AMERICAN CAPITAL MUNICIPAL BOND FUND INC, 497, 1995-02-03

AMERICAN CAPITAL MUNICIPAL BOND FUND INC
497, 1995-02-03

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AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
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2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
January 31, 1995

American Capital Municipal Bond Fund, Inc. (the "Fund") is a mutual fund whose
primary objective is to provide, through investment in a professionally managed
portfolio of municipal bonds ("Municipal Bonds"), as high a level of current
interest income exempt from federal income tax as is consistent with the
preservation of capital.

There is no assurance that the Fund will achieve its investment objective.

This Prospectus tells investors briefly the information they should know
before investing in the Fund. Investors should read and retain this Prospectus
for future reference.

A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and contains
further information about the Fund. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Fund at the
telephone number and address printed above. The Statement of Additional
Information is incorporated by reference into this Prospectus.

THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.

THE SHARES OF THIS FUND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2

CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110

SHAREHOLDER SERVICE AGENT:

Van Kampen/American Capital

Shareholder Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256

INVESTMENT ADVISER:
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056

DISTRIBUTOR:
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181

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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus Summary............... 2
Expense Synopsis................. 4
Financial Highlights............. 5
Multiple Pricing System.......... 6
Investment Objective and
Policies....................... 8
Municipal Bonds.................. 9
Investment Practices and
Restrictions................... 10
The Fund and Its Management...... 13
Purchase of Shares............... 13
Distribution Plans............... 18
Shareholder Services............. 19
Redemption of Shares............. 21
Dividends, Distributions and
Taxes.......................... 23
Prior Performance Information.... 24
Additional Information........... 25
Investment Holdings.............. 27
</TABLE>

***************************************************************************
* *
* No dealer, salesperson, or other person has been authorized to give *
* any information or to make any representations other than those *
* contained in this Prospectus or in the Statement of Additional *
* Information, and, if given or made, such other information or *
* representations must not be relied upon as having been authorized by *
* the Fund or by the Distributor. This Prospectus does not constitute *
* an offering by the Distributor in any jurisdiction in which such *
* offering may not lawfully be made. *
* *
***************************************************************************

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PROSPECTUS SUMMARY
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SHARES OFFERED. Common Stock.

MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").

TYPE OF COMPANY. Diversified, open-end management investment company.

INVESTMENT OBJECTIVE. Interest income exempt from federal income tax. There
is, however, no assurance that the Fund will be successful in achieving its
objective.

INVESTMENT POLICY. Investing in a diversified portfolio of obligations issued
by states, territories or possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest from which is exempt from federal income tax.

RISK FACTORS. The Fund invests primarily in long-term Municipal Bonds which
tend to produce higher yields and are subject to greater market fluctuations as
a result of changes in interest rates ("market risk") than Municipal Bonds with
shorter maturities and lower yields. Up to 20% of the Fund's total assets may be
invested in Municipal Bonds rated Ba or B by Moody's Investors Service
("Moody's") and BB or B by Standard & Poor's Corporation ("S&P"), or which, if
non-rated, are in the opinion of the Adviser of comparable quality. Lower rated
securities are subject to market risks and are also subject to the ability of
the issuer to meet its principal and interest obligations ("credit risk").
Municipal Bonds rated B by Moody's are considered generally to lack
characteristics of the desirable investment in that assurance of interest and
principal payments or maintenance of other terms of the contract over any long
period of time may be small. The Fund may seek to hedge interest rate risk

2
<PAGE> 3

through transactions in futures contracts and related options. Any net gains
from futures and options transactions are subject to federal income tax and
such transactions involve certain risks. See "Investment Practices and
Restrictions -- Futures Contracts and Related Options." The Fund invests a
portion of its assets in private-activity bonds so that a portion of its
exempt-interest dividends constitutes an item of tax preference to the extent
such dividends represent interest received from these private-activity
bonds. See "Dividends, Distributions and Taxes."

INVESTMENT RESULTS. The investment results of the Fund during the past ten
years are shown in the table of "Financial Highlights."

INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") serves as investment adviser to the Fund. The Adviser provides
investment advice to 45 investment company portfolios. See "The Fund and Its
Management."

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").

MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Multiple Pricing
System -- Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."

CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."

CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first and second year, declining each year thereafter to 0%
after the fifth year. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class B
Shares" and "Distribution Plans." Class B shares will convert automatically to
Class A shares six years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."

CLASS C SHARES. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of 1% on redemptions made within
one year of purchase. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution Plans." Class C shares will convert automatically to
Class A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."

DIVIDENDS. Income dividends are distributed monthly. Any taxable net realized
capital gains are distributed annually. Such distributions are automatically
reinvested in shares of the Fund at net asset value per share (without sales
charge) unless payment in cash is requested. See "Shareholder
Services -- Reinvestment Plan" and "Dividends, Distributions and Taxes."

3
<PAGE> 4

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EXPENSE SYNOPSIS
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The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
- ----------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases (as a percentage of
offering price)................ 4.75%(a) None None
Sales charge imposed on dividend
reinvestments.................. None None None
Deferred sales charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)............ None* 4% during the first and 1.0% during the
second year, 3% during first year(b)
the third year, 2.5%
during the fourth year,
1.5% during the fifth
year and 0% after the
fifth year(b)
Exchange fee..................... $5.00(c) $5.00(c) $5.00(c)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees (after
reimbursement)................. .50% .50% .50%
Rule 12b-1 fees(d)............... .21% 1.00%(g) 1.00%(g)
Other expenses (after
reimbursement)(e).............. .22% .22% .22%(f)
Total fund operating expenses.... .93% 1.72% 1.72%
</TABLE>

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

(a) Reduced for purchases of $100,000 and over. See "Purchase of
Shares -- Class A Shares" -- page 15.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- page
17.
(c) Not charged in certain circumstances. See "Shareholder
Services -- Systematic Exchange" and "-- Automatic Exchange" -- page 20.
(d) Up to .25% for Class A shares and 1.00% for Class B and C shares. See
"Distribution Plans" -- page 18.
(e) See "The Fund and Its Management" -- page 13.
(f) "Other Expenses" is based on estimated amounts for the current fiscal
year.
(g) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
* Investments of $1 million or more are not subject to any sales charge at
the time of purchase, but a contingent deferred sales charge of 1% may be
imposed on certain redemptions made within one year of the purchase.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
1 3
EXAMPLE: YEAR YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum $47.50
front-end sales charge and for Class B and Class C shares, a
contingent deferred sales charge assuming (1) an operating
expense ratio of .93% for Class A shares, 1.72% for Class B
shares and 1.72% for Class C shares, (2) a 5% annual return
throughout the period and (3) redemption at the end of the
period:
Class A................................................... $57 $76 $ 97 $156
Class B................................................... $59 $87 $111 $163**
Class C................................................... $28 $54 $ 93 $203
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A................................................... $57 $76 $ 97 $156
Class B................................................... $17 $54 $ 93 $163**
Class C................................................... $17 $54 $ 93 $203
</TABLE>

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** Based on conversion to Class A shares after six years.

The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. See "Purchase of Shares," "The Fund and Its Management" and
"Redemption of Shares." The example is included to provide a means for the
investor to compare expense levels of funds with different fee structures over
varying investment periods. To facilitate such comparison, all funds are
required to utilize a five percent annual return assumption. This assumption is
unrelated to the Fund's prior performance and is not a projection of future
performance. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.

4
<PAGE> 5

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FINANCIAL HIGHLIGHTS
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(Selected data for a share of capital stock outstanding throughout each of the
periods indicated)

The following financial highlights for each of the five most recent fiscal
years have been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A(1)
----------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------
1994 1993(2) 1992 1991 1990 1989 1988 1987
--------- -------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period....... $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33 $ 9.05 $ 9.03 $ 10.35
--------- --------- ---------- ---------- --------- --------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .68 .69 .705 .71 .72 .72 .72 .795
Expenses................................... (.09) (.094) (.09) (.08) (.08) (.065) (.06) (.065)
--------- --------- ---------- ---------- --------- --------- ---------- ---------
Net investment income...................... .59 .596 .615 .63 .64 .655 .66 .73
Net realized and unrealized gains or losses
on securities............................. (.7255) .558 .349 .5198 (.195) .30 .5913 (1.27)
--------- --------- ---------- ---------- --------- --------- ---------- ---------
Total from investment operations........... (.1355) 1.154 .964 1.1498 .445 .955 1.2513 (.54)
--------- --------- ---------- ---------- --------- --------- ---------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income....... (.5745) (.596) (.624) (.6398) (.645) (.675) (.785) (.78)
Distributions in excess of book-basis
net investment income(3).................. -- (.008) -- -- -- -- (.4463) --
--------- --------- ---------- ---------- --------- --------- ---------- ---------
Total distributions........................ (.5745) (.604) (.624) (.6398) (.645) (.675) (1.2313) (.78)
--------- --------- ---------- ---------- --------- --------- ---------- ---------
Net asset value, end of period............. $ 9.82 $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33 $ 9.05 $ 9.03
========= ========= ========== ========== ========= ========= ========= ==========
TOTAL RETURN(5)............................ (1.33%) 11.91% 10.31% 12.98% 4.90% 10.77% 15.57% (5.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....... $309.0 $332.3 $292.3 $266.9 $237.4 $231.8 $191.7 $166.7
Ratios to average net assets
Expenses.................................. .93% .91% .90% .89% .86% .71% .69% .64%
Net investment income..................... 5.76% 5.82% 6.29% 6.71% 6.84% 7.05% 7.47% 7.29%
Portfolio turnover rate.................... 6% 3% 6% 10% 17% 32% 33% 164%

CLASS B(4) CLASS C(2)
----------------- -----------------------------------
YEAR ENDED YEAR AUGUST 30,
SEPTEMBER 30 ENDED 1993(6) THROUGH
------------------ SEPTEMBER 30, SEPTEMBER 30,
1986 1985 1994 1993(2) 1994 1993
-------- -------- -------- ------- ---------------- ----------------

<S> <<C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period....... $ 9.23 $ 8.46 $ 10.53 $ 9.98 $ 10.54 $ 10.53
-------- -------- --------- -------- --------- ---------

INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .895 .88 .68 .685 .69 .05

Expenses................................... (.07) (.065) (.17) (.175) (.18) (.015)

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

Net investment income...................... .825 .815 .51 .51 .51 .035

Net realized and unrealized gains or losses
on securities............................. 1.075 .735 (.7195) .564 (.7295) .061

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

Total from investment operations........... 1.90 1.55 (.2095) 1.074 (.2195) .096

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

LESS DISTRIBUTIONS
Dividends from net investment income....... (.78) (.78) (.4905) (.501) (.4905) (.007)

Distributions in excess of book-basis
net investment income(3).................. -- -- -- (.023) -- (.079)

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

Total distributions........................ (.78) (.78) (.4905) (.524) (.4905) (.086)

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

Net asset value, end of period............. $ 10.35 $ 9.23 $ 9.83 $ 10.53 $ 9.83 $ 10.54

======== ======== ========= ======== ========= =========

TOTAL RETURN(5)............................ 21.03% 19.11% (2.13%) 11.15% (2.03%) .91%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)....... $159.2 $100.5 $ 37.2 $ 22.1 $ 8.0 $ 1.3

Ratios to average net assets
Expenses.................................. .68% .72% 1.72% 1.71% 1.72% 1.69%(7)

Net investment income..................... 8.10% 9.20% 5.00% 4.96% 5.03% 4.25%(7)

Portfolio turnover rate.................... 69% 197% 6% 3% 6% 3%

</TABLE>

(1) Per share amounts for 1991 through 1985 are adjusted to reflect a 2 for 1
stock split effected July 26, 1991. Additionally, in 1991, the Fund adopted
for financial reporting purposes a method of accounting for debt discounts
and premiums which is the same as is used for federal income tax reporting.
The effect of the change, on a pro forma basis, would have been to increase
net investment income with a corresponding decrease in net realized and
unrealized gains or losses in the amounts of $.01, $.01, $.02, $.01 and
$(.01) for the years 1990 to 1986, respectively. Similarly, the ratios of
net investment income to average net assets would have been 6.94%, 7.17%,
7.71%, 7.37% and 8.02%, respectively. For the year 1985, the effect of the
change in the accounting method was immaterial.

(2) Based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Prior year financial information was not restated.
(4) Sales of Class B commenced September 29, 1992, at a net asset value of
$10.00 per share and at year end, the net asset value was $9.98 per share.
The decrease in net asset value was due principally to a dividend of $0.52
per share. Other financial highlights for Class B shares for this short
period are not meaningful, and therefore not presented.
(5) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(6) Commencement of offering of sales.
(7) Annualized.

5
<PAGE> 6

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MULTIPLE PRICING SYSTEM
- --------------------------------------------------------------------------------

The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.

CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Purchase of Shares -- Class A Shares."

CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of Shares --
Class B Shares." Class B shares will automatically convert to Class A shares six
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. See "Conversion Feature" herein for discussion on
applicability of the conversion feature to Class B shares.

CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will convert automatically to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.

CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding for
a period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares as the case may be, from the burden of the ongoing distribution fee.

For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.

The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six years or ten years, respectively, after the end of the calendar month
in which the shareholder's order to purchase was accepted.

FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share of Class A
shares. To assist investors in making this determination, the table under the
caption "Expense Synopsis" sets forth examples of the charges applicable to each
class of shares. In this regard, Class A shares may be more beneficial to the
investor who qualifies for reduced initial sales charges or purchases at net
asset value, as described herein under "Purchase of Shares --

6
<PAGE> 7

Class A Shares." For these reasons, the Distributor will reject any order of
more than $250,000 for Class B shares or any order of more than $1 million for
Class C shares.

Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors in
Class A shares do not have all their funds invested initially and, therefore,
initially own fewer shares. Other investors might determine that it is more
advantageous to purchase either Class B shares or Class C shares and have all
their funds invested initially, although remaining subject to a contingent
deferred sales charge. Ongoing distribution fees on Class B shares and Class C
shares will be offset to the extent of the additional funds originally invested
and any return realized on those funds. However, there can be no assurance as to
the return, if any, which will be realized on such additional funds. For
investments held for ten years or more, the relative value upon liquidation of
the three classes tends to favor Class A or Class B shares, rather than Class C
shares.

Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (see "Shareholder Services -- Shareholder Services Applicable to Class A
Shareholders Only -- Check Writing Privilege"). Class B shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, and/or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish to
avoid a front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.

Under most circumstances, for investments aggregating less than $100,000 at
the time of purchase, investments originally made in Class C shares will tend to
have a slightly higher value upon liquidation than investments originally made
in either Class A or Class B shares if liquidated within approximately the first
six years after the date of the original investment and investments originally
made in Class B shares will tend to have a slightly higher value upon
liquidation than investments originally made in either Class A or Class C shares
for investments held longer. Under most circumstances, for investments
aggregating $100,000 or more at the time of purchase, investments originally
made in Class C shares will tend to have a slightly higher value upon
liquidation than either investments originally made in Class A or Class B shares
if liquidated within approximately the first two to the first six years after
the date of the original investment, but investments originally made in Class A
and Class B shares will tend to have a slightly higher value upon liquidation
for investments held longer. The foregoing will not, however, be true in all
cases. Particularly, if the Fund experiences a consistently negative or widely
fluctuating total return, results may differ.

The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."

GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
"Dividends, Distributions and Taxes." Shares of the Fund may be exchanged,
subject to certain limitations, for shares of the same class of other mutual
funds advised by the Adviser. See "Shareholder Services -- Exchange Privilege."

The Directors of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 (the "1940 Act") and state laws, will seek to ensure that no
such conflict arises.

7
<PAGE> 8

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

The Fund's objective is to provide as high a level of current interest income
exempt from federal income tax as is consistent with the preservation of
capital. This limitation could result in a lesser level of interest income than
that of funds willing to incur greater risk of capital. Because the value of and
yield on Municipal Bonds fluctuate, there can be no assurance that the Fund's
objective will be achieved.

The Fund seeks to achieve its objective by investing in a diversified
portfolio of obligations issued by or on behalf of states, territories or
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which,
in the opinion of bond counsel for the issuer, is exempt from federal income
tax. See "Municipal Bonds." Under normal circumstances, at least 80% of the
assets of the Fund are invested in Municipal Bonds which are exempt from federal
income tax. This is a fundamental policy and may not be changed without the
approval of at least a majority of the outstanding shares of the Fund. The Fund
does not independently evaluate the tax-exempt status of the Municipal Bonds in
which it invests. The Fund invests principally in Municipal Bonds rated at the
time of purchase within the four highest grades assigned by Moody's or S&P, or
which, if non-rated, is in the Adviser's opinion of comparable quality. The Fund
may not acquire any Municipal Bond which is rated below A by Moody's and S&P or
which is non-rated if immediately after and as a result of such purchase such
Bonds would constitute more than 50% of the Fund's total assets. The Fund may
not acquire any Municipal Bond which is rated below Baa by Moody's and below BBB
by S&P, or which, if non-rated, is in the opinion of the Adviser of comparable
quality, if immediately after and as a result of such purchase such Bonds would
constitute more than 20% of the Fund's total assets. The Fund may not, however,
purchase any Municipal Bond rated below B by Moody's and S&P or any non-rated
Municipal Bond considered by the Adviser to be of comparable quality. Ratings at
the time of purchase determine which securities may be acquired, and a
subsequent reduction in rating does not require the Fund to dispose of a
security. Because investment in lower-rated securities involves greater
investment risks, achievement of the Fund's investment objectives may be more
dependent on the Adviser's credit analysis than would be the case if the Fund
invested only in higher-rated securities. Non-rated Municipal Bonds are not
necessarily of lower quality than rated Municipal Bonds, but the market for
rated Municipal Bonds is often broader. The Fund may seek to hedge against
changes in interest rates through transactions in listed futures contracts
related to U.S. Government securities or based upon the Bond Buyers Municipal
Bond Index and options thereon. See "Investment Practices and
Restrictions -- Futures Contracts and Related Options."

During the fiscal year ended September 30, 1994, the average percentage of the
Fund's assets invested in Municipal Bonds within the various rating categories
(based on the higher of the S&P or Moody's ratings), and the non-rated debt
securities, determined on a dollar weighted average, were as follows:

<TABLE>
<S> <C>
AAA/Aaa........................................................ 20.98%
AA/Aa.......................................................... 16.74%
A/A............................................................ 28.99%
BBB/Baa........................................................ 11.13%
BB/Ba.......................................................... 1.16%
CCC/Caa........................................................ .63%
*Non-rated..................................................... 14.37%
Other net assets............................................... 6.00%
--------
Total net assets.......................................... 100%
</TABLE>

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

* The non-rated debt securities as a percentage of total net assets were
considered by the Adviser to be comparable to securities rated by Moody's as
follows: AAA - .17%, BBB - 10.08%, BB - 3.68% and B - .44%.

Variations in the quality and maturity of the Fund's portfolio investments can
be expected to affect the Fund's yield and the degree of market and credit risk
to which the Fund is subject. Municipal Bonds rated BBB by S&P or Baa by Moody's
may have speculative characteristics so that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade Municipal
Bonds. The Fund maintains the flexibility to invest up to 20% of its total
assets in Municipal Bonds rated Ba or B by Moody's or BB or B by S&P. Municipal
Bonds rated Ba by Moody's are judged to have speculative elements so that their
future cannot be considered as well assured. Municipal Bonds rated B by Moody's
are considered generally to lack characteristics of a desirable investment in
that assurance of interest and principal payments or maintenance of other terms
of the contract over any long period of time may be small. Additional risks of
investing in lower-rated Municipal Bonds are described in the Statement of
Additional Information which includes an appendix describing Municipal Bond
ratings. Generally, Municipal Bonds with longer maturities tend to produce
higher yields and are subject to greater market fluctuations as a result of
changes in interest rates than Municipal Bonds with shorter maturities and lower
yields. The market value of Municipal Bonds generally rises when interest rates
decline and falls when interest rates rise. Generally, lower-rated Munic-

8
<PAGE> 9

ipal Bonds provide a higher yield than higher-rated Municipal Bonds of similar
maturity but are subject to greater credit risk. The Fund is not limited as to
the maturities of the Municipal Bonds in which it invests. Such securities may
have remaining maturities of up to 30 years or more. The average maturity, which
may vary from time to time, of the Municipal Bonds owned by the Fund on
September 30, 1994, was 20.32 years.

On a temporary defensive basis, due to market conditions or pending investment
in Municipal Bonds, the Fund may hold temporary investments ("Temporary
Investments") consisting of short term municipal notes rated MIG 1 through MIG 4
by Moody's or SP-1 or SP-2 by S&P; variable rate demand notes rated VMIG 1 or
VMIG 2; tax-exempt commercial paper rated P-1 or P-2 in the case of Moody's or
A-1 or A-2 by S&P; securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; certificates of deposit of domestic banks with
assets of $500 million or more and having deposits insured by the Federal
Deposit Insurance Corporation; and shares of tax-exempt money market investment
companies. See "Investment Practices and Restrictions -- Money Market Investment
Companies."

Temporary Investments may also include repurchase agreements collateralized by
Municipal Bonds or by any of the Temporary Investments described above,
provided, however, that no more than 15% of the Fund's net assets at the time of
purchase may be invested in repurchase agreements which do not mature within
seven days. Interest income from certain Temporary Investments may be taxable to
shareholders as ordinary income. See "Dividends, Distributions and Taxes." The
Fund generally invests at least 90% of its assets in securities, the income from
which is exempt from regular federal income tax and at least 80% of its assets
in securities, the income from which is exempt from both such tax and the
federal alternative minimum tax. As a temporary defensive measure during times
of adverse market conditions, up to 50% of the Fund's assets may be invested in
such Temporary Investments.

The Fund may invest up to 15% of its net assets in illiquid securities which
include Municipal Bonds issued in limited placements under which the Fund
represents that it is purchasing for investment purposes only, repurchase
agreements maturing in more than seven days and other securities subject to
legal or contractual restrictions on resale. Municipal Bonds acquired in limited
placements generally may be resold only in a privately negotiated transaction to
one or more other institutional investors. Such limitation could result in the
Fund's inability to realize a favorable price upon disposition, and in some
cases might make disposition of such securities at the time desired by the Fund
impossible. The 15% limitation applies at the time the purchase commitment is
made. See "Investment Practices and Restrictions -- Repurchase Agreements."

- --------------------------------------------------------------------------------
MUNICIPAL BONDS
- --------------------------------------------------------------------------------

Municipal Bonds include debt obligations of a state, territory or a possession
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public purposes for
which Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and obtaining funds to lend to
other public institutions and facilities. Certain types of Municipal Bonds are
issued to obtain funding for privately operated facilities.

Many new issues of Municipal Bonds are sold on a "when-issued" basis. While
the Fund has ownership rights to the Bonds, the Fund does not have to pay for
them until they are delivered, normally 15 to 45 days later. To meet that
payment obligation, the Fund sets aside with the custodian sufficient cash or
securities equal to the amount that will be due. See "Investment Practices and
Restrictions -- Delayed Delivery and When-Issued Securities."

The yields of Municipal Bonds depend on, among other things, general money
market conditions, general conditions of the Municipal Bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of Moody's and S&P represent their opinions of the quality of the
Municipal Bonds they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Municipal Bonds of the same maturity and coupon with different
ratings may have the same yield. A description of the ratings is included in the
Statement of Additional Information.

Among the various types of Municipal Bonds are general obligation bonds,
revenue or special obligation bonds, industrial development bonds, pollution
control bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes.

General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
- -- tolls from a toll-bridge, for example. Industrial development revenue bonds
are a specific type of revenue bond backed by the credit and security of a
private user. The Fund's

9
<PAGE> 10

ability to achieve its objective depends to a great extent on the ability of
these various issuers to meet their scheduled payments of principal and
interest.

The Fund considers investments in tax-exempt Municipal Bonds not to be subject
to concentration policies and may invest a relatively high percentage of its
assets in Municipal Bonds issued by entities having similar characteristics. The
issuers may be located in the same geographic area or may pay their interest
obligations from revenue of similar projects such as hospitals, utility systems
and housing finance agencies. This may make the Fund's investments more
susceptible to similar economic, political or regulatory occurrences. As the
similarity in issuers increases, the potential for fluctuation in the Fund's per
share net asset value also increases. The Fund may invest more than 25% of its
total assets in industrial development revenue bonds, but it does not intend to
invest more than 25% of its assets in industrial development revenue bonds
issued for companies in the same industry or state. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
issuers of any such related projects or facilities experience financial
difficulties.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. It may be expected that similar proposals may be
introduced in the future. If any such proposals were to be enacted, the ability
of the Fund to pay "exempt-interest" dividends may be adversely affected and the
Fund would re-evaluate its investment objective and policies and consider
changes in its structure.

- --------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RESTRICTIONS
- --------------------------------------------------------------------------------

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and that
seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the holding period. Repurchase agreements
involve certain risks in the event of default by the other party. In the event
of the bankruptcy of the seller of a repurchase agreement, the Fund could
experience delays in liquidating the underlying securities, and the Fund could
incur a loss if the value of the underlying securities declines. The Fund will
not invest in repurchase agreements maturing in more than seven days if any
such investment, together with any other illiquid securities held by the Fund,
exceeds 15% of the value of its net assets. In the event of the bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and loss including: (a)
possible decline in the value of the underlying security during the period
while the Fund seeks to enforce its rights thereto, (b) possible lack of access
to income on the underlying security during this period, and (c) expenses of
enforcing its rights.

For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.

VARIABLE RATE DEMAND NOTES. Variable rate demand notes ("VRDNs") are
tax-exempt obligations which contain a floating or variable interest rate
adjustment formula and which are subject to an unconditional right of demand to
receive payment of the principal balance plus accrued interest either at any
time or at specified intervals not exceeding one year and in either case upon no
more than seven days notice. The interest rates are adjustable at intervals
ranging from daily ("floating rate") to up to one year to some prevailing market
rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDN at approximately the par value of the VRDN
upon the adjustment date. The adjustments are typically based upon the prime
rate of a bank or some other appropriate interest rate adjustment index.

The Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days.
The Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.

10
<PAGE> 11

STAND-BY COMMITMENTS. The Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a bank or
dealer from which Municipal Securities are acquired agrees to purchase from the
Fund, at the Fund's option, the Municipal Securities at a specified price. Such
commitments are sometimes called "liquidity puts."

The amount payable to the Fund upon its exercise of a "stand-by commitment" is
normally (i) the Fund's acquisition cost of the Municipal Securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during that period.
"Stand-by commitments" generally can be acquired when the remaining maturity of
the underlying Municipal Securities is not greater than one year, and are
exercisable by the Fund at any time before the maturity of such obligations.

The Fund's right to exercise "stand-by commitments" is unconditional and
unqualified. A "stand-by commitment" generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Securities to a third party
at any time.

The Fund expects that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield-to-maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding "stand-by commitments" held in the Fund will not exceed
1/2 of 1% of the value of the Fund's total assets calculated immediately after
each "stand-by commitment" is acquired. The Fund intends to enter into "stand-by
commitments" only with banks and dealers which, in the Adviser's opinion,
present minimal credit risks.

The Fund would acquire "stand-by commitments" solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a "stand-by commitment" would not affect the
valuation of the underlying Municipal Securities which would continue to be
valued in accordance with the method of valuation employed for the Fund in which
they are held. "Stand-by commitments" acquired by the Fund would be valued at
zero in determining net asset value. Where the Fund paid any consideration
directly or indirectly for a "stand-by commitment," its costs would be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.

DELAYED DELIVERY AND WHEN-ISSUED SECURITIES. Municipal Bonds may at times be
purchased or sold on a delayed delivery or a when-issued basis. These
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future, often a month or more after the
purchase. The payment obligation and the interest rate are each fixed at the
time the Fund enters into the commitment. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to settlement date if
it is deemed advisable. Purchasing Municipal Bonds on a when-issued basis
involves the risk that the yield available in the market when the delivery takes
place may actually be higher than those obtained in the transaction itself; if
yields so increase, the value of the when-issued obligation will generally
decrease. The Fund will maintain a separate account at its custodian bank
consisting of cash or liquid high-grade debt obligations (valued on a daily
basis) equal at all times to the amount of any when-issued commitment.

MONEY MARKET INVESTMENT COMPANIES. The Fund may invest in shares of open-end
investment companies which are tax-exempt money market funds. Such investment
would not exceed three percent of the total outstanding voting stock of the
acquired company; five percent of the value of the total assets of the Fund; or
ten percent of the total assets of the acquired company as held by the Fund and
all American Capital funds. When the Fund invests in a tax-exempt money market
fund, the Adviser will reduce its advisory fee by the amount of any investment
advisory and administrative services fees paid to the investment adviser of the
money market fund.

FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies of the Fund
permit the Fund to engage in transactions in listed futures contracts and
related options. Such transactions may be in listed futures contracts based upon
The Bond Buyer Municipal Bond Index (the "Index"), a price weighted measure of
the market value of 40 large-sized, recent issues of tax-exempt bonds or in
listed contracts based on U.S. Government securities.

Futures contracts and options thereon may be used for defensive hedging or
anticipatory hedging purposes, depending upon the composition of the Fund's
portfolio and the Adviser's expectations concerning the securities markets. See
the Statement of Additional Information for discussion of futures contracts and
related options.

Potential Risks of Futures Contracts and Related Options. The purchase and
sale of futures contracts and related options involve risks different from those
involved with direct investments in securities. While utilization of futures
contracts and related options may be advantageous to the Fund, if the Adviser is
not successful in employing such instruments in managing the Fund's investments,
the Fund's performance will be worse than if the

11
<PAGE> 12

Fund did not make such investments. In addition, the Fund would pay commissions
and other costs in connection with such investments, which may increase the
Fund's expenses and reduce its return. The Fund may not purchase or sell futures
contracts or related options for which the aggregate initial margin and premiums
exceed five percent of the fair market value of the Fund's assets. In order to
prevent leverage in connection with the purchase of futures contracts or call
options thereon by the Fund, an amount of cash, cash equivalent or liquid
high-grade debt securities equal to the market value of the obligation under the
futures contracts or options (less any related margin deposits) will be
maintained in a segregated account with the custodian.

PORTFOLIO TURNOVER. The Fund may purchase or sell securities without regard to
the length of time the security has been held to take advantage of short-term
differentials in bond yields consistent with its objective of seeking tax-exempt
interest income. The Fund engages in short-term trading only if the anticipated
benefits are expected by the Adviser to exceed the transaction costs. The Fund's
annual portfolio turnover rate is shown in the "Financial Highlights" table
shown herein. Since portfolio changes are made in light of market and other
conditions, the turnover rate may vary greatly from year to year. A 100%
turnover rate would occur, for example, if all the securities in the Fund's
portfolio were replaced once a year. A 100% turnover rate is substantially
greater than that of many other investment companies. Higher portfolio turnover
involves higher transaction costs and may result in realization of short-term
capital gains if securities are held for one year or less. Such gains are
taxable to shareholders as ordinary income except to the extent such gains are
offset by capital losses.

PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund and the negotiation of the price of such transactions. The Municipal
Bonds in which the Fund invests are traded in the over-the-counter market.
Municipal Bonds are generally traded on a net basis and do not normally involve
any brokerage commissions. The cost of portfolio securities transactions of the
Fund primarily consists of dealer or underwriter spreads. The Adviser is
authorized to place portfolio transactions with brokerage firms participating in
the distribution of shares of the Fund and other American Capital funds if it
reasonably believes that the quality of the execution and the commission are
comparable to that available from other qualified firms. The Adviser is
authorized to place portfolio transactions with brokerage firms that provide it
with investment and research information and to pay higher than the lowest
available commission if the Adviser determines that the cost is reasonable in
relation to the overall services provided. The information received may be used
by the Adviser in managing the assets of other advisory accounts as well as in
the management of the assets of the Fund.

INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the Fund's shareholders. These
restrictions provide, among other things, that the Fund may not:

1. Invest in securities other than Municipal Bonds and Temporary Investments
(as defined herein), listed futures contracts related to U.S. Government
securities, Municipal Bonds or to an index of Municipal Bonds, and options
on such contracts.

2. Invest more than five percent of its total assets at market value at the
time of purchase in the securities of any one issuer (other than
obligations of the United States Government or of any instrumentalities
thereof).

3. Borrow money, except from banks for temporary or emergency purposes, such
borrowing not to exceed five percent of its total assets at market value at
the time of borrowing. Any such borrowing may be secured provided that not
more than ten percent of the total assets at market value at the time of
pledging may be used as security for such borrowings. Notwithstanding the
foregoing, the Fund may engage in transactions in options, futures
contracts and related options, segregate or deposit assets to cover or
secure options written, and make margin deposits and payments in connection
with futures contracts and related options.

4. Purchase any Municipal Bond rated below Baa by Moody's and below BBB by
S&P, or which, if non-rated, is in the opinion of the Adviser of comparable
quality, if immediately after and as a result of such purchase such Bonds
would constitute more than 20% of the Fund's total assets.

5. Purchase any Municipal Bond rated below A by Moody's and S&P, or which is
non-rated, if immediately after and as a result of such purchase such Bonds
would constitute more than 50% of the Fund's total assets.

6. Purchase any Municipal Bond rated below B by Moody's and S&P or any
non-rated Municipal Bonds considered by the Adviser to be of comparable
quality.

12
<PAGE> 13

security is guaranteed by another entity, securities issued or guaranteed by
such guaranteeing entity shall be limited to ten percent of the value of the
Fund's total assets.

- --------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------

The Fund is an open-end, diversified management investment company originally
incorporated in Texas on September 8, 1976. The Fund was reincorporated in
Maryland on July 2, 1992. A mutual fund provides, for those who have similar
investment goals, a practical and convenient way to invest in a diversified
portfolio of securities by combining their resources in an effort to achieve
such goals.

A board of eight directors has the responsibility for overseeing the affairs
of the Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056,
determines the investment of the Fund's assets, provides administrative services
and manages the Fund's business and affairs. The Adviser, together with its
predecessors, has been in the investment advisory business since 1926 and has
served as investment adviser to the Fund since its inception. As of December 31,
1994, the Adviser provides investment advice to 45 investment company portfolios
with total net assets of approximately $15.8 billion.

The Adviser and the Distributor are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.

Mr. Don G. Powell is President and Director of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chairman, Chief Executive
Officer and Director of the Distributor. Most other officers of the Fund are
also officers and/or directors of the Adviser.

The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated December 20, 1994 (the "Advisory
Agreement"), the Fund pays the Adviser an annual fee of 0.50% of the Fund's
average net assets. The fee is computed daily and payable monthly. Under the
Advisory Agreement, the Fund also reimburses the Adviser for the cost of the
Fund's accounting services, which include maintaining its financial books and
records and calculating its daily net asset value. Operating expenses paid by
the Fund include shareholder service agency fees, service fees, distribution
fees, custodian fees, legal and accounting fees, the costs of reports and
proxies to shareholders, directors' fees, and all other business expenses not
specifically assumed by the Adviser. Advisory (management) fee, and total
operating expense, ratios are shown under the caption "Expense Synopsis" herein.

Robert B. Evans has been primarily responsible for the day-to-day management
of the Fund's investment portfolio since November 1987. Mr. Evans is Vice
President of the Fund. Mr. Evans has been associated with the Adviser since
1991.

- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------

GENERAL

The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B shares and Class C shares are
sold without an initial sales charge and are subject to a contingent deferred
sales charge upon certain redemptions. See "Multiple Pricing System" for a
discussion of factors to consider in selecting which class of shares to
purchase. Contact the Service Department at (800) 421-5666 for further
information and appropriate forms.

Shares of the Fund are offered continuously for sale by the Distributor and
are available through authorized investment dealers. Initial investments must be
at least $500 and subsequent investments must be at least $25. Both minimums may
be waived by the Distributor for plans involving periodic investments. Shares of
the Fund may be sold in foreign countries where permissible. The Fund and the
Distributor reserve the right to refuse any order for the purchase of shares.
The Fund also reserves the right to suspend the sale of the Fund's shares in
response to conditions in the securities markets or for other reasons.

13
<PAGE> 14

Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application included in this Prospectus
and forwarding the application, through the designated dealer, to the
shareholder service agent, Van Kampen/American Capital Shareholder Services,
Inc. ("ACCESS"). When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B or Class C shares.

Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time)
each day the Exchange is open. Net asset value per share for each class is
determined by dividing the value of the Fund's securities, cash and other assets
(including accrued interest) attributable to such class, less all liabilities
(including accrued expenses) attributable to such class, by the total number of
shares of the class outstanding. The Fund's investments are valued by an
independent pricing service.

Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the net asset
value next computed plus applicable Class A sales charges after an order is
received by a dealer provided such order is transmitted to the Distributor prior
to the Distributor's close of business on such day. Orders received by dealers
after the close of the Exchange are priced based on the next close provided they
are received by the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit orders received by
them to the Distributor so they will be received prior to such time. Orders of
less than $500 are mailed by the dealer and processed at the offering price next
calculated after acceptance by ACCESS.

Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges and certain different shareholder service options available. See
"Distribution Plans" and "Shareholder Services -- Exchange Privilege." The net
income attributable to Class B and Class C shares and the dividends payable on
Class B and Class C shares will be reduced by the amount of the distribution fee
and incremental expenses associated with such distribution fees. Sales personnel
of broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A, Class B or Class C shares.

Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund, with subsidiaries of The Travelers Inc.

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on sales generated by the broker or
dealer during such programs. Also, the Distributor in its discretion may from
time to time, pursuant to objective criteria established by it, pay fees to, and
sponsor business seminars for, qualifying brokers, dealers or financial
intermediaries for certain services or activities which are primarily intended
to result in sales of shares of the Fund. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis.

14
<PAGE> 15

CLASS A SHARES

The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.

SALES CHARGE TABLE
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SIZE OF AS % OF NET AS % OF REALLOWED TO DEALERS
INVESTMENT AMOUNT INVESTED OFFERING PRICE (AS A % OF OFFERING PRICE)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Less than $100,000............ 4.99% 4.75% 4.25%
$100,000 but less than
$250,000.................... 3.90% 3.75% 3.25%
$250,000 but less than
$500,000.................... 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000.................. 2.04% 2.00% 1.75%
$1,000,000 and over........... (see herein) (see herein) (see herein)
- -----------------------------------------------------------------------------------------------
</TABLE>

No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.

For full service participant directed profit sharing and money purchase plans
and qualified 401(k) retirement plans administered by Van Kampen American
Capital Trust Company's (k) Advantage Program, or similar recordkeeping programs
made available through the Van Kampen American Capital Trust Company, no sales
charge is payable at the time of purchase for plans with at least 50 eligible
employees or investing at least $250,000 in American Capital funds, which
include Participating Funds as described herein under "Purchase of
Shares -- Class A Shares -- Volume Discounts," and American Capital Reserve
Fund, Inc. ("Reserve"). For such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for such
purchases as follows: 1% on sales to $5 million, plus 0.50% on the next $5
million, plus 0.25% on the excess over $10 million.

In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. The Distributor is
sponsoring a sales incentive program for A.G. Edwards & Sons, Inc. ("A.G.
Edwards"). The Distributor will reallow its portion of the Fund's sales
concession to A.G. Edwards on sales of Class A shares of the Fund relating to
the "rollover" of any savings into an Individual Retirement Account ("IRA"), the
transfer of assets into an IRA and contributions to an IRA, commencing on
January 1, 1995 and terminating on April 15, 1995.

The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described above. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.

Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the shares
will not be resold except through redemption by the Fund, by (a) current or
retired Directors of the Fund; current or retired employees of VK/AC Holding,
Inc. or any of its subsidiaries; spouses, minor children and grandchildren of
the above persons; and parents of employees and parents of spouses of employees
of VK/AC Holding, Inc. and any of its subsidiaries; trustees, directors and
employees of Clayton, Dubilier & Rice, Inc.; (b) employees of an investment
subadviser to any Fund in the same "group of investment companies" (as defined
in Rule 11a-3 under the 1940 Act) as the Fund or an affiliate of the subadviser;
employees and registered representatives of Service Organizations with selling
group agreements with the Distributor; employees of financial institutions that
have arrangements with Service Organizations having selling group agreements
with the Distributor; and spouses and minor children of such persons; (c) any
trust, pension, profit sharing or other benefit plan for such persons (d)
trustees or other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more; and (e)
clients of Service Organizations that are participating in such Service
Organizations' wrap accounts. Service Organizations

15
<PAGE> 16

must execute supplemental agreements to their existing selling agreement with
the Distributor in order to qualify for the program. Shares are offered at net
asset value to such persons because of anticipated economies in sales efforts
and sales related expenses. Such shares are also offered at net asset value to
(f) accounts opened for shareholders by dealers where the amounts invested
represent the redemption proceeds from investment companies distributed by an
entity other than the Distributor if such redemption has occurred no more than
15 days prior to the purchase of shares of the Fund and the shareholder paid an
initial sales charge and was not subject to a deferred sales charge on the
redeemed account. Shares are also offered at net asset value to (g) registered
investment advisers, trust companies and bank trust departments exercising
discretionary investment authority with respect to the money to be invested in
the Fund, provided that the aggregate amount invested in the Fund alone, or in
any combination of shares of the Fund and shares of certain other participating
American Capital mutual funds as described herein under "Purchase of
Shares -- Class A Shares -- Volume Discounts," during the 13-month period
commencing with the first investment pursuant hereto at net asset value, equals
at least $1 million. Purchase orders made pursuant to clause (g) may be placed
either through authorized dealers as described above or directly with ACCESS by
the investment adviser, trust company or bank trust department, provided that
ACCESS receives federal funds for the purchase by the close of business on the
next business day following acceptance of the order. An authorized dealer or
financial institution may charge a transaction fee for placing an order to
purchase shares pursuant to this provision or for placing a redemption order
with respect to such shares. Service Organizations will be paid a service fee as
described herein under "Distribution Plans" on purchases made on behalf of
registered investment advisers, trust companies and bank trust departments
described in clause (g) above, retirement plans described in clause (g) above
and for registered representatives' accounts.

The Distributor may pay commissions of up to 1% for such purchases described
in clause (d). The Distributor may pay Service Organizations through which
purchases are made as described in clause (g) above for transactions of $1
million or more an amount up to 0.50% of the amount invested, over a twelve
month period following the pertinent transaction. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.

Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described herein.

VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc., American Capital Enterprise Fund, Inc., American Capital Equity
Income Fund, Inc., American Capital Federal Mortgage Trust ("Federal Mortgage"),
American Capital Global Managed Assets Fund, Inc. ("Global Managed"), American
Capital Government Securities, Inc., American Capital Government Target Series
("Government Target"), American Capital Growth and Income Fund, Inc., American
Capital Harbor Fund, Inc., American Capital High Yield Investments, Inc. ("High
Yield"), American Capital Municipal Bond Fund, Inc., American Capital Pace Fund,
Inc., American Capital Real Estate Securities Fund, Inc. ("Real Estate"),
American Capital Tax-Exempt Trust ("Tax-Exempt"), American Capital Texas
Municipal Securities, Inc. ("Texas Municipal"), American Capital U.S. Government
Trust for Income ("Government Trust"), American Capital Utilities Income Fund,
Inc. ("Utilities Income"), and American Capital World Portfolio Series, Inc.
("World Portfolio"). A person eligible for a volume discount includes an
individual; members of a family unit comprising husband, wife and minor
children; or a trustee or other fiduciary purchasing for a single fiduciary
account.

CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's dealer at the time an
order is placed for a purchase which would qualify for a reduced sales charge on
the basis of previous purchases and if sufficient information is furnished to
permit confirmation of such purchases.

LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the table herein. The size
of investment shown in the preceding table also includes purchases of shares of
the Participating Funds over a 13-month period based on the total amount of
intended purchases plus the value of all shares of the Participating Funds
previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charges applicable to the purchases made and the charges previously paid. The
initial purchase must be for an amount equal to at least five percent of the
minimum total purchased amount of the level selected. If trades not initially
made under a Letter of Intent subse-

16
<PAGE> 17

quently qualify for a lower sales charge through the 90-day back-dating
provisions, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. Such adjustment in sales charge will be used
to purchase additional shares for the shareholder at the applicable discount
category. Additional information is contained in the application form included
in this Prospectus.

CLASS B SHARES

Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.

The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
- --------------------------------------------------------------------------------

CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- --------------------------------------------------------------------------------

<S> <C>
First......................................................... 4%
Second........................................................ 4%
Third......................................................... 3%
Fourth........................................................ 2.5%
Fifth......................................................... 1.5%
Sixth......................................................... None
</TABLE>

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

In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge, second, of shares held for over five years
or shares acquired pursuant to reinvestment of dividends or distributions and
third, of shares held longest during the five year period. The charge is not
applied to dollar amounts representing an increase in the net asset value since
the time of purchase.

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4% (the applicable rate in the second year after purchase).

A commission or transaction fee of 4% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.

CLASS C SHARES

Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1%. The charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price. In addition, no charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.

In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second, of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.

A commission or transaction fee of 1% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing

17
<PAGE> 18

commissions and transaction fees of up to 0.65% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.

- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------

Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing of its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Directors of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") applicable to
mutual fund sales charges. The NASD Rules limit the annual distribution charges
that a mutual fund may impose on a class of shares. The NASD Rules also limit
the aggregate amount which the Fund may pay for such distribution costs. Under
the Class A Plan, the Fund pays a service fee to the Distributor at an annual
rate of up to 0.25% of the Fund's aggregate average daily net assets
attributable to the Class A shares. Such payments to the Distributor under the
Class A Plan are based on an annual percentage of the value of Class A shares
held in shareholder accounts for which such Service Organizations are
responsible at the rates of 0.15% annually with respect to Class A shares in
such accounts on September 29, 1989 and 0.25% annually with respect to Class A
shares issued after that date. Under the Class B Plan and the Class C Plan, the
Fund pays a service fee to the Distributor at an annual rate of up to 0.25% and
a distribution fee at an annual rate of up to 0.75% of the Fund's aggregate
average daily net assets attributable to the Class B shares or Class C shares to
reimburse the Distributor for service fees paid by it to Service Organizations
and for its distribution costs.

The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to 4% of
the purchase price of Class B shares purchased by the clients of broker-dealers
and other Service Organizations, and (ii) other distribution expenses as
described in the Statement of Additional Information. Under the Class C Plan,
the Distributor receives additional payments from the Fund in the form of a
distribution fee at the annual rate of up to 0.75% of the net assets of the
Class C shares as reimbursement for (i) upfront commissions and transaction fees
of up to 0.75% of the purchase price of Class C shares purchased by the clients
of broker-dealers and other Service Organizations and ongoing commissions and
transaction fees of up to 0.65% of the average daily net assets of the Fund's
Class C shares, and (ii) other distribution expenses as described in the
Statement of Additional Information.

In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Directors of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with respect
to distribution and service revenues and expenses is presented to the Directors
each year for their consideration in connection with their deliberations as to
the continuance of the Distribution Plans. In their review of the Distribution
Plans, the Directors are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.

Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.

The distribution fee attributable to Class B or Class C shares is designed to
permit an investor to purchase such shares without the assessment of a front-end
sales load and at the same time permit the Distributor to compensate Service
Organizations with respect to such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and distribution fee
are the same as those of the initial sales charge with respect

18
<PAGE> 19

to the Class A shares of the Fund in that in both cases such charges provide for
the financing of the distribution of the Fund's shares.

Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward without
interest charges unless permitted under SEC regulations, and may be reimbursed
by the Fund or its shareholders from payments received through contingent
deferred sales charges in future years and from payments under the Class B Plan
and Class C Plan so long as such Plans are in effect. For example, if in a
fiscal year the Distributor incurred distribution expenses under the Class B
Plan of $1 million, of which $500,000 was recovered in the form of contingent
deferred sales charges paid by investors and $400,000 was reimbursed in the form
of payments made by the Fund to the Distributor under the Class B Plan, the
balance of $100,000 would be subject to recovery in future fiscal years from
such sources. For the plan year ended June 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B Plan and carried forward were
approximately $1.5 million or 4.25% of the Class B shares' net assets. The
unreimbursed expenses incurred by the Distributor under the Class C Plan from
August 30, 1993 (inception of Class C shares) through June 30, 1994, and carried
forward were approximately $118,000 or 1.71% of the Class C shares' net assets.

If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.

- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. The
following is a description of these services.

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Stock certificates are not issued except upon
shareholder request. Most shareholders elect not to receive certificates in
order to facilitate redemptions and transfers. A shareholder may incur an
expense to replace a lost certificate. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds listed under "Purchase of Shares -- Class A Shares -- Volume
Discounts," or Reserve, may receive statements quarterly from ACCESS showing any
reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized investment dealers or by mailing a
check directly to ACCESS.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.

AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized dealers.

FUND TO FUND DIVIDENDS. A shareholder may, upon written request or by
completing the appropriate section of the application form in this Prospectus,
elect to have all dividends and other distributions paid on a Class A, Class B
or Class C account in the Fund reinvested into a pre-existing Class A, Class B
or Class C account in any of the Participating Funds listed under "Purchase of
Shares -- Class A Shares -- Volume Discounts," or Reserve. If a qualified,
pre-existing account does not exist, the shareholder must establish a new
account subject to minimum investment and other requirements of the fund into
which distributions would be invested. Distributions are invested into the
selected fund at its net asset value as of the payable date of the distribution
only if shares of such selected funds have been registered for sale in the
investor's state.

EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts"), other
than Government Target, may be exchanged for the same class of shares of any
other fund without sales charge, provided that shares of the Fund and shares of
Corpo-

19
<PAGE> 20

rate Bond, Federal Mortgage, Global Managed, Government Trust, High Yield, Real
Estate, Tax Exempt, Texas Municipal, Utilities Income and the Global Government
Securities Fund of World Portfolio are subject to a 30-day holding period
requirement. Shares of Government Target may be exchanged for Class A shares of
the Fund without sales charge. Shares of Reserve may be exchanged for Class A
shares of any Participating Fund upon payment of the excess, if any, of the
sales charge rate applicable to the shares being acquired over the sales charge
rate previously paid. Shares of any Participating Fund or Reserve may be
exchanged for shares of any other Participating Fund if shares of that
Participating Fund are available for sale; however, during periods of suspension
of sales, shares of a Participating Fund may be available for sale only to
existing shareholders. Additional funds may be added from time to time as a
Participating Fund.

Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other
American Capital fund that offers such shares ("new shares") in an amount equal
to the aggregate net asset value of the original shares, without the payment of
any contingent deferred sales charge otherwise due upon redemption of the
original shares. For purposes of computing the contingent deferred sales charge
payable upon a disposition of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B and
Class C shareholders may exchange their shares for shares of Reserve without
incurring the contingent deferred sales charge that otherwise would be due upon
redemption of such Class B or Class C shares. Class B or Class C shareholders
would remain subject to the contingent deferred sales charge imposed by the
original fund upon their redemption from the American Capital complex of funds.
Shares of Reserve acquired through an exchange of Class B or Class C shares may
be exchanged only for the same class of shares of a Participating Fund without
incurring a contingent deferred sales charge.

Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described herein under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held for
less than 91 days, the sales charge paid on such shares is not included in the
tax basis of the exchanged shares, but is carried over and included in the tax
basis of the shares acquired. See the Statement of Additional Information.

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. VKAC
and its subsidiaries, including ACCESS (collectively, "Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Exchanges are effected at the net asset value per
share next calculated after the request is received in good order with
adjustment for any additional sales charge. See "Purchase of Shares" and
"Redemption of Shares." If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options (except fund to
fund dividends) and dealer of record as the account from which shares are
exchanged, unless otherwise specified by the shareholder. In order to establish
a systematic withdrawal plan for the new account or reinvest dividends from the
new account into another fund, however, an exchanging shareholder must file a
specific written request. The Fund reserves the right to reject any order to
acquire its shares through exchange, or otherwise to modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.

A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.

SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
above under "Shareholder Services -- Exchange Privilege" will be waived for such
systematic exchanges. Additional information on how to establish this option is
available from the Distributor.

AUTOMATIC EXCHANGE. The exchange fee described under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the Service
Department at (800) 421-5666 for further information on how to utilize this
option.

SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any in-

20
<PAGE> 21

vestor whose shares in a single account total $5,000 or more may establish a
withdrawal plan on a quarterly, semiannual or annual basis. This plan provides
for the orderly use of the entire account, not only the income but also the
capital, if necessary. Each withdrawal constitutes a redemption of shares on
which any capital gain or loss will be recognized. The planholder may arrange
for monthly, quarterly, semiannual or annual checks in any amount, not less than
$25.

Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.

Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon the
redemption of shares.

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY CHECK
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to ACCESS, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.

When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the Class A shareholder's account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of shares. Any gain or
loss realized on the sale of shares is a taxable event. See "Redemption of
Shares."

Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or
State Street Bank. Accounts that are subject to backup withholding are not
eligible for the privilege. A "stop payment" system is not available on these
checks. See the Statement of Additional Information for further information
regarding the establishment of the privilege.

- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------

REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized investment
dealer. Orders received from dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by a dealer provided such order
is transmitted to the Distributor prior to the Distributor's close of business
on such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.

As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of one percent may be imposed on certain
redemptions of Class A shares made within one year of purchase for investments
of $1 million or more and for certain qualified 401(k) retirement plans. The
contingent deferred sales charge incurred upon redemption is paid to the
Distributor in reimbursement for distribution-related expenses. See "Purchase of
Shares." A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.

21
<PAGE> 22

The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company;
a broker-dealer; a credit union; a national securities exchange, registered
securities association or clearing agency; a savings and loan association; or a
federal savings bank.

Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request.

In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed is made by check mailed
within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until the purchase check has cleared, usually a period of up to
15 days.

The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum investment as specified by the
Board of Directors. Any involuntary redemption may only occur if the shareholder
account is less than the minimum initial investment due to shareholder
redemptions. Any applicable contingent deferred sales charge will be deducted
from the proceeds of this redemption. At least 60 days advance written notice of
any such involuntary redemption is required and the shareholder is given an
opportunity to purchase the required value of additional shares at the next
determined net asset value without sales charge. Any applicable contingent
deferred sales charge will be deducted from the proceeds of this redemption.

TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth, the Fund permits shareholders and the dealer
representative of record to redeem shares by telephone and to have redemption
proceeds sent to the address of record for the account or to the bank account of
record as described below. To establish such privilege, a shareholder must
complete the appropriate section of the application form in this Prospectus or
call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares,
contact the telephone transaction line at (800) 421-5684. Van Kampen American
Capital and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Telephone redemptions may not be available if the
shareholder cannot reach ACCESS by telephone, whether because all telephone
lines are busy or for any other reason; in such case, a shareholder would have
to use the Fund's regular redemption procedure previously described. Requests
received by ACCESS prior to 4:00 p.m., New York time, on a regular business day
will be processed at the net asset value per share determined that day. These
privileges are available for the following types of non-retirement accounts:
individual accounts, joint accounts and accounts of minors with custodians
acting on their behalf. The telephone redemption privilege is not available for
shares represented by certificates. If an account has multiple owners, ACCESS
may rely on the instructions of any one owner.

For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed once in each 30-day period. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account or
wired directly to their predesignated bank account. This privilege is not
available if the address of record has been changed within 60 days prior to a
telephone redemption request. Proceeds from redemptions are expected to be wired
on the next business day following the date of redemption. The Fund reserves the
right at any time to terminate, limit or otherwise modify this redemption
privilege.

REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under

22
<PAGE> 23

"Shareholder Services -- Exchange Privilege") next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge" and the
Statement of Additional Information.

- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

DIVIDEND POLICY. The Fund distributes substantially all of its net investment
income in monthly dividends to shareholders. The Fund intends to distribute
after the end of a fiscal year the net capital gains, if any, realized during
the fiscal year, except to the extent that such gains are offset by capital loss
carryovers. Unless the shareholder instructs otherwise, dividends and
distributions are automatically applied to purchase shares of the Fund at net
asset value. See "Shareholder Services -- Reinvestment Plan."

The per share dividends on Class B and Class C shares of the Fund will be
lower than the per share dividends on Class A shares of the Fund as a result of
the distribution fees and higher incremental transfer agency fees applicable to
such classes of shares.

FEDERAL INCOME TAXES. The Fund has qualified and intends to be taxed as a
regulated investment company under the Code. By qualifying as a regulated
investment company, the Fund is not subject to federal income taxes to the
extent it distributes its net investment income and net realized capital gains.
In addition, the Fund intends to continue to invest in sufficient Municipal
Bonds to permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
Municipal Bonds qualify as exempt-interest dividends if, at the close of each
quarter of the Fund's fiscal year, at least 50% of the value of its total assets
consists of Municipal Bonds.

The Omnibus Budget Reconciliation Act of 1993, which was signed into law on
August 10, 1993, included certain provisions intended to prevent the conversion
of ordinary income into capital gains. One such provision affects tax-exempt
securities by requiring that gains on such securities purchased at a market
discount be treated as ordinary income to the extent of the accrued market
discount, if the securities are acquired after April 30, 1993. Such securities
were exempt from the market discount rules under prior law.

Except as provided below, exempt-interest dividends paid to shareholders are
not includable in the shareholders' gross income for federal income tax
purposes. For each of the last three fiscal years of the Fund, over 99% of the
dividends paid by the Fund were exempt-interest dividends. The percentage of
income that is tax-
exempt is applied uniformly to all dividends paid during each fiscal year. This
percentage may differ from the actual tax-exempt percentage during any
particular month.

Interest on certain "private-activity bonds" issued after August 7, 1986, is
an item of tax preference subject to the alternative minimum tax on individuals
and corporations. The Fund invests a portion of its assets in such
private-activity bonds so that a portion of its exempt-interest dividends is an
item of tax preference to the extent such dividends represent interest received
from these private-activity bonds. For the fiscal year ended September 30, 1994,
approximately 12% of the Fund's income consisted of interest on private-activity
bonds which is an item of tax preference. The Tax Reform Act of 1986 also
imposed per capita volume limitations on certain private-activity bonds which
could limit the amount of such bonds available for investment by the Fund.

Shareholders are notified annually of the federal tax status of dividends and
any capital gains distributions.

Individuals whose modified income exceeds a base amount are subject to federal
income tax on up to one-half of their Social Security benefits. Modified income
includes adjusted gross income, one-half of Social Security benefits and
tax-exempt interest, including tax-exempt interest dividends from the Fund.

To avoid being subject to a 31% federal back-up withholding on dividends
(except exempt-interest dividends), distributions and redemption payments,
shareholders must furnish the Fund with a certification of their correct
taxpayer identification number.

Dividends and distributions paid by the Fund have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents, in substance, a return of capital to the
investor, even though subject to income taxes to the extent discussed herein.

The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Fund and its investors who are U.S.
residents or U.S. corporations. Additional tax information of relevance to
particular investors, including investors who may be "substantial users" of
facilities financed by Municipal Bonds, is contained in the Statement of
Additional Information. Investors are urged to consult their tax advisers with
specific reference to their own tax situation. Foreign investors should consult
their own counsel for further information as to the U.S. and their country of
residence or citizenship tax consequences of receipt of dividends and
distributions from the Fund.

23
<PAGE> 24

FEDERAL INCOME TAX ASPECTS OF FUTURES AND OPTIONS. The Fund's ability to
engage in transactions in listed futures contracts and related options may be
limited by provisions of the Code, including the requirement that the Fund
derive less than 30% of its gross income from the sale or other disposition of
securities held for less than three months. Gains and losses recognized by the
Fund from transactions in futures contracts and options generally constitute
capital gains and losses for federal income tax purposes. See "Federal Tax
Information" in the Statement of Additional Information. To the extent such
activities result in net realized short-term capital gains which are distributed
to shareholders, such distributions constitute taxable ordinary income. To the
extent such activities result in net realized long-term capital gains which are
distributed to shareholders, such distributions constitute taxable long-term
capital gains.

STATE AND LOCAL TAXES. The exemption of interest income for federal income tax
purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that shareholders consult their tax advisers for information in this
regard. The Fund reports annually to its shareholders the percentage and source,
on a state-by-state basis, of interest income earned on Municipal Bonds held by
the Fund during the preceding year. Distributions paid by the Fund from sources
other than tax-exempt interest are generally subject to taxation at the state
and local levels.

- --------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one, five and ten year periods. Other total return quotations,
aggregate or average, over other time periods may also be included.

The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund or to reflect the fact no 12b-1 fees were incurred prior to October 1,
1989.

Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.

Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%; Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.

In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding. The Fund's "tax-equivalent
yield" is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after-tax equivalent of
the Fund's yield, assuming certain tax brackets for a Fund shareholder.

For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.

The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.

24
<PAGE> 25

Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.

In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc.,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds; or with municipal bond indices, such as Lehman
Brothers Municipal Bond Index or Bond Buyer's Index of 25 Revenue Securities or
with the Consumer Price Index, Standard & Poor's, NASDAQ, or other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Investor's Business Daily, Kiplinger's Personal Finance Magazine,
Money, Mutual Fund Forecaster, Stanger's Investment Advisor, USA Today, U.S.
News & World Report, and The Wall Street Journal. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Any such advertisement would also include the standard
performance information required by the SEC as described above. For these
purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce Fund performance. The Fund will include performance data for Class
A, Class B and Class C shares of the Fund in any advertisement or information
including performance data of the Fund.

The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.

The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

ORGANIZATION OF THE FUND. The Fund was originally incorporated in Texas on
September 8, 1976. The Fund was incorporated in the State of Maryland on July 2,
1992. The Fund may offer three classes of shares: Class A, Class B and Class C
shares. Each class of shares represents interests in the assets of the Fund and
has identical voting, dividend, liquidation and other rights on the same terms
and conditions, except that the distribution fees and/or service fees related to
each class of shares are borne solely by that class, and each class of shares
has exclusive voting rights with respect to provisions of the Fund's Class A
Plan, Class B Plan and Class C Plan which pertain to that class. An order has
been received from the SEC permitting the issuance and sale of multiple classes
of shares representing interests in the Fund's existing portfolio. Shares issued
are fully paid, nonassessable and have no preemptive or conversion rights.

PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, officers and employees to
buy and sell securities for their personal accounts subject to preclearance and
other procedures designed to prevent conflicts of interest.

VOTING RIGHTS. The Bylaws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the 1940 Act. Such
event is likely to occur infrequently. In addition, a special meeting of the
shareholders will be called, if requested by the holders of ten percent of the
Fund's outstanding shares, for the purposes, and to act upon the matters,
specified in the request (which may include election or removal of directors).
When matters are submitted for a shareholder vote, each shareholder is entitled
to one vote for each share owned. The shares have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so,
and in such event the holders of the remaining less than 50% of the shares
voting for the election of directors will not be able to elect any person to the
Board of Directors.

SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund at
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.

SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256, serves as transfer agent, shareholder service agent and dividend
disbursing agent for the Fund. ACCESS, a wholly owned subsidiary of the
Adviser's parent, provides these services at cost plus a profit.

25
<PAGE> 26

LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Fund.

26
<PAGE> 27

- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------
September 30, 1994

MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
EDUCATION

$ 1,000,000 Broward County, Florida,
Educational Facilities
Authority Rev. (Nova
University Project), G.O.,
8.50%, 4/1/10
625,000 Clear Creek, Texas,
Independent School District,
G.O., 6.25%, 2/1/11
1,000,000 Cook County, Illinois,
Community College, District
#508, Certificates of
Participation, FGIC, 8.75%,
1/1/07
1,150,000 Florida State Board of
Education, Capital Outlay,
Series A, 7.25%, 6/1/23
Illinois Educational
Facilities Authority Rev.,
G.O.
1,000,000 Lake First College, FSA,
6.75%, 10/1/21
1,000,000 Northwestern University,
Series 1985, 6.90%, 12/1/21
2,000,000 New Hampshire Higher
Education & Daniel Webster
College Issue, G.O., 7.625%,
7/1/16
1,000,000 New York City, New York,
Industrial Development
Agency, Civil Facility Rev.
(Marymount Manhattan College
Project), G.O., 7.00%,
7/1/23
New York State Dormitory
Authority Rev.
1,000,000 City University, 8.125%,
7/1/17;
Pre-refunded 7/1/97
3,250,000 State University Educational
Facility, Series 1990-A,
7.70%, 5/15/12
Pennsylvania State Higher
Educational Facilities
Authority Rev.
500,000 Hahnemann University
Project, MBIA, G.O., 7.20%, 7/1/19
250,000 Pennsylvania Medical
College, Series A, G.O., 7.50%,
3/1/14
University of the Virgin
Islands, Series A
500,000 7.50%, 1/1/90
500,000 7.65%, 10/1/14

HEALTH CARE
500,000 Colorado Health Facilities
Authority Rev. (Cleo Wallace
Center Project), 7.00%,
8/1/15

<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 1,500,000 Colorado Health Facilities
Authority Rev. (PSL
Healthcare System Project),
Series 1991-A, FSA, 6.25%,
2/15/21
1,000,000 Cuyahoga County, Ohio,
Health Care Facilities Rev.
(Jennings Hall), 7.30%,
11/15/23
1,000,000 Lebanon County,
Pennsylvania, Health
Facilities Authority Health
Center Rev. (UTD Church of
Christ Homes Project),
6.75%, 10/1/10
750,000 Massachusetts State,
Industrial Finance Rev.,
7.10%, 11/15/18
235,000 Pinal County, Arizona,
Industrial Development
Authority (Casa Grande
Regional Medical Center
Project), 9.00%, 12/1/13
1,000,000 St. Petersburg, Florida,
Health Facilities Authority
Rev. (Allegany Health
Systems), 7.75%, 12/1/15

HOSPITALS
Bexar County, Texas, Health
Facilities Development Rev.
(St. Lukes Lutheran Hospital
Project)
500,000 7.00%, 5/1/21
1,500,000 7.90%, 5/1/18
1,000,000 Boston, Massachusetts, Rev.
(Boston City Hospital), FHA,
7.625%, 2/15/21
500,000 Boulder County, Colorado,
Industrial Development Rev.
(Boulder Medical Center
Project), 8.875%, 1/1/17
1,000,000 Charlotte County, Florida,
Hospital Authority Rev.,
(Bon Secours Health System),
8.25%, 8/15/18
500,000 Clarksville, Tennessee,
Hospital Rev., Refunding &
Improvement (Clarksville
Memorial Project), 6.25%,
7/1/13
995,000 Clearfield, Pennsylvania,
Hospital Authority Rev.
(Clearfield Hospital
Project), Series-94, 6.875%,
6/1/16
800,000 Colorado Health Facilities
Authority Rev. (Rocky
Mountain Adventist), 6.625%,
2/1/13
2,000,000 Delaware State Economic
Development Authority Rev.
(Osteopathic Hospital
Association of Delaware),
Series A, 6.90%, 1/1/18
</TABLE>

27
<PAGE> 28

MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 1,000,000 Ector County, Texas,
Hospital District (Medical
Center Hospital), 7.125%,
4/15/02
500,000 Erie County, Pennsylvania,
Hospital Authority Rev.
(Metro Health Center),
Series 1992, 7.25%, 7/1/12
1,000,000 Harris County, Texas Health
Facilities Development Corp.
(Memorial Hospital System
Project), 7.125%, 6/1/15
Illinois Health Facilities
Authority Rev.
1,000,000 Elmhurst Memorial Hospital,
Series 87-A, 8.125%, 1/1/13
1,000,000 Improvement Swedish
Covenant, Series A, 6.30%, 8/1/13
2,000,000 Lutheran Health System,
Series B, MBIA, 6.00%, 4/1/18
1,000,000 Masonic Medical System,
Series 1989-B, 7.70%, 10/1/19
1,000,000 Memorial Hospital, 7.25%,
5/1/22
500,000 Mercy Center For Health Care
Services, 6.625%, 10/1/12
1,000,000 Northwestern Memorial
Hospital, 6.75%, 8/15/11
1,000,000 Indiana Health Facilities,
Financing Hospital Authority
Rev. (Community Hospital of
Indiana), Series-H, MBIA,
6.85%, 7/1/22
1,160,000 Jefferson County, Texas,
Health Facility Authority
Rev. (Baptist Health Care
Project), 8.30%, 10/1/14
845,000 Lebanon County,
Pennsylvania, Good Samaritan
Hospital Authority Rev.
(Good Samaritan Hospital
Project), 5.85%, 11/15/07
1,000,000 Marion County, Indiana,
Hospital Authority, Facility
Rev. (Methodist Hospital of
Indiana), 6.50%, 9/1/13
1,000,000 McKeesport, Pennsylvania,
Hospital Authority Rev.
(McKeesport Hospital Corp.),
6.50%, 7/1/08
1,000,000 Michigan State Hospital
Finance Authority Rev. (St.
Joseph Hospital Corp.),
Series A, 8.125%, 7/1/05
1,000,000 Missouri State Health &
Educational Facilities
Authority (Heartland Health
Systems Project), 8.125%,
10/1/10
2,500,000 New Hampshire Health &
Higher Educational Facility
Authority Rev. (Wentworth
Douglass Hospital), 8.50%,
1/1/15

<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
New York State Medical Care
Facilities Finance Agency
Rev.
$ 1,000,000 Columbia Presbyterian
Hospital, Series A, FHA,
8.00%, 2/15/25
1,965,000 Montefiore Medical Center,
7.25%, 2/15/09
1,000,000 North General Hospital,
Series 89-A, 7.40%, 2/15/19
725,000 Philadelphia, Pennsylvania,
Hospital & Higher Education
Facilities Authority Rev.
(Roxborough Memorial
Hospital), Series 2, 7.25%,
3/1/24
1,500,000 Richardson, Texas, Hospital
Authority, Refunding &
Improvement Rev. (Richardson
Medical Center), 6.75%,
12/1/23
1,000,000 Royal Oak, Michigan,
Hospital Finance Authority,
Rev. (William Beaumont
Hospital), Series D, 6.75%,
1/1/20
1,750,000 Rusk County, Texas, Health
Facilities Corp., Hospital
Rev. (Henderson Memorial
Hospital Project), 7.75%,
4/1/13
500,000 Salem, Oregon, Hospitals
Facilities Authority Rev.,
7.50%, 12/1/24
Scranton-Lackawanna,
Pennsylvania, Health &
Welfare Authority Rev.
(Moses Taylor Hospital
Project)
1,000,000 Series A, 7.375%, 7/15/08
500,000 Series B, 8.25%, 7/1/09
South Dakota State Health &
Educational Facilities
Authority Rev. (Sioux Valley
Hospital)
1,000,000 7.25%, 4/1/20
2,000,000 7.625%, 11/1/13
1,500,000 St. Joseph County, Indiana,
Hospital Authority Rev.
(Memorial Hospital South
Bend Project), MBIA, 6.25%,
8/15/22
1,000,000 Tyler, Texas, Health
Facilities Development Corp.
(East Texas Medical Center
Regional Health), Series B,
6.75%, 11/1/25
1,000,000 Washington County,
Pennsylvania, Hospital
Authority, 7.35%, 6/1/13
1,500,000 Wells County, Indiana,
Hospital Authority Rev.,
Refunding (Caylor-Nickel
Medical Center, Inc.),
8.50%, 4/15/03
1,000,000 Weslaco, Texas, Health
Facilities Development
(Knapp Medical Center
Project), Series-A, 5.25%,
6/1/16
</TABLE>

28
<PAGE> 29

MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 1,000,000 West Virginia State,
Hospital Finance Authority,
Refunding & Improvement
(Fairmont General Hospital),
Series A, 6.75%, 3/1/14
2,000,000 Wisconsin State Health &
Educational Facilities Rev.
(Wheaton Franciscan Services
Inc.), 8.20%, 8/15/18

HOUSING
1,275,000 Albuquerque, New Mexico,
Home Mtg. Rev., 12.00%,
9/1/98
1,645,000 Arapahoe County, Colorado,
Single Family Mtg. Rev.,
8.375%, 8/1/19
1,000,000 Austin, Texas, Housing
Finance Corp., Multi-family
Rev. (Stassey Woods
Apartments Project), 6.75%,
4/1/19
Bexar County, Texas, Housing
Finance Corp., Rev.
410,000 8.20%, 4/1/22
435,000 Series B, 9.25%, 4/1/16
145,000 El Paso, Texas, Property
Finance Authority Inc.,
Single Family Mtg. Rev.,
Series A, 8.70%, 12/1/18
680,000 Fort Worth, Texas, Housing
Finance Corp., Home Mtg.
Rev., Refunding, 8.50%,
10/1/11
800,000 Harris County, Texas,
Housing Financing Corp.,
Single Family Mtg. Rev.,
Series 1983-A, 10.125%,
7/15/03
Houston, Texas, Housing
Finance Corp., Single Family
Mtg. Rev.
705,000 10.00%, 9/15/14
885,000 Series A, FSA, 5.95%,
12/1/10
1,000,000 Maricopa County, Arizona,
IDR, Multi-Family Rev.,
Refunding (Laguna Point
Apartments Project), 6.50%,
7/1/09
Massachusetts State Housing
Finance Agency
1,000,000 Multi-family Housing Authority,
Series A, 8.75%, 8/1/08
550,000 Residential Housing Authority,
Series A, 8.40%, 8/1/21
965,000 Minnesota State Housing
Finance Agency, Single
Family Mtg. Rev., 6.75%,
1/1/26
1,000,000 Montgomery County,
Pennsylvania, Industrial
Development Authority,
Retirement Community Rev.
(GDL Farms Corp. Project),
6.30%, 1/1/13
1,000,000 Mount Clemens, Michigan,
Housing Corp., Multi-family
Rev., Refunding, Series A,
6.60%, 6/1/13

<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 1,000,000 North St. Paul, Minnesota,
Multi-family Refunding
Housing Rev. (Cottages North
St. Paul), 9.25%, 2/1/22
1,000,000 Pima County, Arizona, IDR,
Single Family Mtg. Rev.,
6.625%, 11/1/14
1,155,000 Ridgeland, Mississippi,
Urban Renewal (The Orchard,
Ltd. Project), Series A,
7.75%, 12/1/15
2,500,000 St. Paul, Minnesota Port
Authority, Housing &
Redevelopment Authority,
Multi-family Housing Rev.,
Series J, 9.50%, 12/1/11
1,000,000 South Dakota State Housing
Development Authority,
Homeowner Mtg., Series D-1,
6.85%, 5/1/26
1,450,000 Texas State Veterans Housing
Assistance, MBIA, G.O.,
6.80%, 12/1/23
245,000 Travis County, Texas,
Housing Finance Corp.,
Single Family Mtg. Rev.,
8.20%, 4/1/22

LIFE CARE
2,000,000 Butler County, Pennsylvania,
Industrial Development
Authority Rev., 1st Mtg.
Rev. (Sherwood Oaks
Project), Series A, 8.75%,
6/1/16
975,000 Hanover Park, Illinois, 1st
Mtg. Rev. (Windsor Park
Manor Project), 9.25%,
12/1/07
1,000,000 Massachusetts State
Industrial Finance Agency
Rev., 1st Mtg. (Reeds
Landing Project), 8.625%,
10/1/23
500,000 Tempe, Arizona, Industrial
Development Authority Rev.
(Friendship Village Temple),
Series-A, 6.75%, 12/1/13
1,000,000 Wisconsin State Health &
Educational Facilities
Authority Rev. (United
Lutheran Program for the
Aging Inc. Project), 8.50%,
3/1/19

MISCELLANEOUS
500,000 Berry Creek Metropolitan
District, Colorado, G.O.,
Refunding and Improvement,
8.25%, 12/1/11
2,000,000 Compton, California,
Certificates of
Participation, Refunding,
Series B, 7.50%, 8/1/15
1,000,000 Detroit, Michigan, Tax
Increment Bonds (Development
Area No. 1 Project), Series
89-A, 7.60%, 7/1/10
2,500,000 District of Columbia Rev.
(National Public Radio),
Series A, 7.70%, 1/1/23
</TABLE>

29
<PAGE> 30

MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 1,000,000 Dove Valley Metropolitan
District, Arapahoe County,
Colorado, G.O., 9.50%,
12/1/08
1,000,000 Du Page County, Illinois
(Stormwater Project), 6.55%,
1/1/21
Fort Bend County, Texas,
Levee Improvement District
No. 11, G.O.
500,000 8.70%, 3/1/09
440,000 8.70%, 3/1/10
1,000,000 Lake Charles, Louisiana,
Harbor & Terminal Facilities
Rev. (Trunkline Liquified
Natural Gas Co. Project),
7.75%, 8/15/22
1,000,000 Lehigh County, Pennsylvania,
IDR (Allentown Interstate
Motel), 8.00%, 8/1/12
Mountain Village
Metropolitan District, San
Miguel County, Colorado,
Refunding, Series 1992, G.O.
630,000 7.95%, 12/1/03
500,000 8.10%, 12/1/11
145,000 Pocahontas, Iowa, Industrial
Development Rev. (Navistar
International Harvester Co.)
10.25%, 10/1/00
1,000,000 Port of New Orleans,
Louisiana, IDR, Refunding
(Avondale Industries, Inc.),
8.25%, 6/1/04
2,330,000 Somerset County,
Pennsylvania, General
Authority, Commonwealth
Lease Rev., FGIC, 6.25%,
10/15/11
1,750,000 St. Charles, Illinois,
Industrial Development Rev,
(Tri-City Center Project),
7.50%, 11/1/13
Texas General Services,
Community Partner Interests,
(Office Building and Land
Acquisition Project)
500,000 7.00%, 8/1/19
500,000 7.00%, 8/1/24
1,000,000 Texas State, Refunding
(Superconducting Project),
Series C, G.O., 5.50%,
4/1/20
Utah State Building
Ownership Authority Lease
Rev. (Dept. of Employment
Security)
1,000,000 7.80%, 8/15/10
1,300,000 7.80%, 8/15/11
1,000,000 Valdez, Alaska, Marine Term
Rev., Refunding, (Sohio
Pipeline), 7.125%, 12/1/25

<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 1,250,000 Virginia, Port of Authority,
Commonwealth, 8.20%, 7/1/08
1,500,000 Woodward, Oklahoma,
Municipal Auto Sales,
Refunding, 8.00%, 11/1/12

MUNICIPAL UTILITY DISTRICT (MUD)
500,000 Eldridge Road, Texas, MUD,
Refunding, 6.125%, 3/1/11
1,000,000 Harris County, Texas, MUD
No.1, 9.75%, 3/1/00;
Pre-refunded 3/1/95
500,000 Harris County, Texas, MUD,
Refunding, G.O., 7.30%,
3/1/14
1,000,000 Mills Road, Texas, MUD,
6.50%, 9/1/14
Mission Bend MUD No. 2,
Texas
500,000 10.00%, 9/1/98
375,000 10.00%, 9/1/00
655,000 Montgomery County, Texas,
MUD No. 4 (Water Works
System), 8.90%, 9/1/02
500,000 North Mission Glen, Texas,
MUD Refunding, 6.50%, 9/1/14

NURSING HOMES
500,000 Fairfield, Ohio, Economic
Development Rev., Refunding
(Beverly Enterprises),
8.50%, 1/1/03
475,000 Louisiana Public Facilities
Authority, Industrial
Development Rev., Refunding
(Beverly Enterprises),
8.25%, 9/1/08
1,315,000 Luzerne County,
Pennsylvania, Industrial
Development Authority, 1st
Mtg. Rev., Refunding
(Birchwood Nursing Center
Project), Series-A, 7.875%,
12/1/13

POLLUTION CONTROL REVENUE (PCR)
3,675,000 Brazos River Authority,
Texas, PCR (Texas Utility
Co. Project A, 9.875%,
10/1/17
1,000,000 Burke County, Georgia,
Development Authority, PCR
(Georgia Power Co.), 9.375%,
12/1/17
1,000,000 Burlington, Kansas, PCR,
MBIA (Kansas Gas & Electric
Co. Project), 7.00%, 6/1/31
1,595,000 Capital Industrial
Development Corp., Texas,
PCR (International Business
Machines Corp.), 7.40%,
5/1/12
750,000 County of Coshocton, Ohio,
Solid Waste Disposal Rev.
(Stone Container Corp.
Project), Series 1992,
7.875%, 8/1/13
</TABLE>

30
<PAGE> 31

MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 1,000,000 Hodge, Louisiana, Utility
Rev. (Stone Container Corp.
Project), Series 1990,
9.00%, 3/1/10
1,280,000 Illinois Development Finance
Authority, PCR (Commonwealth
Edison Co.), 11.375%,
10/15/14
1,250,000 Mercer County, North Dakota,
PCR, Basin Electric Power,
Series E, 7.00%, 1/1/19
500,000 Monroe County, Michigan, PCR
(Detroit Edison Co.) Series
A, 10.50%, 12/1/16
New Hampshire State
Industrial Development
Authority, PCR
1,000,000 New England Power Co.,
7.80%, 4/1/16
1,000,000 United Illuminating Co.,
Series B, 10.75%, 10/1/12
1,000,000 Parish of St. Charles,
Louisiana, PCR (Louisiana
Power & Light Co.), 8.25%,
6/1/14
1,400,000 Parish of West Feliciana,
Louisiana, PCR (Gulf States
Utilities), Series A, 7.50%,
5/1/15
1,000,000 Petersburg, Indiana, PCR,
Refunding (Indianapolis
Power & Lighting), Series
1993-A, 6.10%, 1/1/16
750,000 Pope County, Arkansas, PCR
(Arkansas Power & Light
Project), 11.00%, 12/1/15
1,350,000 Sabine River Authority,
Texas, Refunding, PCR (Texas
Utilities Co. Project),
7.75%, 4/1/16
440,000 Series 1986, 9.00%, 9/1/07

POOL FINANCING PROGRAMS
Emmaus, Pennsylvania,
General Authority, Local
Government Bond Pool
Program, Rev.
1,750,000 Series A, BIG, 8.15%,
5/15/18
2,500,000 Series C, BIG, 7.90%,
5/15/18
Indianapolis, Indiana, Local
Public Improvement
1,000,000 Series A, 6.00%, 2/1/20
2,000,000 Series C, 6.70%, 1/1/17
450,000 Series D, 6.50%, 2/1/22
550,000 Series D, 6.75%, 2/1/14
1,000,000 Series D, 6.75%, 2/1/20

<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 670,000 Tampa, Florida, Capital
Improvement Program Rev.,
Series A, 8.25%, 10/1/18

RESOURCE RECOVERY
Broward County, Florida,
Resource Recovery Rev.
1,810,000 North Project, 7.95%,
12/1/08
2,365,000 South Project, 7.95%,
12/1/08
1,000,000 Camden County, New Jersey,
PCR, Solid Waste Resource
Recovery Rev., Series B,
7.50%, 12/1/09
1,500,000 Delaware County,
Pennsylvania, Industrial
Development Authority Rev.,
(Resource Recovery Project),
8.10%, 12/1/13
1,000,000 El Centro, California,
Certificates of
Participation, 7.00%, 6/1/19
1,000,000 Montgomery County,
Pennsylvania, Industrial
Development Authority Rev.,
Resource Recovery, 7.50%,
1/1/12
2,000,000 Northeast, Maryland, Solid
Waste Disposal Authority
Rev. (Montgomery County
Resource Recovery Project),
Series A, 6.30%, 7/1/16
500,000 Rockdale County, Georgia,
Development Authority Rev.,
Solid Waste Disposal (Visy
Paper, Inc. Project), 7.50%,
1/1/26

SALES TAX REVENUE
1,000,000 Crestwood, Illinois, Tax
Increment Rev., Refunding,
7.25%, 12/1/08
1,000,000 Edgewater, Colorado,
Redevelopment Rev., 6.75%,
12/1/08
1,000,000 Orange County, Florida,
Tourist Development Tax
Rev., AMBAC, 6.00%, 10/1/16
Round Lake Beach, Illinois,
Tax Increment Rev.
900,000 Series 1993, 7.20%, 12/1/04
500,000 Series 1993, 7.50%, 12/1/13
975,000 St. Louis, Missouri, Tax
Increment Rev. (Scullin
Redevelopment Area), Series
A, 10.00%, 8/1/10

TRANSPORTATION
3,000,000 Atlanta, Georgia, Airport
Facilities Rev. (Atlanta
International Airport),
Series 1990, 6.25%, 1/1/21
Chicago, Illinois, O'Hare
International Airport Rev.
1,000,000 Series A, 6.00%, 1/1/18
1,000,000 Series B, 6.00%, 1/1/18
</TABLE>

31
<PAGE> 32

MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 500,000 Cleveland, Ohio, Parking
Facilities Improvement Rev.,
8.00%, 9/15/12
940,000 Dallas-Fort Worth, Texas,
International Airport
Facility Rev, (American
Airlines, Inc.), 7.50%,
11/1/25
2,500,000 Greater Orlando Aviation
Authority, Florida, Airport
Facilities Rev., 8.375%,
10/1/16
500,000 Hawaii State Harbor Capital
Improvement Rev., MBIA,
7.00%, 7/1/17
2,000,000 Indiana Transportation
Finance Authority, Airport
Facilities Lease Rev.,
Series A, 6.25%, 11/1/16
Kentucky State Turnpike
Authority, Toll Road Rev.,
Refunding
1,000,000 Series A, 5.50%, 7/1/07
8,000,000 Series 1987-A, 5.00%, 7/1/08
2,000,000 Los Angeles, California,
Regional Airport Facility
Improvement Corp., Lease
Rev., 11.25%, 11/1/25
1,500,000 Metropolitan Transportation
Authority, New York
Transportation Facilities,
Rev., Series G, MBIA, 5.50%,
7/1/15
1,000,000 New Hampshire State Turnpike
System, Rev., Refunding,
Series A, FGIC, 6.75%,
11/1/11
3,200,000 New Jersey State Turnpike
Authority, Series C, 6.50%,
1/1/16
1,000,000 Port Authority of New York
and New Jersey, Consolidated
Board, 95th Series, 6.125%,
7/15/22
1,000,000 Philadelphia, Pennsylvania,
Industrial Development
Authority Rev. (Parking
Garage II Project), 6.125%,
2/15/03
1,750,000 San Joaquin Hills,
California, Transcorridor
Agency, Toll Road Rev.,
6.75%, 1/1/32
1,000,000 St. Louis, Missouri, Parking
Facilities Rev., 6.625%,
12/15/21
1,000,000 Triborough Bridge & Tunnel
Authority, New York Rev.,
7.875%, 1/1/18
Tulsa, Oklahoma, Municipal
Airport Trust, Rev.
1,000,000 7.60%, 12/1/30
800,000 American Airlines, 9.50%,
6/1/20
825,000 Virgin Islands Port
Authority, Marine Division
Rev. (Marine Terminal),
Series A, 10.13%, 11/1/05

<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>

UTILITIES -- COMBINATION ELECTRIC, GAS
AND/OR WATER
Austin, Texas Utility System
Rev.
$ 1,250,000 FGIC, 7.75%, 11/15/06
2,280,000 Refunding, 6.00%, 5/15/15
1,000,000 Series A, 7.80%, 11/15/12
2,380,000 Series B, 7.80%, 11/15/12
1,000,000 Chicago, Illinois, Gas
Supply Rev. (People's Gas
Lighting and Coke Co.),
Series A, 8.10%, 5/1/20
1,000,000 Chicago, Illinois,
Metropolitan Water District,
G.O., 7.00%, 1/1/11
700,000 Citronelle, Alabama,
Utilities Board, Water,
Sewer & Gas Rev., 9.00%,
5/1/13
10,950,000 Jefferson County, Kentucky,
Capital Project Lease Rev.,
Waste Water Treatment Plant,
Zero Coupon, 8/15/14
750,000 Jefferson, Wisconsin, Sewer
System, Waterworks, 7.40%,
7/1/16
2,000,000 Los Angeles, California,
Dept. of Water & Power,
Electric Plant Rev., 5.375%,
9/1/23
2,000,000 Massachusetts State Water
Resource Authority, Series
A, 7.50%, 4/1/16
1,000,000 New Hampshire State Business
Finance Authority, Electric
Facilities Rev. (Plymouth
Cogeneration Light Power),
7.75%, 6/1/14
New York City Municipal
Water Finance Authority, New
York, Water & Sewer Rev.
1,000,000 Series A, 7.625%, 6/15/16
3,000,000 Series A, MBIA, 7.25%,
6/15/15
4,100,000 Series B, 5.00%, 6/15/17
1,000,000 New York State Environment
Facilities Corp., Water
Facilities Rev. (Long Island
Water Corp.), 10.00%,
10/1/17
Norco, California, Sewer and
Water Rev., Refunding,
500,000 6.70%, 10/1/13
500,000 7.20%, 10/1/19
750,000 Northwest Harris County,
Texas, Municipal Utility,
Waterworks and Sewer System
Combination Tax, 8.10%,
10/1/15
</TABLE>

32
<PAGE> 33

MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 2,000,000 Orlando, Florida, Utilities
Commission, Water & Electric
Rev., Refunding, 8.625%,
10/1/05; Pre-refunded
10/1/95
Willow Fork, Texas, Drainage
District, G.O.
500,000 7.00%, 3/1/12
500,000 7.00%, 3/1/13
1,000,000 Winters, Texas, Water Works
& Sewer Rev., 8.50%, 8/1/17

UTILITIES--ELECTRIC
2,500,000 Alaska Energy Authority
Power Rev., First Series
(Bradley Lake Hydroelectric
Project), BIG, 6.25%, 7/1/21
1,500,000 Florida State Municipal
Power Agency, Refunding (St.
Lucie Project), FGIC, 5.00%,
10/1/01
Georgia State Municipal
Electric Authority, Power
Rev.
850,000 6.00%, 1/1/20
2,000,000 Series A, 7.875%, 1/1/18;
Pre-refunded 1/1/96
1,750,000 Series Q, 8.375%, 1/1/16;
Pre-refunded 1/1/98
9,685,000 Grand River Dam Authority,
Oklahoma, Rev., Series 1987,
5.00%, 6/1/12
Intermountain Power Agency,
Utah, Power Supply Authority
Rev.
1,850,000 1st Crossover Series, 5.00%,
7/1/16
1,000,000 Series A, 6.00%, 7/1/23
2,400,000 Series A, 7.75%, 7/1/17
3,650,000 Series B, 7.75%, 7/1/20
2,000,000 Series H, 6.00%, 7/1/21
2,000,000 Series I, 6.00%, 7/1/21
1,000,000 Lewis County, Washington,
Public Utility District No.
1, Rev. (Cowlitz Falls
Hydroelectric Project),
6.00%, 10/1/24
Massachusetts Municipal
Wholesale Electric Co., Rev.
2,060,000 Series B, 13.00%, 7/1/18
310,000 Series B, 13.625%, 7/1/17;
Pre-refunded 1/1/93
750,000 Michigan Public Power
Agency, Rev., Refunding
(Belle River Project),
7.00%, 1/1/18
1,250,000 Municipal Electric
Authority, Georgia, Special
Obligation, 2nd Crossover
Series Rev., 8.125%, 1/1/17

<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 3,000,000 Muscatine, Iowa, Electric
Authority Rev., 5.00%,
1/1/08
2,500,000 New York State Power
Authority, Rev., Series T,
7.375%, 1/1/18
300,000 Northern California, Public
Power Agency, Rev., 5.00%,
7/1/09
North Carolina Eastern
Municipal Power Agency,
Power System Rev.
335,000 8.00%, 1/1/21
2,665,000 8.00%, 1/1/21; Pre-refunded
1/1/98
7,695,000 Series A, 4.50%, 1/1/24
North Carolina Municipal
Power Agency No. 1, Catawba
Electric Rev.
1,000,000 6.00%, 1/1/20
2,850,000 7.875%, 1/1/19
1,070,000 Piedmont Municipal Power
Agency, South Carolina,
Rev., 5.00%, 1/1/25
5,290,000 Salt River Project, Arizona
Agricultural Improvement &
Power District Electric
System Rev., 7.875%, 1/1/28
Sam Rayburn, Texas,
Municipal Power Agency,
Refunding
1,000,000 Series A, 6.25%, 10/1/17
1,000,000 Series A, 6.75%, 10/1/14
1,000,000 South Carolina, Public
Service Authority, 7.875%,
7/1/21; Pre-refunded 1/1/96
Southern Minnesota Municipal
Power Agency, Power Supply
System Rev.
2,000,000 Series A, 5.00%, 1/1/16
1,250,000 Series C, 5.00%, 1/1/17
8,565,000 Texas Municipal Power Agency
Rev., 5.50%, 9/1/13
Washington State Public
Power Supply System Rev.
1,250,000 Nuclear Project No. 1,
Series B, 7.125%, 7/1/16
445,000 Nuclear Project No. 1,
Series D, 15.00%, 7/1/17
2,500,000 Nuclear Project No. 2,
Series B, 7.00%, 7/1/12
1,000,000 Nuclear Project No. 2,
Series B, 7.375%, 7/1/12
2,000,000 Nuclear Project No. 2,
Series 1990-C, 7.625%, 7/1/10
3,000,000 Nuclear Project No. 3, MBIA
5.60%, 7/1/17

</TABLE>

33
<PAGE> 34

MUNICIPAL VARIABLE RATE DEMAND NOTES+
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 100,000 Arkansas State Development
Finance Authority, 3.65%,
12/1/15
California Statewide
Communities Development
Corp. Rev., Series A
600,000 3.50%, 6/1/19
1,000,000 3.50%, 8/1/19
400,000 Cuyahoga County, Ohio, IDR
(Allen Group, Inc. Project),
3.50%, 12/1/15
500,000 Dade County, Florida,
Industrial Development
Authority Rev., (Dynacolor
Graphic Project), 4.00%,
6/1/99
500,000 Delaware County,
Pennsylvania, Industrial
Development Authority Rev.
(Ram Motors, Inc.), 4.20%,
9/1/10
300,000 Fort Wayne, Indiana,
Hospital Authority, Series
C, 3.90%, 1/1/16
900,000 Illinois Development Finance
Authority Rev., 3.70%,
4/1/07
100,000 Illinois Health Facilities
Authority Rev., 3.70%,
1/1/18
800,000 Indiana Health Facilities
Financing Authority Rev.,
Capital Access Designated
Pool Program, 3.70%, 12/1/02
100,000 Maricopa County, Arizona,
Industrial Development
Authority, Hospital Facility
Rev. (Samaritan Health
Services Hospital), Series
B-2, 3.60%, 12/1/08

<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
New York City, New York,
G.O.
$ 500,000 3.70%, 8/1/10
700,000 3.70%, 8/1/17
400,000 3.70%, 8/1/21
1,550,000 New York, New York,
Subseries A-7, G.O., 3.95%,
8/1/20
100,000 New York State Job
Development Authority,
3.60%, 3/1/07
500,000 Ossian, Indiana, Economic
Development Rev. (Walbro
Auto Corporation Project),
3.80%, 12/1/23
3,100,000 Panola County, Mississippi
(Moog Automotive, Inc.
Project), 3.85%, 9/1/10
400,000 Pennsylvania State Higher
Educational Facility
Authority Rev., Series B,
3.75%, 7/1/18
300,000 Sacramento County,
California, Multi-family
Housing Rev., Series E,
3.75%, 9/15/07
100,000 Uinta County, Wyoming, PCR,
Refunding (Chevron U.S.A.,
Inc. Project), 3.50%,
12/1/22
</TABLE>

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

+Interest rates are as of September 30, 1994.
FHA -- Federal Housing Administration
G.O. -- General obligation bond
Rev. -- Revenue bond
IDR -- Industrial Revenue Bond

Insurers:
AMBAC -- AMBAC Indemnity Corp.
BIG -- Bond Investors Guaranty Insurance Co.
FGIC -- Financial Guaranty Insurance Corp.
FSA -- Financial Security Assurance Inc.
MBIA -- Municipal Bond Investor's Assurance Corp.

34
<PAGE> 35

BACKUP WITHHOLDING INFORMATION

STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with the
following guidelines:

<TABLE>
<CAPTION>
Account Type Give Social Security Number or Tax Identification Number of:
- --------------------------------------- -----------------------------------------------------------------
<S> <C>
Individual Individual
- --------------------------------------- -----------------------------------------------------------------
Joint (or Joint Tenant) Owner who will be paying tax
- --------------------------------------- -----------------------------------------------------------------
Uniform Gifts to Minors Minor
- --------------------------------------- -----------------------------------------------------------------
Legal Guardian Ward, Minor or Incompetent
- --------------------------------------- -----------------------------------------------------------------
Sole Proprietor Owner of Business
- --------------------------------------- -----------------------------------------------------------------
Trust, Estate, Pension Plan Trust Trust, Estate, Pension Plan Trust (not personal TIN of fiduciary)
- --------------------------------------- -----------------------------------------------------------------
Corporation, Partnership,
Other Organization Corporation, Partnership, Other Organization
- --------------------------------------- -----------------------------------------------------------------
Broker/Nominee Broker/Nominee
- --------------------------------------- -----------------------------------------------------------------
</TABLE>

STEP 2. If you do not have a TIN or you do not know your TIN, you must obtain
Form SS-5 (Application for Social Security Number) or Form SS-4 (Application
for Employer Identification Number) from your local Social Security or IRS
office and apply for one. Write "Applied For" in the space on the application.

STEP 3. If you are one of the entities listed below, you are exempt from
backup withholding and should not check the box on the Application in Section
2, Taxpayer Identification.

o A corporation
o Financial institution
o Section 501(a) exempt organization (IRA, Corporate Retirement Plan,
403(b), Keogh)
o United States or any agency or instrumentality thereof
o A State, the District of Columbia, a possession of the United States,
or any subdivision or instrumentality thereof
o International organization or any agency or instrumentality thereof
o Registered dealer in securities or commodities registered in the U.S.
or a possession of the U.S.
o Real estate investment trust
o Common trust fund operated by a bank under section 584(a)
o An exempt charitable remainder trust, or a non-exempt trust described
in section 4947(a)(1)

If you are in doubt as to whether you are exempt, please contact the Internal
Revenue Service.

STEP 4. IRS Penalties -- If you do not supply us with your TIN, you will be
subject to an IRS $50 penalty unless your failure is due to reasonable cause
and not willful neglect. If you fail to report interest, dividend or patronage
dividend income on your federal income tax return, you will be treated as
negligent and subject to an IRS 5% penalty tax on any resulting underpayment of
tax unless there is clear and convincing evidence to the contrary. If you
falsify information on this form or make any other false statement resulting in
no backup withholding on an account which should be subject to backup
withholding, you may be subject to an IRS $500 penalty and certain criminal
penalties including fines and imprisonment.
<PAGE> 36

AMERICAN CAPITAL
MUNICIPAL BOND FUND, INC.

================================================================================

NATIONAL DISTRIBUTOR PROSPECTUS
Van Kampen American Capital Distributors, Inc. JANUARY 31, 1995
One Parkview Plaza
Oakbrook Terrace, IL 60181

INVESTMENT ADVISER

Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056

TRANSFER, DISBURSING, REDEMPTION
AND SHAREHOLDER SERVICE AGENT

Van Kampen/American Capital

Shareholder Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256

INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002

CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent,
Van Kampen/American Capital Shareholder
Services, Inc. (ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.

Inquiries concerning sales should be
directed to the Distributor, Van Kampen American
Capital Distributors, Inc., One Parkview Plaza,
Oakbrook Terrace, IL 60181.

AMERICAN CAPITAL C/O ACCESS
MUNICIPAL BOND P.O. BOX 418256
FUND, INC. KANSAS CITY, MO 64141-9256

FOR INVESTORS SEEKING INTEREST INCOME
EXEMPT FROM FEDERAL INCOME TAXES

[AMERICAN CAPITAL LOGO]

PRINTED MATTER
Printed in U.S.A./###-##-####/027PRO-001

<PAGE> 37

Part B: Statement of Additional Information

AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.

January 31, 1995

This Statement of Additional Information is not a Prospectus but
contains information in addition to and more detailed than that set forth in
the Prospectus and should be read in conjunction with the Prospectus. The
Statement of Additional Information and the related Prospectus are both dated
January 31, 1995. A Prospectus may be obtained without charge by calling or
writing Van Kampen American Capital Distributors, Inc. at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 at (800) 421-5666.

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>

GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

MUNICIPAL BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

RISK FACTORS RELATING TO HIGH YIELD BONDS . . . . . . . . . . . . . . . . . . . . 3

TEMPORARY INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

REPURCHASE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

FUTURES CONTRACTS AND RELATED OPTIONS . . . . . . . . . . . . . . . . . . . . . . 5

INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . 10

INVESTMENT ADVISORY AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 12

DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . . . 15

DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . 16

PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . 17

EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

CHECK WRITING PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

FEDERAL TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

PRIOR PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 25

OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
<PAGE> 38
GENERAL INFORMATION

The Fund was originally incorporated in Texas on September 8, 1976.
The Fund was reincorporated in Maryland on July 2, 1992.

Van Kampen American Capital Asset Management, Inc. (the "Adviser"),
Van Kampen American Capital Distributors, Inc. (the "Distributor") and Van
Kampen/American Capital Shareholder Services, Inc. ("ACCESS") are wholly owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is a wholly
owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled,
through the ownership of a substantial majority of its common stock, by The
Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a
Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier &
Rice, Inc. a New York based private investment firm. The General Partner of
C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C.
Howe, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In
addition, certain officers, directors and employees of VKAC own, in the
aggregate, not more than 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. Advantage Capital Corporation,
a retail broker-dealer affiliate of the Distributor, is a wholly owned
subsidiary of VK/AC Holding, Inc. See "The Fund and Its Management" in the
Prospectus.

As of January 18, 1995, no person was known by the Fund to own
beneficially or of record as much as five percent of the Class A shares of the
Fund.

As of January 18, 1995, no person was known by the Fund to own
beneficially or of record as much as five percent of the Class B shares of the
Fund except as follows: 6.79% was owned of record by National Financial
Services, 200 Liberty One World Finance Center, New York, New York 10281-1003
and 14.68% was owned of record by Smith Barney Inc., 388 Greenwich Street, 11th
Floor, New York, New York 10013-2375.

As of January 18, 1995, no person was known by the Fund to own
beneficially or of record as much as five percent of the Class C shares of the
Fund except as follows: 5.20% was owned of record by DLJP (Donaldson Lufkin),
1 Pershing Plaza, 5th Floor, Jersey City, New Jersey 07399-0001; 5.44% was
owned of record by PaineWebber Inc., 1285 Avenue of the Americas, 15th Floor,
New York, New York 10019; and 35.70% was owned of record by Smith Barney Inc.,
388 Greenwich Street, 11th Floor, New York, New York 10013-2375.

MUNICIPAL BONDS

"Municipal Bonds" include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development obligations
are issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Bonds if the interest paid thereon is exempt from Federal income tax.
Municipal Bonds also include short-term tax-exempt municipal obligations such
as tax anticipation notes, bond anticipation notes, revenue anticipation notes,
and variable rate demand notes.

The two principal classifications of Municipal Bonds are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of full faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or from
other specific revenue sources such as the user of the facility being financed.
Industrial development bonds, including pollution control bonds, are revenue
bonds and do not constitute the pledge of the credit or taxing

2
<PAGE> 39
power of the issuer of such bonds. The payment of the principal and interest
on such industrial revenue bonds depends solely on the ability of the user of
the facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. The Fund's portfolio may also include "moral obligation" bonds which
are normally issued by special purpose public authorities. If an issuer of
moral obligation bonds is unable to meet its obligations, the repayment of such
bonds becomes a moral commitment but not a legal obligation of the state or
municipality which is the issuer of the bonds.

When the Fund engages in when-issued and delayed delivery
transactions, the Fund relies on the buyer or seller, as the case may be, to
consummate the trade. Failure of the buyer or seller to do so may result in
the Fund missing the opportunity of obtaining a price considered to be
advantageous.

The Fund may invest in Municipal Notes which include demand notes and
short-term municipal obligations (such as tax anticipation notes, revenue
anticipation notes, construction loan notes and short-term discount notes) and
tax-exempt commercial paper, provided that such obligations have the ratings
described in the Prospectus. Demand notes are obligations which normally have
a stated maturity in excess of one year, but permit any holder to demand
payment of principal plus accrued interest upon a specified number of days'
notice. Frequently, such obligations are secured by letters of credit or other
credit support arrangements provided by banks. The issuer of such notes
normally has a corresponding right, after a given period, to prepay at its
discretion the outstanding principal of the note plus accrued interest upon a
specified number of days' notice to the noteholders. The interest rate on a
demand note may be based on a known lending rate, such as a bank's prime rate,
and may be adjusted when such rate changes, or the interest rate on a demand
note may be a market rate that is adjusted at specified intervals.
Participation interests in variable rate demand notes will be purchased only
if, in the opinion of counsel, interest income on such interest will be
tax-exempt when distributed as dividends to shareholders.

Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Bonds in which the Fund invests to meet their obligations for the
payment of interest and principal when due. There are variations in the risks
involved in holding Municipal Bonds, both within a particular classification
and among classifications, depending on numerous factors. Furthermore, the
rights of holders of Municipal Bonds and the obligations of the issuers of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar
laws and court decisions affecting the rights of creditors generally, and such
laws, if any, which may be enacted by Congress or state legislatures imposing a
moratorium on the payment of principal and interest or imposing other
constraints or conditions on the payments of principal and interest on
Municipal Bonds.

RISK FACTORS RELATING TO HIGH YIELD BONDS

As described in the Prospectus, the Fund may purchase Municipal Bonds
rated BB or B by Standard & Poor's Corporation ("S&P") and Ba or B by Moody's
Investors Services, Inc. ("Moody's") and non-rated securities considered by the
Adviser to be of comparable quality if the purchase would not cause more than
20% of the Fund's total assets to be invested in such lower rated securities.
See the Appendix for a description of Municipal Bond ratings. The Prospectus
discussion of the risks of investing in such lower rated high yield bonds is
supplemented as follows:

1. Youth and Growth of the High Yield Bond Market. Since the
high yield bond market is relatively new, its growth has
paralleled a long economic expansion, and it has not weathered
a recession in its present size and form. An economic
downturn or increase in interest rates is

3
<PAGE> 40

likely to have a negative effect on the high yield bond market
and on the value of the high yield bonds in the Fund's
portfolio, as well as on the ability of the bonds' issuers to
repay principal and interest.

2. Sensitivity to Interest Rate and Economic Changes. The
economy and interest rates affect high yield securities
differently from other securities. The prices of high yield
bonds have been found to be less sensitive to interest rate
changes than higher-rated investments, but more sensitive to
adverse economic changes or individual issuer developments.
During an economic downturn or substantial period of rising
interest rates, the issuers may experience financial stress
which would adversely affect their ability to service their
principal and interest obligations, to meet projected revenue
goals, and to obtain additional financing. If the issuer of a
bond owned by the Fund defaults, the Fund may incur additional
expenses to seek recovery. In addition, periods of economic
uncertainty and changes can be expected to result in increased
volatility of market prices of high yield bonds and the Fund's
asset value. Furthermore, in the case of high yield bonds
structured as zero coupon or pay-in-kind securities, their
market prices are affected to a greater extent by interest
rate changes and thereby tend to be more volatile than
securities which pay interest periodically and in cash.

3. Liquidity and Valuation. To the extent that there is no
established retail secondary market, there may be thin trading
of high yield bonds, and there may be a negative impact on the
Fund's board of directors' ability to accurately value high
yield bonds and the Fund's assets and on the Fund's ability to
dispose of the bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield bonds,
especially in a thinly traded market. To the extent the Fund
owns or may acquire illiquid high yield bonds, these
securities may involve special liquidity and valuation
difficulties.

4. Credit Ratings. Certain risks are associated with applying
credit ratings as a method of evaluating high yield bonds.
Credit ratings evaluate the safety of principal and interest
payments, not market value risk of high yield bonds. Since
credit rating agencies may fail to timely change the credit
ratings to reflect subsequent events, the Adviser monitors the
issuers of high yield bonds in the Fund's portfolio to
determine if the issuers appear to have sufficient cash flow
to meet required principal and interest payments, and to
attempt to assure the bonds' liquidity so the Fund can meet
redemption requests. The Fund may retain a portfolio security
whose rating has been changed.

TEMPORARY INVESTMENTS

The taxable securities in which the Fund may invest as temporary
investments include U.S. Government securities, domestic bank certificates of
deposit and repurchase agreements.

U.S. Government securities include obligations issued or guaranteed as
to principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line or credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality, or
(d) the credit of the instrumentality. Such agencies or instrumentalities
include, but are not limited to, the Federal National Mortgage Association, the
Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration. The Fund may not invest in a certificate of deposit
issued by a commercial bank unless the bank is organized and operating in the
United States and has total assets of at least $500 million and is a member of
the Federal Deposit Insurance Corporation.

4
<PAGE> 41
REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are
collateralized by the underlying debt securities and may be considered to be
loans under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund will make payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of a custodian or bank acting as
agent. The seller under a repurchase agreement will be required to maintain
the value of the underlying securities marked to market daily at not less than
the repurchase price. The underlying securities (normally securities of the
U.S. Government, or its agencies and instrumentalities), may have maturity
dates exceeding one year. The Fund does not bear the risk of a decline in
value of the underlying security unless the seller defaults under its
repurchase obligation. See "Investment Practices and Restrictions - Repurchase
Agreements" in Prospectus for further information.

FUTURES CONTRACTS AND RELATED OPTIONS

FUTURES CONTRACTS

A municipal bond futures contract is an agreement pursuant to which
two parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index (the "Index") value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. The
Index is a priceweighted measure of the market value of 40 large sized, recent
issues of tax-exempt bonds.

An interest rate futures contract is an agreement pursuant to which a
party agrees to take or make delivery of a specified debt security (such as
U.S. Treasury bonds or notes) at a specified future time and at a specified
price.

Initial and Variation Margin. In contrast to the purchase or sale of
a security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in securities
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract,
which is returned to the Fund upon termination of the futures contact and
satisfaction of its contractual obligations. Subsequent payments to and from
the broker, called variation margin, are made on a daily basis as the price of
the underlying securities or index fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
marking to market.

For example, when the Fund purchases a futures contract and the price
of the underlying security or index rises, that position increases in value,
and the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.

5
<PAGE> 42
At any time prior to expiration of the futures contract, the Fund may
elect to terminate the position by taking an opposite position. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund, and the Fund realizes a loss or a gain.

Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as
a temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures
contracts substantially reduces the risk to the Fund of a market decline and,
by so doing, provides an alternative to the liquidation of securities positions
in the Fund with attendant transaction costs.

In the event of the bankruptcy of a broker through which the Fund
engages in transactions in futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the Adviser.

Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.

There may be an imperfect correlation (or no correlation) between
movements in the price of the futures contracts and of the securities being
hedged. The risk of imperfect correlation increases as the composition of the
securities being hedged diverges from the securities upon which the futures
contract is based. If the price of the futures contract moves less than the
price of the securities being hedged, the hedge will not be fully effective.
To compensate for the imperfect correlation, the Fund could buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities being
hedged if the historical volatility of the securities being hedged is greater
than the historical volatility of the securities underlying the futures
contact. Conversely, the Fund could buy or sell futures contracts in a lesser
dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is less than the
historical volatility of the securities underlying the futures contract. It is
also possible that the value of futures contracts held by the Fund could
decline at the same time as portfolio securities being hedged; if this
occurred, the Fund would lose money on the futures contract in addition to
suffering a decline in value in the portfolio securities being hedged.

There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore,
increased participation by speculators in the futures markets may cause
temporary price distortions. Due to the possibility of price distortion in the
futures markets and because of the imperfect correlation between movements in
futures contracts and movements in the securities underlying them, a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction judged over a very short time frame.

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<PAGE> 43
There is also the risk that futures markets may not be sufficiently
liquid. Futures contracts may be closed out only on an exchange or board of
trade that provides a market for such futures contracts. Although the Fund
intends to purchase or sell futures only on exchanges and boards of trade where
there appears to be an active secondary market, there can be no assurance that
an active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movements, the Fund
would continue to be required to make daily payments of variation margin.
Since the securities being hedged would not be sold until the related futures
contract is sold, an increase, if any, in the price of the securities may to
some extent offset losses on the related futures contract. In such event, the
Fund would lose the benefit of the appreciation in value of the securities.

Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in futures
contracts. In such cases, if the Fund has insufficient cash, it may have to
sell portfolio securities at a time when it is disadvantageous to do so in
order to meet the daily variation margin.

The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool". CFTC regulations require,
among other things, (i) that futures and related options be used solely for
bona fide hedging purposes (or meet certain conditions as specified in CFTC
regulations) and (ii) that the Fund not enter into futures and related options
for which the aggregate initial margin and premiums exceed five percent of the
fair market value of the Fund's assets. In order to minimize leverage in
connection with the purchase of futures contracts by the Fund, an amount of
cash, cash equivalents or liquid high grade debt securities equal to the market
value of the obligation under the futures contracts (less any related margin
deposits) will be maintained in a segregated account with the Custodian.

OPTIONS ON FUTURES CONTRACTS

The Fund could also purchase and write options on futures contracts.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put), at a
specified exercise price at any time during the option period. As a writer of
an option on a futures contract, the Fund would be subject to initial margin
and maintenance requirements similar to those applicable to futures contracts.
In addition, net option premiums received by the Fund are required to be
included in initial margin deposits. When an option on a futures contract is
exercised, delivery of the futures position is accompanied by cash representing
the difference between the current market price of the futures contract and the
exercise price of the option. The Fund could purchase put options on futures
contracts in lieu of, and for the same purpose as, it could sell a futures
contract. The purchase of call options on futures contracts would be intended
to serve the same purpose as the actual purchase of the futures contract.

Risks of Transactions in Options on Futures Contracts. In addition to
the risks described above which apply to all options transactions, there are
several special risks relating to options on futures. The Adviser will not
purchase options on futures on any exchange unless in the Adviser's opinion, a
liquid secondary exchange market for such options exists. Compared to the use
of futures, the purchase of options on futures involves less potential risk to
the Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the level of the index or in the price of the
underlying security, when the use of an option on a future would result in a
loss to the Fund when the use of a future would not.

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<PAGE> 44
ADDITIONAL RISKS TO FUTURES CONTRACTS AND RELATED OPTIONS

Each of the Exchanges has established limitations governing the
maximum number of call or put options on the same underlying security or
futures contract (whether or not covered) which may be written by a single
investor, whether acting alone or in concert with other (regardless of whether
such options are written on the same or different Exchanges or are held or
written on one or more accounts or through one or more brokers). Option
positions of all investment companies advised by the Adviser are combined for
purposes of these limits. An Exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Fund may write.

Although the Fund intends to enter into futures contracts only if
there is an active market for such contracts, there is no assurance that an
active market will exist for the contracts at any particular time. Most U.S.
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit
has been reached in a particular contract, no trades may be made that day at a
price beyond that limit. It is possible that futures contract prices would
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses. In such event, and in
the event of adverse price movements, the Fund would be required to make daily
cash payments of variation margin. In such circumstances, an increase in the
value of the portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. However, as described above,
there is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of its outstanding shares. Such majority is defined by the 1940 Act
as the lesser of (i) 67% or more of the voting securities present in person or
by proxy at the meeting, if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy; or (ii) more than 50% of
the outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. These restrictions provide that the Fund shall not:

1. Purchase or hold securities of any issuer if any of the Fund's
officers or directors, or officers or directors of its
investment adviser, who beneficially own more than 1/2% of the
securities of that issuer, together own beneficially more than
five percent of the securities of such issuer.

2. Purchase securities on margin or make short sales, but it may
engage in transactions in options, futures contracts and
related options and make margin deposits and payments in
connection therewith.

3. Make loans of money or securities to other persons except
through the purchase of securities in accordance with its
investment objective and policies.

4. Invest in real estate; commodities or commodities contracts;
interests in oil, gas, or other mineral exploration or
development programs; or any security not payable in United
States currency (but this shall not prevent the Fund from
investing in Municipal Bonds or Temporary Investments secured
by real estate or interests therein or from entering into
transactions in futures contracts and related options).

8
<PAGE> 45
5. Engage in the underwriting of securities or invest more than
15% of its net assets in securities subject to restrictions on
resale or for which there is no readily available market.
Such securities include securities issued in limited
placements under which the Fund represents that it is
purchasing without a view to a public distribution, repurchase
agreements maturing in more than seven days and securities
subject to legal or contractual restrictions on resale.

6. Invest in securities other than Municipal Bonds and Temporary
Investments (as defined in the Prospectus), listed futures
contacts related to U.S. Government securities, Municipal
Bonds or to an index of Municipal Bonds, and options on such
contracts.

7. Invest more than five percent of its total assets at market
value at time of purchase in the securities of any one issuer
(other than obligations of the United States Government or of
any instrumentalities thereof).

8. Borrow money, except from banks for temporary or emergency
purposes, such borrowing not to exceed five percent of its
total assets at market value at the time of borrowing. Any
such borrowing may be secured provided that not more than ten
percent of the total assets at market value at the time of
pledging may be used as security for such borrowings.
Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures contracts and related
options, segregate or deposit assets to cover or secure
options written, and make margin deposits and payments in
connection with futures contracts and related options.

9. Purchase any Municipal Bond rated below Baa by Moody's and
below BBB by S&P, or which, if non-rated, is in the opinion of
the Adviser of comparable quality, if immediately after and as
a result of such purchase such Bonds would constitute more
than 20% of the Fund's total assets.

10. Purchase any Municipal Bond rated below A by Moody's and S&P,
or which is non-rated, if immediately after and as a result of
such purchase such Bonds would constitute more than 50% of the
Fund's total assets.

11. Purchase any Municipal Bond rated below B by Moody's and S&P
or any non-rated Municipal bonds considered by the Adviser to
be of comparable quality.

12. Issue senior securities, as defined in the 1940 Act, except
that this restriction shall not be deemed to prohibit the Fund
from (i) making and collateralizing any permitted borrowings,
(ii) making any permitted loans of its portfolio securities,
or (iii) entering into repurchase agreements, utilizing
futures contracts, options on futures contracts and other
investment strategies and instruments that would be considered
"senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of
"cover".

Each state and each political subdivision, agency or instrumentality
of such state, and each multi-state agency of which a state is a member is a
separate "issuer" as that term is used in the Prospectus. The non-government
user of facilities financed by industrial development bonds is also considered
as a separate issuer. If, however, a security is guaranteed by another entity,
securities issued or guaranteed by such guaranteeing entity shall be limited to
ten percent of the value of the Fund's total assets.

Because of the nature of the securities in which the Fund may invest,
the Fund may not invest in voting securities, or invest for the purpose of
exercising control or management, or invest in securities of other investment
companies.

9
<PAGE> 46
DIRECTORS AND EXECUTIVE OFFICERS

The Fund's directors and executive officers and their principal
occupations during the past five years are listed below. All persons named as
Directors also serve in similar capacities for other funds advised by the
Adviser as indicated below.

FERNANDO SISTO, Chairman of the Board and Director. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991.
Dean of Graduate School, George M. Bond Professor and formerly Dean of
Graduate School and Chairman, Department of Mechanical Engineering,
Stevens Institute of Technology; Director, Dynalysis of Princeton
(engineering research). (1)

J. MILES BRANAGAN, Director. 2300 205th Street, Torrance, California
90501-1452. Co-Founder, Chairman and President, MDT Corporation
(medical equipment). (1)

RICHARD E. CARUSO, Director. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief
Executive Officer, Integra Life Sciences Corporation
(biotechnology/life sciences); Trustee, Susquehanna University;
Trustee and First Vice President, The Baum School of Art (community
art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business
Performance Group, London School of Economics; formerly Director,
First Sterling Bank; formerly Director and Executive Vice President,
LFC Financial Corporation (leasing/financial). (1)

ROGER HILSMAN, Director. 251-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly Professor of Government and International Affairs, Columbia
University. (1)

*DON G. POWELL, President and Director. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. President, Chief Executive Officer and
Director of VK/AC Holding, Inc., VKAC and the Adviser; Chairman, Chief
Executive Officer and Director of the Distributor. (1)(2)(4)

DAVID REES, Director. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal. (1)(3)

**LAWRENCE J. SHEEHAN, Director. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner
(1969-1994) of the law firm of O'Melveny & Myers, legal counsel to the
Fund. (1)(3)(5)

WILLIAM S. WOODSIDE, Director. 712 Fifth Avenue, 40th Floor, New York, New
York 10019. Vice Chairman of the Board, Sky Chefs, Inc. (airline
food catering); formerly Director, Primerica Corporation (currently
known as The Travelers Inc.); formerly Chairman of the Board and Chief
Executive Officer, old Primerica Corporation (American Can Company);
formerly Director, James River Corporation (paper products); Trustee
and formerly President, Whitney Museum of American Art; Chairman,
Institute for Educational Leadership, Inc., Board of Visitors,
Graduate School of The City University of New York, Academy of
Political Science; Committee for Economic Development; Director,
Public Education Fund Network, Fund for New York City Public
Education; Trustee, Barnard College; Member, Dean's Council, Harvard
School of Public Health; Member, Mental Health Task Force, Carter
Center. (1)

ROBERT B. EVANS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Mr. Evans also serves as Vice President of American Capital Tax-Exempt
Trust, American Capital Texas Municipal Securities, Inc., Mosher,
Inc., and the Common Sense Municipal Bond Fund of Common Sense Trust.
(4)

NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate
Secretary of the Adviser. (4)

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<PAGE> 47
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant
Controller. (4)

CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the
investment companies advised by the Adviser. (4)

ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President - Chief Investment Officer/Fixed Income
Department and Director of the Adviser.(4)

J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel and
Compliance Review Officer of the Adviser. (4)

PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President of the Adviser; President, Chief Operating
Officer and Director of Van Kampen American Capital Services, Inc.;
Executive Vice President, Chief Operating Officer and Director of Van
Kampen American Capital Trust Company; Executive Vice President and
Director of Van Kampen American Capital Shareholder Services, Inc.
("ACCESS"). (4)

* Director who is an interested person of the Adviser and of the Fund
within the meaning of the 1940 Act, by virtue of his affiliation with
the Adviser.

** Director who is an interested person of the Fund and may be an
interested person of the Adviser within the meaning of the 1940 Act by
virtue of his affiliation with legal counsel of the Fund.

(1) Also a director or trustee of American Capital Comstock Fund, Inc.,
American Capital Corporate Bond Fund, Inc., American Capital Emerging
Growth Fund, Inc., American Capital Enterprise Fund, Inc., American
Capital Equity Income Fund, Inc., American Capital Federal Mortgage
Trust, American Capital Global Managed Assets Fund, Inc., American
Capital Government Securities, Inc., American Capital Government
Target Series, American Capital Growth and Income Fund, Inc., American
Capital Harbor Fund, Inc., American Capital High Yield Investments,
Inc., American Capital Life Investment Trust, American Capital Pace
Fund, Inc., American Capital Real Estate Securities Fund, Inc.,
American Capital Reserve Fund, Inc., American Capital Small
Capitalization Fund, Inc., American Capital Tax-Exempt Trust, American
Capital Texas Municipal Securities, Inc., American Capital U.S.
Government Trust for Income, American Capital Utilities Income Fund,
Inc. and American Capital World Portfolio Series, Inc.

(2) A director/trustee/managing general partner of American Capital Bond
Fund, Inc., American Capital Convertible Securities, Inc., American
Capital Exchange Fund and American Capital Income Trust, investment
companies advised by the Adviser, and a trustee of Common Sense
Trust, an open-end investment company for which the Adviser serves as
adviser for eight of the portfolios.

(3) A director of Source Capital, Inc., a closed-end investment company
not advised by the Adviser.

(4) An officer and/or director/trustee of other investment companies
advised or subadvised by the Adviser.

(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc. and FPA
Perennial Fund, Inc., investment companies not advised by the Adviser,
and TCW Convertible Securities Fund, Inc., a closed-end investment
company not advised by the Adviser.

The Executive Committee, consisting of Messrs. Hilsman, Powell,
Sheehan, and Sisto, may act for the Board of Directors between Board meetings
except where board action is required by law.

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<PAGE> 48
The directors and officers of the Fund as a group own less than one
percent of the outstanding shares of the Fund. During the fiscal year ended
September 30, 1994, the Directors who were not affiliated with the Adviser or
its parent received as a group $13,494 in directors' fees from the Fund in
addition to certain out-of-pocket expenses. Such directors also received
compensation for serving as directors of other investment companies advised by
the Adviser as identified in the notes to the foregoing table. For legal
services rendered during the fiscal year, the Fund paid legal fees of $11,680
to the law firm of O'Melveny & Myers, of which Mr. Sheehan is Of Counsel. The
firm also serves as legal counsel to the American Capital funds listed in
Footnote 1 above.

INVESTMENT ADVISORY AGREEMENT

The Fund and the Adviser are parties to an investment advisory
agreement, dated December 20, 1994 (the "Advisory Agreement"). Under the
Advisory Agreement, the Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. The Adviser is responsible for obtaining and evaluating economic,
statistical, and financial data and for formulating and implementing investment
programs in furtherance of the Fund's investment objective. The Adviser also
furnishes at no cost to the Fund (except as noted herein) the services of
sufficient executive and clerical personnel for the Fund as are necessary to
prepare registration statements, prospectuses, shareholder reports and notices,
and proxy solicitation materials. In addition, the Adviser furnishes at no
cost to the Fund the services of a President of the Fund, one or more Vice
Presidents as needed, and a Secretary.

Under the Advisory Agreement, the Fund bears the cost of its
accounting services, which includes maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting
services include the salaries and overhead expenses of a Treasurer or other
principal financial officer and the personnel operating under his direction.
During the fiscal years ended September 30, 1992, 1993 and 1994, the Adviser
received $1,393,099, $1,615,258 and $1,804,381, respectively, in advisory fees
from the Fund. For such periods the Fund paid $91,361, $120,055 and $115,272,
respectively, for accounting services. A substantial portion of these amounts
was paid to the Adviser or its parent in reimbursement of personnel, office
space, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services are provided at cost which is
allocated among the investment companies advised by the Adviser. The Fund also
pays shareholder service agency fees, distribution fees, custodian fees, legal
and auditing fees, the costs of reports to shareholders and all other ordinary
expenses not specifically assumed by the Adviser. See "The Fund and Its
Management" in the Prospectus.

Under the Advisory Agreement, the Fund pays to the Adviser as
compensation for the services rendered, facilities furnished, and expenses paid
by it a fee payable monthly computed on average daily net assets of the Fund at
an annual rate of 0.50% of the Funds average net assets.

The average net asset value is determined by taking the average of all
of the determinations of net asset value for each business day during a given
calendar month. Such fee is payable for each calendar month as soon as
practicable after the end of that month. The Adviser agrees to use its best
efforts to recapture tender solicitation fees and exchange offer fees for the
Fund's benefit, and to advise the Board of Directors of the Fund of any other
commissions, fees, brokerage or similar payments which may be possible under
applicable laws for the Adviser or any other direct or indirect majority owned
subsidiary of VK/AC Holding, Inc. to receive in connection with the Fund's
portfolio transactions or other arrangements which may benefit the Fund.

The Advisory Agreement also provides that, in the event the expenses
of the Fund for any fiscal year exceed the most restrictive expense limitation
applicable in the states where the Fund's shares are qualified for sale, the
compensation due the Adviser for such fiscal year shall be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory
fee is insufficient, the Adviser will pay the Fund monthly an amount sufficient
to make up the deficiency, subject to readjustment during the year. The
Advisory Agreement

12
<PAGE> 49
also provides that the Adviser shall not be liable to the Fund for any actions
or omissions if it acted in good faith without negligence or misconduct.

Currently, the most restrictive applicable limitations are 2 1/2% of
the first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.

The Advisory Agreement may be continued from year to year if
specifically approved at least annually (a)(i) by the Fund's Board of Directors
or (ii) by vote of a majority of the Fund's outstanding voting securities and
(b) by the affirmative vote of a majority of the Directors who are not parties
to the agreement or interested persons of any such party by votes cast in
person at a meeting called for such purpose. The Advisory Agreement provides
that it shall terminate automatically if assigned and that it may be terminated
without penalty by either party on 60 days' written notice.

DISTRIBUTOR

The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, dated December 20, 1994 (the "Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of
the Fund through affiliated and unaffiliated dealers. The Distributor's
obligation is an agency or "best efforts" arrangement under which the
Distributor is required to take and pay for only such shares of the Fund as may
be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost
and expense of supplemental sales literature, promotion and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Fund's Board of Directors or by a vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Directors
who are not parties to the Underwriting Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.

During the fiscal years ended September 30, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $1,079,211,
$1,055,715 and $793,290, respectively. Of such totals, the amount retained by
the Distributor was $32,794, $97,650 and $118,647, respectively. The remainder
was reallowed to dealers. Of such dealer reallowances, $314,982, $197,590 and
$105,378, respectively, was received by Advantage Capital Corporation, an
affiliated dealer of the Distributor.

DISTRIBUTION PLANS

The Fund adopted a Class A distribution plan, a Class B distribution
plan and a Class C distribution plan (the "Class A Plan", "Class B Plan" and
"Class C Plan", respectively) to permit the Fund directly or indirectly to pay
expenses associated with servicing shareholders and in the case of the Class B
Plan and Class C Plan the distribution of its shares (the Class A Plan, the
Class B Plan and the Class C Plan are sometimes referred to herein collectively
as "Plans" and individually as a "Plan").

The Directors have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible.
With respect to the Class A Plan, the Distributor intends to make payments
thereunder only to compensate Service Organizations for personal service and/or
the maintenance of shareholder accounts. With respect to the Class B and Class
C Plans, authorized payments by the Fund include payments at an annual rate of
up to 0.25% of the net assets of the shares of the respective class to
reimburse the Distributor for payments for personal service and/or the
maintenance of

13
<PAGE> 50
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of the Class B shares
purchased by the clients of broker-dealers and other Service Organizations, (2)
out- of-pocket expenses of printing and distributing prospectuses and annual
and semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professions, and (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel- related expenses.
With respect to the Class C Plan, authorized payments under the Class C Plan
also include payments at an annual rate of up to 0.75% of the net assets of the
Class C shares to reimburse the Distributor for (1) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees paid to broker-dealers and other
Service Organizations in an amount up to 0.65% of the average daily net assets
of the Fund's Class C shares, (2) out-of-pocket expenses of printing and
distributing prospectuses and annual and semi-annual shareholder reports to
other than existing shareholders, (3) out-of-pocket and overhead expenses for
preparing, printing and distributing advertising material and sales literature,
(4) expenses for promotional incentives to broker-dealers and financial and
industry professionals, and (5) advertising and promotion expenses, including
conducting and organizing sales seminars, marketing support salaries and
bonuses, and travel-related expenses. Such reimbursements are subject to the
maximum sales charge limits specified by the National Association of Securities
Dealers, Inc. ("NASD") for asset-based charges.

Banks are currently prohibited under the Glass-Steagall Act from
providing certain underwriting or distribution services. If banking firms were
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.

As required by Rule 12b-1 under the 1940 Act, each Plan and form of
servicing agreement and selling group agreement were approved by the Directors,
including a majority of the Directors who are not affiliated persons (as
defined in the 1940 Act) of the Fund and who have no direct or indirect
financial interest in the operation of any of the Plans or in any agreements
related to each Plan ("Independent Directors"). In approving the Plans in
accordance with the requirements of Rule 12b-1, the Directors determined that
there is a reasonable likelihood that each Plan will benefit the Fund and its
shareholders.

Each Plan requires the Distributor to provide the Directors at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner
terminated in accordance with its terms, each Plan will continue in effect for
a period of one year and thereafter will continue in effect so long as such
continuance is specifically approved at least annually by the Directors,
including a majority of Independent Directors.

Each Plan may be terminated by vote of a majority of the Independent
Directors, or by vote of a majority of the outstanding voting shares of the
respective class of the Fund. Any change in any of the Plans that would
materially increase the distribution expenses borne by the Fund requires
shareholder approval, voting separately by class; otherwise, it may be amended
by a majority of the Directors, including a majority of the Independent
Directors, by vote cast in person at a meeting called for the purpose of voting
upon such amendment. So long as the Plan is in effect, the selection or
nomination of the Independent Directors is committed to the discretion of the
Independent Directors.

For the fiscal year ended September 30, 1994, the Fund's aggregate
expenses under the Class A Plan were $686,403 or .21%, of the Fund's average
net assets. Such expenses were paid to reimburse the Distributor for payments
made to Service Organizations for servicing Fund shareholders and administering
the Class A Plan.

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<PAGE> 51
The offering of Class B shares commenced on September 29, 1992. For the fiscal
year ended September 30, 1994, the Fund's aggregate expenses under the Class B
Plan were $311,708 or 1.00% of the Class B shares' average daily net assets.
Such expenses were paid to reimburse the Distributor for the following
payments: $233,781 for commissions and transaction fees paid to broker-dealers
and other Service Organizations in respect of sales of Class B shares of the
Fund and $77,927 for fees paid to Service Organizations for servicing Class B
shareholders and administering the Class B Plan. For the fiscal year ended
September 30, 1994, the unreimbursed expenses incurred by the Distributor under
the Class B Plan and carried forward were approximately $1.6 million. The
offering of Class C shares commenced August 30, 1993. For the fiscal year
ended September 30, 1994, the Fund's aggregate expenses under the Class C Plan
were $54,489 or 1.00% of the Class C shares' average daily net assets. Such
expenses were paid to the Distributor for the following payments: $40,867 for
commissions and transaction fees paid to broker-dealers and other Service
Organizations in respect of Class C shares of the Fund and $13,622 for fees
paid to Service Organizations for servicing Class C shareholders and
administering the Class C Plan. For the fiscal year ended September 30, 1994,
the unreimbursed expenses incurred by the Distributor under the Class C Plan
and carried forward were approximately $130,000.

TRANSFER AGENT

For the fiscal years ended September 30, 1992, 1993 and 1994, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $242,356, $280,191 and $334,826, respectively, for these
services. These services are provided at cost plus a profit.

PORTFOLIO TURNOVER

The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate for prior
years is shown under "Financial Highlights" in the Prospectus. The annual
turnover rate is expected to exceed 100%, which is higher than that of many
other investment companies. A 100% turnover rate would occur if all the Fund's
portfolio securities were replaced during one year. The lower turnover rate
during the last fiscal year reflects the Adviser's investment strategy and the
lower volatility of the market for municipal securities during the period.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities
for the Fund and for the placement of its portfolio business and the
negotiation of any commissions, if any, paid on such transactions. As most
transactions made by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. Portfolio securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include the spread between the bid and
asked price. Sales to dealers are effected at bid prices.

The Adviser is responsible for placing portfolio transactions and does
so in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser. No specific

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<PAGE> 52
value can be assigned to such research services which are furnished without
cost to the Adviser. The investment advisory fee is not reduced as a result of
the Adviser's receipt of such research services. Services provided may include
(a) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (b) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of the accounts and (c)
effecting securities transactions and performing functions incidental thereto
(such as clearance, settlement and custody). Research services furnished by
firms through which the Fund effects its securities transactions may be used by
the Adviser in servicing all of its advisory accounts; not all of such services
may be used by the Adviser in connection with the Fund.

Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution and such other policies as the Board of Directors may
determine, the Adviser may consider sales of shares of the Fund as a factor in
the selection of firms to execute portfolio transactions for the Fund.

The Adviser places portfolio transactions for other advisory accounts
including other investment companies. The Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations among the Fund and other
advisory accounts, the main factors considered by the Adviser are the
respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held and opinions of the persons
responsible for recommending the investment.

The Adviser's brokerage practices are monitored on a quarterly basis
by the Brokerage Review Committee comprised of Fund Directors who are not
affiliated persons (as defined in the 1940 Act) of the Adviser. During the
fiscal years ended September 30, 1992, 1993 and 1994, the Fund paid $-0-,
$-0- and $4,589, respectively, in brokerage commissions. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction.

DETERMINATION OF NET ASSET VALUE

The net asset value of Fund shares is computed by dividing the value
of all securities plus other assets, less liabilities, by the number of shares
outstanding. The net asset value of the shares of the Fund is determined once
daily as of the close of trading (currently 4:00 p.m., New York time) each day
the New York Stock Exchange (the "Exchange") is open. The Exchange is
currently closed on weekends and on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

The Fund's investments are valued by an independent pricing service
("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at such quoted bid prices (as obtained by
the Service from dealers in such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. Any assets which
are not valued by the Service would be valued at fair value using methods
determined in good faith by the Directors. Expenses and fees, including the
management fee are accrued daily and taken into account for the purpose of
determining the net asset value of Fund shares. Short-term instruments having
remaining maturities of 60 days or less are valued at amortized cost.

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<PAGE> 53
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").

PURCHASE AND REDEMPTION OF SHARES

The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."

PURCHASE OF SHARES

Shares of the Fund are sold in a continuous offering and may be
purchased on any business day through authorized dealers, including Advantage
Capital Corporation.

MULTIPLE PRICING SYSTEM

The Fund issues three classes of shares: Class A shares are subject
to an initial sales charge; Class B shares and Class C shares are sold at net
asset value and are subject to a contingent deferred sales charge. The three
classes of shares each represent interests in the same portfolio of investments
of the Fund, have the same rights and are identical in all respects, except
that Class B and Class C shares bear the expenses of the deferred sales
arrangements, a higher distribution services fee, and any expenses (including
higher transfer agency costs) resulting from such sales arrangements, and have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the distribution fee is paid.

During special promotions, the entire sales charge on Class A shares
may be reallowed to dealers, and at such times dealers may be deemed to be
underwriters for purposes of the 1933 Act.

INVESTMENTS BY MAIL

A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be
waived by the Distributor for plans involving continuing investments.
Subsequent investments of $25 or more may be mailed directly to ACCESS. All
such investments are made at the public offering price of Fund shares next
computed following receipt of payment by ACCESS. Confirmations of the opening
of an account and of all subsequent transactions in the account are forwarded
by ACCESS to the investor's dealer of record, unless another dealer is
designated.

In processing applications and investments, ACCESS acts as agent for
the investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases
to act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.

CUMULATIVE PURCHASE DISCOUNT

The reduced sales charges reflected in the sales charge table as shown
in the Prospectus apply to purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single fiduciary

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<PAGE> 54
account. An aggregate investment includes all shares of the Fund and all
shares of certain other participating American Capital mutual funds described
in the Prospectus (the "Participating Funds"), which have been previously
purchased and are still owned, plus the shares being purchased. The current
offering price is used to determine the value of all such shares. If, for
example, an investor has previously purchased and still holds Class A shares of
the Fund and shares of other Participating Funds having a current offering
price of $40,000, and that person purchases $65,000 of additional Class A
shares of the Fund, the sales charge applicable to the $65,000 purchase would
be 3.75% of the offering price. The same reduction is applicable to purchases
under a Letter of Intent as described in the next paragraph. THE DEALER MUST
NOTIFY THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH
WOULD QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES.
SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY
MAIL. The reduced sales charge will not be applied if such notification is not
furnished at the time of the order. The reduced sales charge will also not be
applied should a review of the records of the Distributor or ACCESS fail to
confirm the investor's representations concerning his holdings.

LETTER OF INTENT

Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount", made pursuant to the Letter of Intent and
the value of all shares of such Participating Funds previously purchased and
still owned are also included in determining the applicable quantity discount.
A Letter of Intent permits an investor to establish a total investment goal to
be achieved by any number of investments over a 13-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal as if it were a single
investment. Escrowed shares totaling five percent of the dollar amount of the
Letter of Intent are held by ACCESS in the name of the shareholder. The
effective date of a Letter of Intent may be back-dated up to 90 days in order
that any investments made during this 90-day period, valued at the investor's
cost, can become subject to the Letter of Intent. The Letter of Intent does
not obligate the investor to purchase the indicated amount. In the event the
Letter of Intent goal is not achieved within the 13-month period, the investor
is required to pay the difference between sales charges otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrow shares to obtain such difference.
If the goal is exceeded in an amount which qualifies for a lower sales charge,
a price adjustment is made by refunding to the investor in shares of the Fund,
the amount of excess sales charge, if any, paid during the 13-month period.

VOLUME DISCOUNTS

The schedule of volume discounts in the Prospectus applies to
purchases of Class A shares made at one time by any purchaser, which term
includes (1) an individual -- or an individual, his or her spouse and children
under the age of 21 -- purchasing securities for his or her or their own
account; (2) a trustee or other fiduciary of a single trust estate or a single
fiduciary account (including a pension, profit-sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Internal Revenue Code (the "Code")), although more than one beneficiary is
involved; and (3) a tax-exempt organization enumerated in Section 501(c)(3) or
(13) of the Code.

REDEMPTION OF SHARES

Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or
(d) the SEC, by order, so permits.

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<PAGE> 55
CONTINGENT DEFERRED SALES CHARGE - CLASS A

For certain full service participant directed profit sharing and
money purchase plans and qualified 401(k) retirement plans and for investments
in the amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent
deferred sales charge ("CDSC-Class A") of one percent is imposed in the event
of certain redemptions within one year of the purchase. If a CDSC-Class A is
imposed upon redemption, the amount of the CDSC-Class A will be equal to the
lesser of one percent of the net asset value of the shares at the time of
purchase, or one percent of the net asset value of the shares at the time of
redemption.

The CDSC-Class A will only be imposed if a Qualified Purchaser redeems
an amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The
CDSC-Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., in retirement plans qualified under Section 401(a) of the
Code and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such payments include, but are not limited to, death, disability,
retirement or separation from service. No CDSC-Class A will be imposed on
exchanges between funds. For purposes of the CDSC-Class A, when shares of one
fund are exchanged for shares of another fund, the purchase date for the shares
of the fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged
shares themselves are acquired through an exchange, the purchase date is
assumed to carry over from the date of the original election to purchase shares
subject to a CDSC-Class A rather than a front-end load sales charge. In
determining whether a CDSC-Class A is payable, it is assumed that shares held
the longest are the first to be redeemed.

Cumulative Purchase Discounts and Letters of Intent apply to the net
asset value privilege. Also, in order to establish an amount of $1,000,000 or
more, a Qualified Purchaser may aggregate shares of American Capital Reserve
Fund, Inc. with shares of certain other participating American Capital mutual
funds described as "Participating Funds" in the Prospectus.

As described in the Prospectus under "Redemption of Shares,"
redemptions of Class B and Class C shares will be subject to a contingent
deferred sales charge.

WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC - CLASS B
AND C")

The CDSC - Class B and C is waived on redemptions of Class B and Class
C shares in the circumstances described below:

(a) Redemption Upon Disability or Death

The Fund will waive the CDSC - Class B and C on redemptions following
the death or disability of a Class B and Class C shareholder. An individual
will be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not
specifically adopt the balance of the Code's definition which pertains to
furnishing the Secretary of Treasury with such proof as he or she may require,
the Distributor will require satisfactory proof of death or disability before
it determines to waive the CDSC - Class B and C.

In cases of disability or death, the CDSC - Class B and C will be
waived where the decedent or disabled person is either an individual
shareholder or owns the shares as a joint tenant with right of survivorship or
is the beneficial owner of a custodial or fiduciary account, and where the
redemption is made within one year of the

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<PAGE> 56
death or initial determination of disability. This waiver of the CDSC - Class
B and C applies to a total or partial redemption, but only to redemptions of
shares held at the time of the death or initial determination of disability.

(b) Redemption in Connection with Certain Distributions from
Retirement Plans

The Fund will waive the CDSC - Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of American Capital
Funds; in such event, as described below, the Fund will "tack" the period for
which the original shares were held on to the holding period of the shares
acquired in the transfer or rollover for purposes of determining what, if any,
CDSC - Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge will be waived on any minimum distribution required to be
distributed in accordance with Code Section 401(a)(9).

The Fund does not intend to waive the CDSC - Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.

A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC - Class B and C will be waived
on redemptions made under the Plan.

The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC - Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and
conditions of the Plan and the ability to offer the Plan.

(d) Involuntary Redemptions of Shares in Accounts that Do Not Have
the Required Minimum Balance

The Fund reserves the right to redeem shareholder accounts with
balances of less than a specified dollar amount as set forth in the Prospectus.
Prior to such redemptions, shareholders will be notified in writing and allowed
a specified period of time to purchase additional shares to bring the account
up to the required minimum balance. The Fund will waive the CDSC upon such
involuntary redemption.

(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund
Within 120 Days After Redemption

A shareholder who has redeemed Class C shares of a Fund may reinvest,
with credit for any CDSC - Class C paid on the redeemed shares, any portion or
all of his or her redemption proceeds (plus that amount necessary to acquire a
fractional share to round off his or her purchase to the nearest full share) in
shares of the Fund, provided that the reinvestment is effected within 120 days
after such redemption and the shareholder has not previously exercised this
reinvestment privilege with respect to Class C shares of the Fund. Shares
acquired

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<PAGE> 57
in this manner will be deemed to have the original cost and purchase date of
the redeemed shares for purposes of applying the CDSC - Class C to subsequent
redemptions.

(f) Redemption by Adviser

The Fund may waive the CDSC - Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.

EXCHANGE PRIVILEGE

The following supplements the discussion of "Shareholder Services -
Exchange Privilege" in the Prospectus:

By use of the exchange privilege, the investor authorizes ACCESS to
act on telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
by telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.

For purposes of determining the sales charge rate previously paid on
Class A shares, all sales charges paid on the exchanged security and on any
security previously exchanged for such security or for any of its predecessors
shall be included. If the exchanged security was acquired through
reinvestment, that security is deemed to have been sold with a sales charge
rate equal to the rate previously paid on the security on which the dividend or
distribution was paid. If a shareholder exchanges less than all of his
securities, the security upon which the highest sales charge rate was
previously paid is deemed exchanged first.

Exchange requests received on a business day prior to the time shares
of the funds involved in the request are priced will be processed on the date
of receipt. "Processing" a request means that shares in the fund from which
the shareholder is withdrawing an investment will be redeemed at the net asset
value per share next determined on the date of receipt. Shares of the new fund
into which the shareholder is investing will also normally be purchased at the
net asset value per share, plus any applicable sales charge, next determined on
the date of receipt. Exchange requests received on a business day after the
time shares of the funds involved in the request are priced will be processed
on the next business day in the manner described herein.

A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to
one of such funds should refer to the prospectus for additional information
regarding such fund.

CHECK WRITING PRIVILEGE

To establish the check writing privilege for Class A shares, a
shareholder must complete the appropriate section of the application and the
Authorization for Redemption form to ACCESS before checks will be issued. All
signatures on the authorization card must be guaranteed if any of the signators
are persons not referenced in the account registration or if more than 30 days
have elapsed since ACCESS established the account on its records. Moreover, if
the shareholder is a corporation, partnership, trust, fiduciary, executor or
administrator, the appropriate documents appointing authorized signers
(corporate resolutions, partnerships or trust agreements) must

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<PAGE> 58
accompany the authorization card. The documents must be certified in original
form, and the certificates must be dated within 60 days of their receipt by
ACCESS.

The privilege does not carry over to accounts established through
exchanges or transfers. It must be requested separately for each fund account.

FEDERAL TAX INFORMATION

The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.

The Fund has elected to be taxed as a regulated investment company
under Sections 851-855 of the Code. This means the Fund must pay all or
substantially all its taxable net investment income and taxable net realized
capital gains to shareholders of Class A, Class B and Class C shares and meet
certain diversification and other requirements. The per share dividends on
Class B and Class C shares will be lower than the per share dividends on Class
A shares as a result of the higher distribution services and incremental
transfer agency fees applicable to the Class B and Class C shares. By
qualifying as a regulated investment company, the Fund is not subject to
federal income taxes to the extent it distributes its taxable net investment
income and taxable net realized capital gains. If for any taxable year the
Fund does not qualify for the special tax treatment afforded regulated
investment companies, all of its taxable income, including any net realized
capital gains, would be subject to tax at regular corporate rates (without any
deduction for distributions to shareholders).

If shares of the Fund are sold or exchanged within 90 days of
acquisition, and shares of the same or a related mutual fund are acquired, to
the extent the sales charge is reduced or waived on the subsequent acquisition,
the sales charge may not be used to determine the basis in the disposed shares
for purposes of determining gain or loss. To the extent the sales charge is
not allowed in determining gain or loss on the initial shares, it is
capitalized in the basis of the subsequent shares.

The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Bonds to pass through to its investors, tax-
exempt, net Municipal Bond interest income. In order for the Fund to be
eligible to pay exempt-interest dividends during any taxable year, at the close
of each fiscal quarter, at least 50% of the aggregate value of the Fund's
assets must consist of exempt-interest obligations. In addition, the Fund must
distribute at least (i) 90% of the excess of its exempt-interest income over
certain disallowed deductions, and (ii) 90% of its "investment company taxable
net income" (i.e., its ordinary taxable income and the excess, if any, of its
net short-term capital gains over any net long-term capital losses) recognized
by the Fund during the taxable year (the "Distribution Requirements").

The Fund is subject to a four percent excise tax to the extent it
fails to distribute to its shareholders at least 98% of its ordinary taxable
(net investment) income for the twelve months ended December 31, plus 98% of
its capital gain net income for the twelve months ended October 31 of such
calendar year. The Fund intends to distribute sufficient amounts to avoid
liability for the excise tax.

Not later than 60 days after the close of its taxable year, the Fund
will notify its shareholders of the portion of the dividends paid by the Fund
to the shareholders for the taxable year which constitutes exempt-interest
dividends. The aggregate amount of dividends so designated cannot exceed,
however, the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. Since the percentage of
dividends which

22
<PAGE> 59
are "exempt-interest" dividends is determined on an average annual method for
the fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax-exempt during the period covered by the dividend.

Although exempt-interest dividends generally may be treated by the
Fund's shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" or a "related person" with respect to any of
the tax-exempt obligations held by the Fund. "Substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses in his trade or business a part of any facilities financed with the tax-
exempt obligations and whose gross revenues derived from such facilities exceed
five percent of the total revenues derived from the facilities by all users, or
who occupies more than five percent of the usable area of the facilities or for
whom the facilities or a part thereof were specifically constructed,
reconstructed or acquired. Examples of "related persons" include certain
related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.

Interest on indebtedness incurred by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to
any shares and such shares are held for six months or less, any short-term
capital loss on the sale or exchange of the shares will be disallowed to the
extent of the amount of such exempt-interest dividend.

If, during any taxable year, the Fund realizes net capital gains (the
excess of net long-term capital gains over net short-term capital losses) from
the sale or other disposition of Municipal Bonds or other assets, the Fund will
have no tax liability with respect to such gains if they are distributed to
shareholders. Distributions designated as capital gains dividends are taxable
to shareholders as long-term capital gains, regardless of how long a
shareholder has held his shares. Not later than 60 days after the close of the
Fund's taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during the year which
constitute capital gain.

A capital gain dividend received after the purchase of the Fund's
shares reduces the net asset value of the shares by the amount of the
distribution and will be subject to income taxes. A loss on the sale of shares
held for less than six months (to the extent not disallowed on account of the
receipt of exempt-interest dividends) attributable to a capital gain dividend
is treated as a long-term capital loss for Federal income tax purposes.

Dividends to shareholders who are non-resident aliens may be subject
to a United States withholding tax at a rate of up to 30% under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Non-resident shareholders are urged to consult their
own tax adviser concerning the applicability of the United States withholding
tax.

BACK-UP WITHHOLDING

The Fund is required to withhold and remit to the United States
Treasury 31% of (i) reportable taxable dividends and distributions and (ii) the
proceeds of any redemptions of Fund shares with respect to any shareholder who
is not exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.)
The 31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.

23
<PAGE> 60
TREATMENT OF DIVIDENDS

While the Fund expects that a major portion of its investment income
will constitute tax-exempt interest, a portion may consist of "investment
company taxable income" and "net capital gains". As pointed out above, the
Fund will be subject to tax for any year on its undistributed investment
company taxable income and net capital gains.

It is anticipated that substantially all of the Fund's taxable income
and capital gain net income will be distributed by the Fund in order to meet
the Distribution Requirements and to avoid taxation at the Fund level.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income.

Dividends and distributions declared to shareholders of record after
September 30 of any year and paid before February 1 of the following year, are
considered taxable income to shareholders on the record date even though paid
in the next year.

Since none of the Fund's net investment income will arise from
dividends on common or preferred stock, none of its distributions are eligible
for the 70% dividends received deduction for corporations. To qualify for the
dividends received deduction, a corporate shareholder must hold the shares on
which the dividend is paid for more than 45 days.

The Tax Reform Act of 1986 (the "Tax Reform Act") added a provision
that, for taxable years beginning after December 31, 1989, 75% of the excess of
a corporation's adjusted current earnings (generally, earning and profits, with
adjustments) over its other alternative minimum taxable income is an item of
tax preference for corporations. All tax-exempt interest is included in the
definition of "adjusted current earnings" so a portion of such interest is
included in computing the alternative minimum tax on corporations. For
shareholders that are financial institutions, the Tax Reform Act eliminated
their ability to deduct interest payments to the extent allocated on a pro rata
basis to the purchase of Fund shares.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and these
Treasury regulations are subject to change by legislative or administrative
action either prospectively or retroactively.

Dividends and capital gains distributions may also be subject to state
and local taxes.

Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.

TAX TREATMENT OF FUTURES CONTRACTS AND RELATED OPTIONS

In connection with its operations, the Fund may effect transactions in
U.S. Government securities and municipal bond futures contracts ("Futures
Contracts") and in options thereon ("Futures Options"). Gains or losses
recognized by the Fund from transactions in such Futures Contracts and Futures
Options constitute capital gains and losses for federal income tax purposes and
do not therefore qualify as exempt-interest income.

With respect to a Futures Contract closed out by the Fund, any
realized gain or loss will be treated as long-term capital gain or loss to the
extent of 60 percent thereof and short-term capital gain or loss to the extent
of 40 percent thereof (hereinafter "60/40 gain or loss"). Open Futures
Contracts held by the Fund at the end of any fiscal year will be required to be
treated as sold at market value on the last day of such fiscal year for federal
income tax purposes (i.e. "marked-to-market"). Gain or loss recognized under
this mark-to-market rule is 60/40 gain or loss. The federal income tax
treatment accorded to Futures Options will be the same as that accorded to
Futures Contracts. The Distribution Requirements may limit the Fund's ability
to hold Futures Contracts and Futures Options at the end of a year.

24
<PAGE> 61
A portion of the Fund's transactions in Futures Contracts and Futures
Options, particularly its hedging transactions, may constitute "straddles" with
respect to the Fund's holdings of Municipal Securities. Straddles are defined
in Section 1092 of the Code as offsetting positions with respect to personal
property. A straddle in which at least one (but not all) of the positions are
Section 1256 contracts is a "mixed straddle" under the Code if certain
identification requirements are met.

The Code generally provides with respect to straddles (i) "loss
deferral" rules which may postpone a recognition for tax purposes of losses
from certain closing purchase transactions or other dispositions of a position
in the straddle to the extent of unrealized gains in the offsetting position,
(ii) "wash sale" rules which may postpone recognition for tax purposes of
losses where a position forming part of a straddle is sold and a new offsetting
position is acquired within a prescribed period, and (iii) "short sale" rules
which may terminate the holding period of securities owned by the Fund when
offsetting positions are established and which may convert certain losses from
short-term to long-term.

The Code provides that certain elections may be made for mixed
straddles that can alter the character of the capital gain or loss recognized
upon disposition of positions which form part of a straddle. Certain other
elections are also provided in the Code. The Fund has not determined whether
it will make any of these elections.

The Fund may acquire an option to "put" specified portfolio securities
to banks or municipal bond dealers from whom the securities are purchased. See
"Stand-By Commitments," in the Prospectus. The Fund has been advised by its
legal counsel that it will be treated for federal income tax purposes as the
owner of the Municipal Securities acquired subject to the put; and the interest
on the Municipal Securities will be tax-exempt to the Fund. Counsel has
pointed out that although the Internal Revenue Service has issued a favorable
published ruling on a similar but not identical situation, it could reach a
different conclusion from that of counsel. Counsel has also advised the Fund
that the Internal Revenue Service presently will not ordinarily issue private
letter rulings regarding the ownership of securities subject to stand-by
commitments.

RESTRICTIONS ON FUTURES CONTRACTS AND RELATED OPTIONS

Among the requirements for qualification as a regulated investment
company under the Code, the Fund must derive less than 30% of its gross income
each year from sales of securities held for less than three months. This
requirement and the mark-to-market rule may restrict the Fund's ability to:
(i) effect closing purchase transactions in Futures Contracts and Futures
Options which have been held for less than three months, and (ii) enter into
various other short-term transactions.

In addition, the Code requires that a Fund satisfy certain portfolio
diversification requirements at the end of each fiscal quarter of its taxable
year in order to maintain its qualification as a regulated investment company.
In general, no more than 25% of the value of a Fund's assets may be invested in
the securities of any one issuer and at least 50% of the value of the Fund's
assets must be represented by securities of issuers each of which separately
represents not more than five percent of the value of the total assets of the
Fund. Consequently, a Fund's ability to invest in Futures Contracts and
Futures Options may be limited.

PRIOR PERFORMANCE INFORMATION

The Fund's average annual total return for Class A shares for the
one-year, five-year and ten-year periods ended September 30, 1994, was -6.14%,
6.53% and 9.06%, respectively. The average annual total return for Class B
shares of the Fund for the one- year period ended September 30, 1994 was
- -5.86%, and for the period from September 29, 1992 (the initial offering of
Class B shares) to September 30, 1994 was 3.04%. The average annual total
return for Class C shares for the one-year period ended September 30, 1994 was
- -3.06%, and for the period from August 30, 1993 (the initial offering of Class
C shares) to September 30, 1994 was -1.05%. These results are based on
historical earnings and asset value fluctuations and are not intended to
indicate future

25
<PAGE> 62
performance. Such information should be considered in light of the Fund's
investment objective and policies as well as the risks incurred in the Fund's
investment practices.

The annualized current yield for Class A shares, Class B shares and
Class C shares of the Fund for the 30-day period ending September 30, 1994 was
4.98%, 4.40% and 4.40%, respectively. The tax equivalent yield (based on an
assumption of a tax rate of 36%) for the same period for Class A, Class B and
Class C shares of the Fund was 7.78%, 6.88%, and 6.86%, respectively. The
yield for Class A, Class B and Class C shares are not fixed and will fluctuate
in response to prevailing interest rates and the market value of portfolio
securities, and as a function of the type of securities owned by the Fund,
portfolio maturity and the Fund's expenses.

Yield and total return are computed separately for Class A, Class B
and Class C shares.

From time to time, in reports or other communications, or in
advertising or sales materials, the Adviser may announce the results of actual
tests performed by DALBAR Financial Securities, Inc., an independent research
firm, as they relate to the level of services for mutual fund investors and may
refer to the Missouri Quality Award received by ACCESS, the Fund's transfer
agent, in 1993. In addition, the Adviser may also refer to the Houston Awards
for Quality received by American Capital in 1994.

From time to time, VKAC will announce the results of its monthly polls
of U.S. investor intentions -the American Capital Index of Investor
Intentions(SM) and the American Capital Mutual Fund Index(SM) - which polls
measure how Americans plan to use their money.

The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising
market; (3) illustrate allocations among different types of mutual funds for
investors at different stages of their lives; and (4) in reports or other
communications to shareholders or in advertising material, illustrate the
benefits of compounding at various assumed rates of return. Such illustrations
may be in the form of charts or graphs and will not be based on historical
returns experienced by the Fund.

OTHER INFORMATION

Custody of Assets - All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.

Shareholder Reports - Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.

Independent Accountants - Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, perform an annual audit of the
Fund's financial statements.

FINANCIAL STATEMENTS

Financial Statements including Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets, Notes
to Financial Statements, Financial Highlights and Report of Independent
Accountants on such financial statements, are hereby incorporated by reference
to the Fund's Annual Report previously filed with the SEC on or about December
1, 1994.

26
<PAGE> 63
The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares aggregating less than $100,000
subject to the schedule of sales charges set forth in the Prospectus at a price
based upon the net asset value of Class A shares of the Fund.

<TABLE>
<CAPTION>
September 30, 1994
------------------
<S> <C>
Net Asset Value per
Class A Share $ 9.82

Class A Per Share Sales Charge -
4.75% of offering price
(4.99% of net asset value
per share) $ .49
------

Class A Per Share Offering
Price to the Public $10.31

</TABLE>

27
<PAGE> 64
APPENDIX
RATINGS OF INVESTMENTS

Ratings of Municipal Bonds
Descriptions of Moody's Investors Service, Inc. ("Moody's") Municipal Bond
Ratings:

Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

A - Bonds which are rated A possess many favorable investment
attributes and are to be considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.

Baa - Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.

Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.

B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.

Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3
in each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a midrange
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.

Short-term Notes: The four ratings of Moody's for short-term notes
are MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk but having protection...and not
distinctly or predominantly speculative."

28
<PAGE> 65
Beginning on February 5, 1985, Moody's started new rating categories
for variable rate demand obligations ("VRDO's"). VRDO's receive two ratings.
The first rating, depending on the maturity of the VRDO, is assigned either a
bond or MIG rating which represents an evaluation of the risk associated with
scheduled principal and interest payments. The second rating, designated as
"VMIG," represents an evaluation of the degree of risk associated with the
demand feature. The new VRDO's demand feature ratings and symbols are:

VMIG 1: strong protection by established cash flows, superior
liquidity support, demonstrated access to the market for
refinancing.

VMIG 2: ample margins of protection, high quality.

VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well
established.

VMIG 4: adequate quality, not predominantly speculative but there is
risk.

Descriptions of Moody's Commercial Paper Ratings

Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers. The first two are described below:

Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term
promissory obligations.

Issuers rated Prime-2 (or related supporting institutions)
have a strong capacity for repayment of short-term
promissory obligations.

Description of Standard & Poor's Corporation's ("S&P") Municipal Debt Ratings:

A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.

The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.

The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources S&P considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
for other reasons.

The ratings are based, in varying degrees, on the following
considerations:

I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the obligation;

II. Nature of and provisions of the obligation;

III. Protection afforded by, and relative position of the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditor's rights.

29
<PAGE> 66
AAA Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.

AA Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest-rated
issues only in small degree.

A Debt rated "A" has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories.

BBB Debt rated "BBB" is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated
categories.

BB,B Debt rated "BB" and "B" is regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of
speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.

Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.

Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.

NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that S&P does
not rate a particular type of obligation as a matter of policy.

A S&P Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The highest category is "A" which is further defined with the
designation of 1, 2 and 3 to indicate the relative degree of safety. The first
two categories are described below:

A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment.

A-1 This designation indicates that the degree of safety
regarding timely payment is very strong.

A-2 Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".

The Commercial Paper Rating is not a recommendation to purchase or
sell a security. The ratings are based on current information furnished to S&P
by the issuer and obtained by S&P from other sources it considers reliable.
The ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.

30
<PAGE> 67
Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:

SP-1 A very strong, or strong, capacity to pay principal and
interest. Issues that possess overwhelming safety
characteristics will be given a "+" designation.

SP-2 A satisfactory capacity to pay principal and interest.

SP-3 A speculative capacity to pay principal and interest.

S&P may continue to rate note issues with a maturity greater than
three years in accordance with the same rating scale currently employed for
municipal bond ratings.

S&P assigns dual ratings to all long-term debt issues that have a
demand or put feature. The first rating addresses the likelihood of repayment
of principal and interest as due, and the second rating addresses the demand
feature alone. Long-term debt rating symbols are used for the long-term
maturity and commercial paper rating symbols are used for the put option (for
example, AAA/A-1+). For demand notes, S&P's note rating symbols are used with
the commercial paper symbols (for example, SP-1+/a-1+).

Rating criteria described in the Prospectus are applied on the basis
of the highest rating applicable to the Municipal Security. This applies to
split rated securities (i.e., different ratings by Moody's and S&P) and dual
rated securities as described above.

Subsequent to its purchase by the Fund, an issue of Municipal Bonds or
a Temporary Investment may cease to be rated or its rating may be reduced,
causing more than 20% of the Fund's assets invested in Municipal Bonds to be
invested in low or non-rated bonds. This would not require the elimination of
such obligation from the Fund's portfolio, but the Adviser will consider such
an event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by S&P or
Moody's for Municipal Bonds or Temporary Investment may change as a result of
changes in such organizations, or changes in their rating systems, the Fund
will attempt to use comparable ratings as standards for its investments in
Municipal Bonds or Temporary Investments in accordance with the investment
policies contained herein.

31
<PAGE> 68
===============================================================================

AMERICAN CAPITAL
FAMILY OF FUNDS

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

NEW ACCOUNT
APPLICATION*
FOR CLASS A, CLASS B, AND CLASS C SHARES

FOR ASSISTANCE CALL 1-800-421-5666

*IF YOU WISH TO OPEN A RETIREMENT PLAN WITH
AMERICAN CAPITAL TRUST COMPANY AS CUSTODIAN,
PLEASE CALL US FOR AN APPROPRIATE APPLICATION.

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

{AMERICAN CAPITAL LOGO}

999APL-007 REV 1294

================================================================================

<PAGE> 69

AMERICAN CAPITAL'S CHECK-WRITING PRIVILEGE
(AVAILABLE ON CLASS A SHARES, FIXED-INCOME ACCOUNTS ONLY)

American Capital offers a check-writing privilege to provide you with
quick liquidity for major purchases and emergency needs. Simply complete the
AUTHORIZATION FOR REDEMPTION BY CHECK below.

When your application for this privilege has been received and
processed, you will receive a supply of special checks which you may write
against your fund account made payable to any person in amounts of $100 or
more. When a check is presented to the Custodian for payment, full and
fractional shares required to cover the amount of the check will be redeemed
from your account at the next determined net asset value.

Please note that, since the share prices of the selected income funds
fluctuate daily, use of the check-writing privilege in these funds can result
in the liquidation of shares at a profit or a loss from the time of your
purchase and may be considered a taxable event. Consequently, while this
privilege can provide you with easy liquidity, it is not meant to be used as
a regular checking account.

- -If the amount of your check is greater than the value of your fund account
at the time the redemption is processed by ACCESS (the fund's service agent),
the check will be returned and you may be subject to additional charges.

- -You may not liquidate your entire account by means of a check.

- -No check will be accepted if written for an amount less than $100.

- -A "stop payment" system is not available with this privilege.

- -Checks will not be honored for redemption of shares held less than 15 days,
unless these shares were paid for by bank wire.

- -Any shares which are escrowed due to Letter of Intent requirements or which
are represented by outstanding certificates may not be redeemed by check.

- -If the shareholder is a corporation, partnership, trust, fiduciary, executor
or administrator, the appropriate documents appointing authorized signers
(corporate resolutions, partnership or trust agreements) must accompany the
Authorization Card. The documents must be certified in original form and the
certifications must be dated within 60 days of their receipt by ACCESS.

- -All signatures on the Authorization Card must be guaranteed if any of the
signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its
records.

- -This privilege is not available to accounts with missing social security
numbers, uncertified TIN numbers, accounts subject to backup withholding or
retirement plan accounts.

- -The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.

- -For additional information on the Check-Writing Privilege, call the American
Capital Service Line toll-free at 1-800-421-5666. This line is available from
7a.m. to 7p.m. central time any business day.

CUT ON PERFORATED LINE
- --------------------------------------------------------------------------------
AUTHORIZATION FOR REDEMPTION BY CHECK - CLASS A SHARES, FIXED INCOME ACCOUNT
ONLY

- ----------------------------------- -------------------- ------------------
American Capital Fund Name ("Fund") Acct # (If Existing) # of signatures
required on checks

- --------------------------------------------------------------------------------
Name(s) of all authorized persons as they will appear on checks: (Please Print)

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

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

Signature(s) of all registrants as they appear on the account:

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

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

By signing, the signator(s) agrees to the conditions on the reverse side
hereof. If multiple signatures, each signatory guarantees the other's
signature. If the account has been established for more than 30 days or any
signator is not referenced in the account registration, all signatures must
be guaranteed.

SIGNATURE GUARANTEE
All signatures must be guaranteed.
GUARANTEE STAMP HERE

- ---------------------------------------------
SIGNATURE GUARANTEED BY (a Bank or Trust
Company; a Broker/Dealer; a Credit Union;
a National Securities Association or Clearing
Agency; a Savings and Loan Association; or a
Federal Savings Bank.)

<PAGE> 70

EASY TEAROUT
APPLICATION

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

DETACH APPLICATION
FROM THE PERFORATED EDGE

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

ENCLOSE CHECK WITH
THE COMPLETED APPLICATION
AND MAIL TO:

AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 419319
KANSAS CITY, MO 64141-6319

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

{AMERICAN CAPITAL LOGO}

<PAGE> 71

TELEPHONE TRANSACTION AUTHORIZATION

AUTHORIZATION AND AGREEMENT

The registrant hereby authorizes ACCESS to accept and act conclusively upon
telephone instructions from me, anyone other than me representing himself to
be me, or any person purporting to represent me in effecting a redemption of
specified share or dollar amount or in effecting exchanges of shares of one
(or more) American Capital managed fund(s) (the "Fund" or "Fund(s)" or
"Funds") for which such an exchange is available. American Capital Management
& Research, Inc. and its subsidiaries, including Access (collectively,
"American Capital"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither
American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. American Capital and
the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. I understand and agree
to indemnify and hold harmless American Capital and the Funds from any
liability (including attorney's fees) arising directly or indirectly from any
act or omission to act hereunder not occasioned by their gross negligence or
willful misconduct. I understand that the redemption and/or exchange
privilege may be modified or terminated at any time. I also understand that
these privileges are subject to the conditions and provisions set forth
herein and in the current prospectuses of the Funds. For each exchange, I
will have received and perused a copy of the then current prospectus of the
Fund being purchased. In the case of a registrant other than an individual, I
certify that the organization has the authority to transact telephone
exchanges. I will notify ACCESS of any change in such authority. Telephone
Redemptions may be executed on all accounts other than retirement accounts.
This Authorization shall be effective upon receipt by ACCESS. It
shall in all respects be interpreted, enforced and governed under the laws of
the State of Missouri. Any suit, claim or action hereunder against American
Capital and the Funds shall have as its sole venue the County of Harris,
State of Texas.
If any provision of this Authorization is declared by any court to
be illegal or invalid, the validity of the remaining parts shall not be
affected thereby, and the illegal or invalid portion shall be deemed stricken
from this Authorization.

CONDITIONS
1. Telephone redemption and/or exchange instructions received before the
pricing of the Fund on any day on which the New York Stock Exchange is
open for business (a "Business Day"), but not later than 3:00 p.m. central
time, will be processed at that day's closing net asset value. For each
exchange my account shall be charged an exchange fee noted in the then
current prospectus. There is no fee for telephone redemption; however,
redemptions of Class B and Class C shares are subject to a contingent
deferred sales charge (See "Redemption of Shares" in the appropriate
Funds' prospectus.
2. Telephone redemption and/or exchange instructions should be made by
dialing 1-800-421-5684.
3. A waiting period as described in each Fund's Prospectus may apply to
exchanges. Exchanges will not be requested prior to the expiration of any
waiting period or in violation of any of the terms and conditions of any
of the Funds' prospectuses and I agree to indemnify American Capital and
the Funds against any harm occasioned by their compliance with an improper
order under any of the Funds' prospectus.
4. Telephone redemption requests in excess of $50,000 will not be allowed.
To transact redemptions over this dollar amount, a written request must be
directed to ACCESS. (See "Redemption of Shares" in the appropriate
Funds' prospectus for any additional requirements.)
5. Telephone redemption requests must meet the following conditions to be
accepted by ACCESS:
(a) Proceeds of the redemption may be directly deposited into
predetermined bank account, or the current address on the
registration. This address cannot reflect any change within the
previous sixty (60) days.
(b) Certain account information will need to be provided for verification
purposes before the redemption will be executed.
(c) Only one telephone redemption can be processed within a 30 day
period.
6. If the Fund to which an exchange of Class A Shares is made has a sales
charge greater than the Fund from which the exchange is made, either a
full, partial or no sales charge may be imposed depending on the
particular Fund from which such exchange has occurred. See the current
prospectus.
7. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Fund being acquired.
8. Any new account established through the exchange privilege will have
the same account information and options except as stated in the current
prospectus and be subject to this authorization.
9. Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to ACCESS and deposited into the customer's account
before any transaction may be processed.
10. If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares of
the Fund to be purchased on the exchange having the same aggregate net
asset value as the shares being exchanged shall be substituted in the
escrow account. Shares held in escrow may not be redeemed until the Letter
of Intent has expired and/or the appropriate adjustments have been made to
the account.
11. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to each Fund's current
prospectus.
12. I agree that my ability to exchange and/or redeem under this
authorization may be cancelled, modified or restricted at any time
indiscriminately at the sole discretion of American Capital or by the
Fund(s).

INFORMATION PERTAINING TO THIS LETTER OF INTENT
Subject to conditions specified below, each purchase of shares of the Fund or
shares of one or more of the Participating Funds within the American Capital
family of funds during the 13-month period subsequent to the effective date
of this Application will be made at the public offering price applicable to a
single transaction of the dollar amount indicated, as described in the then
effective prospectus. The offering price may be further reduced under the
Cumulative Purchase Discount if ACCESS is advised of any shares of this or
other American Capital fund(s) previously purchased and still owned. The
purchaser may at any time during the period revise upward the stated
intention by submitting a written request to this effect. Such revision shall
provide for the escrowing of additional shares. The original period of the
Letter, however, shall remain unchanged. Each separate purchase made pursuant
to the Letter is subject to the terms and conditions contained in the
prospectus in effect at the time of that particular purchase. It is
understood that the purchaser makes no commitment to purchase additional
shares, but that if those shares previously purchased at public offering
price under the Cumulative Purchase Discount, together with purchases so made
within thirteen months from this date do not aggregate the amount specified
when valued at the public offering price, the purchaser will pay the
increased amount of sales charge prescribed in the terms of escrow. The
purchaser(s) or the purchaser's dealer must refer to this Letter of Intent in
placing each future order for shares while this Letter is in effect. It is
understood that, when remitting funds directly to ACCESS for investment in an
account, specific reference must be made to this Letter. This cancels and
supersedes any previous instructions which the purchaser may have given
inconsistent with the above.

TERMS OF ESCROW
1. To assure compliance with provisions of the Investment Company Act of
1940, out of the initial purchase 5% of the dollar amount indicated on the
Application will be held in escrow in the form of shares (computed to the
nearest full share at the applicable public offering price) registered in
the purchaser's name. These shares will be held at ACCESS and be subject
to the terms of escrow.
2. If total purchases pursuant to this Letter equal the amount specified at
the expected aggregate purchases, escrow shares will be released from
restriction.
3. If the total purchases pursuant to this Letter are less than the amount
specified, the purchaser shall remit to ACCESS an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases
if all such purchases had been made at a single time. If ACCESS, within 10
business days after request, does not receive said difference in sales
charge, ACCESS will redeem an appropriate number of escrow shares to
realize such difference. If the proceeds from this redemption are
inadequate, the purchaser will be liable to ACCESS for the difference. The
remaining shares after the redemption will be deposited to the purchaser's
account unless otherwise instructed.
4. The purchaser hereby irrevocably constitutes and appoints ACCESS as
attorney to surrender for redemption any or all shares on the books of the
Fund, under the conditions previously outlined, with full power of
substitutions in the premises.

PROVISIONS FOR PRICE ADJUSTMENT
If total purchases made under this Letter of Intent and the Cumulative
Purchase Discount are large enough to qualify for a lower sales charge than
that applicable to the amount initially specified, or if trades not initially
made under this Letter subsequently qualify for a lower sales charge through
the 90-day back-dating provisions, an adjustment will be made at the
expiration of this Letter to give effect to the lower charge. Such adjustment
in sales charge will be used to purchase additional shares for the shareowner
at the applicable discount category.

CANCELLATION OR LIQUIDATION
If at any time prior to or after completion of this Letter of Intent the
purchaser wishes to cancel this Letter, the purchaser must notify ACCESS in
writing. If at any time prior to the completion of this Letter of Intent the
purchaser requests ACCESS to liquidate his total shares, a cancellation of
this Letter will be effected automatically. Under either of the above
conditions the total purchased pursuant to this Letter may be less than the
amount specified as the expected aggregate purchases. If so, ACCESS will
redeem at net asset value an appropriate number of escrow shares to remit to
the Distributor and to the appropriate dealer an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases if
all such purchases would have been made at a single time.

REDUCED SALES CHARGES
Some defined individuals may qualify for a reduced sales charge. (See the
"Purchase of Shares -- Volume Discounts" in the prospectus.)

DEALER AGREEMENT
Under these plans, the dealer signing the application acts as principal in
all purchases of Fund shares and appoints ACCESS as its agent to execute the
purchases and to confirm each purchase to the investor. ACCESS remits monthly
to the dealer the amount of its commissions. The dealer hereby guarantees the
genuineness of the signature(s) on the application and represents that he is
a duly licensed dealer and may lawfully sell Fund shares in the state
designated by the investor's mailing address, and that he has entered into a
Selling Group Agreement with the Distributor with respect to the sale of Fund
shares. The dealer signature on the Application, signifies acceptance of the
concession terms, and acceptance of responsibility for obtaining additional
sales charges if specified purchases are not completed.

CUT ON PERFORATED LINE
- -------------------------------------------------------------------------------

I/WE HAVE READ AND UNDERSTAND THE CONDITIONS THAT FOLLOW:
When a check is presented to the Bank for payment, the Bank will present
the check to the Fund as authority to redeem a sufficient number of shares
presently or hereafter registered in the previous account name on the
shareholder records of the Fund to cover the amount of the check. Checks may
not be for less than $100. The Fund is hereby authorized and directed to
accept and act upon checks presented by the Bank and to redeem a sufficient
number of shares presently or hereafter registered in the previous account
name on the shareholder records of the Fund and forward the proceeds of such
redemption to the Bank. The signator(s) understands and agrees that the Fund
and/or its agents will not be liable for any loss, expense or cost arising
out of check redemptions. The signator(s) will be subject to the terms of the
Fund's current offering prospectus and the Bank's rules and regulations, as
now in effect and as amended from time to time, including the right of the
Bank not to honor checks in amounts exceeding the value of the account at the
time the check is presented for payment. The Bank has reserved the right to
change, modify or terminate this check-writing privilege at any time. Checks
will not be honored for redemption of shares held less than fifteen (15) days
unless such shares have been paid for by bank wire.
I/We certify and agree that the certifications, authorizations and
appointments contained in this document will continue in effect until ACCESS,
the Fund's service agent, receives actual written notice of any change
thereof, and, to the extent of the amount of any check accepted by the Fund
for the purchase of shares or as authorization to redeem shares, the Fund
shall have a security interest in such shares.

<PAGE> 72

ALL SECTIONS ON THIS PAGE MUST BE COMPLETED FOR ACCOUNT TO BE ESTABLISHED.

AMERICAN CAPITAL FAMILY OF FUNDS {AMERICAN
NEW ACCOUNT APPLICATION CAPITAL LOGO}

SEND COMPLETED APPLICATION TO: AMERICAN CAPITAL COMPANIES SHAREHOLDER
SERVICES, INC., P.O. Box 419319, Kansas City, Missouri 64141-6319

================================================================================

1. ACCOUNT OWNER INFORMATION
TYPE OF ACCOUNT
(Check one only)

/ / INDIVIDUAL __________ ______________ ___________ _______________________
First Name Middle Initial Last Name Social Security Number
(first individual only)

/ / JOINT ______________ ______________ __________________________
TENANT Joint Tenant's Middle Initial Last Name
First Name

/ / GIFT/
TRANSFER
TO MINOR __________________________________ __________________________
Custodian's Name (one only) Minor's Name (one only)

/ / GUARDINSHIP/
CONSERVATOR-
SHIP ____________________ ___________________ ___________________
Guardian/Conservator Ward/Incompetent Ward/Incompetent
or Minor's Name or Minor's Social
(one only) Security Number

/ / CORPORATION,
PARTNERSHIP, __________________________________________ __________________
TRUST OR Exact Name of Corporation, Tax Identification
OTHER Partnership or other Organization Number
ORGANIZATION _______________________________________________________________
Trustee Accounts Only: Name of all Trustees required by trust
agreement to sell/purchase shares

______________ _________________ _________________________
Date of Trust Name of Trust Tax Identification Number

/ / OTHER _______________________________________________________________

/ / CHECK HERE IF YOU ARE SUBJECT TO BACKUP WITHHOLDING

================================================================================

2. MAILING ADDRESS
____________ ____________ ____________ ____________ ____________
Street Apartment City State Zip Code
Address Number

( ) ( )
______________ ____________ Citizenship ______________________
Business Phone Home Phone / / U.S. / / Other Indicate County

================================================================================

3. FUND SECTION

PLEASE INDICATE DOLLAR AMOUNT IN SPACE PROVIDED, $500 MINIMUM FOR EACH
FUND. IF MORE THAN ONE FUND IS SELECTED, ACCOUNTS MUST HAVE IDENTICAL
REGISTRATIONS, CLASS OF SHARES AND OPTIONS.

FIXED INCOME FUNDS
$________ AC Corporate Bond Fund
$________ AC Federal Mortgage Trust
$________ AC Global Government Securities Fund
$________ AC Government Securities
$________ AC High Yield Investments
$________ AC Municipal Bond Fund
$________ AC Reserve Fund (A shares only)
$________ AC Tax-Exempt Trust High Yield Municipal Portfolio
$________ AC Tax-Exempt Trust Insured Municipal Portfolio
$________ AC Texas Municipal Securities
$________ AC U.S. Government Trust for Income
$________ Other ______
$________ TOTAL AMOUNT ENCLOSED

EQUITY FUNDS
$________ AC Comstock Fund
$________ AC Emerging Growth Fund
$________ AC Enterprise Fund
$________ AC Equity Income Fund
$________ AC Global Equity Fund
$________ AC Global Managed Assets Fund
$________ AC Growth & Income Fund
$________ AC Harbor Fund
$________ AC Pace Fund
$________ AC Real Estate Securities Fund
$________ AC Utilities Income Fund
$________ Other
$________ TOTAL AMOUNT ENCLOSED

CLASS OF SHARES
(Must select one only)

/ / A SHARES
(front-end sales charge)

/ / B SHARES
(contingent deferred sales charge)

Class B shares are not available for
purchases of $250,000 or more

/ / C SHARES
(contingent deferred sales charge)

Class C shares are not available for
purchases of $1 million or more

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

MAKE CHECK PAYABLE TO THE SPECIFIC AMERICAN CAPITAL FUND. IF MORE
THAN ONE FUND IS SELECTED, MAKE CHECK PAYABLE TO "AMERICAN CAPITAL
FAMILY OF FUNDS."

================================================================================

4. DISTRIBUTION OPTIONS

(Check one only) -- If no option is selected, all distributions will be
reinvested into the Fund that pays them.

/ / Reinvest all dividend and capital gains into the Fund that pays them.

/ / Reinvest all dividends and capital gains into an existing account in
another American Capital Fund. (Must be like class of shares.)

__________________________________ _____________________________________
Fund Name Account Number

/ / Pay all dividends and reinvest capital gains.
OR
/ / Pay all dividends and capital gains.
(IF EITHER PAY OPTION IS SELECTED,
COMPLETE INFORMATION AT RIGHT)

I request the payable distributions be: (Check one.)

/ / Sent to the address in Section 2.

/ / Directly deposited in my bank account. (Please attach a voided check to
Section 6.) If voided check is not enclosed, will be sent to address in
Section 2.

/ / Sent to special payee listed in Section 10.

===============================================================================

5. INVESTMENT PROFESSIONAL

____________________________________ ______________________________________
Broker/Dealer Name Investment Professional's Name

____________________________________ ______________________________________
Branch Office Address Investment Professional's
Representative Number

____________________________________ ________________ __________________
City State Zip Code

____________________________________ ______________________________________
Investment Professional's Phone Authorized Signature of Broker/dealer

===============================================================================

6. SIGNATURES

I have read the prospectus and application for the Fund in which I am
investing and agree to its terms. I am also aware that a Telephone
Exchange Privilege exists and that this privilege is automatically
available unless affirmatively declined. I also understand that if the
Fund fails to follow the procedures outlined in the prospectus and in the
Telephone Transaction Authorization hereto, it may be liable for any
losses due to unauthorized or fraudulent instructions. See Telephone
Transaction Authorization section for procedures. I am of legal age.
Sign below exactly as printed in registration. For joint registration,
both must sign. Under penalty of perjury, I certify with my signature
below that the number shown in section one is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
__________________________________________________________________________
Signature Date

__________________________________________________________________________
Signature Date

ATTACH VOIDED CHECK HERE _____________________
(IF APPROPRIATE)

For Corporations, Trusts, or Partnerships: We hereby certify that each of
the persons listed below has been duly elected, and is now legally holding
the office set forth opposite his/her name and has the authority to make
this authorization.

Please print titles below if signing on behalf of a business or trust to
establish this account.

__________________________________________________________________________
President, Trustee, General Partner or Title

__________________________________________________________________________
Co-owner, Secretary of Corporation, Co-trustee, etc.

================================================================================

7. ACCOUNT OPTIONS

For account options, please complete the reverse side of this account
application. Account options are:

- Cumulative Purchase Discount
- Letter of Intent
- Automatic Investment Plan (AIP)
- Systematic Exchange
- Telephone Exchange
- Checkwriting (Available on Class A shares, Fixed Income Accounts Only)
- Dividend Mail
- Interested Party Mail
- Systematic Withdrawal (for Class B and Class C shares see prospectus)
- Telephone Redemption

================================================================================

THIS APPLICATION IS NOT A PART OF THE PROSPECTUS.
<PAGE> 73

================================================================================
8. PURCHASE OPTIONS

CUMULATIVE PURCHASE DISCOUNT

/ / I qualify for cumulative discount with the account(s) listed below.

_____________________________________ _____________________________________
Fund Name Account Number

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

LETTER OF INTENT (Check one only)

/ / I wish to establish a new letter of intent. (If cumulative discount or
90-day backdate privilege is applicable, provide the amount and
account(s) information below.)

/ / Please apply this purchase to an existing Letter of Intent with the
account(s) listed below.

/ / Please amend my existing Letter of Intent with the new amount indicated
below.

If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the prospectus.
The aggregate amount of these purchases will be at least equal to the amount
listed below:

/ / $50,000* / / $100,000 / / $250,000 / / $500,000 / / $1,000,000
*Equity Funds Only

_____________________________________ _____________________________________
Fund Name Account Number

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

AUTOMATIC INVESTMENT PLAN (AIP)--AUTOMATIC MONTHLY INVESTING

/ / I wish to invest on a monthly basis, directly from my checking account into
the following fund(s).
(PLEASE ATTACH A VOIDED CHECK TO SECTION 6.)

____________________ ____________________ _____________________
Fund Name Fund Name Fund Name

Amount $____________, to start _____________ of _____________, _____________
Minimum $25 Day Month Year

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

STEP UP PLAN OPTION -- THIS OPTION IS AVAILABLE WHEN AN AUTOMATIC INVESTMENT
PLAN IS SELECTED. (ALL SECTIONS MUST BE COMPLETED TO ESTABLISH OPTION)

A. I wish to increase my AIP / / Quarterly / / Semi-Annually / / Annually
B. To start ______________ of ___________.
Month Year
C. Check one only:
Amount Increase / / $10 / / $25 / / $50 Other (Specify amount-
min. $10) _________________
OR
Percentage Increase / / 10% / / 25% / / 50% Other (Specify percentage-
min. 10%) _________________

===============================================================================

9. ADDITIONAL OPTIONS

SYSTEMATIC EXCHANGE--ACCOUNTS MUST HAVE THE SAME CLASS OF SHARES.

/ / I wish to establish a systematic monthly exchange
from ______________ into the ______________ Fund.
Fund Name Fund Name

/ / Exchange $___________ monthly into my existing account ______________.
Minimum $25 Account Number

/ / Exchange $____________ monthly into a new account.
Minimum $100

Start the exchanges on _______________ of _______________, _______________.
Day Month Year

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

TELEPHONE EXCHANGE--IF ACCEPTED ACCOUNTS MUST HAVE THE SAME ACCOUNT
INFORMATION, OPTIONS AND CLASS OF SHARES.

/ / I decline telephone exchange, and do not want this privilege. (See
Telephone Transaction Authorization section for procedures.)

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

SYSTEMATIC WITHDRAWAL PLAN--FOR CLASS B AND CLASS C SHARE LINITATIONS,
SEE PROSPECTUS.
(Minimum account balance for monthly SWP is $10,000 and quaterly SWP is
$5,000.)

/ / I wish to automatically withdraw $_____________ from this account.
Minimum $25

/ / Monthly / / Quarterly / / Semi-Annually / / Annually

I request this distribution be: (Check One)

/ / Sent to the address listed in Section 2. To begin ____________
Month
of __________. (Will occur about the 21st of the month.)
Year

/ / Sent to the special payee listed in Section 10. to begin __________
Month
of __________. (Will occur about the 21st of the month.)
Year

/ / Directly deposited in my bank account. (PLease attach a voided check
to Section 6.) To begin __________ of __________, __________.
Day Month Year

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

TELEPHONE REDEMPTION--AVAILABLE ON ALL NON-RETIREMENT ACCOUNTS.

/ / I wish to redeem shares by telephone and request that the redemption
proceeds be sent to the address listed in Section 2.

/ / I wish to redeem shares by telephone and request that the proceeds be
directly deposited into my bank account. (Please attach a voided
check to Section 6.) (if voided check is not enclosed, will be sent
to address in Section 2.)

/ / I decline telephone redemption, and do not want this privilege.

See Telephone Authorization section for procedures.

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

CHECKWRITING--AVAILABLE ON CLASS A SHARES, FIXED-INCOME ACCOUNTS ONLY.

/ / I wish to redeem shares by check ($100 minimum per check).

Please complete the Authorization for Redemption by Check (on back
cover) and attach to the application in Section 6.

================================================================================

10. INTERESTED PARTY MAIL/DIVIDENDS MAIL

/ / I wish to have my distributions sent to the address listed below.

/ / I wish to have duplicate confirmation statements sent to the
interested party listed below.

___________________________________________________________________________
Name of Individual

___________________________________________________________________________
Street Address

___________________________ _____________________ ___________________
City State Zip Code

===============================================================================

THIS APPLICATION IS NOT A PART OF THIS PROSPECTUS.

<PAGE> 74

EASY TEAROUT
APPLICATION

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

DETACH APPLICATION
FROM THE PERFORATED EDGE

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

ENCLOSE CHECK WITH
THE COMPLETED APPLICATION
AND MAIL TO:

AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 419319
KANSAS CITY, MO 64141-6319

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

{AMERICAN CAPITAL LOGO}