1
 
                                  SCHEDULE 14A
                                 (RULE 14A-101)
 
                    INFORMATION REQUIRED IN PROXY STATEMENT
 
                            SCHEDULE 14A INFORMATION
 
          PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
                  EXCHANGE ACT OF 1934 (AMENDMENT NO.       )
 
Filed by the Co-Registrants /X/
Filed by a Party other than the Registrant / /
 
Check the appropriate box:
 
/X/ Preliminary Proxy Statement            / / Confidential, for Use of the Com-
                                               mission Only (as permitted by
                                               Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
 
               VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME TRUST
             VAN KAMPEN AMERICAN CAPITAL CALIFORNIA MUNICIPAL TRUST
        VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM HIGH INCOME TRUST
           VAN KAMPEN AMERICAN CAPITAL LIMITED TERM HIGH INCOME TRUST
          VAN KAMPEN AMERICAN CAPITAL INVESTMENT GRADE MUNICIPAL TRUST
              VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
                  VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST
         VAN KAMPEN AMERICAN CAPITAL CALIFORNIA QUALITY MUNICIPAL TRUST
          VAN KAMPEN AMERICAN CAPITAL NEW YORK QUALITY MUNICIPAL TRUST
        VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST
          VAN KAMPEN AMERICAN CAPITAL FLORIDA QUALITY MUNICIPAL TRUST
            VAN KAMPEN AMERICAN CAPITAL OHIO QUALITY MUNICIPAL TRUST
            VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS
       VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE MUNICIPALS
  VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE CALIFORNIA MUNICIPALS
   VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW YORK MUNICIPALS
 VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE PENNSYLVANIA MUNICIPALS
   VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE FLORIDA MUNICIPALS
  VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW JERSEY MUNICIPALS
          VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST
   VAN KAMPEN AMERICAN CAPITAL ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME TRUST
            VAN KAMPEN AMERICAN CAPITAL VALUE MUNICIPAL INCOME TRUST
      VAN KAMPEN AMERICAN CAPITAL NEW JERSEY VALUE MUNICIPAL INCOME TRUST
         VAN KAMPEN AMERICAN CAPITAL OHIO VALUE MUNICIPAL INCOME TRUST
     VAN KAMPEN AMERICAN CAPITAL MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
       VAN KAMPEN AMERICAN CAPITAL NEW YORK VALUE MUNICIPAL INCOME TRUST
      VAN KAMPEN AMERICAN CAPITAL CALIFORNIA VALUE MUNICIPAL INCOME TRUST
     VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
            VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST
        VAN KAMPEN AMERICAN CAPITAL FLORIDA MUNICIPAL OPPORTUNITY TRUST
           VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
        VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST II
           VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
          VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST
                        THE EXPLORER INSTITUTIONAL TRUST
 
            (Names of Co-Registrants as Specified in Their Charters)
 
Payment of Filing Fee (Check the appropriate box):
 
/X/ $125 per each Co-Registrant (an aggregate of $4,250 for the Co-Registrants
    listed above) per Item 22(a)(2) of Schedule 14A.
 
/ / Fee paid previously with preliminary materials.
   2
 
  Dear Van Kampen American Capital Fund Shareholder:
 
  Each proxy card enclosed in this envelope represents your voting privilege in
a separate Van Kampen American Capital Fund. We have grouped your proxy cards
together for your convenience and to reduce postage expenses.
 
  The meeting date for your Fund is October 23, 1996. Please sign all proxy
cards and return them in the postage-paid envelope included with this material.
 
  We appreciate the prompt return of your proxy cards.
   3
 
September   , 1996
 
  Dear Van Kampen American Capital Fund Shareholder:
 
  The enclosed proxy statement relates to a joint meeting of the shareholders of
certain of the Van Kampen American Capital closed-end investment companies and
the Van Kampen American Capital Explorer Funds (the "Funds"). VK/AC Holding,
Inc., the corporate parent of the investment adviser of each Fund, has entered
into a merger agreement with Morgan Stanley Group Inc. ("Morgan Stanley") and
certain of Morgan Stanley's affiliates. Pursuant to the merger agreement, your
Fund's investment adviser will become an indirect subsidiary of Morgan Stanley.
Each Fund's current investment adviser will continue to provide the Fund with
investment advisory and management services following the merger. The primary
purpose of the meeting is to permit each Fund's shareholders to consider a new
investment advisory agreement to take effect following the merger, as required
by federal securities laws. The new investment advisory agreement between your
Fund and its investment adviser will be substantially identical to the Fund's
current investment advisory agreement, except for the dates of execution,
effectiveness and termination.
 
  The attached proxy statement seeks shareholder approval on these and certain
other items. Although we encourage you to read carefully the full proxy
statement, we have created a brief question-and-answer section for your
convenience.
 
                 Your vote is important and your participation
           in the governance of your Fund(s) does make a difference.
 
  The proposals have been unanimously approved by the Board of Trustees of each
Fund, who recommend you vote "FOR" each of these proposals. YOUR IMMEDIATE
RESPONSE WILL HELP SAVE ON THE COSTS OF ADDITIONAL SOLICITATIONS. EACH FUND
VOTES SEPARATELY, SO PLEASE SIGN AND RETURN ALL OF YOUR FUND PROXY FORMS. We
look forward to your participation, and we thank you for your continued
confidence in Van Kampen American Capital.
 
  PLEASE SIGN AND RETURN YOUR PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
 
                                          Sincerely,
 
                                          Dennis J. McDonnell
                                          President
   4
 
                     INFORMATION ABOUT YOUR PROXY STATEMENT
 
Q.    WHY AM I RECEIVING THIS PROXY STATEMENT?
A.    Federal securities laws require a vote by each Fund's shareholders on
      certain matters whenever the Fund's investment adviser, or its parent
      corporation, is subject to a change in control. Morgan Stanley's
      acquisition of the corporate parent of your Fund's investment adviser may
      be deemed to be a change of control. Among the proposed items your Fund is
      seeking shareholder approval on are:
 
      - approval of a new investment advisory agreement
 
      - approval of amendments to the Declaration of Trust of certain Funds
 
      - approval of amendments to certain fundamental investment policies
 
      - ratification of the independent public accountants for certain Funds
 
      Please refer to the proxy statement for a detailed explanation of the
      proposed items.
 
Q.    HOW WILL THIS AFFECT MY ACCOUNT?
A.    You can expect the same management expertise and high quality shareholder
      service you've grown accustomed to. The new investment advisory agreement
      between your Fund and its investment adviser generally will be
      substantially identical to the Fund's current investment advisory
      agreement and subadvisory agreement, except for the dates of execution,
      effectiveness and termination.
 
Q.    WHY DO I NEED TO VOTE?
A.    Your vote is needed to ensure that the proposals can be acted upon. Your
      immediate response on the enclosed proxy card(s) will help save on the
      costs of any further solicitations for a shareholder vote. We encourage
      all shareholders to participate in the governance of their Fund(s).
 
Q.    HOW DO THE TRUSTEES OF MY FUND SUGGEST THAT I VOTE?
A.    After careful consideration, the trustees of your Fund unanimously
      recommend that you vote "FOR" each of the items proposed on the enclosed
      proxy card(s).
 
Q.    WHO IS PAYING FOR EXPENSES RELATED TO THE SHAREHOLDER MEETING?
A.    Van Kampen American Capital will pay for those expenses relating to
      reapproval of investment advisory agreements and the Funds will pay for
      those expenses related to other proposals.
 
Q.    WHERE DO I MAIL MY PROXY CARD(S)?
A.    You may use the enclosed postage-paid envelope or mail
      your proxy card(s) to:
      Proxy Tabulator
      P.O. Box 9111
      Hingham, MA 02043
 
Q.    WHO DO I CALL IF I HAVE QUESTIONS?
A.    We will be happy to answer your questions about the proxy solicitation.
      Please call us at 1-800-341-2929 (1-800-421-5666 for shareholders of Van
      Kampen American Capital Prime Rate Income Trust and the Van Kampen
      American Capital Explorer Funds) between 7:00 a.m. and 7:00 p.m. Central
      time, Monday through Friday.
   5
 
                       VAN KAMPEN AMERICAN CAPITAL FUNDS
 
                               ONE PARKVIEW PLAZA
                        OAKBROOK TERRACE, ILLINOIS 60181
                            TELEPHONE (800) 341-2929
 
                NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
 
                          TO BE HELD OCTOBER 23, 1996
 
  Notice is hereby given to the holders of common shares of beneficial interest
("Common Shares") and preferred shares of beneficial interest (the "Preferred
Shares"), if any, of each of the Van Kampen American Capital Funds listed on
Annex A (the "Funds") to the attached Proxy Statement that a Joint Special
Meeting of the Shareholders of the Funds (the "Meeting") will be held at the
offices of Van Kampen American Capital, Inc., One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, on Wednesday, October 23, 1996, at    p.m., for the
following purposes:
 
   
1.    For each Fund, to approve or disapprove a new investment advisory
      agreement;
2.    For VIT and VLT (each defined on Annex A), to approve or
      disapprove an amendment to its Declaration of Trust;
3.    For each Closed-End Fund (defined on Annex A), to approve or
      disapprove certain changes to its fundamental investment policies
      with respect to investments in other investment companies;
4.    For each Explorer Fund (defined on Annex A), to ratify or reject
      the selection of KPMG Peat Marwick as independent public
      accountants for its fiscal year; and
5.    To transact such other business as may properly come before the
      Meeting.


 
The Common Shares and the Preferred Shares sometimes are referred to herein
collectively as the "Shares".
 
  Holders of record of the Shares of each Fund at the close of business on
August 23, 1996 are entitled to notice of, and to vote at, the Meeting and any
adjournment thereof.
                                    By order of the Board of Trustees
 
                                    RONALD A. NYBERG, Vice President and
                                    Secretary
September   , 1996
   6
 
  EACH FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL
REPORT (AND THE MOST RECENT SEMI-ANNUAL REPORT SUCCEEDING THE ANNUAL REPORT, IF
ANY) TO A SHAREHOLDER UPON REQUEST. ANY SUCH REQUEST SHOULD BE DIRECTED TO THE
VAN KAMPEN AMERICAN CAPITAL FUNDS BY CALLING 1-800-341-2929 (1-800-421-5666 FOR
THE PRIME RATE FUND AND THE EXPLORER FUNDS) OR BY WRITING TO THE RESPECTIVE FUND
AT ONE PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 60181.
 
  SHAREHOLDERS OF THE FUNDS ARE INVITED TO ATTEND THE MEETING IN PERSON. IF YOU
DO NOT EXPECT TO ATTEND THE MEETING, PLEASE INDICATE YOUR VOTING INSTRUCTIONS ON
THE ENCLOSED PROXY CARD WITH RESPECT TO EACH FUND IN WHICH YOU WERE A
SHAREHOLDER AS OF THE RECORD DATE, DATE AND SIGN SUCH PROXY CARD(S), AND RETURN
IT (THEM) IN THE ENVELOPE PROVIDED, WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND
NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES.
 
  IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY PROMPTLY.
 
  MANAGEMENT OF EACH FUND RECOMMENDS THAT YOU CAST YOUR VOTE:
 
  - FOR approval of each new investment advisory agreement;
 
  - FOR approval of an amendment to the Declaration of Trust of each of VIT and
    VLT;
 
  - FOR approval of changes in certain fundamental investment policies of each
    Closed-End Fund relating to investments in other investment companies; and
 
  - FOR the ratification of the selection of independent public accountants for
    the current fiscal year of each Explorer Fund.
 
                            YOUR VOTE IS IMPORTANT.
                   PLEASE RETURN YOUR PROXY CARD(S) PROMPTLY
                       NO MATTER HOW MANY SHARES YOU OWN.
   7
 
                                PROXY STATEMENT
 
                       VAN KAMPEN AMERICAN CAPITAL FUNDS
 
                               ONE PARKVIEW PLAZA
                        OAKBROOK TERRACE, ILLINOIS 60181
                            TELEPHONE (800) 341-2929
 
                     JOINT SPECIAL MEETING OF SHAREHOLDERS
 
                                OCTOBER 23, 1996
 
  This Proxy Statement is furnished in connection with the solicitation by the
Board of Trustees (the "Trustees" or "Board of Trustees") of each of the Van
Kampen American Capital Funds listed on Annex A to this Proxy Statement (the
"Funds") of proxies to be voted at a Joint Special Meeting of Shareholders, and
all adjournments thereof (the "Meeting"), of the Funds, to be held at the
offices of Van Kampen American Capital, Inc., One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, on Wednesday, October 23, 1996, at   :   .m. The
approximate mailing date of this Proxy Statement and accompanying form of proxy
is September   , 1996.
 
  The primary purpose of the Meeting is to permit each Fund's shareholders to
consider a New Advisory Agreement (defined below) to take effect following the
consummation of the transactions contemplated by an Agreement and Plan of
Merger, dated as of June 21, 1996 (the "Merger Agreement"), among Morgan Stanley
Group Inc. ("Morgan Stanley"), MSAM Holdings II, Inc., MSAM Acquisition Inc. and
VK/AC Holding, Inc. ("VKAC Holding"), the indirect parent corporation of the
Funds' investment adviser. Pursuant to the Merger Agreement, the investment
adviser will become an indirect subsidiary of Morgan Stanley. The shareholder
vote on the New Advisory Agreements is required under the Investment Company Act
of 1940, as amended (the "1940 Act"), as a result of Morgan Stanley's
contemplated acquisition of the investment advisers. Each Fund's New Advisory
Agreement is substantially identical to such Fund's Current Advisory Agreement
(defined below), except for the dates of execution, effectiveness and
termination.
 
  Participating in the Meeting are holders of common shares of beneficial
interest (the "Common Shares") and preferred shares of beneficial interest (the
"Preferred Shares"), if any, of each of the Funds as set forth on Annex A to
this Proxy Statement. The Common Shares and the Preferred Shares sometimes are
referred to herein collectively as the "Shares." The Meeting is scheduled as a
joint meeting of the shareholders of the Funds, because the Board of Trustees of
each Fund is
   8
 
identical and the shareholders of the Funds are expected to consider and vote on
similar matters. The Boards of Trustees have determined that the use of a joint
Proxy Statement for the Meeting is in the best interest of the shareholders of
the Funds. In the event that a shareholder of any Fund present at the Meeting
objects to the holding of a joint meeting and moves for an adjournment of the
meeting of such Fund to a time immediately after the Meeting so that such Fund's
meeting may be held separately, the persons named as proxies will vote in favor
of the adjournment.
 
  The following table summarizes each proposal to be presented at the Meeting
and the Funds solicited with respect to such proposal:
 


                   PROPOSAL                        AFFECTED FUNDS
     -------------------------------------  -----------------------------
                                      
1.   Approval of New Advisory Agreement     All Funds
2.   Amendment to Declaration of Trust      VIT and VLT
3.   Amendment of Fundamental Investment    Closed-End Funds
     Policies
4.   Ratification of Independent Public     Explorer Funds
     Accountants

 
  Annex A lists the abbreviated names by which the Funds sometimes are referred
to in this Proxy Statement and groups the Funds into "Closed-End Funds" and
"Explorer Funds". Please refer to Annex A for any questions you may have
regarding whether your Fund is participating at the Meeting, defined terms
relating to the Funds and abbreviated Fund names. The Van Kampen American
Capital investment companies not listed on Annex A will vote at separate
shareholder meetings on proposals substantially similar to Proposals 1, 3 and 4
in this Proxy Statement. They will hold separate shareholder meetings because
they are supervised by Boards of Trustees that are not identical to the Boards
of Trustees of the Funds. If you are a shareholder of Van Kampen American
Capital investment companies not listed on Annex A, you will receive one or more
additional proxy statements relating to such other shareholder meetings.
 
  EACH FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL
REPORT (AND THE MOST RECENT SEMI-ANNUAL REPORT SUCCEEDING THE ANNUAL REPORT, IF
ANY) TO A SHAREHOLDER UPON REQUEST. ANY SUCH REQUEST SHOULD BE DIRECTED TO THE
VAN KAMPEN AMERICAN CAPITAL FUNDS BY CALLING 1-800-341-2929 (1-800-421-5666 FOR
THE PRIME RATE FUND AND THE EXPLORER FUNDS) OR BY WRITING TO THE RESPECTIVE
FUND AT ONE PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 60181.
 
                                        2
   9
 
VOTING
 
  The Boards of Trustees have fixed the close of business on August 23, 1996, as
the record date (the "Record Date") for the determination of holders of Shares
of each Fund entitled to vote at the Meeting. Shareholders of a Fund on the
Record Date will be entitled to one vote per share with respect to each proposal
submitted to the shareholders of the Fund, with no Share having cumulative
voting rights.
 
  The voting requirement for passage of each of Proposals 1, 2 and 3 is the
"vote of a majority of the outstanding voting securities", which is defined
under the 1940 Act as the lesser of (i) 67% or more of the voting securities of
each respective Fund entitled to vote thereon present in person or by proxy at
the Meeting, if the holders of more than 50% of the outstanding voting
securities entitled to vote thereon are present in person or represented by
proxy, or (ii) more than 50% of the outstanding voting securities of each
respective Fund entitled to vote thereon. With respect to Proposal 4, the
affirmative vote of a majority of the Shares of a Fund present in person or by
proxy is necessary to ratify the selection of the independent public accountants
for such Fund.
 
  The Board of Trustees recommends that you cast your vote:
 
  - FOR approval of each New Advisory Agreement.
 
  - FOR approval of an amendment to the Declaration of Trust of each of VIT and
    VLT.
 
  - FOR approval of changes in certain fundamental investment policies of each
    Closed-End Fund regarding investment in other investment companies.
 
  - FOR the ratification of the selection of independent public accountants for
    the current fiscal year of each Explorer Fund.
 
  With respect to each Fund, the holders of Common Shares and holders of
Preferred Shares will vote together as a single class on all proposals to be
brought before the shareholders of such Fund at the Meeting. An unfavorable vote
on a proposal by the shareholders of one Fund will not affect the implementation
of such a proposal by another Fund, if the proposal is approved by the
shareholders of the other Fund.
 
  All properly executed proxies received prior to the Meeting will be voted at
the Meeting in accordance with the instructions marked thereon. Proxies received
prior to the Meeting on which no vote is indicated will be voted "for" each
proposal as to which it is entitled to vote. Shares not voted with respect to a
proposal due to an abstention or broker non-vote will be deemed votes not cast
with respect to such proposal, but such Shares will be deemed present for quorum
purposes. A majority of the outstanding Shares entitled to vote on a proposal
must be present in person or by proxy to have a quorum to conduct business at
the Meeting. Abstentions and broker non-votes will be deemed present for quorum
purposes.
 
                                        3
   10
 
  Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the respective Fund a written notice of revocation, by
delivering a duly executed proxy bearing a later date or by attending the
Meeting and voting in person.
 
  The Funds know of no business other than that mentioned in Proposals 1 through
4 of the Notice that will be presented for consideration at the Meeting. If any
other matters are properly presented, it is the intention of the persons named
on the enclosed proxy to vote proxies in accordance with their best judgment. In
the event a quorum is present at the Meeting but sufficient votes to approve any
of the proposals with respect to one or more Funds are not received, the persons
named as proxies may propose one or more adjournments of the Meeting of the
concerned Fund to permit further solicitation of proxies, provided they
determine that such an adjournment and additional solicitation is reasonable and
in the interest of shareholders based on a consideration of all relevant
factors, including the nature of the relevant proposal, the percentage of votes
then cast, the percentage of negative votes then cast, the nature of the
proposed solicitation activities and the nature of the reasons for such further
solicitation.
 
- ------------------------------------------------------------------------------
PROPOSAL 1: APPROVAL OF NEW ADVISORY AGREEMENTS
- ------------------------------------------------------------------------------
 
THE ADVISERS
 
  Van Kampen American Capital Investment Advisory Corp. ("Advisory Corp.") acts
as investment adviser for each Closed-End Fund. Van Kampen American Capital
Management, Inc. ("Management Inc.") acts as investment adviser for each
Explorer Fund. Advisory Corp. and Management Inc. sometimes are referred to
herein collectively as the "Advisers" or individually as an "Adviser". An
Adviser has acted as investment adviser for each Fund since the Fund commenced
its investment operations. Prior to 1988, Advisory Corp. provided investment
advisory services under the name "American Portfolio Advisory Services Inc." On
December 31, 1987, Advisory Corp. changed its name to Van Kampen Merritt
Investment Advisory Corp. In January 1995, Advisory Corp. changed its name to
Van Kampen American Capital Investment Advisory Corp.
 
  Each Adviser currently is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("VKAC"), which is a wholly-owned subsidiary of VKAC Holding,
which in turn is controlled, through the ownership of a substantial majority of
its common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
 
                                        4
   11
 
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of VKAC own, in the
aggregate, approximately 6% of the common stock of VKAC Holding and have the
right to acquire, upon the exercise of options (whether or not vested),
approximately an additional 12% of the common stock of VKAC Holding. Currently,
and after giving effect to the exercise of such options, no officer or trustee
of the Funds owns or would own 5% of more of the common stock of VKAC Holding.
The addresses of VKAC Holding, VKAC and the Advisers are One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 and 2800 Post Oak Blvd., Houston, Texas 77056.
 
INFORMATION CONCERNING MORGAN STANLEY
 
  Morgan Stanley and various of its directly or indirectly owned subsidiaries,
including Morgan Stanley & Co. Incorporated ("Morgan Stanley & Co."), a
registered broker-dealer and investment adviser, and Morgan Stanley
International, are engaged in a wide range of financial services. Their
principal businesses include securities underwriting, distribution and trading;
merger, acquisition, restructuring and other corporate finance advisory
activities; merchant banking; stock brokerage and research services; asset
management; trading of futures, options, foreign exchange, commodities and swaps
(involving foreign exchange, commodities, indices and interest rates); real
estate advice, financing and investing; and global custody, securities clearance
services and securities lending. Morgan Stanley Asset Management Inc. also is a
wholly-owned subsidiary of Morgan Stanley. As of June 30, 1996, Morgan Stanley
Asset Management Inc., together with its affiliated investment advisory
companies, had approximately $103.5 billion of assets under management and
fiduciary advice.
 
THE ACQUISITION
 
  Pursuant to the Merger Agreement, MSAM Acquisition Inc. will be merged with
and into VKAC Holding and VKAC Holding will be the surviving corporation (the
"Acquisition"). Following the Acquisition, VKAC Holding and the Advisers will be
indirect subsidiaries of Morgan Stanley.
 
  The Advisers anticipate that the consummation of the Acquisition will occur by
the end of November 1996, provided that a number of conditions set forth in the
Merger Agreement are met or waived. The conditions require, among other things,
that as of the closing the aggregate assets of certain investment companies (not
including the Funds, except for Prime Rate and the Explorer Funds) and certain
accounts advised by the Advisers or their affiliates are in excess of a
specified minimum amount, and that the shareholders of such investment companies
or accounts have approved new investment advisory agreements or consented to the
assignment of existing investment advisory agreements. At the closing, MSAM
Acquisition Inc. will pay approximately $740 million (based on VKAC's long-term
debt outstanding as of July 31, 1996) in cash to the stockholders of VKAC
Holding
 
                                        5
   12
 
(excluding certain management stockholders), and to persons owning options to
purchase stock of VKAC Holding, subject to certain purchase price adjustments
set forth in the Merger Agreement. As of July 31, 1996, VKAC had long-term debt
outstanding of approximately $410 million. To the extent that pre-tax income of
VKAC prior to the closing of the Acquisition permits the repayment of its long-
term debt, the purchase price for the equity interests in VKAC Holding will be
increased by the amount of long-term debt repaid. The purchase price also is
subject to certain adjustments based, among other things, on assets under
management of VKAC and its subsidiaries at the time of closing. The Advisers
also contemplate that, as part of the Acquisition, certain officers and
directors of VKAC Holding and its affiliates will contribute to MSAM Holdings
II, Inc. their existing shares of common stock of VKAC Holding in exchange for
approximately $25 million of shares of preferred stock of MSAM Holdings II, Inc.
which, in turn, will be exchangeable into common stock, par value $1.00 per
share, of Morgan Stanley at specified times over a four year period. Such shares
of preferred stock will represent, in the aggregate, 5% of the combined voting
power in MSAM Holdings II, Inc., the remainder of which will be indirectly owned
by Morgan Stanley.
 
  VKAC Holding will engage in certain preparatory transactions prior to the
Acquisition, including the distribution to stockholders of VKAC Holding of (i)
all of VKAC Holding's investment in McCarthy, Crisanti & Maffei, Inc., a
wholly-owned subsidiary engaged in the business of distributing research and
financial information, (ii) all of VKAC Holding's investment in Hansberger
Global Investors, Inc. ("HGI"), a company in which VKAC Holding made a minority
investment in May 1996, and (iii) certain related cash amounts.
 
  There is no financing condition to the closing of the Acquisition. VKAC has
been advised by Morgan Stanley that, as of August   , 1996, no determination had
been made whether any additional indebtedness will be incurred by Morgan Stanley
and its affiliates or VKAC and its affiliates in connection with the
Acquisition. In addition, the disposition of VKAC's outstanding long-term
indebtedness (including its bank loans and senior notes) in connection with the
Acquisition had not yet been determined.
 
  The operating revenue of VKAC and its subsidiaries for the fiscal year ended
December 31, 1995, less expenses for the same period, was more than adequate to
service VKAC's outstanding debt. VKAC prepaid $80 million of its long-term debt
in 1995, and has continued to make debt prepayments during 1996. VKAC Holding
and VKAC believe, based on the earnings experience of VKAC and its subsidiaries,
that after the Acquisition the operating revenue of VKAC and its subsidiaries
should be more than sufficient to service their debt and that VKAC and its
subsidiaries should be able to conduct their respective operations as now
conducted and as proposed to be conducted.
 
  The Merger Agreement does not contemplate any changes, other than changes in
the ordinary course of business, in the management or operation of the Advisers
 
                                        6
   13
 
relating to the Funds, the Advisers' personnel managing the Funds or other
services or business activities of the Funds. The Acquisition is not expected to
result in material changes in the business, corporate structure or composition
of the senior management or personnel of the Advisers, or in the manner in which
the Advisers render services to the Funds. Morgan Stanley has agreed in the
Merger Agreement that, for a period of two years from the date of the
Acquisition, it will cause the Advisers to provide compensation and employee
benefits which are substantially comparable in the aggregate to those presently
provided. The Advisers do not anticipate that the Acquisition or any ancillary
transactions will cause a reduction in the quality of services now provided to
the Funds by the Advisers, or have any adverse effect on the Advisers' ability
to fulfill their obligations under the New Advisory Agreements or to operate
their business in a manner consistent with past business practices.
 
  Certain officers of the Advisers, including Dennis J. McDonnell, who is a
member of the Board of Trustees and Don G. Powell who was a member of the Board
of Trustees prior to August 1996, previously entered into employment agreements
with VKAC Holding which expire from between 1997 and 2000. Certain officers of
the Advisers also previously entered into retention agreements with VKAC
Holding, which will remain in place for two years following the consummation of
the Acquisition. The Merger Agreement contemplates that Morgan Stanley will, and
will cause VKAC Holding to, honor such employment and retention agreements. The
employment agreements and retention agreements are intended to assure that the
services of the officers are available to the Advisers (and thus to the Funds)
for a remaining term of two to four years. As described above, certain officers
and employees of VKAC and the Advisers, including Messrs. McDonnell and Powell,
are expected to contribute their existing shares of common stock of VKAC Holding
to MSAM Holdings II, Inc. in exchange for approximately $25 million of preferred
stock in MSAM Holdings II, Inc. which, in turn, will be exchangeable into common
stock, par value $1.00 per share, of Morgan Stanley at specified times over a
four year period. Such shares of preferred stock will represent, in the
aggregate, 5% of the combined voting power in MSAM Holdings II, Inc.
 
THE ADVISORY AGREEMENTS
 
  Consummation of the Acquisition may constitute an "assignment" (as defined in
the 1940 Act) of the investment advisory agreement currently in effect between
each Fund and its respective Adviser (the "Current Advisory Agreement"). As
required by the 1940 Act, the Current Advisory Agreement provides for its
automatic termination in the event of an assignment. See "The Current Advisory
Agreements" below.
 
  In anticipation of the Acquisition and in order for the Advisers to continue
to serve as investment advisers to the Funds after consummation of the
Acquisition, a
 
                                        7
   14
 
new investment advisory agreement (the "New Advisory Agreement") between each
Fund and its respective Adviser must be approved (i) by a majority of the
Trustees of each Fund who are not parties to the New Advisory Agreement or
interested persons of any such party ("Disinterested Trustees") and (ii) by
holders of a majority of the outstanding voting securities (within the meaning
of the 1940 Act) of each Fund. See "The New Advisory Agreements" below.
 
  THE CURRENT ADVISORY AGREEMENTS. The Current Advisory Agreement for each
Closed-End Fund was last approved by a majority of the Trustees, including a
majority of the Disinterested Trustees, voting in person at a meeting called for
that purpose on May 17, 1996, to continue the Current Advisory Agreement for a
period of two years. The Current Advisory Agreement was last approved by
shareholders of each Closed-End Fund at a meeting held on December 16, 1994
relating to the acquisition of Advisory Corp.'s corporate parent by The Van
Kampen Merritt Companies, Inc.
 
  The Current Advisory Agreement for each Explorer Fund was initially approved
by a majority of the Trustees, including a majority of the Disinterested
Trustees, voting in person at a meeting called for that purpose on          ,
for a period of two years. The Current Advisory Agreement was approved by
Management Inc., as sole shareholder of each Explorer Fund, on          in
connection with the initial approval of the Current Advisory Agreements for the
Explorer Funds.
 
  Each Current Advisory Agreement provides that the respective Adviser will
supply investment research and portfolio management, including the selection of
securities for each Fund to purchase, hold or sell and the selection of brokers
through whom that Fund's portfolio transactions are executed, except that the
Adviser is permitted to delegate certain of the foregoing responsibilities for
each Fund to a subadviser pursuant to a subadvisory agreement approved by the
Board of Trustees. The Adviser also administers the business affairs of each
Fund, furnishes offices, necessary facilities and equipment, provides
administrative services, and permits its officers and employees to serve without
compensation as Trustees and officers of such Fund if duly elected to such
positions.
 
  Each Current Advisory Agreement provides that the respective Adviser shall not
be liable for any error of judgment or of law, or for any loss suffered by the
particular Fund in connection with the matters to which the Current Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its
obligations and duties, or by reason of its reckless disregard of obligations or
duties under each Current Advisory Agreement.
 
  Each Adviser's activities are subject to the review and supervision of the
Board of Trustees to which the Adviser renders periodic reports with respect to
each Fund's
 
                                        8
   15
 
investment activities. The Current Advisory Agreement may be terminated by
either party, at any time, without penalty, upon 60 days written notice, and
automatically terminates in the event of its assignment.
 
  The net assets of each of the Funds as of August 23, 1996, as well as other
investment companies sponsored by VKAC and advised by the Advisers, and other
investment companies for which either of the Advisers acts as sub-adviser, and
the rates of compensation paid thereto are set forth at Annex D hereto. Each
respective Fund recognized net advisory expenses, for its most recently
completed fiscal year, in the amounts set forth at Annex E hereto.
 
  Each Fund pays all other expenses incurred in its operation including, but not
limited to, direct charges relating to the purchase and sale of its portfolio
securities, interest charges, fees and expenses of legal counsel and independent
auditors, taxes and governmental fees, costs of share certificates and any other
expenses (including clerical expenses), expenses in connection with its dividend
reinvestment plan, membership fees in trade associations, expenses of
registering and qualifying its Shares for sale under federal and state
securities laws, expenses of printing and distribution, expenses of filing
reports and other documents filed with governmental agencies, expenses of annual
and special meetings of the trustees and shareholders, fees and disbursements of
the transfer agents, custodians and sub-custodians, expenses of disbursing
dividends and distributions, fees, expenses and out-of-pocket costs of the
trustees who are not affiliated with the Advisers, insurance premiums,
indemnification and other expenses not expressly provided for in each Current
Advisory Agreement and any extraordinary expenses of a nonrecurring nature. In
the case of the Prime Rate Fund and the Explorer Funds, such expenses also
include expenses related to the issuance, sale and repurchase of its Shares.
Each Fund also compensates the Adviser, VKAC and, in the case of the Prime Rate
Fund and the Explorer Funds, the Distributor (defined below) ACCESS (defined
below) for certain non-advisory services provided pursuant to agreements
discussed below. See "OTHER INFORMATION -- Non-Advisory Agreements" below.
 
  The foregoing summary of the Current Advisory Agreement between each
Closed-End Fund and Advisory Corp. is qualified by reference to the form of New
Advisory Agreement attached to this Proxy Statement as Annex B-1, which has been
marked to show changes from such Current Advisory Agreement. The foregoing
summary of the Current Advisory Agreement between each Explorer Fund and
Management Inc. is qualified by reference to the form of New Advisory Agreement
attached to this Proxy Statement as Annex B-2, which has been marked to show
changes from such Current Advisory Agreement.
 
THE NEW ADVISORY AGREEMENTS
 
  The Board of Trustees approved a proposed New Advisory Agreement between each
Closed-End Fund and Advisory Corp. on July 18, 1996, the form of which is
 
                                        9
   16
 
attached hereto as Annex B-1. The form of the proposed New Advisory Agreement
is substantially identical to the Current Advisory Agreement between each
Closed-End Fund and Advisory Corp., except for the dates of execution,
effectiveness and termination.
 
  The Board of Trustees approved a proposed New Advisory Agreement between each
Explorer Fund and Management Inc. on July 18, 1996, the form of which is
attached hereto as Annex B-2. The form of the proposed New Advisory Agreement is
substantially identical to the Current Advisory Agreement between each Explorer
Fund and Management Inc., except for the dates of execution, effectiveness and
termination.
 
  The investment advisory fee as a percentage of net assets payable by each Fund
will be the same under its New Advisory Agreement as under its Current Advisory
Agreement. If the investment advisory fee under each New Advisory Agreement had
been in effect for each Fund's most recently completed fiscal year, advisory
fees paid to the respective Adviser by each Fund would have been identical to
those paid under the Current Advisory Agreements.
 
  The Board of Trustees of each Fund held a joint meeting on July 18, 1996, at
which meeting the Trustees, including the Disinterested Trustees, concluded that
if the Acquisition occurs, entry by each respective Fund into a New Advisory
Agreement would be in the best interest of each Fund and the shareholders of
each Fund. The Board of Trustees of each Fund, including the Disinterested
Trustees, unanimously approved the New Advisory Agreement for each Fund and
recommended each such agreement for approval by the shareholders of the
respective Fund at the Meeting. The New Advisory Agreement would take effect
upon the later to occur of (i) the obtaining of shareholder approval or (ii) the
closing of the Acquisition. Each New Advisory Agreement will continue in effect
until May 30, 1997 and thereafter for successive annual periods as long as such
continuance is approved in accordance with the 1940 Act.
 
  In evaluating the New Advisory Agreements, the Boards of Trustees of the Funds
took into account that each Fund's Current Advisory Agreement and its New
Advisory Agreement, including the terms relating to the services to be provided
thereunder by the Adviser and the fees and expenses payable by such Fund, are
substantially identical, except for the dates of execution, effectiveness and
termination. The Trustees also considered other possible benefits to the
Advisers and Morgan Stanley that may result from the Acquisition, including the
continued use, to the extent permitted by law, of Morgan Stanley & Co. and its
affiliates for brokerage services and the possible retention of Morgan Stanley
Asset Management Inc. as subadviser by certain Van Kampen American Capital
investment companies (not including the Funds).
 
                                       10
   17
 
  The Boards of Trustees also considered the terms of the Merger Agreement and
the possible effects of the Acquisition upon VKAC's and the Advisers'
organization and upon the ability of the Advisers to provide advisory services
to each respective Fund. The Boards of Trustees considered the skills and
capabilities of the Advisers and the representations of Morgan Stanley that no
material change was planned in the current management or facilities of the
Advisers. In this regard, representatives of Morgan Stanley met with the Boards
of Trustees at the joint board meeting at which time such representatives
described the resources available to VKAC and the Advisers, after giving effect
to the Acquisition, to secure for each Fund quality investment research,
investment advice and other client services. The Board considered the financial
resources of Morgan Stanley and Morgan Stanley's representation to the Board
that it will provide sufficient capital to support the operations of the
Advisers. The Boards of Trustees also considered the reputation, expertise and
resources of Morgan Stanley and its affiliates in domestic and international
financial markets. The Boards of Trustees considered the continued employment of
members of senior management of the Advisers and VKAC pursuant to employment and
retention agreements and the incentives provided to such members and other key
employees of the Advisers and VKAC, to be important to help to assure continuity
of the personnel primarily responsible for maintaining the quality of investment
advisory and other services for the Funds.
 
  The Boards of Trustees considered the effects on the Funds of the Advisers
becoming affiliated persons of Morgan Stanley. Following the Acquisition, the
1940 Act will prohibit or impose certain conditions on the ability of the Funds
to engage in certain transactions with Morgan Stanley and its affiliates. For
example, absent exemptive relief, the Funds will be prohibited from purchasing
securities from Morgan Stanley & Co., a wholly-owned broker-dealer subsidiary of
Morgan Stanley, in transactions in which Morgan Stanley & Co. acts as a
principal, and the Funds will have to satisfy certain conditions in order to
engage in securities transactions in which Morgan Stanley & Co. acts as a broker
or to purchase securities in an underwritten offering in which Morgan Stanley &
Co. is acting as an underwriter. In this connection, management of the Advisers
represented to the Boards of Trustees that they do not believe these
prohibitions or conditions will have a material effect on the management or
performance of the Funds.
 
  The Boards of Trustees were advised that Section 15(f) of the 1940 Act is
applicable to the Acquisition. Section 15(f) of the 1940 Act permits, in the
context of a change in control of an investment adviser to a registered
investment company, the receipt by such investment adviser, or any of its
affiliated persons, of an amount of benefit in connection with such sale, as
long as two conditions are satisfied. First, an "unfair burden" must not be
imposed on the investment company for which the investment adviser acts in such
capacity as a result of the sale of such interest, or any express or implied
terms, conditions or understandings applicable thereto. The term "unfair
burden," as defined in the 1940 Act, includes any arrangement during
 
                                       11
   18
 
the two-year period after the transaction whereby the investment adviser (or
predecessor or successor adviser), or any interested person of any such adviser,
receives or is entitled to receive any compensation, directly or indirectly,
from the investment company or its security holders (other than fees for bona
fide investment advisory and other services), or from any person in connection
with the purchase or sale of securities or other property to, from or on behalf
of the investment company (other than ordinary fees for bona fide principal
underwriting services).
 
  Management of each of the Funds is aware of no circumstances arising from the
Acquisition, preparatory transactions to the Acquisition or any potential
financing that might result in the imposition of an "unfair burden" on the
Funds. Moreover, Morgan Stanley has agreed in the Merger Agreement that, upon
consummation of the Acquisition, it will take no action which would have the
effect, directly or indirectly, of violating any of the provisions of Section
15(f) of the 1940 Act in respect of the Acquisition. In this regard, the Merger
Agreement provides that Morgan Stanley will use its reasonable best efforts to
assure that (i) no "unfair burden" will be imposed on any Fund as a result of
the transactions contemplated by the Merger Agreement and (ii) except as
provided in the Merger Agreement, the investment advisory fees paid by the Funds
will not be increased for a period of two years from the closing of the
Acquisition and that, during such period, advisory fee waivers shall not be
permitted to expire except in accordance with their terms. An adviser may permit
a voluntary fee waiver unilaterally adopted by it to expire at any time and no
assurance can be given that voluntary waivers will not be permitted to expire
during the two year period. During the two year period following the
Acquisition, the Advisers do not intend to change its policies with respect to
the circumstances under which voluntary fee waivers may be permitted to expire.
Following the Acquisition, to the extent permitted by applicable law, VKAC
anticipates that the Funds will continue to use Morgan Stanley & Co. and its
affiliates for brokerage services.
 
  The second condition of Section 15(f) is that during the three-year period
immediately following a transaction to which Section 15(f) is applicable, at
least 75% of the subject investment company's board of directors must not be
"interested persons" (as defined in the 1940 Act) of the investment company's
investment adviser or predecessor adviser. The current composition of the Board
of Trustees of each Fund would be in compliance with such condition subsequent
to the Acquisition.
 
  Based upon its review, the Boards of Trustees concluded that the New Advisory
Agreement is in the best interest of each respective Fund and such Fund's
shareholders. Accordingly, after consideration of the above factors, and such
other factors and information that it deemed relevant, the Board of Trustees of
each Fund, including the Disinterested Trustees, unanimously approved the New
 
                                       12
   19
 
Advisory Agreement and voted to recommend its approval to the shareholders of
the respective Fund.
 
  In the event that shareholders of a Fund do not approve the New Advisory
Agreement with respect to a Fund and the Acquisition is consummated, the Board
of Trustees of such Fund would seek to obtain for the Fund interim investment
advisory services at the lesser of cost or the current fee rate either from the
respective Adviser or from another advisory organization. Thereafter, the Board
of Trustees of such Fund would either negotiate a new investment advisory
agreement with an advisory organization selected by the Board of Trustees or
make appropriate arrangements, in either event subject to approval of the
shareholders of such Fund. In the event the Acquisition is not consummated, the
Advisers would continue to serve as investment adviser of the Funds pursuant to
the terms of the Current Advisory Agreement.
 
SHAREHOLDER APPROVAL
 
  To become effective, each New Advisory Agreement must be approved by a
majority of the outstanding voting securities of the respective Fund. The "vote
of a majority of the outstanding voting securities" is defined under the 1940
Act as the lesser of the vote of (i) 67% or more of the Shares of the respective
Fund entitled to vote thereon present at the Meeting if the holders of more than
50% of such outstanding Shares are present in person or represented by proxy; or
(ii) more than 50% of such outstanding Shares of the Fund entitled to vote
thereon. Each New Advisory Agreement was unanimously approved by the Board of
Trustees after consideration of all factors which they determined to be relevant
to their deliberations, including those discussed above. The Board of Trustees
also unanimously determined to submit each New Advisory Agreement for
consideration by the shareholders of the respective Fund. THE BOARD OF TRUSTEES
OF EACH FUND RECOMMENDS A VOTE "FOR" APPROVAL OF THE NEW ADVISORY AGREEMENT.
 
- ------------------------------------------------------------------------------
PROPOSAL 2: AMENDMENT TO DECLARATION OF TRUST
               FOR VIT AND VLT
- ------------------------------------------------------------------------------
 
  Van Kampen American Capital Intermediate Term High Income Trust ("VIT") and
Van Kampen American Capital Limited Term High Income Trust ("VLT") were
initially organized as closed-end investment companies that would terminate
investment operations and distribute substantially all of their net assets on or
shortly before February 1, 1999 and June 1, 2001, respectively. At a meeting of
the Boards of Trustees of VIT and VLT on July 18, 1996, Advisory Corp.
recommended, and the Board of Trustees approved, eliminating the termination
dates for VIT and VLT and extending their investment operations indefinitely.
Advisory Corp. believes eliminating the Funds' termination dates may permit the
Funds to (i) maintain
 
                                       13
   20
 
higher dividend rates than if the termination dates are not eliminated and
(ii) provide a higher total return to investors than if the termination dates
are not eliminated. In this connection, shareholders of the VIT and VLT are
being asked to approve an amendment to their respective Declarations of Trust to
provide that each such Fund continue to exist indefinitely.
 
BACKGROUND INFORMATION ON VIT
 
  VIT was organized as a closed-end management investment company on November
30, 1988. The investment objective of VIT is to provide high current income,
while seeking to preserve shareholder's capital. VIT seeks to achieve its
investment objective through investment in a professionally managed, diversified
portfolio of high yield fixed-income securities, primarily securities rated in
the medium and lower categories by nationally recognized rating agencies or
unrated securities of comparable quality. VIT may invest up to 35% of its total
assets in securities rated higher than BB by Standard & Poor's Ratings Group
("S&P") or higher than Ba by Moody's Investor Service ("Moody's") or unrated
securities of comparable quality. Under certain circumstances VIT may invest a
higher percentage of its assets in higher rated securities. VIT currently has a
non-fundamental investment policy of maintaining a dollar-weighted average
portfolio maturity of not more than 10 years beyond the termination date of VIT.
As of June 30, 1996, the dollar-weighted average portfolio maturity of VIT's
portfolio was   years. VIT also currently has a non-fundamental investment
policy of not investing in individual securities with a maturity of not more
than 10 years beyond the termination date of VIT.
 
  The Declaration of Trust of VIT currently provides that the Trustees of VIT
must terminate VIT on or up to 30 days prior to February 1, 1999. In connection
with the termination date, VIT currently is required to distribute substantially
all of its net assets to shareholders on or shortly before February 1, 1999.
 
  As of August   , 1996, VIT had       common shares of beneficial interest
listed for trading on the New York Stock Exchange (the "NYSE") with a market
price of $         per share. On the same date, the net asset value per share of
VIT was $         .
 
BACKGROUND INFORMATION ON VLT
 
  VLT was organized as a closed-end management investment company on February
15, 1989. The investment objective of VLT is to provide high current income,
while seeking to preserve shareholder's capital. VLT seeks to achieve its
investment objective through investment in a professionally managed, diversified
portfolio of high income producing fixed-income securities, primarily securities
rated in the medium and lower categories by nationally recognized rating
agencies or unrated securities of comparable quality. VLT may invest up to 35%
of its total assets in securities rated higher than BB by S&P or higher than Ba
by Moody's or unrated securities of comparable quality.
 
                                       14
   21
 
Under certain circumstances, VLT may invest a higher percentage of its assets in
higher rated securities. VLT currently has a non-fundamental investment policy
of maintaining a dollar-weighted average portfolio maturity of not more than 12
years beyond the termination date of VLT. As of June 30, 1996, the
dollar-weighted average portfolio maturity of VLT's portfolio was   years. VLT
also has a non-fundamental investment policy of not investing in individual
securities with a maturity of not more than 12 years beyond the termination date
of VLT.
 
  The Declaration of Trust of VLT currently provides that the Trustees of VLT
must terminate the trust on or up to 30 days prior to June 1, 2001. In
connection with the termination date, VLT currently is required to distribute
substantially all of its net assets to shareholders on or prior to June 1, 2001.
 
  As of August   , 1996, VLT had common shares of beneficial interest listed for
trading on the NYSE with a market price of $         per share. On the same
date, the net asset value per share of VLT was $         .
 
DELIBERATIONS OF THE BOARD OF TRUSTEES
 
  At a special meeting of the Boards of Trustees of VIT and VLT held on July 18,
1996, Advisory Corp., the investment adviser for VIT and VLT, recommended
eliminating the termination dates for VIT and VLT and extending their investment
operations indefinitely. The Adviser believes eliminating the Fund's termination
dates may permit the Funds to (i) maintain higher dividend rates than if the
termination dates are not eliminated and (ii) provide a higher total return to
investors than if the termination dates are not eliminated.
 
  Management of the Adviser believes that eliminating the termination date for
each of VIT and VLT may help such Funds maintain their current dividend rates.
If the Funds' termination dates are not eliminated, as each Fund's termination
date approaches, the Adviser anticipates that it would replace the income
securities in each Fund's portfolio with income securities that have shorter
maturities and higher credit ratings, because such securities generally are less
susceptible to credit, market and other risks. By investing in income securities
with shorter maturities and higher credit ratings, the Adviser would seek to
reduce the risk that credit, market or other risks would adversely affect the
Fund's portfolio near their termination dates. Under normal market conditions,
however, income securities with shorter maturities and higher credit ratings
generally pay a lower rate of interest than securities with longer maturities or
lower credit ratings. Accordingly, VIT and VLT would be required to reduce their
dividend rates as they neared their respective maturity dates. As the Funds
moved even closer to their termination dates, they would begin to hold a greater
portion of their assets in cash and cash equivalents, reducing their dividends
even further. By eliminating VIT's and VLT's termination dates, the Adviser can
continue to maintain a longer average portfolio maturity for each Fund, which
would help each Fund maintain a higher dividend rate than if the termination
date was not eliminated.
 
                                       15
   22
 
  Management of Advisory Corp. also stated that shares of VIT and VLT have
traded at a market price greater than their net asset value [during their last
fiscal year.] If VIT and VLT were liquidated, however, their respective
portfolio securities would be sold at net asset value. Accordingly, the Adviser
believes that, as the termination date approaches, there is a substantial
likelihood that the market price of each of VIT and VLT would decrease until it
equals approximately the net asset value of the respective Fund. To the extent
that the market price of the Fund's shares declined, the total return or an
investment in VIT or VLT also would decline. Management noted, however, that
other closed-end investment companies with similar investment objectives, but
without a termination date, also trade at a premium to their net asset value. If
the VIT and VLT termination dates are eliminated, the Adviser believes that
there is a better likelihood that shares of VIT and VLT may continue to trade at
a premium for a longer period of time than if the termination dates were not
eliminated. Of course, there can be no assurance that shares of VIT or VLT will
trade at, above or below their net asset value.
 
  For the foregoing reasons, management of Advisory Corp. recommended to the
Boards of Trustees that the termination dates for VIT and VLT be eliminated. In
this connection, VIT and VLT would no longer have any non-fundamental investment
policies tied to a termination date. Instead, VIT would adopt a non-fundamental
investment policy of maintaining a dollar-weighted average portfolio maturity of
3 to 10 years, with no limitation on the maturity of individual securities that
may be acquired by VIT. VLT would adopt a non-fundamental investment policy of
maintaining a dollar-weighted average portfolio maturity of up to 12 years, with
no limitation on the maturity of individual securities that may be acquired by
VLT. These policies would not be fundamental and could be changed by the Boards
of Trustees without shareholder approval.
 
  In evaluating the proposed amendments, the Boards of Trustees considered the
effect of the proposed amendment on the ability of VIT and VLT to achieve their
investment objectives and to invest in accordance with their fundamental
investment policies. The Boards of Trustees also considered the effect of such
proposal on the dollar-weighted average maturity of each fund's portfolio and
the maximum maturity of each individual security in each fund's portfolio. In
this connection, the Trustees also considered the possible effect of the
proposal on the price at which VIT and VLT trade on the NYSE.
 
  Based upon their evaluation, the Trustees concluded that the proposed
amendments to extend indefinitely the term of each of VIT and VLT were in the
best interests of shareholders of such funds. Accordingly, after careful
consideration and deliberation of the above factors and such other factors and
information that they deemed relevant, the Board of Trustees of VIT and VLT,
including the Disinterested Trustees thereof, unanimously approved the proposed
amendments to the Declaration of Trust of each such fund.
 
                                       16
   23
 
SHAREHOLDER APPROVAL
 
  To become effective, the proposed amendments to each respective Declaration of
Trust must be approved by a vote of a majority of the outstanding common and
preferred shares, voting as separate classes, of each of VIT and VLT. The "vote
of a majority of the outstanding voting securities" is defined in the 1940 Act
as the lesser of the vote of (i) 67% or more of the Shares of the respective
Fund entitled to vote thereon present at the meeting if the holders of more than
50% of such outstanding Shares are present in person or represented by proxy; or
(ii) more than 50% of such outstanding Shares of the Fund entitled to vote
thereon. The proposed amendments were unanimously approved by the Boards of
Trustees of VIT and VLT after consideration of all factors which they determined
to be relevant to their deliberations, including those discussed above. The
Boards of Trustees also unanimously determined to submit each amendment for
consideration by the shareholders of VIT and VLT. THE BOARDS OF TRUSTEES OF VIT
AND VLT RECOMMEND A VOTE "FOR" APPROVAL OF THE AMENDMENTS TO THE DECLARATION OF
TRUST OF EACH SUCH FUND.
 
- ------------------------------------------------------------------------------
PROPOSAL 3: APPROVAL OF CHANGES TO FUNDAMENTAL INVESTMENT POLICIES OF THE
            CLOSED-END FUNDS
- ------------------------------------------------------------------------------
 
  Section 12 of the 1940 Act generally prohibits each Fund from (i) owning more
than 3% of the total outstanding voting stock of any other investment company;
(ii) investing more than 5% of its total assets in the securities of any one
other investment company; and (iii) investing more than 10% of its total assets
(in the aggregate) in the securities of other investment companies.
 
  On and before June 18, 1996, the Securities and Exchange Commission issued a
series of exemptive orders granting Advisory Corp., Van Kampen American Capital
Asset Management, Inc. (an affiliate of the Advisers) and certain of the
open-end investment companies advised by them exemptive relief to permit such
open-end investment companies to invest their assets in shares of Van Kampen
American Capital Small Capitalization Fund and Van Kampen American Capital
Foreign Securities Fund in excess of the limitations imposed by Section 12 of
the 1940 Act. On August 22, 1996, the Boards of Trustees authorized the
Closed-End Funds and Advisory Corp., together with certain other investment
companies managed by the Advisers and their affiliates, to seek additional
exemptive relief from the SEC to permit the Closed-End Funds to purchase
securities of the Van Kampen American Capital Reserve Fund and the Van Kampen
American Capital Tax Free Money Fund in excess of the limitations imposed by
Section 12 of the 1940 Act. The exemptive orders previously granted by the
Securities and Exchange Commission and similar exemptive orders that may be
obtained by the Funds and the Advisers in the future are referred to herein
collectively as the "Exemptive Orders." The Van Kampen American Capital Reserve
Fund, the Van Kampen American Capital
 
                                       17
   24
 
Tax Free Money Fund and any other Van Kampen American Capital funds in which the
Closed-End Funds may in the future invest pursuant to exemptive relief similar
to the Exemptive Orders are referred to herein collectively as the "Exemptive
Order Funds."
 
  The Closed-End Funds and Advisory Corp. apply to the Securities and Exchange
Commission for Exemptive Orders when they believe the Closed-End Funds can more
effectively invest in certain types of securities through pooled investment
vehicles such as the Exemptive Order Funds. By pooling their investments, the
Closed-End Funds have the ability to invest in a wider range of issuers,
industries and markets, thereby seeking to decrease volatility and risk while at
the same time providing greater liquidity than a Closed-End Fund would have
available to it investing in such securities by itself. Pooling investments also
allows the Closed-End Funds to increase the efficiency of portfolio management
by permitting each Closed-End Fund's portfolio manager to concentrate on those
investments that comprise the bulk of the Closed-End Fund's assets and not spend
a disproportionate amount of time on specialized areas such as small
capitalization stocks and foreign securities.
 
  If the proposed amendments to the Closed-End Funds' investment restrictions
are approved, each Closed-End Fund will invest in securities of the Exemptive
Order Funds only to the extent consistent with its investment objectives and
policies as set forth from time to time in its prospectus.
 
  Advisory Corp. and its affiliated investment advisers currently do not charge
advisory fees for managing any Exemptive Order Funds, nor is any sales load or
other sales charge imposed in connection with any purchases of their shares. In
connection with obtaining future Exemptive Orders, Advisory Corp. and its
affiliated investment advisers may agree to waive fees applicable to the
Closed-End Funds and collect fees from the Exemptive Order Funds. Other expenses
incurred by the Exemptive Order Funds (such as audit and custodial fees) will be
borne by them, and thus indirectly by the Closed-End Funds. Management of
Advisory Corp., however, anticipates that cost savings in the areas of
administration, out-of-pocket expenses (such as audit and custodial fees) and
portfolio transaction expenses will mitigate such additional expenses.
 
  Certain of the Closed-End Funds currently have fundamental investment
restrictions that prohibit them from purchasing securities issued by other
investment companies in excess of the percentage limitations imposed by Section
12 of the 1940 Act. In order to take full advantage of the exemptive relief
granted by the Securities and Exchange Commission and to invest in shares of the
Exemptive Order Funds in excess of the percentage limitations imposed by Section
12, each
 
                                       18
   25
 
such Closed-End Fund is seeking shareholder approval to amend this investment
restriction. The amended investment restriction would state:
 
  The Closed-End Fund may not invest in securities issued by other investment
  companies except as part of a merger, reorganization or other acquisition and
  except to the extent permitted by (i) the 1940 Act, as amended from time to
  time, (ii) the rules and regulations promulgated by the SEC under the 1940
  Act, as amended from time to time, or (iii) an exemption or other relief from
  the provisions of the 1940 Act.
 
  Certain of the Closed-End Funds also have adopted other fundamental investment
restrictions that may prohibit each such Closed-End Fund from taking full
advantage of the Exemptive Orders. These fundamental restrictions may include
one or more of the following:
 
  1.Diversification. Your Closed-End Fund may be prohibited from investing more
    than 5% of its assets in securities of a single issuer or holding more than
    10% of the outstanding voting securities of an issuer, except that the
    Closed-End Fund may be able to invest up to 25% (50% for a nondiversified
    Closed-End Fund) of its assets without regard to such restrictions. From
    time to time, a Closed-End Fund may desire to invest more than 5% of its
    assets in, or own more than 10% of the assets of, one or more Exemptive
    Order Funds.
 
  2. Control. Your Closed-End Fund may be prohibited from making investments for
     the purpose of exercising control or participation in management, except to
     the extent that exercise by the Closed-End Fund of its rights under
     agreements related to securities owned by the Closed-End Fund would be
     deemed to constitute such control or participation. The 1940 Act deems a
     person to have presumptive control over another person if it beneficially
     owns more than 25% of the other person's voting securities. From time to
     time, a Closed-End Fund may own more than 25% of the voting securities of
     the of one or more Exemptive Order Funds.
 
  3. Unseasoned Issuers. Your Closed-End Fund may be prohibited from investing
     in securities of issuers that have less than three years of continuous
     operation or may be prohibited from investing more than a certain
     percentage of its assets in such issuers. Each of the Closed-End Funds may
     want to invest in one or more Exemptive Order Funds prior to the third
     anniversary of the commencement of investment operations of the respective
     Exemptive Order Funds.
 
  4. Restricted Securities. Your Closed-End Fund may be prohibited from
     investing more than a certain percentage of its assets in restricted
     securities. Although each Exemptive Order Fund will redeem its shares
     within seven days of presentment for redemption as required by the 1940
     Act, shares issued by the Exemptive Order Funds may be deemed to be
     restricted securities
 
                                       19
   26
 
     because they are not registered under the Securities Act of 1933. From time
     to time, each Closed-End Fund may desire to purchase shares of an Exemptive
     Order Fund in excess of the percentage limitations imposed by its
     restricted securities investment restriction.
 
  The foregoing restrictions may be worded differently from Closed-End Fund to
Closed-End Fund, but the substance of the restrictions is as set forth above.
 
  In order to take full advantage of the Exemptive Order, each Fund subject to
one or more of the foregoing investment restrictions seeks shareholder approval
to amend such restrictions by adding the following exception to each
restriction:
 
  ..., except that the Closed-End Fund may purchase securities of other
  investment companies to the extent permitted by (i) the 1940 Act, as amended
  from time to time, (ii) the rules and regulations promulgated by the SEC under
  the 1940 Act, as amended from time to time, or (iii) an exemption or other
  relief from the provisions of the 1940 Act.
 
  The proposed amendments to each Closed-End Fund's investment restrictions are
not related to the Acquisition described in Proposal 1. Shareholders are being
asked to consider such amendments at this time in order to permit the Closed-End
Funds to take full advantage of any Exemptive Orders obtained prior to their
next regularly scheduled annual meeting.
 
SHAREHOLDER APPROVAL
 
  To become effective, the proposed amendments to each Closed-End Fund's
investment restrictions must be approved by a vote of a majority of the
outstanding voting securities of the respective Closed-End Fund. The "vote of a
majority of the outstanding voting securities" is defined in the 1940 Act as the
lesser of the vote of (i) 67% or more of the Shares of the respective Closed-End
Fund entitled to vote thereon present at the Meeting if the holders of more than
50% of such outstanding Shares are present in person or represented by proxy; or
(ii) more than 50% of such outstanding Shares of the Closed-End Fund entitled to
vote thereon. The proposed amendments were approved by the Board of Trustees of
each Closed-End Fund after consideration of all the factors they determined to
be relevant to their deliberations, including those discussed above. The Board
of Trustees also unanimously determined to submit the proposed changes to the
Shareholders of the Closed-End Funds. THE BOARD OF TRUSTEES OF EACH CLOSED-END
FUND RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDED INVESTMENT RESTRICTIONS.
 
                                       20
   27
 
- ------------------------------------------------------------------------------
PROPOSAL 4: RATIFICATION OF INDEPENDENT PUBLIC
               ACCOUNTANTS FOR EXPLORER FUNDS
- ------------------------------------------------------------------------------
 
  The Boards of Trustees, including a majority of the Disinterested Trustees,
have selected the firm of KPMG Peat Marwick LLP, independent public accountants,
to examine the financial statements for the current fiscal year of each Explorer
Fund. Each Explorer Fund knows of no direct or indirect financial interest of
the accountants in the Explorer Funds. Such appointment is subject to
ratification or rejection by the shareholders of each Explorer Fund. It is
expected that KPMG Peat Marwick LLP will also act as independent public
accountants for VKAC Holding, VKAC, Advisory Corp., Van Kampen American Capital
Asset Management, Inc., the Distributor (defined below) and ACCESS (defined
below).
 
  Representatives of KPMG Peat Marwick LLP are expected to be present at the
Meeting and will be available to respond to questions from shareholders and will
have the opportunity to make a statement if they so desire.
 
SHAREHOLDER APPROVAL
 
  The shareholders of each Explorer Fund, voting with respect to such Explorer
Fund as a single class, are entitled to vote on this issue. An affirmative vote
of a majority of the Shares of each Explorer Fund present in person or by proxy
and voting is required to ratify the selection of the accountants for such Fund.
THE BOARD OF TRUSTEES OF EACH EXPLORER FUND RECOMMENDS A VOTE "FOR" RATIFICATION
OF KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE CURRENT
FISCAL YEAR OF EACH EXPLORER FUND.
 
                                       21
   28
 
- ------------------------------------------------------------------------------
OTHER INFORMATION
- ------------------------------------------------------------------------------
 
DIRECTORS AND OFFICERS OF THE ADVISERS
 
  The following table sets forth certain information concerning the principal
executive officers and directors of the Advisers.
 
                     DIRECTORS AND OFFICERS OF THE ADVISERS
 


    NAME AND ADDRESS                      PRINCIPAL OCCUPATION
- ------------------------- -----------------------------------------------------
                       
Don G. Powell............ President, Chief Executive Officer and a Director of
  2800 Post Oak Blvd.     VKAC Holding and VKAC and Chairman, Chief Executive
  Houston, TX 77056       Officer and a Director of VKAC Distributors, the
                          Advisers, Van Kampen American Capital Management,
                          Inc. and Van Kampen American Capital Advisors, Inc.
                          Chairman, President and a Director of Van Kampen
                          American Capital Exchange Corporation, American
                          Capital Contractual Services, Inc., Van Kampen
                          Merritt Equity Holdings Corp., and American Capital
                          Shareholders Corporation. Chairman and a Director of
                          ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen
                          Merritt Equity Advisors Corp., McCarthy, Crisanti &
                          Maffei, Inc., and Van Kampen American Capital Trust
                          Company. Chairman, President and a Director of Van
                          Kampen American Capital Services, Inc. Prior to July
                          1996, Chairman and Director of VSM Inc. and VCJ Inc.
                          Prior to July 1996, President, Chief Executive
                          Officer and a Trustee/Director of open-end investment
                          companies and closed-end investment companies advised
                          by the Advisers.
Dennis J. McDonnell...... President, Chief Operating Officer and a Director of
  One Parkview Plaza      Advisers, Van Kampen American Capital Advisors, Inc.
  Oakbrook Terrace, IL    and Van Kampen American Capital Management, Inc.
  60181                   Executive Vice President and a Director of VKAC
                          Holding and VKAC. President and Director of Van
                          Kampen Merritt Equity Advisors Corp. Director of Van
                          Kampen Merritt Equity Holdings Corp. and McCarthy,
                          Crisanti & Maffei, S.A. Chief Executive Officer and
                          Director of McCarthy, Crisanti & Maffei, Inc.
                          Chairman and a Director of MCM Asia Pacific Company,
                          Limited. President and Trustee/Director of open-end
                          investment companies and closed-end investment
                          companies advised by the Advisers. Prior to July
                          1996, President, Chief Operating Officer and Director
                          of VSM Inc. and VCJ Inc. Prior to December, 1991,
                          Senior Vice President of Van Kampen Merritt, Inc.

 
                                       22
   29
 


    NAME AND ADDRESS                      PRINCIPAL OCCUPATION
- ------------------------- -----------------------------------------------------
                       
Ronald A. Nyberg......... Executive Vice President, General Counsel and
  One Parkview Plaza      Secretary of VKAC Holding and VKAC. Executive Vice
  Oakbrook Terrace, IL    President, General Counsel and a Director of the VKAC
  60181                   Distributors, the Advisers, Van Kampen American
                          Capital Management, Inc., Van Kampen Merritt Equity
                          Advisors Corp., and Van Kampen Merritt Equity
                          Holdings Corp. Executive Vice President, General
                          Counsel and Assistant Secretary of Van Kampen
                          American Capital Advisors, Inc., American Capital
                          Contractual Services, Inc., Van Kampen American
                          Capital Exchange Corporation, ACCESS Investor
                          Services, Inc., Van Kampen American Capital Services,
                          Inc. and American Capital Shareholders Corporation.
                          Executive Vice President, General Counsel, Assistant
                          Secretary and Director of Van Kampen American Capital
                          Trust Company. General Counsel of McCarthy, Crisanti
                          & Maffei, Inc. Vice President and Secretary of
                          open-end investment companies and closed-end
                          investment companies advised by the Advisers.
                          Director of ICI Mutual Insurance Co., a provider of
                          insurance to members of the Investment Company
                          Institute. Prior to July 1996, Executive Vice
                          President and General Counsel of VSM Inc., and
                          Executive Vice President, General Counsel and
                          Director of VCJ Inc.
William R. Rybak......... Executive Vice President and Chief Financial Officer
  One Parkview Plaza      of VKAC Holding and VKAC since February 1993, and
  Oakbrook Terrace, IL    Treasurer of VKAC Holding through December 1993.
  60181                   Executive Vice President, Chief Financial Officer and
                          a Director of the VKAC Distributors, the Advisers,
                          and Van Kampen American Capital Management, Inc.
                          Executive Vice President, Chief Financial Officer,
                          Treasurer and a Director of Van Kampen Merritt Equity
                          Advisors Corp. Executive Vice President and Chief
                          Financial Officer of the Van Kampen American Capital
                          Advisors, Inc., Van Kampen American Capital Exchange
                          Corporation, Van Kampen American Capital Trust
                          Company, ACCESS Investor Services, Inc., and American
                          Capital Contractual Services, Inc. Executive Vice
                          President, Chief Financial Officer and Treasurer of
                          American Capital Shareholders Corporation, Van Kampen
                          American Capital Services, Inc. and Van Kampen
                          Merritt Equity Holdings Corp. Chief Financial Officer
                          and Treasurer of McCarthy, Crisanti & Maffei, Inc.
                          Chairman of the Board of Hinsdale Financial Corp., a
                          savings and loan holding company. Prior to July 1996,
                          Executive Vice President, Chief Financial Officer and
                          a Director of VCJ Inc., and Executive Vice President
                          and Chief Financial Officer of VSM Inc.

 
                                       23
   30
 


    NAME AND ADDRESS                      PRINCIPAL OCCUPATION
- ------------------------- -----------------------------------------------------
                       
Peter W. Hegel........... Executive Vice President of Advisory Corp., Van
  One Parkview Plaza      Kampen American Capital Advisors, Inc., Management
  Oakbrook Terrace, IL    Inc. Executive Vice President and Director of Van
  60181                   Kampen American Capital Asset Management, Inc.
                          Director of McCarthy, Crisanti & Maffei, Inc. Vice
                          President of open-end investment companies and
                          closed-end investment companies advised by the
                          Advisers. Prior to July 1996, Director of VSM Inc.
Robert C. Peck, Jr. ..... Executive Vice President of Advisory Corp. and
  2800 Post Oak Blvd.     Management Inc. Executive Vice President and Director
  Houston, TX 77056       of Van Kampen American Capital Asset Management, Inc.
                          and Van Kampen American Capital Advisors, Inc. Vice
                          President of open-end investment companies advised by
                          the Advisers.
Alan T. Sachtleben....... Executive Vice President of Advisory Corp. and
  One Parkview Plaza      Management Inc. Executive Vice President and a
  Oakbrook Terrace, IL    Director of Van Kampen American Capital Asset
  60181                   Management, Inc. and Van Kampen American Capital
                          Advisors, Inc. Vice President of open-end investment
                          companies advised by the Advisers.

 
  The following table sets forth the trustees and officers of the Funds who are
also officers of the Advisers.
 


                NAME                             POSITIONS WITH THE FUNDS
- -------------------------------------  ---------------------------------------------
                                    
Dennis J. McDonnell..................  Trustee
William N. Brown.....................  Vice President
Peter W. Hegel.......................  Vice President
Curtis W. Morell.....................  Vice President and Chief Accounting Officer
Ronald A. Nyberg.....................  Vice President and Secretary
Robert C. Peck, Jr...................  Vice President
Alan T. Sachtleben...................  Vice President
Paul R. Wolkenberg...................  Vice President
Edward C. Wood III...................  Vice President and Chief Financial Officer
John L. Sullivan.....................  Treasurer
Tanya M. Loden.......................  Controller
Nicholas Dalmaso.....................  Assistant Secretary
Huey P. Falgout, Jr..................  Assistant Secretary
Scott E. Martin......................  Assistant Secretary
Weston B. Wetherell..................  Assistant Secretary
Steven M. Hill.......................  Assistant Treasurer
Robert Sullivan......................  Assistant Controller

 
  The officers of the Funds serve for one year or until their respective
successors are chosen and qualified. The Funds' officers receive no compensation
from the Funds, but are all officers of the Advisers, Van Kampen American
Capital Asset Management, Inc., the Distributor, VKAC or their affiliates and
receive compensation in such capacities.
 
                                       24
   31
 
NON-ADVISORY AGREEMENTS
 
  Each Fund has entered into certain other agreements with the Advisers, Van
Kampen American Capital Asset Management, Inc. Prime Rate Trust and the Explorer
Funds also have entered into agreements with Van Kampen American Capital
Distributors Inc., the distributor of Shares of the Prime Rate Trust and the
Explorer Funds and an affiliate of the Advisers, ACCESS Investor Services, Inc.,
the transfer agent for each respective Fund ("ACCESS") and an affiliate of the
Advisers, or VKAC, as the case may be. These agreements are not terminated by
the change in control and do not need to be voted on by the shareholders of the
Funds at the Meeting. The Advisers currently anticipate that the services
provided to the Funds pursuant to these agreements will continue to be provided
after the proposed New Advisory Agreements are approved.
 
  Fund Accounting Agreement. Each Fund is party to the Fund Accounting
Agreement, and currently receives all accounting services through the Adviser.
Each Fund shares equally, together with the other mutual funds advised and
distributed by the Advisers and the Distributor, respectively, in 25% of the
cost of providing such services, with the remaining 75% of such cost being paid
by each Fund based proportionally upon their respective net assets. Under the
Fund Accounting Agreements, each Fund paid the Adviser the amount set forth at
Annex   hereto for its most recently completed fiscal year.
 
  Legal Services Agreement. Each Fund has entered into a Legal Services
Agreement pursuant to which VKAC provides legal services, including without
limitation maintenance of the Funds' minute books and records, preparation and
oversight of the Funds' regulatory reports, and other information provided to
shareholders, as well as responding to day-to-day legal issues. Payment by each
Fund for such services is made on a cost basis for the employment of personnel
as well as the overhead and equipment necessary to render such services. Under
the Legal Services Agreement, each Fund paid VKAC the amount set forth at Annex
  hereto for its most recently completed fiscal year. VKAC also provides legal
services for certain other Van Kampen American Capital investment companies,
some of which do not currently reimburse VKAC for the provision of such
services. VKAC allocates 50% of its costs equally to each Fund or other
investment company and the remaining 50% of such costs are allocated to specific
Funds or other investment companies based on specific time allocations, or in
the event services are attributable only to types of investment companies (i.e.
closed-end or open-end), the relative amount of time spent on each type of
investment companies and then further allocated among investment companies of
that type based upon their respective net asset values.
 
  Transfer Agency Agreement. Prime Rate Trust has entered into a Transfer Agency
Agreement with ACCESS pursuant to which ACCESS provides transfer agency and
dividend disbursing services for such Fund. For its services, ACCESS charges
each Fund a fee that is determined in accordance with a cost allocation
 
                                       25
   32
 
model developed in conjunction with, and periodically reviewed by, Coopers &
Lybrand LLP. The model allocates among the Funds ACCESS's cost of providing the
Funds with transfer agency services, plus a profit margin approved by the Board
of Trustees. The allocation is based upon a number of factors including (i) the
number of shareholder accounts per Fund, (ii) the number and type of shareholder
transactions experienced by each Fund, (iii) [add other factors]. Under the
Transfer Agency Agreement, each Fund paid ACCESS the amount set forth at Annex
  hereto for its most recently completed fiscal year.
 
  Distribution Agreement. Each of the Prime Rate Trust and the Explorer Funds
have executed a distribution agreement with the Distributor pursuant to which
the Distributor, as principal underwriter, purchases shares for resale to the
public, either directly or through securities dealers. Under each Distribution
Agreement, each such Fund paid the Distributor the amount set forth at Annex
  hereto for its most recently completed fiscal year. The address of the
Distributor is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
 
  Following the Acquisition, the Advisers will be an affiliate of Morgan Stanley
& Co., a registered broker-dealer. The amount of brokerage commissions, if any,
paid by each Fund to Morgan Stanley & Co. during its most recently completed
fiscal year is set forth on Annex D to this Proxy Statement.
 
  As of August 23, 1996, the trustees and officers of the Funds as a group owned
less than 1% of the outstanding shares of each Fund. At such date the
"interested persons" of each Fund, as a group, owned an aggregate of less than
5% of the outstanding shares of the Fund.
 
  The number of each Fund's outstanding Shares as of August 23, 1996 is set
forth at Annex   hereto. The persons who, to the knowledge of the Funds, owned
beneficially more than 5% of a class of a Fund's outstanding Shares as of August
23, 1996 are set forth at Annex   hereto.
- ------------------------------------------------------------------------------
EXPENSES
- ------------------------------------------------------------------------------
 
  VKAC Holding and the Funds will share the expense of preparing, printing and
mailing the enclosed form of proxy, the accompanying Notice and this Proxy
Statement. VKAC Holding will bear such expenses to the extent that they relate
to the Acquisition (i.e., Proposal 1). The Funds will bear such expenses to the
extent that they relate to the management or governance of the Funds (i.e.,
Proposals 2, 3 and 4).
 
  In order to obtain the necessary quorum at the Meeting, additional
solicitation may be made by mail, telephone, telegraph or personal interview by
representatives of the Funds, the Advisers or VKAC, or by dealers or their
representatives or by Applied Mailing Systems, a solicitation firm located in
Boston, Massachusetts that has been engaged to assist in proxy solicitations at
an estimated cost of approximately $          .
 
                                       26
   33
 
- ------------------------------------------------------------------------------
SHAREHOLDER PROPOSALS
- ------------------------------------------------------------------------------
 
  As a general matter, each Fund does not hold regular annual meetings of
shareholders. Any shareholder who wishes to submit proposals for consideration
at a meeting of such shareholder's Fund should send such proposal to the
respective Fund at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. To be
considered for presentation at a shareholders' meeting, rules promulgated by the
Securities and Exchange Commission require that, among other things, a
shareholder's proposal must be received at the offices of such Fund a reasonable
time before a solicitation is made. Timely submission of a proposal does not
necessarily mean that such proposal will be included.
- ------------------------------------------------------------------------------
GENERAL
- ------------------------------------------------------------------------------
 
  Management of each Fund does not intend to present and does not have reason to
believe that others will present any other items of business at the Meeting.
However, if other matters are properly presented to the Meeting for a vote, the
proxies will be voted upon such matters in accordance with the judgment of the
persons acting under the proxies.
 
  A list of shareholders of each Fund entitled to be present and vote at the
Meeting will be available at the offices of the respective Fund, One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, for inspection by any shareholder
during regular business hours for ten days prior to the date of the Meeting.
 
  Failure of a quorum to be present at the Meeting for any Fund may necessitate
adjournment and may subject such Fund to additional expense.
 
  IF YOU CANNOT BE PRESENT IN PERSON, YOU ARE REQUESTED TO FILL IN, SIGN AND
RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
 
                                          RONALD A. NYBERG,
                                          Vice President and Secretary
September   , 1996
 
                                       27
   34
 
                                                                         ANNEX A
 
                       VAN KAMPEN AMERICAN CAPITAL FUNDS
 
  The following list sets forth the Van Kampen American Capital mutual funds
(the "Funds") participating in the Joint Special Meeting of Shareholders to be
held at the offices of Van Kampen American Capital, Inc., One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 on Wednesday, October 23, 1996, at
[a.m.]/[p.m.] The name in the left hand column below is the legal name for each
Fund and the name in the right hand column is the abbreviated name as used in
the Proxy Statement. Each of the Funds has issued common shares of beneficial
interest, par value $.01 per share (the "Common Shares"). Certain of the
Closed-End Funds also have issued preferred shares of beneficial interest (the
"Preferred Shares") each with a liquidation preference per share as designated
below.
 
                                CLOSED-END FUNDS
 


         LEGAL NAME                  ABBREVIATED NAME         PREFERRED SHARES OUTSTANDING
- -----------------------------  -----------------------------  -----------------------------
                                                        
Van Kampen American Capital    Investment Grade Municipal     Remarketed Preferred Shares,
 Investment Grade Municipal     Trust                          liquidation preference
 Trust                                                         $100,000 per share
Van Kampen American Capital    California Municipal Trust     Remarketed Preferred Shares,
 California Municipal Trust                                    liquidation preference
                                                               $50,000 per share
Van Kampen American Capital    Select Sector Municipal Trust  Remarketed Preferred Shares,
 Select Sector Municipal                                       liquidation preference
 Trust                                                         $25,000 per share
Van Kampen American Capital    Municipal Trust                Auction Preferred Shares,
 Municipal Trust                                               liquidation preference
                                                               $50,000 per share
Van Kampen American Capital    California Quality Municipal   Auction Preferred Shares,
 California Quality Municipal   Trust                          liquidation preference
 Trust                                                         $50,000 per share
Van Kampen American Capital    New York Quality Municipal     Auction Preferred Shares,
 New York Quality Municipal     Trust                          liquidation preference
 Trust                                                         $50,000 per share
Van Kampen American Capital    Pennsylvania Quality           Auction Preferred Shares,
 Pennsylvania Quality           Municipal Trust                liquidation preference
 Municipal Trust                                               $50,000 per share
Van Kampen American Capital    Florida Quality Municipal      Auction Preferred Shares,
 Florida Quality Municipal      Trust                          liquidation preference
 Trust                                                         $50,000 per share
Van Kampen American Capital    Ohio Quality Municipal Trust   Auction Preferred Shares,
 Ohio Quality Municipal Trust                                  liquidation preference
                                                               $50,000 per share
Van Kampen American Capital    Trust for Insured Municipals   Auction Preferred Shares,
 Trust for Insured Municipals                                  liquidation preference
                                                               $50,000 per share

 
                                       A-1
   35
 


         LEGAL NAME                  ABBREVIATED NAME         PREFERRED SHARES OUTSTANDING
- -----------------------------  -----------------------------  -----------------------------
                                                        
Van Kampen American Capital    Trust for Investment Grade     Auction Preferred Shares,
 Trust for Investment Grade     Municipals                     liquidation preference
 Municipals                                                    $50,000 per share
Van Kampen American Capital    Trust for Investment Grade     Auction Preferred Shares,
 Trust for Investment Grade     California Municipals          liquidation preference
 California Municipals                                         $50,000 per share
Van Kampen American Capital    Trust for Investment Grade     Auction Preferred Shares,
 Trust for Investment Grade     New York Municipals            liquidation preference
 New York Municipals                                           $50,000 per share
Van Kampen American Capital    Trust for Investment Grade     Auction Preferred Shares,
 Trust for Investment Grade     Pennsylvania Municipals        liquidation preference
 Pennsylvania Municipals                                       $50,000 per share
Van Kampen American Capital    Trust for Investment Grade     Auction Preferred Shares,
 Trust for Investment Grade     Florida Municipals             liquidation preference
 Florida Municipals                                            $50,000 per share
Van Kampen American Capital    Trust for Investment Grade     Auction Preferred Shares,
 Trust for Investment Grade     New Jersey Municipals          liquidation preference
 New Jersey Municipals                                         $50,000 per share
Van Kampen American Capital    Municipal Opportunity Trust    Auction Preferred Shares,
 Municipal Opportunity Trust                                   liquidation preference
                                                               $50,000 per share
Van Kampen American Capital    Advantage Municipal Income     Auction Preferred Shares,
 Advantage Municipal Income     Trust                          liquidation preference
 Trust                                                         $50,000 per share
Van Kampen American Capital    Advantage Pennsylvania         Auction Preferred Shares,
 Advantage Pennsylvania         Municipal Income Trust         liquidation preference
 Municipal Income Trust                                        $50,000 per share
Van Kampen American Capital    New Jersey Value Municipal     Auction Preferred Shares,
 New Jersey Value Municipal     Income Trust                   liquidation preference
 Income Trust                                                  $50,000 per share
Van Kampen American Capital    Ohio Value Municipal Income    Auction Preferred Shares,
 Ohio Value Municipal Income    Trust                          liquidation preference
 Trust                                                         $50,000 per share
Van Kampen American Capital    Massachusetts Value Municipal  Auction Preferred Shares,
 Massachusetts Value            Income Trust                   liquidation preference
 Municipal Income Trust                                        $50,000 per share
Van Kampen American Capital    Strategic Sector Municipal     Auction Preferred Shares,
 Strategic Sector Municipal     Trust                          liquidation preference
 Trust                                                         $50,000 per share
Van Kampen American Capital    New York Value Municipal       Auction Preferred Shares,
 New York Value Municipal       Income Trust                   liquidation preference
 Income Trust                                                  $50,000 per share
Van Kampen American Capital    California Value Municipal     Auction Preferred Shares,
 California Value Municipal     Income Trust                   liquidation preference
 Income Trust                                                  $50,000 per share
Van Kampen American Capital    Pennsylvania Value Municipal   Auction Preferred Shares,
 Pennsylvania Value Municipal   Income Trust                   liquidation preference
 Income Trust                                                  $50,000 per share

 
                                       A-2
   36
 


         LEGAL NAME                  ABBREVIATED NAME         PREFERRED SHARES OUTSTANDING
- -----------------------------  -----------------------------  -----------------------------
                                                        
Van Kampen American Capital    Value Municipal Income Trust   Auction Preferred Shares,
 Value Municipal Income Trust                                  liquidation preference
                                                               $50,000 per share
Van Kampen American Capital    Florida Municipal Opportunity  Auction Preferred Shares,
 Florida Municipal              Trust                          liquidation preference
 Opportunity Trust                                             $50,000 per share
Van Kampen American Capital    Municipal Opportunity Trust    Auction Preferred Shares,
 Municipal Opportunity Trust    II                             liquidation preference
 II                                                            $50,000 per share
Van Kampen American Capital    Advantage Municipal Income     Auction Preferred Shares,
 Advantage Municipal Income     Trust II                       liquidation preference
 Trust II                                                      $50,000 per share
Van Kampen American Capital    VLT or Limited Term High       Auction Preferred Shares,
 Limited Term High Income       Income Trust                   liquidation preference
 Trust                                                         $50,000 per share
Van Kampen American Capital    VIT or Intermediate Term High  Auction Market Preferred
 Intermediate Term High         Income Trust                   Shares, liquidation
 Income Trust                                                  preference $100,000 per
                                                               share
Van Kampen American Capital    Municipal Income Trust         Rate Adjusted Tax-Exempt
 Municipal Income Trust                                        Shares, liquidation
                                                               preference $500,000 per
                                                               share
Van Kampen American Capital    Prime Rate Trust               Not Applicable
 Prime Rate Income Trust

 
                                 EXPLORER FUNDS
 


         LEGAL NAME                  ABBREVIATED NAME         PREFERRED SHARES OUTSTANDING
- -----------------------------  -----------------------------  -----------------------------
                                                        
Explorer Institutional Active  Active Core Fund               Not applicable
 Core Fund
Explorer Institutional         Limited Duration Fund          Not applicable
 Limited Duration Fund

 
                                       A-3
   37
 
                                                                       ANNEX B-1
 
                                CLOSED-END FUNDS
                                    FORM OF
                         INVESTMENT ADVISORY AGREEMENT
 
  THIS INVESTMENT ADVISORY AGREEMENT dated as of          , 1995, by and between
VAN KAMPEN AMERICAN CAPITAL [FUND NAME] (the "Fund"), a Massachusetts business
trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
(the "Advisor"), a Delaware corporation.
 
  1. (a) RETENTION OF ADVISOR BY FUND. The Fund hereby employs the Advisor to
act as the investment adviser for and to manage the investment and reinvestment
of the assets of the Fund in accordance with the Fund's investment objective and
policies and limitations, and to administer its affairs to the extent requested
by, and subject to the review and supervision of, the Board of Trustees of the
Fund for the period and upon the terms herein set forth. The investment of funds
shall be subject to all applicable restrictions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as may from time to time be in force and delivered or made
available to the Advisor.
 
  (b) ADVISOR'S ACCEPTANCE OF EMPLOYMENT. The Advisor accepts such employment
and agrees during such period to render such services, to supply investment
research and portfolio management (including without limitation the selection of
securities for the Fund to purchase, hold or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed, in accordance with
the policies adopted by the Fund and its Board of Trustees), to administer the
business affairs of the Fund, to furnish offices and necessary facilities and
equipment to the Fund, to provide administrative services for the Fund, to
render periodic reports to the Board of Trustees of the Fund, and to permit any
of its officers or employees to serve without compensation as trustees or
officers of the Fund if elected to such positions.
 
  (c) INDEPENDENT CONTRACTOR. The Advisor shall be deemed to be an independent
contractor under this Agreement and, unless otherwise expressly provided or
authorized, shall have no authority to act for or represent the Fund in any way
or otherwise be deemed as agent of the Fund.
 
  (d) NON-EXCLUSIVE AGREEMENT. The services of the Advisor to the Fund under
this Agreement are not to be deemed exclusive, and the Advisor shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
 
  2. (a) FEE. For the services and facilities described in Section 1, the Fund
will accrue daily and pay to the Advisor at the end of each calendar month an
 
                                      B1-1
   38
 
investment management fee equal to .65% of the average daily net assets of the
Fund.
 
  (b) DETERMINATION OF NET ASSET VALUE. The net asset value of the Fund shall be
calculated as of the close of the New York Stock Exchange on the last day the
Exchange is open for trading in each calendar week or as of such other time or
times as the trustees may determine in accordance with the provisions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as from time to time in force.
For the purpose of the foregoing computations, on each such day when net asset
value is not calculated, the net asset value of a share of beneficial interest
of the Fund shall be deemed to be the net asset value of such share as of the
close of business of the last day on which such calculation was made.
 
  (c) PRORATION. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Advisor's fee on the basis of the number of days that the Agreement is in effect
during such month and year, respectively.
 
  3. EXPENSES. In addition to the fee of the Advisor, the Fund shall assume and
pay any expenses for services rendered by a custodian for the safekeeping of the
Fund's securities or other property, for keeping its books of account, for any
other charges of the custodian and for calculating the net asset value of the
Fund as provided above. The Advisor shall not be required to pay, and the Fund
shall assume and pay, the charges and expenses of its operations, including
compensation of the trustees (other than those who are interested persons of the
Advisor), charges and expenses of independent accountants, of legal counsel and
of any transfer or dividend disbursing agent, costs of acquiring and disposing
of portfolio securities, cost of listing shares of the New York Stock Exchange
or other exchange interest (if any) on obligations incurred by the Fund, costs
of share certificates, membership dues in the Investment Company Institute or
any similar organization, costs of reports and notices to shareholders, costs of
registering shares of the Fund under the federal securities laws, miscellaneous
expenses and all taxes and fees to federal, state or other governmental agencies
on account of the registration of securities issued by the Fund, filing of
corporation documents or otherwise. The Fund shall not pay or incur any
obligation for any management or administrative expenses for which the Fund
intends to seek reimbursement from the Advisor without first obtaining the
written approval of the Advisor. The Advisor shall arrange, if desired by the
Fund, for officers or employees of the Advisor to serve, without compensation
from the Fund, as trustees, officers or agents of the Fund if duly elected or
appointed to such positions and subject to their individual consent and to any
limitations imposed by law.
 
  4. INTERESTED PERSONS. Subject to applicable statutes and regulations, it is
understood that trustees, officers, shareholders and agents of the Fund are or
may
 
                                      B1-2
   39
 
be interested in the Advisor as directors, officers, shareholders, agents or
otherwise and that the directors, officers, shareholders and agents of the
Advisor may be interest in the Fund as trustees, officers, shareholders, agents
or otherwise.
 
  5. LIABILITY. The Advisor shall not be liable for any error of judgment or of
law, or for any loss suffered by the Fund in connection with the matters to
which this Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Advisor in the performance of
its obligations and duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement.
 
  6. (a) TERM. This Agreement shall become effective on the date hereof and
shall remain in full force until December 31, 1994, unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only as long as such continuance is specifically approved as
least annually in the manner required by the Investment Company Act of 1940 (the
"1940 Act"), as amended.
 
  (b) TERMINATION. This Agreement shall automatically terminate in the event of
its assignment. This Agreement may be terminated at any time without the payment
of any penalty by the Fund or by the Advisor on sixty (60) days written notice
to the other party. The Fund may effect termination by action of the Board of
Trustees or by vote of a majority of the outstanding shares of stock of the
Fund, accompanied by appropriate notice. This Agreement may be terminated at any
time without the payment of any penalty and without advance notice by the Board
of Trustees or by vote of a majority of the outstanding shares of the Fund in
the event that it shall have been established by a court of competent
jurisdiction that the Advisor or any officer or director of the Advisor has
taken any action which results in a breach of the covenants of the advisor set
forth herein.
 
  (c) PAYMENT UPON TERMINATION. Termination of this Agreement shall not affect
the right of the Advisor to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
 
  7. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall not
be thereby affected.
 
  8. NOTICES. Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notice.
 
  9. DISCLAIMER. The Advisor acknowledges and agrees that, as provided by
Section 5.5 of the Declaration of Trust of the Trust, the shareholders,
trustees, officers, employees and other agents of the Trust and the Fund shall
not personally
 
                                      B1-3
   40
 
be bound by or liable hereunder, nor shall resort be had to their private
property for the satisfaction of any obligation or claim hereunder.
 
  10. GOVERNING LAW. This Agreement shall be construed in accordance with the
laws of the State of Illinois and the 1940 Act without reference to the choice
of law principals thereof. To the extent that the applicable laws of the State
of Illinois conflict with the applicable provisions of the 1940 Act, the latter
shall control.
 
  IN WITNESS WHEREOF, the Fund and the Advisor have caused this Agreement to be
executed on the day and year first above written.
 
                              VAN KAMPEN AMERICAN CAPITAL 
                              INVESTMENT ADVISORY CORP.
 
                              By:
                                  ----------------------------------------------
                                  First Vice President
 
                              VAN KAMPEN AMERICAN CAPITAL 
                              [FUND NAME]
 
                              By:
                                  ----------------------------------------------
                                  Vice President and Treasurer
 
                                      B1-4
   41
 
                                                                       ANNEX B-2
 
                                 EXPLORER FUNDS
                                    FORM OF
                             NEW ADVISORY AGREEMENT
 
  The following is the proposed form of New Advisory Agreement that will be in
effect between each Fund and the Adviser if approved by shareholders of the
Funds. The form of New Advisory Agreement has been marked to show changes from
the Form of Current Advisory Agreement.
 
                                    FORM OF
                         INVESTMENT ADVISORY AGREEMENT
 
  THIS INVESTMENT ADVISORY AGREEMENT dated as of          , 1996, by and between
THE EXPLORER INSTITUTIONAL TRUST (the "Trust"), a Massachusetts business trust,
on behalf of its sub-trust (the "Fund"), and VAN KAMPEN AMERICAN CAPITAL
MANAGEMENT INC. (the "Adviser"), a Delaware corporation.
 
  1. (a) RETENTION OF ADVISER BY FUND. The Fund hereby employs the Adviser to
act as the investment adviser for and to manage the investment and reinvestment
of the assets of the Fund in accordance with the Fund's investment objective and
policies and limitations, and to administer its affairs to the extent requested
by, and subject to the review and supervision of, the Board of Trustees of the
Fund for the period and upon the terms herein set forth. The investment of funds
shall be subject to all applicable restrictions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as may from time to time be in force and delivered or made
available to the Adviser.
 
  (b) ADVISER'S ACCEPTANCE OF EMPLOYMENT. The Adviser accepts such employment
and agrees during such period to render such services, to supply investment
research and portfolio management (including without limitation the selection of
securities for the Fund to purchase, hold or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed, in accordance with
the policies adopted by the Fund and its Board of Trustees), to administer the
business affairs of the Fund, to furnish offices and necessary facilities and
equipment to the Fund, to provide administrative services for the Fund, to
render periodic reports to the Board of Trustees of the Fund, and to permit any
of its officers or employees to serve without compensation as trustees or
officers of the Fund if elected to such positions.
 
                                      B2-1
   42
 
  (c) INDEPENDENT CONTRACTOR. The Adviser shall be deemed to be an independent
contractor under this Agreement and, unless otherwise expressly provided or
authorized, shall have no authority to act for or represent the Fund in any way
or otherwise be deemed as agent of the Fund.
 
  (d) NON-EXCLUSIVE AGREEMENT. The services of the Adviser to the Fund under
this Agreement are not to be deemed exclusive, and the Adviser shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
 
  2. (a) FEE. For the services and facilities described in Section 1, the Fund
will accrue daily and pay to the Adviser at the end of each calendar month an
investment management fee equal to a percentage of the average daily net assets
of the Fund as follows:
 


                                FEE PERCENT OF
     AVERAGE DAILY              AVERAGE DAILY
       NET ASSETS                 NET ASSETS
- ------------------------   ------------------------
                        
Up to $1,000,000,000                 .30%
More than $1,000,000,000             .25%

 
  (b) EXPENSE LIMITATION. The Adviser's compensation for any fiscal year of the
Fund shall be reduced by the amount, if any, by which the Fund's expense for
such fiscal year exceeds the most restrictive applicable expense limitation in
any jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded from
computation of the Fund's expenses any amount borne directly or indirectly by
the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses of
the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by the
applicable expense limitation.
 
  In addition to the expense limitation described above, during the term of this
Agreement, the Adviser may determine to waive or reimburse to the Fund all or a
portion of its fees, in order to insure that the total expenses of the Fund,
exclusive of extraordinary costs or expenses such as legal, accounting or other
costs of expenses not incurred in the course of the Fund's ongoing operations,
and expenditures which
 
                                      B2-2
   43
 
are capitalized in accordance with generally accepted accounting principles, but
including fees paid to the Adviser pursuant to subsection 2(a) above, shall not
exceed such expense limitation as may be set forth in the Fund's prospectus from
time to time. Interest, taxes, brokers' commissions and other charges relating
to the purchase and sale of securities are not regarded as expenses for this
purpose. The Fund agrees that any waiver or reimbursement to the Fund by the
Adviser pursuant to this paragraph shall be deemed a contingent liability of the
Fund which shall be subject to potential reimbursement by the Fund to the
Adviser, provided the Fund's assets reach a sufficient size to permit such
reimbursement to be made without causing the annual expense ratio of the Fund to
exceed the applicable expense limitation set forth in the Fund's prospectus from
time to time, or such lower amount as may be imposed by any state expense
limitation to which the Fund is subject, and provided such reimbursement is made
within four (4) years of recognition of the contingent liability by the Fund.
 
  (c) DETERMINATION OF NET ASSET VALUE. The net asset value of the Fund shall be
calculated as of the close of the New York Stock Exchange on each day the
Exchange is open for trading or such other time or times as the trustees may
determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not calculated,
the net asset value of a share of beneficial interest of the Fund shall be
deemed to be the net asset value of such share as of the close of business of
the last day on which such calculation was made.
 
  (d) PRORATION. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in effect
during such month and year, respectively.
 
  3. EXPENSES. In addition to the fee of the Adviser, the Fund shall assume and
pay any expenses for services rendered by a custodian for the safekeeping of the
Fund's securities or other property, for keeping its books of account, for any
other charges of the custodian and for calculating the net asset value of the
Fund as provided above. The Adviser shall not be required to pay, and the Fund
shall assume and pay, the charges and expenses of its operations, including
compensation of the trustees (other than those who are interested persons of the
Adviser and other than those who are interested persons of the distributor of
the Fund but not of the Adviser, if the distributor has agreed to pay such
compensation), charges and expenses of independent accountants, of legal counsel
and of any transfer or dividend disbursing agent, costs of acquiring and
disposing of portfolio securities, interest (if any) on obligations incurred by
the Fund, costs of share certificates, membership dues in the Investment Company
Institute or any similar organization,
 
                                      B2-3
   44
 
costs of reports and notices to shareholders, costs of registering shares of the
Fund under the federal securities laws, miscellaneous expenses and all taxes and
fees to federal, state or other governmental agencies on account of the
registration of securities issued by the Fund, filing of corporate documents or
otherwise. The Fund shall not pay or incur any obligation for any management or
administrative expenses for which the Fund intends to seek reimbursement from
the Adviser without first obtaining the written approval of the Adviser. The
Adviser shall arrange, if desired by the Fund, for officers or employees of the
Adviser to serve, without compensation from the Fund, as trustees, officers or
agents of the Fund if duly elected or appointed to such positions and subject to
their individual consent and to any limitations imposed by law.
 
  4. INTERESTED PERSONS. Subject to applicable statutes and regulations, it is
understood that trustees, officers, shareholders and agents of the Fund are or
may be interested in the Adviser as directors, officers, shareholders, agents or
otherwise and that the directors, officers, shareholders and agents of the
Adviser may be interest in the Fund as trustees, officers, shareholders, agents
or otherwise.
 
  5. LIABILITY. The Adviser shall not be liable for any error of judgment or of
law, or for any loss suffered by the Fund in connection with the matters to
which this Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the performance of
its obligations and duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement.
 
  6. (a) TERM. This Agreement shall become effective on the date hereof and
shall remain in full force until May 30, 1997 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only as long as such continuance is specifically approved as
least annually in the manner required by the Investment Company Act of 1940, as
amended.
 
  (b) TERMINATION. This Agreement shall automatically terminate in the event of
its assignment. This Agreement may be terminated at any time without the payment
of any penalty by the Fund or by the Adviser on sixty (60) days written notice
to the other party. The Fund may effect termination by action of the Board of
Trustees or by vote of a majority of the outstanding shares of stock of the
Fund, accompanied by appropriate notice. This Agreement may be terminated at any
time without the payment of any penalty and without advance notice by the Board
of Trustees or by vote of a majority of the outstanding shares of the Fund in
the event that it shall have been established by a court of competent
jurisdiction that the Adviser or any officer or director of the Adviser has
taken any action which results in a breach of the covenants of the Adviser set
forth herein.
 
                                      B2-4
   45
 
  (c) PAYMENT UPON TERMINATION. Termination of this Agreement shall not affect
the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
 
  7. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall not
thereby affected.
 
  8. NOTICES. Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notice.
 
  9. DISCLAIMER. The Adviser acknowledges and agrees that, as provided in the
Declaration of Trust of the Trust, the shareholders, trustees, officers,
employees and other agents of the Trust and the Fund shall not personally be
bound by or liable hereunder, nor shall resort be had to their private property
for the satisfaction of any obligation or claim hereunder.
 
  10. USE OF THE NAME "EXPLORER INSTITUTIONAL". Van Kampen American Capital Inc.
("Van Kampen") has consented to the use by the Trust of the identifying word or
name "Explorer Institutional" in the name of the Trust and its Series. Such
consent is conditioned upon the employment of Van Kampen, its successors or any
affiliate thereof, as investment advisor and distributor of the Trust and each
of its Series. As between the Trust and itself, Van Kampen controls the use of
the name of the Trust insofar as such name contains "Explorer Institutional".
The name or identifying word "Explorer Institutional" may be used from time to
time in other connections and for other purposes by Van Kampen or affiliated
entities. Van Kampen may require the Trust to cease using "Explorer
Institutional" in the name of the Trust if the Trust ceases to employ, for any
reason, Van Kampen, an affiliate, or any successor as investment advisor and
distributor of the Trust and each of its Series.
 
                                      B2-5
   46
 
  IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be
executed on the day and year first above written.
 
                              VAN KAMPEN AMERICAN CAPITAL MANAGEMENT INC.
 
                              By:
                                 -----------------------------------------------
                                  Name:
                                  Title:
 
                              THE EXPLORER INSTITUTIONAL TRUST, on behalf of its
                              sub-trust 
                                        ----------------------------------------
 
                              By:
                                 -----------------------------------------------
                                  Name:
                                  Title:
 
                                      B2-6
   47
 
                                                                         ANNEX D
 
  The table below sets forth, for each investment company advised by Van Kampen
American Capital Investment Advisory Corp. and Asset Management, such fund's net
assets as of August 23, 1996 and the rate at which it compensates Van Kampen
American Capital Investment Advisory Corp. and Asset Management for investment
advisory services. Funds for which Van Kampen American Capital Investment
Advisory Corp. and Asset Management has waived or reduced its compensation are
marked by an "*". There can be no assurance that the respective investment
adviser will continue such waiver or reduction.
 


                                      NUMBER OF
                                       SHARES
                                     OUTSTANDING   NET ASSETS
                                        AS OF         AS OF
                                     AUGUST 23,    AUGUST 23,          ADVISORY FEE
                  FUNDS                 1996          1996               SCHEDULE
      -----------------------------  -----------   -----------   ------------------------
                                                     
I. ADVISORY AGREEMENTS BETWEEN ADVISORY CORP. AND THE VK FUNDS
A.    California Insured Tax Free
        Fund*......................                $             First $100 Million .500%
                                                                 Next $150 Million .450%
                                                                 Next $250 Million .425%
                                                                 Over $500 Million .400%
B.    Insured Tax Free Income
        Fund.......................                $             First $500 Million .525%
                                                                 Next $500 Million .500%
                                                                 Next $500 Million .475%
                                                                 Over $1.5 Billion .450%
C.    Tax Free High Income Fund....                $             First $500 Million .500%
      Municipal Income Fund*.......                $             Over $500 Million .450%
      Intermediate Term Municipal
        Income Fund*...............                $
      Florida Insured Tax Free
        Income Fund*...............                $
D.    New Jersey Tax Free Income
        Fund*......................                $             First $500 Million .600%
      New York Tax Free Income                                   Over $500 Million .500%
        Fund*......................                $
      Pennsylvania Tax Free Income
        Fund.......................                $
E.    High Yield Fund*.............                $             First $500 Million .750%
                                                                 Over $500 Million .650%
F.    Short-Term Global Income
        Fund.......................                $             .550%
G.    Strategic Income Fund........                $             First $500 Million .750%
      Growth Fund..................                $             Next $500 Million .700%
      Value Fund...................                $             Over $1 Billion .650%
      Aggressive Growth Fund.......                $
H.    Utility Fund.................                $             First $500 Million .650%
                                                                 Next $500 Million .600%
                                                                 Over $1 Billion .550%
I.    Balanced Fund*...............                $             First $500 Million .700%
                                                                 Over $500 Million .650%

 
                                       D-1
   48
 


                                      NUMBER OF
                                       SHARES
                                     OUTSTANDING   NET ASSETS
                                        AS OF         AS OF
                                     AUGUST 23,    AUGUST 23,          ADVISORY FEE
                  FUNDS                 1996          1996               SCHEDULE
      -----------------------------  -----------   -----------   ------------------------
                                                     
J.    U.S. Government Fund.........                $             First $500 Million .550%
                                                                 Next $500 Million .525%
                                                                 Next $2 Billion .500%
                                                                 Next $2 Billion .475%
                                                                 Next $2 Billion .450%
                                                                 Next $2 Billion .425%
                                                                 Over $9 Billion .400%

K.    Tax Free Money Fund*.........                $             First $500 Million .500%
                                                                 Next $500 Million .475%
                                                                 Next $500 Million .425%
                                                                 Over $1.5 Billion .375%
L.    Great American Companies
        Fund.......................                $             First $500 Million .700%
      Prospector Fund..............                $             Next $500 Million .650%
                                                                 Over $1 Billion .600%
M.    Foreign Securities Fund......                $             N/A(2)

II. ADVISORY AGREEMENTS BETWEEN ADVISORY CORP. AND
   OTHER INVESTMENT COMPANIES

A.    Van Kampen American Capital
        Investment Grade Municipal
        Trust......................                $             .600%
      Van Kampen American Capital
        Trust for Insured
        Municipals.................                $
      Van Kampen American Capital
        Municipal Income Trust.....                $
      Van Kampen American Capital
        California Municipal
        Trust......................                $

B.    Van Kampen American Capital
        Trust for Investment Grade
        Municipals.................                $             .650%
      Van Kampen American Capital
        Trust for Investment Grade
        California Municipals......                $
      Van Kampen American Capital
        Trust for Investment Grade
        New York Municipals........                $
      Van Kampen American Capital
        Trust for Investment Grade
        Pennsylvania Municipals....                $
      Van Kampen American Capital
        Trust for Investment Grade
        Florida Municipals.........                $
      Van Kampen American Capital
        Trust for Investment Grade
        New Jersey Municipals......                $
      Van Kampen American Capital
        Municipal Opportunity
        Trust......................                $
      Van Kampen American Capital
        Advantage Municipal Income
        Trust......................                $
      Van Kampen American Capital
        Advantage Pennsylvania
        Municipal Income Trust.....                $

 
                                       D-2
   49
 


                                      NUMBER OF
                                       SHARES
                                     OUTSTANDING   NET ASSETS
                                        AS OF         AS OF
                                     AUGUST 23,    AUGUST 23,          ADVISORY FEE
                  FUNDS                 1996          1996               SCHEDULE
      -----------------------------  -----------   -----------   ------------------------
                                                     
      Van Kampen American Capital
        New Jersey Value Municipal
        Income Trust...............                $
      Van Kampen American Capital
        Ohio Value Municipal Income
        Trust......................                $
      Van Kampen American Capital
        Massachusetts Value
        Municipal Income Trust.....                $
      Van Kampen American Capital
        Strategic Sector Municipal
        Trust......................                $
      Van Kampen American Capital
        California Value Municipal
        Income Trust...............                $
      Van Kampen American Capital
        Pennsylvania Value
        Municipal Income Trust.....                $
      Van Kampen American Capital
        Value Municipal Income
        Trust......................                $
      Van Kampen American Capital
        Florida Municipal
        Opportunity Trust..........                $
      Van Kampen American Capital
        Municipal Opportunity Trust
        II.........................                $
      Van Kampen American Capital
        Advantage Municipal Income
        Trust II...................                $
C.    Van Kampen American Capital
        Municipal Trust............                $             .700%
      Van Kampen American Capital
        California Quality
        Municipal Trust............                $
      Van Kampen American Capital
        New York Quality Municipal
        Trust......................                $
      Van Kampen American Capital
        Pennsylvania Quality
        Municipal Trust............                $
      Van Kampen American Capital
        Florida Quality Municipal
        Trust......................                $
      Van Kampen American Capital
        Ohio Quality
        Municipal Trust............                $
      Van Kampen American Capital
        Select Sector
        Municipal Trust............                $
D.    Van Kampen American Capital
        Intermediate Term High
        Income Trust...............                $             .750%

 
                                       D-3
   50
 


                                      NUMBER OF
                                       SHARES
                                     OUTSTANDING   NET ASSETS
                                        AS OF         AS OF
                                     AUGUST 23,    AUGUST 23,          ADVISORY FEE
                  FUNDS                 1996          1996               SCHEDULE
      -----------------------------  -----------   -----------   ------------------------
                                                                     
IncomeTrust...$E. Van Kampen American Capital
        Prime Rate Income Trust....                $             First $4.0 Billion .950%
                                                                 Next $3.5 Billion .900%
                                                                 Next $2.5 Billion .875%
                                                                 Over $10 Billion .850%
III.    SUBADVISORY AGREEMENTS PURSUANT TO WHICH
        ADVISORY CORP. ACTS AS SUBADVISER
A.    Cova Series Trust............                $             Money Market Portfolio
                                                                 First $500 million .25
                                                                   of 1%
                                                                   Over $500 million .15
                                                                   of 1%
                                                                 Quality Income Portfolio
                                                                 First $500 million .25
                                                                   of 1%
                                                                   Over $500 million .20
                                                                   of 1%
                                                                 High Yield Portfolio
                                                                 First $500 million .50
                                                                   of 1%
                                                                   Over $500 million .40
                                                                   of 1%
                                                                 Growth and Income
                                                                 Portfolio
                                                                 First $500 million .35
                                                                   of 1%
                                                                   Over $500 million .25
                                                                   of 1%
                                                                 Stock Index Portfolio
                                                                 .25 of 1%
                                                                 World Equity Portfolio
                                                                 First $500 million .50
                                                                   of 1%
                                                                   Over $500 million .40
                                                                   of 1%
                                                                 Utility Portfolio
                                                                 First $500 million .40
                                                                   of 1% Over $500
                                                                   million but less than
                                                                   $1 billion .35 of 1%
                                                                   Over $1 billion .30 of
                                                                   1%
IV.     ADVISORY AGREEMENTS BETWEEN VAN KAMPEN AMERICAN CAPITAL MANAGEMENT, INC. AND
        OTHER INVESTMENT COMPANIES
A.    Active Core Funds............  $                           First $1 Billion .300%
      Limited Duration Fund........  $                           Over $1 Billion .250%

 
                                       D-4
   51
 


                                      NUMBER OF
                                       SHARES
                                     OUTSTANDING   NET ASSETS
                                        AS OF         AS OF
                                     AUGUST 23,    AUGUST 23,          ADVISORY FEE
                  FUNDS                 1996          1996               SCHEDULE
      -----------------------------  -----------   -----------   ------------------------
                                                     
V.      SUBADVISORY AGREEMENT BETWEEN VAN KAMPEN AMERICAN CAPITAL MANAGEMENT, INC. AND
        THE INDICATED INVESTMENT ADVISERS

A.    Investment Advisors Corpora-
        tion--Sierra Trust Fund and
        Sierra Investment Advisors
        Corporation
        California Municipal Fund....              $             Up to $150 million .20%
        National Municipal Fund......              $             Over $15 million .15%
                                                                 Average daily net assets
      Florida Insured Municipal
        Fund.......................                $             Up to $75 million .20%
                                                                 Over $75 million .125%
                                                                 Average daily net assets
      California Insured Intermedi-
        ate Municipal Fund.........                $
      Prime Income Fund............                $             .475% of average daily
                                                                 net assets
B.    Cambridge Investment
        Advisors, Inc.
      Mentor Municipal Income
        Portfolio, a series of
        Mentor Series Trust........                $             .30%

 
- ---------------
(1) Advisory fee includes administrative services provided to the Trust.
(2) Fund does not charge an advisory fee; shares of the fund are held by other
    funds advised by the Advisory Corp. or its affiliates. Assets of the fund
    also are reflected in the assets of such other funds.
 
                                       D-5
   52
 
                                                                         ANNEX E
 
  The following table sets forth amounts paid by each Fund during its most
recently completed fiscal year pursuant to its investment advisory, fund
accounting, transfer agency, legal services and distribution agreements.
 



                                      FUND      TRANSFER    LEGAL
                        ADVISORY   ACCOUNTING    AGENCY    SERVICES   DISTRIBUTION
         FUND           EXPENSES    EXPENSES    EXPENSES   EXPENSES     EXPENSES
- ----------------------  --------   ----------   --------   --------   ------------
                                                       
                                       E-1


   53
                                     PROXY
 
                      VAN KAMPEN AMERICAN CAPITAL [FUND]
 
                    JOINT SPECIAL MEETING OF SHAREHOLDERS
 
               PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
 
     The undersigned holder of shares of beneficial interest (the "Shares"), 
of VAN KAMPEN AMERICAN CAPITAL [FUND], a Massachusetts business trust (the 
"[Fund]"), hereby appoints Dennis J. McDonnell and Ronald A. Nyberg, and each of
them, with full power of substitution and revocation, as proxies to represent 
the undersigned at the Joint Special Meeting of Shareholders to be held at the 
offices of Van Kampen American Capital, Inc., One Parkview Plaza, Oakbrook 
Terrace, Illinois 60181, on Wednedsay, October 23, 1996 at [   ] p.m., and any
and all adjournments thereof (the "Special Meeting"), and thereat to vote all 
Shares which the undersigned would be entitled to vote, with all powers the 
undersigned would possess if personally present, in accordance with the 
following instructions.

     If more than one of the proxies, or their substitutes, are present at the
Joint Special Meeting or any adjournment thereof, they jointly (or, if only 
one is present and voting then that one) shall have authority and may exercise 
all powers granted hereby. This Proxy, when properly executed, will be voted in
accordance with the instructions marked hereon by the undersigned. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS
DESCRIBED HEREIN AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.
 
     Account No.     No. of Shares     Class of Shares     Proxy No.
 
  
     1.  For each Fund, to approve or disapprove a new investment advisory             FOR      AGAINST    ABSTAIN
         agreement;                                                                   ------     ------     ------           
                                                                                                       
                                                                                      ------     ------     ------    
                                                                                                       
                                                                                                       
     2.  For VIT and VLT (each defined on Annex A), to approve or disapprove           FOR      AGAINST    ABSTAIN   
         an amendment to its Declaration of Trust;                                    ------     ------     ------
                                                                                                       
                                                                                      ------     ------     ------  


     3.  For each Closed-End Fund (defined on Annex A), to approve or                  FOR      AGAINST    ABSTAIN   
         disapprove certain changes to its fundamental investment policies with       ------     ------     ------   
         respect to investments in other investment companies;                                         
                                                                                      ------     ------     ------   


     4.  For each Explorer Fund (defined on Annex A), to ratify or reject the          FOR      AGAINST    ABSTAIN  
         selection of KPMG Peat Marwick as independent public accountants for its     ------     ------     ------  
         fiscal year; and
                                                                                      ------     ------     ------  


     5.  To transact such other business as may properly come before the Meeting.      FOR      AGAINST    ABSTAIN  
                                                                                      ------     ------     ------  

                                                                                      ------     ------     ------  


 
     The undersigned hereby acknowledges receipt of the accompanying Notice of
Special Meeting and Proxy Statement for the Joint Special Meeting to be held on
October 23, 1996.
     Please sign this Proxy exactly as your name or names appear on the books of
the [Fund]. When signing as attorney, trustee, executor, administrator,
custodian, guardian or corporate officer, please give full title. If shares are
held jointly, each holder should sign.
 
                                                       
- -----------------------------------------------------     ----------------------------------- ,
Shareholder signature                                     1996
                                                          Date
- -----------------------------------------------------     ----------------------------------- ,
Co-owner signature (if applicable)                        1996
                                                          Date