610,545 ----------- ------------- Total Sales................................................. 16,908,658 $ 323,995,612 =========== ============= Dividend Reinvestment: Class A................................................... 2,306,810 $ 44,213,876 Class B................................................... 112,868 2,160,427 Class C................................................... 35,696 682,826 ----------- ------------- Total Dividend Reinvestment................................. 2,455,374 $ 47,057,129 =========== ============= Repurchases: Class A................................................... (18,180,737) $(348,581,095) Class B................................................... (1,260,175) (24,097,852) Class C................................................... (461,820) (8,805,954) ----------- ------------- Total Repurchases........................................... (19,902,732) $(381,484,901) =========== =============
33 NOTES TO FINANCIAL STATEMENTS September 30, 2003 At September 30, 2002, capital aggregated $1,115,955,023, $83,001,975 and $21,646,012 for Classes A, B and C, respectively. For the year ended September 30, 2002, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 11,854,715 $ 222,434,143 Class B................................................... 2,417,973 43,950,889 Class C................................................... 666,929 12,370,420 ----------- ------------- Total Sales................................................. 14,939,617 $ 278,755,452 =========== ============= Dividend Reinvestment: Class A................................................... 3,087,862 $ 57,682,494 Class B................................................... 108,130 2,016,147 Class C................................................... 28,266 527,323 ----------- ------------- Total Dividend Reinvestment................................. 3,224,258 $ 60,225,964 =========== ============= Repurchases: Class A................................................... (10,413,420) $(196,238,859) Class B................................................... (645,598) (12,219,836) Class C................................................... (155,217) (2,922,945) ----------- ------------- Total Repurchases........................................... (11,214,235) $(211,381,640) =========== =============
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares eight years after the end of the calendar month in which the shares were purchased. Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares seven years after the end of the calendar month in which the shares were purchased. For the years ended September 30, 2003 and 2002, 177,637 and 129,662 Class B Shares converted to Class A Shares, respectively, and are shown in the above tables as sales of Class A Shares and repurchases of Class B Shares. Class C Shares purchased before January 1, 1997, and any dividend reinvestment plan Class C Shares received on such shares, automatically convert to Class A Shares ten years after the end of the calendar month in which such shares were purchased. Class C Shares purchased on or after January 1, 1997 do not possess a conversion feature. For the years ended September 30, 2003 and 2002, no Class C Shares converted to Class A Shares. Class B and Class C Shares are offered without a front end sales charge, but are subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and Class C Shares will be imposed on 34 NOTES TO FINANCIAL STATEMENTS September 30, 2003 most redemptions made within six years of the purchase for Class B and one year of the purchase for Class C as detailed in the following schedule.
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLAR AMOUNT SUBJECT TO CHARGE -------------------------- YEAR OF REDEMPTION CLASS B CLASS C First....................................................... 4.00% 1.00% Second...................................................... 3.75% None Third....................................................... 3.50% None Fourth...................................................... 2.50% None Fifth....................................................... 1.50% None Sixth....................................................... 1.00% None Seventh and Thereafter...................................... None None
For the year ended September 30, 2003, Van Kampen, as Distributor for the Fund, received commissions on sales of the Fund's Class A Shares of approximately $217,500 and CDSC on redeemed shares of approximately $294,800. Sales charges do not represent expenses of the Fund. On September 13, 2002, the Fund acquired all of the assets and liabilities of the Van Kampen Florida Insured Tax Free Income Fund (the "VKFITFI Fund") through a tax free reorganization approved by VKFITFI Fund shareholders on August 28, 2002. The Fund issued 2,203,153, 1,707,524 and 243,096 shares of Classes A, B and C, valued at $42,873,349, $33,194,271 and $4,723,361, respectively in exchange for VKFITFI Fund's net assets. The shares of VKFITFI Fund were converted into Fund shares at a ratio of 1.215 to 1, 1.212 to 1 and 1.209 to 1 for Classes A, B and C, respectively. Included in these net assets was a capital loss carryforward of $1,308,223 which is included in the accumulated net realized gain/loss. Also included in these net assets was a deferred compensation balance of $128,639 which is included in accumulated undistributed net investment income. Net unrealized appreciation of VKFITFI Fund as of September 13, 2002 was $6,342,242. Shares issued in connection with this reorganization are included in proceeds from shares sold for the year ended September 30, 2002. Combined net assets on the day of reorganization were $1,338,185,210. 4. INVESTMENT TRANSACTIONS During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were $784,830,604 and $783,694,202, respectively. 5. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument in very general terms refers to a security whose value is "derived" from the value of an underlying asset, reference rate or index. The Fund has a variety of reasons to use derivative instruments, such as to attempt to protect the Fund against possible changes in the market value of its portfolio and to manage 35 NOTES TO FINANCIAL STATEMENTS September 30, 2003 the portfolio's effective yield, maturity and duration. All of the Fund's portfolio holdings, including derivative instruments, are marked to market each day with the change in value reflected in unrealized appreciation/depreciation. Upon disposition, a realized gain or loss is recognized accordingly, except when taking delivery of a security underlying a futures contract. In this instance, the recognition of gain or loss is postponed until the disposal of the security underlying the futures contract. Summarized below are the specific types of derivative financial instruments used by the Fund. A. FUTURES CONTRACTS A futures contract is an agreement involving the delivery of a particular asset on a specified future date at an agreed upon price. The Fund generally invests in exchange traded futures contracts on U.S. Treasury Notes and typically closes the contract prior to the delivery date. Upon entering into futures contracts, the Fund maintains an amount of cash or liquid securities with a value equal to a percentage of the contract amount with either a futures commission merchant pursuant to rules and regulations promulgated under the 1940 Act, as amended, or with its custodian in an account in the broker's name. This amount is known as initial margin. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). The risk of loss associated with a futures contract is in excess of the variation margin reflected on the Statement of Assets and Liabilities. Transactions in futures contracts, for the year ended September 30, 2003, were as follows:
CONTRACTS Outstanding at September 30, 2002........................... -0- Futures Opened.............................................. 9,079 Futures Closed.............................................. (7,329) ------ Outstanding at September 30, 2003........................... 1,750 ======
The futures contracts outstanding as of September 30, 2003, and the descriptions and unrealized appreciation/depreciation are a follows:
UNREALIZED APPRECIATION/ CONTRACTS DEPRECIATION Short Contracts: U.S. Treasury Notes 10-Year Futures December 2003 (Current Notional Value of $114,625 per contract)................ 339 $(1,918,906) U.S. Treasury Notes 5-Year Futures December 2003 (Current Notional Value of $113,469 per contract)................ 1,411 (5,439,871) ----- ----------- 1,750 $(7,358,777) ===== ===========
36 NOTES TO FINANCIAL STATEMENTS September 30, 2003 B. INVERSE FLOATING RATE SECURITIES An Inverse Floating Rate security is one where the coupon is inversely indexed to a short-term floating interest rate multiplied by a specified factor. As the floating rate rises, the coupon is reduced. Conversely as the floating rate declines, the coupon is increased. The price of these securities may be more volatile than the price of a comparable fixed rate security. These instruments are typically used by the Fund to enhance the yield of the portfolio. 6. DISTRIBUTION AND SERVICE PLANS With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund and its shareholders have adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act, as amended, and a service plan (collectively the "Plans"). The Plans govern payments for: the distribution of the Fund's Class A Shares, Class B Shares and Class C Shares; the provision of ongoing shareholder services with respect to such classes of shares; and maintenance of shareholder accounts with respect to such classes of shares. Annual fees under the Plans of up to .25% of Class A average daily net assets and 1.00% each of Class B and Class C average daily net assets are accrued daily. The amount of distribution expenses incurred by Van Kampen and not yet reimbursed ("unreimbursed receivable") was approximately $2,450,430 and $76,041 for Class B and Class C Shares, respectively. This amount may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed receivable has been fully recovered, any excess 12b-1 fees will be refunded to the Fund on a quarterly basis. Included in the fees for the year ended September 30, 2003, are payments retained by Van Kampen of approximately $905,800 and payments made to Morgan Stanley DW Inc., an affiliate of the Adviser, of approximately $100,000. 37 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees of Van Kampen Insured Tax Free Income Fund We have audited the accompanying statement of assets and liabilities of the Van Kampen Insured Tax Free Income Fund (the "Fund"), including the portfolio of investments, as of September 30, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the year ended September 30, 1999 were audited by other auditors whose report dated November 5, 1999 expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and financial highlights. Our procedures included confirmation of securities owned as of September 30, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. 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 the Van Kampen Insured Tax Free Income Fund at September 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended in conformity with accounting principles generally accepted in the United States. -s- Ernst & Young LLP Chicago, Illinois November 4, 2003 38 VAN KAMPEN INVESTMENTS THE VAN KAMPEN FAMILY OF FUNDS Global/International Emerging Markets Emerging Markets Income European Value Equity Global Equity Allocation Global Franchise Global Value Equity International Advantage International Magnum Growth Aggressive Growth American Value Emerging Growth Enterprise Equity Growth Focus Equity Growth Mid Cap Growth Pace Select Growth Small Cap Growth Small Cap Value Technology Growth and Income Comstock Equity and Income Growth and Income Harbor Real Estate Securities Utility Value Value Opportunities Income Corporate Bond Government Securities High Income Corporate Bond High Yield Limited Maturity Government U.S. Government Tax Free California Insured Tax Free High Yield Municipal* Insured Tax Free Income Intermediate Term Municipal Income Municipal Income New York Tax Free Income Pennsylvania Tax Free Income Strategic Municipal Income Capital Preservation Reserve Tax Free Money Senior Loan Senior Loan Fund For more complete information, including risk considerations, fees, sales charges and ongoing expenses, please contact your financial advisor for a prospectus. Please read it carefully before you invest or send money. To view a current Van Kampen fund prospectus or to receive additional fund information, choose from one of the following: - - Visit our Web site at VANKAMPEN.COM. To view a prospectus select Literature, Download Fund Info. (COMPUTER ICON) - - Call us at (800) 847-2424 Telecommunications Device for the Deaf (TDD) users, call (800) 421-2833. (PHONE ICON) - - E-mail us by visiting VANKAMPEN.COM and selecting Contact Us. (MAIL ICON) * Open to new investors for a limited time 39 BOARD OF TRUSTEES AND IMPORTANT ADDRESSES VAN KAMPEN INSURED TAX FREE INCOME FUND BOARD OF TRUSTEES DAVID C. ARCH J. MILES BRANAGAN JERRY D. CHOATE ROD DAMMEYER LINDA HUTTON HEAGY R. CRAIG KENNEDY HOWARD J KERR MITCHELL M. MERIN* JACK E. NELSON RICHARD F. POWERS, III* HUGO F. SONNENSCHEIN WAYNE W. WHALEN* - Chairman SUZANNE H. WOOLSEY INVESTMENT ADVISER VAN KAMPEN INVESTMENT ADVISORY CORP. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 DISTRIBUTOR VAN KAMPEN FUNDS INC. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 SHAREHOLDER SERVICING AGENT VAN KAMPEN INVESTOR SERVICES INC. P.O. Box 947 Jersey City, New Jersey 07303-0947 CUSTODIAN STATE STREET BANK AND TRUST COMPANY 225 Franklin Street P.O. Box 1173 Boston, Massachusetts 02110 LEGAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606 INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, Illinois 60606 For federal income tax purposes, the following information is furnished with respect to the distributions paid by the Fund during its taxable year ended September 30, 2003. The Fund designated 99.2% of the income distributions as tax-exempt income distribution. The Fund designated and paid $7,723,917 as a long-term capital gain distribution. In January, the Fund provides tax information to shareholders for the preceding calendar year. * "Interested persons" of the Fund, as defined in the Investment Company Act of 1940, as amended. 40 TRUSTEES AND OFFICERS The business and affairs of the Fund are managed under the direction of the Fund's Board of Trustees and the Fund's officers appointed by the Board of Trustees. The tables below list the trustees and executive officers of the Fund and their principal occupations during the last five years, other directorships held by trustees and their affiliations, if any, with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are referred to herein collectively as the "Advisers." The term "Fund Complex" includes each of the investment companies advised by the Advisers or their affiliates as of the date of this Statement of Additional Information. Trustees serve until reaching their retirement age or until their successors are duly elected and qualified. Officers are annually elected by the trustees. INDEPENDENT TRUSTEES
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing Blistex Inc. since 2003 Executive Officer of General Partner of funds 1800 Swift Drive Blistex Inc., a consumer in the Fund Complex. Oak Brook, IL 60523 health care products manufacturer. Former Director of the World Presidents Organization-Chicago Chapter. Director of the Heartland Alliance, a nonprofit organization serving human needs based in Chicago. J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing 1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex. Chief Executive Officer and President, MDT Corporation (now known as Getinge/Castle, Inc., a subsidiary of Getinge Industrier AB), a company which develops, manufactures, markets and services medical and scientific equipment.
41
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing 33971 Selva Road since 1999 Chairman and Chief General Partner of funds Suite 130 Executive Officer of the in the Fund Complex. Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a ("Allstate") and Allstate biotechnological company, Insurance Company. Prior and Director of Valero to January 1995, Energy Corporation, an President and Chief independent refining Executive Officer of company. Allstate. Prior to August 1994, various management positions at Allstate. Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing CAC, llc. since 2003 private company offering General Partner of funds 4350 LaJolla Village Drive capital investment and in the Fund Complex. Suite 980 management advisory Director of TeleTech San Diego, CA 92122-6223 services. Prior to July Holdings Inc., 2000, Managing Partner of Stericycle, Inc., Equity Group Corporate TheraSense, Inc., GATX Investment (EGI), a Corporation, Arris Group, company that makes Inc. and Trustee of the private investments in University of Chicago other companies. Hospitals and Health Systems. Prior to May 2002, Director of Peregrine Systems Inc. Prior to February 2001, Vice Chairman and Director of Anixter International, Inc. and IMC Global Inc. Prior to July 2000, Director of Allied Riser Communications Corp., Matria Healthcare Inc., Transmedia Networks, Inc., CNA Surety, Corp. and Grupo Azcarero Mexico (GAM). Prior to April 1999, Director of Metal Management, Inc.
42
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds 233 South Wacker Drive executive search firm. in the Fund Complex. Suite 7000 Trustee on the University Chicago, IL 60606 of Chicago Hospitals Board, Vice Chair of the Board of the YMCA of Metropolitan Chicago and a member of the Women's Board of the University of Chicago. Prior to 1997, Partner of Ray & Berndtson, Inc., an executive recruiting firm. Prior to 1996, Trustee of The International House Board, a fellowship and housing organization for international graduate students. Prior to 1995, Executive Vice President of ABN AMRO, N.A., a bank holding company. Prior to 1992, Executive Vice President of La Salle National Bank. R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing 11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds Washington, D.C. 20016 of the United States, an in the Fund Complex. independent U.S. foundation created to deepen understanding, promote collaboration and stimulate exchanges of practical experience between Americans and Europeans. Formerly, advisor to the Dennis Trading Group Inc., a managed futures and option company that invests money for individuals and institutions. Prior to 1992, President and Chief Executive Officer, Director and member of the Investment Committee of the Joyce Foundation, a private foundation. Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing 736 North Western Avenue since 2003 and Chief Executive General Partner of funds P.O. Box 317 Officer of Pocklington in the Fund Complex. Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake investment holding Forest Bank & Trust. company. Director of the Marrow Foundation.
43
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing 423 Country Club Drive since 1984 Investment Planning General Partner of funds Winter Park, FL 32789 Services, Inc., a in the Fund Complex. financial planning company and registered investment adviser in the State of Florida. President of Nelson Ivest Brokerage Services Inc., a member of the NASD, Securities Investors Protection Corp. and the Municipal Securities Rulemaking Board. President of Nelson Sales and Services Corporation, a marketing and services company to support affiliated companies. Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing 1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds Chicago, IL 60637 University of Chicago and in the Fund Complex. the Adam Smith Director of Winston Distinguished Service Laboratories, Inc. Professor in the Department of Economics at the University of Chicago. Prior to July 2000, President of the University of Chicago. Trustee of the University of Rochester and a member of its investment committee. Member of the National Academy of Sciences, the American Philosophical Society and a fellow of the American Academy of Arts and Sciences. Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing 2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds Room 285 Academy of in the Fund Complex. Washington, D.C. 20418 Sciences/National Director of Neurogen Research Council, an Corporation, a independent, federally pharmaceutical company, chartered policy since January 1998. institution, since 2001 and previously Chief Operating Officer from 1993 to 2001. Director of the Institute for Defense Analyses, a federally funded research and development center, Director of the German Marshall Fund of the United States, and Trustee of Colorado College. Prior to 1993, Executive Director of the Commission on Behavioral and Social Sciences and Education at the National Academy of Sciences/National Research Council. From 1980 through 1989, Partner of Coopers & Lybrand.
44 INTERESTED TRUSTEES*
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing 1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex. Officer Complex. Chairman, President, Chief Executive Officer and Director of the Advisers and VK Advisors Inc. since December 2002. Chairman, President and Chief Executive Officer of Van Kampen Investments since December 2002. Director of Van Kampen Investments since December 1999. Chairman and Director of Van Kampen Funds Inc. since December 2002. President, Director and Chief Operating Officer of Morgan Stanley Investment Management since December 1998. President and Director since April 1997 and Chief Executive Officer since June 1998 of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chairman, Chief Executive Officer and Director of Morgan Stanley Distributors Inc. since June 1998. Chairman since June 1998, and Director since January 1998 of Morgan Stanley Trust. Director of various Morgan Stanley subsidiaries. President of the Morgan Stanley Funds since May 1999. Previously Chief Executive Officer of Van Kampen Funds Inc. from December 2002 to July 2003, Chief Strategic Officer of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. and Executive Vice President of Morgan Stanley Distributors Inc. from April 1997 to June 1998. Chief Executive Officer from September 2002 to April 2003 and Vice President from May 1997 to April 1999 of the Morgan Stanley Funds.
45
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing 1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds P.O. Box 5555 December 2002, Chairman, in the Fund Complex. Oakbrook Terrace, IL 60181 Director, President, Chief Executive Officer and Managing Director of Van Kampen Investments and its investment advisory, distribution and other subsidiaries. Prior to December 2002, President and Chief Executive Officer of funds in the Fund Complex. Prior to May 1998, Executive Vice President and Director of Marketing at Morgan Stanley and Director of Dean Witter, Discover & Co. and Dean Witter Realty. Prior to 1996, Director of Dean Witter Reynolds Inc. Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing 333 West Wacker Drive since 1984 of Skadden, Arps, Slate, General Partner of funds Chicago, IL 60606 Meagher & Flom in the Fund Complex. (Illinois), legal counsel to funds in the Fund Complex.
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of certain funds in the Fund Complex by reason of his firm currently acting as legal counsel to such funds in the Fund Complex. Messrs. Merin and Powers are interested persons of funds in the Fund Complex and the Advisers by reason of their current or former positions with Morgan Stanley or its affiliates. 46 OFFICERS
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management. 2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to 45th Floor December 2002, Chief Investment Officer of Van Kampen Houston, TX 77056 Investments and President and Chief Operations Officer of the Advisers and Van Kampen Advisors Inc. Prior to May 2002, Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Prior to May 2001, Managing Director and Chief Investment Officer of Van Kampen Investments, and Managing Director and President of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Executive Vice President and Chief Investment Officer of Van Kampen Investments, and President and Chief Operating Officer of the Advisers. Prior to April 2000, Executive Vice President and Chief Investment Officer for Equity Investments of the Advisers. Prior to October 1998, Vice President and Senior Portfolio Manager with AIM Capital Management, Inc. Prior to February 1998, Senior Vice President and Portfolio Manager of Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp. and Van Kampen American Capital Management, Inc. Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management. 1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex. New York, NY 10020 Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan 1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Managing Director and Chief Investment Officer of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc. since December 2002. John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers 1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Senior Vice President of the Advisers and Van Kampen Advisors Inc. Prior to May 2000, Senior Vice President of the investment grade taxable group for the Advisers. Prior to June 1999, Senior Vice President of the government securities bond group for Asset Management.
47
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services. 1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer Executive Officer and Managing Director of Morgan Stanley Investment Management Inc. Managing Director of Morgan Stanley. Managing Director and Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chief Executive Officer and Director of Morgan Stanley Trust. Vice President of the Morgan Stanley Funds. A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and 1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Managing Director and General Counsel-Mutual Funds of Morgan Stanley Investment Advisors, Inc. Vice President and Secretary of funds in the Fund Complex. Prior to July 2001, Managing Director, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, the Distributor, Investor Services, and certain other subsidiaries of Van Kampen Investments. Prior to December 2000, Executive Vice President, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Prior to January 1999, Vice President and Associate General Counsel to New York Life Insurance Company ("New York Life"), and prior to March 1997, Associate General Counsel of New York Life. Prior to December 1993, Assistant General Counsel of The Dreyfus Corporation. Prior to August 1991, Senior Associate, Willkie Farr & Gallagher. Prior to January 1989, Staff Attorney at the Securities and Exchange Commission, Division of Investment Management, Office of Chief Counsel. John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments, 1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President, Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund Complex. Head of Fund Accounting for Morgan Stanley Investment Management. Prior to December 2002, Executive Director of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc.
48 Van Kampen Privacy Notice The Van Kampen companies and investment products* respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain nonpublic personal information about you. This is information we collect from you on applications or other forms, and from the transactions you conduct with us, our affiliates, or third parties. We may also collect information you provide when using our Web site, and text files (also known as "cookies") may be placed on your computer to help us to recognize you and to facilitate transactions you initiate. We do not disclose any nonpublic personal information about you or any of our former customers to anyone, except as permitted by law. For instance, so that we may continue to offer you Van Kampen investment products and services that meet your investing needs, and to effect transactions that you request or authorize, we may disclose the information we collect to companies that perform services on our behalf, such as printers and mailers that assist us in the distribution of investor materials. These companies will use this information only for the services for which we hired them, and are not permitted to use or share this information for any other purpose. To protect your nonpublic personal information internally, we permit access to it only by authorized employees, and maintain physical, electronic and procedural safeguards to guard your nonpublic personal information. * Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc., Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many Van Kampen mutual funds and Van Kampen unit investment trusts. The Statement of Additional Information includes additional information about Fund trustees and is available, without charge, upon request by calling (800) 847-2424. Van Kampen Funds Inc. 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 www.vankampen.com (VAN KAMPEN INVESTMENTS LOGO) Copyright (C)2003 Van Kampen Funds Inc. All rights reserved. Member NASD/SIPC. 32, 332, 532 TFIN ANR 11/03 12224K03-AP-11/03 Item 1. Report to Shareholders Welcome, Shareholder In this report, you'll learn about how your investment in Van Kampen Strategic Municipal Income Fund performed during the annual period. The portfolio management team will provide an overview of the market conditions and discuss some of the factors that affected investment performance during the reporting period. In addition, this report includes the fund's financial statements and a list of fund investments as of September 30, 2003. This material must be preceded or accompanied by a prospectus for the fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the fund will achieve its investment objective. The fund is subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and, therefore, the value of the fund shares may be less than what you paid for them. Accordingly, you can lose money investing in this fund. Please see the prospectus for more complete information on investment risks. Income may subject certain individuals to the federal Alternative Minimum Tax (AMT). NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Performance Summary PERFORMANCE OF A $10,000 INVESTMENT This chart compares your fund's performance to that of the Lehman Brothers Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for sales charges. (LINE GRAPH)
VAN KAMPEN STRATEGIC MUNICIPAL LEHMAN BROTHERS MUNICIPAL BOND INCOME FUND INDEX ------------------------------ ------------------------------ 9/93 9523.00 10000.00 12/93 9854.00 10140.70 9303.00 9583.91 9370.00 9689.41 9497.00 9755.81 12/94 9369.00 9616.39 9939.00 10295.80 10098.00 10543.80 10365.00 10847.00 12/95 10823.00 11294.80 10611.00 11158.80 10708.00 11244.10 10918.00 11501.80 12/96 11170.00 11794.80 11222.00 11766.60 11528.00 12171.80 11905.00 12538.80 12/97 12181.00 12878.90 12358.00 13027.10 12532.00 13225.60 12911.00 13631.40 12/98 12909.00 13713.40 12979.00 13835.00 12793.00 13590.60 12588.00 13536.50 12/99 12380.00 13431.40 12517.00 13823.90 12543.00 14032.70 12747.00 14372.30 12/00 12802.00 15000.70 13081.00 15333.50 13177.00 15433.10 13444.00 15866.50 12/01 13364.00 15769.60 13464.00 15918.30 13827.00 16500.70 14153.00 17284.40 12/02 14184.00 17284.30 14246.00 17492.10 14663.00 17943.30 9/03 14749.00 17957.30
Index data source: Bloomberg
A SHARES B SHARES C SHARES since 6/28/85 since 4/30/93 since 8/13/93 - --------------------------------------------------------------------------------------------- AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES Since Inception 6.57% 6.29% 4.51% 4.51% 4.00% 4.00% 10-year 4.47 3.96 3.89 3.89 3.71 3.71 5-year 2.70 1.70 1.92 1.68 2.06 2.06 1-year 4.21 -0.75 3.42 -0.53 4.10 3.11 - --------------------------------------------------------------------------------------------- 30-Day SEC Yield 5.64% 5.17% 5.13%
Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and fund shares, when redeemed, may be worth more or less than their original cost. The returns shown in this report do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. As a result of recent market activity, current performance may vary from the figures shown. For more up-to-date information, please visit vankampen.com or speak with your financial advisor. Average annual total return with sales charges includes payment of the maximum sales charge of 4.75 percent for Class A shares, a contingent deferred sales charge of 4.00 percent for Class B shares (in year one and declining to zero after year five), a contingent deferred sales charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1 fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent for Class B and C shares. The since inception and 10-year returns for Class B and C shares reflect their conversion into Class A shares seven and 10 years after purchase, respectively. See footnote 3 in the Notes to Financial Statements for additional information. Certain non-recurring payments were made to Class C shares, resulting in an increase to the one-year total return of 0.68 percent. Figures shown above assume reinvestment of all dividends and capital gains. SEC yield is a calculation for determining the amount of portfolio income, excluding non-income items as prescribed by the SEC. Yields are subject to change. Distribution rate represents the monthly annualized distributions of the fund at the end of the period and not the earnings of the fund. The Lehman Brothers Municipal Bond Index is generally representative of investment-grade, tax-exempt bonds. Index is unmanaged and does not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. 1 Fund Report FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003 Van Kampen Strategic Municipal Income Fund is managed by the Adviser's Municipal Fixed-Income team.(1) Members of the team include Dennis S. Pietrzak, Executive Director; Wayne Godlin, Executive Director; and James D. Phillips, Vice President. The following discussion reflects their views on the fund's performance. Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE OVERALL MARKET ENVIRONMENT. A. The economic backdrop for the 12 months ended September 30 was largely characterized by the persistent weakness of the U.S. economy. One of the most closely watched economic indicators, employment strength, was in negative territory for much of the period. Repeated comments from government and Wall Street officials suggesting that the U.S. economy might be entering a deflationary period also seemed to weigh heavily on the minds of investors. The Federal Reserve Board (the Fed) attempted to allay these fears and keep the economy moving in the right direction by cutting the Fed Funds target rate twice during the period, for a total reduction of 0.75 percent. At the same time, ongoing budgetary and fiscal difficulties at the state and local levels contributed to ratings downgrades for many municipal bonds. The uncertain climate had a definite effect on the municipal bond market. While yields on intermediate- and long-term bonds ended the period roughly where they began, the road between those two points was decidedly bumpy. From October 2002 to mid-June 2003, municipal yields fell by roughly 80 basis points to levels not seen since the late 1960s. These plummeting yields led to a surge in issuance as municipalities moved to lock in low financing rates and, in the case of older bonds, refinancing costs. These record levels of supply met with record levels of demand as investors in search of relative investment stability poured cash into municipal bond funds. Demand for municipal bonds was also strong from so-called "cross-over" buyers--investors who traditionally favor taxable investments but were drawn to municipal bonds for their relatively attractive yields. The municipal market reversed abruptly in mid-June, when yields began to climb from their lows and investors shifted their attention to the rising equity market. Interest from cross-over investors also evaporated as the relative attractiveness of the taxable market grew. Issuance remained strong throughout this leg of the period, though it abated somewhat in the last three months. (1)Team members may change at any time without notice. 2 Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD? A. The fund outperformed its benchmark index. -- The fund returned 4.21 percent for the 12 months that ended September 30, 2003. Performance figures are for Class A shares, and assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. If sales charges were included, performance would be lower. Past performance is no guarantee of future results. -- The fund's benchmark, the Lehman Brothers Municipal Bond Index, returned 3.89 percent for the same period. -- The fund's monthly dividend of $0.0625 translated to a distribution rate of 5.48 percent based on the fund's maximum offering price (as of September 30, 2003, Class A shares adjusted for sales charges). See Performance Summary for additional information and index definition. Q. WHAT FACTORS HELPED PERFORMANCE DURING THE REPORTING PERIOD? A. The fund's performance was primarily driven by strong returns from the portfolio's high-grade segment. The portfolio contained several AAA-rated pre-refunded securities that benefited from rising investor demand for high-quality and shorter-duration securities. We sold these TOP 5 SECTORS AS OF 9/30/03 RATING ALLOCATION AS OF 9/30/03 Continuing Care 17.6% AAA/Aaa 11.4% Health Care 14.8 AA/Aa 2.8 Industrial Revenue 14.2 A/A 6.1 Tax District 11.4 BBB/Baa 6.2 Multi-Family Housing 7.1 BB/Ba 2.4 B/B 3.8 TOP 5 STATES AS OF 9/30/03 CC/Ca 0.1 Illinois 10.7% Non-Rated 67.2 Texas 10.7 Florida 9.0 Pennsylvania 8.0 New York 4.7
Subject to change daily. All percentages are as a percentage of long-term investments. Provided for informational purposes only and should not be deemed as a recommendation to buy securities in the sectors shown above. Securities are classified by sectors that represent broad groupings of related industries. Rating allocations based upon ratings as issued by Standard and Poor's and Moody's, respectively. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. 3 positions into a strong market in order to redeploy the assets into holdings with greater total-return potential. Q. WHAT HINDERED PERFORMANCE DURING THE REPORTING PERIOD? A. One of the key detractors from performance during the period was our avoidance of the airline industry. Airline bonds rallied strongly during the period, based on what many saw to be excessively low valuations. We continue to believe, however, that the industry faces serious challenges going forward. The portfolio also experienced a few isolated security-specific incidents, where borrowers needed to restructure their operations for various reasons. The impact of these on the portfolio, however, was limited due to the small size of the positions in question. Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY THEMES. A. Our strategy for the fund remained consistent with our long-term approach of keeping the portfolio exposed to both high-quality and higher-yielding instruments. This strategy was particularly challenging given the volatile market environment, and called for frequent portfolio adjustments in order to maintain desired balance. Within the investment-grade portion of the portfolio, we continued to focus on high-quality securities with premium coupons and moderate interest-rate sensitivity. We believe these securities are attractive because they offer higher income and may be less affected by rising interest rates. Our strategy within the high-yield component of the portfolio continued to be driven by relative-value considerations. For example, through credit research, our analysts identified a bond issued by the Athens County Ohio Hospital Facilities Authority that we added to the portfolio. This bond was attractive to us because of the issuer's protected competitive position as a rural hospital, and we took advantage of relatively low valuations in purchasing the bond. Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY CLOSING THOUGHTS? A. We believe that the economy has lately shown some signs of improvement, though the employment picture remains murky and the likelihood of a sustained rebound is questionable. In this environment, we believe the Fed is likely to maintain a neutral stance in the absence of signs of strong economic growth. We will continue to monitor the market closely for compelling investment opportunities. 4 ANNUAL HOUSEHOLDING NOTICE To reduce expenses, the fund attempts to eliminate duplicate mailings to the same address. The fund delivers a single copy of certain shareholder documents to investors who share an address, even if the accounts are registered under different names. The fund's prospectus and shareholder reports (including annual privacy notices) will be delivered to you in this manner indefinitely unless you instruct us otherwise. You can request multiple copies of these documents by either calling (800) 341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has received your instructions, we will begin sending individual copies for each account within 30 days. PROXY VOTING POLICIES AND PROCEDURES A description of the fund's policies and procedures with respect to the voting of proxies relating to the fund's portfolio securities is available without charge, upon request, by calling 1-800-847-2424. This information is also available on the Securities and Exchange Commission's website at http://www.sec.gov. 5 BY THE NUMBERS YOUR FUND'S INVESTMENTS September 30, 2003 THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF THE REPORTING PERIOD.
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MUNICIPAL BONDS 98.2% ALABAMA 1.7% $1,000 Alabama Drinking Wtr Fin Auth Revolving Fd Ln Ser C (AMBAC Insd)...................... 5.750% 08/15/18 $ 1,144,400 2,000 Alabama Drinking Wtr Fin Auth Revolving Fd Ln Ser C (AMBAC Insd)...................... 5.375 08/15/23 2,111,900 2,000 Alabama Wtr Pollutn Ctl Auth (AMBAC Insd)...................................... 5.750 08/15/18 2,269,320 1,500 Colbert Cnty Northwest Auth Hlth Care Facs....................................... 5.750 06/01/27 1,433,640 2,500 Huntsville/Carlton Cove, AL Carlton Cove Inc Proj Ser A............................. 7.000 11/15/17 2,290,375 238 Mobile, AL Indl Dev Brd Solid Waste Disp Rev Mobile Energy Svcs Co Proj Rfdg (a) (b)........................................ 6.950 01/01/20 1,666 1,395 Valley, AL Spl Care Fac Fin Auth Rev Lanier Mem Hosp Ser A............................. 5.600 11/01/16 1,287,348 2,050 Valley, AL Spl Care Fac Fin Auth Rev Lanier Mem Hosp Ser A............................. 5.650 11/01/22 1,806,091 ------------ 12,344,740 ------------ ALASKA 0.8% 1,630 Alaska Indl Dev & Expt Auth Williams Lynxs AK Cargoport (c)........................... 7.800 05/01/14 1,675,314 4,000 Juneau, AK City & Borough Rev Saint Anns Care Ctr Proj.............................. 6.875 12/01/25 3,988,200 ------------ 5,663,514 ------------ ARIZONA 3.3% 2,000 Arizona Hlth Fac Auth Hosp John C Lincoln Hlth Network............................... 6.375 12/01/37 2,072,440 1,000 Flagstaff, AZ Indl Dev Auth Rev Sr Living Cmnty Northn AZ Proj....................... 7.500 03/01/35 1,033,460 1,000 Maricopa Cnty, AZ Indl Dev Auth AZ Charter Sch Proj 1 Ser A........................... 6.625 07/01/20 1,008,440 1,000 Maricopa Cnty, AZ Indl Dev Auth Horizon Cmnty Learning Ctr Proj 1 Ser A............ 7.125 06/01/10 1,032,450 4,000 Maricopa Cnty, AZ Indl Dev Auth Multi-Family Hsg Rev Natl Hlth Fac II Proj Ser B (c).................................. 6.625 07/01/33 3,597,960 2,605 Maricopa Cnty, AZ Indl Dev Christian Care Mesa Inc Proj Ser A........................ 7.750 04/01/15 2,735,510
6 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE ARIZONA (CONTINUED) $2,000 Maricopa Cnty, AZ Indl Dev Christian Care Mesa Inc Proj Ser A........................ 7.875% 04/01/27 $ 2,068,680 350 Maricopa Cnty, AZ Uni Sch Dist No 41 Gilbert Cap Apprec Rfdg (FGIC Insd)........ * 01/01/08 315,833 1,500 Peoria, AZ Indl Dev Auth Rev Sierra Winds Life Ser A Rfdg............................ 6.375 08/15/29 1,431,480 1,355 Pima Cnty, AZ Indl Dev Auth Dev Radisson City Ctr Proj Rfdg (c)..................... 7.000 12/02/12 1,339,526 2,130 Pima Cnty, AZ Indl Dev Auth Multi-Family Rev (c).................................... 6.625 10/01/28 1,972,721 1,000 Pima Cnty, AZ Indl Dev Auth Rev La Posada at Park Ctr Ser A.......................... 7.000 05/15/27 1,007,540 520 Pima Cnty, AZ Indl Dev Auth Ser A.......... 7.250 11/15/18 505,554 500 Pima Cnty, AZ Indl Dev Auth Ser A.......... 8.250 11/15/22 510,505 1,110 Red Hawk Canyon Cmnty Fac Dist No 2 AZ Dist Assmt Rev.................................. 6.500 12/01/12 1,165,755 2,150 Tucson, AZ Multi-Family Rev Hsg Catalina Asstd Living Ser A......................... 6.500 07/01/31 1,886,668 ------------ 23,684,522 ------------ CALIFORNIA 3.5% 2,000 California St Dept Wtr Res Pwr Ser A (AMBAC Insd)...................................... 5.500 05/01/16 2,238,880 1,000 California Statewide Cmnty Dev Auth Elder Care Alliance Ser A........................ 8.250 11/15/32 994,380 985 California Statewide Cmnty Dev Auth Multi-Family Rev Hsg Heritage Pointe Sr Apt Ser QQ (c)................................. 7.500 10/01/26 965,989 1,000 California Statewide Cmnty Dev Auth San Francisco Art Institute (c)................ 7.375 04/01/32 1,010,170 5,000 Contra Costa, CA Home Mtg Fin Auth Home Mtg Rev (Escrowed to Maturity) (MBIA Insd)..... * 09/01/17 2,565,000 2,500 Corona, CA Ctf Part Vista Hosp Sys Inc Ser C (a) (b).................................. 8.375 07/01/11 1,125,000 2,300 Foothill/Eastern Tran Corridor Agy CA Toll Rd Rev (MBIA Insd)......................... * 01/15/18 1,107,887 1,460 Healdsburg, CA Ctf Partn Nuestro Hosp Inc (a) (c).................................... 6.375 11/01/28 87,454 920 Indio, CA Pub Fin Auth Rev Tax Increment... 6.500 08/15/27 961,952 1,900 Lake Elsinore, CA Pub Fin Auth Loc Agy Rev Ser F...................................... 7.100 09/01/20 2,029,884 1,750 Los Angeles, CA Regl Arpt Impt Corp Lease Rev Fac Sublease LA Intl Ser A-1 Rfdg...... 7.125 12/01/24 1,538,407 3,075 Los Angeles, CA Regl Arpt Impt Corp Lease Rev Ser C.................................. 7.500 12/01/24 2,761,012
See Notes to Financial Statements 7 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA (CONTINUED) $1,470 Millbrae, CA Residential Fac Rev Magnolia of Millbrae Proj Ser A..................... 7.375% 09/01/27 $ 1,502,443 1,000 Perris, CA Cmnty Fac Dist Spl Tax No 01-2 Ser A...................................... 6.375 09/01/32 1,016,370 1,000 San Jose, CA Multi-Family Hsg Rev Helzer Courts Apt Ser A........................... 6.400 12/01/41 960,450 1,000 San Luis Obispo, CA Ctf Partn Vista Hosp Sys Inc (a) (b)............................ 8.375 07/01/29 450,000 1,240 Simi Vly, CA Cmnty Dev Agy Coml Sycamore Plaza II Rfdg (c).......................... 6.000 09/01/12 1,311,362 1,965 Vallejo, CA Ctf Partn Touro Univ........... 7.250 06/01/16 1,990,604 ------------ 24,617,244 ------------ COLORADO 2.5% 1,000 Bromley Pk Met Dist CO No 2 Ser B.......... 8.050 12/01/32 1,014,930 1,000 Colorado Ed & Cultural Fac Charter Sch Frontier Academy........................... 7.250 06/01/20 1,034,550 2,000 Colorado Hlth Fac Auth Rev Baptist Home Assn Ser A................................. 6.375 08/15/24 1,581,220 1,060 Colorado Hlth Fac Auth Rev Christian Living Campus Proj................................ 7.050 01/01/19 1,052,029 6,200 Colorado Hlth Fac Auth Rev Christian Living Campus Proj (Prerefunded @ 01/01/05)....... 9.000 01/01/25 6,891,858 2,500 Elk Vly, CO Pub Impt Fee Ser A............. 7.300 09/01/22 2,569,875 755 Lafayette, CO Indl Dev Rev Rocky Mtn Instr Proj Ser A................................. 6.750 10/01/14 540,723 2,015 Lafayette, CO Indl Dev Rev Rocky Mtn Instr Proj Ser A................................. 7.000 10/01/18 1,423,779 1,830 Skyland Metro Dist CO Gunnison Cnty Rfdg... 6.750 12/01/22 1,819,075 ------------ 17,928,039 ------------ CONNECTICUT 0.5% 1,500 Connecticut St Dev Auth Indl Afco Cargo Bdl LLC Proj................................... 8.000 04/01/30 1,564,425 2,000 Mohegan Tribe Indians CT Pub Impt Priority Dist (c)................................... 6.250 01/01/31 2,098,220 ------------ 3,662,645 ------------ DELAWARE 0.1% 1,120 Wilmington, DE Multi-Family Rent Rev Hsg Electra Arms Sr Assoc Proj................. 6.250 06/01/28 1,001,426 ------------
8 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE DISTRICT OF COLUMBIA 0.1% $1,000 District of Columbia Rev Methodist Home Issue...................................... 6.000% 01/01/29 $ 890,780 85 District of Columbia Ser A-1 (Escrowed to Maturity) (MBIA Insd)...................... 6.500 06/01/10 103,679 ------------ 994,459 ------------ FLORIDA 8.8% 3,590 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Ctr.................................... 10.250 07/01/11 3,607,017 1,520 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Ctr Ser A.............................. 10.250 07/01/11 1,527,205 915 Fishhawk Cmnty Dev Dist of FL Spl Assmt Rev........................................ 6.650 05/01/07 924,635 1,435 Fishhawk Cmnty Dev Dist of FL Spl Assmt Rev........................................ 7.625 05/01/18 1,527,227 3,720 Florida Hsg Fin Corp Rev Hsg Beacon Hill Apt Ser C.................................. 6.610 07/01/38 3,476,414 5,400 Florida Hsg Fin Corp Rev Hsg Cypress Trace Apt Ser G.................................. 6.600 07/01/38 5,045,004 1,000 Florida Hsg Fin Corp Rev Hsg Westbrook Apt Ser U-1.................................... 6.450 01/01/39 930,660 4,905 Florida Hsg Fin Corp Rev Hsg Westchase Apt Ser B...................................... 6.610 07/01/38 4,561,503 320 Heritage Harbor Cmnty Dev Dist FL Rev Recntl..................................... 7.750 05/01/23 307,392 850 Heritage Harbor Cmnty Dev Dist FL Rev Spl Assmt Ser A................................ 6.700 05/01/19 869,907 1,500 Hillsborough Cnty, FL Hsg Fin Hsg Clipper Cove Apt Proj Ser A........................ 7.375 07/01/40 1,494,540 850 Lake Saint Charles, FL Cmnty Dev Dist Spl Assmt Rev.................................. 7.875 05/01/17 888,462 2,000 Lee Cnty, FL Indl Dev Auth Hlthcare Fac Rev Cypress Cove Hlthpk Ser A.................. 6.750 10/01/32 2,013,720 3,550 Leon Cnty, FL Ed Fac Auth Rev Southgate Residence Hall Ser A Rfdg.................. 6.750 09/01/28 3,271,928 530 Marshall Creek Cmnty Dev FL Spl Assmt Ser B.......................................... 6.750 05/01/07 533,885 1,425 Miromar Lakes Cmnty Dev Dist Ser B......... 7.250 05/01/12 1,473,079 950 Northern Palm Beach Cnty Dist FL Impt Wtr Ctl & Impt Unit Dev No 16 Rfdg............. 7.500 08/01/24 1,001,243 2,050 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran Twr Rfdg.................. 8.625 07/01/20 2,142,188 2,250 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran Twr Rfdg.................. 8.750 07/01/26 2,321,955
See Notes to Financial Statements 9 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE FLORIDA (CONTINUED) $1,560 Orange Cnty, FL Hlth Fac Auth Rev Hosp Adventist Hlth Sys......................... 5.875% 11/15/11 $ 1,750,226 1,000 Orange Cnty, FL Hlth Fac Auth Rev Hosp Adventist Hlth Sys......................... 6.375 11/15/20 1,107,220 2,000 Orange Cnty, FL Hlth Fac Auth Rev Westminster Cmnty Care..................... 6.600 04/01/24 1,549,040 2,395 Pinellas Cnty, FL Ed Fac Auth Rev College Harbor Proj Ser A.......................... 8.250 12/01/21 2,466,179 1,685 Pinellas Cnty, FL Ed Fac Auth Rev College Harbor Proj Ser A.......................... 8.500 12/01/28 1,745,930 1,000 Saddlebrook, FL Cmnty Ser A................ 6.900 05/01/33 1,019,020 6,000 Sarasota Cnty, FL Hlth Fac Auth Hlth Fac Sunnyside Pptys............................ 6.700 07/01/25 3,950,580 545 Stoneybrook West Cmnty Dev Dist FL Spl Assmt Rev Ser B............................ 6.450 05/01/10 552,973 20,341 Sun N Lake of Sebring, FL Impt Dist Spl Assmt Ser A (a) (c) (d).................... 10.000 12/15/11 4,305,420 680 Tampa Palms, FL Open Space & Trans Cmnty Dev Dist Rev Cap Impt Area 7 Proj.......... 8.500 05/01/17 702,304 947 Tara Cmnty Dev Dist 1 FL Cap Impt Rev Ser B (c)........................................ 6.750 05/01/10 963,752 1,847 University Square Cmnty Dev Dist FL Cap Impt Rev (c)............................... 6.750 05/01/20 1,929,727 204 Vista Lakes Cmnty Dev Dist FL Cap Impt Rev Ser B...................................... 6.350 05/01/05 204,747 2,000 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj Rfdg (Prerefunded @ 11/01/06)......... 7.625 11/01/26 2,404,420 ------------ 62,569,502 ------------ GEORGIA 2.4% 2,000 Atlanta, GA Tax Alloc Atlantic Sta Proj.... 7.750 12/01/14 2,058,420 2,415 Atlanta, GA Urban Residential Fin Auth Multi-Family Rev John Eagan Proj Ser A..... 6.750 07/01/30 2,376,505 2,750 De Kalb Cnty, GA Residential Care Fac Kings Bridge Ser A............................... 8.250 07/01/26 2,891,048 4,000 Fulton Cnty, GA Hsg Auth Multi-Family Hsg Rev Azalea Manor Proj Ser A (c)............ 6.500 02/01/28 3,230,720 2,000 Fulton Cnty, GA Residential Care Sr Lien RHA Asstd Living Ser A..................... 7.000 07/01/29 1,941,740 1,000 Private Colleges & Univ Auth GA Mercer Hsg Corp Proj Ser A............................ 6.000 06/01/21 1,031,590 2,930 Renaissance on Peachtree Unit Invt Tr Ctf GA Custody Ctf............................. 12.374 10/01/25 3,473,837 ------------ 17,003,860 ------------
10 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE HAWAII 0.8% $3,000 Hawaii St Dept Budget & Fin Kahala Nui Proj Ser A...................................... 8.000% 11/15/33 $ 2,992,770 2,825 Kuakini, HI Hlth Sys Ser A................. 6.375 07/01/32 2,902,772 ------------ 5,895,542 ------------ IDAHO 0.1% 1,000 Idaho Hlth Fac Auth Rev Vly Vista Care Ser A Rfdg..................................... 7.875 11/15/29 969,250 ------------ ILLINOIS 10.5% 2,500 Bolingbrook, IL Cap Apprec Ser B (MBIA Insd)...................................... * 01/01/29 623,025 1,993 Bolingbrook, IL Spl Svc Area No 01-1....... 7.375 07/01/31 2,104,708 1,500 Bolingbrook, IL Spl Svc Area No 1 Spl Tax Augusta Vlg Proj (c)....................... 6.750 03/01/32 1,504,890 1,910 Bolingbrook, IL Spl Svc Area No 3 Lakewood Ridge Proj................................. 7.050 03/01/31 2,002,864 992 Cary, IL Spl Tax Svc Area No 1 Cambridge Ser A...................................... 7.625 03/01/30 1,076,241 3,000 Chicago, IL Lakefront Millenium Pkg Fac (MBIA Insd) (e)............................ 0/5.700 01/01/25 2,728,800 7,750 Chicago, IL O'Hare Intl Arpt Rev RR II R 239-1 (Variable Rate Coupon) (c)........... 10.220 01/01/19 9,319,453 3,600 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airl Inc Proj Ser B Rfdg (a) (b).... 6.100 11/01/35 720,000 5,000 Chicago, IL Proj Ser A Rfdg (MBIA Insd).... 5.500 01/01/38 5,265,400 4,000 Chicago, IL Spl Assmt Lakeshore East Proj....................................... 6.625 12/01/22 3,982,320 920 Chicago, IL Tax Increment Alloc Read Dunning Ser B (ACA Insd)................... 7.250 01/01/14 1,015,579 2,000 Chicago, IL Tax Increment Alloc Sub Cent Loop Redev Ser A........................... 6.500 12/01/05 2,157,900 3,000 Chicago, IL Tax Increment Alloc Sub Cent Loop Redev Ser A (ACA Insd)................ 6.500 12/01/06 3,386,640 1,925 Chicago, IL Tax Increment Alloc Sub Cent Loop Redev Ser A (ACA Insd)................ 6.500 12/01/08 2,245,801 1,295 Gilberts, IL Spl Svc Area No 9 Spl Tax Big Timber Proj................................ 7.375 03/01/11 1,363,493 1,245 Gilberts, IL Spl Svc Area No 9 Spl Tax Big Timber Proj................................ 7.750 03/01/27 1,350,476 1,500 Godfrey, IL Rev United Methodist Vlg Ser A.......................................... 5.875 11/15/29 1,216,515 2,700 Hoopeston, IL Hosp Cap Impt Rev Hoopeston Cmnty Mem Hosp Rfdg........................ 6.550 11/15/29 2,479,572 1,865 Huntley, IL Increment Alloc Rev Huntley Redev Proj Ser A........................... 8.500 12/01/15 1,997,583
See Notes to Financial Statements 11 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE ILLINOIS (CONTINUED) $ 271 Huntley, IL Spl Svc Area No 10 Spl Tax Ser A.......................................... 6.250% 03/01/09 $ 274,515 2,621 Huntley, IL Spl Svc Area No 10 Spl Tax Ser A.......................................... 6.500 03/01/29 2,661,573 1,405 Illinois Dev Fin Auth Rev Cmnty Fac Clinic Altgeld Proj............................... 8.000 11/15/16 1,149,023 1,500 Illinois Ed Fac Auth Rev Peace Mem Ministries Proj............................ 7.500 08/15/26 1,515,600 1,000 Illinois Hlth Fac Auth Rev Center Baptist Home Proj.................................. 7.125 11/15/29 962,710 2,500 Illinois Hlth Fac Auth Rev Decatur Mem Hosp....................................... 5.750 10/01/24 2,566,850 3,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Ser A Rfdg........................... 7.400 08/15/23 2,999,610 1,000 Illinois Hlth Fac Auth Rev Lifelink Corp Oblig Group Ser B (Prerefunded @ 02/15/05).................................. 8.000 02/15/25 1,093,160 650 Illinois Hlth Fac Auth Rev Loyola Univ Hlth Sys Ser A.................................. 6.000 07/01/21 675,838 1,200 Illinois Hlth Fac Auth Rev Lutheran Sr Ministries Oblig Ser A..................... 7.375 08/15/31 1,217,904 1,710 Illinois Hlth Fac Auth Rev Proctor Cmnty Hosp Proj.................................. 7.500 01/01/11 1,710,086 700 Illinois Hlth Fac Auth Rev Silver Cross Hosp & Med Rfdg............................ 5.500 08/15/19 713,608 2,375 Lake Cnty, IL Fst Presv Dist Ld Acquisition & Dev...................................... 5.750 12/15/16 2,764,144 675 Lake Cnty, IL Fst Presv Dist Ld Acquisition & Dev...................................... 5.750 12/15/17 783,851 80 Lake, Cook, Kane & McHenry Cntys, IL Cmnty Unit Sch Dist No 22 (FGIC Insd)............ 5.750 12/01/19 90,812 1,250 Montgomery, IL Spl Assmt Impt Lakewood Creek Proj................................. 7.750 03/01/30 1,391,100 1,800 Peoria, IL Spl Tax Weaverridge Spl Svc Area....................................... 8.050 02/01/17 1,933,452 2,095 Regional Tran Auth IL Ser B (AMBAC Insd)... 8.000 06/01/17 2,933,880 3,953 Robbins, IL Res Recovery Rev Restructuring Proj Ser A (a)............................. 8.375 10/15/16 5,930 1,547 Robbins, IL Res Recovery Rev Restructuring Proj Ser B (a)............................. 8.375 10/15/16 2,320 965 Sterling, IL Rev Hoosier Care Proj Ser A... 7.125 06/01/34 882,164 ------------ 74,869,390 ------------
12 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE INDIANA 1.1% $ 825 Crawfordsville, IN Redev Cmnty Redev Dist Tax Increment Rev (c)...................... 7.000% 02/01/12 $ 840,098 1,935 Indiana Hlth Fac Fin Auth Rev Hoosier Care Proj Ser A................................. 7.125 06/01/34 1,770,757 3,000 Indianapolis, IN Arpt Auth Rev Spl Fac Fed Express Corp Proj.......................... 7.100 01/15/17 3,166,440 2,000 Petersburg, IN Pollutn Ctl Rev IN Pwr & Lt......................................... 6.375 11/01/29 1,899,020 ------------ 7,676,315 ------------ IOWA 0.5% 1,500 Cedar Rapids, IA Rev First Mtg Cottage Grove Ser A Rfdg........................... 5.875 07/01/28 1,128,225 2,000 Estherville, IA Hosp Rev Avera Holy Family Proj....................................... 6.250 07/01/26 2,111,780 ------------ 3,240,005 ------------ KANSAS 0.7% 955 Lawrence, KS Coml Dev Rev Holiday Inn Sr Ser A Rfdg................................. 8.000 07/01/16 823,888 1,000 Lenexa, KS Hlthcare Fac Rev Lakeview Vlg Inc Ser B.................................. 6.250 05/15/26 1,004,790 960 Manhattan, KS Coml Dev Rev Holiday Inn Sr Ser A Rfdg................................. 8.000 07/01/16 826,714 1,000 Olathe, KS Sr Living Fac Rev Aberdeen Vlg Inc Ser A.................................. 8.000 05/15/30 1,028,650 1,500 Overland Pk, KS Dev Corp Rev First Tier Overland Park Ser A........................ 7.375 01/01/32 1,508,655 ------------ 5,192,697 ------------ KENTUCKY 0.5% 1,000 Kenton Cnty, KY Arpt Brd Spl Fac Rev Mesaba Aviation Inc Proj Ser A.................... 6.700 07/01/29 723,630 3,000 Newport, KY Pub Pptys Corp Rev First Mtg Pub Pkg & Plaza Ser A 1.................... 8.500 01/01/27 2,909,700 ------------ 3,633,330 ------------ LOUISIANA 1.3% 2,135 Louisiana Hsg Fin Agy Rev Multi-Family Hsg Plantation Ser A........................... 7.125 01/01/28 2,100,797 2,000 Louisiana Loc Govt Envir Fac Hlthcare Saint James Place Ser A Rfdg..................... 8.000 11/01/29 1,934,080
See Notes to Financial Statements 13 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE LOUISIANA (CONTINUED) $1,000 Louisiana Pub Fac Auth Rev Progressive Hlthcare................................... 6.375% 10/01/20 $ 809,170 1,000 Louisiana Pub Fac Auth Rev Progressive Hlthcare................................... 6.375 10/01/28 767,820 3,424 Louisiana St Univ & Agric & Mechanical College Univ Rev Master Agreement (c)...... 5.750 10/30/18 3,285,798 ------------ 8,897,665 ------------ MAINE 0.0% 25 Maine Hlth & Higher Ed Fac Auth Rev Ser B (Prerefunded @ 07/01/04) (FSA Insd)........ 7.000 07/01/24 26,621 ------------ MARYLAND 1.3% 1,000 Baltimore Cnty, MD Mtg Rev Shelter Elder Care Ser A................................. 7.250 11/01/29 960,430 730 Maryland St Econ Dev Corp Air Cargo Rev Afco Cargo BWI II LLC Proj................. 6.250 07/01/07 715,269 1,200 Maryland St Econ Dev Corp MD Golf Course Sys........................................ 8.250 06/01/28 1,167,192 3,000 Montgomery Cnty, MD Econ Dev Editorial Proj In Ed Ser A (c)............................ 6.400 09/01/28 2,774,040 3,000 Prince Georges Cnty, MD Spl Oblig Spl Assmt Woodview Ser A............................. 8.000 07/01/26 3,293,850 ------------ 8,910,781 ------------ MASSACHUSETTS 4.6% 1,000 Massachusetts St Dev Fin Agy Briarwood Ser B.......................................... 8.000 12/01/22 1,035,690 910 Massachusetts St Dev Fin Agy Rev Gtr Lynn Mental Hlth (c)............................ 7.750 06/01/18 927,390 1,965 Massachusetts St Dev Fin Agy Rev Hillcrest Ed Ctr Inc................................. 6.375 07/01/29 1,879,935 3,000 Massachusetts St Dev Fin Agy Rev Hlthcare Fac Alliance Ser A......................... 7.100 07/01/32 2,763,300 1,000 Massachusetts St Dev Fin Agy Rev MCHSP Human Svc Providers Ser A (Prerefunded @ 07/01/10).................................. 8.000 07/01/20 1,292,480 3,765 Massachusetts St Dev Fin Agy Rev New England Ctr For Children................... 6.000 11/01/19 3,392,943 3,100 Massachusetts St Hlth & Ed Civic Investments Ser B.......................... 9.150 12/15/23 3,506,596 1,000 Massachusetts St Hlth & Ed Nichols College Issue Ser C................................ 6.000 10/01/17 929,750 1,929 Massachusetts St Hsg Fin Agy Hsg Rev Insd Rental Ser A (AMBAC Insd).................. 6.650 07/01/19 1,987,804
14 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MASSACHUSETTS (CONTINUED) $1,965 Massachusetts St Indl Fin Agy Assisted Living Fac Rev Marina Bay LLC Proj......... 7.500% 12/01/27 $ 2,002,767 410 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Ctr............................. 8.000 12/01/06 422,936 1,085 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Ctr............................. 8.375 12/01/13 1,168,263 675 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Ctr............................. 8.500 12/01/20 727,589 645 Massachusetts St Indl Fin Agy Rev First Mtg GF/Pilgrim Inc Proj........................ 6.500 10/01/15 583,899 2,000 Massachusetts St Indl Fin Agy Rev First Mtg GF/Pilgrim Inc Proj........................ 6.750 10/01/28 1,745,940 795 Massachusetts St Indl Fin Agy Rev Gtr Lynn Mental Hlth (c)............................ 6.200 06/01/08 767,191 2,965 Massachusetts St Indl Fin Agy Rev Gtr Lynn Mental Hlth (c)............................ 6.375 06/01/18 2,751,075 4,500 Massachusetts St Indl Fin Agy Rev Swr Fac Res Ctl Composting (c)..................... 9.250 06/01/10 4,512,870 ------------ 32,398,418 ------------ MICHIGAN 1.3% 895 Detroit, MI Loc Dev Fin Auth Tax Increment Sub Ser C (c).............................. 6.850 05/01/21 888,162 2,390 Meridian, MI Econ Dev Corp Ltd Oblig Rev First Mtg Burcham Hills Ser A Rfdg......... 7.500 07/01/13 2,451,758 3,430 Meridian, MI Econ Dev Corp Ltd Oblig Rev First Mtg Burcham Hills Ser A Rfdg......... 7.750 07/01/19 3,531,940 995 Michigan Muni Bd Auth Rev Pub Sch Academy Fac Pgm.................................... 8.125 10/01/31 975,110 11,084 Michigan St Strategic Fd Ltd Oblig Rev Great Lakes Pulp & Fiber Proj (a) (f)...... 8.000 12/01/27 1,717,950 ------------ 9,564,920 ------------ MINNESOTA 2.9% 2,000 Aitkin, MN Hlth Fac Rev Riverwood Hlthcare Ctr Proj................................... 7.750 02/01/31 1,990,680 1,000 Cambridge, MN Hsg & Hlthcare Fac Rev Grandview West Proj Ser B.................. 6.000 10/01/33 839,480 2,000 Carlton, MN Hlth & Hsg Fac Intermediate Faith Social Svc Inc Proj.................. 7.500 04/01/19 2,071,020 1,000 Dakota Cnty, MN Hsg & Redev................ 6.250 05/01/29 918,970 1,500 Duluth, MN Econ Dev Auth Saint Lukes Hosp.. 7.250 06/15/32 1,537,020 2,000 Glencoe, MN Hlthcare Fac Rev............... 7.500 04/01/31 2,047,680 6,890 Minneapolis & Saint Paul, MN Met Northwest Airl Proj Ser A............................ 7.000 04/01/25 6,060,789
See Notes to Financial Statements 15 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MINNESOTA (CONTINUED) $1,000 Minneapolis & Saint Paul, MN Met Northwest Airl Proj Ser B............................ 6.500% 04/01/25 $ 921,200 1,500 Saint Cloud, MN Hsg & Redev Auth Sterling Heights Apt Proj........................... 7.550 04/01/39 1,481,745 1,500 Saint Paul, MN Port Auth Hotel Fac Rev Radisson Kellogg Proj Ser 2 Rfdg........... 7.375 08/01/29 1,529,385 1,280 St Paul, MN Hsg & Redev Auth Hosp Rev Healtheast Proj Ser A Rfdg................. 6.625 11/01/17 1,271,923 ------------ 20,669,892 ------------ MISSISSIPPI 0.3% 1,900 Mississippi Dev Bank Spl Oblig Diamond Lakes Util Ser A Rfdg...................... 6.250 12/01/17 1,847,332 ------------ MISSOURI 4.6% 1,000 Fenton, MO Tax Increment Rev............... 6.125 10/01/21 1,021,490 1,000 Fenton, MO Tax Increment Rev............... 7.000 10/01/21 1,081,290 400 Ferguson, MO Tax Increment Rev Crossings at Halls Ferry Proj........................... 7.250 04/01/07 409,452 3,095 Ferguson, MO Tax Increment Rev Crossings at Halls Ferry Proj........................... 7.625 04/01/17 3,302,303 484 Ferguson, MO Tax Increment Rev Crossings at Halls Ferry Proj........................... 7.625 04/01/18 515,470 1,525 Jefferson Cnty, MO Jr College Dist Student Hsg Sys Rev Jefferson College.............. 7.250 07/01/31 1,435,803 996 Kansas City, MO Indl Dev Auth Multi-Family Hsg Rev Brentwood Manor Apt Proj Ser B..... 7.250 10/15/38 988,440 965 Kansas City, MO Multi-Family Hsg Rev Vlg Green Apt Proj............................. 6.250 04/01/30 817,326 10,820 Missouri St Hlth & Edl Fac Rev Drivers Ser 362 (c).................................... 9.230 05/15/11 12,448,626 2,220 Nevada, MO Hosp Rev Nevada Regional Med Ctr........................................ 6.750 10/01/22 2,290,152 1,000 Saint Louis, MO Indl Dev Auth Rev Sr Lien Saint Louis Convention Ser A............... 7.200 12/15/28 983,760 5,000 Saline Cnty, MO Indl Dev Auth Hlth Fac Rev (c)........................................ 6.500 12/01/28 5,036,100 1,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd)..... 6.000 06/01/15 1,207,330 1,305 Three Riv Jr College Dist MO Cmnty College.................................... 7.000 09/01/18 1,199,269 ------------ 32,736,811 ------------
16 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW HAMPSHIRE 0.9% $2,000 New Hampshire Higher Ed & Hlth Fac Auth Rev Havenwood-Heritage Heights................. 7.350% 01/01/18 $ 2,041,940 2,000 New Hampshire Higher Ed & Hlth Fac Auth Rev Havenwood-Heritage Heights................. 7.450 01/01/25 2,034,500 1,000 New Hampshire Hlth & Ed Fac Auth Rev NH College Issue.............................. 7.500 01/01/31 1,078,570 1,000 New Hampshire St Business Fin Auth Rev Alice Peck Day Hlth Sys Ser A.............. 6.875 10/01/19 1,003,960 ------------ 6,158,970 ------------ NEW JERSEY 3.6% 2,240 Camden Cnty, NJ Impt Auth Lease Rev Dockside Refrig (a) (b) (c)................ 8.400 04/01/24 2,038,400 1,940 New Jersey Econ Dev Auth Asstd Living Rev........................................ 6.750 08/01/30 1,665,975 2,000 New Jersey Econ Dev Auth Cedar Crest Vlg Inc Fac Ser A.............................. 7.000 11/15/16 2,038,440 2,000 New Jersey Econ Dev Auth Continental Airl Inc Proj................................... 6.250 09/15/19 1,701,900 2,000 New Jersey Econ Dev Auth First Mtg Franciscan Oaks Proj....................... 5.700 10/01/17 1,830,300 1,000 New Jersey Econ Dev Auth Retirement Cmnty Rev Ser A.................................. 8.000 11/15/15 1,047,620 1,000 New Jersey Econ Dev Auth Retirement Cmnty Rev Ser A.................................. 8.125 11/15/18 1,032,900 1,440 New Jersey Econ Dev Auth Retirement Cmnty Rev Ser A.................................. 8.125 11/15/23 1,501,344 1,000 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens Ser A................... 8.500 11/01/16 1,054,220 1,500 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens Ser A................... 8.625 11/01/25 1,578,765 1,000 New Jersey Econ Dev Auth Rev Kapkowsi Rd Landfill Ser A (Prerefunded @ 05/15/14).... 6.375 04/01/18 1,237,670 1,580 New Jersey Econ Dev Auth Rev Kullman Assoc Proj Ser A................................. 6.125 06/01/18 1,336,048 2,000 New Jersey Econ Dev Auth Rev Sr Living Fac Esplanade Bear............................. 7.000 06/01/39 1,655,400 3,000 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen Proj Ser A (Prerefunded @ 05/15/06)... 8.750 05/15/26 3,620,100 1,010 New Jersey Hlthcare Fac Fin Auth Rev Raritan Bay Med Ctr Issue Rfdg............. 7.250 07/01/14 1,042,239 1,090 New Jersey St Ed Fac Auth Rev Felician College of Lodi Ser D (c).................. 7.375 11/01/22 1,020,262 ------------ 25,401,583 ------------
See Notes to Financial Statements 17 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW MEXICO 0.7% $4,195 Albuquerque, NM Retirement Fac Rev La Vida Llena Proj Ser B Rfdg...................... 6.600% 12/15/28 $ 4,098,851 1,040 New Mexico Hsg Auth Region III Sr Brentwood Gardens Apt Ser A.......................... 6.850 12/01/31 1,010,838 ------------ 5,109,689 ------------ NEW YORK 4.7% 990 Bethlehem, NY Indl Dev Agy Sr Hsg Rev Van Allen Proj Ser A........................... 6.875 06/01/39 895,346 1,400 Brookhaven, NY Indl Dev Agy Sr Residential Hsg Rev Woodcrest Estates Fac Ser A........ 6.375 12/01/37 1,308,118 2,330 Monroe Cnty, NY Indl Dev Agy Woodland Vlg Proj....................................... 8.000 11/15/15 2,438,555 3,000 New York City Indl Dev Agy Field Hotel Assoc LP JFK Rfdg.......................... 6.000 11/01/28 1,704,330 3,000 New York City Indl Dev Agy JFK Intl Arpt Proj Ser B (a)............................. 8.500 08/01/28 2,085,090 2,185 New York City Indl Dev Agy LaGuardia Assoc LP Proj Rfdg (a)........................... 5.800 11/01/13 1,448,546 5,000 New York City Ser A........................ 7.000 08/01/07 5,690,150 2,130 New York City Ser D........................ 8.000 02/01/05 2,305,597 870 New York City Ser D (Escrowed to Maturity).................................. 8.000 02/01/05 949,849 2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse Fltg) (g)..................... 11.509 04/01/20 3,259,725 1,985 Saratoga Cnty, NY Indl Dev Agy Sr Hsg Rev Highpointe at Malta Proj Ser A............. 6.875 06/01/39 1,822,131 1,000 Suffolk Cnty, NY Indl Dev Agy Continuing Care Retirement Cmnty Rev.................. 7.250 11/01/28 1,047,150 990 Suffolk Cnty, NY Indl Dev Agy Eastern Long Is Hosp Assoc Ser A........................ 7.750 01/01/22 981,149 1,400 Suffolk Cnty, NY Indl Dev Agy Indl Dev Rev Spellman High Voltage Fac Ser A............ 6.375 12/01/17 1,280,076 1,445 Suffolk Cnty, NY Indl Dev Agy Peconic Landing Ser A.............................. 8.000 10/01/20 1,461,589 1,000 Syracuse, NY Indl Dev Agy Rev First Mtg Jewish Home Ser A.......................... 7.375 03/01/31 1,021,320 2,315 Utica, NY Indl Dev Agy Civic Utica College Civic Fac.................................. 6.750 12/01/21 2,337,594 1,000 Westchester Cnty, NY Indl Dev Hebrew Hosp Sr Hsg Inc Ser A........................... 7.375 07/01/30 1,052,860 ------------ 33,089,175 ------------ NORTH CAROLINA 0.3% 2,000 North Carolina Med Care Comm First Mtg United Methodist Homes..................... 7.000 10/01/17 2,074,760 ------------
18 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NORTH DAKOTA 0.2% $1,000 Grand Forks, ND Sr Hsg Rev Spl Term 4000 Vly Square Proj............................ 6.250% 12/01/34 $ 838,990 965 Grand Forks, ND Sr Hsg Rev Spl Term 4000 Vly Square Proj............................ 6.375 12/01/34 809,664 ------------ 1,648,654 ------------ OHIO 2.2% 1,500 Akron Bath Copley, OH St Twp Hosp Dist Rev Summa Hosp Ser A........................... 5.375 11/15/24 1,346,295 5,000 Athens Cnty, OH Hosp Facs Rev Impt O'Bleness Mem Ser A Rfdg................... 7.125 11/15/33 5,010,500 3,000 Cleveland-Cuyahoga Cnty, OH Spl Assmt/Tax Increment.................................. 7.000 12/01/18 3,066,330 623 Cuyahoga Cnty, OH Multi-Family Rev Hsg Park Lane Apts Ser A1 Rfdg (e).................. 1.250/6.000 10/01/37 479,472 1,081 Cuyahoga Cnty, OH Multi-Family Rev Hsg Park Lane Apts Ser A2 Rfdg (a).................. 5.460 10/01/37 26,493 1,760 Dayton, OH Spl Fac Rev Afco Cargo Day LLC Proj....................................... 6.300 04/01/22 1,520,622 1,500 Lucas Cnty, OH Hlthcare & Impt Sunset Retirement Rfdg............................ 6.500 08/15/20 1,600,890 2,905 Madison Cnty, OH Hosp Impt Rev Madison Cnty Hosp Proj Rfdg............................. 6.400 08/01/28 2,685,382 ------------ 15,735,984 ------------ OKLAHOMA 2.0% 685 Langston, OK Econ Dev Langston Cmnty Dev Corp Proj Ser A............................ 7.000 08/01/10 685,096 750 Langston, OK Econ Dev Langston Cmnty Dev Corp Proj Ser A............................ 7.400 08/01/17 740,018 1,000 Langston, OK Econ Dev Langston Cmnty Dev Corp Proj Ser A............................ 7.625 08/01/20 992,370 1,000 Oklahoma Cnty, OK Fin Auth Epworth Villa Proj Ser A Rfdg............................ 7.000 04/01/25 998,890 1,065 Oklahoma Dev Fin Auth Rev Hillcrest Hlthcare Sys Ser A Rfdg.................... 5.750 08/15/12 873,928 1,000 Oklahoma Dev Fin Auth Rev Hillcrest Hlthcare Sys Ser A Rfdg.................... 5.750 08/15/15 781,660 4,000 Oklahoma Dev Fin Auth Rev Hillcrest Hlthcare Sys Ser A Rfdg.................... 5.625 08/15/19 2,932,320 3,250 Tulsa Cnty, OK Pub Fac Auth (AMBAC Insd)... 6.250 11/01/22 3,816,053 3,000 Tulsa, OK Muni Arpt Trust Rev American Airl Proj Rfdg.................................. 6.250 06/01/20 2,144,970 ------------ 13,965,305 ------------
See Notes to Financial Statements 19 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE OREGON 1.1% $2,000 Clackamas Cnty, OR Hosp Fac Willamette View Inc Proj Ser A............................. 7.500% 11/01/29 $ 2,124,860 2,145 Clatsop Care Ctr Hlth Dist OR Rev Sr Hsg... 6.875 08/01/28 2,094,614 3,878 Oregon St Hlth Hsg Ed & Cultural Fac Auth....................................... 7.250 06/01/28 3,768,697 ------------ 7,988,171 ------------ PENNSYLVANIA 7.9% 2,000 Allegheny Cnty, PA Hosp Dev Hlth Sys Ser B.......................................... 9.250 11/15/15 1,971,220 2,000 Allegheny Cnty, PA Hosp Dev Hlth Sys Ser B.......................................... 9.250 11/15/22 1,966,240 1,500 Allegheny Cnty, PA Hosp Dev Hlth Sys Ser B.......................................... 9.250 11/15/30 1,471,695 2,000 Allegheny Cnty, PA Indl Dev Auth Lease Rev........................................ 6.625 09/01/24 1,823,360 6,000 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Collateral Toledo Edison Co Proj Ser A Rfdg....................................... 7.750 05/01/20 6,565,080 1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg Inc Proj Rfdg (Prerefunded @ 05/15/06).................................. 7.700 05/15/22 1,174,720 1,000 Bucks Cnty, PA Indl Dev Auth Rev First Mtg Hlthcare Fac Chandler...................... 6.200 05/01/19 947,400 1,500 Chester Cnty, PA Hlth & Ed Fac Chester Cnty Hosp Ser A................................. 6.750 07/01/31 1,380,450 2,500 Cliff House Ctf Trust Var Sts Ctf Partn Ser A.......................................... 6.625 06/01/27 2,139,400 2,000 Cumberland Cnty, PA Indl Dev Auth Rev First Mtg Woods Cedar Run Ser A Rfdg............. 6.500 11/01/28 1,392,240 5,000 Dauphin Cnty, PA Gen Auth Rev Hotel & Conf Ctr Hyatt Regency (c)...................... 6.200 01/01/29 3,946,550 3,000 Dauphin Cnty, PA Gen Auth Rev Office & Pkg Riverfront Office.......................... 6.000 01/01/25 2,569,410 1,000 Lancaster Cnty, PA Hosp Auth Rev Hlth Ctr Saint Anne's Home.......................... 6.625 04/01/28 962,000 1,200 Lehigh Cnty, PA Gen Purp Auth First Mtg Bible Fellowship Church.................... 7.625 11/01/21 1,242,096 2,000 Lehigh Cnty, PA Gen Purp Auth Rev Kidspeace Oblig Group Rfdg........................... 6.000 11/01/23 1,928,500 1,000 Lehigh Cnty, PA Indl Dev Auth Hlth Fac Rev Lifepath Inc Proj.......................... 6.100 06/01/18 890,440 2,000 Montgomery Cnty, PA Higher Ed & Temple Continuing Care Ctr (a).................... 6.750 07/01/29 897,240 500 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The Meadowood Corp Rfdg................ 7.000 12/01/10 518,145 2,500 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The Meadowood Corp Rfdg................ 7.250 12/01/15 2,535,400
20 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE PENNSYLVANIA (CONTINUED) $6,000 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The Meadowood Corp Rfdg................ 7.400% 12/01/20 $ 6,076,020 925 Montgomery Cnty, PA Indl Dev Auth Rev Wordsworth Academy......................... 7.750 09/01/24 944,860 1,435 Northeastern PA Hosp & Ed Auth Hlthcare Rev........................................ 7.125 10/01/29 1,388,922 3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev Colver Proj Ser D...................... 7.050 12/01/10 3,103,470 980 Pennsylvania St Higher Ed Student Assn Inc Proj Ser A................................. 6.750 09/01/32 1,014,672 2,150 Philadelphia, PA Auth Indl Dev Rev Coml Dev Rfdg....................................... 7.750 12/01/17 2,185,798 1,500 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Rfdg................................... 7.250 01/15/17 1,472,250 2,000 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Rfdg................................... 7.350 01/15/22 1,956,480 1,500 Westmoreland Cnty, PA Indl Dev Hlthcare Fac Redstone Ser B............................. 8.000 11/15/23 1,624,455 ------------ 56,088,513 ------------ RHODE ISLAND 0.3% 1,825 Rhode Island St Econ Dev Corp Rev Oblig Providence Place........................... 7.250 07/01/20 1,782,094 ------------ SOUTH CAROLINA 0.7% 115 Charleston Cnty, SC Ctf Part Ser B (MBIA Insd)...................................... 7.000 06/01/19 121,656 1,000 Oconee Cnty, SC Indl Rev Bond Johnson Ctl Inc Ser 84................................. 3.198 06/15/04 993,900 2,000 South Carolina Jobs Econ Dev First Mtg Westley Commons Proj....................... 7.750 10/01/24 1,863,440 2,000 South Carolina Jobs Econ Impt Palmetto Health Ser C Rfdg.......................... 6.375 08/01/34 2,020,000 ------------ 4,998,996 ------------ SOUTH DAKOTA 0.3% 590 Keystone, SD Econ Dev Rev Wtr Quality Mgmt Corp Ser A................................. 5.500 12/15/08 563,645 1,760 Keystone, SD Econ Dev Rev Wtr Quality Mgmt Corp Ser A................................. 6.000 12/15/18 1,565,291 ------------ 2,128,936 ------------ TENNESSEE 2.9% 940 Chattanooga, TN Indl Dev Brd Indl Rev Dev Mkt Street Proj Rfdg....................... 7.000 12/15/12 798,098 4,625 Chattanooga, TN Indl Dev Brd Indl Rev Dev Warehouse Row Ltd Proj Rfdg................ 7.000 12/15/12 3,926,810
See Notes to Financial Statements 21 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE TENNESSEE (CONTINUED) $3,000 Elizabethton, TN Hlth & Ed Fac Brd Rev Rfdg (MBIA Insd)................................ 7.750% 07/01/29 $ 3,918,690 2,970 SCA Tax Exempt Trust Multi-Family Mtg Memphis Hlth Ed Rev Ser A6 (FSA Insd)...... 7.350 01/01/30 3,094,918 5,495 Sullivan Cnty, TN Hlth Ed & Hsg Fac Brd Rev........................................ 8.410 11/01/19 5,451,370 2,900 Trenton, TN Hlth & Ed Fac Brd Rev Inc Proj Ser A (c).................................. 10.000 11/01/19 3,100,738 1,160 Trenton, TN Hlth & Ed Fac Brd Rev Inc Proj Ser B (a) (b) (c).......................... 10.000 11/01/20 115,884 ------------ 20,406,508 ------------ TEXAS 10.5% 680 Abia Dev Corp TX Arpt Fac Rev Austin Belly Port Dev LLC Proj Ser A.................... 6.250 10/01/08 656,982 3,000 Abia Dev Corp TX Arpt Fac Rev Austin Belly Port Dev LLC Proj Ser A.................... 6.500 10/01/23 2,687,430 1,000 Atlanta, TX Hosp Auth Fac Rev.............. 6.700 08/01/19 964,950 2,035 Atlanta, TX Hosp Auth Fac Rev.............. 6.750 08/01/29 1,934,837 1,000 Austin-Bergstorm Landhost Enterprises Inc TX Arpt Hotel Sr Ser A..................... 6.750 04/01/27 842,750 1,960 Bell Cnty, TX Indl Dev Corp Solid Waste Disposal Rev............................... 7.600 12/01/17 1,368,942 1,000 Bexar Cnty, TX Hsg Fin Corp Multi-Family Hsg Rev Woodland Ridge Apt Proj Ser A...... 7.000 01/01/39 984,420 2,000 Brazos Cnty, TX Hlth Fac Dev Oblig Grp..... 5.375 01/01/32 2,009,220 735 Comal Cnty, TX Hlth Fac Dev Hlthcare Sys McKenna Mem Proj Ser A..................... 6.250 02/01/32 749,759 1,825 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg (c)........................................ * 08/01/11 1,017,602 3,445 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg... 7.250 04/01/32 3,505,219 2,970 Dallas, TX Wtrwks & Swr Sys Rev Rfdg....... 5.750 10/01/17 3,383,840 2,500 Garland, TX Indl Dev Auth Rev Bond Ashland Oil Proj Ser 84 Rfdg....................... 8.920 04/01/04 2,505,700 6,400 Houston, TX Arpt Sys Rev Spl Fac Continental Airl Ser B..................... 6.125 07/15/17 5,173,632 3,000 Houston, TX Arpt Sys Rev Spl Fac Continental Airl Ser C..................... 5.700 07/15/29 2,077,830 1,750 Houston, TX Arpt Sys Rev Sub Lien Ser A (FSA Insd)................................. 5.125 07/01/32 1,763,370 8,880 Lower CO River Auth TX Rev Ser A Rfdg (Variable Rate Coupon) (FSA Insd) (c)...... 10.389 05/15/14 11,509,279 3,750 Lower CO River Auth TX Rev Ser A Rfdg (Variable Rate Coupon) (FSA Insd) (c)...... 10.389 05/15/15 4,860,338 1,445 Lubbock, TX Hlth Fac Dev Corp Rev First Mtg Carillon Proj Ser A........................ 6.500 07/01/19 1,098,200
22 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE TEXAS (CONTINUED) $2,305 Meadow Parc Dev Inc TX Multi-Family Rev Hsg Meadow Parc Apt Proj....................... 6.500% 12/01/30 $ 2,141,783 2,500 Metropolitan Hlth Fac Dev Corp TX Wilson N Jones Mem Hosp Proj........................ 7.250 01/01/31 2,333,775 2,950 Midlothian, TX Dev Auth Tax Increment Contract Rev............................... 6.700 11/15/23 3,000,681 2,000 Midlothian, TX Dev Auth Tax Increment Contract Rev............................... 7.875 11/15/26 2,206,080 250 San Antonio, TX Hlth Fac Dev Corp Rev Encore Nursing Ctr Partn................... 8.250 12/01/19 253,598 1,819 Texas Gen Svcs Comm Part Interests......... 7.250 08/01/11 1,849,292 4,800 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev (Inverse Fltg) (GNMA Collateralized)... 6.900 07/02/24 5,066,112 875 Texas St Higher Edl Coordinating Brd College Student Ln Rev..................... 7.849 10/01/25 878,281 2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll Tunnel Proj (Prerefunded @ 01/01/05) (FGIC Insd).................... 6.750 01/01/15 2,180,540 2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll Tunnel Proj (Prerefunded @ 01/01/05) (FGIC Insd).................... 6.600 01/01/23 2,176,820 1,000 Wichita Cnty,TX Hlth Fac Rolling Meadows Fac Ser A Rfdg............................. 6.250 01/01/28 960,740 2,500 Woodhill Pub Fac Corp TX Hsg-Woodhill Apt Proj....................................... 7.500 12/01/29 2,477,000 ------------ 74,619,002 ------------ UTAH 0.2% 1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj (a)................................... 7.800 09/01/15 400,000 1,165 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj (a)................................... 8.000 09/01/20 466,000 1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj (a)................................... 7.800 09/01/25 400,000 325 Utah St Hsg Fin Agy Single Family Mtg Mezz A1 (AMBAC Insd)............................ 6.100 07/01/13 341,409 ------------ 1,607,409 ------------
See Notes to Financial Statements 23 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE VERMONT 0.4% $1,015 Vermont Ed & Hlth Bldg Fin Agy Rev Hlthcare Fac Copley Manor Proj (a).................. 6.250% 04/01/29 $ 450,822 1,000 Vermont Ed & Hlth Bldg Fin Agy Rev VT Council Dev Mental Hlth Ser A.............. 6.000 12/15/09 1,112,750 1,000 Vermont Ed & Hlth Bldg Fin Bennington College Proj............................... 6.625 10/01/29 1,005,880 ------------ 2,569,452 ------------ VIRGINIA 1.7% 1,000 Greensville Cnty, VA Indl Dev Wheeling Steel Proj Ser A........................... 7.000 04/01/14 680,000 2,500 Henrico Cnty, VA Econ Dev Utd Methodist Ser A Rfdg..................................... 6.500 06/01/22 2,480,250 6,000 Peninsula Port Auth VA Baptist Homes Ser A.......................................... 7.375 12/01/32 6,099,420 1,500 Pittsylvania Cnty, VA Indl Dev Auth Rev Exempt Fac Ser A (c)....................... 7.450 01/01/09 1,483,395 1,700 Virginia Small Business Fin Auth Rev Indl Dev SIL Clean Wtr Proj..................... 7.250 11/01/24 1,680,331 ------------ 12,423,396 ------------ WASHINGTON 1.4% 6,580 Energy Northwest WA Elec Rev Proj No 3 Ser A Rfdg (FSA Insd).......................... 5.500 07/01/17 7,319,855 1,000 King Cnty, WA Pub Hosp Dist No 004 Snoqualmie Vly Hosp........................ 7.250 12/01/15 1,036,120 1,000 Port Seattle, WA Spl Fac Rev Northwest Airl Proj....................................... 7.125 04/01/20 874,390 1,000 Port Seattle, WA Spl Fac Rev Northwest Airl Proj....................................... 7.250 04/01/30 863,560 ------------ 10,093,925 ------------ WISCONSIN 1.2% 800 Baldwin, WI Hosp Rev Mtg Ser A............. 6.125 12/01/18 798,744 1,000 Baldwin, WI Hosp Rev Mtg Ser A............. 6.375 12/01/28 1,001,150 1,750 Milwaukee, WI Rev Sr Air Cargo............. 6.500 01/01/25 1,770,615 3,000 Wisconsin St Hlth & Ed Fac Auth Rev Milwaukee Catholic Home Inc Proj........... 7.500 07/01/26 3,022,350 1,000 Wisconsin St Hlth & Ed Fac Auth Rev Oakwood Vlg Proj Ser A............................. 7.625 08/15/30 1,039,150 1,000 Wisconsin St Hlth & Ed Fac Divine Savior Hlthcare Ser C............................. 7.500 05/01/32 1,002,400 ------------ 8,634,409 ------------ WYOMING 0.2% 1,500 Teton Cnty, WY Hosp Dist Hosp Saint Johns Med Ctr.................................... 6.750 12/01/27 1,470,075 ------------
24 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE PUERTO RICO 0.2% $2,465 Puerto Rico Port Auth Rev Spl Fac Amern Airl Ser A................................. 6.250% 06/01/26 $ 1,405,099 ------------ U. S. VIRGIN ISLANDS 0.4% 2,500 Northern Mariana Islands Ser A............. 7.375 06/01/30 2,560,275 ------------ TOTAL MUNICIPAL BONDS......................................................... 697,959,300 ------------ TAXABLE NOTE 0.1% 976 Divine Family Trust (d).................... 6.000 10/29/04 966,397 ------------ TOTAL INVESTMENTS 98.3% (Cost $736,786,476)......................................................... 698,925,697 OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%................................... 11,851,394 ------------ NET ASSETS 100.0%............................................................ $710,777,091 ============
* Zero coupon bond (a) Non-income producing security. (b) This borrower has filed for protection in federal bankruptcy court. (c) These securities are restricted and may be resold only in transactions exempt from registration which are normally those transactions with qualified institutional buyers. (d) Market value is determined in accordance with procedures established in good faith by the Board of Trustees. (e) Security is a "step-up" bond where the coupon increases or steps up at a predetermined date. (f) Payment-in-kind security. (g) An Inverse Floating Rate security is one where the coupon is inversely indexed to a short-term floating interest rate multiplied by a specific factor. As the floating rate rises, the coupon is reduced. Conversely, as the floating rate declines, the coupon is increased. The price of these securities may be more volatile than the price of a comparable fixed rate security. These instruments are typically used by the Fund to enhance the yield of the portfolio. All of the Trust's portfolio holdings including derivative instruments, are marked to market each day with the change in value reflected in the unrealized appreciation/depreciation. Upon disposition a realized gain or loss is recognized accordingly. See Notes to Financial Statements 25 YOUR FUND'S INVESTMENTS September 30, 2003 ACA--American Capital Access AMBAC--AMBAC Indemnity Corp. FGIC--Financial Guaranty Insurance Co. FSA--Financial Security Assurance Inc. GNMA--Government National Mortgage Association MBIA--Municipal Bond Investors Assurance Corp. 26 See Notes to Financial Statements FINANCIAL STATEMENTS Statement of Assets and Liabilities September 30, 2003 ASSETS: Total Investments (Cost $736,786,476)....................... $698,925,697 Receivables: Interest.................................................. 14,906,546 Investments Sold.......................................... 1,059,000 Fund Shares Sold.......................................... 289,943 Other....................................................... 149,343 ------------ Total Assets............................................ 715,330,529 ------------ LIABILITIES: Payables: Fund Shares Repurchased................................... 1,560,586 Income Distributions...................................... 1,201,526 Custodian Bank............................................ 845,138 Distributor and Affiliates................................ 319,807 Investment Advisory Fee................................... 281,368 Trustees' Deferred Compensation and Retirement Plans........ 194,897 Accrued Expenses............................................ 150,116 ------------ Total Liabilities....................................... 4,553,438 ------------ NET ASSETS.................................................. $710,777,091 ============ NET ASSETS CONSIST OF: Capital (Par value of $.01 per share with an unlimited number of shares authorized).............................. $828,716,452 Accumulated Undistributed Net Investment Income............. 3,564,047 Net Unrealized Depreciation................................. (37,860,779) Accumulated Net Realized Loss............................... (83,642,629) ------------ NET ASSETS.................................................. $710,777,091 ============ MAXIMUM OFFERING PRICE PER SHARE: Class A Shares: Net asset value and redemption price per share (Based on net assets of $560,865,859 and 43,052,976 shares of beneficial interest issued and outstanding)............. $ 13.03 Maximum sales charge (4.75%* of offering price)......... .65 ------------ Maximum offering price to public........................ $ 13.68 ============ Class B Shares: Net asset value and offering price per share (Based on net assets of $115,578,643 and 8,877,104 shares of beneficial interest issued and outstanding)............. $ 13.02 ============ Class C Shares: Net asset value and offering price per share (Based on net assets of $34,332,589 and 2,618,663 shares of beneficial interest issued and outstanding)............. $ 13.11 ============
* On sales of $100,000 or more, the sales charge will be reduced. See Notes to Financial Statements 27 Statement of Operations For the Year Ended September 30, 2003 INVESTMENT INCOME: Interest.................................................... $ 51,161,275 ------------ EXPENSES: Investment Advisory Fee..................................... 3,543,296 Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $1,374,865, $1,298,373 and $368,302, respectively)............................................. 3,041,540 Shareholder Services........................................ 463,816 Legal....................................................... 215,415 Custody..................................................... 58,821 Trustees' Fees and Related Expenses......................... 27,415 Other....................................................... 393,116 ------------ Total Expenses.......................................... 7,743,419 Less Credits Earned on Cash Balances.................... 8,642 ------------ Net Expenses............................................ 7,734,777 ------------ NET INVESTMENT INCOME....................................... $ 43,426,498 ============ REALIZED AND UNREALIZED GAIN/LOSS: Net Realized Loss........................................... $ (3,546,709) ------------ Unrealized Appreciation/Depreciation: Beginning of the Period................................... (26,406,315) End of the Period......................................... (37,860,779) ------------ Net Unrealized Depreciation During the Period............... (11,454,464) ------------ NET REALIZED AND UNREALIZED LOSS............................ $(15,001,173) ============ NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 28,425,325 ============
28 See Notes to Financial Statements Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 ---------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income.............................. $ 43,426,498 $ 45,693,443 Net Realized Loss.................................. (3,546,709) (24,732,738) Net Unrealized Appreciation/Depreciation During the Period........................................... (11,454,464) 17,786,818 ------------- ------------- Change in Net Assets from Operations............... 28,425,325 38,747,523 ------------- ------------- Distributions from Net Investment Income: Class A Shares................................... (31,090,893) (31,960,261) Class B Shares................................... (6,152,493) (7,625,939) Class C Shares................................... (1,735,013) (1,952,996) ------------- ------------- Total Distributions................................ (38,978,399) (41,539,196) ------------- ------------- NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....................................... (10,553,074) (2,791,673) ------------- ------------- FROM CAPITAL TRANSACTIONS: Proceeds from Shares Sold.......................... 55,882,726 92,763,808 Net Asset Value of Shares Issued Through Dividend Reinvestment..................................... 24,291,545 23,840,923 Cost of Shares Repurchased......................... (125,918,977) (174,785,925) ------------- ------------- NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS..................................... (45,744,706) (58,181,194) ------------- ------------- TOTAL DECREASE IN NET ASSETS....................... (56,297,780) (60,972,867) NET ASSETS: Beginning of the Period............................ 767,074,871 828,047,738 ------------- ------------- End of the Period (Including accumulated undistributed net investment income of $3,564,047 and ($277,011), respectively).................... $ 710,777,091 $ 767,074,871 ============= =============
See Notes to Financial Statements 29 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS A SHARES ------------------------------------------------ 2003 2002 (a) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $13.21 $13.25 $13.27 $13.91 $15.08 ------ ------ ------ ------ ------ Net Investment Income..................... .79 .78 .77 .77 .81 Net Realized and Unrealized Gain/Loss..... (.25) (.11) (.05) (.63) (1.17) ------ ------ ------ ------ ------ Total from Investment Operations............ .54 .67 .72 .14 (.36) Less Distributions from Net Investment Income.................................... .72 .71 .74 .78 .81 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $13.03 $13.21 $13.25 $13.27 $13.91 ====== ====== ====== ====== ====== Total Return (b)............................ 4.21% 5.28% 5.46% 1.27% -2.51% Net Assets at End of the Period (In millions)................................. $560.9 $579.1 $607.1 $621.5 $745.2 Ratio of Expenses to Average Net Assets..... .89% .86% .87% .91% .96% Ratio of Net Investment Income to Average Net Assets................................ 6.07% 5.99% 5.88% 5.91% 5.46% Portfolio Turnover.......................... 14% 14% 22% 37% 77%
(a) As required, effective October 31, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets from 5.95% to 5.99%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum sales charge of 4.75% or contingent deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be imposed on certain redemptions made within one year of purchase. If the sales charges were included, total returns would be lower. These returns include combined Rule 12b-1 fees of up to .25% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. 30 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS B SHARES -------------------------------------------------- 2003 (c) 2002 (a) 2001 2000 1999 -------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD..... $13.20 $13.24 $13.27 $13.90 $15.07 ------ ------ ------ ------ ------ Net Investment Income...................... .69 .70 .68 .69 .69 Net Realized and Unrealized Gain/Loss...... (.25) (.12) (.06) (.64) (1.16) ------ ------ ------ ------ ------ Total from Investment Operations............. .44 .58 .62 .05 (.47) Less Distributions from Net Investment Income..................................... .62 .62 .65 .68 .70 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD........... $13.02 $13.20 $13.24 $13.27 $13.90 ====== ====== ====== ====== ====== Total Return (b)............................. 3.42% 4.49% 4.71% .48% -3.25% Net Assets at End of the Period (In millions).................................. $115.6 $149.5 $176.5 $221.4 $282.5 Ratio of Expenses to Average Net Assets...... 1.64% 1.62% 1.63% 1.67% 1.73% Ratio of Net Investment Income to Average Net Assets..................................... 5.32% 5.23% 5.12% 5.15% 4.70% Portfolio Turnover........................... 14% 14% 22% 37% 77%
(a) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01, and increase the ratio of net investment income to average net assets from 5.19% to 5.23%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 4% charged on certain redemptions made within one year of purchase and declining to 0% after the sixth year. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of up to 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (c) Based on average shares outstanding. See Notes to Financial Statements 31 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS C SHARES -------------------------------------------------- 2003 (d) 2002 (a) 2001 2000 1999 -------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD..... $13.20 $13.24 $13.27 $13.90 $15.07 ------ ------ ------ ------ ------ Net Investment Income...................... .79 .70 .68 .69 .69 Net Realized and Unrealized Gain/Loss...... (.26) (.12) (.06) (.64) (1.16) ------ ------ ------ ------ ------ Total from Investment Operations............. .53 .58 .62 .05 (.47) Less Distributions from Net Investment Income..................................... .62 .62 .65 .68 .70 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD........... $13.11 $13.20 $13.24 $13.27 $13.90 ====== ====== ====== ====== ====== Total Return (b)............................. 4.10%(c) 4.49% 4.71% .48% -3.25% Net Assets at End of the Period (In millions).................................. $ 34.3 $ 38.5 $ 44.4 $ 49.1 $ 61.5 Ratio of Expenses to Average Net Assets...... 1.64% 1.62% 1.62% 1.67% 1.73% Ratio of Net Investment Income to Average Net Assets..................................... 6.00%(c) 5.23% 5.13% 5.15% 4.69% Portfolio Turnover........................... 14% 14% 22% 37% 77%
(a) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01, and increase the ratio of net investment income to average net assets from 5.19% to 5.23%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 1%, charged on certain redemptions made within one year of purchase. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of up to 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (c) Certain non-recurring payments were made to Class C Shares, resulting in an increase to the Total Return and Ratio of Net Investment Income to Average Net Assets of .68% and .69%, respectively. (d) Based on average shares outstanding. 32 See Notes to Financial Statements NOTES TO FINANCIAL STATEMENTS September 30, 2003 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Strategic Municipal Income Fund (the "Fund") is organized as a series of the Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a diversified, open-end management investment company under the Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to provide investors a high level of current income exempt from federal income tax primarily through investment in a diversified portfolio of medium- and lower-grade municipal securities. The Fund commenced investment operations on June 28, 1985. The distribution of the Fund's Class B and Class C shares commenced on April 30, 1993 and August 13, 1993, respectively. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION Municipal bonds are valued by independent pricing services or dealers using the mean of the bid and asked prices or, in the absence of market quotations, at fair value based upon yield data relating to municipal bonds with similar characteristics and general market conditions. Securities which are not valued by independent pricing services or dealers are valued at fair value using procedures established in good faith by the Board of Trustees. Short-term securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. The Fund may purchase and sell securities on a "when-issued" or "delayed delivery" basis, with settlement to occur at a later date. The value of the security so purchased is subject to market fluctuations during this period. The Fund will segregate assets with the custodian having an aggregate value at least equal to the amount of the when-issued or delayed delivery purchase commitments until payment is made. At September 30, 2003, the Fund had no when-issued or delayed delivery purchase commitments. C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond premium is amortized and discount is accreted over the expected life of each applicable security. Income and expenses of the Fund are allocated on a pro rata basis to each class of shares, except for distribution and service fees and transfer agency costs which are unique to each class of shares. D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute 33 NOTES TO FINANCIAL STATEMENTS September 30, 2003 substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward for eight years following the year of the loss and offset these losses against any future realized capital gains. At September 30, 2003, the Fund had an accumulated capital loss carryforward for tax purposes of $78,989,131 which expires between September 30, 2004 and September 30, 2011. Of this amount, $9,606,294 will expire on September 30, 2004. At September 30, 2003, the cost and related gross unrealized appreciation and depreciation are as follows: Cost of investments for tax purposes........................ $738,476,853 ============ Gross tax unrealized appreciation........................... $ 26,755,368 Gross tax unrealized depreciation........................... (66,306,524) ------------ Net tax unrealized depreciation on investments.............. $(39,551,156) ============
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly dividends from net investment income. Net realized gains, if any, are distributed annually. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income for tax purposes. The tax character of distributions paid during the years ended September 30, 2003 and 2002 was as follows:
2003 2002 Distributions paid from: Ordinary income........................................... $113,206 $210,294 Long-term capital gain.................................... -0- -0- -------- -------- $113,206 $210,294 ======== ========
Due to inherent differences in the recognition of income, expenses and realized gain/losses under accounting principles generally accepted in the United States of America and federal income tax purposes, permanent differences between book and tax basis reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. Permanent book and tax differences relating to a portion of the capital loss carry forward expiring in the current year totaling $29,216,115 has been reclassified from accumulated net realized loss to capital. Additionally, a permanent book and tax difference relating to the Fund's investment in other regulated investment companies totaling $13,637 was reclassified from accumulated undistributed net investment income to accumulated net realized loss. A permanent book and tax difference relating to the book to tax amortization differences on bonds sold totaling $8,397 was reclassified from accumulated undistributed net investment income to accumulated net realized loss. Additionally, a permanent difference relating to book to tax amortization differences totaling $629,075 was reclassified from accumulated undistributed net investment income to accumulated net realized loss. 34 NOTES TO FINANCIAL STATEMENTS September 30, 2003 As of September 30, 2003, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income............................... $103,011
Net realized gains or losses may differ for financial and tax reporting purposes primarily as a result of post October losses which are not realized for tax purposes until the first day of the following fiscal year, the deferral of losses related to wash sale transactions and the capitalization of reorganization and restructuring costs, and losses recognized for tax purposes but not for book purposes. F. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's custody fee was reduced by $8,642 as a result of credits earned on cash balances. 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE DAILY NET ASSETS % PER ANNUM First $500 million.......................................... .50% Over $500 million........................................... .45%
For the year ended September 30, 2003, the Fund recognized expenses of approximately $29,000 representing legal services provided by Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the Fund is an affiliated person. Under separate Accounting Services and Legal Services agreements, the Adviser provides accounting and legal services to the Fund. The Adviser allocates the cost of such services to each fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $115,300 representing Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen") cost of providing accounting and legal services to the Fund, which are reported as part of "Other" and "Legal" expenses in the Statement of Operations. Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser, serves as the shareholder servicing agent of the Fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $377,400 representing transfer agency fees paid to VKIS. Transfer agency fees are determined through negotiations with the Fund's Board of Trustees. Certain officers and trustees of the Fund are also officers and directors of Van Kampen. The Fund does not compensate its officers or trustees who are officers of Van Kampen. The Fund provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Fund and to the extent permitted by the 1940 Act, as amended, may be invested in the common shares of those funds selected by the trustees. Investments in such funds of $116,914 are included in 35 NOTES TO FINANCIAL STATEMENTS September 30, 2003 "Other" assets on the Statement of Assets and Liabilities at September 30, 2003. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. Benefits under the retirement plan are payable upon retirement for a ten-year period and are based upon each trustee's years of service to the Fund. The maximum annual benefit per trustee under the plan is $2,500. 3. CAPITAL TRANSACTIONS At September 30, 2003, capital aggregated $654,459,030, $135,935,365 and $38,322,057 for Classes A, B and C, respectively. For the year ended September 30, 2003, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 3,764,226 $ 48,895,391 Class B................................................... 330,503 4,299,420 Class C................................................... 205,707 2,687,915 ---------- ------------- Total Sales................................................. 4,300,436 $ 55,882,726 ========== ============= Dividend Reinvestment: Class A................................................... 1,530,608 $ 19,879,267 Class B................................................... 256,324 3,326,662 Class C................................................... 83,177 1,085,616 ---------- ------------- Total Dividend Reinvestment................................. 1,870,109 $ 24,291,545 ========== ============= Repurchases: Class A................................................... (6,076,868) $ (78,875,948) Class B................................................... (3,037,630) (39,421,866) Class C................................................... (584,518) (7,621,163) ---------- ------------- Total Repurchases........................................... (9,699,016) $(125,918,977) ========== =============
36 NOTES TO FINANCIAL STATEMENTS September 30, 2003 At September 30, 2002, capital aggregated $687,614,413, $172,481,948 and $43,580,912 for Classes A, B and C, respectively. For the year ended September 30, 2002, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 6,042,249 $ 79,393,394 Class B................................................... 758,304 9,941,317 Class C................................................... 262,118 3,429,097 ----------- ------------- Total Sales................................................. 7,062,671 $ 92,763,808 =========== ============= Dividend Reinvestment: Class A................................................... 1,453,948 $ 19,024,194 Class B................................................... 283,146 3,702,423 Class C................................................... 85,216 1,114,306 ----------- ------------- Total Dividend Reinvestment................................. 1,822,310 $ 23,840,923 =========== ============= Repurchases: Class A................................................... (9,943,857) $(124,596,365) Class B................................................... (3,050,451) (39,875,659) Class C................................................... (789,710) (10,313,901) ----------- ------------- Total Repurchases........................................... (13,784,018) $(174,785,925) =========== =============
Class B Shares purchased on or after June 1, 1996 and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares eight years after the end of the calendar month in which the shares were purchased. Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares seven years after the end of the calendar month in which the shares were purchased. For the years ended September 30, 2003 and 2002, 740,191 and 654,389 Class B Shares automatically converted to Class A Shares, respectively, and are shown in the above tables as sales of Class A Shares and repurchases of Class B Shares. Class C Shares purchased before January 1, 1997, and any dividend reinvestment plan Class C Shares received thereon, automatically convert to Class A Shares ten years after the end of the calendar month in which the shares are purchased. Class C Shares purchased on or after January 1, 1997 do not possess a conversion feature. For the years ended September 30, 2003 and 2002, no Class C Shares converted to Class A Shares. Class B and C Shares are offered without a front end sales charge, but are subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and C Shares will be 37 NOTES TO FINANCIAL STATEMENTS September 30, 2003 imposed on most redemptions made within six years of the purchase for Class B Shares and one year of the purchase for Class C Shares as detailed in the following schedule.
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLAR AMOUNT SUBJECT TO CHARGE -------------------------- YEAR OF REDEMPTION CLASS B CLASS C First....................................................... 4.00% 1.00% Second...................................................... 3.75% None Third....................................................... 3.50% None Fourth...................................................... 2.50% None Fifth....................................................... 1.50% None Sixth....................................................... 1.00% None Seventh and Thereafter...................................... None None
For the year ended September 30, 2003, Van Kampen, as distributor for the Fund, received commissions on sales of the Fund's Class A shares of approximately $98,000 and CDSC on redeemed shares of approximately $199,600. Sales charges do not represent expenses of the Fund. 4. INVESTMENT TRANSACTIONS During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were $103,844,729 and $137,995,583, respectively. 5. DISTRIBUTION AND SERVICE PLANS With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund and its shareholders have adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act, as amended, and a service plan (collectively the "Plans"). The Plans govern payments for: the distribution of the Fund's Class A Shares, Class B Shares and Class C Shares; the provision of ongoing shareholder services with respect to such classes of shares; and maintenance of shareholder accounts with respect to such classes of shares. Annual fees under the Plans of up to 0.25% of Class A average daily net assets and 1.00% each for Class B and Class C average daily net assets are accrued daily. The amount of distribution expenses incurred by Van Kampen and not yet reimbursed ("unreimbursed receivable") was approximately 2,322,200 and 1,200 for Class B and Class C Shares, respectively. These amounts may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed receivable has been fully recovered, any excess 12b-1 fees will be refunded to the Fund on a quarterly basis. Included in the fees for the year ended September 30, 2003, are payments retained by Van Kampen of approximately $691,800 and payments made to Morgan Stanley DW Inc., an affiliate of the Adviser, of approximately $78,300. 38 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees of Van Kampen Strategic Municipal Income Fund We have audited the accompanying statement of assets and liabilities of the Van Kampen Strategic Municipal Income Fund (the "Fund"), including the portfolio of investments, as of September 30, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the year ended September 30, 1999 were audited by other auditors whose report dated November 9, 1999 expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and financial highlights. Our procedures included confirmation of securities owned as of September 30, 2003, 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 the Van Kampen Strategic Municipal Income Fund at September 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended in conformity with accounting principles generally accepted in the United States. -s- Ernst & Young LLP Chicago, Illinois November 4, 2003 39 VAN KAMPEN INVESTMENTS THE VAN KAMPEN FAMILY OF FUNDS Global/International Emerging Markets Emerging Markets Income European Value Equity Global Equity Allocation Global Franchise Global Value Equity International Advantage International Magnum Growth Aggressive Growth American Value Emerging Growth Enterprise Equity Growth Focus Equity Growth Mid Cap Growth Pace Select Growth Small Cap Growth Small Cap Value Technology Growth and Income Comstock Equity and Income Growth and Income Harbor Real Estate Securities Utility Value Value Opportunities Income Corporate Bond Government Securities High Income Corporate Bond High Yield Limited Maturity Government U.S. Government Tax Free California Insured Tax Free High Yield Municipal* Insured Tax Free Income Intermediate Term Municipal Income Municipal Income New York Tax Free Income Pennsylvania Tax Free Income Strategic Municipal Income Capital Preservation Reserve Tax Free Money Senior Loan Senior Loan Fund For more complete information, including risk considerations, fees, sales charges and ongoing expenses, please contact your financial advisor for a prospectus. Please read it carefully before you invest or send money. To view a current Van Kampen fund prospectus or to receive additional fund information, choose from one of the following: - - Visit our Web site at VANKAMPEN.COM. To view a prospectus select Literature, Download Fund Info. (COMPUTER ICON) - - Call us at (800) 847-2424 Telecommunications Device for the Deaf (TDD) users, call (800) 421-2833. (PHONE ICON) - - E-mail us by visiting VANKAMPEN.COM and selecting Contact Us. (MAIL ICON) * Open to new investors for a limited time 40 BOARD OF TRUSTEES AND IMPORTANT ADDRESSES VAN KAMPEN STRATEGIC MUNICIPAL INCOME FUND BOARD OF TRUSTEES DAVID C. ARCH J. MILES BRANAGAN JERRY D. CHOATE ROD DAMMEYER LINDA HUTTON HEAGY R. CRAIG KENNEDY HOWARD J KERR MITCHELL M. MERIN* JACK E. NELSON RICHARD F. POWERS, III* HUGO F. SONNENSCHEIN WAYNE W. WHALEN* - Chairman SUZANNE H. WOOLSEY INVESTMENT ADVISER VAN KAMPEN INVESTMENT ADVISORY CORP. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 DISTRIBUTOR VAN KAMPEN FUNDS INC. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 SHAREHOLDER SERVICING AGENT VAN KAMPEN INVESTOR SERVICES INC. P.O. Box 947 Jersey City, New Jersey 07303-0947 CUSTODIAN STATE STREET BANK AND TRUST COMPANY 225 Franklin Street P.O. Box 1713 Boston, Massachusetts 02110 LEGAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606 INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, Illinois 60606 For federal income tax purposes, the following is furnished with respect to the distributions paid by the Fund during its taxable year ended September 30, 2003. The Fund designated 99.7% of the income distributions as a tax-exempt income distribution. In January, the Fund provides tax information to shareholders for the preceding calendar year. * "Interested persons" of the Fund, as defined in the Investment Company Act of 1940, as amended. 41 TRUSTEES AND OFFICERS The business and affairs of the Fund are managed under the direction of the Fund's Board of Trustees and the Fund's officers appointed by the Board of Trustees. The tables below list the trustees and executive officers of the Fund and their principal occupations during the last five years, other directorships held by trustees and their affiliations, if any, with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are referred to herein collectively as the "Advisers." The term "Fund Complex" includes each of the investment companies advised by the Advisers or their affiliates as of the date of this Statement of Additional Information. Trustees serve until reaching their retirement age or until their successors are duly elected and qualified. Officers are annually elected by the trustees. INDEPENDENT TRUSTEES
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing Blistex Inc. since 2003 Executive Officer of General Partner of funds 1800 Swift Drive Blistex Inc., a consumer in the Fund Complex. Oak Brook, IL 60523 health care products manufacturer. Former Director of the World Presidents Organization-Chicago Chapter. Director of the Heartland Alliance, a nonprofit organization serving human needs based in Chicago. J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing 1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex. Chief Executive Officer and President, MDT Corporation (now known as Getinge/Castle, Inc., a subsidiary of Getinge Industrier AB), a company which develops, manufactures, markets and services medical and scientific equipment.
42
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing 33971 Selva Road since 1999 Chairman and Chief General Partner of funds Suite 130 Executive Officer of the in the Fund Complex. Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a ("Allstate") and Allstate biotechnological company, Insurance Company. Prior and Director of Valero to January 1995, Energy Corporation, an President and Chief independent refining Executive Officer of company. Allstate. Prior to August 1994, various management positions at Allstate. Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing CAC, llc. since 2003 private company offering General Partner of funds 4350 LaJolla Village Drive capital investment and in the Fund Complex. Suite 980 management advisory Director of TeleTech San Diego, CA 92122-6223 services. Prior to July Holdings Inc., 2000, Managing Partner of Stericycle, Inc., Equity Group Corporate TheraSense, Inc., GATX Investment (EGI), a Corporation, Arris Group, company that makes Inc. and Trustee of the private investments in University of Chicago other companies. Hospitals and Health Systems. Prior to May 2002, Director of Peregrine Systems Inc. Prior to February 2001, Vice Chairman and Director of Anixter International, Inc. and IMC Global Inc. Prior to July 2000, Director of Allied Riser Communications Corp., Matria Healthcare Inc., Transmedia Networks, Inc., CNA Surety, Corp. and Grupo Azcarero Mexico (GAM). Prior to April 1999, Director of Metal Management, Inc.
43
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds 233 South Wacker Drive executive search firm. in the Fund Complex. Suite 7000 Trustee on the University Chicago, IL 60606 of Chicago Hospitals Board, Vice Chair of the Board of the YMCA of Metropolitan Chicago and a member of the Women's Board of the University of Chicago. Prior to 1997, Partner of Ray & Berndtson, Inc., an executive recruiting firm. Prior to 1996, Trustee of The International House Board, a fellowship and housing organization for international graduate students. Prior to 1995, Executive Vice President of ABN AMRO, N.A., a bank holding company. Prior to 1992, Executive Vice President of La Salle National Bank. R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing 11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds Washington, D.C. 20016 of the United States, an in the Fund Complex. independent U.S. foundation created to deepen understanding, promote collaboration and stimulate exchanges of practical experience between Americans and Europeans. Formerly, advisor to the Dennis Trading Group Inc., a managed futures and option company that invests money for individuals and institutions. Prior to 1992, President and Chief Executive Officer, Director and member of the Investment Committee of the Joyce Foundation, a private foundation. Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing 736 North Western Avenue since 2003 and Chief Executive General Partner of funds P.O. Box 317 Officer of Pocklington in the Fund Complex. Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake investment holding Forest Bank & Trust. company. Director of the Marrow Foundation.
44
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing 423 Country Club Drive since 1985 Investment Planning General Partner of funds Winter Park, FL 32789 Services, Inc., a in the Fund Complex. financial planning company and registered investment adviser in the State of Florida. President of Nelson Ivest Brokerage Services Inc., a member of the NASD, Securities Investors Protection Corp. and the Municipal Securities Rulemaking Board. President of Nelson Sales and Services Corporation, a marketing and services company to support affiliated companies. Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing 1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds Chicago, IL 60637 University of Chicago and in the Fund Complex. the Adam Smith Director of Winston Distinguished Service Laboratories, Inc. Professor in the Department of Economics at the University of Chicago. Prior to July 2000, President of the University of Chicago. Trustee of the University of Rochester and a member of its investment committee. Member of the National Academy of Sciences, the American Philosophical Society and a fellow of the American Academy of Arts and Sciences. Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing 2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds Room 285 Academy of in the Fund Complex. Washington, D.C. 20418 Sciences/National Director of Neurogen Research Council, an Corporation, a independent, federally pharmaceutical company, chartered policy since January 1998. institution, since 2001 and previously Chief Operating Officer from 1993 to 2001. Director of the Institute for Defense Analyses, a federally funded research and development center, Director of the German Marshall Fund of the United States, and Trustee of Colorado College. Prior to 1993, Executive Director of the Commission on Behavioral and Social Sciences and Education at the National Academy of Sciences/National Research Council. From 1980 through 1989, Partner of Coopers & Lybrand.
45 INTERESTED TRUSTEES*
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing 1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex. Officer Complex. Chairman, President, Chief Executive Officer and Director of the Advisers and VK Advisors Inc. since December 2002. Chairman, President and Chief Executive Officer of Van Kampen Investments since December 2002. Director of Van Kampen Investments since December 1999. Chairman and Director of Van Kampen Funds Inc. since December 2002. President, Director and Chief Operating Officer of Morgan Stanley Investment Management since December 1998. President and Director since April 1997 and Chief Executive Officer since June 1998 of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chairman, Chief Executive Officer and Director of Morgan Stanley Distributors Inc. since June 1998. Chairman since June 1998, and Director since January 1998 of Morgan Stanley Trust. Director of various Morgan Stanley subsidiaries. President of the Morgan Stanley Funds since May 1999. Previously Chief Executive Officer of Van Kampen Funds Inc. from December 2002 to July 2003, Chief Strategic Officer of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. and Executive Vice President of Morgan Stanley Distributors Inc. from April 1997 to June 1998. Chief Executive Officer from September 2002 to April 2003 and Vice President from May 1997 to April 1999 of the Morgan Stanley Funds.
46
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing 1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds P.O. Box 5555 December 2002, Chairman, in the Fund Complex. Oakbrook Terrace, IL 60181 Director, President, Chief Executive Officer and Managing Director of Van Kampen Investments and its investment advisory, distribution and other subsidiaries. Prior to December 2002, President and Chief Executive Officer of funds in the Fund Complex. Prior to May 1998, Executive Vice President and Director of Marketing at Morgan Stanley and Director of Dean Witter, Discover & Co. and Dean Witter Realty. Prior to 1996, Director of Dean Witter Reynolds Inc. Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing 333 West Wacker Drive since 1985 of Skadden, Arps, Slate, General Partner of funds Chicago, IL 60606 Meagher & Flom in the Fund Complex. (Illinois), legal counsel to funds in the Fund Complex.
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of certain funds in the Fund Complex by reason of his firm currently acting as legal counsel to such funds in the Fund Complex. Messrs. Merin and Powers are interested persons of funds in the Fund Complex and the Advisers by reason of their current or former positions with Morgan Stanley or its affiliates. 47 OFFICERS
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management. 2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to 45th Floor December 2002, Chief Investment Officer of Van Kampen Houston, TX 77056 Investments and President and Chief Operations Officer of the Advisers and Van Kampen Advisors Inc. Prior to May 2002, Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Prior to May 2001, Managing Director and Chief Investment Officer of Van Kampen Investments, and Managing Director and President of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Executive Vice President and Chief Investment Officer of Van Kampen Investments, and President and Chief Operating Officer of the Advisers. Prior to April 2000, Executive Vice President and Chief Investment Officer for Equity Investments of the Advisers. Prior to October 1998, Vice President and Senior Portfolio Manager with AIM Capital Management, Inc. Prior to February 1998, Senior Vice President and Portfolio Manager of Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp. and Van Kampen American Capital Management, Inc. Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management. 1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex. New York, NY 10020 Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan 1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Managing Director and Chief Investment Officer of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc. since December 2002. John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers 1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Senior Vice President of the Advisers and Van Kampen Advisors Inc. Prior to May 2000, Senior Vice President of the investment grade taxable group for the Advisers. Prior to June 1999, Senior Vice President of the government securities bond group for Asset Management.
48
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services. 1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer Executive Officer and Managing Director of Morgan Stanley Investment Management Inc. Managing Director of Morgan Stanley. Managing Director and Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chief Executive Officer and Director of Morgan Stanley Trust. Vice President of the Morgan Stanley Funds. A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and 1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Managing Director and General Counsel-Mutual Funds of Morgan Stanley Investment Advisors, Inc. Vice President and Secretary of funds in the Fund Complex. Prior to July 2001, Managing Director, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, the Distributor, Investor Services, and certain other subsidiaries of Van Kampen Investments. Prior to December 2000, Executive Vice President, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Prior to January 1999, Vice President and Associate General Counsel to New York Life Insurance Company ("New York Life"), and prior to March 1997, Associate General Counsel of New York Life. Prior to December 1993, Assistant General Counsel of The Dreyfus Corporation. Prior to August 1991, Senior Associate, Willkie Farr & Gallagher. Prior to January 1989, Staff Attorney at the Securities and Exchange Commission, Division of Investment Management, Office of Chief Counsel. John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments, 1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President, Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund Complex. Head of Fund Accounting for Morgan Stanley Investment Management. Prior to December 2002, Executive Director of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc.
49 Van Kampen Privacy Notice The Van Kampen companies and investment products* respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain nonpublic personal information about you. This is information we collect from you on applications or other forms, and from the transactions you conduct with us, our affiliates, or third parties. We may also collect information you provide when using our Web site, and text files (also known as "cookies") may be placed on your computer to help us to recognize you and to facilitate transactions you initiate. We do not disclose any nonpublic personal information about you or any of our former customers to anyone, except as permitted by law. For instance, so that we may continue to offer you Van Kampen investment products and services that meet your investing needs, and to effect transactions that you request or authorize, we may disclose the information we collect to companies that perform services on our behalf, such as printers and mailers that assist us in the distribution of investor materials. These companies will use this information only for the services for which we hired them, and are not permitted to use or share this information for any other purpose. To protect your nonpublic personal information internally, we permit access to it only by authorized employees, and maintain physical, electronic and procedural safeguards to guard your nonpublic personal information. * Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc., Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many Van Kampen mutual funds and Van Kampen unit investment trusts. The Statement of Additional Information includes additional information about Fund trustees and is available, without charge, upon request by calling (800) 847-2424. Van Kampen Funds Inc. 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 www.vankampen.com (VAN KAMPEN INVESTMENTS LOGO) Copyright (C)2003 Van Kampen Funds Inc. All rights reserved. Member NASD/SIPC. 39, 399, 539 STMI ANR 11/03 12240K03-AP-11/03 Item 1. Report to Shareholders Welcome, Shareholder In this report, you'll learn about how your investment in Van Kampen California Insured Tax Free Fund performed during the annual period. The portfolio management team will provide an overview of the market conditions and discuss some of the factors that affected investment performance during the reporting period. In addition, this report includes the fund's financial statements and a list of fund investments as of September 30, 2003. This material must be preceded or accompanied by a prospectus for the fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the fund will achieve its investment objective. The fund is subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and, therefore, the value of the fund shares may be less than what you paid for them. Accordingly, you can lose money investing in this fund. Please see the prospectus for more complete information on investment risks. Income may subject certain individuals to the federal Alternative Minimum Tax (AMT). NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Performance Summary PERFORMANCE OF A $10,000 INVESTMENT This chart compares your fund's performance to that of the Lehman Brothers Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for sales charges. (LINE GRAPH)
VAN KAMPEN CA INSURED TAX FREE LEHMAN BROTHERS MUNICIPAL BOND FUND INDEX ------------------------------ ------------------------------ 9/93 9674.00 10000.00 12/93 9744.00 10140.70 9002.00 9583.91 9039.00 9689.41 9052.00 9755.81 12/94 8892.00 9616.39 9570.00 10295.80 9737.00 10543.80 9981.00 10847.00 12/95 10517.00 11294.80 10304.00 11158.80 10372.00 11244.10 10658.00 11501.80 12/96 10959.00 11794.80 10864.00 11766.60 11276.00 12171.80 11590.00 12538.80 12/97 11938.00 12878.90 12062.00 13027.10 12249.00 13225.60 12700.00 13631.40 12/98 12693.00 13713.40 12789.00 13835.00 12455.00 13590.60 12263.00 13536.50 12/99 12047.00 13431.40 12591.00 13823.90 12747.00 14032.70 13145.00 14372.30 12/00 13807.00 15000.70 13977.00 15333.50 13921.00 15433.10 14471.00 15866.50 12/01 14304.00 15769.60 14321.00 15918.30 14827.00 16500.70 15775.00 17284.40 12/02 15640.00 17284.30 15747.00 17492.10 16052.00 17943.30 9/03 16038.00 17957.30
Index data source: Bloomberg
A SHARES B SHARES C SHARES since 12/13/85 since 4/30/93 since 8/13/93 - --------------------------------------------------------------------------------------------- AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES Since Inception 7.29% 7.09% 5.19% 5.19% 4.63% 4.63% 10-year 5.19 4.84 4.69 4.69 4.40 4.40 5-year 4.78 4.09 4.02 4.02 4.03 4.03 1-year 1.67 -1.62 0.87 -2.03 0.92 -0.05 - --------------------------------------------------------------------------------------------- 30-Day SEC Yield 3.59% 2.98% 2.98%
Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and fund shares, when redeemed, may be worth more or less than their original cost. The returns shown in this report do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. As a result of recent market activity, current performance may vary from the figures shown. For more up-to-date information, please visit vankampen.com or speak with your financial advisor. Average annual total return with sales charges includes payment of the maximum sales charge of 3.25 percent for Class A shares, a contingent deferred sales charge of 3.00 percent for Class B shares (in year one and declining to zero after year four), a contingent deferred sales charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1 fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent for Class B and C shares. Certain non-recurring payments were made to Class C shares, resulting in an increase to the one-year total return of 0.03 percent. The since inception and 10-year returns for Class B and C shares reflect their conversion into Class A shares six and 10 years after purchase, respectively. See footnote 3 in the Notes to Financial Statements for additional information. Figures shown above assume reinvestment of all dividends and capital gains. SEC yield is a calculation for determining the amount of portfolio income, excluding non-income items as prescribed by the SEC. Yields are subject to change. Distribution rate represents the monthly annualized distributions of the fund at the end of the period and not the earnings of the fund. The Lehman Brothers Municipal Bond Index is generally representative of investment-grade, tax-exempt bonds. Index is unmanaged and does not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. 1 Fund Report FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003 Van Kampen California Insured Tax Free Fund is managed by the Adviser's Municipal Fixed-Income team.(1) Members of the team include Dennis S. Pietrzak, Executive Director; John R. Reynoldson, Executive Director; and Joseph A. Piraro, Vice President. The following discussion reflects their views on the fund's performance. Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE OVERALL MARKET ENVIRONMENT. A. The economic backdrop for the 12 months ended September 30 was largely characterized by the persistent weakness of the U.S. economy. One of the most closely watched economic indicators, employment strength, was in negative territory for much of the period. Repeated comments from government and Wall Street officials suggesting that the U.S. economy might be entering a deflationary period also seemed to weigh heavily on the minds of investors over the course of the year. At the same time, ongoing budgetary and fiscal difficulties at the state and local levels contributed to ratings downgrades for many municipal bonds. The Federal Reserve Board (the Fed) attempted to allay these fears and keep the economy moving in the right direction by cutting the Fed Funds target rate twice during the period for a total reduction of 0.75 percent. The uncertain climate had a definite effect on the municipal bond market. While yields on intermediate- and long-term bonds ended the period approximately where they began, the road between those two points was decidedly bumpy. The 12-month period can be divided into two distinct market environments. The first of these, which lasted from October 2002 to mid-June 2003, saw municipal yields fall by roughly 80 basis points to levels not seen since the late 1960s. These plummeting yields led to a surge in issuance as municipalities moved to lock in low financing rates and, in the case of older bonds, low refinancing costs. These record levels of supply met with record levels of demand as investors in search of relative stability poured cash into municipal bond funds. Demand for municipal bonds was also strong from so-called "cross-over" buyers--investors who traditionally favor taxable investments but were drawn to municipal bonds because of their relatively attractive yields. The municipal market reversed abruptly in mid-June, when yields began to climb from their lows and investors shifted their attention to the rising equity market. Interest from cross-over investors also evaporated as the relative attractiveness of the taxable market grew. (1)Team members may change at any time without notice. 2 Issuance remained strong throughout this leg of the period, though it abated somewhat in the last three months. These forces combined to drive municipal-bond yields off of their historic lows, ending the period where they began. California faced a host of economic problems during the year, including a $38 billion budget deficit that led Moody's and Standard & Poor's to downgrade the state's general obligations in February. Against this backdrop, state municipal debt issuance rose significantly. California issued approximately $46 billion in the first nine months of 2003, an increase of about 60 percent compared to the same period in 2002. Because of fiscal and credit concerns, valuations in the state's municipal bond market declined to extremely low levels during the period, drawing buying interest from many national investors seeking to benefit from relatively attractive yields in the California market. Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD? A. The fund underperformed its benchmark index. -- The fund returned 1.67 percent for the 12 months that ended September 30, 2003. Performance figures are for Class A shares, and assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. If sales charges were included, performance would be lower. Past performance is no guarantee of future results. -- The fund's benchmark, the Lehman Brothers Municipal Bond Index, returned 3.89 percent for the same period. -- The fund's monthly dividend of $0.0595 translated to a distribution rate of 3.67 percent based on the fund's maximum offering price (as of September 30, 2003, Class A shares adjusted for sales charges). See Performance Summary for additional information and index definition. TOP 5 SECTORS AS OF 9/30/03 Tax District 22.7% Public Education 21.0 Public Building 14.1 General Purpose 10.8 Water & Sewer 8.4
Subject to change daily. All percentages are as a percentage of long-term investments. Provided for informational purposes only and should not be deemed as a recommendation to buy securities in the sectors shown above. Securities are classified by sectors that represent broad groupings of related industries. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. 3 Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD? A. With interest rates at low levels early in the period, we moved to attempt to protect the fund from any sudden rate increases. One of our primary tactics was to reduce the fund's duration (a measure of interest-rate sensitivity) below that of its benchmark. This defensive positioning, which benefited the fund later in the fiscal year, was a drag on performance during the bond market rally that occurred last winter and spring. The fund's position in California general obligation bonds also detracted from overall performance. These bonds underwent considerable volatility during the period, reflecting investors' concerns about California's creditworthiness and fiscal outlook. Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD? A. The majority of the fund's holdings are concentrated in essential-services bonds. Because these securities are backed by specific projects rather than tax receipts, they tend to provide a more reliable income stream than other municipal issues in weak economic environments such as that of the past year. Sectors within essential services that contributed positively to the fund's performance during the period included transportation, public education, and water and sewer bonds. Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY ISSUES. A. Over the past year we increased the fund's exposure to bonds with structural characteristics designed to withstand interest-rate volatility relatively well. Many of those purchases were concentrated in bonds that feature the premium coupons of longer maturities while trading to a shorter, more intermediate call date. In an environment of rising interest rates, these bonds offer the dual cushion of high income (to offset capital losses) and moderate interest-rate vulnerability. In our opinion, their income stream alone makes them an appealing investment, regardless of interest rate considerations. We continued to emphasize essential services in the portfolio throughout the period. These sectors tend to outperform bonds backed by tax revenues in periods of economic weakness because their revenue streams come from receipts from public services that are in demand no matter what the economic climate. By the end of the period, this strategy resulted in public education and tax districts comprising the two largest sector weights in the portfolio. We maintained a very low percentage of assets in the health-care sector because of concerns about financial difficulties in that area. We also 4 shied away from the airport sector because of the negative circumstances currently surrounding the airline industry. At the security level, we took advantage of relative-value opportunities created by the volatile interest-rate environment during the period. For example, the rapid increase in yields during June and July allowed us to invest in newer securities carrying higher yields. We funded many of these purchases through carefully managed selling of lower-coupon holdings that allowed the portfolio to benefit from targeted tax losses that offset capital gains elsewhere in the portfolio. Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY CLOSING THOUGHTS? A. We believe that the economy has lately shown clear signs of improvement, though the employment picture remains soft and the likelihood of a sustained rebound is questionable. In this environment, we believe the Fed is likely to maintain a neutral stance in the absence of signs of strong economic growth. We will continue to monitor the markets closely for compelling investment opportunities. ANNUAL HOUSEHOLDING NOTICE To reduce expenses, the fund attempts to eliminate duplicate mailings to the same address. The fund delivers a single copy of certain shareholder documents to investors who share an address, even if the accounts are registered under different names. The fund's prospectus and shareholder reports (including annual privacy notices) will be delivered to you in this manner indefinitely unless you instruct us otherwise. You can request multiple copies of these documents by either calling (800) 341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has received your instructions, we will begin sending individual copies for each account within 30 days. PROXY VOTING POLICIES AND PROCEDURES A description of the fund's policies and procedures with respect to the voting of proxies relating to the fund's portfolio securities is available without charge, upon request, by calling 1-800-847-2424. This information is also available on the Securities and Exchange Commission's website at http://www.sec.gov. 5 BY THE NUMBERS YOUR FUND'S INVESTMENTS September 30, 2003 THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF THE REPORTING PERIOD.
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA MUNICIPAL BONDS 102.1% $ 1,925 Alhambra, CA City Elem Sch Dist Cap Apprec Ser A (FSA Insd)...................................... * 09/01/20 $ 842,341 2,900 Anaheim, CA Pub Fin Auth Rev Elec Sys Generation Ser B Rfdg (FSA Insd)........................... 5.000% 10/01/16 3,136,814 2,000 Anaheim, CA Pub Fin Auth Tax Alloc Rev (Inverse Fltg) (MBIA Insd)............................... 11.630 12/28/18 2,697,360 4,070 Anaheim, CA Uni High Sch Dist Ser A (FSA Insd)........................................... 5.000 08/01/25 4,143,952 1,430 Bay Area Govt Assn CA Lease Rev Cap Proj Ser A (AMBAC Insd).................................... 5.250 07/01/17 1,563,076 3,000 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool Ser A2 (FSA Insd).......................... 6.400 12/15/14 3,246,810 1,730 Brea & Olinda, CA Uni Sch Dist Ser A Rfdg (FSA Insd)........................................... 5.500 08/01/17 1,926,182 1,850 Brea & Olinda, CA Uni Sch Dist Ser A Rfdg (FSA Insd)........................................... 5.500 08/01/18 2,047,894 7,000 California Edl Fac Auth Rev Univ Of The Pacific (MBIA Insd)..................................... 5.875 11/01/20 8,021,440 2,000 California Infrastructure & Econ Dev Bk Rev Bay Area Toll Brdgs First Lien Ser A (FGIC Insd).... 5.000 07/01/29 2,031,500 3,000 California Infrastructure & Econ Dev Bk Rev Bay Area Toll Brdgs First Lien Ser A (AMBAC Insd)... 5.000 07/01/33 3,042,570 1,050 California Spl Dist Assn Fin Corp Ctf Partn Pgm Ser DD (FSA Insd)............................... 5.625 01/01/27 1,138,704 1,250 California St (FGIC Insd)....................... 6.250 09/01/12 1,507,325 2,385 California St (XLCA Insd)....................... 6.250 09/01/12 2,853,796 2,450 California St (FGIC Insd)....................... 5.000 10/01/14 2,636,592 1,000 California St (XLCA Insd)....................... 5.000 10/01/28 1,012,660 1,200 California St Dept Transn Ctf Ser A Rfdg (MBIA Insd)........................................... 5.250 03/01/16 1,315,668 2,000 California St Dept Vet Affairs Ser A (AMBAC Insd)........................................... 5.300 12/01/21 2,097,160 2,000 California St Dept Wtr Res Pwr Supply Rev Ser A (AMBAC Insd).................................... 5.500 05/01/16 2,238,880 1,000 California St Dept Wtr Res Pwr Supply Rev Ser A (AMBAC Insd).................................... 5.375 05/01/18 1,096,610 2,500 California St Dept Wtr Res Pwr Supply Rev Rite Ser B (Inverse Fltg) (MBIA Insd) (c)............ 9.409 05/01/21 2,859,550 2,500 California St Pub Wks Brd Lease Dept Corrections Ten Admin Ser A (AMBAC Insd).................... 5.250 03/01/17 2,714,925
6 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA MUNICIPAL BONDS (CONTINUED) $ 4,125 California St Pub Wks Brd Lease Rev CA St Univ Ser A Rfdg (AMBAC Insd)......................... 5.500% 10/01/14 $ 4,613,689 2,000 California St Pub Wks Brd Lease Rev Dept Corrections Ser B Rfdg (AMBAC Insd)............. 5.250 01/01/12 2,251,180 1,000 California St Pub Wks Brd Lease Rev Var Cmnty College Proj Ser B Rfdg (AMBAC Insd)............ 5.625 03/01/16 1,102,730 7,750 California St Rfdg (FGIC Insd).................. 5.000 02/01/23 7,859,972 1,000 California St Univ Rev & Colleges Systemwide Ser A (AMBAC Insd).................................. 5.375 11/01/18 1,100,250 1,000 Carson, CA Redev Agy Redev Proj Area No 1 Tax Alloc (MBIA Insd)............................... 5.500 10/01/15 1,166,310 2,000 Castaic Lake Wtr Agy CA Ctf Partn Wtr Sys Impt Proj Ser A Rfdg (MBIA Insd)..................... 7.000 08/01/12 2,525,520 3,000 Castaic Lake Wtr Agy CA Rev Ctf Partn Ser A (MBIA Insd)..................................... 5.250 08/01/23 3,140,970 2,000 Cerritos, CA Pub Fin Auth Rev Tax Alloc Redev Proj Ser A (AMBAC Insd)......................... 5.000 11/01/19 2,179,540 2,335 Chaffey, CA Uni High Sch Dist Ser B (FGIC Insd)........................................... 5.500 08/01/16 2,631,708 1,205 Channel Islands Beach, CA Cmnty Svcs Dist Ctf Partn CA Spl Dist Fin Proj BB (FSA Insd)........ 5.700 09/01/21 1,353,914 5,165 Corona, CA Redev Agy Tax Alloc Redev Proj Area Ser A Rfdg (FGIC Insd).......................... 6.250 09/01/13 5,502,274 1,000 Coronado, CA Uni Sch Dist Ser B (FGIC Insd)..... 5.375 08/01/26 1,059,480 1,000 East Bay, CA Muni Util Dist Wtr Sys Rev (MBIA Insd)........................................... 5.000 06/01/21 1,035,680 1,300 Folsom Cordova, CA Uni Sch Dist Sch Fac Impt Dist No 2 Ser A (MBIA Insd)..................... 5.375 10/01/17 1,437,917 1,360 Folsom, CA Pub Fin Auth City Hall & Cmnty Ctr Rfdg (FSA Insd) (a)............................. 5.000 10/01/16 1,471,792 1,480 Fontana, CA Redev Agy Tax Alloc Dwntwn Redev Proj Rfdg (MBIA Insd)........................... 5.000 09/01/21 1,525,747 650 Fresno, CA Jt Pwrs Fin Auth Ser A (FSA Insd).... 5.000 06/01/17 698,217 590 Fresno, CA Uni Sch Dist Ser C Rfdg (MBIA Insd)........................................... 5.900 08/01/17 710,224 630 Fresno, CA Uni Sch Dist Ser C Rfdg (MBIA Insd)........................................... 5.900 08/01/18 757,342 675 Fresno, CA Uni Sch Dist Ser C Rfdg (MBIA Insd)........................................... 5.900 08/01/19 810,979 720 Fresno, CA Uni Sch Dist Ser C Rfdg (MBIA Insd)........................................... 5.900 08/01/20 861,682 2,000 Glendale, CA Redev Agy Tax Ctr Glendale Redev Proj (MBIA Insd)................................ 5.250 12/01/20 2,160,100 2,425 Glendora, CA Pub Fin Auth Tax Alloc Proj No 1 Ser A (MBIA Insd) (b)........................... 5.000 09/01/24 2,467,607 20,000 Grossmont, CA Uni High Sch Dist Ctf Part (MBIA Insd)........................................... * 11/15/21 6,437,200
See Notes to Financial Statements 7 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA MUNICIPAL BONDS (CONTINUED) $ 1,750 Hacienda La Puente, CA Uni Sch Dist Ser A (MBIA Insd)........................................... 5.500% 08/01/20 $ 1,930,933 1,250 Hemet, CA Uni Sch Dist Ctf Partn Nutrition Ctr Proj (FSA Insd)................................. 5.875 04/01/27 1,398,513 1,950 Imperial Irr Dist CA Ctf Partn Wtr Sys Proj (AMBAC Insd).................................... 5.000 07/01/19 2,057,211 2,000 Inglewood, CA Redev Agy Tax Alloc Merged Redev Proj Ser A Rfdg (AMBAC Insd).................... 5.250 05/01/23 2,196,860 1,715 Irvine, CA Pub Fac & Infrastructure Ser B (AMBAC Insd)........................................... 5.000 09/02/23 1,759,624 2,250 La Mesa Spring Vly, CA Sch Dist Ser A (FGIC Insd)........................................... 5.000 08/01/26 2,287,620 2,000 La Quinta, CA Redev Agy Tax Alloc Redev Proj Area No 1 (AMBAC Insd).......................... 5.000 09/01/22 2,072,340 1,000 Livermore-Amador Vly Wtr Mgmt Agy CA Swr Rev Ser A (AMBAC Insd).................................. 5.250 08/01/16 1,104,770 1,000 Long Beach, CA Bond Fin Auth Lease Rev Rainbow Harbor Refin Proj Ser A (AMBAC Insd)............ 5.250 05/01/24 1,040,720 1,200 Long Beach, CA Bond Fin Auth Pub Lease Safety Fac Proj (AMBAC Insd)........................... 5.250 11/01/15 1,336,008 1,260 Long Beach, CA Bond Fin Auth Pub Lease Safety Fac Proj (AMBAC Insd)........................... 5.250 11/01/16 1,392,602 1,545 Long Beach, CA Bond Fin Auth Pub Lease Safety Fac Proj (AMBAC Insd)........................... 5.250 11/01/20 1,660,999 2,740 Los Angeles Cnty, CA Ctf Partn Antelope Vly Courthouse Ser A (AMBAC Insd)................... 5.750 11/01/16 3,134,944 1,000 Los Angeles Cnty, CA Ctf Partn Disney Pkg Proj Rfdg (AMBAC Insd)............................... 4.750 03/01/23 1,002,010 1,000 Los Angeles Cnty, CA Met Tran Auth Sales Tax Rev Prop A First Tier Sr Ser C Rfdg (AMBAC Insd).... 5.000 07/01/23 1,020,890 2,000 Los Angeles Cnty, CA Met Tran Auth Sales Tax Rev Prop A Second Tier Sr Ser A Rfdg (AMBAC Insd)... 5.000 07/01/25 2,008,340 1,235 Los Angeles Cnty, CA Met Tran Auth Sales Tax Rev Prop C Second Tier Sr Ser A Rfdg (FGIC Insd).... 5.000 07/01/15 1,339,271 1,000 Los Angeles Cnty, CA Met Tran Auth Sales Tax Rev Prop C Second Tier Sr Ser A Rfdg (FGIC Insd).... 5.000 07/01/16 1,079,510 1,265 Los Angeles Cnty, CA Schs Regionalized Business Svcs Ctf Partn Cap Apprec Pooled Fin Ser A (AMBAC Insd).................................... * 08/01/24 421,473 1,320 Los Angeles Cnty, CA Schs Regionalized Business Svcs Ctf Partn Cap Apprec Pooled Fin Ser A (AMBAC Insd).................................... * 08/01/25 413,662
8 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA MUNICIPAL BONDS (CONTINUED) $ 2,460 Los Angeles Cnty, CA Schs Regionalized Business Svcs Ctf Partn Cap Apprec Pooled Fin Ser A (AMBAC Insd).................................... * 08/01/28 $ 650,990 342 Los Angeles Cnty, CA Tran Comm Lease Rev Dia RR Lease Ltd (FSA Insd)............................ 7.375% 12/15/06 346,422 1,975 Los Angeles, CA Ctf Partn Real Ppty Pgm Ser T (MBIA Insd)..................................... 5.000 02/01/19 2,077,246 2,380 Los Angeles, CA Mtg Rev FHA Security 8 Asstd Proj Ser A Rfdg (MBIA Insd)..................... 6.100 07/01/25 2,421,150 1,000 Los Angeles, CA Ser A (MBIA Insd)............... 5.000 09/01/16 1,080,520 1,375 Los Angeles, CA Spl Assmt Landscaping & Ltg Dist No 96 Ser 1 (AMBAC Insd)........................ 5.000 03/01/21 1,428,061 1,000 Los Angeles, CA Uni Sch Dist 1997 Election Ser E (MBIA Insd)..................................... 5.500 07/01/17 1,118,800 2,860 Los Angeles, CA Wtr & Pwr Rev Pwr Sys Ser B (FSA Insd)........................................... 5.000 07/01/26 2,911,737 1,000 Lynwood, CA Uni Sch Dist 2002 Election Ser A (FSA Insd)...................................... 5.000 08/01/27 1,030,740 1,500 Modesto, CA Irr Dist Ctfs Partn Cap Impts Ser A (FSA Insd)...................................... 5.250 07/01/18 1,622,370 1,105 Monrovia, CA Fin Auth Lease Rev Hillside Wilderness Preserve (AMBAC Insd)................ 5.000 12/01/20 1,169,455 2,000 Montclair, CA Redev Agy Tax Redev Proj No V Rfdg (MBIA Insd)..................................... 5.000 10/01/20 2,093,720 1,000 Mount Pleasant, CA Elem Sch Dist 1998 Election Ser C (FSA Insd)................................ 5.500 03/01/26 1,066,150 1,570 Mountain View, CA Shoreline Tax Alloc Ser A (MBIA Insd)..................................... 5.250 08/01/16 1,734,253 370 M-S-R Pub Pwr Agy CA San Juan Proj Rev Adj Sub Lien Ser E (MBIA Insd).......................... 6.000 07/01/22 374,355 2,000 Natomas, CA Uni Sch Dist Rfdg (FGIC Insd)....... 5.250 09/01/16 2,199,080 1,250 North City West, CA Sch Fac Fin Auth Spl Tax Ser B Rfdg (FSA Insd)............................... 5.750 09/01/15 1,405,475 3,915 Oak Grove, CA Sch Dist 1995 Election (FGIC Insd)........................................... 5.250 08/01/25 4,080,839 1,000 Oakland, CA Uni Sch Dist Alameda Cnty (FSA Insd)........................................... 5.000 08/01/17 1,045,970 1,300 Oceanside, CA Ctf Partn Ser A Rfdg (AMBAC Insd)........................................... 5.200 04/01/23 1,354,314 1,930 Ontario, CA Redev Fin Auth Rev Proj No 1 Ctr City & Cimarron (MBIA Insd)..................... 5.250 08/01/15 2,137,243 3,025 Orange Cnty, CA Pub Fin Auth Lease Rev Juvenile Justice Ctr Fac Rfdg (AMBAC Insd)............... 5.375 06/01/17 3,366,129 5,000 Orange Cnty, CA Recovery Ctfs Partn Ser A (MBIA Insd)........................................... 5.800 07/01/16 5,595,150
See Notes to Financial Statements 9 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA MUNICIPAL BONDS (CONTINUED) $ 1,270 Palm Desert, CA Fin Auth Proj Area No 3 (MBIA Insd)........................................... 5.125% 04/01/33 $ 1,304,455 1,340 Palm Springs, CA Fin Lease Rev Convention Ctr Proj Ser A Rfdg (MBIA Insd)..................... 5.250 11/01/19 1,451,381 1,000 Perris, CA Sch Dist Ctf Partn Rfdg (FSA Insd)... 6.100 03/01/16 1,039,850 2,020 Pomona, CA Pub Fin Auth Rev Merged Redev Proj Ser AD (MBIA Insd).............................. 5.000 02/01/15 2,182,287 1,110 Pomona, CA Pub Fin Auth Rev Merged Redev Proj Ser AD (MBIA Insd).............................. 5.000 02/01/16 1,194,016 1,360 Port Hueneme, CA Ctf Partn Cap Impt Pgm Rfdg (MBIA Insd)..................................... 6.000 04/01/19 1,635,998 1,055 Poway, CA Redev Agy Tax Alloc Paguay Redev Proj (AMBAC Insd).................................... 5.375 06/15/20 1,143,536 3,000 Poway, CA Redev Agy Tax Alloc Paguay Redev Proj Ser A (MBIA Insd) (b)........................... 5.000 06/15/33 3,037,770 3,000 Rancho Cucamonga, CA Redev Agy Rancho Redev Proj (MBIA Insd)..................................... 5.375 09/01/25 3,173,340 1,680 Rancho, CA Wtr Dist Spl Tax Cmnty Fac Dist 883 Ser A Rfdg (AMBAC Insd)......................... 6.000 09/01/17 1,850,386 1,000 Redding, CA Elec Sys Rev Ctf Partn (Inverse Fltg) (MBIA Insd)............................... 11.590 07/01/22 1,447,720 1,600 Redding, CA Jt Pwrs Auth Wtr Ser A Rfdg (AMBAC Insd)........................................... 5.000 06/01/21 1,669,088 1,400 Redding, CA Redev Agy Tax Alloc Canby Hilltop Cypress Redev Ser A (MBIA Insd)................. 5.000 09/01/23 1,440,208 2,000 Rialto, CA Spl Tax Cmnty Fac Dist 87-1 Rfdg (FSA Insd)........................................... 5.625 09/01/18 2,235,620 1,000 Riverside Cnty, CA Ctf Partn Historic Courthouse Proj (MBIA Insd)................................ 5.875 11/01/27 1,119,030 1,755 Rohnert Pk, CA Cmnty Dev Agy Tax Alloc Rohnert Redev Proj (MBIA Insd).......................... * 08/01/31 388,101 1,755 Rohnert Pk, CA Cmnty Dev Agy Tax Alloc Rohnert Redev Proj (MBIA Insd).......................... * 08/01/33 348,227 1,755 Rohnert Pk, CA Cmnty Dev Agy Tax Alloc Rohnert Redev Proj (MBIA Insd).......................... * 08/01/35 309,933 1,310 Rowland, CA Uni Sch Dist Ser A (FSA Insd)....... 5.500 09/01/20 1,445,939 1,000 Sacramento, CA City Fin Auth Rev Cap Impt (AMBAC Insd)........................................... 5.000 12/01/33 1,014,670 1,000 San Diego, CA Indl Dev Rev San Diego Gas & Elec Ser A (MBIA Insd)............................... 6.400 09/01/18 1,014,200 2,565 San Diego, CA Uni Sch Dist Election 1998 Ser E (FSA Insd)...................................... 5.250 07/01/18 2,829,246 3,000 San Francisco, CA City & Cnty George R Moscone Ctr Rfdg (FSA Insd)............................. 5.000 07/01/17 3,200,520
10 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA MUNICIPAL BONDS (CONTINUED) $ 1,500 San Francisco, CA City & Cnty Redev Fin Auth Tax Alloc San Francisco Redev Proj Ser A (FSA Insd)........................................... 5.000% 08/01/15 $ 1,617,870 2,000 San Francisco, CA City & Cnty Second Ser Issue 26B (FGIC Insd)................................. 5.000 05/01/22 2,064,020 1,000 San Joaquin Cnty, CA Rev Ctf Partn Solid Waste Sys Fac Proj (MBIA Insd)........................ 5.000 04/01/22 1,033,230 2,000 San Jose, CA Arpt Rev Ser A Rfdg (FSA Insd)..... 5.375 03/01/17 2,216,400 2,675 San Jose, CA Fin Auth Lease Rev Convention Ctr Proj Ser F Rfdg (MBIA Insd)..................... 5.000 09/01/17 2,876,187 1,000 San Leandro, CA Ctf Partn Lib & Fire Stations Fin (AMBAC Insd)................................ 5.750 11/01/29 1,103,490 1,000 San Leandro, CA Jt Proj Area Fin (MBIA Insd).... 5.100 12/01/26 1,024,290 1,260 San Luis, CA Wtr Dists Rev Ctf Partn Cap Impt Proj Rfdg (AMBAC Insd).......................... 5.500 11/01/16 1,408,541 1,460 San Marcos, CA Redev Agy Tax Alloc (FSA Insd)... 5.375 08/01/25 1,536,095 2,000 San Mateo, CA Uni High Sch Dist Cap Apprec Election of 2000 Ser B (FGIC Insd).............. * 09/01/24 667,500 975 Santa Clara Cnty, CA Brd Ed Rfdg (MBIA Insd).... 5.000 04/01/25 991,604 1,715 Santa Clara, CA Elec Rev Sub Ser A (MBIA Insd) (b)............................................. 5.250 07/01/18 1,880,069 1,000 Santa Clara, CA Elec Rev Sub Ser A (MBIA Insd) (b)............................................. 5.250 07/01/19 1,088,680 2,000 Santa Fe Springs, CA Cmnty Dev Comm Tax Alloc Ser A Rfdg (MBIA Insd).......................... 5.375 09/01/20 2,183,360 2,065 Santa Fe Springs, CA Cmnty Dev Comm Tax Alloc Ser A Rfdg (MBIA Insd).......................... 5.375 09/01/21 2,235,032 1,000 Shasta, CA Jt Pwrs Fin Auth Cnty Admin Bldg Proj Ser A (MBIA Insd)............................... 5.250 04/01/22 1,061,840 1,105 Sierra Uni Sch Dist CA Ctf Partn (FSA Insd) (b)............................................. 5.000 03/01/17 1,152,968 1,000 South Gate, CA Pub Fin Auth South Gate Redev Proj No 1 (XLCA Insd)........................... 5.750 09/01/22 1,105,580 2,750 Southern CA Pub Pwr Transmission Rev Southn Transmission Sub Ser A Rfdg (FSA Insd).......... 5.250 07/01/16 3,030,390 1,135 Sweetwater, CA Auth Wtr Rev (FSA Insd).......... 5.250 04/01/15 1,251,508 1,195 Sweetwater, CA Auth Wtr Rev (FSA Insd).......... 5.250 04/01/16 1,317,523 1,500 Tahoe Truckee, CA Uni Sch Dist Sch Fac Impt Dist No 1 Rfdg (MBIA Insd)........................... 5.500 08/01/18 1,736,145 2,150 Temecula, CA Redev Agy Tax Alloc Rev Temecula Redev Proj No 1 (MBIA Insd)..................... 5.125 08/01/27 2,193,301 1,000 University of CA Rev Gen Ser A (AMBAC Insd)..... 5.000 05/15/26 1,017,920 1,000 University of CA Rev Multi Purp Proj Ser F (FGIC Insd)........................................... 5.000 09/01/16 1,073,490 1,000 University of CA Rev Multi Purp Proj Ser M (FGIC Insd)........................................... 5.125 09/01/17 1,080,270 1,000 University of CA Rev Resh Fac Ser E (AMBAC Insd)........................................... 5.000 09/01/19 1,049,280
See Notes to Financial Statements 11 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA MUNICIPAL BONDS (CONTINUED) $ 1,540 Vallejo City, CA Uni Sch Dist Ser A Rfdg (MBIA Insd)........................................... 5.900% 02/01/20 $ 1,830,752 2,000 Ventura Cnty, CA Ctf Partn Pub Fin Auth Ser I (FSA Insd)...................................... 5.250 08/15/16 2,198,920 2,000 Vista, CA Uni Sch Dist Ser A (FSA Insd)......... 5.000 08/01/23 2,052,320 1,060 Woodland, CA Fin Auth Lease Rev Cap Proj Rfdg (XLCA Insd)..................................... 5.000 03/01/25 1,074,236 ------------ TOTAL LONG-TERM INVESTMENTS 102.1% (Cost $250,722,925)......................................................... 268,630,634 SHORT-TERM INVESTMENTS 0.8% (Cost $2,245,000)........................................................... 2,245,000 ------------ TOTAL INVESTMENTS 102.9% (Cost $252,967,925)......................................................... 270,875,634 LIABILITIES IN EXCESS OF OTHER ASSETS (2.9%)................................. (7,653,678) ------------ NET ASSETS 100.0%............................................................ $263,221,956 ============
* Zero coupon bond (a) All or a portion of these securities have been physically segregated in connection with open futures contracts. (b) Securities purchased on a when-issued or delayed delivery basis. (c) These securities are restricted and may be resold only in transactions exempt from registration which are normally those transactions with qualified institutional buyers. AMBAC--AMBAC Indemnity Corp. FGIC--Financial Guaranty Insurance Co. FSA--Financial Security Assurance Inc. MBIA--Municipal Bond Investors Assurance Corp. XLCA--XL Capital Assurance Inc. 12 See Notes to Financial Statements FINANCIAL STATEMENTS Statement of Assets and Liabilities September 30, 2003 ASSETS: Total Investments (Cost $252,967,925)....................... $270,875,634 Cash........................................................ 73,567 Receivables: Interest.................................................. 2,883,764 Fund Shares Sold.......................................... 217,439 Other....................................................... 118,993 ------------ Total Assets............................................ 274,169,397 ------------ LIABILITIES: Payables: Investments Purchased..................................... 9,473,132 Fund Shares Repurchased................................... 514,041 Income Distributions...................................... 229,452 Variation Margin on Futures............................... 213,719 Distributor and Affiliates................................ 168,829 Investment Advisory Fee................................... 100,314 Trustees Deferred Compensation and Retirement Plans......... 170,327 Accrued Expenses............................................ 77,627 ------------ Total Liabilities....................................... 10,947,441 ------------ NET ASSETS.................................................. $263,221,956 ============ NET ASSETS CONSIST OF: Capital (Par value of $.01 per share with an unlimited number of shares authorized).............................. $246,153,324 Net Unrealized Appreciation................................. 16,847,748 Accumulated Net Realized Gain............................... 271,509 Accumulated Undistributed Net Investment Income............. (50,625) ------------ NET ASSETS.................................................. $263,221,956 ============ MAXIMUM OFFERING PRICE PER SHARE: Class A Shares: Net asset value and redemption price per share (Based on net assets of $195,353,928 and 10,371,801 shares of beneficial interest issued and outstanding)............. $ 18.84 Maximum sales charge (3.25%* of offering price)......... .63 ------------ Maximum offering price to public........................ $ 19.47 ============ Class B Shares: Net asset value and offering price per share (Based on net assets of $49,812,060 and 2,646,644 shares of beneficial interest issued and outstanding)............. $ 18.82 ============ Class C Shares: Net asset value and offering price per share (Based on net assets of $18,055,968 and 959,243 shares of beneficial interest issued and outstanding)............. $ 18.82 ============
* On sales of $25,000 or more, the sales charge will be reduced. See Notes to Financial Statements 13 Statement of Operations For the Year Ended September 30, 2003 INVESTMENT INCOME: Interest.................................................... $12,928,039 ----------- EXPENSES: Investment Advisory Fee..................................... 1,257,632 Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $493,426, $522,742 and $173,640, respectively)............................................. 1,189,808 Shareholder Services........................................ 143,483 Legal....................................................... 34,735 Trustees' Fees and Related Expenses......................... 23,426 Custody..................................................... 22,898 Other....................................................... 187,028 ----------- Total Expenses.......................................... 2,859,010 Less Credits Earned on Cash Balances.................... 4,070 ----------- Net Expenses............................................ 2,854,940 ----------- NET INVESTMENT INCOME....................................... $10,073,099 =========== REALIZED AND UNREALIZED GAIN/LOSS: Realized Gain/Loss: Investments............................................... $ 566,717 Futures................................................... (309,466) ----------- Net Realized Gain........................................... 257,251 ----------- Unrealized Appreciation/Depreciation: Beginning of the Period................................... 23,550,782 ----------- End of the Period: Investments............................................. 17,907,709 Futures................................................. (1,059,961) ----------- 16,847,748 ----------- Net Unrealized Depreciation During the Period............... (6,703,034) ----------- NET REALIZED AND UNREALIZED LOSS............................ $(6,445,783) =========== NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 3,627,316 ===========
14 See Notes to Financial Statements Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 ---------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income.............................. $ 10,073,099 $ 9,724,962 Net Realized Gain.................................. 257,251 2,313,461 Net Unrealized Appreciation/Depreciation During the Period........................................... (6,703,034) 9,135,971 ------------ ------------ Change in Net Assets from Operations............... 3,627,316 21,174,394 ------------ ------------ Distributions from Net Investment Income: Class A Shares................................... (7,904,427) (7,620,889) Class B Shares................................... (1,686,177) (1,810,095) Class C Shares................................... (557,298) (414,336) ------------ ------------ (10,147,902) (9,845,320) ------------ ------------ Distributions from Net Realized Gain: Class A Shares................................... (1,755,292) (295,777) Class B Shares................................... (460,678) (88,471) Class C Shares................................... (133,437) (19,226) ------------ ------------ (2,349,407) (403,474) ------------ ------------ Total Distributions................................ (12,497,309) (10,248,794) ------------ ------------ NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....................................... (8,869,993) 10,925,600 ------------ ------------ FROM CAPITAL TRANSACTIONS: Proceeds from Shares Sold.......................... 48,488,523 65,568,344 Net Asset Value of Shares Issued Through Dividend Reinvestment..................................... 8,957,796 6,741,692 Cost of Shares Repurchased......................... (53,753,503) (48,379,678) ------------ ------------ NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS..................................... 3,692,816 23,930,358 ------------ ------------ TOTAL INCREASE/DECREASE IN NET ASSETS.............. (5,177,177) 34,855,958 NET ASSETS: Beginning of the Period............................ 268,399,133 233,543,175 ------------ ------------ End of the Period (Including accumulated undistributed net investment income of ($50,625) and $107,952, respectively)...................... $263,221,956 $268,399,133 ============ ============
See Notes to Financial Statements 15 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS A SHARES ------------------------------------------------ 2003 2002 (c) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $19.45 $18.64 $17.67 $17.28 $18.77 ------ ------ ------ ------ ------ Net Investment Income..................... .74 .77 .81 .82 .83 Net Realized and Unrealized Gain/Loss..... (.44) .85 .94 .38 (1.45) ------ ------ ------ ------ ------ Total from Investment Operations............ .30 1.62 1.75 1.20 (.62) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .75 .78 .78 .81 .87 Distributions from Net Realized Gain...... .16 .03 -0- -0- -0- ------ ------ ------ ------ ------ Total Distributions......................... .91 .81 .78 .81 .87 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $18.84 $19.45 $18.64 $17.67 $17.28 ====== ====== ====== ====== ====== Total Return (a)............................ 1.67% 9.01% 10.09% 7.20% -3.44% Net Assets at End of the Period (In millions)................................. $195.4 $200.4 $174.9 $152.5 $162.0 Ratio of Expenses to Average Net Assets (b)....................................... .87% .87% .89% .98% .92% Ratio of Net Investment Income to Average Net Assets................................ 3.93% 4.18% 4.43% 4.79% 4.52% Portfolio Turnover.......................... 25% 32% 39% 52% 44%
(a) Assumes reinvestment of all distributions for the period and does not include payment of the maximum sales charge of 3.25% or contingent deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be imposed on certain redemptions made within one year of purchase. If the sales charges were included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of up to .25% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (b) The Ratio of Expenses to Average Net Assets does not reflect credits earned on cash balances. If these credits were reflected as a reduction of expenses, the ratio would decrease by .01% for the year ended September 30, 2000. (c) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets from 4.16% to 4.18%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. 16 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS B SHARES ------------------------------------------------ 2003 2002 (c) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $19.44 $18.65 $17.69 $17.26 $18.76 ------ ------ ------ ------ ------ Net Investment Income..................... .60 .63 .67 .68 .68 Net Realized and Unrealized Gain/Loss..... (.45) .84 .94 .43 (1.45) ------ ------ ------ ------ ------ Total from Investment Operations............ .15 1.47 1.61 1.11 (.77) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .61 .65 .65 .68 .73 Distributions from Net Realized Gain...... .16 .03 -0- -0- -0- ------ ------ ------ ------ ------ Total Distributions......................... .77 .68 .65 .68 .73 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $18.82 $19.44 $18.65 $17.69 $17.26 ====== ====== ====== ====== ====== Total Return (a)............................ 0.87% 8.16% 9.27% 6.63% -4.20% Net Assets at End of the Period (In millions)................................. $ 49.8 $ 53.0 $ 47.7 $ 38.3 $ 45.3 Ratio of Expenses to Average Net Assets (b)....................................... 1.62% 1.63% 1.65% 1.74% 1.68% Ratio of Net Investment Income to Average Net Assets................................ 3.18% 3.42% 3.67% 4.03% 3.76% Portfolio Turnover.......................... 25% 32% 39% 52% 44%
(a) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 3%, charged on certain redemptions made within one year of purchase and declining to 0% after the fourth year. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on the Fund distributions or the redemption of Fund shares. (b) The Ratio of Expenses to Average Net Assets does not reflect credits earned on cash balances. If these credits were reflected as a reduction of expenses, the ratio would decrease by .01% for the year ended September 30, 2000. (c) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets from 3.40% to 3.42%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. See Notes to Financial Statements 17 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS C SHARES ------------------------------------------------ 2003 2002 (c) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $19.43 $18.64 $17.68 $17.26 $18.75 ------ ------ ------ ------ ------ Net Investment Income..................... .61 .64 .68 .68 .69 Net Realized and Unrealized Gain/Loss..... (.45) .83 .93 .42 (1.45) ------ ------ ------ ------ ------ Total from Investment Operations............ .16 1.47 1.61 1.10 (.76) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .61 .65 .65 .68 .73 Distributions from Net Realized Gain...... .16 .03 -0- -0- -0- ------ ------ ------ ------ ------ Total Distributions......................... .77 .68 .65 .68 .73 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $18.82 $19.43 $18.64 $17.68 $17.26 ====== ====== ====== ====== ====== Total Return (a)............................ 0.92%(d) 8.16% 9.27% 6.57% -4.15% Net Assets at End of the Period (In millions)................................. $ 18.1 $ 15.0 $ 11.0 $ 6.6 $ 7.4 Ratio of Expenses to Average Net Assets (b)....................................... 1.62% 1.63% 1.65% 1.74% 1.69% Ratio of Net Investment Income to Average Net Assets................................ 3.20%(d) 3.41% 3.67% 4.03% 3.75% Portfolio Turnover.......................... 25% 32% 39% 52% 44%
(a) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 1% charged on certain redemptions made within one year of purchase. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (b) The Ratio of Expenses to Average Net Assets does not reflect credits earned on cash balances. If these credits were reflected as a reduction of expenses, the ratio would decrease by .01% for the year ended September 30, 2000. (c) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets from 3.39% to 3.41%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (d) Certain non-recurring payments were made to Class C Shares, resulting in an increase to the Total Return and Ratio of Net Investment Income to Average Net Assets of .03%. 18 See Notes to Financial Statements NOTES TO FINANCIAL STATEMENTS September 30, 2003 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen California Insured Tax Free Fund (the "Fund") is organized as a series of the Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a diversified, open-end management investment company under the Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to provide only California investors with a high level of current income exempt from federal and California income taxes, with liquidity and safety of principal, primarily through investment in a diversified portfolio of insured California municipal securities. The Fund commenced investment operations on December 13, 1985. The distribution of the Fund's Class B shares and Class C shares commenced on April 30, 1993 and August 13, 1993, respectively. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION Municipal bonds are valued by independent pricing services or dealers using the mean of the bid and asked prices or, in the absence of market quotations, at fair value based upon yield data relating to municipal bonds with similar characteristics and general market conditions. Securities which are not valued by independent pricing services or dealers are valued at fair value using procedures established in good faith by the Board of Trustees. Futures contracts are valued at the settlement price established each day on the exchange on which they are traded. Short-term securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. The Fund may purchase and sell securities on a "when-issued" or "delayed delivery" basis, with settlement to occur at a later date. The value of the security so purchased is subject to market fluctuations during this period. The Fund will segregate assets with the custodian having an aggregate value at least equal to the amount of the when-issued or delayed delivery purchase commitments until payment is made. At September 30, 2003, the Fund had $9,473,132 of when-issued and delayed delivery purchase commitments. C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond premium is amortized and discount is accreted over the expected life of each applicable security. Income and expenses of the Fund are allocated on a pro rata basis to each class of shares, except for distribution and service fees and transfer agency costs which are unique to each class of shares. 19 NOTES TO FINANCIAL STATEMENTS September 30, 2003 D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund intends to utilize provisions of the federal income tax law 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 September 30, 2003, the Fund had an accumulated capital loss carryforward for tax purposes of $29,472, which will expire on September 30, 2011. At September 30, 2003, the cost and related gross unrealized appreciation and depreciation are as follows: Cost of investments for tax purposes........................ $252,866,156 ------------ Gross tax unrealized appreciation........................... $ 18,142,132 Gross tax unrealized depreciation........................... (132,654) ------------ Net tax unrealized appreciation on investments.............. $ 18,009,478 ============
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly dividends from net investment income. Net realized gains, if any, are distributed annually. Distributions from net realized gains for book purposes may include short-term capital gains, and a portion of futures gains, which are included in ordinary income for tax purposes. The tax character of distributions paid during the years ended September 30, 2003 and 2002 was as follows:
2003 2002 Distributions paid from: Ordinary income........................................... $ 58,761 $ 48,176 Long-term capital gain.................................... 2,326,272 385,485 ---------- -------- $2,385,033 $433,661 ========== ========
Due to inherent differences in the recognition of income, expenses and realized gains/losses under accounting principles generally accepted in the United States of America and federal income tax purposes, permanent differences between book and tax basis reporting for the 2003 fiscal year have been identified and appropriately reclassified on the Statement of Assets and Liabilities. A permanent difference relating to the Fund's investment in other regulated investment companies totaling $10,125 was reclassified to accumulated net realized gain from accumulated undistributed net investment income. Additionally, a permanent difference relating to book to tax accretion differences totaling $93,899 was reclassified from accumulated undistributed net investment income to accumulated net realized gain. 20 NOTES TO FINANCIAL STATEMENTS September 30, 2003 As of September 30, 2003, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income............................... $6,520
Net realized gains or losses may differ for financial reporting and tax purposes primarily as a result of post October 31 losses which are not recognized for tax purposes until the first day of the following fiscal year and gains or losses recognized for tax purposes on open future transactions on September 30, 2003. F. INSURANCE EXPENSE The Fund typically invests in insured bonds. Any portfolio securities not specifically covered by a primary insurance policy are insured secondarily through the Fund's portfolio insurance policy. Insurance premiums are based on the daily balances of uninsured bonds in the portfolio of investments and are charged to expense on an accrual basis. The insurance policy guarantees the timely payment of principal and interest on the securities in the Fund's portfolio. G. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's custody fee was reduced by $4,070 as a result of credits earned on cash balances. 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE DAILY NET ASSETS % PER ANNUM First $100 million.......................................... .500% Next $150 million........................................... .450% Next $250 million........................................... .425% Over $500 million........................................... .400%
For the year ended September 30, 2003, the Fund recognized expenses of approximately $12,800 representing legal services provided by Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the Fund is an affiliated person. Under separate Accounting Services and Legal Services Agreements, the Adviser provides accounting and legal services to the Fund. The Adviser allocates the cost of such services to each fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $58,100 representing Van Kampen Investment Inc.'s or its affiliates' (collectively "Van Kampen") cost of providing accounting and legal services to the Fund, which are reported as part of "Other" and "Legal" expenses, respectively, in the Statement of Operations. Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser, serves as the shareholder servicing agent for the Fund. For the year ended September 30, 2003, the Fund 21 NOTES TO FINANCIAL STATEMENTS September 30, 2003 recognized expenses of approximately $116,500 representing transfer agency fees paid to VKIS. Transfer agency fees are determined through negotiations with the Fund's Board of Trustees. Certain officers and trustees of the Fund are also officers and directors of Van Kampen. The Fund does not compensate its officers or trustees who are officers of Van Kampen. The Fund provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Fund and to the extent permitted by the 1940 Act, as amended, may be invested in the common shares of those funds selected by the trustees. Investments in such funds of $95,780 are included in "Other" assets on the Statement of Assets and Liabilities at September 30, 2003. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. Benefits under the retirement plan are payable upon retirement for a ten-year period and are based upon each trustee's years of service to the Fund. The maximum annual benefit per trustee under the plan is $2,500. 3. CAPITAL TRANSACTIONS At September 30, 2003, capital aggregated $179,566,488, $48,435,951 and $18,150,885 for Classes A, B and C, respectively. For the year ended September 30, 2003, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 1,661,438 $ 31,350,394 Class B................................................... 428,696 8,090,363 Class C................................................... 480,104 9,047,766 ---------- ------------ Total Sales................................................. 2,570,238 $ 48,488,523 ========== ============ Dividend Reinvestment: Class A................................................... 366,301 $ 6,890,766 Class B................................................... 83,899 1,577,306 Class C................................................... 26,042 489,724 ---------- ------------ Total Dividend Reinvestment................................. 476,242 $ 8,957,796 ========== ============ Repurchases: Class A................................................... (1,957,587) $(36,611,996) Class B................................................... (593,532) (11,117,759) Class C................................................... (320,896) (6,023,748) ---------- ------------ Total Repurchases........................................... (2,872,015) $(53,753,503) ========== ============
22 NOTES TO FINANCIAL STATEMENTS September 30, 2003 At September 30, 2002, capital aggregated $177,937,324, $49,886,041 and $14,637,143 for Classes A, B and C, respectively. For the year ended September 30, 2002, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 2,363,919 $ 43,821,231 Class B................................................... 799,096 14,892,121 Class C................................................... 367,401 6,854,992 ---------- ------------ Total Sales................................................. 3,530,416 $ 65,568,344 ========== ============ Dividend Reinvestment: Class A................................................... 280,419 $ 5,198,487 Class B................................................... 68,135 1,261,680 Class C................................................... 15,185 281,525 ---------- ------------ Total Dividend Reinvestment................................. 363,739 $ 6,741,692 ========== ============ Repurchases: Class A................................................... (1,722,209) $(31,827,451) Class B................................................... (696,543) (12,857,656) Class C................................................... (198,946) (3,694,571) ---------- ------------ Total Repurchases........................................... (2,617,698) $(48,379,678) ========== ============
Class B Shares purchased on or after June 1, 1996 and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares eight years after the end of the calendar month in which the shares were purchased. Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares six years after the end of the calendar month in which the shares were purchased. For the years ended September 30, 2003 and 2002, 44,998 and 177,057 Class B Shares automatically converted to Class A Shares, respectively, and are shown in the above tables as sales of Class A Shares and repurchases of Class B Shares. Class C Shares purchased before January 1, 1997, and any dividend reinvestment plan Class C Shares received thereon, automatically convert to Class A Shares ten years after the end of the calendar month in which such shares are purchased. Class C Shares purchased on or after January 1, 1997 do not possess a conversion feature. For the years ended September 30, 2003 and 2002, no Class C shares converted to Class A Shares. Classes B and C Shares are offered without a front end sales charge, but are subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed on most redemptions 23 NOTES TO FINANCIAL STATEMENTS September 30, 2003 made within four years of the purchase for Class B Shares and one year of the purchase for Class C Shares as detailed in the following schedule.
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLAR AMOUNT SUBJECT TO CHARGE -------------------------- YEAR OF REDEMPTION CLASS B CLASS C First....................................................... 3.00% 1.00% Second...................................................... 2.50% None Third....................................................... 2.00% None Fourth...................................................... 1.00% None Fifth and Thereafter........................................ None None
For the year ended September 30, 2003, Van Kampen, as Distributor for the Fund, received commissions on sales of the Fund's Class A Shares of approximately $44,400 and CDSC on redeemed shares of approximately $94,600. Sales charges do not represent expenses of the Fund. 4. INVESTMENT TRANSACTIONS During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were $77,150,961 and $66,815,452, respectively. 5. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument in very general terms refers to a security whose value is "derived" from the value of an underlying asset, reference rate or index. The Fund has a variety of reasons to use derivative instruments, such as to attempt to protect the Fund against possible changes in the market value of its portfolio, to manage the portfolio's effective yield, maturity and duration, or generate potential gain. All of the Fund's portfolio holdings, including derivative instruments, are marked to market each day with the change in value reflected in the unrealized appreciation/depreciation. Upon disposition, a realized gain or loss is recognized accordingly, except when taking delivery of a security underlying a futures contract. In this instance, the recognition of gain or loss is postponed until the disposal of the security underlying the futures contract. Summarized below are the different types of derivative financial instruments used by the Fund. A. FUTURES CONTRACTS A futures contract is an agreement involving the delivery of a particular asset on a specified future date at an agreed upon price. The Fund generally invests in exchange traded futures on U.S. Treasury Bonds and Notes and typically closes the contract prior to delivery date. Upon entering into futures contracts, the Fund maintains an amount of cash or liquid securities with a value equal to a percentage of the contract amount 24 NOTES TO FINANCIAL STATEMENTS September 30, 2003 with either a futures commission merchant pursuant to rules and regulations promulgated under the 1940 Act, as amended, or with its custodian in an account in the broker's name. This amount is known as initial margin. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). The risk of loss associated with a futures contract is in excess of the variation margin reflected on the Statement of Assets and Liabilities. Transactions in futures contracts for the year ended September 30, 2003, were as follows:
CONTRACTS Outstanding at September 30, 2002........................... -0- Futures Opened.............................................. 1,657 Futures Closed.............................................. (1,405) ------ Outstanding at September 30, 2003........................... 252 ======
The futures contracts outstanding as of September 30, 2003 and the descriptions and unrealized appreciation/depreciation are as follows:
UNREALIZED APPRECIATION/ CONTRACTS DEPRECIATION SHORT CONTRACTS: U.S. Treasury Notes 10-Year Futures December 2003 (Current Notional Value of $114,625 per contract)................ 49 $ (277,364) U.S. Treasury Notes 5-Year Futures December 2003 (Current Notional Value of $113,469 per contract)................ 203 (782,597) --- ----------- 252 $(1,059,961) === ===========
B. INDEXED SECURITY An inverse floating rate security is one where the coupon is inversely indexed to a short-term floating interest rate multiplied by a specific factor. As the floating rate rises, the coupon is reduced. Conversely, as the floating rate declines, the coupon is increased. The price of these securities may be more volatile than the price of a comparable fixed rate security. These instruments are typically used by the Fund to enhance the yield of the portfolio. These instruments are identified in the portfolio of investments. 6. DISTRIBUTION AND SERVICE PLANS With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund and its shareholders have adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act, as amended, and a service plan (collectively the "Plans"). The Plans govern payments for: the distribution of the Fund's Class A Shares, Class B Shares and Class C Shares; the provision of ongoing shareholder services with respect to such classes of shares; and maintenance of shareholder accounts with respect to such classes of shares. 25 NOTES TO FINANCIAL STATEMENTS September 30, 2003 Annual fees under the Plans of up to 0.25% of Class A average daily net assets and 1.00% each for Class B and Class C average daily net assets are accrued daily. The amount of distribution expenses incurred by Van Kampen and not yet reimbursed ("unreimbursed receivable") was approximately $14,900 and $28,000 for Class B and Class C Shares, respectively. These amounts may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed receivable has been fully recovered, any excess 12b-1 fees will be refunded to the Fund on a quarterly basis. Included in the fees for the year ended September 30, 2003 are payments retained by Van Kampen of approximately $503,900 and payments made to Morgan Stanley DW Inc., an affiliate of the Adviser, of approximately $56,800. 26 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees of Van Kampen California Insured Tax Free Fund: We have audited the accompanying statement of assets and liabilities of the Van Kampen California Insured Tax Free Fund (the "Fund"), including the portfolio of investments, as of September 30, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the year ended September 30, 1999 were audited by other auditors whose report dated November 11, 1999 expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and financial highlights. Our procedures included confirmation of securities owned as of September 30, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. 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 the Van Kampen California Insured Tax Free Fund at September 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended in conformity with accounting principles generally accepted in the United States. -s- Ernst & Young LLP Chicago, Illinois November 4, 2003 27 VAN KAMPEN INVESTMENTS THE VAN KAMPEN FAMILY OF FUNDS Global/International Emerging Markets Emerging Markets Income European Value Equity Global Equity Allocation Global Franchise Global Value Equity International Advantage International Magnum Growth Aggressive Growth American Value Emerging Growth Enterprise Equity Growth Focus Equity Growth Mid Cap Growth Pace Select Growth Small Cap Growth Small Cap Value Technology Growth and Income Comstock Equity and Income Growth and Income Harbor Real Estate Securities Utility Value Value Opportunities Income Corporate Bond Government Securities High Income Corporate Bond High Yield Limited Maturity Government U.S. Government Tax Free California Insured Tax Free High Yield Municipal* Insured Tax Free Income Intermediate Term Municipal Income Municipal Income New York Tax Free Income Pennsylvania Tax Free Income Strategic Municipal Income Capital Preservation Reserve Tax Free Money Senior Loan Senior Loan Fund For more complete information, including risk considerations, fees, sales charges and ongoing expenses, please contact your financial advisor for a prospectus. Please read it carefully before you invest or send money. To view a current Van Kampen fund prospectus or to receive additional fund information, choose from one of the following: - - Visit our Web site at VANKAMPEN.COM. To view a prospectus select Literature, Download Fund Info. (COMPUTER ICON) - - Call us at (800) 847-2424 Telecommunications Device for the Deaf (TDD) users, call (800) 421-2833. (PHONE ICON) - - E-mail us by visiting VANKAMPEN.COM and selecting Contact Us. (MAIL ICON) * Open to new investors for a limited time 28 BOARD OF TRUSTEES AND IMPORTANT ADDRESSES VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND BOARD OF TRUSTEES DAVID C. ARCH J. MILES BRANAGAN JERRY D. CHOATE ROD DAMMEYER LINDA HUTTON HEAGY R. CRAIG KENNEDY HOWARD J KERR MITCHELL M. MERIN* JACK E. NELSON RICHARD F. POWERS, III* HUGO F. SONNENSCHEIN WAYNE W. WHALEN* - Chairman SUZANNE H. WOOLSEY INVESTMENT ADVISER VAN KAMPEN INVESTMENT ADVISORY CORP. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 DISTRIBUTOR VAN KAMPEN FUNDS INC. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 SHAREHOLDER SERVICING AGENT VAN KAMPEN INVESTOR SERVICES INC. P.O. Box 947 Jersey City, New Jersey 07303-0947 CUSTODIAN STATE STREET BANK AND TRUST COMPANY 225 Franklin Street P.O. Box 1713 Boston, Massachusetts 02110 LEGAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606 INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, Illinois 60606 For federal income tax purposes, the following is furnished with respect to the distributions paid by the Fund during its taxable year ended September 30, 2003. The Fund designated 99.7% of the income distributions as a tax-exempt income distribution. The Fund designated and paid $2,326,272 as a long-term capital gain distribution. In January, the Fund provides tax information to shareholders for the preceding calendar year. * "Interested persons" of the Fund, as defined in the Investment Company Act of 1940, as amended. 29 TRUSTEES AND OFFICERS The business and affairs of the Fund are managed under the direction of the Fund's Board of Trustees and the Fund's officers appointed by the Board of Trustees. The tables below list the trustees and executive officers of the Fund and their principal occupations during the last five years, other directorships held by trustees and their affiliations, if any, with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are referred to herein collectively as the "Advisers." The term "Fund Complex" includes each of the investment companies advised by the Advisers or their affiliates as of the date of this Statement of Additional Information. Trustees serve until reaching their retirement age or until their successors are duly elected and qualified. Officers are annually elected by the trustees. INDEPENDENT TRUSTEES
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing Blistex Inc. since 2003 Executive Officer of General Partner of funds 1800 Swift Drive Blistex Inc., a consumer in the Fund Complex. Oak Brook, IL 60523 health care products manufacturer. Former Director of the World Presidents Organization-Chicago Chapter. Director of the Heartland Alliance, a nonprofit organization serving human needs based in Chicago. J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing 1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex. Chief Executive Officer and President, MDT Corporation (now known as Getinge/Castle, Inc., a subsidiary of Getinge Industrier AB), a company which develops, manufactures, markets and services medical and scientific equipment.
30
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing 33971 Selva Road since 1999 Chairman and Chief General Partner of funds Suite 130 Executive Officer of the in the Fund Complex. Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a ("Allstate") and Allstate biotechnological company, Insurance Company. Prior and Director of Valero to January 1995, Energy Corporation, an President and Chief independent refining Executive Officer of company. Allstate. Prior to August 1994, various management positions at Allstate. Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing CAC, llc. since 2003 private company offering General Partner of funds 4350 LaJolla Village Drive capital investment and in the Fund Complex. Suite 980 management advisory Director of TeleTech San Diego, CA 92122-6223 services. Prior to July Holdings Inc., 2000, Managing Partner of Stericycle, Inc., Equity Group Corporate TheraSense, Inc., GATX Investment (EGI), a Corporation, Arris Group, company that makes Inc. and Trustee of the private investments in University of Chicago other companies. Hospitals and Health Systems. Prior to May 2002, Director of Peregrine Systems Inc. Prior to February 2001, Vice Chairman and Director of Anixter International, Inc. and IMC Global Inc. Prior to July 2000, Director of Allied Riser Communications Corp., Matria Healthcare Inc., Transmedia Networks, Inc., CNA Surety, Corp. and Grupo Azcarero Mexico (GAM). Prior to April 1999, Director of Metal Management, Inc.
31
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds 233 South Wacker Drive executive search firm. in the Fund Complex. Suite 7000 Trustee on the University Chicago, IL 60606 of Chicago Hospitals Board, Vice Chair of the Board of the YMCA of Metropolitan Chicago and a member of the Women's Board of the University of Chicago. Prior to 1997, Partner of Ray & Berndtson, Inc., an executive recruiting firm. Prior to 1996, Trustee of The International House Board, a fellowship and housing organization for international graduate students. Prior to 1995, Executive Vice President of ABN AMRO, N.A., a bank holding company. Prior to 1992, Executive Vice President of La Salle National Bank. R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing 11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds Washington, D.C. 20016 of the United States, an in the Fund Complex. independent U.S. foundation created to deepen understanding, promote collaboration and stimulate exchanges of practical experience between Americans and Europeans. Formerly, advisor to the Dennis Trading Group Inc., a managed futures and option company that invests money for individuals and institutions. Prior to 1992, President and Chief Executive Officer, Director and member of the Investment Committee of the Joyce Foundation, a private foundation. Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing 736 North Western Avenue since 2003 and Chief Executive General Partner of funds P.O. Box 317 Officer of Pocklington in the Fund Complex. Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake investment holding Forest Bank & Trust. company. Director of the Marrow Foundation.
32
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing 423 Country Club Drive since 1985 Investment Planning General Partner of funds Winter Park, FL 32789 Services, Inc., a in the Fund Complex. financial planning company and registered investment adviser in the State of Florida. President of Nelson Ivest Brokerage Services Inc., a member of the NASD, Securities Investors Protection Corp. and the Municipal Securities Rulemaking Board. President of Nelson Sales and Services Corporation, a marketing and services company to support affiliated companies. Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing 1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds Chicago, IL 60637 University of Chicago and in the Fund Complex. the Adam Smith Director of Winston Distinguished Service Laboratories, Inc. Professor in the Department of Economics at the University of Chicago. Prior to July 2000, President of the University of Chicago. Trustee of the University of Rochester and a member of its investment committee. Member of the National Academy of Sciences, the American Philosophical Society and a fellow of the American Academy of Arts and Sciences. Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing 2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds Room 285 Academy of in the Fund Complex. Washington, D.C. 20418 Sciences/National Director of Neurogen Research Council, an Corporation, a independent, federally pharmaceutical company, chartered policy since January 1998. institution, since 2001 and previously Chief Operating Officer from 1993 to 2001. Director of the Institute for Defense Analyses, a federally funded research and development center, Director of the German Marshall Fund of the United States, and Trustee of Colorado College. Prior to 1993, Executive Director of the Commission on Behavioral and Social Sciences and Education at the National Academy of Sciences/National Research Council. From 1980 through 1989, Partner of Coopers & Lybrand.
33 INTERESTED TRUSTEES*
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing 1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex. Officer Complex. Chairman, President, Chief Executive Officer and Director of the Advisers and VK Advisors Inc. since December 2002. Chairman, President and Chief Executive Officer of Van Kampen Investments since December 2002. Director of Van Kampen Investments since December 1999. Chairman and Director of Van Kampen Funds Inc. since December 2002. President, Director and Chief Operating Officer of Morgan Stanley Investment Management since December 1998. President and Director since April 1997 and Chief Executive Officer since June 1998 of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chairman, Chief Executive Officer and Director of Morgan Stanley Distributors Inc. since June 1998. Chairman since June 1998, and Director since January 1998 of Morgan Stanley Trust. Director of various Morgan Stanley subsidiaries. President of the Morgan Stanley Funds since May 1999. Previously Chief Executive Officer of Van Kampen Funds Inc. from December 2002 to July 2003, Chief Strategic Officer of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. and Executive Vice President of Morgan Stanley Distributors Inc. from April 1997 to June 1998. Chief Executive Officer from September 2002 to April 2003 and Vice President from May 1997 to April 1999 of the Morgan Stanley Funds.
34
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing 1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds P.O. Box 5555 December 2002, Chairman, in the Fund Complex. Oakbrook Terrace, IL 60181 Director, President, Chief Executive Officer and Managing Director of Van Kampen Investments and its investment advisory, distribution and other subsidiaries. Prior to December 2002, President and Chief Executive Officer of funds in the Fund Complex. Prior to May 1998, Executive Vice President and Director of Marketing at Morgan Stanley and Director of Dean Witter, Discover & Co. and Dean Witter Realty. Prior to 1996, Director of Dean Witter Reynolds Inc. Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing 333 West Wacker Drive since 1985 of Skadden, Arps, Slate, General Partner of funds Chicago, IL 60606 Meagher & Flom in the Fund Complex. (Illinois), legal counsel to funds in the Fund Complex.
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of certain funds in the Fund Complex by reason of his firm currently acting as legal counsel to such funds in the Fund Complex. Messrs. Merin and Powers are interested persons of funds in the Fund Complex and the Advisers by reason of their current or former positions with Morgan Stanley or its affiliates. 35 OFFICERS
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management. 2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to 45th Floor December 2002, Chief Investment Officer of Van Kampen Houston, TX 77056 Investments and President and Chief Operations Officer of the Advisers and Van Kampen Advisors Inc. Prior to May 2002, Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Prior to May 2001, Managing Director and Chief Investment Officer of Van Kampen Investments, and Managing Director and President of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Executive Vice President and Chief Investment Officer of Van Kampen Investments, and President and Chief Operating Officer of the Advisers. Prior to April 2000, Executive Vice President and Chief Investment Officer for Equity Investments of the Advisers. Prior to October 1998, Vice President and Senior Portfolio Manager with AIM Capital Management, Inc. Prior to February 1998, Senior Vice President and Portfolio Manager of Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp. and Van Kampen American Capital Management, Inc. Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management. 1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex. New York, NY 10020 Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan 1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Managing Director and Chief Investment Officer of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc. since December 2002. John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers 1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Senior Vice President of the Advisers and Van Kampen Advisors Inc. Prior to May 2000, Senior Vice President of the investment grade taxable group for the Advisers. Prior to June 1999, Senior Vice President of the government securities bond group for Asset Management.
36
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services. 1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer Executive Officer and Managing Director of Morgan Stanley Investment Management Inc. Managing Director of Morgan Stanley. Managing Director and Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chief Executive Officer and Director of Morgan Stanley Trust. Vice President of the Morgan Stanley Funds. A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and 1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Managing Director and General Counsel-Mutual Funds of Morgan Stanley Investment Advisors, Inc. Vice President and Secretary of funds in the Fund Complex. Prior to July 2001, Managing Director, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, the Distributor, Investor Services, and certain other subsidiaries of Van Kampen Investments. Prior to December 2000, Executive Vice President, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Prior to January 1999, Vice President and Associate General Counsel to New York Life Insurance Company ("New York Life"), and prior to March 1997, Associate General Counsel of New York Life. Prior to December 1993, Assistant General Counsel of The Dreyfus Corporation. Prior to August 1991, Senior Associate, Willkie Farr & Gallagher. Prior to January 1989, Staff Attorney at the Securities and Exchange Commission, Division of Investment Management, Office of Chief Counsel. John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments, 1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President, Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund Complex. Head of Fund Accounting for Morgan Stanley Investment Management. Prior to December 2002, Executive Director of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc.
37 Van Kampen Privacy Notice The Van Kampen companies and investment products* respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain nonpublic personal information about you. This is information we collect from you on applications or other forms, and from the transactions you conduct with us, our affiliates, or third parties. We may also collect information you provide when using our Web site, and text files (also known as "cookies") may be placed on your computer to help us to recognize you and to facilitate transactions you initiate. We do not disclose any nonpublic personal information about you or any of our former customers to anyone, except as permitted by law. For instance, so that we may continue to offer you Van Kampen investment products and services that meet your investing needs, and to effect transactions that you request or authorize, we may disclose the information we collect to companies that perform services on our behalf, such as printers and mailers that assist us in the distribution of investor materials. These companies will use this information only for the services for which we hired them, and are not permitted to use or share this information for any other purpose. To protect your nonpublic personal information internally, we permit access to it only by authorized employees, and maintain physical, electronic and procedural safeguards to guard your nonpublic personal information. * Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc., Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many Van Kampen mutual funds and Van Kampen unit investment trusts. The Statement of Additional Information includes additional information about Fund trustees and is available, without charge, upon request by calling (800) 847-2424. Van Kampen Funds Inc. 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 www.vankampen.com (VAN KAMPEN INVESTMENTS LOGO) Copyright (C)2003 Van Kampen Funds Inc. All rights reserved. Member NASD/SIPC. 41, 341, 541 CAI ANR 11/03 12216K03-AP-11/03 Item 1. Report to Shareholders Welcome, Shareholder In this report, you'll learn about how your investment in Van Kampen Municipal Income Fund performed during the annual period. The portfolio management team will provide an overview of the market conditions and discuss some of the factors that affected investment performance during the reporting period. In addition, this report includes the fund's financial statements and a list of fund investments as of September 30, 2003. This material must be preceded or accompanied by a prospectus for the fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the fund will achieve its investment objective. The fund is subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and, therefore, the value of the fund shares may be less than what you paid for them. Accordingly, you can lose money investing in this fund. Please see the prospectus for more complete information on investment risks. Income may subject certain individuals to the federal Alternative Minimum Tax (AMT). NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Performance Summary PERFORMANCE OF A $10,000 INVESTMENT This chart compares your fund's performance to that of the Lehman Brothers Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for sales charges. (LINE GRAPH)
VAN KAMPEN MUNICIPAL INCOME LEHMAN BROTHERS MUNICIPAL BOND FUND INDEX --------------------------- ------------------------------ 9/93 9523.00 10000.00 12/93 9662.00 10140.70 8999.00 9583.91 9115.00 9689.41 9151.00 9755.81 12/94 9047.00 9616.39 9684.00 10295.80 9768.00 10543.80 9965.00 10847.00 12/95 10459.00 11294.80 10296.00 11158.80 10379.00 11244.10 10630.00 11501.80 12/96 10884.00 11794.80 10882.00 11766.60 11246.00 12171.80 11556.00 12538.80 12/97 11878.00 12878.90 12008.00 13027.10 12171.00 13225.60 12545.00 13631.40 12/98 12492.00 13713.40 12517.00 13835.00 12225.00 13590.60 12013.00 13536.50 12/99 11814.00 13431.40 12038.00 13823.90 12128.00 14032.70 12336.00 14372.30 12/00 12767.00 15000.70 13020.00 15333.50 13049.00 15433.10 13437.00 15866.50 12/01 13247.00 15769.60 13334.00 15918.30 13823.00 16500.70 14560.00 17284.40 12/02 14487.00 17284.30 14641.00 17492.10 15005.00 17943.30 9/03 15041.00 17957.30
Index data source: Bloomberg
A SHARES B SHARES C SHARES since 8/01/90 since 8/24/92 since 8/13/93 - --------------------------------------------------------------------------------------------- AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES Since Inception 6.32% 5.93% 4.93% 4.93% 4.01% 4.01% 10-year 4.68 4.17 4.22 4.22 3.89 3.89 5-year 3.70 2.69 2.92 2.67 2.92 2.92 1-year 3.31 -1.60 2.48 -1.47 2.48 1.50 - --------------------------------------------------------------------------------------------- 30-Day SEC Yield 3.83% 3.29% 3.30%
Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and fund shares, when redeemed, may be worth more or less than their original cost. The returns shown in this report do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. As a result of recent market activity, current performance may vary from the figures shown. For more up-to-date information, please visit vankampen.com or speak with your financial advisor. Average annual total return with sales charges includes payment of the maximum sales charge of 4.75 percent for Class A shares, a contingent deferred sales charge of 4.00 percent for Class B shares (in year one and declining to zero after year six), a contingent deferred sales charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1 fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent for Class B and C shares. The since inception and 10-year returns for Class B and C shares reflect their conversion into Class A shares six and 10 years after purchase, respectively. See footnote 3 in the Notes to Financial Statements for additional information. Figures shown above assume reinvestment of all dividends and capital gains. SEC yield is a calculation for determining the amount of portfolio income, excluding non-income items as prescribed by the SEC. Yields are subject to change. Distribution rate represents the monthly annualized distributions of the fund at the end of the period and not the earnings of the fund. The Lehman Brothers Municipal Bond Index is generally representative of investment-grade, tax-exempt bonds. Index is unmanaged and does not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. 1 Fund Report FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003 Van Kampen Municipal Income Fund is managed by the Adviser's Municipal Fixed-Income team.(1) Current members of the team include James F. Willison, Managing Director; Joseph R. Arcieri, Executive Director; and Timothy Haney, Vice President. The following discussion reflects their views on the fund's performance. Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE OVERALL MARKET ENVIRONMENT. A. The economic backdrop for the 12 months ended September 30 was largely characterized by the persistent weakness of the U.S. economy. One of the most closely watched economic indicators, employment strength, was in negative territory for much of the period. Repeated comments from government and Wall Street officials suggesting that the U.S. economy might be entering a deflationary period also weighed heavily on the minds of investors. The Federal Reserve Board (the Fed) attempted to allay these fears and keep the economy moving in the right direction by cutting the Fed Funds target rate twice, for a total reduction of 0.75 percent. At the same time, ongoing budgetary and fiscal difficulties at the state and local levels contributed to ratings downgrades for many municipal bonds. The uncertain climate had a definite effect on the municipal bond market. While yields on intermediate- and long-term bonds ended the period roughly where they began, the road between those two points was decidedly bumpy. From October 2002 to mid-June 2003, municipal yields fell by roughly 80 basis points to levels not seen since the late 1960s. These plummeting yields led to a surge in issuance as municipalities moved to lock in low financing rates and, in the case of older bonds, low refinancing costs. These record levels of supply met with record levels of demand as investors in search of relative investment stability poured cash into municipal bond funds. Demand for municipal bonds was also strong from so-called "cross-over" buyers--investors who traditionally favor taxable investments but were drawn to municipal bonds for their relatively attractive yields. The municipal market reversed abruptly in mid-June, when yields began to climb from their lows and investors shifted their attention to the rising equity market. Interest from cross-over investors also evaporated as the relative attractiveness of the taxable market grew. Issuance remained strong throughout this leg of the period, though it abated somewhat in the last three months. (1)Team members may change at any time without notice. 2 Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD? A. The fund underperformed its benchmark index. -- The fund returned 3.31 percent for the 12 months that ended September 30, 2003. Performance figures are for Class A shares, and assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. If sales charges were included, performance would be lower. Past performance is no guarantee of future results. -- The fund's benchmark, the Lehman Brothers Municipal Bond Index, returned 3.89 percent for the same period. -- The fund's monthly dividend of $0.0530 translated to a distribution rate of 4.08 percent based on the fund's maximum offering price (as of September 30, 2003, Class A shares adjusted for sales charges). See Performance Summary for additional information and index definition. Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD? A. In an effort to help protect the fund from the effects of potentially rising interest rates, we trimmed the portfolio's duration (a measure of interest-rate sensitivity) at the beginning of the period. While this defensive positioning proved beneficial during the summer when interest rates spiked, it kept the fund from benefiting fully from the TOP 5 SECTORS AS OF 9/30/03 RATINGS ALLOCATION AS OF 9/30/03 Transportation 15.0% AAA/Aaa 67.6% Public Education 13.3 AA/Aa 15.2 General Purpose 13.3 A/A 3.4 Health Care 7.8 BBB/Baa 4.0 Water & Sewer 7.7 BB/Ba 0.8 B/B 0.3 TOP 5 STATES AS OF 9/30/03 CCC/Caa 0.0 New York 13.8% CC/Ca 0.2 New Jersey 10.6 Non-Rated 8.5 California 8.5 Texas 8.4 Illinois 8.2
Subject to change daily. All percentages are as a percentage of long-term investments. Provided for informational purposes only and should not be deemed as a recommendation to buy securities in the sectors shown above. Securities are classified by sectors that represent broad groupings of related industries. Rating allocations based upon ratings as issued by Standard and Poor's and Moody's, respectively. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. 3 strong price appreciation earlier in the period when rates declined last winter and spring. As part of our defensive structure, we positioned the fund for a flattening of the yield curve (where either short-term rates rise, long-term rates decline, or both), by underweighting the fund's exposure to securities with five- to ten-year maturities. Unfortunately, the yield curve remained quite steep throughout the fiscal year, and bonds in that maturity range performed well. Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD? A. In order to strike an optimum balance between income and principal preservation, we used a barbell approach to structure the fund's portfolio during the period. We emphasized both ends of the maturity spectrum--short and, to a lesser extent, long--while underweighting intermediate maturities. Longer-term bonds helped us maintain the fund's yield in light of falling interest rates, while short-term bonds provided a buffer against price volatility. On the long end of the maturity spectrum, we emphasized bonds in the 15- to 20-year range because we believed they presented greater opportunities than 30-year bonds. We sought premium bonds that were priced to their call date in an effort to maximize the fund's income while protecting the fund from excessive vulnerability to adverse shifts in interest rates. These bonds provided a favorable yield during a challenging year for income-oriented investors. Helping augment the fund's price earlier in the period was our overweight position relative to the benchmark index in zero-coupon bonds, which sell at a deep discount from face value. These bonds experienced strong price appreciation during the bond market rally that lasted through mid-June. While these bonds suffered when interest rates spiked from mid-June through July, the benefits of the fund's below-benchmark duration offset the bond's poor performance during that time. Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY ISSUES. A. With interest rates falling to historic lows during the period, our analysis indicated an increasing probability that the next significant movement in interest rates would be upward. As a result, we lowered the fund's interest-rate risk profile by trimming the portfolio's duration. We also adjusted the fund's positioning along the maturity spectrum to deemphasize areas that appeared fully valued in favor of more attractively priced securities. Credit quality was key in a year when many municipalities faced budget shortfalls. In this environment, we were highly selective in choosing bonds for the portfolio. We focused our purchases on higher-quality 4 securities, and by the end of the period had increased the fund's holdings of AAA rated bonds by 4 percent to make up just under three-fourths of the portfolio. Many of our trades during the period were concentrated in so-called "specialty states." These are states such as California and New York that have high tax brackets and a substantial need for public financing. Specialty states provided ample total return opportunities that we sought to take advantage of through relative-value trading. Here we were able to lock in gains by selling a given bond once it hit our valuation targets, then replacing it with a comparable bond offering greater potential value for the portfolio. Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY CLOSING THOUGHTS? A. The economy has lately shown clear signs of improvement, though the employment picture remains murky and the likelihood of a sustained rebound is questionable. In this environment, we believe the Fed is likely to maintain a neutral stance in the absence of signs of strong economic growth. We will continue to monitor the market closely for compelling investment opportunities. ANNUAL HOUSEHOLDING NOTICE To reduce expenses, the fund attempts to eliminate duplicate mailings to the same address. The fund delivers a single copy of certain shareholder documents to investors who share an address, even if the accounts are registered under different names. The fund's prospectus and shareholder reports (including annual privacy notices) will be delivered to you in this manner indefinitely unless you instruct us otherwise. You can request multiple copies of these documents by either calling (800) 341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has received your instructions, we will begin sending individual copies for each account within 30 days. PROXY VOTING POLICIES AND PROCEDURES A description of the fund's policies and procedures with respect to the voting of proxies relating to the fund's portfolio securities is available without charge, upon request, by calling 1-800-847-2424. This information is also available on the Securities and Exchange Commission's website at http://www.sec.gov. 5 BY THE NUMBERS YOUR FUND'S INVESTMENTS September 30, 2003 THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF THE REPORTING PERIOD.
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MUNICIPAL BONDS 97.0% ALABAMA 0.7% $ 1,865 Alabama St Univ Rev Gen Tuition & Fee Ser B (MBIA Insd)..................................... 5.250% 03/01/33 $ 1,936,150 2,930 Alabama Wtr Pollutn Ctl Auth Revolving Fd Ln Ser A (AMBAC Insd) (a).............................. 6.750 08/15/17 3,217,872 238 Mobile, AL Indl Dev Brd Solid Waste Disp Rev Mobile Energy Svcs Co Proj Rfdg (b) (c)......... 6.950 01/01/20 1,666 ------------ 5,155,688 ------------ ARIZONA 3.2% 8,685 Arizona Sch Facs Brd Ctfs Ser B (FGIC Insd)..... 5.250 09/01/17 9,675,611 4,250 Maricopa Cnty, AZ Indl Dev Waste Mgmt Inc Proj............................................ 4.800 12/01/31 4,347,452 5,000 Phoenix, AZ Civic Impt Corp Amt Sr Lien Ser B (FGIC Insd)..................................... 5.250 07/01/32 5,096,200 500 Scottsdale, AZ Indl Dev Auth Rev First Mtg Westminster Vlg Ser A Rfdg...................... 8.250 06/01/15 520,530 1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg (AMBAC Insd)......................... 6.000 09/01/12 2,141,906 1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg (AMBAC Insd)......................... 6.125 09/01/17 2,009,332 ------------ 23,791,031 ------------ ARKANSAS 0.6% 1,400 Jackson Cnty, AR Hlthcare Fac Brd First Mtg Hosp Rev Newport Hosp & Clinic Inc................... 7.375 11/01/11 1,404,494 3,042 Maumell, AR Dogwood Addition Prd Muni Ppty Owners Rfdg..................................... 7.500 03/01/06 3,023,619 ------------ 4,428,113 ------------ CALIFORNIA 8.2% 4,870 Anaheim, CA Pub Fin Auth Lease Rev Cap Apprec Sub Pub Impts Proj C (FSA Insd)................. * 09/01/20 2,120,495 305 California Infrastructure & Econ Dev Bk Rev Bay Area Toll Brdgs 1st Lien A (FSA Insd)........... 5.250 07/01/20 329,251 5,000 California Infrastructure & Econ Dev Bk Rev Rites-PA-1202R (Inverse Fltg) (FSA Insd) (d).... 9.159 07/01/11 5,795,150 10,000 California St Dept Wtr Res Pwr Ser A (AMBAC Insd)........................................... 5.500 05/01/16 11,194,400 5,000 California St Dept Wtr Res Pwr Ser A (XLCA Insd)........................................... 5.375 05/01/17 5,483,050 6,575 California St Dept Wtr Res Pwr Supply Rev Rites- PA-1201R (Inverse Fltg) (MBIA Insd) (d)......... 9.159 05/01/20 7,606,420
6 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CALIFORNIA (CONTINUED) $ 2,640 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)........................................... * 09/01/13 $ 1,548,307 5,430 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)........................................... * 09/01/14 2,963,803 3,000 Foothill/Eastern Corridor Agy CA Toll Rd Rev Cap Apprec Rfdg (MBIA Insd)......................... * 01/15/17 1,541,820 21,000 Foothill/Eastern Corridor Agy CA Toll Rd Rev Cap Apprec Rfdg..................................... * 01/15/24 6,456,660 15,000 Foothill/Eastern Corridor Agy CA Toll Rd Rev Cap Apprec Rfdg..................................... * 01/15/30 3,176,850 6,695 San Francisco, CA City & Cnty Second Ser Issue 29 B Rfdg (FGIC Insd)........................... 5.125% 05/01/20 7,122,208 5,000 West Contra Costa Calif Uni Election of 2002 Ser B (FSA Insd) (e)................................ 5.000 08/01/26 5,083,600 ------------ 60,422,014 ------------ COLORADO 6.0% 2,840 Adams Cnty, CO Single Family Mtg Rev Ser A (Escrowed to Maturity).......................... 8.875 08/01/10 3,857,828 3,985 Adams Cnty, CO Single Family Mtg Rev Ser A (Escrowed to Maturity).......................... 8.875 08/01/12 5,584,659 5,000 Arapahoe Cnty, CO Wtr & Waste Proj Ser A (MBIA Insd)........................................... 5.125 12/01/32 5,111,600 5,000 Colorado Dept Transn Rev Rev Antic Nts Ser A (AMBAC Insd).................................... 5.250 12/15/16 5,624,200 5,000 Colorado Springs, CO Utils Rev Sys Sub Lien Ser A Impt & Rfdg................................... 5.000 11/15/21 5,211,500 6,500 E 470 Pub Hwy Auth Co Rev Cap Apprec Sr Ser B (MBIA Insd)..................................... * 09/01/20 2,832,570 15,000 E 470 Pub Hwy Auth Co Rev Cap Apprec Sr Ser B (MBIA Insd)..................................... * 09/01/20 6,586,500 1,320 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (Prerefunded @ 12/15/05) (MBIA Insd)............ * 12/15/14 775,355 1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (Prerefunded @ 12/15/05) (MBIA Insd)............ * 12/15/15 786,254 1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (Prerefunded @ 12/15/05) (MBIA Insd)............ * 12/15/16 737,179 1,330 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (Prerefunded @ 12/15/05) (MBIA Insd)............ * 12/15/18 607,039 3,690 Jefferson Cnty, CO Residential Mtg Rev (Escrowed to Maturity).................................... 11.500 09/01/12 5,923,741 ------------ 43,638,425 ------------
See Notes to Financial Statements 7 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CONNECTICUT 1.7% $ 2,785 Bridgeport, CT Rol Ser II R 182 (Inverse Fltg) (FGIC Insd) (d)................................. 9.580% 08/15/15 $ 3,473,870 2,950 Bridgeport, CT Rol Ser II R 182 (Inverse Fltg) (FGIC Insd) (d)................................. 9.580 08/15/16 3,641,893 2,530 Mashantucket Western Pequot Tribe CT Spl Rev Ser A, 144A-Private Placement (f)................... 6.400 09/01/11 2,744,240 2,470 Mashantucket Western Pequot Tribe CT Spl Rev Ser A, 144A-Private Placement (Prerefunded @ 09/01/07) (f)................................... 6.400 09/01/11 2,843,093 ------------ 12,703,096 ------------ DISTRICT OF COLUMBIA 1.1% 5,150 District Columbia Tax Incrmnt Gallary Place Proj (FSA Insd)...................................... 5.250 07/01/27 5,316,602 3,000 Metropolitan Washington DC Arpts Auth Sys Ser A (FGIC Insd) (e)................................. 5.250 10/01/32 3,050,580 ------------ 8,367,182 ------------ FLORIDA 6.9% 5,000 Broward Cnty, FL Arpt Sys Rev Ser J-I (AMBAC Insd)........................................... 5.250 10/01/26 5,109,700 9,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg (MBIA Insd).............................. * 02/01/18 4,219,200 5,000 Escambia Cnty, FL Hlth Fac Auth Rev (AMBAC Insd)........................................... 5.950 07/01/20 5,384,050 5,405 Florida St Brd of Edl Pub Ed Ser B (e).......... 5.000 06/01/16 5,937,663 5,700 Florida St Brd of Edl Pub Ed Ser B (e).......... 5.000 06/01/17 6,218,301 6,385 Lake Cnty, FL Sch Brd Ctfs Part (AMBAC Insd).... 5.375 07/01/16 7,135,046 500 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran Twr Rfdg....................... 8.625 07/01/20 522,485 595 Orange Cnty, FL Tourist Dev Tax Rev (Escrowed to Maturity) (AMBAC Insd).......................... 6.000 10/01/16 596,053 12,860 Orlando, FL Utils Commn Wtr Rfdg................ 5.250 10/01/19 13,966,989 675 Tampa Palms, FL Open Space & Tran Cmnty Dev Dist Rev Cap Impt Area 7 Proj........................ 8.500 05/01/17 697,140 823 Tampa Palms, FL Open Space & Tran Cmnty Dev Dist Rev Cap Impt Area 7 Proj........................ 7.500 05/01/18 856,908 ------------ 50,643,535 ------------ GEORGIA 1.2% 2,000 Fulton Cnty, GA Hsg Auth Multi-Family Hsg Rev Azalea Manor Proj Ser A (d)..................... 6.500 02/01/28 1,615,360 6,315 Municipal Elec Auth GA Combustion Turbine Proj Ser A (MBIA Insd)............................... 5.250 11/01/17 6,959,256 ------------ 8,574,616 ------------
8 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE HAWAII 0.4% $ 1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd)....... 6.350% 07/01/07 $ 1,510,813 1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd)....... 6.400 07/01/08 1,598,017 ------------ 3,108,830 ------------ ILLINOIS 8.0% 5,000 Chicago, IL Brd Edl Cap Apprec Sch Reform B-1 (FGIC Insd)..................................... * 12/01/22 1,872,400 5,000 Chicago, IL Brd Edl Cap Apprec Sch Reform Ser A (FGIC Insd)..................................... * 12/01/20 2,145,100 3,000 Chicago, IL Lakefront Millennium Pkg Fac (MBIA Insd) (g)....................................... 0/5.650 01/01/19 2,829,030 1,000 Chicago, IL Metro Wtr Reclamation Dist Gtr Chicago (Escrowed to Maturity).................. 7.000 01/01/11 1,232,720 8,050 Chicago, IL O'Hare Intl Arpt Rev Gen Airport 3rd Lien C 2 Rfdg (XLCA Insd)....................... 5.250 01/01/34 8,103,291 5,100 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Proj Ser B (b) (c)........................ 5.200 04/01/11 1,045,500 900 Chicago, IL O'Hare Intl Arpt Spl United Airl Proj Ser A (b) (c).............................. 5.350 09/01/16 189,000 3,210 Chicago, IL Proj & Rfdg Ser C (FGIC Insd)....... 5.750 01/01/16 3,673,524 365 Chicago, IL Single Family Mtg Rev Ser A (GNMA Collateralized)................................. 7.000 09/01/27 365,679 210 Chicago, IL Tax Increment Alloc Santn Drain & Ship Canal Ser A................................ 7.375 01/01/05 212,535 1,000 Chicago, IL Tax Increment Alloc Santn Drain & Ship Canal Ser A................................ 7.750 01/01/14 1,054,770 2,000 Chicago, IL Tax Increment Alloc Sub Cent Loop Redev Ser A..................................... 6.500 12/01/05 2,157,900 1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctf Part (FGIC Insd)............................ 8.750 01/01/07 1,215,210 2,265 Cook Cnty, IL Cons High Sch Dist No 200 Oak Park (FSA Insd)...................................... * 12/01/11 1,666,700 5,000 Cook Cnty, IL Ser A (FGIC Insd)................. 5.500 11/15/31 5,274,850 1,500 Hodgkins, IL Tax Increment Ser A Rfdg........... 7.625 12/01/13 1,593,225 1,405 Huntley, IL Increment Alloc Rev Huntley Redev Proj Ser A...................................... 8.500 12/01/15 1,504,881 320 Illinois Dev Fin Auth Rev Cmnty Fac Clinic Altgeld Proj.................................... 8.000 11/15/06 273,491 5,000 Illinois St First Ser (FSA Insd)................ 5.250 12/01/21 5,342,800 9,250 Metropolitan Pier & Expo Auth IL Dedicated St Tax Rev Cap Apprec McCormick Rfdg (MBIA Insd)... * 06/15/19 6,187,510 3,555 Metropolitan Pier & Expo Auth IL Dedicated St Tax Rev Cap Apprec McCormick Ser A Rfdg (MBIA Insd)........................................... * 12/15/15 2,089,665 2,800 Regional Tran Auth IL Ser A (AMBAC Insd)........ 8.000 06/01/17 3,921,176
See Notes to Financial Statements 9 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE ILLINOIS (CONTINUED) $ 3,773 Robbins, IL Res Recovery Rev Restructuring Proj Ser A (b) (h)................................... 8.375% 10/15/16 $ 5,660 1,477 Robbins, IL Res Recovery Rev Restructuring Proj Ser B (b) (h)................................... 8.375 10/15/16 2,215 275 Round Lake Beach, IL Tax Increment Rev Rfdg..... 7.200 12/01/04 279,900 500 Round Lake Beach, IL Tax Increment Rev Rfdg..... 7.500 12/01/13 511,275 1,275 Saint Charles, IL Indl Dev Rev Tri-City Ctr Proj (d)............................................. 7.500 11/01/13 1,270,168 4,270 Will Cnty, IL Fst Presv Dist Ser B (FGIC Insd)........................................... * 12/01/15 2,502,263 ------------ 58,522,438 ------------ INDIANA 1.2% 2,500 Indiana Bond Bank Spl Pgm Hendricks Redev....... 6.200 02/01/23 2,501,975 1,940 Indiana Hlth Fac Fin Auth Rev Hoosier Care Proj Ser A........................................... 7.125 06/01/34 1,775,333 550 Indianapolis, IN Loc Pub Impt Bond Bank Ser D (Escrowed to Maturity).......................... 6.750 02/01/14 679,613 140 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B....................................... * 06/30/11 78,441 140 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B....................................... * 06/30/12 72,692 135 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B....................................... * 06/30/13 64,932 130 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B....................................... * 06/30/14 57,921 130 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B....................................... * 06/30/15 53,655 135 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B....................................... * 06/30/16 51,613 225 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B....................................... * 06/30/17 79,686 3,295 Vigo Cnty, IN Elem Sch Bldg First Mtg Impt & Rfdg (FSA Insd)................................. 5.250 01/10/22 3,481,794 ------------ 8,897,655 ------------ IOWA 0.5% 640 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp Proj (FSA Insd)................................. 6.000 07/01/07 728,230 2,400 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp Proj (FSA Insd)................................. 5.750 07/01/17 2,670,216 ------------ 3,398,446 ------------ KANSAS 1.0% 6,600 Sedgwick Cnty, KS Uni Sch Dist No 259 Wichita (MBIA Insd)..................................... 5.625 09/01/13 7,562,808 ------------
10 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE LOUISIANA 0.3% $ 420 Louisiana St Hlth Edl Auth Rev Lambeth House Ser A Rfdg.......................................... 5.250% 01/01/05 $ 420,315 1,400 West Feliciana Parish, LA Pollutn Ctl Rev Gulf States Util Co Proj Ser A....................... 7.500 05/01/15 1,433,446 ------------ 1,853,761 ------------ MASSACHUSETTS 4.3% 5,000 Massachusetts St Cons Ln Ser A (Prerefunded @ 01/01/13) (AMBAC Insd).......................... 5.250 01/01/18 5,489,200 7,500 Massachusetts St Fed Hwy Ser A.................. 5.750 06/15/14 8,794,200 3,500 Massachusetts St Hlth & Edl Facs Auth Rev (MBIA Insd)........................................... 5.000 07/01/13 3,657,780 1,500 Massachusetts St Indl Fin Agy Hillcrest Edl Ctr Inc Proj (Prerefunded @ 07/01/05)............... 8.450 07/01/18 1,693,020 5,355 Massachusetts St Indl Fin Agy Rev First Mtg Reeds Landing Proj.............................. 7.100 10/01/28 5,335,133 5,000 Massachusetts St Rol-R 143-Ser II (Inverse Fltg) (MBIA Insd) (d)................................. 9.330 11/01/16 6,417,950 ------------ 31,387,283 ------------ MICHIGAN 3.9% 875 Detroit, MI Loc Dev Fin Auth Tax Increment Ser C (d)............................................. 6.850 05/01/21 868,315 5,000 Detroit, MI Sew Disp Rev Sr Lien Ser A Rfdg (FGIC Insd)..................................... 5.125 07/01/31 5,097,000 1,400 Hillsdale, MI Hosp Fin Auth Hosp Rev Hillsdale Cmnty Hlth Cent................................. 5.250 05/15/26 1,209,558 5,000 Michigan St Bldg Auth Rev Facs Prog Ser II...... 5.500 10/15/16 5,644,350 5,000 Michigan St Strategic Fd Detroit Edison Co Proj C Rfdg (XLCA Insd).............................. 5.450 12/15/32 5,159,200 2,000 Michigan St Strategic Fd Detroit Edison Pollutn Ctl Ser B Rfdg.................................. 5.650 09/01/29 2,034,740 9,739 Michigan St Strategic Fd Ltd Oblig Rev Great Lakes Pulp & Fiber Proj (b) (h)................. 8.000 12/01/27 1,509,622 1,970 Michigan St Strategic Fd Solid Genesee Pwr Sta Proj Rfdg....................................... 7.500 01/01/21 1,901,483 5,000 Western Townships, MI Util Sew Rfdg (MBIA Insd)........................................... 5.250 01/01/16 5,484,350 ------------ 28,908,618 ------------ MISSISSIPPI 0.1% 985 Ridgeland, MS Urban Renewal Rev The Orchard Ltd Proj Ser A Rfdg................................. 7.750 12/01/15 1,011,142 ------------
See Notes to Financial Statements 11 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MISSOURI 1.1% $ 2,835 Kansas City, MO Port Auth Fac Riverfront Park Proj Ser A...................................... 5.750% 10/01/06 $ 2,886,880 3,935 Macon, MO Ctfs Partn (MBIA Insd)................ 5.250 08/01/17 4,321,614 595 Saint Louis, MO Tax Increment Rev Scullin Redev Area Ser A...................................... 10.000 08/01/10 730,035 ------------ 7,938,529 ------------ NEBRASKA 0.8% 5,435 Nebraska Pub Pwr Dist Rev Ser A (AMBAC Insd).... 5.000 01/01/18 5,826,863 ------------ NEW HAMPSHIRE 0.8% 1,555 New Hampshire Higher Edl & Hlth Fac Auth Rev.... 8.800 06/01/09 1,666,649 890 New Hampshire Higher Edl & Hlth Fac Auth Rev Daniel Webster College Issue Rfdg............... 6.100 07/01/09 943,222 795 New Hampshire St Business Fin Auth Elec Fac Rev Plymouth Cogeneration (d)....................... 7.750 06/01/14 794,126 1,000 New Hampshire St Business Fin Auth Rev Alice Peck Day Hlth Sys Ser A......................... 6.875 10/01/19 1,003,960 1,000 New Hampshire St Tpk Sys Rev Ser A Rfdg (FGIC Insd)........................................... 6.750 11/01/11 1,176,400 ------------ 5,584,357 ------------ NEW JERSEY 10.3% 2,000 Camden Cnty, NJ Impt Auth Lease Rev Dockside Refrig (b) (c) (d).............................. 8.400 04/01/24 1,820,000 3,250 Landis, NJ Sew Auth Swr Rev (Inverse Fltg) (FGIC Insd)........................................... 10.070 09/19/19 4,195,133 6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg (MBIA Insd)..................................... 6.250 08/15/10 7,191,532 500 New Jersey Econ Dev Auth Dist Heating & Cooling Rev Trigen-Trenton Ser A........................ 6.200 12/01/10 500,145 9,725 New Jersey Econ Dev Auth Drivers Ser 365 (Inverse Fltg) (FGIC Insd) (d).................. 9.340 06/15/11 11,427,264 2,000 New Jersey Econ Dev Auth Holt Hauling & Warehsg Rev Ser G Rfdg (b).............................. 8.400 12/15/15 1,820,000 1,900 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens Ser A........................ 8.500 11/01/16 2,003,018 350 New Jersey Econ Dev Auth Rev RWJ Hlthcare Corp (FSA Insd)...................................... 6.250 07/01/14 370,549 1,000 New Jersey Econ Dev Auth Rev Utd Methodist Homes (Prerefunded @ 07/01/05)........................ 7.500 07/01/20 1,124,460 1,000 New Jersey Econ Dev Auth Rev Utd Methodist Homes (Prerefunded @ 07/01/05)........................ 7.500 07/01/25 1,124,460 8,000 New Jersey Econ Dev Auth Sch Facs Constr Ser F (FGIC Insd)..................................... 5.250 06/15/17 8,889,360
12 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW JERSEY (CONTINUED) $ 3,480 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg (MBIA Insd)........................................... 6.500% 01/01/16 $ 4,311,372 5,710 New Jersey St Tran Corp Ctfs Fed Tran Admin Grants Ser A (AMBAC Insd)....................... 5.750 09/15/10 6,527,387 10,000 New Jersey St Tran Corp Ctfs Fed Tran Admin Grants Ser B (AMBAC Insd)....................... 6.000 09/15/15 11,693,400 5,500 New Jersey St Tran Tr Fd Auth Rols RR II R 236 (Inverse Fltg) (FSA Insd) (d)................... 9.810 06/15/20 6,745,750 5,000 New Jersey St Tran Tr Fd Auth Tran Sys Ser C (FSA Insd)...................................... 5.500 06/15/16 5,712,800 ------------ 75,456,630 ------------ NEW YORK 13.4% 10,000 Nassau Cnty, NY Interim Fin Auth Ser A.......... 5.750 11/15/14 11,427,900 5,000 New York City Ser A............................. 7.000 08/01/07 5,690,150 21,860 New York City Ser B (MBIA Insd)................. 5.875 08/01/15 25,438,701 1,420 New York City Ser D............................. 8.000 02/01/05 1,537,065 5,000 New York City Ser D (MBIA Insd)................. 5.200 08/01/14 5,478,800 5,000 New York City Transitional Drivers Ser 307 (Inverse Fltg) (AMBAC Insd) (d)................. 9.120 08/01/19 5,848,550 2,295 New York St Dorm Auth Rev Mental Hlth Svcs Fac Ser A........................................... 5.750 02/15/11 2,499,140 2,280 New York St Dorm Auth Rev Mental Hlth Svcs Fac Ser A........................................... 5.750 02/15/12 2,548,789 2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse Fltg).................................. 11.509 04/01/20 3,259,725 3,000 New York St Energy Resh & Dev Auth Gas Fac Rev Brooklyn Union Gas Ser B (Inverse Fltg)......... 12.504 07/01/26 3,725,400 2,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev Niagara Mohawk Pwr Corp Ser A Rfdg (FGIC Insd)........................................... 7.200 07/01/29 2,125,680 10,725 New York St Environmental Facs Revolving Fds-2nd Resolution (e).................................. 5.000 06/15/20 11,336,861 2,000 New York St Twy Auth Svc Ctl Rol-R 142 Ser II (Inverse Fltg) (d).............................. 9.280 04/01/16 2,414,860 3,000 New York St Twy Auth Svc Ctl Rol-R 142 Ser II (Inverse Fltg) (d).............................. 9.280 04/01/18 3,557,520 1,200 Port Auth NY & NJ Cons 95th Ser................. 6.125 07/15/22 1,257,900 10,000 Triborough Brdg & Tunl Auth NY Gen Ser B Rfdg... 5.000 11/15/22 10,328,700 ------------ 98,475,741 ------------ NORTH CAROLINA 1.3% 8,700 North Carolina Muni Pwr Agy Ser A (MBIA Insd)... 5.250 01/01/19 9,459,945 ------------
See Notes to Financial Statements 13 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE OHIO 0.2% $ 1,000 Ohio St Air Quality Dev Auth Rev JMG Funding Ltd Part Proj Rfdg (AMBAC Insd)..................... 6.375% 04/01/29 $ 1,070,660 ------------ OKLAHOMA 0.1% 625 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class B (GNMA Collateralized)......................... 7.997 08/01/18 679,850 ------------ OREGON 2.4% 5,000 Oregon Hlth Sciences Univ Insd Ser A (MBIA Insd)........................................... 5.250 07/01/22 5,325,700 1,000 Port Morrow, OR Pollutn Ctl Portland Gen A Rfdg............................................ 5.200 05/01/33 1,013,730 10,000 Portland, OR Swr Sys Rev Ser A (FGIC Insd)...... 5.750 08/01/18 11,402,600 ------------ 17,742,030 ------------ PENNSYLVANIA 2.3% 5,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys Rev (AMBAC Insd)................................ 5.650 05/15/20 5,221,750 740 Lehigh Cnty, PA Indl Dev Auth Rev Rfdg.......... 8.000 08/01/12 745,720 5,000 Pennsylvania St Tpk Commn Oil Sub Ser B (MBIA Insd)........................................... 5.000 12/01/31 5,077,400 5,250 Philadelphia, PA Auth Indl Ser B (FSA Insd)..... 5.500 10/01/16 5,890,080 ------------ 16,934,950 ------------ RHODE ISLAND 0.5% 1,490 Rhode Island St Econ Dev Corp Rev............... 7.250 07/01/10 1,499,059 2,000 Rhode Island St Hlth & Edl Bldg Higher Edl Johnson & Wales Rfdg (XLCA Insd)................ 5.375 04/01/19 2,199,860 ------------ 3,698,919 ------------ SOUTH CAROLINA 0.1% 1,070 Piedmont Muni Pwr Agy SC Elec Rev............... 5.000 01/01/25 954,119 ------------ SOUTH DAKOTA 0.1% 1,000 South Dakota St Hlth & Edl Fac Auth Rev Huron Regl Med Ctr.................................... 7.250 04/01/20 1,034,450 ------------ TENNESSEE 1.0% 4,000 Elizabethton, TN Hlth & Edl Fac Brd Rev Rfdg (MBIA Insd)..................................... 7.750 07/01/29 5,224,920 2,000 Springfield, TN Hlth & Edl Jesse Holman Jones Hosp Proj (Prerefunded @ 04/01/06).............. 8.500 04/01/24 2,387,780 ------------ 7,612,700 ------------ TEXAS 8.2% 1,955 Bell Cnty, TX Indl Dev Corp Solid Waste Disposal Rev............................................. 7.600 12/01/17 1,365,450 500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint Luke's Lutheran Hosp (Escrowed to Maturity)..... 7.000 05/01/21 650,385
14 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE TEXAS (CONTINUED) $ 4,000 Brazos River Auth TX Pollutn Ctl Rev Adj Elec Co Proj Ser C Rfdg................................. 5.750% 05/01/36 $ 4,164,960 90 Coastal Wtr Auth TX Conveyance Sys Rev (Escrowed to Maturity) (AMBAC Insd)....................... 6.250 12/15/17 90,167 5,000 Dallas-Fort Worth, TX Intl Arpt Rev Impt Jt Ser A Impt & Rfdg (FGIC Insd)....................... 5.500 11/01/31 5,176,150 7,350 Grapevine Colleyville Indpt Sch Dist TX (PSFG Insd)........................................... * 08/15/11 5,468,621 10,000 Houston, TX Hotel Occupancy Tax Convtn & Entertnmnt Ser B (AMBAC Insd)................... 5.750 09/01/14 11,493,500 7,500 Lower CO River Auth TX Rev Ser A Rfdg (Inverse Fltg) (FSA Insd) (d)............................ 10.389 05/15/14 9,720,675 6,250 Lower CO River Auth TX Rev Ser A Rfdg (Inverse Fltg) (FSA Insd) (d)............................ 10.389 05/15/15 8,100,563 3,250 Lower CO River Auth TX Rev Ser A Rfdg (Inverse Fltg) (FSA Insd) (d)............................ 10.389 05/15/16 4,212,293 2,000 Metropolitan Hlth Fac Dev Corp TX Wilson N Jones Mem Hosp Proj................................... 7.200 01/01/21 1,919,760 500 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land Acquisition Proj.................... 7.000 08/01/19 507,345 500 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land Acquisition Proj.................... 7.000 08/01/24 507,360 685 Texas Genl Svcs Cmnty Partn Lease Purchase Ctfs............................................ 7.500 02/15/13 695,794 3,475 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev Coll Ser C Rfdg (Inverse Fltg) (GNMA Collateralized)................................. 12.552 07/02/24 3,860,482 1,185 Texas St Higher Edl Coordinating Brd College Student Ln Rev.................................. 7.849 10/01/25 1,189,444 990 Texas St Vet Hsg Assistance (MBIA Insd)......... 6.800 12/01/23 1,013,968 ------------ 60,136,917 ------------ UTAH 2.0% 1,340 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj (b)............................................. 7.800 09/01/15 536,000 1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj (b)............................................. 8.000 09/01/20 400,000 1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj (b)............................................. 7.800 09/01/25 400,000 11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg... 6.150 02/15/12 12,828,530 70 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A1 (FHA Gtd)....................................... 7.100 07/01/14 72,933 95 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A2 (FHA Gtd)....................................... 7.200 01/01/27 98,564 ------------ 14,336,027 ------------ VERMONT 0.1% 1,000 Vermont Edl & Hlth Bldgs Fing Agy Rev Bennington College Proj.................................... 6.625 10/01/29 1,005,880 ------------
See Notes to Financial Statements 15 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE WASHINGTON 2.2% $ 5,000 Energy Northwest WA Elec Rev Proj No 3 Ser A Rfdg (XLCA Insd)................................ 5.500% 07/01/17 $ 5,637,050 8,000 King Cnty WA Sch Dist No 411 (FGIC Insd)........ 5.250 12/01/20 8,651,520 1,250 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev (FGIC Insd)............................... 7.125 07/01/16 1,612,375 ------------ 15,900,945 ------------ WEST VIRGINIA 0.8% 1,500 West Virginia St Hosp Fin Auth Hosp Rev Bears & Bulls WV Univ Med Corp Rfdg (MBIA Insd)......... 6.100 01/01/18 1,518,030 4,000 West Virginia St Hosp Fin Auth Hosp Rev Bears & Bulls WV Univ Med Corp Rfdg (MBIA Insd)......... 6.100 01/01/18 4,048,080 ------------ 5,566,110 ------------ WISCONSIN 0.0% 105 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn (ACA Insd)............................ 7.200 11/01/05 110,157 ------------ TOTAL LONG-TERM INVESTMENTS 97.0% (Cost $679,984,363).......................................................... 711,900,460 SHORT-TERM INVESTMENTS 3.8% (Cost $27,750,000)........................................................... 27,750,000 ------------ TOTAL INVESTMENTS 100.8% (Cost $707,734,363).......................................................... 739,650,460 LIABILITIES IN EXCESS OF OTHER ASSETS (0.8%).................................. (5,781,423) ------------ NET ASSETS 100.0%............................................................. $733,869,037 ============
* Zero coupon bond (a) All or a portion of these securities have been physically segregated in connection with open future contracts. (b) Non-income producing security. (c) This borrower has filed for protection in federal bankruptcy court. (d) These securities are restricted and may be resold only in transactions exempt from registration which are normally those transactions with qualified institutional buyers. (e) Security purchased on a when-issued or delayed delivery basis. 16 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003 (f) 144A securities are those which are exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may only be resold in transactions exempt from registration which are normally those transactions with qualified institutional buyers. (g) Security is a "step-up" bond where the coupon increases or steps up at a predetermined date. (h) Payment-in-kind security. ACA--American Capital Access AMBAC--AMBAC Indemnity Corp. FGIC--Financial Guaranty Insurance Co. FHA--Federal Housing Administration FSA--Financial Security Assurance Inc. GNMA--Government National Mortgage Association MBIA--Municipal Bond Investors Assurance Corp. PSFG--Permanent School Fund Guaranty XLCA--XL Capital Assurance Inc. See Notes to Financial Statements 17 FINANCIAL STATEMENTS Statement of Assets and Liabilities September 30, 2003 ASSETS: Total Investments (Cost $707,734,363)....................... $739,650,460 Cash........................................................ 92,077 Receivables: Investments Sold.......................................... 18,793,278 Interest.................................................. 9,293,983 Fund Shares Sold.......................................... 161,739 Other....................................................... 176,999 ------------ Total Assets............................................ 768,168,536 ------------ LIABILITIES: Payables: Investments Purchased..................................... 31,064,501 Fund Shares Repurchased................................... 1,204,320 Income Distributions...................................... 833,948 Distributor and Affiliates................................ 305,711 Investment Advisory Fee................................... 288,668 Variation Margin on Futures............................... 233,844 Trustees' Deferred Compensation and Retirement Plans........ 218,789 Accrued Expenses............................................ 149,718 ------------ Total Liabilities....................................... 34,299,499 ------------ NET ASSETS.................................................. $733,869,037 ============ NET ASSETS CONSIST OF: Capital (Par value of $.01 per share with an unlimited number of shares authorized).............................. $729,918,079 Net Unrealized Appreciation................................. 30,747,521 Accumulated Undistributed Net Investment Income............. 135,804 Accumulated Net Realized Loss............................... (26,932,367) ------------ NET ASSETS.................................................. $733,869,037 ============ MAXIMUM OFFERING PRICE PER SHARE: Class A Shares: Net asset value and redemption price per share (Based on net assets of $658,487,434 and 44,372,967 shares of beneficial interest issued and outstanding)............. $ 14.84 Maximum sales charge (4.75%* of offering price)......... .74 ------------ Maximum offering price to public........................ $ 15.58 ============ Class B Shares: Net asset value and offering price per share (Based on net assets of $58,372,639 and 3,938,621 shares of beneficial interest issued and outstanding)............. $ 14.82 ============ Class C Shares: Net asset value and offering price per share (Based on net assets of $17,008,964 and 1,149,097 shares of beneficial interest issued and outstanding)............. $ 14.80 ============
* On sales of $100,000 or more, the sales charge will be reduced. 18 See Notes to Financial Statements Statement of Operations For the Year Ended September 30, 2003 INVESTMENT INCOME: Interest.................................................... $ 40,563,678 ------------ EXPENSES: Investment Advisory Fee..................................... 3,628,734 Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $1,670,190, $612,369 and $184,375, respectively)............................................. 2,466,934 Shareholder Services........................................ 451,236 Legal....................................................... 146,812 Custody..................................................... 64,036 Trustees' Fees and Related Expenses......................... 26,119 Other....................................................... 377,619 ------------ Total Expenses.......................................... 7,161,490 Less Credits Earned on Cash Balances.................... 12,346 ------------ Net Expenses............................................ 7,149,144 ------------ NET INVESTMENT INCOME....................................... $ 33,414,534 ============ REALIZED AND UNREALIZED GAIN/LOSS: Realized Gain/Loss: Investments............................................... $ 12,070,841 Futures................................................... (743,478) ------------ Net Realized Gain........................................... 11,327,363 ------------ Unrealized Appreciation/Depreciation: Beginning of the Period................................... 52,585,737 ------------ End of the Period: Investments............................................. 31,916,097 Futures................................................. (1,168,576) ------------ 30,747,521 ------------ Net Unrealized Depreciation During the Period............... (21,838,216) ------------ NET REALIZED AND UNREALIZED LOSS............................ $(10,510,853) ============ NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 22,903,681 ============
See Notes to Financial Statements 19 Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 ---------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income.............................. $ 33,414,534 $ 36,560,116 Net Realized Gain.................................. 11,327,363 794,190 Net Unrealized Appreciation/Depreciation During the Period........................................... (21,838,216) 23,742,553 ------------- ------------- Change in Net Assets from Operations............... 22,903,681 61,096,859 ------------- ------------- Distributions from Net Investment Income: Class A Shares................................... (30,423,796) (33,015,759) Class B Shares................................... (2,325,118) (2,621,270) Class C Shares................................... (700,757) (735,588) ------------- ------------- Total Distributions................................ (33,449,671) (36,372,617) ------------- ------------- NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....................................... (10,545,990) 24,724,242 ------------- ------------- FROM CAPITAL TRANSACTIONS: Proceeds from Shares Sold.......................... 127,051,831 147,636,068 Net Asset Value of Shares Issued Through Dividend Reinvestment..................................... 22,094,872 22,552,780 Cost of Shares Repurchased......................... (184,959,736) (200,100,482) ------------- ------------- NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS..................................... (35,813,033) (29,911,634) ------------- ------------- TOTAL DECREASE IN NET ASSETS....................... (46,359,023) (5,187,392) NET ASSETS: Beginning of the Period............................ 780,228,060 785,415,452 ------------- ------------- End of the Period (Including accumulated undistributed net investment income of $135,804 and $946,449, respectively)...................... $ 733,869,037 $ 780,228,060 ============= =============
20 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS A SHARES -------------------------------------------------- 2003 (a) 2002 (c) 2001 2000 1999 -------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD... $15.03 $14.56 $14.06 $14.50 $15.99 ------ ------ ------ ------ ------ Net Investment Income.................... .67 .71 .74 .79 .82 Net Realized and Unrealized Gain/Loss.... (.19) .46 .49 (.42) (1.46) ------ ------ ------ ------ ------ Total from Investment Operations........... .48 1.17 1.23 .37 (.64) Less Distributions from Net Investment Income................................... .67 .70 .73 .81 .85 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD......... $14.84 $15.03 $14.56 $14.06 $14.50 ====== ====== ====== ====== ====== Total Return (b)........................... 3.31% 8.35% 8.93% 2.69% -4.25% Net Assets at End of the Period (In millions)................................ $658.5 $696.4 $701.5 $688.3 $777.5 Ratio of Expenses to Average Net Assets.... .88% .87% .83% .89% .88% Ratio of Interest Expense to Average Net Assets................................... N/A N/A N/A .01% .17% Ratio of Net Investment Income to Average Net Assets............................... 4.53% 4.89% 5.16% 5.58% 5.34% Portfolio Turnover......................... 46% 49% 31% 45% 116%
(a) Based on average shares outstanding. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum sales charge of 4.75% or contingent deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be imposed on certain redemptions made within one year of purchase. If the sales charges were included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of up to .25% and do not reflect the deductions of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (c) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by $.01, decrease net realized and unrealized gains and losses by $.01 and increase the ratio of net investment income to average net assets from 4.85% to 4.89%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. N/A=Not Applicable. See Notes to Financial Statements 21 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS B SHARES -------------------------------------------------- 2003 (a) 2002 (c) 2001 2000 1999 -------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD... $15.02 $14.54 $14.05 $14.49 $15.98 ------ ------ ------ ------ ------ Net Investment Income.................... .56 .60 .63 .68 .71 Net Realized and Unrealized Gain/Loss.... (.20) .48 .48 (.42) (1.47) ------ ------ ------ ------ ------ Total from Investment Operations........... .36 1.08 1.11 .26 (.76) Less Distributions from Net Investment Income................................... .56 .60 .62 .70 .73 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD......... $14.82 $15.02 $14.54 $14.05 $14.49 ====== ====== ====== ====== ====== Total Return (b)........................... 2.48% 7.64% 8.06% 1.90% -4.95% Net Assets at End of the Period (In millions)................................ $ 58.4 $ 65.0 $ 66.6 $ 69.5 $106.6 Ratio of Expenses to Average Net Assets.... 1.63% 1.62% 1.59% 1.67% 1.63% Ratio of Interest Expense to Average Net Assets................................... N/A N/A N/A .01% .17% Ratio of Net Investment Income to Average Net Assets............................... 3.78% 4.13% 4.40% 4.86% 4.57% Portfolio Turnover......................... 46% 49% 31% 45% 116%
(a) Based on average shares outstanding. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 4%, charged on certain redemptions made within one year of purchase and declining to 0% after the sixth year. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (c) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by $.01, decrease net realized and unrealized gains and losses by $.01 and increase the ratio of net investment income to average net assets from 4.09% to 4.13%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. N/A=Not Applicable. 22 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS C SHARES -------------------------------------------------- 2003 (a) 2002 (c) 2001 2000 1999 -------------------------------------------------- NET ASSET VALUE, BEGINNING OF THE PERIOD... $15.00 $14.52 $14.04 $14.48 $15.96 ------ ------ ------ ------ ------ Net Investment Income.................... .56 .60 .63 .68 .70 Net Realized and Unrealized Gain/Loss.... (.20) .48 .47 (.42) (1.45) ------ ------ ------ ------ ------ Total from Investment Operations........... .36 1.08 1.10 .26 (.75) Less Distributions from Net Investment Income................................... .56 .60 .62 .70 .73 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD......... $14.80 $15.00 $14.52 $14.04 $14.48 ====== ====== ====== ====== ====== Total Return (b)........................... 2.48% 7.65% 8.00% 1.91% -4.90% Net Assets at End of the Period (In millions)................................ $ 17.0 $ 18.8 $ 17.4 $ 13.8 $ 17.5 Ratio of Expenses to Average Net Assets.... 1.63% 1.62% 1.62% 1.66% 1.63% Ratio of Interest Expense to Average Net Assets................................... N/A N/A N/A .01% .17% Ratio of Net Investment Income to Average Net Assets............................... 3.78% 4.13% 4.37% 4.84% 4.55% Portfolio Turnover......................... 46% 49% 31% 45% 116%
(a) Based on average shares outstanding. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 1%, charged on certain redemptions made within one year of purchase. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (c) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by $.01, decrease net realized and unrealized gains and losses by $.01 and increase the ratio of net investment income to average net assets from 4.09% to 4.13%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. N/A=Not Applicable. See Notes to Financial Statements 23 NOTES TO FINANCIAL STATEMENTS September 30, 2003 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Municipal Income Fund (the "Fund") is organized as a series of the Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a diversified open-end management investment company under the Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to provide a high level of current income exempt from federal income tax, consistent with preservation of capital. The Fund commenced investment operations on August 1, 1990. The distribution of the Fund's Class B and Class C shares commenced on August 24, 1992 and August 13, 1993, respectively. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION Municipal bonds are valued by independent pricing services or dealers using the mean of the bid and asked prices or, in the absence of market quotations, at fair value based upon yield data relating to municipal bonds with similar characteristics and general market conditions. Securities which are not valued by independent pricing services or dealers are valued at fair value using procedures established in good faith by the Board of Trustees. Short-term securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. The Fund may purchase and sell securities on a "when-issued" or "delayed delivery" basis, with settlement to occur at a later date. The value of the security so purchased is subject to market fluctuations during this period. The Fund will segregate assets with the custodian having an aggregate value at least equal to the amount of the when-issued or delayed delivery purchase commitments until payment is made. At September 30, 2003, the Fund had $31,064,501 of when-issued and delayed delivery purchase commitments. C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond premium is amortized and discount is accreted over the expected life of each applicable security. Income and expenses of the Fund are allocated on a pro rata basis to each class of shares, except for distribution and service fees and transfer agency costs which are unique to each class of shares. D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. 24 NOTES TO FINANCIAL STATEMENTS September 30, 2003 The Fund intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward for eight years following the year of the loss and offset these losses against any future realized capital gains. At September 30, 2003, the Fund had an accumulated capital loss carryforward for tax purposes of $28,396,676 which will expire between September 30, 2008 and September 30, 2010. At September 30, 2003, the cost and related gross unrealized appreciation and depreciation are as follows: Cost of investments for tax purposes........................ $707,403,296 ============ Gross tax unrealized appreciation........................... $ 51,267,617 Gross tax unrealized depreciation........................... (19,020,453) ------------ Net tax unrealized appreciation investments................. $ 32,247,164 ============
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly dividends from net investment income. Net realized gains, if any, are distributed annually. Distributions from net realized gains for book purposes may include short-term capital gains and a portion of futures gains, which are included in ordinary income for tax purposes. The tax character of distributions paid during 2003 and 2002 were as follows:
2003 2002 Distribution paid from: Ordinary Income........................................... $239,149 $83,445 Long-term capital gain.................................... -- -- -------- ------- $239,149 $83,445 ======== =======
Due to inherent differences in the recognition of income, expenses and realized gains/ losses under accounting principles generally accepted in the United States of America and federal income tax purposes, permanent differences between book and tax basis reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. A permanent book and tax difference related to the Fund's investment in other regulated investment companies totaling $14,813 was reclassified from accumulated undistributed net investment income to accumulated net realized loss. Additionally, a permanent book and tax difference of $790,321 related to book to tax amortization differences were reclassified from accumulated undistributed net investment income to accumulated net realized loss. As of September 30, 2003, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income............................... $141,325
25 NOTES TO FINANCIAL STATEMENTS September 30, 2003 Net realized gains or losses may differ for financial reporting and tax purposes primarily as a result of gains or losses recognized for tax purposes on open futures transactions on September 30, 2003. F. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's custody fee was reduced by $12,346 as a result of credits earned on cash balances. 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE DAILY NET ASSETS % PER ANNUM First $500 million.......................................... .50% Over $500 million........................................... .45%
For the year ended September 30, 2003, the Fund recognized expenses of approximately $28,500 representing legal services provided by Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the Fund is an affiliated person. Under separate Accounting Services and Legal Services agreements, the Adviser provides accounting and legal services to the Fund. The Adviser allocates the cost of such services to each fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $103,800 representing Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen") cost of providing accounting and legal services to the Fund, which are reported as part of "Other" and "Legal" expenses, respectively, in the Statement of Operations. Van Kampen Investor Services Inc. (VKIS) an affiliate of the Adviser, serves as the shareholder servicing agent for the Fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $360,800 representing transfer agency fees paid to VKIS. Transfer agency fees are determined through negotiations with the Fund's Board of Trustees. Certain officers and trustees of the Fund are also officers and directors of Van Kampen. The Fund does not compensate its officers or trustees who are officers of Van Kampen. The Fund provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Fund and, to the extent permitted by the 1940 Act, as amended, may be invested in the common shares of those funds selected by the trustees. Investments in such funds of approximately $141,000 are included in "Other" assets on the Statements of Assets and Liabilities at September 30, 2003. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. Benefits under the retirement plan are payable 26 NOTES TO FINANCIAL STATEMENTS September 30, 2003 upon retirement for a ten-year period and are based upon each trustee's years of service to the Fund. The maximum annual benefit per trustee under the plan is $2,500. 3. CAPITAL TRANSACTIONS At September 30, 2003, capital aggregated $651,646,248, $60,665,432 and $17,606,399 for Classes A, B and C, respectively. For the year ended September 30, 2003, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 7,801,000 $ 114,651,871 Class B................................................... 503,655 7,411,147 Class C................................................... 338,633 4,988,813 ----------- ------------- Total Sales................................................. 8,643,288 $ 127,051,831 =========== ============= Dividend Reinvestment: Class A................................................... 1,375,257 $ 20,229,463 Class B................................................... 96,732 1,421,035 Class C................................................... 30,289 444,374 ----------- ------------- Total Dividend Reinvestment................................. 1,502,278 $ 22,094,872 =========== ============= Repurchases: Class A................................................... (11,127,622) $(163,537,726) Class B................................................... (988,417) (14,485,338) Class C................................................... (474,542) (6,936,672) ----------- ------------- Total Repurchases........................................... (12,590,581) $(184,959,736) =========== =============
27 NOTES TO FINANCIAL STATEMENTS September 30, 2003 At September 30, 2002, capital aggregated $680,302,640, $66,318,588 and $19,109,884 for Classes A, B and C, respectively. For the year ended September 30, 2002, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 9,146,949 $ 132,261,572 Class B................................................... 779,839 11,279,454 Class C................................................... 282,384 4,095,042 ----------- ------------- Total Sales................................................. 10,209,172 $ 147,636,068 =========== ============= Dividend Reinvestment: Class A................................................... 1,426,526 $ 20,624,689 Class B................................................... 102,707 1,483,411 Class C................................................... 30,823 444,680 ----------- ------------- Total Dividend Reinvestment................................. 1,560,056 $ 22,552,780 =========== ============= Repurchases: Class A................................................... (12,440,538) $(180,091,131) Class B................................................... (1,132,658) (16,316,746) Class C................................................... (254,346) (3,692,605) ----------- ------------- Total Repurchases........................................... (13,827,542) $(200,100,482) =========== =============
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares eight years after the end of the calendar month in which the shares were purchased. Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares six years after the end of the calendar month in which the shares were purchased. For the years ended September 30, 2003 and 2002, 155,348 and 402,684 Class B Shares converted to Class A Shares, respectively and are shown in the above tables as sales of Class A Shares and repurchases of Class B Shares. Class C Shares purchased before January 1, 1997, and any dividend reinvestment plan Class C Shares received on such shares, automatically convert to Class A Shares ten years after the end of the calendar month in which such shares were purchased. Class C Shares purchased on or after January 1, 1997 do not possess a conversion feature. For the years ended September 30, 2003 and 2002, no Class C Shares converted to Class A Shares. Class B and C Shares are offered without a front end sales charges, but are subject to a contingent deferred sale charge (CDSC). The CDSC will be imposed on most redemptions 28 NOTES TO FINANCIAL STATEMENTS September 30, 2003 made within six years of the purchase for Class B and one year of the purchase for Class C as detailed in the following schedule.
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLAR AMOUNT SUBJECT TO CHARGE -------------------------- YEAR OF REDEMPTION CLASS B CLASS C First....................................................... 4.00% 1.00% Second...................................................... 3.75% None Third....................................................... 3.50% None Fourth...................................................... 2.50% None Fifth....................................................... 1.50% None Sixth....................................................... 1.00% None Seventh and Thereafter...................................... None None
For the year ended September 30, 2003, Van Kampen as Distributor for the Fund, received commissions on sales of the Fund's Class A Shares of approximately $95,200 and CDSC on redeemed shares of approximately $104,500. Sales charges do not represent expenses of the Fund. 4. INVESTMENT TRANSACTIONS During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were $339,813,524 and $380,612,095, respectively. 5. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument in very general terms refers to a security whose value is "derived" from the value of an underlying asset, reference rate or index. The Fund has a variety of reasons to use derivative instruments, such as to attempt to protect the Fund against possible changes in the market value of its portfolio, to manage the portfolio's effective yield, maturity and duration, or generate potential gain. All of the Fund's portfolio holdings, including derivative instruments, are marked to market each day with the change in value reflected in unrealized appreciation/depreciation. Upon disposition, a realized gain or loss is recognized accordingly, except when taking delivery of a security underlying a future contract. In this instance, the recognition of gain or loss is postponed until the disposal of the security underlying the future contract. Summarized below are the different types of derivative financial instruments used by the Fund. A. FUTURES CONTRACT A futures contract is an agreement involving the delivery of a particular asset on a specified future date at an agreed upon price. The Fund generally invests in futures on U.S. Treasury Notes. Upon entering into futures contracts, the Fund maintains an amount of cash or liquid securities with a value equal to a percentage of the contract amount with 29 NOTES TO FINANCIAL STATEMENTS September 30, 2003 either a futures commission merchant pursuant to rules and regulations promulgated under the 1940 Act, as amended, or with its custodian in an account in the broker's name. This amount is known as initial margin. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). The risk of loss associated with a futures contract is in excess of the variation margin reflected on the statement of Assets and Liabilities. Transactions in futures contracts for the year ended September 30, 2003, were as follows:
CONTRACTS Outstanding at September 30, 2002........................... -0- Futures Opened.............................................. 2,937 Futures Closed.............................................. (2,661) ------ Outstanding at September 30, 2003........................... 276 ======
The futures contracts outstanding as of September 30, 2003, and the descriptions and unrealized appreciation/depreciation are as follows:
UNREALIZED CONTRACTS DEPRECIATION SHORT CONTRACTS: U.S. Treasury Notes 10-Year Futures December 2003 (Current Notional Value of $114,625 per contract)............................................... 53 $ (292,100) U.S. Treasury Notes 5-Year Futures December 2003 (Current Notional Value of $113,469 per contract)............................................... 223 (876,476) --- ----------- 276 $(1,168,576) === ===========
B. INDEXED SECURITIES These instruments are identified in the portfolio of investments. The price of these securities may be more volatile than the price of a comparable fixed rate security. An Inverse Floating security is one where the coupon is inversely indexed to a short-term floating interest rate multiplied by a specified factor. As the floating rate rises, the coupon is reduced. Conversely, as the floating rate declines, the coupon is increased. These instruments are typically used by the Fund to enhance the yield of the portfolio. 6. DISTRIBUTION AND SERVICE PLANS With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund and its shareholders have adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act, as amended, and a service plan (collectively, the "Plans"). The Plans govern payments for: the distribution of the Fund's Class A Shares, Class B Shares and Class C Shares; the provision of ongoing shareholder services with respect to such classes of shares; and the maintenance of shareholder accounts with respect to such classes of shares. 30 NOTES TO FINANCIAL STATEMENTS September 30, 2003 Annual fees under the Plans of up to 0.25% of Class A average daily net assets and 1.00% each for Class B and Class C average daily net assets are accrued daily. The amount of distribution expenses incurred by Van Kampen and not yet reimbursed ("unreimbursed receivable") was approximately $3,129,600 and $188,700 for Class B and Class C Shares, respectively. These amounts may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed receivable has been fully recovered, any excess 12b-1 fees will be refunded to the Fund on a quarterly basis. Included in these fees for the year ended September 30, 2003, are payments retained by Van Kampen of approximately $525,000 and payments made to Morgan Stanley DW Inc., an affiliate of the Adviser, of approximately $67,400. 31 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees of Van Kampen Municipal Income Fund We have audited the accompanying statement of assets and liabilities of the Van Kampen Municipal Income Fund (the "Fund"), including the portfolio of investments, as of September 30, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the year ended September 30, 1999 were audited by other auditors whose report dated November 9, 1999 expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and financial highlights. Our procedures included confirmation of securities owned as of September 30, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. 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 the Van Kampen Municipal Income Fund at September 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended in conformity with accounting principles generally accepted in the United States. -s- Ernst & Young LLP Chicago, Illinois November 4, 2003 32 BOARD OF TRUSTEES AND IMPORTANT ADDRESSES VAN KAMPEN MUNICIPAL INCOME FUND BOARD OF TRUSTEES DAVID C. ARCH J. MILES BRANAGAN JERRY D. CHOATE ROD DAMMEYER LINDA HUTTON HEAGY R. CRAIG KENNEDY HOWARD J KERR MITCHELL M. MERIN* JACK E. NELSON RICHARD F. POWERS, III* HUGO F. SONNENSCHEIN WAYNE W. WHALEN* - Chairman SUZANNE H. WOOLSEY INVESTMENT ADVISER VAN KAMPEN INVESTMENT ADVISORY CORP. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 DISTRIBUTOR VAN KAMPEN FUNDS INC. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 SHAREHOLDER SERVICING AGENT VAN KAMPEN INVESTOR SERVICES INC. P.O. Box 947 Jersey City, New Jersey 07303-0947 CUSTODIAN STATE STREET BANK AND TRUST COMPANY 225 Franklin Street P.O. Box 1713 Boston, Massachusetts 02110 LEGAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606 INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, Illinois 60606 For federal income tax purposes, the following is furnished with respect to the distribution paid by the Fund during its taxable year ended September 30, 2003. The Fund designated 99.3% of the income distributions as a tax-exempt income distribution. In January, the Fund provides tax information to shareholders for the preceding calendar year. * "Interested persons" of the Fund, as defined in the Investment Company Act of 1940, as amended. 33 TRUSTEES AND OFFICERS The business and affairs of the Fund are managed under the direction of the Fund's Board of Trustees and the Fund's officers appointed by the Board of Trustees. The tables below list the trustees and executive officers of the Fund and their principal occupations during the last five years, other directorships held by trustees and their affiliations, if any, with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are referred to herein collectively as the "Advisers." The term "Fund Complex" includes each of the investment companies advised by the Advisers or their affiliates as of the date of this Statement of Additional Information. Trustees serve until reaching their retirement age or until their successors are duly elected and qualified. Officers are annually elected by the trustees. INDEPENDENT TRUSTEES
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing Blistex Inc. since 2003 Executive Officer of General Partner of funds 1800 Swift Drive Blistex Inc., a consumer in the Fund Complex. Oak Brook, IL 60523 health care products manufacturer. Former Director of the World Presidents Organization-Chicago Chapter. Director of the Heartland Alliance, a nonprofit organization serving human needs based in Chicago. J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing 1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex. Chief Executive Officer and President, MDT Corporation (now known as Getinge/Castle, Inc., a subsidiary of Getinge Industrier AB), a company which develops, manufactures, markets and services medical and scientific equipment.
34
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing 33971 Selva Road since 1999 Chairman and Chief General Partner of funds Suite 130 Executive Officer of the in the Fund Complex. Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a ("Allstate") and Allstate biotechnological company, Insurance Company. Prior and Director of Valero to January 1995, Energy Corporation, an President and Chief independent refining Executive Officer of company. Allstate. Prior to August 1994, various management positions at Allstate. Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing CAC, llc. since 2003 private company offering General Partner of funds 4350 LaJolla Village Drive capital investment and in the Fund Complex. Suite 980 management advisory Director of TeleTech San Diego, CA 92122-6223 services. Prior to July Holdings Inc., 2000, Managing Partner of Stericycle, Inc., Equity Group Corporate TheraSense, Inc., GATX Investment (EGI), a Corporation, Arris Group, company that makes Inc. and Trustee of the private investments in University of Chicago other companies. Hospitals and Health Systems. Prior to May 2002, Director of Peregrine Systems Inc. Prior to February 2001, Vice Chairman and Director of Anixter International, Inc. and IMC Global Inc. Prior to July 2000, Director of Allied Riser Communications Corp., Matria Healthcare Inc., Transmedia Networks, Inc., CNA Surety, Corp. and Grupo Azcarero Mexico (GAM). Prior to April 1999, Director of Metal Management, Inc.
35
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds 233 South Wacker Drive executive search firm. in the Fund Complex. Suite 7000 Trustee on the University Chicago, IL 60606 of Chicago Hospitals Board, Vice Chair of the Board of the YMCA of Metropolitan Chicago and a member of the Women's Board of the University of Chicago. Prior to 1997, Partner of Ray & Berndtson, Inc., an executive recruiting firm. Prior to 1996, Trustee of The International House Board, a fellowship and housing organization for international graduate students. Prior to 1995, Executive Vice President of ABN AMRO, N.A., a bank holding company. Prior to 1992, Executive Vice President of La Salle National Bank. R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing 11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds Washington, D.C. 20016 of the United States, an in the Fund Complex. independent U.S. foundation created to deepen understanding, promote collaboration and stimulate exchanges of practical experience between Americans and Europeans. Formerly, advisor to the Dennis Trading Group Inc., a managed futures and option company that invests money for individuals and institutions. Prior to 1992, President and Chief Executive Officer, Director and member of the Investment Committee of the Joyce Foundation, a private foundation. Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing 736 North Western Avenue since 2003 and Chief Executive General Partner of funds P.O. Box 317 Officer of Pocklington in the Fund Complex. Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake investment holding Forest Bank & Trust. company. Director of the Marrow Foundation.
36
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing 423 Country Club Drive since 1990 Investment Planning General Partner of funds Winter Park, FL 32789 Services, Inc., a in the Fund Complex. financial planning company and registered investment adviser in the State of Florida. President of Nelson Ivest Brokerage Services Inc., a member of the NASD, Securities Investors Protection Corp. and the Municipal Securities Rulemaking Board. President of Nelson Sales and Services Corporation, a marketing and services company to support affiliated companies. Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing 1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds Chicago, IL 60637 University of Chicago and in the Fund Complex. the Adam Smith Director of Winston Distinguished Service Laboratories, Inc. Professor in the Department of Economics at the University of Chicago. Prior to July 2000, President of the University of Chicago. Trustee of the University of Rochester and a member of its investment committee. Member of the National Academy of Sciences, the American Philosophical Society and a fellow of the American Academy of Arts and Sciences. Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing 2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds Room 285 Academy of in the Fund Complex. Washington, D.C. 20418 Sciences/National Director of Neurogen Research Council, an Corporation, a independent, federally pharmaceutical company, chartered policy since January 1998. institution, since 2001 and previously Chief Operating Officer from 1993 to 2001. Director of the Institute for Defense Analyses, a federally funded research and development center, Director of the German Marshall Fund of the United States, and Trustee of Colorado College. Prior to 1993, Executive Director of the Commission on Behavioral and Social Sciences and Education at the National Academy of Sciences/National Research Council. From 1980 through 1989, Partner of Coopers & Lybrand.
37 INTERESTED TRUSTEES*
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing 1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex. Officer Complex. Chairman, President, Chief Executive Officer and Director of the Advisers and VK Advisors Inc. since December 2002. Chairman, President and Chief Executive Officer of Van Kampen Investments since December 2002. Director of Van Kampen Investments since December 1999. Chairman and Director of Van Kampen Funds Inc. since December 2002. President, Director and Chief Operating Officer of Morgan Stanley Investment Management since December 1998. President and Director since April 1997 and Chief Executive Officer since June 1998 of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chairman, Chief Executive Officer and Director of Morgan Stanley Distributors Inc. since June 1998. Chairman since June 1998, and Director since January 1998 of Morgan Stanley Trust. Director of various Morgan Stanley subsidiaries. President of the Morgan Stanley Funds since May 1999. Previously Chief Executive Officer of Van Kampen Funds Inc. from December 2002 to July 2003, Chief Strategic Officer of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. and Executive Vice President of Morgan Stanley Distributors Inc. from April 1997 to June 1998. Chief Executive Officer from September 2002 to April 2003 and Vice President from May 1997 to April 1999 of the Morgan Stanley Funds.
38
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing 1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds P.O. Box 5555 December 2002, Chairman, in the Fund Complex. Oakbrook Terrace, IL 60181 Director, President, Chief Executive Officer and Managing Director of Van Kampen Investments and its investment advisory, distribution and other subsidiaries. Prior to December 2002, President and Chief Executive Officer of funds in the Fund Complex. Prior to May 1998, Executive Vice President and Director of Marketing at Morgan Stanley and Director of Dean Witter, Discover & Co. and Dean Witter Realty. Prior to 1996, Director of Dean Witter Reynolds Inc. Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing 333 West Wacker Drive since 1990 of Skadden, Arps, Slate, General Partner of funds Chicago, IL 60606 Meagher & Flom in the Fund Complex. (Illinois), legal counsel to funds in the Fund Complex.
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of certain funds in the Fund Complex by reason of his firm currently acting as legal counsel to such funds in the Fund Complex. Messrs. Merin and Powers are interested persons of funds in the Fund Complex and the Advisers by reason of their current or former positions with Morgan Stanley or its affiliates. 39 OFFICERS
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management. 2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to 45th Floor December 2002, Chief Investment Officer of Van Kampen Houston, TX 77056 Investments and President and Chief Operations Officer of the Advisers and Van Kampen Advisors Inc. Prior to May 2002, Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Prior to May 2001, Managing Director and Chief Investment Officer of Van Kampen Investments, and Managing Director and President of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Executive Vice President and Chief Investment Officer of Van Kampen Investments, and President and Chief Operating Officer of the Advisers. Prior to April 2000, Executive Vice President and Chief Investment Officer for Equity Investments of the Advisers. Prior to October 1998, Vice President and Senior Portfolio Manager with AIM Capital Management, Inc. Prior to February 1998, Senior Vice President and Portfolio Manager of Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp. and Van Kampen American Capital Management, Inc. Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management. 1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex. New York, NY 10020 Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan 1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Managing Director and Chief Investment Officer of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc. since December 2002. John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers 1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Senior Vice President of the Advisers and Van Kampen Advisors Inc. Prior to May 2000, Senior Vice President of the investment grade taxable group for the Advisers. Prior to June 1999, Senior Vice President of the government securities bond group for Asset Management.
40
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services. 1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer Executive Officer and Managing Director of Morgan Stanley Investment Management Inc. Managing Director of Morgan Stanley. Managing Director and Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chief Executive Officer and Director of Morgan Stanley Trust. Vice President of the Morgan Stanley Funds. A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and 1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Managing Director and General Counsel-Mutual Funds of Morgan Stanley Investment Advisors, Inc. Vice President and Secretary of funds in the Fund Complex. Prior to July 2001, Managing Director, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, the Distributor, Investor Services, and certain other subsidiaries of Van Kampen Investments. Prior to December 2000, Executive Vice President, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Prior to January 1999, Vice President and Associate General Counsel to New York Life Insurance Company ("New York Life"), and prior to March 1997, Associate General Counsel of New York Life. Prior to December 1993, Assistant General Counsel of The Dreyfus Corporation. Prior to August 1991, Senior Associate, Willkie Farr & Gallagher. Prior to January 1989, Staff Attorney at the Securities and Exchange Commission, Division of Investment Management, Office of Chief Counsel. John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments, 1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President, Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund Complex. Head of Fund Accounting for Morgan Stanley Investment Management. Prior to December 2002, Executive Director of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc.
41 Van Kampen Privacy Notice The Van Kampen companies and investment products* respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain nonpublic personal information about you. This is information we collect from you on applications or other forms, and from the transactions you conduct with us, our affiliates, or third parties. We may also collect information you provide when using our Web site, and text files (also known as "cookies") may be placed on your computer to help us to recognize you and to facilitate transactions you initiate. We do not disclose any nonpublic personal information about you or any of our former customers to anyone, except as permitted by law. For instance, so that we may continue to offer you Van Kampen investment products and services that meet your investing needs, and to effect transactions that you request or authorize, we may disclose the information we collect to companies that perform services on our behalf, such as printers and mailers that assist us in the distribution of investor materials. These companies will use this information only for the services for which we hired them, and are not permitted to use or share this information for any other purpose. To protect your nonpublic personal information internally, we permit access to it only by authorized employees, and maintain physical, electronic and procedural safeguards to guard your nonpublic personal information. * Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc., Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many Van Kampen mutual funds and Van Kampen unit investment trusts. The Statement of Additional Information includes additional information about Fund trustees and is available, without charge, upon request by calling (800) 847-2424. Van Kampen Funds Inc. 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 www.vankampen.com (VAN KAMPEN INVESTMENTS LOGO) Copyright (C)2003 Van Kampen Funds Inc. All rights reserved. Member NASD/SIPC. 49, 349, 549 MIF ANR 11/03 12228K03-AP-11/03 Item 1. Report to Shareholders Welcome, Shareholder In this report, you'll learn about how your investment in Van Kampen Intermediate Term Municipal Income Fund performed during the annual period. The portfolio management team will provide an overview of the market conditions and discuss some of the factors that affected investment performance during the reporting period. In addition, this report includes the fund's financial statements and a list of fund investments as of September 30, 2003. This material must be preceded or accompanied by a prospectus for the fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the fund will achieve its investment objective. The fund is subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and, therefore, the value of the fund shares may be less than what you paid for them. Accordingly, you can lose money investing in this fund. Please see the prospectus for more complete information on investment risks. Income may subject certain individuals to the federal Alternative Minimum Tax (AMT). NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Performance Summary PERFORMANCE OF A $10,000 INVESTMENT This chart compares your fund's performance to that of the Lehman Brothers Municipal Bond Index from 9/30/93 through 9/30/03. Class A shares, adjusted for sales charges. (LINE GRAPH)
VAN KAMPEN INTERMEDIATE TERM LEHMAN BROTHERS MUNICIPAL BOND MUNICIPAL INCOME FUND INDEX ---------------------------- ------------------------------ 9/93 9676.00 10000.00 12/93 9828.00 10140.70 9433.00 9583.91 9606.00 9689.41 9674.00 9755.81 12/94 9502.00 9616.39 10113.00 10295.80 10370.00 10543.80 10651.00 10847.00 12/95 10957.00 11294.80 10869.00 11158.80 10954.00 11244.10 11183.00 11501.80 12/96 11425.00 11794.80 11435.00 11766.60 11740.00 12171.80 12059.00 12538.80 12/97 12349.00 12878.90 12515.00 13027.10 12695.00 13225.60 13011.00 13631.40 12/98 13086.00 13713.40 13201.00 13835.00 13037.00 13590.60 12998.00 13536.50 12/99 12881.00 13431.40 13039.00 13823.90 13252.00 14032.70 13535.00 14372.30 12/00 13720.00 15000.70 14066.00 15333.50 14156.00 15433.10 14508.00 15866.50 12/01 14416.00 15769.60 14534.00 15918.30 15083.00 16500.70 15738.00 17284.40 12/02 15744.00 17284.30 15900.00 17492.10 16197.00 17943.30 9/03 16262.00 17957.30
Index data source: Bloomberg
A SHARES B SHARES C SHARES since 5/28/93 since 5/28/93 since 10/19/93 - --------------------------------------------------------------------------------------------- AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES Since Inception 5.75% 5.41% 5.31% 5.31% 4.44% 4.44% 10-year 5.33 4.98 4.87 4.87 -- -- 5-year 4.56 3.87 3.89 3.89 3.79 3.79 1-year 3.33 0.01 2.96 -0.02 2.69 1.70 - --------------------------------------------------------------------------------------------- 30-Day Subsidized SEC Yield 3.14% 2.50% 2.52% 30-Day SEC Yield 3.04 2.40 2.42
Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and fund shares, when redeemed, may be worth more or less than their original cost. The returns shown in this report do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. As a result of recent market activity, current performance may vary from the figures shown. For more up-to-date information, please visit vankampen.com or speak with your financial advisor. Average annual total return with sales charges includes payment of the maximum sales charge of 3.25 percent for Class A shares, a contingent deferred sales charge of 3.00 percent for Class B shares (in year one and declining to zero after year four), a contingent deferred sales charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1 fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent for Class B and C shares. The since inception and 10-year returns for Class B shares reflect its conversion into Class A shares six years after purchase. See footnote 3 in the Notes to Financial Statements for additional information. Certain non-recurring payments were made to Class B and C shares, resulting in an increase to the one-year total return by approximately 0.28 percent and 0.06 percent, respectively. Figures shown above assume reinvestment of all dividends and capital gains. The fund's adviser has waived or reimbursed fees and expenses from time to time; absent such waivers/reimbursements the fund's returns would have been lower. SEC yield is a calculation for determining the amount of portfolio income, excluding non-income items as prescribed by the SEC. The subsidized SEC yields reflect some or all of the expenses that the adviser had voluntarily waived. Yields are subject to change. Distribution rate represents the monthly annualized distributions of the fund at the end of the period and not the earnings of the fund. The Lehman Brothers Municipal Bond Index is generally representative of investment-grade, tax-exempt bonds. Index is unmanaged and does not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. 1 Fund Report FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003 Van Kampen Intermediate Term Municipal Income Fund is managed by the Adviser's Municipal Fixed-Income team. Current members of the team include Timothy Haney, Vice President.(1) The following discussion reflects his views on the fund's performance. Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE OVERALL MARKET ENVIRONMENT. A. The economic backdrop for the 12 months ended September 30 was largely characterized by the persistent weakness of the U.S. economy. One of the most closely watched economic indicators, employment strength, was in negative territory for much of the period. Repeated comments from government and Wall Street officials suggesting that the U.S. economy might be entering a deflationary period also weighed heavily on the minds of investors. The Federal Reserve Board (the Fed) attempted to allay these fears and keep the economy moving in the right direction by cutting the Fed Funds target rate twice, for a total reduction of 0.75 percent. At the same time, ongoing budgetary and fiscal difficulties at the state and local levels contributed to ratings downgrades for many municipal bonds. The uncertain climate had a definite effect on the municipal bond market. While yields on intermediate- and long-term bonds ended the period roughly where they began, the road between those two points was decidedly bumpy. From October 2002 to mid-June 2003, municipal yields fell by roughly 80 basis points to levels not seen since the late 1960s. These plummeting yields led to a surge in issuance as municipalities moved to lock in low financing rates and, in the case of older bonds, low refinancing costs. These record levels of supply met with record levels of demand as investors in search of relative investment stability poured cash into municipal bond funds. Demand for municipal bonds was also strong from so-called "cross-over" buyers--investors who traditionally favor taxable investments but were drawn to municipal bonds for their relatively attractive yields. The municipal market reversed abruptly in mid-June, when yields began to climb from their lows and investors shifted their attention to the rising equity market. Interest from cross-over investors also evaporated as the relative attractiveness of the taxable market grew. Issuance remained strong throughout this leg of the period, though it abated somewhat in the last three months. (1)Team members may change at any time without notice. 2 Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD? A. The fund underperformed its benchmark index. -- The fund returned 3.33 percent for the 12 months that ended September 30, 2003. Performance figures are for Class A shares, and assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. If sales charges were included, performance would be lower. Past performance is no guarantee of future results. -- The fund's benchmark, the Lehman Brothers Municipal Bond Index, returned 3.89 percent for the same period. -- The fund's monthly dividend of $0.0305 translated to a distribution rate of 3.29 percent based on the fund's maximum offering price on September 30, 2003 (as of September 30, 2003, Class A shares adjusted for sales charges). See Performance Summary for additional information and index definition. Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD? A. In an effort to help protect the fund from a potential rise in interest rates, we trimmed the portfolio's duration (a measure of interest-rate sensitivity) at the beginning of the period. While this defensive positioning proved beneficial later in the period when rates did indeed TOP 5 SECTORS AS OF 9/30/03 RATING ALLOCATION AS OF 9/30/03 Water & Sewer 15.1% AAA/Aaa 75.7% General Purpose 15.0 AA/Aa 4.5 Public Education 9.8 A/A 9.4 Public Building 8.7 BBB/Baa 3.6 Airport 8.3 CCC/Caa 0.1 Non-Rated 6.7 TOP 5 STATES AS OF 9/30/03 New York 10.70% California 8.10 Florida 6.20 Pennsylvania 5.30 New Jersey 5.00
Subject to change daily. All percentages are as a percentage of long-term investments. Provided for informational purposes only and should not be deemed as a recommendation to buy securities in the sectors shown above. Securities are classified by sectors that represent broad groupings of related industries. Rating allocations based upon ratings as issued by Standard and Poor's and Moody's, respectively. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. 3 rise, the fund was not able to fully benefit from the strong price appreciation earlier in the period when rates declined last winter and spring. Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD? A. In order to strike an optimum balance between income and principal preservation, we used a barbell approach to structure the fund's portfolio during the period. We shifted assets out of the middle part of the maturity spectrum and into the shorter and, to a lesser extent, longer segments of the intermediate portion of the yield curve. The longer-term bonds helped us maintain the fund's yield in light of falling interest rates, while shorter-term bonds provided a buffer against price volatility. Strong fund inflows during the period were used to improve both the credit quality and income potential of the fund. A significant amount of this new cash was allocated to AAA-rated bonds with premium coupons and relatively moderate interest-rate sensitivity. We also increased the fund's commitment to A-rated issues, which offered strong income as well as appreciation potential relative to other issues. This combination of bonds generated a favorable stream of income during a challenging period for income-oriented investors. Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY ISSUES. A. The growing budgetary difficulties faced by local and state municipalities led us to be highly selective in choosing bonds for the fund's portfolio. As mentioned earlier, we focused on improving the fund's credit quality by purchasing higher-rated securities. By the end of the period, we had increased the fund's holdings of AAA-rated bonds by 4.1 percent, to make up just over three-fourths of the portfolio. With interest rates falling to historic lows during the period, our analysis indicated an increasing probability that the next significant movement in interest rates would be upward. As a result, we lowered the fund's duration. We also adjusted the fund's positioning along the maturity spectrum to deemphasize areas that appeared fully valued, in favor of more attractively-priced securities. Many of our trades during the period were concentrated in so-called "specialty states". These are states such as California and New York that have high tax brackets as well as a substantial need for public financing. Specialty state issues provided ample total return opportunities, which we sought to take advantage of through relative-value trading. Here we were able to lock in gains by selling a given bond once it hit our valuation target, then replacing it with a comparable bond offering greater potential value for the portfolio. 4 Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW FOR THE FUND, DO YOU HAVE ANY CLOSING THOUGHTS? A. The economy has lately shown clear signs of improvement, though the employment picture remains murky and the likelihood of a sustained rebound is questionable. In this environment, we believe the Fed is likely to maintain a neutral stance in the absence of signs of strong economic growth. We will continue to monitor the market closely for compelling investment opportunities. 5 ANNUAL HOUSEHOLDING NOTICE To reduce expenses, the fund attempts to eliminate duplicate mailings to the same address. The fund delivers a single copy of certain shareholder documents to investors who share an address, even if the accounts are registered under different names. The fund's prospectus and shareholder reports (including annual privacy notices) will be delivered to you in this manner indefinitely unless you instruct us otherwise. You can request multiple copies of these documents by either calling (800) 341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has received your instructions, we will begin sending individual copies for each account within 30 days. PROXY VOTING POLICIES AND PROCEDURES A description of the fund's policies and procedures with respect to the voting of proxies relating to the fund's portfolio securities is available without charge, upon request, by calling 1-800-847-2424. This information is also available on the Securities and Exchange Commission's website at http://www.sec.gov. 6 BY THE NUMBERS YOUR FUND'S INVESTMENTS September 30, 2003 THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF THE REPORTING PERIOD.
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MUNICIPAL BONDS 98.2% ALABAMA 1.5% $1,260 Dothan Houston Cnty, AL Arpt Auth (MBIA Insd)... 5.400% 12/01/15 $ 1,371,233 350 West Jefferson Cnty, AL Amusement & Pub Park Auth (Prerefunded @ 12/01/06)................... 7.500 12/01/08 382,879 ------------ 1,754,112 ------------ ARIZONA 1.9% 345 Maricopa Cnty, AZ Indl Dev Auth Sr Living Fac Rev Christian Care Mesa Inc Proj A (a).......... 7.250 04/01/05 351,952 1,000 Maricopa Cnty, AZ Pollutn Ctl Adj AZ Pub Svc Co Ser C Rfdg...................................... 1.700 05/01/29 1,000,340 755 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig Irvington Proj Tucson Ser A Rfdg (FSA Insd)..... 7.250 07/15/10 794,713 ------------ 2,147,005 ------------ ARKANSAS 1.9% 1,000 Arkansas St Fed Hwy Grant Antic Ser A........... 5.500 08/01/06 1,113,620 1,000 Beaver, AR Wtr Dist............................. 5.000 11/15/17 1,078,550 ------------ 2,192,170 ------------ CALIFORNIA 7.9% 210 California Edl Fac Auth Rev Pacific Grad Sch (a)............................................. 6.950 11/01/07 224,465 1,000 California St (AMBAC Insd) (b).................. 6.400 09/01/08 1,197,420 1,000 California St................................... 5.250 02/01/15 1,087,620 1,500 California St Dept Wtr Res Pwr Ser A (AMBAC Insd)........................................... 5.375 05/01/18 1,644,915 1,275 Madera, CA Uni Sch Dist Election 2002 (FSA Insd)........................................... 5.250 08/01/23 1,340,688 2,295 Modesto, CA Irr Dist Ctfs Partn Cap Impts Ser A Rfdg (MBIA Insd)................................ 5.000 07/01/16 2,491,245 1,100 Santa Clara, CA Elec Rev Sub Ser A (MBIA Insd) (c)............................................. 5.250 07/01/20 1,187,461 ------------ 9,173,814 ------------ COLORADO 1.1% 210 Colorado Hlth Fac Auth Rev Sr Living Fac Eaton Ter Ser A....................................... 6.800 07/01/09 213,559 7 Colorado Hsg Fin Auth Single Family Pgm Sr Ser E............................................... 8.125 12/01/24 6,644 1,000 Denver, CO City & Cnty Arpt Rev Ser A........... 7.400 11/15/04 1,060,800 ------------ 1,281,003 ------------ CONNECTICUT 4.8% 145 Mashantucket Western Pequot Tribe, 144A--Private Placement (Escrowed to Maturity) (d)............ 6.500 09/01/06 166,179 565 New Britain, CT................................. 5.000 04/15/04 576,859 560 New Britain, CT................................. 5.000 04/15/05 591,158
See Notes to Financial Statements 7 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE CONNECTICUT (CONTINUED) $ 305 New Haven, CT Indl Fac Rev Adj Govt Ctr Thermal Energies (a).................................... 7.250% 07/01/09 $ 296,207 1,000 New Haven, CT Ser B Rfdg (FGIC Insd)............ 5.250 11/01/11 1,142,790 1,250 New Haven, CT Ser B Rfdg (FGIC Insd)............ 5.375 11/01/12 1,438,912 1,225 Regional Sch Dist No 16 CT Rfdg (AMBAC Insd).... 5.000 03/15/13 1,375,736 ------------ 5,587,841 ------------ FLORIDA 6.1% 2,000 Broward Cnty, FL Arpt Sys Rev Ser E Rfdg (MBIA Insd) (b)....................................... 5.375 10/01/13 2,165,600 1,150 Florida Hsg Fin Agy Hsg Maitland Club Apts Ser B-1 (AMBAC Insd) (a)............................ 6.750 08/01/14 1,202,946 500 Highlands Cnty, FL Hlth Facs Hosp Adventist Health (a)...................................... 3.350 11/15/32 515,125 190 Lee Cnty, FL Indl Dev Auth Econ Rev Encore Nursing Ctr Part Rfdg........................... 8.125 12/01/07 194,454 115 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran Twr Rfdg (a)................... 8.125 07/01/06 118,835 250 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran Twr Rfdg....................... 8.625 07/01/20 261,242 2,000 Orange Cnty, FL Sch Brd Ctf Part Ser A (AMBAC Insd)........................................... 5.250 08/01/14 2,248,620 300 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj Rfdg (Escrowed to Maturity)..................... 7.125 11/01/06 332,808 ------------ 7,039,630 ------------ GEORGIA 2.5% 1,000 Athens, GA Hsg Auth Student Hsg Univ of GA East Campus Hsg (AMBAC Insd)......................... 5.250 12/01/21 1,070,130 1,370 De Kalb Cnty, GA Hsg Auth Multi-Family Hsg Rev North Hill Apts Proj Rfdg (FNMA Collateralized) (Variable Rate Coupon).......................... 6.625 01/01/25 1,439,843 360 Forsyth Cnty, GA Hosp Auth Rev Antic Ctfs GA Baptist Hlthcare Sys Proj (Escrowed to Maturity) (a)............................................. 6.000 10/01/08 395,860 ------------ 2,905,833 ------------ ILLINOIS 2.0% 200 Bedford Park, IL Tax Increment 71st & Cicero Proj Rfdg....................................... 7.000 01/01/06 203,984 210 Chicago, IL Tax Increment Alloc Santn Drain & Ship Canal Ser A (a)............................ 7.375 01/01/05 212,535 250 Chicago, IL Tax Increment Alloc Sub Cent Loop Redev Ser A..................................... 6.500 12/01/05 269,737 545 Clay Cnty, IL Hosp Rev (a)...................... 5.500 12/01/10 508,191 293 Huntley, IL Spl Svc Area No. 7 Spl Tax (a)...... 6.000 03/01/09 314,966
8 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE ILLINOIS (CONTINUED) $ 500 Illinois Health Facs Auth Rev Elmhurst Mem Healthcare Rfdg (a)............................. 5.000% 01/01/04 $ 504,135 265 Peoria, IL Spl Tax Weaverridge Spl Svc Area (a)............................................. 7.625 02/01/08 280,730 ------------ 2,294,278 ------------ INDIANA 2.2% 1,000 Allen Cnty, IN Juvenile Justice Ctr First Mtg (AMBAC Insd).................................... 5.500 01/01/18 1,109,840 1,400 Indiana Bd Bk Spl Prog Hendricks Redev Ser B.... 6.000 02/01/12 1,401,064 ------------ 2,510,904 ------------ KANSAS 2.5% 500 Burlington, KS Envrn Impt Rev................... 4.750 09/01/15 536,675 1,000 Shawnee Cnty, KS Sch Dist 501 Topeka............ 5.000 02/01/20 1,051,770 320 Wyandotte Cnty, KS City KS Univ Brd of Public Utility Office Bldg Complex Proj (MBIA Insd).... 5.000 05/01/11 358,790 860 Wyandotte Cnty, KS City KS Univ Brd of Public Utility Office Bldg Complex Proj (MBIA Insd).... 5.000 05/01/12 950,575 ------------ 2,897,810 ------------ KENTUCKY 0.9% 1,000 Louisville & Jefferson Cnty, KY Ser C........... 5.500 07/01/17 1,090,950 ------------ LOUISIANA 1.3% 265 Louisiana Hsg Fin Agy Rev Multi-Family Hsg Plantation Ser A (a)............................ 7.200 01/01/06 264,338 1,065 Louisiana Loc Govt Envir Pkg Facs Garage Proj Ser A (AMBAC Insd).............................. 5.000 10/01/12 1,175,270 ------------ 1,439,608 ------------ MARYLAND 0.6% 625 Maryland St Economic Dev Corp. Univ MD College Park Proj....................................... 5.750 06/01/13 673,213 ------------ MASSACHUSETTS 0.3% 95 Massachusetts St Indl Fin Agy East Boston Neighborhood Proj............................... 7.250 07/01/06 94,496 295 Massachusetts St Indl Fin Agy Rev Gtr Lynn Mental Hlth (a)................................. 6.200 06/01/08 284,681 ------------ 379,177 ------------ MICHIGAN 3.4% 1,000 Brighton, MI Area Sch Dist Rfdg................. 5.250 05/01/18 1,100,780 1,110 Brighton, MI Area Sch Dist Rfdg................. 5.250 05/01/20 1,202,519 335 John Tolfree Hlth Sys Corp MI Mtg Rev Rfdg (a)............................................. 5.450 09/15/06 341,857
See Notes to Financial Statements 9 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MICHIGAN (CONTINUED) $1,000 Michigan Higher Ed Facs Auth Ltd Oblig Kalamazoo Clg Proj Rfdg................................... 5.250% 12/01/16 $ 1,074,050 250 Michigan St Strategic Fd Ltd Oblig Rev United Waste Sys Proj (a).............................. 5.200 04/01/10 259,200 ------------ 3,978,406 ------------ MINNESOTA 0.6% 490 Dakota Cnty, MN Hsg & Redev Auth Multi-Family Hsg Rev Affordable Hsg View Pointe Proj (a)..... 6.000 11/01/09 483,846 150 Minneapolis, MN Multi-Family Rev Hsg Belmont Apts Proj....................................... 7.000 11/01/06 152,055 ------------ 635,901 ------------ MISSOURI 3.3% 1,500 Kansas City, MO Arpt Rev Genl Impt Ser A (FSA Insd)........................................... 7.000 09/01/12 1,587,630 1,000 Macon, MO Ctfs Partn (MBIA Insd)................ 5.250 08/01/17 1,098,250 1,000 St. Louis, MO Arpt Rev Arpt Dev Prog Ser A (MBIA Insd)........................................... 5.500 07/01/09 1,143,070 ------------ 3,828,950 ------------ MONTANA 0.4% 400 Crow Fin Auth, MT Tribal Purp Rev (a)........... 5.400 10/01/07 445,944 ------------ NEBRASKA 3.3% 1,545 Nebraska Pub Pwr Dist Rev Ser B (AMBAC Insd).... 5.000 01/01/15 1,691,559 1,975 Omaha, NE Rfdg.................................. 5.000 11/01/16 2,164,699 ------------ 3,856,258 ------------ NEW JERSEY 4.9% 1,015 Bordentown, NJ Swr Auth Rev Ser F (MBIA Insd)... 5.250 12/01/15 1,147,732 500 Camden Cnty, NJ Impt Auth Lease Rev Kaighn Pt Marine Terminal A (e) (f) (g)................... 7.375 06/01/07 35,000 1,400 Essex Cnty, NJ Impt Auth Lease Gtd Cnty Correctional Fac Proj (FGIC Insd)............... 5.750 10/01/30 1,545,390 130 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen Proj Ser A (Escrowed to Maturity)............... 8.000 05/15/04 135,355 800 New Jersey Hlthcare Facs Fin Auth Rev Christ Hosp Group Issue (Connie Lee Insd).............. 7.000 07/01/06 916,208 670 New Jersey St Edl Facs Auth Fairleigh Dickinson Univ Ser D (ACA Insd)........................... 5.000 07/01/05 708,183 455 Rahway, NJ Ctfs Partn (MBIA Insd)............... 5.500 02/15/16 510,164 565 Rahway, NJ Ctfs Partn (MBIA Insd)............... 5.600 02/15/17 638,156 ------------ 5,636,188 ------------
10 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW YORK 10.5% $ 305 Brookhaven, NY Indl Dev Agy Sr Residential Hsg Rev Woodcrest Estates Fac Ser A (a)............. 5.875% 12/01/09 $ 312,601 1,000 Long Island Pwr Auth NY Elec Gen Ser C.......... 5.500 09/01/17 1,088,030 1,000 Metropolitan Trans Auth NY Svc Contract Ser B (MBIA Insd)..................................... 5.500 07/01/14 1,157,950 1,000 New York City Hlth & Hosp Hlth Sys Ser A (AMBAC Insd)........................................... 5.000 02/15/11 1,110,790 500 New York City Ser A............................. 7.000 08/01/07 569,015 2,000 New York City Transitional Future Tax Secd Ser C Rfdg (AMBAC Insd)............................... 5.250 08/01/18 2,185,220 3,325 New York St Environmental Facs Ser B............ 5.000 06/15/18 3,558,448 1,000 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser A (Prerefunded @ 02/15/05) (AMBAC Insd)..... 6.200 08/15/05 1,089,600 1,000 Niagara Falls, NY Pub Impt (MBIA Insd).......... 6.900 03/01/20 1,042,850 ------------ 12,114,504 ------------ NORTH CAROLINA 3.5% 1,040 Buncombe Cnty, NC Met Swr Dist Rfdg (MBIA Insd)........................................... 5.000 07/01/18 1,120,194 630 North Carolina Eastn Mun Pwr Agy Pwr Sys Rev Ser D............................................... 6.450 01/01/14 699,136 1,000 North Carolina Infrastructure Correctional Facs Projs........................................... 5.000 10/01/16 1,093,420 1,000 North Carolina Muni Pwr Agy Ser A (MBIA Insd)... 5.250 01/01/19 1,087,350 ------------ 4,000,100 ------------ OHIO 3.5% 500 Athens Cnty, OH Hosp Facs Rev & Impt O' Bleness Mem Ser A Rfdg (a).............................. 6.250 11/15/13 500,065 210 Cleveland-Cuyahoga Cnty, OH Port Auth Rev Dev- Port Cleveland Bd Fd B.......................... 6.500 05/15/05 210,603 500 Dayton, OH Spl Facs Rev Afco Cargo Day LLC Proj (a)............................................. 6.000 04/01/09 464,775 1,670 Toledo, OH Swr Sys Rev.......................... 5.000 11/15/18 1,799,909 1,000 University Cincinnati OH Gen Ser C.............. 5.000 06/01/18 1,075,740 ------------ 4,051,092 ------------ OKLAHOMA 1.9% 1,000 Midwest City, OK Muni Auth (MBIA Insd).......... 5.250 09/01/19 1,086,080 1,000 Oklahoma City, OK Arpt Trust Jr Lien 28th Ser (MBIA Insd)..................................... 4.000 07/01/04 1,020,720 40 Shawnee, OK Hosp Auth Hosp Rev Midamerica Hlthcare Inc Rfdg............................... 5.750 10/01/03 40,002 ------------ 2,146,802 ------------
See Notes to Financial Statements 11 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE OREGON 3.4% $2,575 Emerald Peoples Util Dist OR Ser A Rfdg (FSA Insd)........................................... 5.250% 11/01/16 $ 2,900,274 1,000 Port Morrow, OR Pollutn Ctl Portland Gen A Rfdg............................................ 5.200 05/01/33 1,013,730 ------------ 3,914,004 ------------ PENNSYLVANIA 5.2% 900 Philadelphia, PA Gas Wks Rev Third Ser (FSA Insd)........................................... 5.000 08/01/10 1,011,591 2,000 Philadelphia, PA Redev Auth Rev Neighborhood Trans A (FGIC Insd)............................. 5.500 04/15/16 2,252,980 2,470 York Cnty, PA Sch Technology (FGIC Insd)........ 5.375 02/15/16 2,773,267 ------------ 6,037,838 ------------ RHODE ISLAND 1.6% 1,835 Rhode Island St Cons Cap Dev Ln Ser A........... 5.000 08/01/12 1,877,297 ------------ SOUTH CAROLINA 2.0% 1,020 Berkeley Cnty, SC Impt & Rfdg (FSA Insd)........ 5.000 09/01/17 1,108,475 1,065 Lexington, SC Wtr & Swr Rev & Impt Comb Ser A Rfdg (MBIA Insd)................................ 5.000 04/01/14 1,158,432 ------------ 2,266,907 ------------ TENNESSEE 3.2% 1,045 Clarksville, TN Wtr Swr & Gas Rfdg (FSA Insd)... 5.000 02/01/13 1,164,736 1,150 Franklin, TN Spl Sch Dist Cap Apprec (FSA Insd)........................................... * 06/01/15 710,459 1,505 Gatlinburg, TN Pub Bldg Auth Rfdg (AMBAC Insd)........................................... 5.750 12/01/11 1,768,616 ------------ 3,643,811 ------------ TEXAS 2.9% 1,000 Austin, TX Util Sys Rev Comb Ser A Rfdg (MBIA Insd)........................................... 5.375 11/15/05 1,023,380 500 Brazos River Auth, TX Pollutn Ctl Rev Elec Proj Ser C Rfdg (Variable Rate Coupon)............... 5.750 05/01/36 520,620 1,450 Mesquite, TX Indpt Sch Dist Ser A............... 4.250 08/15/11 1,451,073 300 San Antonio, TX Hsg Fin Corp Multi-Family Hsg Rev Beverly Oaks Arpt Proj Ser A (a)............ 7.500 02/01/10 304,167 ------------ 3,299,240 ------------ UTAH 0.1% 165 Utah St Hsg Fin Agy Single Family Mtg Mezz Ser A (FHA/VA Gtd).................................... 7.150 07/01/12 168,120 ------------ VIRGINIA 2.6% 1,190 James City Svc Auth VA Wtr & Swr................ 5.125 01/15/16 1,320,495 1,125 James City Svc Auth VA Wtr & Swr................ 5.125 01/15/17 1,239,165 500 Pittsylvania Cnty, VA Indl Dev Auth Rev Exempt Fac Ser A (a)................................... 7.450 01/01/09 494,465 ------------ 3,054,125 ------------ WASHINGTON 1.5% 1,500 Clark Cnty, WA Sch Dist 114 Evergreen (FSA Insd)........................................... 5.500 12/01/15 1,698,015 ------------
12 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE WEST VIRGINIA 1.3% $1,500 West Virginia St Hosp Fin Auth (MBIA Insd)...... 6.100% 01/01/18 $ 1,518,030 ------------ PUERTO RICO 1.6% 1,700 Puerto Rico Comwlth Ser C Rfdg (MBIA Insd)...... 5.000 07/01/28 1,900,600 ------------ TOTAL LONG-TERM INVESTMENTS 98.2% (Cost $109,858,398)....................................................... 113,439,480 SHORT-TERM INVESTMENT 1.4% (Cost $1,600,000)......................................................... 1,600,000 ------------ TOTAL INVESTMENTS 99.6% (Cost $111,458,398)....................................................... 115,039,480 OTHER ASSETS IN EXCESS OF LIABILITIES 0.4%................................. 436,098 ------------ NET ASSETS 100.0%.......................................................... $115,475,578 ============
* Zero coupon bond (a) These securities are restricted and may be resold only in transactions exempt from registration which are normally those transactions with qualified institutional buyers. (b) All or a portion of these securities have been physically segregated in connection with open futures contracts. (c) Securities purchased on a when-issued or delayed delivery basis. (d) 144A securities are those which are exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may only be resold in transactions exempt from registration which are normally those transactions with qualified institutional buyers. (e) Non-income producing security. (f) This borrower has filed for protection in federal bankruptcy court. (g) Security is in default. ACA--American Capital Access AMBAC--AMBAC Indemnity Corp. Connie Lee--Connie Lee Insurance Co. FGIC--Financial Guaranty Insurance Co. FHA/VA--Federal Housing Administration/Department of Veterans Affairs FNMA--Federal National Mortgage Association FSA--Financial Security Assurance Inc. MBIA--Municipal Bond Investors Assurance Corp. See Notes to Financial Statements 13 FINANCIAL STATEMENTS Statement of Assets and Liabilities September 30, 2003 ASSETS: Total Investments (Cost $111,458,398)....................... $115,039,480 Receivables: Interest.................................................. 1,619,137 Investments Sold.......................................... 1,416,133 Fund Shares Sold.......................................... 266,367 Other....................................................... 106,301 ------------ Total Assets............................................ 118,447,418 ------------ LIABILITIES: Payables: Investments Purchased..................................... 1,168,794 Custodian Bank............................................ 1,109,939 Fund Shares Repurchased................................... 144,075 Variation Margin on Futures............................... 137,219 Income Distributions...................................... 85,086 Distributor and Affiliates................................ 81,831 Investment Advisory Fee................................... 37,240 Trustees' Deferred Compensation and Retirement Plans........ 142,881 Accrued Expenses............................................ 64,775 ------------ Total Liabilities....................................... 2,971,840 ------------ NET ASSETS.................................................. $115,475,578 ============ NET ASSETS CONSIST OF: Capital (Par value of $.01 per share with an unlimited number of shares authorized).............................. $111,503,739 Net Unrealized Appreciation................................. 2,900,450 Accumulated Net Realized Gain............................... 1,061,974 Accumulated Undistributed Net Investment Income............. 9,415 ------------ NET ASSETS.................................................. $115,475,578 ============ MAXIMUM OFFERING PRICE PER SHARE: Class A Shares: Net asset value and redemption price per share (Based on net assets of $70,140,529 and 6,519,378 shares of beneficial interest issued and outstanding)............. $ 10.76 Maximum sales charge (3.25%* of offering price)......... .36 ------------ Maximum offering price to public........................ $ 11.12 ============ Class B Shares: Net asset value and offering price per share (Based on net assets of $23,901,926 and 2,216,931 shares of beneficial interest issued and outstanding)............. $ 10.78 ============ Class C Shares: Net asset value and offering price per share (Based on net assets of $21,433,123 and 1,997,043 shares of beneficial interest issued and outstanding)............. $ 10.73 ============
* On sales of $25,000 or more, the sales charge will be reduced. 14 See Notes to Financial Statements Statement of Operations For the Year Ended September 30, 2003 INVESTMENT INCOME: Interest.................................................... $ 4,567,462 ----------- EXPENSES: Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $154,236, $221,688 and $185,973, respectively)............................................. 561,897 Investment Advisory Fee..................................... 512,303 Accounting.................................................. 59,824 Shareholder Services........................................ 57,424 Legal....................................................... 27,472 Trustees' Fees and Related Expenses......................... 18,062 Custody..................................................... 9,216 Other....................................................... 122,603 ----------- Total Expenses.......................................... 1,368,801 Investment Advisory Fee Reduction....................... 199,084 Less Credits Earned on Cash Balances.................... 916 ----------- Net Expenses............................................ 1,168,801 ----------- NET INVESTMENT INCOME....................................... $ 3,398,661 =========== REALIZED AND UNREALIZED GAIN/LOSS: Realized Gain/Loss: Investments............................................... $ 695,283 Futures................................................... 382,770 ----------- Net Realized Gain........................................... 1,078,053 ----------- Unrealized Appreciation/Depreciation: Beginning of the Period................................... 4,044,161 End of the Period: Investments............................................. 3,581,082 Futures................................................. (680,632) ----------- 2,900,450 ----------- Net Unrealized Depreciation During the Period............... (1,143,711) ----------- NET REALIZED AND UNREALIZED LOSS............................ $ (65,658) =========== NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 3,333,003 ===========
See Notes to Financial Statements 15 Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 ---------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income.............................. $ 3,398,661 $ 2,488,001 Net Realized Gain.................................. 1,078,053 536,628 Net Unrealized Appreciation/Depreciation During the Period........................................... (1,143,711) 2,502,287 ------------ ------------ Change in Net Assets from Operations............... 3,333,003 5,526,916 ------------ ------------ Distributions from Net Investment Income: Class A Shares................................... (2,298,933) (1,693,416) Class B Shares................................... (666,166) (453,963) Class C Shares................................... (558,258) (301,977) ------------ ------------ (3,523,357) (2,449,356) ------------ ------------ Distributions from Net Realized Gain: Class A Shares................................... (246,892) -0- Class B Shares................................... (92,417) -0- Class C Shares................................... (78,490) -0- ------------ ------------ (417,799) -0- ------------ ------------ Total Distributions................................ (3,941,156) (2,449,356) ------------ ------------ NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....................................... (608,153) 3,077,560 ------------ ------------ FROM CAPITAL TRANSACTIONS: Proceeds from Shares Sold.......................... 65,586,619 53,848,977 Net Asset Value of Shares Issued Through Dividend Reinvestment..................................... 2,827,927 1,662,317 Cost of Shares Repurchased......................... (36,079,223) (23,625,199) ------------ ------------ NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS..................................... 32,335,323 31,886,095 ------------ ------------ TOTAL INCREASE IN NET ASSETS....................... 31,727,170 34,963,655 NET ASSETS: Beginning of the Period............................ 83,748,408 48,784,753 ------------ ------------ End of the Period (Including accumulated undistributed net investment income of $9,415 and $142,494, respectively).......................... $115,475,578 $ 83,748,408 ============ ============
16 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS A SHARES ------------------------------------------------ 2003 2002 (b) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $10.86 $10.42 $10.14 $10.22 $10.73 ------ ------ ------ ------ ------ Net Investment Income..................... .38 .42 .49 .46 .47 Net Realized and Unrealized Gain/Loss..... (.03) .44 .23 (.05) (.48) ------ ------ ------ ------ ------ Total from Investment Operations............ .35 .86 .72 .41 (.01) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .40 .42 .43 .49 .50 Distributions from Net Realized Gain...... .05 -0- .01 -0- -0- ------ ------ ------ ------ ------ Total Distributions......................... .45 .42 .44 .49 .50 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $10.76 $10.86 $10.42 $10.14 $10.22 ====== ====== ====== ====== ====== Total Return* (a)........................... 3.33% 8.48% 7.19% 4.13% -0.10% Net Assets at End of the Period (In millions)................................. $ 70.1 $ 53.5 $ 29.1 $ 26.6 $ 29.5 Ratio of Expenses to Average Net Assets*.... .84% .85% .77% 1.44% 1.28% Ratio of Net Investment Income to Average Net Assets*............................... 3.55% 4.08% 4.78% 4.65% 4.49% Portfolio Turnover.......................... 35% 75% 106% 85% 65% * If certain expenses had not been voluntarily assumed by Van Kampen, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets................................. 1.04% 1.14% 1.23% N/A N/A Ratio of Net Investment Income to Average Net Assets............................. 3.35% 3.79% 4.32% N/A N/A
(a) Assumes reinvestment of all distributions for the period and does not include payment of the maximum sales charge of 3.25% or contingent deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be imposed on certain redemptions made within one year of purchase. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of up to .25% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (b) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets by .01%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. N/A=Not Applicable See Notes to Financial Statements 17 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS B SHARES ------------------------------------------------ 2003 2002 (b) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $10.84 $10.41 $10.13 $10.20 $10.71 ------ ------ ------ ------ ------ Net Investment Income..................... .32 .35 .42 .38 .39 Net Realized and Unrealized Gain/Loss..... (.01) .42 .22 (.04) (.47) ------ ------ ------ ------ ------ Total from Investment Operations............ .31 .77 .64 .34 (.08) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .32 .34 .35 .41 .43 Distributions from Net Realized Gain...... .05 -0- .01 -0- -0- ------ ------ ------ ------ ------ Total Distributions......................... .37 .34 .36 .41 .43 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $10.78 $10.84 $10.41 $10.13 $10.20 ====== ====== ====== ====== ====== Total Return* (a)........................... 2.96%(c) 7.61% 6.42% 3.46% -0.81% Net Assets at End of the Period (In millions)................................. $ 23.9 $ 17.1 $ 11.1 $ 8.6 $ 10.4 Ratio of Expenses to Average Net Assets*.... 1.59% 1.60% 1.52% 2.20% 1.97% Ratio of Net Investment Income to Average Net Assets*............................... 3.08%(c) 3.34% 4.02% 3.90% 3.80% Portfolio Turnover.......................... 35% 75% 106% 85% 65% * If certain expenses had not been voluntarily assumed by Van Kampen, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets................................. 1.79% 1.89% 1.98% N/A N/A Ratio of Net Investment Income to Average Net Assets............................. 2.88%(c) 3.05% 3.56% N/A N/A
(a) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 3%, charged on certain redemptions made within one year of purchase and declining to 0% after the fourth year. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions of the redemption of Fund shares. (b) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets by .01%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (c) Certain non-recurring payments were made to Class B Shares, resulting in an increase to the Ratio of Net Investment Income to Average Net Assets and Total Return of .28%. N/A=Not Applicable 18 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS C SHARES ------------------------------------------------ 2003 2002 (b) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $10.82 $10.40 $10.12 $10.20 $10.71 ------ ------ ------ ------ ------ Net Investment Income..................... .30 .34 .42 .39 .40 Net Realized and Unrealized Gain/Loss..... (.02) .42 .22 (.06) (.48) ------ ------ ------ ------ ------ Total from Investment Operations............ .28 .76 .64 .33 (.08) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .32 .34 .35 .41 .43 Distributions from Net Realized Gain...... .05 -0- .01 -0- -0- ------ ------ ------ ------ ------ Total Distributions......................... .37 .34 .36 .41 .43 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $10.73 $10.82 $10.40 $10.12 $10.20 ====== ====== ====== ====== ====== Total Return* (a)........................... 2.69%(c) 7.52% 6.42% 3.36% -0.81% Net Assets at End of the Period (In millions)................................. $ 21.4 $ 13.2 $ 8.6 $ 6.4 $ 5.6 Ratio of Expenses to Average Net Assets*.... 1.59% 1.60% 1.52% 2.20% 2.02% Ratio of Net Investment Income to Average Net Assets*............................... 2.84%(c) 3.33% 4.02% 3.90% 3.75% Portfolio Turnover.......................... 35% 75% 106% 85% 65% * If certain expenses had not been voluntarily assumed by Van Kampen, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets................................. 1.79% 1.89% 1.98% N/A N/A Ratio of Net Investment Income to Average Net Assets............................. 2.64%(c) 3.04% 3.56% N/A N/A
(a) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 1%, charged on certain redemptions made within one year of purchase. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of up to 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (b) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets by .01%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (c) Certain non-recurring payments were made to Class C Shares, resulting in an increase to the Ratio of Net Investment Income to Average Net Assets and Total Return of .06%. N/A=Not Applicable See Notes to Financial Statements 19 NOTES TO FINANCIAL STATEMENTS September 30, 2003 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Intermediate Term Municipal Income Fund (the "Fund") is organized as a series of the Van Kampen Tax Free Trust (the "Trust"), a Delaware business trust, and is registered as a diversified, open-end management investment company under the Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to provide investors with a high level of current income exempt from federal income tax, consistent with preservation of capital. The Fund commenced investment operations on May 28, 1993 with two classes of common shares, Class A and Class B shares. The distribution of the Fund's Class C shares commenced on October 19, 1993. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION Municipal bonds are valued by independent pricing services or dealers using the mean of the bid and asked prices or, in the absence of market quotations, at fair value based upon yield data relating to municipal bonds with similar characteristics and general market conditions. Securities which are not valued by independent pricing services are valued at fair value using procedures established in good faith by the Board of Trustees. Short-term securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. The Fund may purchase and sell securities on a "when-issued" or "delayed delivery" basis, with settlement to occur at a later date. The value of the security so purchased is subject to market fluctuations during this period. The Fund will segregate assets with the custodian having an aggregate value at least equal to the amount of the when-issued or delayed delivery purchase commitments until payment is made. At September 30, 2003, the Fund had $1,168,794 of when-issued and delayed delivery purchase commitments. C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond premium is amortized and discount is accreted over the expected life of each applicable security. Income and expenses of the Fund are allocated on a pro rata basis to each class of shares, except for distribution and service fees and transfer agency costs which are unique to each class of shares. D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute 20 NOTES TO FINANCIAL STATEMENTS September 30, 2003 substantially all of its taxable income, if any, to its shareholders. Therefore, no provision for federal income taxes is required. At September 30, 2003, the cost and related gross unrealized appreciation and depreciation are as follows: Cost of investments for tax purposes........................ $111,446,591 ------------ Gross tax unrealized appreciation........................... $ 4,199,580 Gross tax unrealized depreciation........................... (606,691) ------------ Net tax unrealized appreciation on investments.............. $ 3,592,889 ============
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly dividends from net investment income. Net realized gains, if any, are distributed annually. Distributions from net realized gains for book purposes may include short term capital gains and a portion of futures gains, which are included in ordinary income for tax purposes. The tax character of distributions paid during the years ended September 30, 2003 and 2002 was as follows:
2003 2002 Distributions paid from: Ordinary Income........................................... $318,534 $2,452 Long Term Capital Gain.................................... 113,705 -0-
Due to inherent differences in the recognition of income, expenses, and realized gains/ losses under accounting principles generally accepted in the United States of America and federal income tax purposes, permanent differences between book and tax basis reporting for the 2003 fiscal year have been identified and appropriately reclassified on the Statement of Assets and Liabilities. For the tax year ended September 30, 2003, a permanent book and tax difference relating to the Fund's investment in other regulated investment companies totaling $9,380 was reclassified from accumulated undistributed net investment income to accumulated net realized gain. Also, a permanent difference of $17,763 relating to book to tax amortization differences were reclassified from accumulated undistributed net investment income to accumulated net realized gain. As of September 30, 2003, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income............................... $213,183 Undistributed long-term capital gain........................ $167,866
Net realized gains or losses may differ for financial and tax reporting purposes primarily as a result of losses recognized for tax purposes for open futures contracts at September 30, 2003. 21 NOTES TO FINANCIAL STATEMENTS September 30, 2003 F. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's custody fee was reduced by $916 as a result of credits earned on cash balances. 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE DAILY NET ASSETS % PER ANNUM First $500 million.......................................... .50% Over $500 million........................................... .45%
For the year ended September 30, 2003, the Adviser waived $199,084 of its investment advisory fee. This waiver is voluntary in nature and can be discontinued at the Adviser's discretion. For the year ended September 30, 2003, the Fund recognized expenses of approximately $3,700 representing legal services provided by Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the Fund is an affiliated person. Under separate Accounting Services and Legal Services agreements, the Adviser provides accounting and legal services to the Fund. The Adviser allocates the cost of such services to each fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $43,500 representing Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen") cost of providing accounting and legal services to the Fund, which are reported as part of "Accounting" and "Legal" expenses, respectively, in the Statement of Operations. Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser, serves as the shareholder servicing agent for the Fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $44,800, representing transfer agency fees paid to VKIS. Transfer agency fees are determined through negotiations with the Fund's Board of Trustees. Certain officers and trustees of the Fund are also officers and directors of Van Kampen. The Fund does not compensate its officers or trustees who are officers of Van Kampen. The Fund provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Fund, and to the extent permitted by the 1940 Act, as amended, may be invested in the common shares of those funds selected by the trustees. Investments in such funds of approximately $91,000 are included in "Other" assets on the Statement of Assets and Liabilities at September 30, 2003. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. Benefits under the retirement plan are payable upon retirement for a ten-year period and are based upon each trustee's years of service to the Fund. The maximum annual benefit per trustee under the plan is $2,500. 22 NOTES TO FINANCIAL STATEMENTS September 30, 2003 3. CAPITAL TRANSACTIONS At September 30, 2003, capital aggregated $68,210,867, $22,672,428 and $20,620,444 for Classes A, B and C, respectively. For the year ended September 30, 2003, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 3,510,100 $ 37,536,509 Class B................................................... 1,307,031 14,035,027 Class C................................................... 1,310,574 14,015,083 ---------- ------------ Total Sales................................................. 6,127,705 $ 65,586,619 ========== ============ Dividend Reinvestment: Class A................................................... 184,280 $ 1,971,012 Class B................................................... 41,458 444,020 Class C................................................... 38,700 412,895 ---------- ------------ Total Dividend Reinvestment................................. 264,438 $ 2,827,927 ========== ============ Repurchases: Class A................................................... (2,098,791) $(22,416,093) Class B................................................... (707,557) (7,574,011) Class C................................................... (572,938) (6,089,119) ---------- ------------ Total Repurchases........................................... (3,379,286) $(36,079,223) ========== ============
23 NOTES TO FINANCIAL STATEMENTS September 30, 2003 At September 30, 2002, capital aggregated $51,119,439, $15,767,392 and $12,281,585 for Classes A, B and C, respectively. For the year ended September 30, 2002, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 3,495,876 $ 36,550,416 Class B................................................... 861,798 9,041,768 Class C................................................... 787,431 8,256,793 ---------- ------------ Total Sales................................................. 5,145,105 $ 53,848,977 ========== ============ Dividend Reinvestment: Class A................................................... 118,435 $ 1,241,803 Class B................................................... 23,048 241,192 Class C................................................... 17,157 179,322 ---------- ------------ Total Dividend Reinvestment................................. 158,640 $ 1,662,317 ========== ============ Repurchases: Class A................................................... (1,482,136) $(15,423,840) Class B................................................... (379,038) (3,970,421) Class C................................................... (406,444) (4,230,938) ---------- ------------ Total Repurchases........................................... (2,267,618) $(23,625,199) ========== ============
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment plan Class B Shares received thereon, automatically convert to Class A Shares eight years after the end of the calendar month in which the shares were purchased. Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan Class B Shares received thereon, automatically convert to Class A Shares six years after the end of the calendar month in which the shares were purchased. For the years ended September 30, 2003 and 2002, 49,940 and 27,888 Class B Shares converted to Class A Shares and are shown in the above tables as sales of Class A Shares and repurchases of Class B Shares. Class C Shares purchased before January 1, 1997, and any dividend reinvestment plan Class C Shares received thereon, automatically convert to Class A Shares ten years after the end of the calendar month in which such shares were purchased. Class C Shares purchased on or after January 1, 1997 do not possess a conversion feature. For the years ended September 30, 2003 and 2002, no Class C Shares converted to Class A Shares. Class B and C Shares are offered without a front end sales charge, but are subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and Class C Shares will be 24 NOTES TO FINANCIAL STATEMENTS September 30, 2003 imposed on most redemptions made within four years of the purchase for Class B Shares and one year of the purchase for Class C Shares as detailed in the following schedule.
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLAR AMOUNT SUBJECT TO CHARGE -------------------------- YEAR OF REDEMPTION CLASS B CLASS C First....................................................... 3.00% 1.00% Second...................................................... 2.50% None Third....................................................... 2.00% None Fourth...................................................... 1.00% None Fifth and Thereafter........................................ None None
For the year ended September 30, 2003, Van Kampen, as Distributor for the Fund, received commissions on sales of the Fund's Class A Shares of approximately $25,300 and CDSC on redeemed shares of approximately $82,300. Sales charges do not represent expenses of the Fund. 4. INVESTMENT TRANSACTIONS During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were $70,773,818 and $34,038,138 respectively. 5. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument in very general terms refers to a security whose value is "derived" from the value of an underlying asset, reference rate or index. The Fund has a variety of reasons to use derivative instruments, such as to attempt to protect the Fund against possible changes in the market value of its portfolio or generate potential gain. All of the Fund's portfolio holdings, including derivative instruments, are marked to market each day with the change in value reflected in the unrealized appreciation/depreciation. Upon disposition, a realized gain or loss is recognized accordingly, except when taking delivery of a security underlying a futures contract. In these instances, the recognition of gain or loss is postponed until the disposal of the security underlying the futures contract. A. FUTURES CONTRACTS During the period, the Fund invested in futures contracts, a type of derivative. A futures contract is an agreement involving the delivery of a particular asset on a specified future date at an agreed upon price. The Fund generally invests in exchange traded futures contracts on U.S. Treasury Bonds and typically closes the contract prior to delivery date. These contracts are generally used to manage the Fund's effective maturity and duration. Upon entering into futures contracts, the Fund maintains, an amount of cash or liquid securities with a value equal to a percentage of the contract amount with either a 25 NOTES TO FINANCIAL STATEMENTS September 30, 2003 future commission merchant pursuant to rules and regulations promulgated in the 1940 Act, as amended, or with its custodian in an account in the broker's name. This amount is known as initial margin. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). The risk of loss associated with a futures contract is in excess of the variation margin reflected on the Statement of Assets and Liabilities. Transactions in futures contracts for the year ended September 30, 2003, were as follows:
CONTRACTS Outstanding at September 30, 2002........................... -0- Futures Opened.............................................. 575 Futures Closed.............................................. (413) ---- Outstanding at September 30, 2003........................... 162 ====
The futures contracts outstanding as of September 30, 2003, and the description and unrealized appreciation/depreciation were as follows:
UNREALIZED CONTRACTS DEPRECIATION SHORT CONTRACTS: U.S. Treasury Notes 5 year futures, December 2003........... 131 $(505,157) (Current Notional Value of $113,469 per contract) U.S. Treasury Notes 10 year futures, December 2003.......... 31 (175,475) (Current Notional Value of $114,625 per contract)......... --- --------- 162 $(680,632) === =========
6. DISTRIBUTION AND SERVICE PLANS With respect to its Class A Shares, Class B Shares, and Class C Shares, the Fund and its shareholders have adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act, as amended, and a service plan (collectively, the "Plans"). The Plans govern payments for: the distribution of the Fund's Class A Shares, Class B Shares and Class C Shares; the provision of ongoing shareholder services with respect to such classes of shares; and the maintenance of shareholder accounts with respect to such classes of shares. Annual fees under the Plans of up to .25% of Class A average daily net assets and 1.00% each of Class B and Class C average daily net assets are accrued daily. The amount of distribution expenses incurred by Van Kampen and not yet reimbursed ("unreimbursed receivable") was approximately $104,500, and $39,200, for Class B and Class C shares, respectively. These amounts may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed receivable has been fully recovered, any excess 12b-1 fees will be refunded to the Fund on a quarterly basis. 26 NOTES TO FINANCIAL STATEMENTS September 30, 2003 Included in these fees for the year ended September 30, 2003, are payments retained by Van Kampen of approximately $284,700 and payments made to Morgan Stanley DW Inc., an affiliate of the Adviser, of approximately $15,500. 27 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees of Van Kampen Intermediate Term Municipal Income Fund: We have audited the accompanying statement of assets and liabilities of the Van Kampen Intermediate Term Municipal Income Fund (the "Fund"), including the portfolio of investments, as of September 30, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the year ended September 30, 1999 were audited by other auditors whose report dated November 9, 1999 expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and financial highlights. Our procedures included confirmation of securities owned as of September 30, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. 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 the Van Kampen Intermediate Term Municipal Income Fund at September 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended in conformity with accounting principles generally accepted in the United States. -s- Ernst & Young LLP Chicago, Illinois November 4, 2003 28 BOARD OF TRUSTEES AND IMPORTANT ADDRESSES VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND BOARD OF TRUSTEES DAVID C. ARCH J. MILES BRANAGAN JERRY D. CHOATE ROD DAMMEYER LINDA HUTTON HEAGY R. CRAIG KENNEDY HOWARD J KERR MITCHELL M. MERIN* JACK E. NELSON RICHARD F. POWERS, III* HUGO F. SONNENSCHEIN WAYNE W. WHALEN* - Chairman SUZANNE H. WOOLSEY INVESTMENT ADVISER VAN KAMPEN INVESTMENT ADVISORY CORP. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 DISTRIBUTOR VAN KAMPEN FUNDS INC. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 SHAREHOLDER SERVICING AGENT VAN KAMPEN INVESTOR SERVICES INC. P.O. Box 947 Jersey City, New Jersey 07303-0947 CUSTODIAN STATE STREET BANK AND TRUST COMPANY 225 Franklin Street P.O. Box 1713 Boston, Massachusetts 02110 LEGAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606 INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, Illinois 60606 For federal income tax purposes, the following information is furnished with respect to the distributions paid by the Fund during its taxable year ended September 30, 2003. The Fund designated 99.6% of the income distributions as a tax-exempt income distribution. The Fund designated and paid $113,705 as a long-term capital gain distribution. In January, the Fund provides tax information to shareholders for the preceding calendar year. * "Interested persons" of the Fund, as defined in the Investment Company Act of 1940, as amended. 29 TRUSTEES AND OFFICERS The business and affairs of the Fund are managed under the direction of the Fund's Board of Trustees and the Fund's officers appointed by the Board of Trustees. The tables below list the trustees and executive officers of the Fund and their principal occupations during the last five years, other directorships held by trustees and their affiliations, if any, with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are referred to herein collectively as the "Advisers." The term "Fund Complex" includes each of the investment companies advised by the Advisers or their affiliates as of the date of this Statement of Additional Information. Trustees serve until reaching their retirement age or until their successors are duly elected and qualified. Officers are annually elected by the trustees. INDEPENDENT TRUSTEES
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing Blistex Inc. since 2003 Executive Officer of General Partner of funds 1800 Swift Drive Blistex Inc., a consumer in the Fund Complex. Oak Brook, IL 60523 health care products manufacturer. Former Director of the World Presidents Organization-Chicago Chapter. Director of the Heartland Alliance, a nonprofit organization serving human needs based in Chicago. J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing 1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex. Chief Executive Officer and President, MDT Corporation (now known as Getinge/Castle, Inc., a subsidiary of Getinge Industrier AB), a company which develops, manufactures, markets and services medical and scientific equipment.
30
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing 33971 Selva Road since 1999 Chairman and Chief General Partner of funds Suite 130 Executive Officer of the in the Fund Complex. Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a ("Allstate") and Allstate biotechnological company, Insurance Company. Prior and Director of Valero to January 1995, Energy Corporation, an President and Chief independent refining Executive Officer of company. Allstate. Prior to August 1994, various management positions at Allstate. Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing CAC, llc. since 2003 private company offering General Partner of funds 4350 LaJolla Village Drive capital investment and in the Fund Complex. Suite 980 management advisory Director of TeleTech San Diego, CA 92122-6223 services. Prior to July Holdings Inc., 2000, Managing Partner of Stericycle, Inc., Equity Group Corporate TheraSense, Inc., GATX Investment (EGI), a Corporation, Arris Group, company that makes Inc. and Trustee of the private investments in University of Chicago other companies. Hospitals and Health Systems. Prior to May 2002, Director of Peregrine Systems Inc. Prior to February 2001, Vice Chairman and Director of Anixter International, Inc. and IMC Global Inc. Prior to July 2000, Director of Allied Riser Communications Corp., Matria Healthcare Inc., Transmedia Networks, Inc., CNA Surety, Corp. and Grupo Azcarero Mexico (GAM). Prior to April 1999, Director of Metal Management, Inc.
31
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds 233 South Wacker Drive executive search firm. in the Fund Complex. Suite 7000 Trustee on the University Chicago, IL 60606 of Chicago Hospitals Board, Vice Chair of the Board of the YMCA of Metropolitan Chicago and a member of the Women's Board of the University of Chicago. Prior to 1997, Partner of Ray & Berndtson, Inc., an executive recruiting firm. Prior to 1996, Trustee of The International House Board, a fellowship and housing organization for international graduate students. Prior to 1995, Executive Vice President of ABN AMRO, N.A., a bank holding company. Prior to 1992, Executive Vice President of La Salle National Bank. R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing 11 DuPont Circle, N.W. since 1993 the German Marshall Fund General Partner of funds Washington, D.C. 20016 of the United States, an in the Fund Complex. independent U.S. foundation created to deepen understanding, promote collaboration and stimulate exchanges of practical experience between Americans and Europeans. Formerly, advisor to the Dennis Trading Group Inc., a managed futures and option company that invests money for individuals and institutions. Prior to 1992, President and Chief Executive Officer, Director and member of the Investment Committee of the Joyce Foundation, a private foundation. Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing 736 North Western Avenue since 2003 and Chief Executive General Partner of funds P.O. Box 317 Officer of Pocklington in the Fund Complex. Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake investment holding Forest Bank & Trust. company. Director of the Marrow Foundation.
32
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing 423 Country Club Drive since 1993 Investment Planning General Partner of funds Winter Park, FL 32789 Services, Inc., a in the Fund Complex. financial planning company and registered investment adviser in the State of Florida. President of Nelson Ivest Brokerage Services Inc., a member of the NASD, Securities Investors Protection Corp. and the Municipal Securities Rulemaking Board. President of Nelson Sales and Services Corporation, a marketing and services company to support affiliated companies. Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing 1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds Chicago, IL 60637 University of Chicago and in the Fund Complex. the Adam Smith Director of Winston Distinguished Service Laboratories, Inc. Professor in the Department of Economics at the University of Chicago. Prior to July 2000, President of the University of Chicago. Trustee of the University of Rochester and a member of its investment committee. Member of the National Academy of Sciences, the American Philosophical Society and a fellow of the American Academy of Arts and Sciences. Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing 2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds Room 285 Academy of in the Fund Complex. Washington, D.C. 20418 Sciences/National Director of Neurogen Research Council, an Corporation, a independent, federally pharmaceutical company, chartered policy since January 1998. institution, since 2001 and previously Chief Operating Officer from 1993 to 2001. Director of the Institute for Defense Analyses, a federally funded research and development center, Director of the German Marshall Fund of the United States, and Trustee of Colorado College. Prior to 1993, Executive Director of the Commission on Behavioral and Social Sciences and Education at the National Academy of Sciences/National Research Council. From 1980 through 1989, Partner of Coopers & Lybrand.
33 INTERESTED TRUSTEES*
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing 1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex. Officer Complex. Chairman, President, Chief Executive Officer and Director of the Advisers and VK Advisors Inc. since December 2002. Chairman, President and Chief Executive Officer of Van Kampen Investments since December 2002. Director of Van Kampen Investments since December 1999. Chairman and Director of Van Kampen Funds Inc. since December 2002. President, Director and Chief Operating Officer of Morgan Stanley Investment Management since December 1998. President and Director since April 1997 and Chief Executive Officer since June 1998 of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chairman, Chief Executive Officer and Director of Morgan Stanley Distributors Inc. since June 1998. Chairman since June 1998, and Director since January 1998 of Morgan Stanley Trust. Director of various Morgan Stanley subsidiaries. President of the Morgan Stanley Funds since May 1999. Previously Chief Executive Officer of Van Kampen Funds Inc. from December 2002 to July 2003, Chief Strategic Officer of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. and Executive Vice President of Morgan Stanley Distributors Inc. from April 1997 to June 1998. Chief Executive Officer from September 2002 to April 2003 and Vice President from May 1997 to April 1999 of the Morgan Stanley Funds.
34
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing 1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds P.O. Box 5555 December 2002, Chairman, in the Fund Complex. Oakbrook Terrace, IL 60181 Director, President, Chief Executive Officer and Managing Director of Van Kampen Investments and its investment advisory, distribution and other subsidiaries. Prior to December 2002, President and Chief Executive Officer of funds in the Fund Complex. Prior to May 1998, Executive Vice President and Director of Marketing at Morgan Stanley and Director of Dean Witter, Discover & Co. and Dean Witter Realty. Prior to 1996, Director of Dean Witter Reynolds Inc. Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing 333 West Wacker Drive since 1993 of Skadden, Arps, Slate, General Partner of funds Chicago, IL 60606 Meagher & Flom in the Fund Complex. (Illinois), legal counsel to funds in the Fund Complex.
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of certain funds in the Fund Complex by reason of his firm currently acting as legal counsel to such funds in the Fund Complex. Messrs. Merin and Powers are interested persons of funds in the Fund Complex and the Advisers by reason of their current or former positions with Morgan Stanley or its affiliates. 35 OFFICERS
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management. 2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to 45th Floor December 2002, Chief Investment Officer of Van Kampen Houston, TX 77056 Investments and President and Chief Operations Officer of the Advisers and Van Kampen Advisors Inc. Prior to May 2002, Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Prior to May 2001, Managing Director and Chief Investment Officer of Van Kampen Investments, and Managing Director and President of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Executive Vice President and Chief Investment Officer of Van Kampen Investments, and President and Chief Operating Officer of the Advisers. Prior to April 2000, Executive Vice President and Chief Investment Officer for Equity Investments of the Advisers. Prior to October 1998, Vice President and Senior Portfolio Manager with AIM Capital Management, Inc. Prior to February 1998, Senior Vice President and Portfolio Manager of Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp. and Van Kampen American Capital Management, Inc. Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management. 1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex. New York, NY 10020 Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan 1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Managing Director and Chief Investment Officer of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc. since December 2002. John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers 1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Senior Vice President of the Advisers and Van Kampen Advisors Inc. Prior to May 2000, Senior Vice President of the investment grade taxable group for the Advisers. Prior to June 1999, Senior Vice President of the government securities bond group for Asset Management.
36
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services. 1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer Executive Officer and Managing Director of Morgan Stanley Investment Management Inc. Managing Director of Morgan Stanley. Managing Director and Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chief Executive Officer and Director of Morgan Stanley Trust. Vice President of the Morgan Stanley Funds. A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and 1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Managing Director and General Counsel-Mutual Funds of Morgan Stanley Investment Advisors, Inc. Vice President and Secretary of funds in the Fund Complex. Prior to July 2001, Managing Director, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, the Distributor, Investor Services, and certain other subsidiaries of Van Kampen Investments. Prior to December 2000, Executive Vice President, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Prior to January 1999, Vice President and Associate General Counsel to New York Life Insurance Company ("New York Life"), and prior to March 1997, Associate General Counsel of New York Life. Prior to December 1993, Assistant General Counsel of The Dreyfus Corporation. Prior to August 1991, Senior Associate, Willkie Farr & Gallagher. Prior to January 1989, Staff Attorney at the Securities and Exchange Commission, Division of Investment Management, Office of Chief Counsel. John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments, 1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President, Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund Complex. Head of Fund Accounting for Morgan Stanley Investment Management. Prior to December 2002, Executive Director of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc.
37 Van Kampen Privacy Notice The Van Kampen companies and investment products* respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain nonpublic personal information about you. This is information we collect from you on applications or other forms, and from the transactions you conduct with us, our affiliates, or third parties. We may also collect information you provide when using our Web site, and text files (also known as "cookies") may be placed on your computer to help us to recognize you and to facilitate transactions you initiate. We do not disclose any nonpublic personal information about you or any of our former customers to anyone, except as permitted by law. For instance, so that we may continue to offer you Van Kampen investment products and services that meet your investing needs, and to effect transactions that you request or authorize, we may disclose the information we collect to companies that perform services on our behalf, such as printers and mailers that assist us in the distribution of investor materials. These companies will use this information only for the services for which we hired them, and are not permitted to use or share this information for any other purpose. To protect your nonpublic personal information internally, we permit access to it only by authorized employees, and maintain physical, electronic and procedural safeguards to guard your nonpublic personal information. * Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc., Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many Van Kampen mutual funds and Van Kampen unit investment trusts. The Statement of Additional Information includes additional information about Fund trustees and is available, without charge, upon request by calling (800) 847-2424. Van Kampen Funds Inc. 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 www.vankampen.com (VAN KAMPEN INVESTMENTS LOGO) Copyright (C)2003 Van Kampen Funds Inc. All rights reserved. Member NASD/SIPC. 138, 338, 538 INF ANR 11/03 12226K03-AP-11/03 Item 1. Report to Shareholders Welcome, Shareholder In this report, you'll learn about how your investment in Van Kampen New York Tax Free Income Fund performed during the annual period. The portfolio management team will provide an overview of the market conditions and discuss some of the factors that affected investment performance during the reporting period. In addition, this report includes the fund's financial statements and a list of fund investments as of September 30, 2003. This material must be preceded or accompanied by a prospectus for the fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the fund will achieve its investment objective. The fund is subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and, therefore, the value of the fund shares may be less than what you paid for them. Accordingly, you can lose money investing in this fund. Please see the prospectus for more complete information on investment risks. Income may subject certain individuals to the federal Alternative Minimum Tax (AMT). NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Performance Summary PERFORMANCE OF A $10,000 INVESTMENT This chart compares your fund's performance to that of the Lehman Brothers Municipal Bond Index from 7/30/94 through 9/30/03. Class A shares, adjusted for sales charges. (LINE GRAPH)
VAN KAMPEN NEW YORK TAX FREE LEHMAN BROTHERS MUNICIPAL BOND INCOME FUND INDEX ---------------------------- ------------------------------ 7/94 9527.00 10000.00 9422.00 9887.29 12/94 9248.00 9746.00 9958.00 10434.60 10046.00 10685.90 10320.00 10993.20 12/95 10850.00 11447.00 10624.00 11309.20 10735.00 11395.60 11077.00 11656.80 12/96 11408.00 11953.80 11430.00 11925.20 11833.00 12335.80 12247.00 12707.80 12/97 12654.00 13052.40 12852.00 13202.70 13090.00 13403.80 13554.00 13815.10 12/98 13602.00 13898.20 13713.00 14021.50 13443.00 13773.80 13201.00 13718.90 12/99 12937.00 13612.40 13292.00 14010.20 13470.00 14221.80 13849.00 14566.00 12/00 14534.00 15202.80 14842.00 15540.20 14980.00 15641.10 15368.00 16080.40 12/01 15184.00 15982.10 15385.00 16132.80 15966.00 16723.10 16849.00 17517.30 12/02 16790.00 17517.20 16963.00 17727.80 17428.00 18185.10 9/03 17470.00 18199.30
Index data source: Bloomberg
A SHARES B SHARES C SHARES since 7/29/94 since 7/29/94 since 7/29/94 - --------------------------------------------------------------------------------------------- AVERAGE ANNUAL W/O SALES W/SALES W/O SALES W/SALES W/O SALES W/SALES TOTAL RETURNS CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES Since Inception 6.83% 6.27% 6.24% 6.24% 6.06% 6.06% 5-year 5.21 4.19 4.43 4.17 4.45 4.45 1-year 3.69 -1.22 2.93 -1.05 2.92 1.93 - --------------------------------------------------------------------------------------------- 30-Day Subsidized SEC Yield 3.71% 3.16% 3.16% 30-Day SEC Yield 3.38 2.81 2.81
Past performance is no guarantee of future results. Investment return and principal value will fluctuate, and fund shares, when redeemed, may be worth more or less than their original cost. The returns shown in this report do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. As a result of recent market activity, current performance may vary from the figures shown. For more up-to-date information, please visit vankampen.com or speak with your financial advisor. Average annual total return with sales charges includes payment of the maximum sales charge of 4.75 percent for Class A shares, a contingent deferred sales charge of 4.00 percent for Class B shares (in year one and declining to zero after year six), a contingent deferred sales charge of 1.00 percent for Class C shares in year one and combined Rule 12b-1 fees and service fees of up to 0.25 percent for Class A shares and 1.00 percent for Class B and C shares. Certain non-recurring payments were made to Class C shares, resulting in an increase to the one-year total return of 0.03 percent. The since inception return for Class B shares reflect its conversion into Class A shares seven years after purchase. See footnote 3 in the Notes to Financial Statements for additional information. Figures shown above assume reinvestment of all dividends and capital gains. The fund's adviser has waived or reimbursed fees and expenses from time to time; absent such waivers/reimbursements the fund's returns would have been lower. SEC yield is a calculation for determining the amount of portfolio income, excluding non-income items as prescribed by the SEC. The subsidized SEC yields reflect some or all of the expenses that the adviser had voluntarily waived. Yields are subject to change. Distribution rate represents the monthly annualized distributions of the fund at the end of the period and not the earnings of the fund. The Lehman Brothers Municipal Bond Index is generally representative of investment-grade, tax-exempt bonds. Index is unmanaged and does not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. 1 Fund Report FOR THE 12-MONTH PERIOD ENDED SEPTEMBER 30, 2003 Van Kampen New York Tax Free Income Fund is managed by the Adviser's Municipal team.(1) Members of the team include Dennis S. Pietrzak, Executive Director; John R. Reynoldson, Executive Director; and Timothy D. Haney, Vice President. The following discussion reflects their views on the fund's performance. Q. BEFORE YOU DISCUSS HOW THE FUND PERFORMED, PLEASE DESCRIBE THE OVERALL MARKET ENVIRONMENT. A. The economic backdrop for the 12 months ended September 30 was largely characterized by the persistent weakness of the U.S. economy. One of the most closely watched economic indicators, employment strength, was in negative territory for much of the period. Repeated comments from government and Wall Street officials suggesting that the U.S. economy might be entering a deflationary period also weighed heavily on the minds of investors. The Federal Reserve Board (the Fed) attempted to allay these fears and keep the economy moving in the right direction by cutting the Fed Funds target rate twice, for a total reduction of 0.75 percent. At the same time, ongoing budgetary and fiscal difficulties at the state and local levels contributed to ratings downgrades for many municipal bonds. The uncertain climate had a definite effect on the municipal bond market. While yields on intermediate- and long-term bonds ended the period roughly where they began, the road between those two points was decidedly bumpy. From October 2002 to mid-June 2003, municipal yields fell by roughly 80 basis points to levels not seen since the late 1960s. These plummeting yields led to a surge in issuance as municipalities moved to lock in low financing rates and, in the case of older bonds, refinancing costs. These record levels of supply met with record levels of demand as investors in search of relative investment stability poured cash into municipal bond funds. Demand for municipal bonds was also strong from so-called "cross-over" buyers--investors who traditionally favor taxable investments but were drawn to municipal bonds for their relatively attractive yields. The municipal market reversed abruptly in mid-June, when yields began to climb from their lows and investors shifted their attention to the rising equity market. Interest from cross-over investors also evaporated as the relative attractiveness of the taxable market grew. Issuance remained strong throughout this leg of the period, though it abated somewhat in the last three months. (1)Team members may change at any time without notice. 2 The New York economy faced enormous challenges during the period, with Wall Street revenues and general tax receipts across the state declining. Demand for New York debt remained strong, however, and helped support price levels in spite of these challenges. State and local municipalities were quick to respond to this demand by stepping up their issuance of new and refinanced debt. Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD? A. The fund underperformed its benchmark index. -- The fund returned 3.69 percent for the 12 months that ended September 30, 2003. Performance figures are for Class A shares, and assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. If sales charges were included, performance would be lower. Past performance is no guarantee of future results. -- The fund's benchmark, the Lehman Brothers Municipal Bond Index, returned 3.89 percent for the same period. -- The fund's monthly dividend of $0.0520 translated to a distribution rate of 3.62 percent based on the fund's maximum offering price (as of September 30, 2003, Class A shares adjusted for sales charges). See Performance Summary for additional information and index definition. Q. WHAT FACTORS HINDERED PERFORMANCE DURING THE REPORTING PERIOD? A. The fund's positions in higher-yielding paper lagged in the broader rally early in the period. While these bonds continued to produce strong income, their relatively low interest-rate sensitivity caused them to trail more rate-responsive bonds. The fund's holdings in the housing sector also dampened performance somewhat. Housing bonds in general lagged the market during the rally because of their perceived vulnerability to refinancing. TOP 5 SECTORS AS OF 9/30/03 RATING ALLOCATION AS OF 9/30/03 General Purpose 22.3% AAA/Aaa 49.6% Higher Education 19.9 AA/Aa 32.5 Transportation 8.1 A/A 11.9 Industrial Revenue 7.6 BBB/Baa 3.5 Water & Sewer 7.3 Non-Rated 2.5
Subject to change daily. All percentages are as a percentage of long-term investments. Provided for informational purposes only and should not be deemed as a recommendation to buy securities in the sectors shown above. Securities are classified by sectors that represent broad groupings of related industries. Rating allocations based upon ratings as issued by Standard and Poor's and Moody's, respectively. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. 3 Q. WHAT HELPED PERFORMANCE DURING THE REPORTING PERIOD? A. One of our key strategies during the period was to shift the portfolio's maturity profile to take advantage of compelling relative-value opportunities. Our analysis indicated that the most attractive part of the curve was in the 15- to 20-year range, where several securities with premium coupons were available. These bonds were attractive because they offered a combination of strong income and moderate interest-rate sensitivity, and were strong performers for the year. The fund also benefited from our avoidance of certain segments of the market that we felt offered weaker total-return opportunities. For example, we made a strategic decision to avoid tobacco bonds, which proved a benefit to the fund when these issues suffered from a string of highly-publicized setbacks. Q. PLEASE WALK US THROUGH HOW YOU POSITIONED THE FUND, HIGHLIGHTING KEY THEMES. A. As mentioned earlier, we actively adjusted the portfolio's maturity profile to take advantage of relative-value and income opportunities. With interest rates at historic lows for much of the period, we also moved to trim the fund's duration (a broad measure of interest-rate sensitivity) slightly in order to help protect the portfolio from any potential increase in rates. Demand among retail investors for higher-yielding, lower- and non-rated bonds grew sharply during the period. We capitalized on this demand by selling from the portfolio several of these types of securities that had met their performance targets, and we reinvested the capital elsewhere. Many of the securities we bought were also from lower-rating categories, and rapidly reached their own price targets. The portfolio remained well diversified during the period, with exposure to all major sectors of the New York market. We added selectively to the fund's holdings of new sectors such as Personal Income Tax bonds, or PITs, that allowed us to further diversify the portfolio's exposure. Q. NOW THAT YOU'VE PROVIDED AN OVERVIEW OF THE FUND, DO YOU HAVE ANY CLOSING THOUGHTS? A. The economy has lately shown clear signs of improvement, though the employment picture remains soft and the likelihood of a sustained rebound is questionable. In this environment, we believe the Fed is likely to maintain a neutral stance in the absence of signs of strong economic growth. We will continue to monitor the market closely for compelling investment opportunities. 4 ANNUAL HOUSEHOLDING NOTICE To reduce expenses, the fund attempts to eliminate duplicate mailings to the same address. The fund delivers a single copy of certain shareholder documents to investors who share an address, even if the accounts are registered under different names. The fund's prospectus and shareholder reports (including annual privacy notices) will be delivered to you in this manner indefinitely unless you instruct us otherwise. You can request multiple copies of these documents by either calling (800) 341-2911 or writing to Van Kampen Investor Services at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor Services has received your instructions, we will begin sending individual copies for each account within 30 days. PROXY VOTING POLICIES AND PROCEDURES A description of the fund's policies and procedures with respect to the voting of proxies relating to the fund's portfolio securities is available without charge, upon request, by calling 1-800-847-2424. This information is also available on the Securities and Exchange Commission's website at http://www.sec.gov. 5 BY THE NUMBERS YOUR FUND'S INVESTMENTS September 30, 2003 THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF THE REPORTING PERIOD.
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE MUNICIPAL BONDS 99.0% NEW YORK 98.1% $ 330 Bethlehem, NY Indl Dev Agy Sr Hsg Rev Van Allen Proj Ser A........................... 6.875% 06/01/39 $ 298,449 1,250 Erie Cnty, NY Indl Dev Agy Sch Fac Rev City of Buffalo Proj (FSA Insd)................. 5.750 05/01/21 1,390,787 1,250 Erie Cnty, NY Indl Dev Agy Sch Fac Rev City of Buffalo Proj (FSA Insd)................. 5.750 05/01/22 1,385,075 1,250 Hempstead Town, NY Indl Dev Adelphi Univ Civic Fac.................................. 5.750 06/01/22 1,347,562 500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev NY Institute of Technology Rfdg (Prerefunded @ 03/01/06).................................. 7.500 03/01/26 582,785 1,250 Long Island Pwr Auth, NY Elec Sys Rev Gen Ser A (AMBAC Insd)......................... 5.500 12/01/09 1,442,025 2,000 Long Island Pwr Auth, NY Elec Sys Rev Gen Ser C...................................... 5.500 09/01/19 2,139,520 1,000 Metropolitan Trans Auth NY Rev Ser A Rfdg (AMBAC Insd)............................... 5.500 11/15/19 1,113,280 1,000 Metropolitan Trans Auth NY Svc Contract Ser A Rfdg..................................... 5.125 01/01/29 1,016,850 1,000 Monroe Cnty, NY Indl Dev Agy Nazareth College Rochester Proj (MBIA Insd)......... 5.250 10/01/21 1,068,370 1,155 Monroe Cnty, NY Indl Dev Agy Saint John Fisher College Proj (a).................... 5.375 06/01/09 1,307,090 2,510 Nassau Cnty, NY Interim Fin Auth Sales Tax Secd Ser A................................. 5.750 11/15/13 2,868,403 1,000 Nassau Cnty, NY Interim Fin Auth Sales Tax Secd Ser A1 (AMBAC Insd)................... 5.375 11/15/16 1,120,150 1,500 Nassau Cnty, NY Interim Fin Auth Sales Tax Secd Ser B Rfdg (AMBAC Insd)............... 5.000 11/15/17 1,621,860 2,425 New York City Fiscal 2003 Ser I............ 5.750 03/01/15 2,695,897 1,500 New York City Hlth & Hosp Corp Rev Hlth Sys Ser A (FSA Insd)........................... 5.500 02/15/18 1,667,175 1,000 New York City Hlth & Hosp Corp Rev Hlth Sys Ser A (FSA Insd)........................... 5.500 02/15/19 1,103,940 1,000 New York City Hsg Dev Corp Ser A........... 5.500 11/01/34 1,033,810 475 New York City Indl Dev Agy Civic Fac Rev Cmnty Res Developmentally Disabled......... 7.500 08/01/26 482,942
6 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW YORK (CONTINUED) $ 500 New York City Indl Dev Agy Civic Fac Rev College of New Rochelle Proj............... 5.750% 09/01/17 $ 528,660 1,800 New York City Indl Dev Agy Civic Fac Rev New York Inst of Technology Proj (MBIA Insd)...................................... 5.250 03/01/18 1,972,872 500 New York City Indl Dev Agy Civic Fac Rev YMCA Greater NY Proj....................... 6.000 08/01/07 563,630 1,015 New York City Indl Dev Agy Fac Rev Royal Charter-NY Presbyterian (FSA Insd)......... 5.250 12/15/11 1,155,395 1,405 New York City Indl Dev Agy Fac Rev Royal Charter-NY Presbyterian (FSA Insd)......... 5.375 12/15/16 1,577,689 1,000 New York City Indl Dev Agy Spl Arpt Fac Rev Airl JFK I LLC Proj Ser A.................. 5.500 07/01/28 954,430 1,440 New York City Indl Dev Agy Spl Fac Rev Terminal One Group Assn Proj............... 6.100 01/01/09 1,475,582 500 New York City Muni Wtr Fin Ser B........... 6.000 06/15/33 588,495 825 New York City Muni Wtr Fin Ser B (Prerefunded @ 06/15/10)................... 6.000 06/15/33 993,424 2,500 New York City Ser A........................ 5.500 08/01/20 2,656,925 1,000 New York City Ser A Rfdg................... 5.250 03/15/14 1,104,030 1,000 New York City Ser A Rfdg................... 5.250 03/15/15 1,101,280 1,000 New York City Ser B (MBIA Insd)............ 5.875 08/01/15 1,163,710 1,000 New York City Ser H (FGIC Insd)............ 6.000 08/01/12 1,188,050 1,000 New York City Transitional Fin Auth Rev Future Tax Secd Ser A Rfdg (b)............. 5.500/14.000 11/01/26 1,134,240 1,500 New York City Transitional Fin Auth Rev Future Tax Secd Ser C (AMBAC Insd)......... 5.250 08/01/21 1,600,905 1,000 New York City Transitional Fin Auth Rev Future Tax Secd Ser D (MBIA Insd).......... 5.250 02/01/19 1,088,810 1,540 New York City Transitional Future Tax Secd Ser B...................................... 5.500 02/01/15 1,720,473 2,000 New York St Dorm Auth Lease Rev Court Fac Ser A...................................... 5.500 05/15/20 2,141,020 510 New York St Dorm Auth Lease Rev Insd St Judicial Inst At Pace (AMBAC Insd)......... 5.500 07/01/09 588,382 600 New York St Dorm Auth Lease Rev Insd St Judicial Inst At Pace (AMBAC Insd)......... 5.500 07/01/10 693,822 1,500 New York St Dorm Auth Lease Rev Muni Hlth Fac Impt Pg Ser 1 (FSA Insd)............... 5.500 01/15/14 1,692,060 1,000 New York St Dorm Auth Lease Rev St Univ Dorm Fac................................... 5.375 07/01/16 1,104,130 1,000 New York St Dorm Auth Rev City Univ Cons Third Ser 1 (FGIC Insd).................... 5.250 07/01/25 1,036,410 1,230 New York St Dorm Auth Rev City Univ Ser D Rfdg (FSA Insd)............................ 5.750 07/01/12 1,435,004
See Notes to Financial Statements 7 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW YORK (CONTINUED) $ 750 New York St Dorm Auth Rev City Univ Sys Cons Ser A................................. 5.625% 07/01/16 $ 863,865 1,000 New York St Dorm Auth Rev City Univ Sys Cons Ser B................................. 6.000 07/01/14 1,177,730 175 New York St Dorm Auth Rev City Univ Third Ser 2...................................... 6.000 07/01/05 188,997 425 New York St Dorm Auth Rev City Univ Third Ser 2 (Escrowed to Maturity)............... 6.000 07/01/05 461,163 1,455 New York St Dorm Auth Rev Insd NY Sarc Inc Ser A (FSA Insd)........................... 5.000 07/01/11 1,627,665 1,055 New York St Dorm Auth Rev Insd NY St Rehab Assn Ser A (AMBAC Insd).................... 5.500 07/01/13 1,203,175 1,040 New York St Dorm Auth Rev Insd NY St Rehab Assn Ser A (AMBAC Insd).................... 5.500 07/01/15 1,175,106 1,500 New York St Dorm Auth Rev Mem Sloan- Kettering Ctr Ser 1 (MBIA Insd)............ 5.000 07/01/20 1,574,895 1,000 New York St Dorm Auth Rev Mental Hlth Svc Fac Impt Ser B (MBIA Insd)................. 5.250 08/15/31 1,033,470 1,200 New York St Dorm Auth Rev Miriam Osborn Mem Home Ser B (ACA Insd)...................... 6.375 07/01/29 1,303,092 750 New York St Dorm Auth Rev Nursing Home Menorah Campus (FHA Gtd)................... 5.950 02/01/17 811,073 1,000 New York St Dorm Auth Rev Sch Dist Fin Pgm Ser C (MBIA Insd).......................... 5.250 10/01/16 1,108,470 1,000 New York St Dorm Auth Rev Sch Dist Fin Pgm Ser D (MBIA Insd).......................... 5.500 10/01/17 1,125,750 1,000 New York St Dorm Auth Rev Sch Dist Fin Pgm Ser I (MBIA Insd).......................... 5.750 10/01/18 1,148,740 1,000 New York St Dorm Auth Rev Secd Hosp North Gen Hosp Rfdg.............................. 5.750 02/15/17 1,141,940 1,000 New York St Dorm Auth Rev Secd Hosp North Gen Hosp Rfdg.............................. 5.750 02/15/18 1,116,170 1,000 New York St Dorm Auth Rev Second Hosp Interfaith Med Cent Ser D (FSA Insd)....... 5.750 02/15/08 1,141,220 1,000 New York St Dorm Auth Rev St Personal Income Tax Ed Ser A........................ 5.375 03/15/20 1,086,440 1,000 New York St Dorm Auth Rev St Personal Income Tax Ed Ser A........................ 5.000 03/15/32 1,010,870 1,000 New York St Dorm Auth Rev St Univ Ed Fac 1989 Res (MBIA Insd)....................... 6.000 05/15/15 1,170,760 1,000 New York St Dorm Auth Rev St Univ Ed Fac Ser A...................................... 5.250 05/15/21 1,093,740 1,140 New York St Dorm Auth Rev St Univ Ed Fac Ser A (FSA Insd)........................... 5.875 05/15/17 1,369,459
8 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW YORK (CONTINUED) $1,665 New York St Dorm Auth Rev St Univ Ed Fac Ser B (FSA Insd)........................... 5.250% 05/15/13 $ 1,890,657 1,000 New York St Dorm Auth Rev Insd Brooklyn Law Sch Ser B (XLCA Insd)...................... 5.375 07/01/23 1,072,060 500 New York St Energy Resh & Dev Auth Gas Fac Rev Brooklyn Union Gas Ser B (Inverse Fltg) (c)........................................ 12.504 07/01/26 620,900 2,500 New York St Environ Fac Corp St Clean Wtr & Drinking Revolving Fds..................... 5.000 06/15/21 2,618,325 1,000 New York St Environ Fac Corp St Clean Wtr & Drinking Revolving Fds Pooled Fin Pgm I.... 5.250 09/15/19 1,089,000 1,890 New York St Environ Fac Corp St Clean Wtr & Drinking Revolving Fds Ser B............... 5.000 12/15/21 1,973,273 2,280 New York St Loc Govt Assist Corp Ser E Rfdg....................................... 6.000 04/01/14 2,716,506 1,500 New York St Med Care Fac Fin Hosp & Nursing Home Ser D Agy Rev (FHA Gtd)............... 6.200 02/15/28 1,616,100 1,000 New York St Mtg Agy Rev Homeowner Mtg Ser 71......................................... 5.400 04/01/29 1,020,770 1,645 New York St Mtg Agy Rev Homeowner Mtg Ser 82......................................... 5.650 04/01/30 1,768,276 1,000 New York St Mtg Agy Rev Ser 101............ 5.400 04/01/32 1,022,670 1,885 New York St Ser C Rfdg..................... 5.000 04/15/19 1,995,668 1,000 New York St Twy Auth Svc Contract Rev Loc Hwy & Brdg................................. 6.000 04/01/07 1,138,120 1,000 New York St Twy Auth Svc Contract Rev Loc Hwy & Brdg (AMBAC Insd).................... 5.500 04/01/11 1,139,990 1,500 New York St Twy Auth Svc Contract Rev Loc Hwy & Brdg................................. 5.500 04/01/16 1,672,845 500 New York St Urban Dev Corp Rev Correctional Fac Ser A Rfdg............................. 5.500 01/01/14 563,660 1,400 New York St Urban Dev Corp Rev Personal Income Tax St Fac Ser A.................... 5.375 03/15/18 1,532,230 420 Niagara Falls, NY Pub Impt (MBIA Insd)..... 6.900 03/01/20 437,997 325 Oneida Cnty, NY Indl Dev Agy Civic Fac Saint Elizabeth Med Ser A.................. 5.875 12/01/29 281,707 200 Port Auth NY & NJ Spl Oblig................ 7.000 10/01/07 209,384 555 Rockland Cnty, NY Indl Dev Agy Civic Fac Rev Dominican College Proj................. 6.250 05/01/28 539,038 1,000 Rockland Cnty, NY Solid Waste Ser B (AMBAC Insd)...................................... 5.000 12/15/23 1,040,910 1,000 Rondout Vly Cent Sch Dist NY Accord Ser A Rfdg (FGIC Insd)........................... 5.000 03/01/19 1,056,570 1,320 Sodus, NY Cent Sch Dist Rfdg (FGIC Insd)... 5.125 06/15/18 1,421,680
See Notes to Financial Statements 9 YOUR FUND'S INVESTMENTS September 30, 2003
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE NEW YORK (CONTINUED) $ 110 Syracuse, NY Hsg Auth Rev Sub Proj Loretto Rest Ser B................................. 7.500% 08/01/10 $ 110,532 250 Syracuse, NY Indl Dev Agy Rev First Mtg Jewish Home Ser A.......................... 7.375 03/01/21 257,060 2,000 Triborough Brdg & Tunl Auth NY Gen Purp Ser A.......................................... 5.250 01/01/18 2,167,540 1,500 Triborough Brdg & Tunl Auth NY Rev Gen Purp Ser A...................................... 5.000 01/01/32 1,513,515 1,000 Ulster Cnty, NY Res Recovery Agy Solid Waste Sys Rev Rfdg......................... 5.250 03/01/18 1,093,570 1,000 Upper Mohawk Vly Regl Wtr Fin Auth NY Wtr Sys Rev (AMBAC Insd)....................... 5.750 04/01/20 1,131,970 380 Utica, NY Indl Dev Agy Civic Fac Rev Utica College Proj Ser A......................... 5.750 08/01/28 366,119 500 Westchester Cnty, NY Indl Dev Agy Mtg Kendal on Hudson Proj Ser A................ 6.375 01/01/24 501,425 1,000 Yonkers, NY Indl Dev Agy Civic Fac Rev Cmnty Dev Ppty Yonkers Inc Ser A........... 6.625 02/01/26 1,059,340 ------------ 119,518,595 ------------ U. S. VIRGIN ISLANDS 0.9% 1,000 Virgin Islands Pub Fin Auth Rev Gross Rcpt Taxes Ln Nt Ser A.......................... 6.375 10/01/19 1,111,560 ------------ TOTAL INVESTMENTS 99.0% (Cost $114,427,751)......................................................... 120,630,155 OTHER ASSETS IN EXCESS OF LIABILITIES 1.0%................................... 1,197,754 ------------ NET ASSETS 100.0%............................................................ $121,827,909 ============
(a) All or a portion of this security has been physically segregated in connection with open futures contracts. (b) Security is a "step-up" bond where the coupon increases or steps up at a predetermined date. (c) An Inverse Floating Rate security is one where the coupon is inversely indexed to a short-term floating interest rate multiplied by a specific factor. As the floating rate rises, the coupon is reduced. Conversely, as the floating rate declines, the coupon is increased. The price of these securities may be more volatile than the price of a comparable fixed rate security. These instruments are typically used by the Fund to enhance the yield of the portfolio. All of the Fund's portfolio holdings, including derivative instruments, are marked to market each day with the change in value reflected in the unrealized appreciation/ depreciation. Upon disposition, a realized gain or loss is recognized accordingly. 10 See Notes to Financial Statements YOUR FUND'S INVESTMENTS September 30, 2003 ACA--American Capital Access AMBAC--AMBAC Indemnity Corp. FGIC--Financial Guaranty Insurance Co. FHA--Federal Housing Administration FSA--Financial Security Assurance Inc. MBIA--Municipal Bond Investors Assurance Corp. XLCA--XL Capital Assurance Inc. See Notes to Financial Statements 11 FINANCIAL STATEMENTS Statement of Assets and Liabilities September 30, 2003 ASSETS: Total Investments (Cost $114,427,751)....................... $120,630,155 Receivables: Interest.................................................. 1,608,776 Investments Sold.......................................... 245,000 Fund Shares Sold.......................................... 210,851 Other....................................................... 63,864 ------------ Total Assets............................................ 122,758,646 ------------ LIABILITIES: Payables: Fund Shares Repurchased................................... 221,919 Custodian Bank............................................ 183,287 Variation Margin on Futures............................... 145,719 Income Distributions...................................... 111,885 Distributor and Affiliates................................ 91,781 Investment Advisory Fee................................... 24,645 Trustees' Deferred Compensation and Retirement Plans........ 89,881 Accrued Expenses............................................ 61,620 ------------ Total Liabilities....................................... 930,737 ------------ NET ASSETS.................................................. $121,827,909 ============ NET ASSETS CONSIST OF: Capital (Par value of $.01 per share with an unlimited number of shares authorized).............................. $116,336,982 Net Unrealized Appreciation................................. 5,479,882 Accumulated Undistributed Net Investment Income............. 65,106 Accumulated Net Realized Loss............................... (54,061) ------------ NET ASSETS.................................................. $121,827,909 ============ MAXIMUM OFFERING PRICE PER SHARE: Class A Shares: Net asset value and redemption price per share (Based on net assets of $63,603,672 and 3,879,124 shares of beneficial interest issued and outstanding)............. $ 16.40 Maximum sales charge (4.75%* of offering price)......... .82 ------------ Maximum offering price to public........................ $ 17.22 ============ Class B Shares: Net asset value and offering price per share (Based on net assets of $40,501,305 and 2,473,212 shares of beneficial interest issued and outstanding)............. $ 16.38 ============ Class C Shares: Net asset value and offering price per share (Based on net assets of $17,722,932 and 1,081,471 shares of beneficial interest issued and outstanding)............. $ 16.39 ============
* On sales of $100,000 or more, the sales charge will be reduced. 12 See Notes to Financial Statements Statement of Operations For the Year Ended September 30, 2003 INVESTMENT INCOME: Interest.................................................... $ 5,191,976 ----------- EXPENSES: Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $135,372, $409,945 and $143,100, respectively)............................................. 688,417 Investment Advisory Fee..................................... 657,224 Accounting.................................................. 56,663 Shareholder Services........................................ 52,997 Legal....................................................... 19,857 Trustees' Fees and Related Expenses......................... 17,725 Custody..................................................... 10,865 Other....................................................... 65,564 ----------- Total Expenses.......................................... 1,569,312 Investment Advisory Fee Reduction....................... 556,273 Less Credits Earned on Cash Balances.................... 945 ----------- Net Expenses............................................ 1,012,094 ----------- NET INVESTMENT INCOME....................................... $ 4,179,882 =========== REALIZED AND UNREALIZED GAIN/LOSS: Realized Gain/Loss: Investments............................................... $ 749,380 Futures................................................... 240,435 ----------- Net Realized Gain........................................... 989,815 ----------- Unrealized Appreciation/Depreciation: Beginning of the Period................................... 7,122,812 End of the Period: Investments............................................. 6,202,404 Futures................................................. (722,522) ----------- 5,479,882 ----------- Net Unrealized Depreciation During the Period............... (1,642,930) ----------- NET REALIZED AND UNREALIZED LOSS............................ $ (653,115) =========== NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 3,526,767 ===========
See Notes to Financial Statements 13 Statements of Changes in Net Assets
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 ---------------------------------------- FROM INVESTMENT ACTIVITIES: Operations: Net Investment Income.............................. $ 4,179,882 $ 3,823,772 Net Realized Gain.................................. 989,815 1,168,453 Net Unrealized Appreciation/Depreciation During the Period........................................... (1,642,930) 3,243,757 ------------ ------------ Change in Net Assets from Operations............... 3,526,767 8,235,982 ------------ ------------ Distributions from Net Investment Income: Class A Shares................................... (2,244,033) (2,039,139) Class B Shares................................... (1,406,581) (1,433,678) Class C Shares................................... (484,424) (354,893) ------------ ------------ Total Distributions................................ (4,135,038) (3,827,710) ------------ ------------ NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....................................... (608,271) 4,408,272 ------------ ------------ FROM CAPITAL TRANSACTIONS: Proceeds from Shares Sold.......................... 44,156,929 29,177,083 Net Asset Value of Shares Issued Through Dividend Reinvestment..................................... 2,899,936 2,645,188 Cost of Shares Repurchased......................... (24,649,019) (21,982,908) ------------ ------------ NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS..................................... 22,407,846 9,839,363 ------------ ------------ TOTAL INCREASE IN NET ASSETS....................... 21,799,575 14,247,635 NET ASSETS: Beginning of the Period............................ 100,028,334 85,780,699 ------------ ------------ End of the Period (Including accumulated undistributed net investment income of $65,106 and $59,000, respectively)....................... $121,827,909 $100,028,334 ============ ============
14 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS A SHARES ------------------------------------------------ 2003 2002 (a) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $16.49 $15.76 $14.91 $14.94 $16.22 ------ ------ ------ ------ ------ Net Investment Income..................... .69 .74 .73 .77 .79 Net Realized and Unrealized Gain/Loss..... (.10) .73 .88 (.07) (1.19) ------ ------ ------ ------ ------ Total from Investment Operations............ .59 1.47 1.61 .70 (.40) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .68 .74 .76 .73 .79 Distributions from Net Realized Gain...... -0- -0- -0- -0- .09 ------ ------ ------ ------ ------ Total Distributions......................... .68 .74 .76 .73 .88 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $16.40 $16.49 $15.76 $14.91 $14.94 ====== ====== ====== ====== ====== Total Return* (b)........................... 3.69% 9.63% 10.97% 4.91% -2.61% Net Assets at End of the Period (In millions)................................. $ 63.6 $ 47.5 $ 43.5 $ 29.0 $ 36.6 Ratio of Expenses to Average Net Assets*.... .55% .38% .53% .61% .33% Ratio of Net Investment Income to Average Net Assets*............................... 4.19% 4.68% 4.74% 5.26% 5.03% Portfolio Turnover.......................... 27% 43% 30% 58% 67% * If certain expenses had not been voluntarily assumed by Van Kampen, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets..... 1.06% 1.07% 1.13% 1.32% 1.23% Ratio of Net Investment Income to Average Net Assets................................ 3.68% 3.99% 4.14% 4.56% 4.13%
(a) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets by .01%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum sales charge of 4.75% or contingent deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be imposed on certain redemptions made within one year of purchase. If the sales charges were included, total returns would be lower. These returns include Rule 12b-1 fees of up to .25% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. See Notes to Financial Statements 15 Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS B SHARES ------------------------------------------------ 2003 2002 (a) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $16.47 $15.74 $14.90 $14.92 $16.21 ------ ------ ------ ------ ------ Net Investment Income..................... .56 .62 .62 .66 .68 Net Realized and Unrealized Gain/Loss..... (.09) .73 .86 (.06) (1.20) ------ ------ ------ ------ ------ Total from Investment Operations............ .47 1.35 1.48 .60 (.52) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .56 .62 .64 .62 .68 Distributions from Net Realized Gain...... -0- -0- -0- -0- .09 ------ ------ ------ ------ ------ Total Distributions......................... .56 .62 .64 .62 .77 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $16.38 $16.47 $15.74 $14.90 $14.92 ====== ====== ====== ====== ====== Total Return* (b)........................... 2.93% 8.83% 10.09% 4.17% -3.34% Net Assets at End of the Period (In millions)................................. $ 40.5 $ 40.5 $ 35.0 $ 28.8 $ 28.2 Ratio of Expenses to Average Net Assets*.... 1.29% 1.13% 1.28% 1.36% 1.08% Ratio of Net Investment Income to Average Net Assets*............................... 3.45% 3.92% 3.99% 4.51% 4.27% Portfolio Turnover.......................... 27% 43% 30% 58% 67% * If certain expenses had not been voluntarily assumed by Van Kampen, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets..... 1.80% 1.82% 1.88% 2.07% 1.98% Ratio of Net Investment Income to Average Net Assets................................ 2.94% 3.24% 3.39% 3.81% 3.37%
(a) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets by .01%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 4%, charged on certain redemptions made within one year of purchase and declining to 0% after the sixth year. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. 16 See Notes to Financial Statements Financial Highlights THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
YEAR ENDED SEPTEMBER 30, CLASS C SHARES ------------------------------------------------ 2003 2002 (a) 2001 2000 1999 ------------------------------------------------ NET ASSET VALUE, BEGINNING OF THE PERIOD.... $16.48 $15.75 $14.91 $14.92 $16.20 ------ ------ ------ ------ ------ Net Investment Income..................... .56 .62 .60 .68 .68 Net Realized and Unrealized Gain/Loss..... (.09) .73 .88 (.07) (1.19) ------ ------ ------ ------ ------ Total from Investment Operations............ .47 1.35 1.48 .61 (.51) ------ ------ ------ ------ ------ Less: Distributions from Net Investment Income.................................. .56 .62 .64 .62 .68 Distributions from Net Realized Gain...... -0- -0- -0- -0- .09 ------ ------ ------ ------ ------ Total Distributions......................... .56 .62 .64 .62 .77 ------ ------ ------ ------ ------ NET ASSET VALUE, END OF THE PERIOD.......... $16.39 $16.48 $15.75 $14.91 $14.92 ====== ====== ====== ====== ====== Total Return* (b)........................... 2.92%(c) 8.83% 10.09% 4.24% -3.28% Net Assets at End of the Period (In millions)................................. $ 17.7 $ 12.0 $ 7.3 $ 4.6 $ 5.1 Ratio of Expenses to Average Net Assets*.... 1.30% 1.13% 1.30% 1.36% 1.08% Ratio of Net Investment Income to Average Net Assets*............................... 3.45%(c) 3.92% 3.97% 4.52% 4.28% Portfolio Turnover.......................... 27% 43% 30% 58% 67% * If certain expenses had not been voluntarily assumed by Van Kampen, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets..... 1.81% 1.82% 1.90% 2.07% 1.98% Ratio of Net Investment Income to Average Net Assets................................ 2.94%(c) 3.23% 3.37% 3.81% 3.38%
(a) As required, effective October 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discount on fixed income securities. The effect of this change for the year ended September 30, 2002 was to increase net investment income per share by less than $.01, decrease net realized and unrealized gains and losses per share by less than $.01 and increase the ratio of net investment income to average net assets by .01%. Per share, ratios and supplemental data for periods prior to September 30, 2002 have not been restated to reflect this change in presentation. (b) Assumes reinvestment of all distributions for the period and does not include payment of the maximum CDSC of 1% charged on certain redemptions made within one year of purchase. If the sales charge was included, total returns would be lower. These returns include combined Rule 12b-1 fees and service fees of 1% and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (c) Certain non-recurring payments were made to Class C Shares, resulting in an increase to the Total Return and Ratio of Net Investment Income to Average Net Assets of .03%. See Notes to Financial Statements 17 NOTES TO FINANCIAL STATEMENTS September 30, 2003 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen New York Tax Free Income Fund (the "Fund") is organized as a series of the Van Kampen Tax Free Trust, a Delaware business trust, and is registered as a non-diversified, open-end management investment company under the Investment Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment objective is to provide investors with a high level of current income exempt from federal, New York State and New York City income taxes, consistent with preservation of capital. The Fund seeks to achieve its investment objective by investing at least 80% of its total assets in a portfolio of New York municipal securities that are rated investment grade at the time of purchase. The Fund commenced investment operations on July 29, 1994, with three classes of common shares, Class A, Class B and Class C. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION Municipal bonds are valued by independent pricing services or dealers using the mean of the bid and asked prices or, in the absence of market quotations, at fair value based upon yield data relating to municipal bonds with similar characteristics and general market conditions. Securities which are not valued by independent pricing services or dealers are valued at fair value using procedures established in good faith by the Board of Trustees. Short-term securities with remaining maturities of 60 days or less are valued at amortized cost, which approximates market value. B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. The Fund may purchase and sell securities on a "when-issued" or "delayed delivery" basis, with settlement to occur at a later date. The value of the security so purchased is subject to market fluctuations during this period. The Fund will segregate assets with the custodian having an aggregate value at least equal to the amount of the when-issued or delayed delivery purchase commitments until payments is made. At September 30, 2003, the Fund had no when-issued and delayed delivery purchase commitments. C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond premium is amortized and discount is accreted over the expected life of each applicable security. Income and expenses of the Fund are allocated on a pro rata basis to each class of shares, except for distribution and service fees and transfer agency costs which are unique to each class of shares. 18 NOTES TO FINANCIAL STATEMENTS September 30, 2003 D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income, if any, to its shareholders. Therefore, no provision for federal income taxes is required. The Fund intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward for eight years following the year of the loss and offset such losses against any future realized capital gains. At September 30, 2003, the Fund had an accumulated capital loss carryforward for tax purposes of $733,829 which will expire on September 30, 2009. At September 30, 2003, the cost and related gross unrealized appreciation and depreciation are as follows: Cost of investments for tax purposes........................ $114,472,272 ============ Gross tax unrealized appreciation........................... $ 6,317,379 Gross tax unrealized depreciation........................... (159,496) ------------ Net tax unrealized appreciation on investments.............. $ 6,157,883 ============
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly dividends from net investment income. Net realized gains, if any, are distributed annually. Distributions from net realized gains for book purposes may include short-term capital gains, which are included as ordinary income for tax purposes. The tax character of distributions paid during the years ended September 30, 2003 and 2002 was as follows:
2003 2002 Distributions paid from: Ordinary Income........................................... $6,501 $25,277 Long-term capital gain.................................... -0- -0- ------ ------- $6,501 $25,277 ====== =======
Due to inherent differences in the recognition of income, expenses and realized gains/ losses under accounting principles generally accepted in the United States of America and federal income tax purposes, permanent differences between book and tax basis reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities. A permanent book and tax difference related to the Fund's investment in other regulated investment companies totaling $5,660 was reclassified from accumulated undistributed net investment income to accumulated net realized loss. Additionally, permanent differences relating to book and tax amortization totaling $44,398 has been reclassified from accumulated undistributed net investment income to accumulated net realized loss. 19 NOTES TO FINANCIAL STATEMENTS September 30, 2003 As of September 30, 2003, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income............................... $11,191
Net realized gains and losses may differ for financial reporting purposes primarily as a result of the deferral of losses relating to wash sale transactions and gains or losses recognized for tax purposes on open future transactions at September 30, 2003. F. EXPENSE REDUCTIONS During the year ended September 30, 2003, the Fund's custody fee was reduced by $945 as a result of credits earned on cash balances. 2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen Investment Advisory Corp. (the "Adviser"), will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE DAILY NET ASSETS % PER ANNUM First $500 million.......................................... 0.60% Over $500 million........................................... 0.50%
For the year ended September 30, 2003, the Adviser voluntarily waived $556,273 of its investment advisory fees. This waiver is voluntary in nature and can be discontinued at the Adviser's discretion. For the year ended September 30, 2003, the Fund recognized expenses of approximately $5,500, representing legal services provided by Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the Fund is an affiliated person. Under separate Accounting Services and Legal Services agreements, the Adviser provides accounting and legal services to the Fund. The Adviser allocates the cost of such services to each fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $38,300 representing Van Kampen Investments or its affiliates' (collectively "Van Kampen") cost of providing accounting and legal services to the Fund, which are reported as part of "Accounting" and "Legal" expenses, respectively, in the Statement of Operations. Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser, serves as the shareholder servicing agent for the Fund. For the year ended September 30, 2003, the Fund recognized expenses of approximately $37,800 representing transfer agency fees paid to VKIS. Transfer agency fees are determined through negotiations with the Fund's Board of Trustees. Certain officers and trustees of the Fund are also officers and directors of Van Kampen. The Fund does not compensate its officers or trustees who are officers of Van Kampen. The Fund provides deferred compensation and retirement plans for its trustees who are not officers of Van Kampen. Under the deferred compensation plan, trustees may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Fund and 20 NOTES TO FINANCIAL STATEMENTS September 30, 2003 to the extent permitted by the 1940 Act, as amended, may be invested in the common shares of those funds selected by the trustees. Investments in such funds of $47,333 are included in "Other" assets on the Statement of Assets and Liabilities at September 30, 2003. Appreciation/ depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. Benefits under the retirement plan are payable upon retirement for a ten-year period and are based upon each trustee's years of service to the Fund. The maximum annual benefit per trustee under the plan is $2,500. 3. CAPITAL TRANSACTIONS At September 30, 2003, capital aggregated $61,360,150, $37,757,810 and $17,219,022 for Classes A, B and C, respectively. For the year ended September 30, 2003, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 1,655,466 $ 27,062,415 Class B................................................... 519,637 8,452,098 Class C................................................... 531,210 8,642,416 ---------- ------------ Total Sales................................................. 2,706,313 $ 44,156,929 ========== ============ Dividend Reinvestment: Class A................................................... 96,700 $ 1,569,395 Class B................................................... 60,400 978,904 Class C................................................... 21,673 351,637 ---------- ------------ Total Dividend Reinvestment................................. 178,773 $ 2,899,936 ========== ============ Repurchases: Class A................................................... (751,111) $(12,180,934) Class B................................................... (568,107) (9,209,533) Class C................................................... (200,158) (3,258,552) ---------- ------------ Total Repurchases........................................... (1,519,376) $(24,649,019) ========== ============
21 NOTES TO FINANCIAL STATEMENTS September 30, 2003 At September 30, 2002, capital aggregated $44,909,274, $37,536,341 and $11,483,521 for Classes A, B and C, respectively. For the year ended September 30, 2002, transactions were as follows:
SHARES VALUE Sales: Class A................................................... 932,347 $ 14,737,924 Class B................................................... 555,685 8,780,808 Class C................................................... 357,695 5,658,351 ---------- ------------ Total Sales................................................. 1,845,727 $ 29,177,083 ========== ============ Dividend Reinvestment: Class A................................................... 91,984 $ 1,451,414 Class B................................................... 59,837 942,959 Class C................................................... 15,889 250,815 ---------- ------------ Total Dividend Reinvestment................................. 167,710 $ 2,645,188 ========== ============ Repurchases: Class A................................................... (903,144) $(14,306,507) Class B................................................... (377,400) (5,933,734) Class C................................................... (110,184) (1,742,667) ---------- ------------ Total Repurchases........................................... (1,390,728) $(21,982,908) ========== ============
Class B Shares purchased on or after June 1, 1996 and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares eight years after the end of the calendar month in which the shares were purchased. Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan Class B Shares received on such shares, automatically convert to Class A Shares seven years after the end of the calendar month in which the shares were purchased. For the years ended September 30, 2003 and 2002, 49,822 and 50,806 Class B Shares automatically converted to Class A Shares, respectively, and are shown in the above tables as sales of Class A Shares and repurchases of Class B Shares. Class C Shares purchased before January 1, 1997, and any dividend reinvestment plan Class C Shares received on such shares, automatically convert to Class A Shares ten years after the end of the calendar month in which the shares are purchased. Class C Shares purchased on or after January 1, 1997 do not possess a conversion feature. For the years ended September 30, 2003 and 2002, no Class C Shares converted to Class A Shares. Class B and Class C Shares are offered without a front end sales charge, but are subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and Class C Shares will be 22 NOTES TO FINANCIAL STATEMENTS September 30, 2003 imposed on most redemptions made within six years of the purchase for Class B Shares and one year of the purchase for Class C Shares as detailed in the following schedule.
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLAR AMOUNT SUBJECT TO CHARGE -------------------------- YEAR OF REDEMPTION CLASS B CLASS C First....................................................... 4.00% 1.00% Second...................................................... 3.75% None Third....................................................... 3.50% None Fourth...................................................... 2.50% None Fifth....................................................... 1.50% None Sixth....................................................... 1.00% None Seventh and Thereafter...................................... None None
For the year ended September 30, 2003, Van Kampen, as Distributor for the Fund, received commissions on sales of the Fund's Class A Shares of approximately $69,300 and CDSC on redeemed shares of approximately $124,700. Sales charges do not represent expenses of the Fund. 4. INVESTMENT TRANSACTIONS During the period, the cost of purchases and proceeds from sales of investments, excluding short-term investments, were $50,805,844 and $29,560,781, respectively. 5. DERIVATIVE FINANCIAL INSTRUMENTS A derivative financial instrument in very general terms refers to a security whose value is "derived" from the value of an underlying asset, reference rate or index. The Fund has a variety of reasons to use derivative instruments, such as to attempt to protect the Fund against possible changes in the market value of its portfolio or to generate potential gain. All of the Fund's portfolio holdings, including derivative instruments, are marked to market each day with the change in value reflected in the unrealized appreciation/depreciation. Upon disposition, a realized gain or loss is recognized accordingly, except when taking delivery of a security underlying a futures contract. In these instances, the recognition of gain or loss is postponed until the disposal of the security underlying the futures contract. During the period, the Fund invested in futures contracts, a type of derivative. A futures contract is an agreement involving the delivery of a particular asset on a specified future date at an agreed upon price. The Fund generally invests in exchange traded futures contracts on U.S. Treasury Bonds or Notes and typically closes the contract prior to the delivery date. These contracts are generally used to manage the Fund's effective maturity and duration. Upon entering into futures contracts, the Fund maintains an amount of cash or liquid securities with a value equal to percentage of the contract amount with either a future 23 NOTES TO FINANCIAL STATEMENTS September 30, 2003 commission merchant pursuant to rules and regulations promulgated in the 1940 Act, as amended, or with its custodian in an account in the broker's name. This amount is known as initial margin. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (variation margin). The risk of loss associated with a futures contract is in excess of the variation margin reflected on the Statement of Assets and Liabilities. Transactions in futures contracts for the year ended September 30, 2003, are as follows:
CONTRACTS Outstanding at September 30, 2002........................... -0- Futures Opened.............................................. 724 Futures Closed.............................................. (552) ---- Outstanding at September 30, 2003........................... 172 ====
The futures contracts outstanding as of September 30, 2003, and the descriptions and unrealized appreciation/depreciation are as follows:
UNREALIZED CONTRACTS DEPRECIATION SHORT CONTRACTS: U.S. Treasury Notes 10-Year Futures December 2003 (Current Notional Value of $114,625 per contract).................. 33 $(186,796) U.S. Treasury Notes 5-Year Futures December 2003 (Current Notional Value of $113,469 per contract).................. 139 (535,726) --- --------- 172 $(722,522) === =========
6. DISTRIBUTION AND SERVICE PLANS With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund and its shareholders have adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act, as amended, and a service plan (collectively the "Plans"). The Plans govern payments for: the distribution of the Fund's Class A Shares, Class B Shares and Class C Shares; the provision of ongoing shareholder services with respect to such classes of shares; and the maintenance of shareholder accounts with respect to such classes of shares. Annual fees under the Plans of up to .25% of Class A average daily net assets and 1.00% each of Class B and Class C average daily net assets are accrued daily. The amount of distribution expenses incurred by Van Kampen and not yet reimbursed ("unreimbursed receivable") was approximately $864,210 and $37,738 for Class B and Class C Shares, respectively. These amounts may be recovered from future payments under the distribution plan or CDSC. To the extent the unreimbursed receivable has been fully recovered, any excess 12b-1 fees will be refunded to the Fund on a quarterly basis. 24 NOTES TO FINANCIAL STATEMENTS September 30, 2003 Included in these fees for the year ended September 30, 2003, are payments retained by Van Kampen of approximately $380,700 and payments made to Morgan Stanley DW Inc., an affiliate of the Adviser, of approximately $20,900. 25 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees of Van Kampen New York Tax Free Income Fund We have audited the accompanying statement of assets and liabilities of the Van Kampen New York Tax Free Income Fund (the "Fund"), including the portfolio of investments, as of September 30, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Fund for the year ended September 30, 1999 were audited by other auditors whose report dated November 11, 1999 expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and financial highlights. Our procedures included confirmation of securities owned as of September 30, 2003, 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 the Van Kampen New York Tax Free Income Fund at September 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended in conformity with accounting principles generally accepted in the United States. -s- Ernst & Young LLP Chicago, Illinois November 4, 2003 26 VAN KAMPEN INVESTMENTS THE VAN KAMPEN FAMILY OF FUNDS Global/International Emerging Markets Emerging Markets Income European Value Equity Global Equity Allocation Global Franchise Global Value Equity International Advantage International Magnum Growth Aggressive Growth American Value Emerging Growth Enterprise Equity Growth Focus Equity Growth Mid Cap Growth Pace Select Growth Small Cap Growth Small Cap Value Technology Growth and Income Comstock Equity and Income Growth and Income Harbor Real Estate Securities Utility Value Value Opportunities Income Corporate Bond Government Securities High Income Corporate Bond High Yield Limited Maturity Government U.S. Government Tax Free California Insured Tax Free High Yield Municipal* Insured Tax Free Income Intermediate Term Municipal Income Municipal Income New York Tax Free Income Pennsylvania Tax Free Income Strategic Municipal Income Capital Preservation Reserve Tax Free Money Senior Loan Senior Loan Fund For more complete information, including risk considerations, fees, sales charges and ongoing expenses, please contact your financial advisor for a prospectus. Please read it carefully before you invest or send money. To view a current Van Kampen fund prospectus or to receive additional fund information, choose from one of the following: - - Visit our Web site at VANKAMPEN.COM. To view a prospectus select Literature, Download Fund Info. (COMPUTER ICON) - - Call us at (800) 847-2424 Telecommunications Device for the Deaf (TDD) users, call (800) 421-2833. (PHONE ICON) - - E-mail us by visiting VANKAMPEN.COM and selecting Contact Us. (MAIL ICON) * Open to new investors for a limited time 27 BOARD OF TRUSTEES AND IMPORTANT ADDRESSES VAN KAMPEN NEW YORK TAX FREE INCOME FUND BOARD OF TRUSTEES DAVID C. ARCH J. MILES BRANAGAN JERRY D. CHOATE ROD DAMMEYER LINDA HUTTON HEAGY R. CRAIG KENNEDY HOWARD J KERR MITCHELL M. MERIN* JACK E. NELSON RICHARD F. POWERS, III* HUGO F. SONNENSCHEIN WAYNE W. WHALEN* - Chairman SUZANNE H. WOOLSEY INVESTMENT ADVISER VAN KAMPEN INVESTMENT ADVISORY CORP. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 DISTRIBUTOR VAN KAMPEN FUNDS INC. 1 Parkview Plaza P.O. Box 5555 Oakbrook Terrace, Illinois 60181-5555 SHAREHOLDER SERVICING AGENT VAN KAMPEN INVESTOR SERVICES INC. P.O. Box 947 Jersey City, New Jersey 07303-0947 CUSTODIAN STATE STREET BANK AND TRUST COMPANY 225 Franklin Street P.O. Box 1713 Boston, Massachusetts 02110 LEGAL COUNSEL SKADDEN, ARPS, SLATE MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago, Illinois 60606 INDEPENDENT AUDITORS ERNST & YOUNG LLP 233 South Wacker Drive Chicago, Illinois 60606 For federal income tax purposes, the following is furnished with respect to the distributions paid by the Fund during its taxable year ended September 30, 2003. The Fund designated 99.8% of the income distributions as a tax-exempt income distribution. In January, the Fund provides tax information to shareholders for the preceding calendar year. * "Interested persons" of the Fund, as defined in the Investment Company Act of 1940, as amended. 28 TRUSTEES AND OFFICERS The business and affairs of the Fund are managed under the direction of the Fund's Board of Trustees and the Fund's officers appointed by the Board of Trustees. The tables below list the trustees and executive officers of the Fund and their principal occupations during the last five years, other directorships held by trustees and their affiliations, if any, with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are referred to herein collectively as the "Advisers." The term "Fund Complex" includes each of the investment companies advised by the Advisers or their affiliates as of the date of this Statement of Additional Information. Trustees serve until reaching their retirement age or until their successors are duly elected and qualified. Officers are annually elected by the trustees. INDEPENDENT TRUSTEES
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE David C. Arch (58) Trustee Trustee Chairman and Chief 90 Trustee/Director/Managing Blistex Inc. since 2003 Executive Officer of General Partner of funds 1800 Swift Drive Blistex Inc., a consumer in the Fund Complex. Oak Brook, IL 60523 health care products manufacturer. Former Director of the World Presidents Organization-Chicago Chapter. Director of the Heartland Alliance, a nonprofit organization serving human needs based in Chicago. J. Miles Branagan (71) Trustee Trustee Private investor. 88 Trustee/Director/Managing 1632 Morning Mountain Road since 1995 Co-founder, and prior to General Partner of funds Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex. Chief Executive Officer and President, MDT Corporation (now known as Getinge/Castle, Inc., a subsidiary of Getinge Industrier AB), a company which develops, manufactures, markets and services medical and scientific equipment.
29
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jerry D. Choate (65) Trustee Trustee Prior to January 1999, 88 Trustee/Director/Managing 33971 Selva Road since 1999 Chairman and Chief General Partner of funds Suite 130 Executive Officer of the in the Fund Complex. Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a ("Allstate") and Allstate biotechnological company, Insurance Company. Prior and Director of Valero to January 1995, Energy Corporation, an President and Chief independent refining Executive Officer of company. Allstate. Prior to August 1994, various management positions at Allstate. Rod Dammeyer (62) Trustee Trustee President of CAC, llc., a 90 Trustee/Director/Managing CAC, llc. since 2003 private company offering General Partner of funds 4350 LaJolla Village Drive capital investment and in the Fund Complex. Suite 980 management advisory Director of TeleTech San Diego, CA 92122-6223 services. Prior to July Holdings Inc., 2000, Managing Partner of Stericycle, Inc., Equity Group Corporate TheraSense, Inc., GATX Investment (EGI), a Corporation, Arris Group, company that makes Inc. and Trustee of the private investments in University of Chicago other companies. Hospitals and Health Systems. Prior to May 2002, Director of Peregrine Systems Inc. Prior to February 2001, Vice Chairman and Director of Anixter International, Inc. and IMC Global Inc. Prior to July 2000, Director of Allied Riser Communications Corp., Matria Healthcare Inc., Transmedia Networks, Inc., CNA Surety, Corp. and Grupo Azcarero Mexico (GAM). Prior to April 1999, Director of Metal Management, Inc.
30
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Linda Hutton Heagy (55) Trustee Trustee Managing Partner of 88 Trustee/Director/Managing Heidrick & Struggles since 1995 Heidrick & Struggles, an General Partner of funds 233 South Wacker Drive executive search firm. in the Fund Complex. Suite 7000 Trustee on the University Chicago, IL 60606 of Chicago Hospitals Board, Vice Chair of the Board of the YMCA of Metropolitan Chicago and a member of the Women's Board of the University of Chicago. Prior to 1997, Partner of Ray & Berndtson, Inc., an executive recruiting firm. Prior to 1996, Trustee of The International House Board, a fellowship and housing organization for international graduate students. Prior to 1995, Executive Vice President of ABN AMRO, N.A., a bank holding company. Prior to 1992, Executive Vice President of La Salle National Bank. R. Craig Kennedy (51) Trustee Trustee Director and President of 88 Trustee/Director/Managing 11 DuPont Circle, N.W. since 1994 the German Marshall Fund General Partner of funds Washington, D.C. 20016 of the United States, an in the Fund Complex. independent U.S. foundation created to deepen understanding, promote collaboration and stimulate exchanges of practical experience between Americans and Europeans. Formerly, advisor to the Dennis Trading Group Inc., a managed futures and option company that invests money for individuals and institutions. Prior to 1992, President and Chief Executive Officer, Director and member of the Investment Committee of the Joyce Foundation, a private foundation. Howard J Kerr (67) Trustee Trustee Prior to 1998, President 90 Trustee/Director/Managing 736 North Western Avenue since 2003 and Chief Executive General Partner of funds P.O. Box 317 Officer of Pocklington in the Fund Complex. Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake investment holding Forest Bank & Trust. company. Director of the Marrow Foundation.
31
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Jack E. Nelson (67) Trustee Trustee President of Nelson 88 Trustee/Director/Managing 423 Country Club Drive since 1994 Investment Planning General Partner of funds Winter Park, FL 32789 Services, Inc., a in the Fund Complex. financial planning company and registered investment adviser in the State of Florida. President of Nelson Ivest Brokerage Services Inc., a member of the NASD, Securities Investors Protection Corp. and the Municipal Securities Rulemaking Board. President of Nelson Sales and Services Corporation, a marketing and services company to support affiliated companies. Hugo F. Sonnenschein (62) Trustee Trustee President Emeritus and 90 Trustee/Director/Managing 1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds Chicago, IL 60637 University of Chicago and in the Fund Complex. the Adam Smith Director of Winston Distinguished Service Laboratories, Inc. Professor in the Department of Economics at the University of Chicago. Prior to July 2000, President of the University of Chicago. Trustee of the University of Rochester and a member of its investment committee. Member of the National Academy of Sciences, the American Philosophical Society and a fellow of the American Academy of Arts and Sciences. Suzanne H. Woolsey (61) Trustee Trustee Chief Communications 88 Trustee/Director/Managing 2101 Constitution Ave., N.W. since 1999 Officer of the National General Partner of funds Room 285 Academy of in the Fund Complex. Washington, D.C. 20418 Sciences/National Director of Neurogen Research Council, an Corporation, a independent, federally pharmaceutical company, chartered policy since January 1998. institution, since 2001 and previously Chief Operating Officer from 1993 to 2001. Director of the Institute for Defense Analyses, a federally funded research and development center, Director of the German Marshall Fund of the United States, and Trustee of Colorado College. Prior to 1993, Executive Director of the Commission on Behavioral and Social Sciences and Education at the National Academy of Sciences/National Research Council. From 1980 through 1989, Partner of Coopers & Lybrand.
32 INTERESTED TRUSTEES*
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Mitchell M. Merin* (50) Trustee, Trustee President and Chief 88 Trustee/Director/Managing 1221 Avenue of the Americas President and since 1999 Executive Officer of General Partner of funds New York, NY 10020 Chief Executive funds in the Fund in the Fund Complex. Officer Complex. Chairman, President, Chief Executive Officer and Director of the Advisers and VK Advisors Inc. since December 2002. Chairman, President and Chief Executive Officer of Van Kampen Investments since December 2002. Director of Van Kampen Investments since December 1999. Chairman and Director of Van Kampen Funds Inc. since December 2002. President, Director and Chief Operating Officer of Morgan Stanley Investment Management since December 1998. President and Director since April 1997 and Chief Executive Officer since June 1998 of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chairman, Chief Executive Officer and Director of Morgan Stanley Distributors Inc. since June 1998. Chairman since June 1998, and Director since January 1998 of Morgan Stanley Trust. Director of various Morgan Stanley subsidiaries. President of the Morgan Stanley Funds since May 1999. Previously Chief Executive Officer of Van Kampen Funds Inc. from December 2002 to July 2003, Chief Strategic Officer of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. and Executive Vice President of Morgan Stanley Distributors Inc. from April 1997 to June 1998. Chief Executive Officer from September 2002 to April 2003 and Vice President from May 1997 to April 1999 of the Morgan Stanley Funds.
33
NUMBER OF TERM OF FUNDS IN OFFICE AND FUND POSITION(S) LENGTH OF COMPLEX NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE Richard F. Powers, III* (57) Trustee Trustee Advisory Director of 90 Trustee/Director/Managing 1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds P.O. Box 5555 December 2002, Chairman, in the Fund Complex. Oakbrook Terrace, IL 60181 Director, President, Chief Executive Officer and Managing Director of Van Kampen Investments and its investment advisory, distribution and other subsidiaries. Prior to December 2002, President and Chief Executive Officer of funds in the Fund Complex. Prior to May 1998, Executive Vice President and Director of Marketing at Morgan Stanley and Director of Dean Witter, Discover & Co. and Dean Witter Realty. Prior to 1996, Director of Dean Witter Reynolds Inc. Wayne W. Whalen* (64) Trustee Trustee Partner in the law firm 90 Trustee/Director/Managing 333 West Wacker Drive since 1994 of Skadden, Arps, Slate, General Partner of funds Chicago, IL 60606 Meagher & Flom in the Fund Complex. (Illinois), legal counsel to funds in the Fund Complex.
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of certain funds in the Fund Complex by reason of his firm currently acting as legal counsel to such funds in the Fund Complex. Messrs. Merin and Powers are interested persons of funds in the Fund Complex and the Advisers by reason of their current or former positions with Morgan Stanley or its affiliates. 34 OFFICERS
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Stephen L. Boyd (62) Vice President Officer Managing Director of Global Research Investment Management. 2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to 45th Floor December 2002, Chief Investment Officer of Van Kampen Houston, TX 77056 Investments and President and Chief Operations Officer of the Advisers and Van Kampen Advisors Inc. Prior to May 2002, Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Prior to May 2001, Managing Director and Chief Investment Officer of Van Kampen Investments, and Managing Director and President of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Executive Vice President and Chief Investment Officer of Van Kampen Investments, and President and Chief Operating Officer of the Advisers. Prior to April 2000, Executive Vice President and Chief Investment Officer for Equity Investments of the Advisers. Prior to October 1998, Vice President and Senior Portfolio Manager with AIM Capital Management, Inc. Prior to February 1998, Senior Vice President and Portfolio Manager of Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital Investment Advisory Corp. and Van Kampen American Capital Management, Inc. Stefanie V. Chang (36) Vice President Officer Executive Director of Morgan Stanley Investment Management. 1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex. New York, NY 10020 Joseph J. McAlinden (60) Executive Officer Managing Director and Chief Investment Officer of Morgan 1221 Avenue of the Americas Vice President since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment New York, NY 10020 and Chief Management Inc. and Morgan Stanley Investments LP and Investment Officer Director of Morgan Stanley Trust for over 5 years. Executive Vice President and Chief Investment Officer of funds in the Fund Complex. Managing Director and Chief Investment Officer of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc. since December 2002. John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Advisers 1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen Advisors Inc. Prior to December 2000, Senior Vice President of the Advisers and Van Kampen Advisors Inc. Prior to May 2000, Senior Vice President of the investment grade taxable group for the Advisers. Prior to June 1999, Senior Vice President of the government securities bond group for Asset Management.
35
TERM OF OFFICE AND POSITION(S) LENGTH OF NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S) ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services. 1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer Executive Officer and Managing Director of Morgan Stanley Investment Management Inc. Managing Director of Morgan Stanley. Managing Director and Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. Chief Executive Officer and Director of Morgan Stanley Trust. Vice President of the Morgan Stanley Funds. A. Thomas Smith III (46) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and 1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Managing Director and General Counsel-Mutual Funds of Morgan Stanley Investment Advisors, Inc. Vice President and Secretary of funds in the Fund Complex. Prior to July 2001, Managing Director, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, the Distributor, Investor Services, and certain other subsidiaries of Van Kampen Investments. Prior to December 2000, Executive Vice President, General Counsel, Secretary and Director of Van Kampen Investments, the Advisers, Van Kampen Advisors Inc., the Distributor, Investor Services and certain other subsidiaries of Van Kampen Investments. Prior to January 1999, Vice President and Associate General Counsel to New York Life Insurance Company ("New York Life"), and prior to March 1997, Associate General Counsel of New York Life. Prior to December 1993, Assistant General Counsel of The Dreyfus Corporation. Prior to August 1991, Senior Associate, Willkie Farr & Gallagher. Prior to January 1989, Staff Attorney at the Securities and Exchange Commission, Division of Investment Management, Office of Chief Counsel. John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments, 1 Parkview Plaza Chief Financial since 1996 the Advisers, Van Kampen Advisors Inc. and certain other P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President, Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund Complex. Head of Fund Accounting for Morgan Stanley Investment Management. Prior to December 2002, Executive Director of Van Kampen Investments, the Advisers and Van Kampen Advisors Inc.
36 Van Kampen Privacy Notice The Van Kampen companies and investment products* respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain nonpublic personal information about you. This is information we collect from you on applications or other forms, and from the transactions you conduct with us, our affiliates, or third parties. We may also collect information you provide when using our Web site, and text files (also known as "cookies") may be placed on your computer to help us to recognize you and to facilitate transactions you initiate. We do not disclose any nonpublic personal information about you or any of our former customers to anyone, except as permitted by law. For instance, so that we may continue to offer you Van Kampen investment products and services that meet your investing needs, and to effect transactions that you request or authorize, we may disclose the information we collect to companies that perform services on our behalf, such as printers and mailers that assist us in the distribution of investor materials. These companies will use this information only for the services for which we hired them, and are not permitted to use or share this information for any other purpose. To protect your nonpublic personal information internally, we permit access to it only by authorized employees, and maintain physical, electronic and procedural safeguards to guard your nonpublic personal information. * Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp., Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc., Van Kampen System Inc. and Van Kampen Exchange Corp., as well as the many Van Kampen mutual funds and Van Kampen unit investment trusts. The Statement of Additional Information includes additional information about Fund trustees and is available, without charge, upon request by calling (800) 847-2424. Van Kampen Funds Inc. 1 Parkview Plaza, P.O. Box 5555 Oakbrook Terrace, IL 60181-5555 www.vankampen.com (VAN KAMPEN INVESTMENTS LOGO) Copyright (C)2003 Van Kampen Funds Inc. All rights reserved. Member NASD/SIPC. 235, 325, 425 NYTF ANR 11/03 12230K03-AP-11/03 Item 2. Code of Ethics. (a) The Trust has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Trust or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) Not applicable. (d) Not applicable. (e) Not applicable. (f) (1) The Trust's Code of Ethics is attached hereto as Exhibit 10A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Trust's Board of Trustees has determined that it has three "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees : J. Miles Branagan, Jerry Choate and R. Craig Kennedy. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services. Applicable only for reports covering fiscal years ending on or after December 15, 2003. Item 5. Audit Committee of Listed Registrants. Applicable only for reports covering periods ending on or after the earlier of (i) the first annual shareholder meeting after January 15, 2004 or (ii) October 31, 2004. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to annual reports filed by closed-end funds. Item 8. [Reserved.] Item 9. Controls and Procedures (a) The Trust's principal executive officer and principal financial officer have concluded that the Trust's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Trust in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Trust's internal controls or in other factors that could significantly affect the Trust's internal controls subsequent to the date of their evaluation. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal half-year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10. Exhibits. (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each Principal Executive Officer and Principal Financial Officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Van Kampen Tax Free Trust ------------------------- By:/s/Ronald E. Robison --------------------- Name: Ronald E. Robison Title: Principal Executive Officer Date: November 19, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/Ronald E. Robison --------------------- Name: Ronald E. Robison Title: Principal Executive Officer Date: November 19, 2003 By: /s/ John L. Sullivan -------------------- Name: John L. Sullivan Title: Principal Financial Officer Date: November 19, 2003 EX-99.CODE 3 c81502a1exv99wcode.txt CODE OF ETHICS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED JULY 23, 2003 I. This Code of Ethics (the "Code") for the investment companies within the Van Kampen complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. o full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; o compliance with applicable laws and governmental rules and regulations; o prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: o use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly) to the detriment of the Fund; o cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or o use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: o service or significant business relationships as a director on the board of any public or private company; o accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; o any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and o a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE o Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; o each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; o each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and o it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: o upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; o annually thereafter affirm to the Boards that he has complied with the requirements of the Code; o not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and o notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(1) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: o the General Counsel will take all appropriate action to investigate any potential violations reported to him; o if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; o any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; o if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; o the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and o any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY - --------- (1) Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. _________________________ Date:_____________________ EXHIBIT A FUND LIST Van Kampen Series Fund, Inc. on behalf of its series Van Kampen American Value Fund Van Kampen Asian Equity Fund Van Kampen Emerging Markets Debt Fund Van Kampen Emerging Markets Fund Van Kampen Equity Growth Fund Van Kampen European Value Equity Fund Van Kampen Focus Equity Fund Van Kampen Global Equity Allocation Fund Van Kampen Global Value Equity Fund Van Kampen Growth and Income Fund II Van Kampen International Magnum Fund Van Kampen Japanese Equity Fund Van Kampen Latin American Fund Van Kampen Mid Cap Growth Fund Van Kampen Global Franchise Fund Van Kampen Value Fund Van Kampen Worldwide High Income Fund Van Kampen U.S. Government Trust on behalf of its series Van Kampen U.S. Government Fund Van Kampen Tax Free Trust on behalf of its series Van Kampen Insured Tax Free Income Fund Van Kampen Strategic Municipal Income Fund Van Kampen California Insured Tax Free Fund Van Kampen Municipal Income Fund Van Kampen Intermediate Term Municipal Income Fund Van Kampen New York Tax Free Income Fund Van Kampen California Municipal Income Fund Van Kampen Michigan Tax Free Income Fund Van Kampen Missouri Tax Free Income Fund Van Kampen Ohio Tax Free Income Fund Van Kampen Trust on behalf of its series Van Kampen High Yield Fund Van Kampen Managed Short Term Income Fund EXHIBIT A (CONT.) FUND LIST Van Kampen Equity Trust on behalf of its series Van Kampen Utility Fund Van Kampen Growth Fund Van Kampen Aggressive Growth Fund Van Kampen Small Cap Value Fund Van Kampen Select Growth Fund Van Kampen Small Company Growth Fund Van Kampen Small Cap Growth Fund Van Kampen Value Opportunities Fund Van Kampen Tax-Exempt Trust on behalf of its Series Van Kampen High Yield Municipal Fund Van Kampen Equity Trust II on behalf of its Series Van Kampen Technology Fund Van Kampen International Advantage EXHIBIT A (CONT.) FUND LIST Van Kampen Pennsylvania Tax Free Income Fund Van Kampen Tax Free Money Fund Van Kampen Comstock Fund Van Kampen Corporate Bond Fund Van Kampen Emerging Growth Fund Van Kampen Enterprise Fund Van Kampen Equity Income Fund Van Kampen Government Securities Fund Van Kampen Growth and Income Fund Van Kampen Harbor Fund Van Kampen High Income Corporate Bond Fund Van Kampen Limited Maturity Government Fund Van Kampen Pace Fund Van Kampen Real Estate Securities Fund Van Kampen Reserve Fund Van Kampen Exchange Fund Van Kampen Life Investment Trust on behalf of its Portfolios Aggressive Growth Portfolio Comstock Portfolio Emerging Growth Portfolio Enterprise Portfolio EXHIBIT A (CONT.) FUND LIST Government Portfolio Growth and Income Portfolio Money Market Portfolio Van Kampen Municipal Income Trust Van Kampen California Municipal Trust Van Kampen High Income Trust Van Kampen High Income Trust II Van Kampen Investment Grade Municipal Trust Van Kampen Municipal Trust Van Kampen California Quality Municipal Trust Van Kampen Florida Quality Municipal Trust Van Kampen New York Quality Municipal Trust Van Kampen Ohio Quality Municipal Trust Van Kampen Pennsylvania Quality Municipal Trust Van Kampen Trust for Insured Municipals Van Kampen Trust for Investment Grade Municipals Van Kampen Trust for Investment Grade California Municipals Van Kampen Trust for Investment Grade Florida Municipals Van Kampen Trust for Investment Grade New Jersey Municipals Van Kampen Trust for Investment Grade New York Municipals Van Kampen Trust for Investment Grade Pennsylvania Municipals Van Kampen Municipal Opportunity Trust Van Kampen Advantage Municipal Income Trust Van Kampen Advantage Pennsylvania Municipal Income Trust Van Kampen Strategic Sector Municipal Trust Van Kampen Value Municipal Income Trust Van Kampen California Value Municipal Income Trust Van Kampen Massachusetts Value Municipal Income Trust Van Kampen New York Value Municipal Income Trust Van Kampen Ohio Value Municipal Income Trust Van Kampen Pennsylvania Value Municipal Income Trust Van Kampen Municipal Opportunity Trust II Van Kampen Advantage Municipal Income Trust II Van Kampen Select Sector Municipal Trust Van Kampen Senior Loan Fund Van Kampen Senior Income Trust Van Kampen Bond Fund Van Kampen Income Trust EXHIBIT B COVERED OFFICERS Mitchell M. Merin -- President Ronald E. Robison -- Executive Vice President and Principal Executive Officer John L. Sullivan -- Vice President, Chief Financial Officer and Treasurer EXHIBIT C GENERAL COUNSEL'S DESIGNEE A. Thomas Smith III EX-99.CERT 4 c81502a1exv99wcert.txt CERTIFICATION I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Van Kampen Tax Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2003 /s/ Ronald E. Robison --------------------------- Principal Executive Officer I, John L. Sullivan, certify that: 1. I have reviewed this report on Form N-CSR of Van Kampen Tax Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2003 /s/ John L. Sullivan --------------------------- Principal Financial Officer I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Van Kampen Tax Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: December 8, 2003 /s/ Ronald E. Robison ---------------------- Principal Executive Officer I, John L. Sullivan, certify that: 1. I have reviewed this report on Form N-CSR of Van Kampen Tax Free Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: December 8, 2003 /s/ John L. Sullivan --------------------- Principal Executive Officer EX-99.906CERT 5 c81502a1exv99w906cert.txt 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Name of Issuer: Van Kampen Tax Free Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended September 30, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: November 19, 2003 /s/ Ronald E. Robison --------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Van Kampen Tax Free Trust and will be retained by Van Kampen Tax Free Trust and furnished to the Securities and Exchange Commission or its staff upon request. This written statement required by Section 906 is being furnished with this report, but not being filed as part of this Report. Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Name of Issuer: Van Kampen Tax Free Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended September 30, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: November 19, 2003 /s/ John L. Sullivan --------------------- John L. Sullivan Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Van Kampen Tax Free Trust and will be retained by Van Kampen Tax Free Trust and furnished to the Securities and Exchange Commission or its staff upon request. This written statement required by Section 906 is being furnished with this report, but not being filed as part of this Report. Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Name of Issuer: Van Kampen Tax Free Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended September 30, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: December 8, 2003 /s/ Ronald E. Robison ---------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Van Kampen Tax Free Trust and will be retained by Van Kampen Tax Free Trust and furnished to the Securities and Exchange Commission or its staff upon request. This written statement required by Section 906 is being furnished with this report, but not being filed as part of this Report. Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Name of Issuer: Van Kampen Tax Free Trust In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended September 30, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: December 8, 2003 /s/ John L. Sullivan ---------------------- John L. Sullivan Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Van Kampen Tax Free Trust and will be retained by Van Kampen Tax Free Trust and furnished to the Securities and Exchange Commission or its staff upon request. This written statement required by Section 906 is being furnished with this report, but not being filed as part of this Report. -----END PRIVACY-ENHANCED MESSAGE-----