<PAGE> 1
- --------------------------------------------------------------------------------
AMERICAN CAPITAL TAX-EXEMPT TRUST
- --------------------------------------------------------------------------------
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
April 3, 1995
American Capital Tax-Exempt Trust (the "Fund") is a mutual fund whose
objective is to provide as high a level of current income exempt from federal
income tax as is consistent with the investment policies of each Portfolio.
The High Yield Municipal Portfolio invests principally in medium to lower
rated tax-exempt debt securities. LOWER RATED SECURITIES ARE REGARDED BY THE
RATING AGENCIES AS PREDOMINANTLY SPECULATIVE WITH RESPECT TO THE ISSUER'S
CONTINUING ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS. The Portfolio is
designed for investors willing to assume additional risk in return for above
average income. Investors should assess carefully the risks associated with an
investment in the Portfolio.
The Insured Municipal Portfolio invests principally in tax-exempt debt
securities covered by insurance guaranteeing the timely payment of principal at
maturity and interest. See "Insured Municipal Portfolio" herein regarding the
nature and limitations of such insurance.
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 entire 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
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AMERICAN CAPITAL TAX-EXEMPT TRUST
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CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICE AGENT:
ACCESS Investor 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
INVESTMENT SUBADVISER:
Van Kampen American Capital Advisors, Inc.
40 Broad Street
Boston, Massachusetts 02110
DISTRIBUTOR:
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary................ 2
Expense Synopsis.................. 5
Financial Highlights.............. 7
Multiple Pricing System........... 9
Investment Objective and
Policies........................ 11
High Yield Municipal
Portfolio.................... 11
Insured Municipal Portfolio..... 13
Municipal Securities.............. 14
Investment Practices and
Restrictions.................... 15
The Fund and Its Management....... 17
Purchase of Shares................ 18
Distribution Plans................ 23
Shareholder Services.............. 24
Redemption of Shares.............. 27
Dividends, Distributions and
Taxes........................... 28
Prior Performance Information..... 30
Additional Information............ 31
</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
- --------------------------------------------------------------------------------
SHARES OFFERED. Shares of beneficial interest in the two Portfolios described
below.
MINIMUM PURCHASE. $500 minimum initial investment in each Portfolio and $25
minimum for each subsequent investment (or less as described under "Purchase of
Shares").
TYPE OF COMPANY. Open-end management investment company. The Fund and each
Portfolio is diversified.
INVESTMENT OBJECTIVE. As high a level of interest income exempt from federal
income tax as is consistent with the investment policies of each Portfolio.
There is, however, no assurance that a Portfolio will be successful in achieving
its objective.
INVESTMENT POLICY. Each Portfolio invests under normal market conditions at
least 80% of its net assets in obligations issued by states, territories or
possessions of the United States and the District of Columbia and their
2
<PAGE> 3
political subdivsions, the interest from which is exempt from federal income tax
("Municipal Securities"). Each Portfolio may acquire stand-by commitments. See
"Investment Practices and Restrictions -- Stand-By Commitments." Each Portfolio
may seek to hedge investments through transactions in futures contracts and
related options. Any net gains from futures and options transactions are subject
to federal income tax. See "Investment Practices and Restrictions -- Futures
Contracts and Related Options."
HIGH YIELD MUNICIPAL PORTFOLIO. Invests principally in medium to lower rated
Municipal Securities. This Portfolio normally can be expected to provide a
higher yield than the Insured Municipal Portfolio, but will also be subject to a
higher market and financial risk. See "Risk Factors" below.
INSURED MUNICIPAL PORTFOLIO. Invests principally in Municipal Securities
covered by insurance guaranteeing the timely payment of principal at maturity
and interest. Such insurance reduces financial risk but not market risk and does
not insure the shares of the Portfolio owned by the investor.
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") serves as investment adviser to the Fund. The Adviser provides
investment advice to 47 investment company portfolios. Van Kampen American
Capital Advisors, Inc. (the "Subadviser") provides advisory services to the
Adviser with respect to High Yield Municipal Portfolio. See "The Fund and Its
Management." The Adviser and the Subadviser are sometimes referred to as the
"Advisers."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").
MULTIPLE PRICING SYSTEM. Each Portfolio 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. Each class of shares
represents an interest in the same portfolio of investments of the Portfolio.
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."
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. Each Portfolio 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." Each Portfolio 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." Each Portfolio 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. Dividends from net investment income are declared on each business
day and distributed monthly. Such distributions are automatically reinvested
(without sales charge) in additional shares at the next determined net asset
value per share. Payment in cash may be requested. Shares begin accruing
dividends on the day on which payment for the shares is received by the
shareholder service agent, ACCESS Investor Services, Inc. ("ACCESS"). See
"Dividends, Distributions and Taxes."
RISK FACTORS. Differences in the investment policies of the two Portfolios
with respect to the maturity and quality of investments can be expected to
affect the yield on each Portfolio and the degree of market and financial risk
to which such Portfolio is subject. Generally, Municipal Securities with longer
maturities tend to produce higher yields and are subject to greater market
fluctuations as a result of changes in interest rates ("market risk") than are
Municipal Securities with shorter maturities and lower yields. Lower rated
Municipal Securities generally provide a higher yield than higher rated
Municipal Securities of similar maturity but are subject to greater market risk
and are also subject to a greater degree of risk with respect to the ability of
the issuer to meet its principal and interest obligations ("financial risk").
Use of futures, options on futures, and other instruments involves certain
risks. See "Investment Practices and Restrictions -- Repurchase Agreements,
Stand-By Commitments, and Futures Contracts and Related Options." The Portfolios
may experience high portfolio turnover which involves higher transaction costs
and may result in short-term gains taxable as ordinary income. See "Investment
Practices and Restrictions -- Portfolio Turnover."
3
<PAGE> 4
ADDITIONAL RISK FACTORS OF THE HIGH YIELD MUNICIPAL PORTFOLIO. The lower rated
Municipal Securities in which the High Yield Municipal Portfolio invests are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Because investment in lower
rated Municipal Securities (commonly referred to as junk bonds) involves greater
investment risk, achievement of the Portfolio's investment objectives may be
more dependent on the Advisers' credit analysis than would be the case if the
Portfolio were investing in higher rated Municipal Securities. Lower rated
Municipal Securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade Municipal
Securities and thus be subject to higher risk. A projection of an economic
downturn, for example, could cause a decline in lower rated Municipal Securities
prices because the advent of a recession could lessen the ability of the issuer
to make principal and interest payments on its debt securities. In addition, the
secondary trading market for lower rated Municipal Securities may be less liquid
than the market for higher grade Municipal Securities. The market prices of all
Municipal Securities generally fluctuate with changes in interest rates so that
the Portfolio's net asset value can be expected to decrease as long-term rates
rise and to increase as long-term interest rates fall.
4
<PAGE> 5
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EXPENSE SYNOPSIS
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
<TABLE>
<CAPTION>
INSURED
HIGH YIELD MUNICIPAL MUNICIPAL
------------------------------------------------------- --------------
CLASS C
CLASS A SHARES CLASS B SHARES SHARES(f) CLASS A SHARES
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a
percentage of offering price)..................... 4.75%(a) None(c) None(c) 4.75%(a)
Sales charge imposed on dividend reinvestments...... None None(e) None(e) None
Deferred sales charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower)......................................... None* 4% during the first 1% during the None*
and second year, first year(b)
3% during 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 $5.00 $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees..................................... .57% .57% .57% .57%
Rule 12b-1 fees(c).................................. .25% 1.00%(e) 1.00%(e) .24%
Other expenses(d)................................... .20% .20% .18% .34%
Total fund operating expenses....................... 1.02% 1.77% 1.75% 1.15%
<CAPTION>
CLASS C
CLASS B SHARES SHARES(f)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a
percentage of offering price)..................... None None
Sales charge imposed on dividend reinvestments...... None None
Deferred sales charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower)......................................... 4% during the first 1% during the
and second year, first year(b)
3% during 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 $5.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees..................................... .57 .57
Rule 12b-1 fees(c).................................. 1.00%(e) 1.00%(e)
Other expenses(d)................................... .34 .32
Total fund operating expenses....................... 1.91 1.89
</TABLE>
- --------------------------------------------------------------------------------
(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares" -- page 20.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- page
22.
(c) Up to .25% for Class A shares, and 1% for Class B and C shares. See
"Distribution Plans" -- page 23.
(d) See "The Fund and Its Management" -- page 17.
(e) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
(f) Annualized.
* 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.
5
<PAGE> 6
- --------------------------------------------------------------------------------
EXPENSE SYNOPSIS -- CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH YIELD MUNICIPAL
----------------------------------------
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
EXAMPLE 1 YEAR 3 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 1.02% and 1.15% for High Yield and Insured, respectively, for
Class A shares, 1.77% and 1.91% for High Yield and Insured, respectively, for
Class B shares and 1.75% and 1.89% for High Yield and Insured, respectively, for
Class C shares, (2) 5% annual return throughout the period and (3) redemption at
the end of the period:
Class A......................................................................... $57 $78 $101 $166
Class B......................................................................... $59 $89 $114 $170**
Class C......................................................................... $28 $55 $ 95 $206
An investor would pay the following expenses on the same $1,000 investment assuming
no redemtion at the end of the period:
Class A......................................................................... $57 $78 $101 $166
Class B......................................................................... $18 $56 $ 96 $170**
Class C......................................................................... $18 $55 $ 95 $206
<CAPTION>
INSURED MUNICIPAL
----------------------------------------
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
EXAMPLE 1 YEAR 3 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 1.02% and 1.15% for High Yield and Insured, respectively, for
Class A shares, 1.77% and 1.91% for High Yield and Insured, respectively, for
Class B shares and 1.75% and 1.89% for High Yield and Insured, respectively, for
Class C shares, (2) 5% annual return throughout the period and (3) redemption at
the end of the period:
Class A......................................................................... $59 $82 $108 $181
Class B......................................................................... $61 $93 $121 $185**
Class C......................................................................... $30 $59 $102 $221
An investor would pay the following expenses on the same $1,000 investment assuming
no redemtion at the end of the period:
Class A......................................................................... $59 $82 $108 $181
Class B......................................................................... $19 $60 $103 $185**
Class C......................................................................... $19 $59 $102 $221
</TABLE>
- --------------------------------------------------------------------------------
** 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 a 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.
6
<PAGE> 7
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated)
The following financial highlights for each of the five years in the period
ended November 30, 1994 has 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
-----------------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO YEAR ENDED NOVEMBER 30
-----------------------------------------------------------------------------------------
1994 1993 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................ $11.19 $10.95 $10.78 $10.72 $10.91 $10.72 $10.85 $12.08
--------- ---------- --------- --------- --------- ---------- --------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Investment income......... .87 .931 .93 .885 1.005 1.03 1.05 1.0754
Expenses.................. (.11) (.1178) (.115) (.115) (.105) (.09) (.09) (.0903)
--------- ---------- --------- --------- --------- ---------- --------- ----------
Net investment income..... .76 .8132 .815 .77 .90 .94 .96 .9851
Net realized and
unrealized gain or loss
on securities............ (.744) .2303 .195 .13 (.23) .1418 (.105) (1.2751)
--------- ---------- --------- --------- --------- ---------- --------- ----------
Total from investment
operations............... .016 1.0435 1.01 .90 .67 1.0818 .855 (.29)
--------- ---------- --------- --------- --------- ---------- --------- ----------
DIVIDENDS FROM NET
INVESTMENT INCOME........ (.766) (.8035) (.84) (.84) (.86) (.8918) (.985) (.94)
--------- ---------- --------- --------- --------- ---------- --------- ----------
Net asset value, end of
period................... $10.44 $11.19 $10.95 $10.78 $10.72 $10.91 $10.72 $10.85
========= =========== ========= ========= ========= =========== ========= ===========
TOTAL RETURN(3)........... .10% 9.65% 9.77% 8.73% 6.43% 10.39% 8.12% (2.51%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............... $411.1 $408.0 $309.5 $225.3 $222.3 $233.3 $206.3 $157.0
Ratios to average net
assets
Expenses................. 1.02% 1.03% 1.07% 1.06% .97% .85% .85% .78%
Expenses without expense
reimbursement.......... -- -- -- -- 1.06% 1.04% 1.07% 1.05%
Net investment income.... 6.98% 7.13% 7.45% 7.20% 8.34% 8.86% 8.84% 8.55%
Net investment income,
without expense
reimbursement.......... -- -- -- -- 8.27% 8.65% 8.62% 8.28%
Portfolio turnover rate... 33% 27% 24% 20% 29% 19% 36% 137%
<CAPTION>
CLASS B CLASS C
-------------------------------------------- ---------------
JANUARY 2, JULY 20, DECEMBER 10,
1986(2) THROUGH YEAR ENDED 1992(2) THROUGH 1993(2) THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
HIGH YIELD PORTFOLIO 1986 1994 1993(1) 1992(1) 1994(1)
--------------- ---------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period................ $11.91 $11.18 $10.96 $ 11.08 $ 11.29
--------------- ---------- --------------- ------------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Investment income......... 1.0014 .87 .8905 .35 .81
Expenses.................. (.0615) (.19) (.1986) (.08) (.18)
--------------- ---------- --------------- ------------ -----------
Net investment income..... .9399 .68 .6919 .27 .63
Net realized and
unrealized gain or loss
on securities............ .1735 (.748) .2476 (.1122) (.8363)
--------------- ---------- --------------- ------------ -----------
Total from investment
operations............... 1.1134 (.068) .9395 .1578 (.2063)
--------------- ---------- --------------- ------------ -----------
DIVIDENDS FROM NET
INVESTMENT INCOME........ (.9434) (.682) (.7195) (.2778) (.6637)
--------------- ---------- --------------- ------------ -----------
Net asset value, end of
period................... $12.08 $10.43 $11.18 $10.96 $10.42
=============== ========== =============== ============= ============
TOTAL RETURN(3)........... 9.64% (.76%) 8.84% 1.45% (1.80%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............... $152.2 $159.3 $104.8 $21.0 $15.3
Ratios to average net
assets
Expenses................. .55%(4) 1.77% 1.77% 1.71%(4) 1.75%(4)
Expenses without expense
reimbursement.......... 1.02%(4) -- -- -- --
Net investment income.... 8.39%(4) 6.19% 6.15% 5.88%(4) 6.07%(4)
Net investment income,
without expense
reimbursement.......... 7.92%(4) -- -- -- --
Portfolio turnover rate... 32% 33% 27% 24% 33%
</TABLE>
- ------------------------------
(1) Based on average month-end shares outstanding.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) Annualized.
7
<PAGE> 8
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------------
JANUARY 2,
INSURED PORTFOLIO YEAR ENDED NOVEMBER 30 1986(2) THROUGH
-------------------------------------------------------------------------------- NOVEMBER 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- ------- ------- -------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period................ $11.59 $11.30 $11.07 $10.86 $10.95 $10.68 $10.56 $12.33 $11.91
-------- -------- -------- ------ ------- -------- --------- --------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Investment income.......... .74 .79 .81 .86 .84 .85 .81 .8443 .831
Expenses................... (.13) (.127) (.135) (.13) (.12) (.09) (.09) (.0827) (.0693)
-------- -------- -------- ------ ------- -------- --------- --------- -----------
Net investment income...... .61 .663 .675 .73 .72 .76 .72 .7616 .7617
Net realized and unrealized
gain or loss on
securities............... (1.0425) .274 .240 .19 (.07) .275 .1225 (1.7853) .4219
-------- -------- -------- ------ ------- -------- --------- --------- -----------
- -
Total from investment
operations............... (.4325) .937 .915 .92 .65 1.035 .8425 (1.0237) 1.1836
-------- -------- -------- ------ ------- -------- --------- --------- ----------
DIVIDENDS FROM NET
INVESTMENT INCOME........ (.6075) (.647) (.685) (.71) (.74) (.765) (.7225) (.7463) (.7636)
-------- -------- -------- ------ ------- -------- --------- --------- ---------
Net asset value, end of
period................... $10.55 $11.59 $11.30 $11.07 $10.86 $10.95 $10.68 $10.56 $12.33
========= ======== ======== ====== ======= ======== ========= ========= ==========
TOTAL RETURN(3)............ (3.88%) 8.47% 8.48% 8.73% 6.21% 9.97% 8.22% (8.53%) 10.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............... $67.3 $75.3 $64.3 $52.2 $42.3 $38.5 $33.7 $31.2 $25.7
Ratios to average net
assets
Expenses................. 1.15% 1.07% 1.20% 1.20% 1.08% .85% .85% .72% .63%(4)
Expenses, without expense
reimbursement.......... -- 1.17% -- -- 1.20% 1.20% 1.19% 1.18% 1.10%(4)
Net investment income.... 5.45% 5.57% 5.98% 6.59% 6.63% 6.96% 6.75% 6.67% 6.93%(4)
Net investment income,
without expense
reimbursement.......... -- 5.47% -- -- 6.51% 6.61% 6.41% 6.21% 6.46%(4)
Portfolio turnover rate.... 5% 5% 3% 5% 1% 38% 131% 166% 33%
<CAPTION>
CLASS B CLASS C(1)
--------------------------------------- --------------
JULY 20 DECEMBER 10,
YEAR ENDED 1992(2) THROUGH 1993(2) THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
INSURED PORTFOLIO 1994 1993(1) 1992(1) 1994
-------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period................ $11.58 $11.30 $11.39 $11.66
-------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Investment income.......... .74 .754 .28 .77
Expenses................... (.21) (.205) (.08) (.22)
-------- ------- ------- -------
Net investment income...... .53 .549 .20 .55
Net realized and unrealized
gain or loss on
securities............... (1.0365) .294 (.07) (1.161)
-------- ------- ------- -------
Total from investment
operations............... (.5065) .843 .13 (.611)
-------- ------- ------- -------
DIVIDENDS FROM NET
INVESTMENT INCOME........ (.5235) (.563) (.22) (.509)
-------- ------- ------- -------
Net asset value, end of
period................... $10.55 $11.58 $11.30 $10.54
======== ======= ======== ======
TOTAL RETURN(3)............ (4.52%) 7.59% 1.16% (5.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............... $35.6 $34.4 $10.1 $1.9
Ratios to average net
assets
Expenses................. 1.91% 1.77% 1.82%(4) 1.89%(4)
Expenses, without expense
reimbursement.......... -- 1.87% -- --
Net investment income.... 4.71% 4.74% 4.33%(4) 4.64%(4)
Net investment income,
without expense
reimbursement.......... -- 4.64% -- --
Portfolio turnover rate.... 5% 5% 3% 5%
</TABLE>
- ------------------------------
(1) Based on average month-end shares outstanding.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) Annualized.
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<PAGE> 9
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MULTIPLE PRICING SYSTEM
- --------------------------------------------------------------------------------
The Multiple Pricing System permits an investor to choose the method of
purchasing shares of each Portfolio 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 of each Portfolio are sold at net asset value
plus an initial maximum sales charge of up to 4.75% of the offering price. Class
A shares of each Portfolio are subject to an ongoing service fee at an annual
rate of up to 0.25% of each Portfolio'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 of each Portfolio 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 of each Portfolio are subject to an ongoing
service fee at an annual rate of up to 0.25% of each Portfolio'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 each Portfolio'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 of each Portfolio 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 of each Portfolio are sold at net asset value
and are subject to a deferred sales charge if redeemed within one year of
purchase. Class C shares of each Portfolio are subject to an ongoing service fee
at an annual rate of up to 0.25% of each Portfolio'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 each Portfolio'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 of
each Portfolio will automatically convert 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 of each Portfolio 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 of each Portfolio
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 of each Portfolio
through the reinvestment of dividends and distributions paid on Class B shares
and Class C shares in a shareholder's Portfolio 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 Portfolio 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 each
Portfolio, the accumu-
9
<PAGE> 10
lated 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 on 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, as described herein
under "Purchase of Shares -- Class A Shares." For these reasons, the Distributor
will reject any order of $250,000 or more for Class B shares or any order of $1
million or more for Class C shares.
Class A shares of each Portfolio 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 ongoing
distribution fees and, for a five-year or one-year period, respectively, being
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 of each Portfolio 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, or purchase. Sales personnel of broker-dealers
distributing each Portfolio'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 of such Portfolio. 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 OF EACH PORTFOLIO ARE THE SAME AS THOSE OF THE INITIAL SALES CHARGE WITH
RESPECT TO CLASS A SHARES. SEE "DISTRIBUTION PLANS."
GENERAL. Dividends paid by each Portfolio 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 each Portfolio 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 Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares of each Portfolio. On an ongoing
basis, the Trustees 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.
10
<PAGE> 11
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The Fund is a diversified, open-end management investment company, generally
known as a mutual fund, organized as a Massachusetts business trust on December
5, 1984, with an investment objective of providing as high a level of interest
income exempt from federal income tax as is consistent with the investment
policies of each Portfolio. However, there can be no assurance that the
objective of the Fund will be achieved. The Fund is comprised of two separate
Portfolios: the High Yield Municipal Portfolio and the Insured Municipal
Portfolio. Each Portfolio invests primarily in Municipal Securities.
Among the various types of Municipal Securities 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 obligations are backed by
the taxing power of the issuing municipality. Revenue obligations are backed by
the revenues of a project or facility -- tolls from a toll-bridge, for example.
Industrial development revenue obligations are a specific type of revenue
obligation backed by the credit and security of a private user. Variable rate
demand notes are described under "Investment Practices and
Restrictions -- Variable Rate Demand Notes."
Each Portfolio maintains at least 80% of its net assets invested in Municipal
Securities except as a temporary defensive measure during periods of adverse
market conditions. This is a fundamental policy and may not be changed without
the approval of at least a majority of the outstanding shares of the Portfolio.
The Fund does not invest in any securities except Municipal Securities and
Temporary Investments as defined below, except that each Portfolio 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."
On a temporary basis, to provide cash reserves or pending investment in
Municipal Securities, each Portfolio may invest up to 20% of its net assets in
taxable securities of at least comparable quality to the Municipal Securities in
which the Portfolio invests ("Temporary Investments"). Each Portfolio also may
invest temporarily a greater proportion of its assets in Temporary Investments
for defensive purposes, when, in the judgment of the Adviser(s), market
conditions warrant. Temporary Investments include but are not limited to
securities issued or guaranteed by the United States Government, its agencies or
instrumentalities; corporate bonds and debentures; certificates of deposit and
bankers' acceptances of domestic banks with assets of $500 million or more and
having deposits insured by the Federal Deposit Insurance Corporation; commercial
paper and repurchase agreements.
The Fund may invest up to 10% of the net assets of any Portfolio in illiquid
securities which include Municipal Securities 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 Securities
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 10% limitation applies at the time
the purchase commitments are made. See "Investment Practices and
Restrictions -- Repurchase Agreements."
Differences in the investment policies of the two Portfolios with respect to
the quality and maturity of portfolio investments can be expected to affect the
yield on each Portfolio and the degree of market and financial risk to which
such Portfolio is subject. Generally Municipal Securities 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 Securities with shorter
maturities and lower yields. In general, market prices of Municipal Securities
vary inversely with interest rates. Lower rated Municipal Securities generally
provide a higher yield than higher rated Municipal Securities of similar
maturity but are subject to greater market and financial risk. The Portfolios
may purchase short-term or long-term Municipal Securities (with remaining
maturities of up to 30 years or more). There is no limitation on the average
maturity of the Municipal Securities in any Portfolio, and such average maturity
is likely to change from time to time based on the Adviser's view of market
conditions held by the Adviser(s). At November 30, 1994, such average maturity
was 20.00 years for the High Yield Municipal Portfolio and 20.48 years for the
Insured Municipal Portfolio. Municipal Securities ratings of Moody's Investors
Service ("Moody's") and of Standard & Poor's Corporation ("S&P") are described
in the Statement of Additional Information. See also "Municipal Securities"
herein.
HIGH YIELD MUNICIPAL PORTFOLIO. The High Yield Municipal Portfolio invests,
under normal market conditions, at least 75% of its net assets in medium to
lower rated high yielding Municipal Securities which are subject to high risk as
described below. This Portfolio normally can be expected to offer the higher
yield of the two
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<PAGE> 12
Portfolios, but it will also be subject to higher market and financial
risks.Because an investment in the High Yield Municipal Portfolio entails
relatively greater risks, it may not be an appropriate investment for all
investors.
The investment policies of the High Yield Municipal Portfolio are not governed
by specific rating categories. The Advisers generally seek medium and lower
rated Municipal Securities (commonly referred to as junk bonds) for the
Portfolio. Generally, the Portfolio invests at least 75% of its assets in
Municipal Securities rated, at the time of purchase, in the following quality
grades as determined by either Moody's (Baa or lower for bonds, and MIG 3 or
VMIG 3 or lower for notes) or by S&P (BBB or lower for bonds and SP-2 or lower
for notes), or non-rated Municipal Securities considered by the Advisers to be
of comparable quality. Lower rated obligations generally are more speculative
with respect to the capacity of the issuer to make interest and principal
payments. For example, Municipal Securities rated BB or Ba or lower are
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
Municipal Securities rated CC by S&P or Ca by Moody's are considered speculative
in a high degree. The Portfolio does not purchase obligations which are in
default or rated C (lowest grade by Moody's) or rated C or D by S&P or non-rated
bonds, notes and other obligations considered by the Advisers to be of
comparable quality, although the Portfolio may retain obligations assigned such
ratings after a purchase is made. The Portfolio may also invest under normal
market conditions up to 20% of its assets in Municipal Securities rated A, SP-1
or higher by S&P or A, MIG 2, VMIG 2 or higher by Moody's, and in tax-exempt
commercial paper rated Prime-3 or higher by Moody's or A-3 or higher by S&P.
While the Portfolio normally will invest at least 75% of its assets in medium
and lower rated Municipal Securities, it may invest in higher rated issues,
particularly when the difference in returns between quality classifications is
very narrow or when the Advisers expect interest rates to increase. These
investments may lessen the decline in net asset value but may also affect the
amount of current income, since high rated yields are usually lower than medium
rated yields.
While the High Yield Municipal Portfolio may invest in both general
obligations and revenue obligations, a substantial portion of the Portfolio
generally is invested in revenue obligations, which may include public utility,
housing, industrial development, pollution control, hospital and health care
issues. The Portfolio's 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.
During the fiscal year ended November 30, 1994, the percentage of the
Portfolio's assets invested in Municipal Securities within the various rating
categories (based on the higher of the S&P or Moody's ratings), and the nonrated
debt securities, determined on a dollar weighted average, were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
AAA/Aaa................................................ 3.71%
AA/Aa.................................................. 2.43%
A/A.................................................... 4.37%
BBB/Baa................................................ 18.05%
BB/Ba.................................................. 5.30%
B...................................................... .56%
CCC/Caa................................................ .21%
CC/Ca.................................................. .06%
*Nonrated............................................... 63.17%
Other Net Assets....................................... 2.14%
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Total Net Assets.............................. 100%
</TABLE>
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* The nonrated debt securities as a percentage of total net assets were
considered by the Advisers to be comparable to securities rated by Moody's as
follows: Aaa--1.08%, A--.31%, Baa--31.95%, Ba--25.15%, B--4.02%, Caa--.13%,
Ca--.08%, C--.34% and D--.11%.
RISK FACTORS OF INVESTING IN LOWER RATED MUNICIPAL SECURITIES. The market for
lower rated Municipal Securities is relatively new and its growth has paralleled
a long economic expansion. Past experience may not, therefore, provide an
accurate indication of future performance of this market, particularly during
periods of economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market, the value of
lower rated Municipal Securities in the Portfolio, the Portfolio's net asset
value and the ability of the bonds' issuers to repay principal and interest,
meet projected business goals and obtain additional financing than on higher
rated securities. These circumstances also may result in a higher incidence of
defaults than with respect to higher rated securities. An investment in this
Portfolio may be considered more speculative than investment in shares of a fund
which invests primarily in higher rated Municipal Securities.
Prices of lower rated Municipal Securities may be more sensitive to adverse
economic changes or individual issuer developments than higher rated
investments. Municipal Securities with longer maturities, which may have higher
yields, may increase or decrease in value more than Municipal Securities with
shorter maturities. Market
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<PAGE> 13
prices of lower rated Municipal Securities structured as zero coupon or
pay-in-kind securities are affected to a greater extent by interest rate changes
and may be more volatile than securities which pay interest periodically and in
cash. When deemed appropriate and in the best interests of shareholders, the
Portfolio may incur additional expenses to seek recovery on a Municipal Security
on which the issuer has defaulted and to pursue litigation to protect its
interests as a debtholder.
Because the market for lower rated securities may be thinner and less active
than for higher rated securities, there may be market price volatility for these
securities and limited liquidity in the resale market. Nonrated securities are
usually not as attractive to as many buyers as are rated securities, a factor
which may make nonrated securities less marketable. These factors may have the
effect of limiting the availability of the securities for purchase by the
Portfolio and may also limit the ability of the Portfolio to sell such
securities at their fair value either to meet redemption requests or in response
to changes in the economy or the financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of lower rated Municipal Securities, especially in a
thinly traded market. To the extent the Portfolio owns or may acquire illiquid
or restricted lower rated Municipal Securities, these securities may involve
special registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties. Changes in values of Municipal Securities which the
Portfolio owns will affect its net asset value per share. If market quotations
are not readily available for the Portfolio's lower rated or nonrated
securities, these securities will be valued by a method that the Fund's Trustees
believe accurately reflects fair value. See "Purchase of Shares -- General" and
"Determination of Net Asset Value" in the Statement of Additional Information.
Judgment plays a greater role in valuing lower rated Municipal Securities than
with respect to securities for which more external sources of quotations and
last sale information are available.
Special tax considerations are associated with investing in lower rated
Municipal Securities structured as zero coupon or pay-in-kind securities. The
Portfolio accrues income on these securities prior to the receipt of cash
payments. The Portfolio must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax laws and may,
therefore, have to dispose of portfolio securities to satisfy cash distribution
requirements for shareholders who do not reinvest dividends.
While credit ratings are only one factor the Advisers rely on in evaluating
lower rated Municipal Securities, certain risks are associated with using credit
ratings. Credit ratings evaluate the safety of principal and interest payments,
not market value risk. Credit rating agencies may fail to timely change the
credit ratings to reflect subsequent events; however, the Advisers continuously
monitor the issuers of lower rated Municipal Securities in its portfolio in an
attempt to determine if the issuers will have a sufficient cash flow and profits
to meet required principal and interest payments. Achievement of the Portfolio's
investment objective may be more dependent upon the Advisers' credit analysis
than is the case for higher quality Municipal Securities. Credit ratings for
individual securities may change from time to time and the Portfolio may retain
a portfolio security whose rating has been changed.
Investors should consider carefully the additional risks associated with
investment in Municipal Securities which carry lower ratings.
INSURED MUNICIPAL PORTFOLIO. The Insured Municipal Portfolio invests, under
normal market conditions, at least 80% of its net assets in Municipal Securities
covered by insurance guaranteeing the timely payment of principal at maturity
and interest. The Portfolio may also invest in Municipal Notes (i.e. Municipal
Securities with maturities of less than five years) rated MIG 1, VMIG 1, MIG 2,
or VMIG 2 by Moody's or rated AAA, AA or SP-1 by S&P and tax-exempt commercial
paper rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. Such short-term
securities are generally not insured. However, it is anticipated that, under
normal market conditions, uninsured obligations (including any taxable
obligations subject to regular federal income tax) will constitute no more than
20% of the Portfolio's net assets.
At November 30, 1994, the percentage of the Portfolio's assets invested in
Municipal Securities within the various rating categories (based on the higher
of the S&P or Moody's ratings) were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
AAA/Aaa................................................. 89.48%
AA/Aa................................................... 2.94%
A/A..................................................... .56%
Nonrated................................................ 1.15%
Other Net Assets........................................ 5.87%
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Total Net Assets.............................. 100%
</TABLE>
- --------------------------------------------------------------------------------
Generally the insured Municipal Securities purchased by the Portfolio consist
of issues which are already insured under an insurance policy obtained by the
issuer or underwriter thereof. All premiums for "new issue"
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<PAGE> 14
insurance are paid in advance. Municipal Securities of this type are acquired
only if they are rated AAA by S&P or Aaa by Moody's. The Portfolio may, but is
not required to, sell any of such Municipal Securities in the event that the
rating is lowered. While insurance coverage for the Municipal Securities held by
the Portfolio reduces credit risk by insuring that the Portfolio will receive
timely payment of principal and interest, it does not protect against other
market factors and does not insure the shares of the Portfolio owned by the
investor.
It is anticipated that under current market conditions, the insured Municipal
Securities purchased by the Portfolio will be insured by one of the following
companies: AMBAC Indemnity Corporation ("AMBAC"), Bond Investors Guaranty
Insurance Co. ("BIG"), Capital Guaranty Insurance Company ("CGIC"), Connie Lee
("CL"), Financial Guaranty Insurance Company ("FGIC"), Financial Security
Assurance, Inc. ("FSA"), and Municipal Bond Investor's Assurance Corp. ("MBIA").
Assuming the insurance policies have been validly issued and are in standard
form, such policies are non-cancellable and continue in force so long as the
insured Municipal Securities are outstanding and the insurers remain in
business. No representation is made as to the ability of the insurance companies
to meet their respective obligations under their policies of insurance. However,
the claims-paying abilities of each of these companies receives a "AAA" rating
from S&P.
In order to be eligible for such insurance, Municipal Securities generally
must have credit characteristics which, in the opinion of the insurer, would
qualify them as "investment grade" obligations. However, at some time in the
future, the Portfolio may purchase Municipal Securities insured by companies
other than AMBAC, BIG, CGIC, CL, FGIC, FSA, and MBIA, if such company has
received a claims-paying ability rating of AAA from S&P or Aaa from Moody's. The
Portfolio may also acquire insurance coverage for individual uninsured Municipal
Securities directly from an insurance company, provided any such company has a
claims-paying ability rated AAA by S&P or Aaa by Moody's. Since the cost of such
special insurance coverage would be borne by the Portfolio, such insurance would
be obtained if the total return net of insurance premiums is expected by the
Adviser to be greater than that anticipated on comparable insured Municipal
Securities. Insured Municipal Securities will usually have a lower yield than
comparable noninsured Municipal Securities.
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MUNICIPAL SECURITIES
- --------------------------------------------------------------------------------
Municipal Securities include debt obligations of a state, territory or
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 Securities 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
Securities are issued to obtain funding for privately operated facilities.
Many new issues of Municipal Securities are sold on a "when-issued" basis.
While the Fund has ownership rights to such Municipal Securities, 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 liquid securities equal to the amount that will be due. See
"Investment Practices and Restrictions -- Delayed Delivery and When-Issued
Securities."
The yields of Municipal Securities depend on, among other things, general
money market conditions, general conditions of the Municipal Securities market,
size of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the Municipal Securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, Municipal Securities with the same maturity, coupon and rating may
have different yields while Municipal Securities 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.
The Fund considers investments in tax-exempt Municipal Securities not to be
subject to concentration policies and may invest a relatively high percentage of
the assets of any Portfolio in Municipal Securities 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
Portfolio's investments more susceptible to similar economic, political or
regulatory occurrences. As the similarity in issuers increases, the potential
for fluctuation in a Portfolio's per share net asset value also increases. The
Fund may invest more than 25% of the total assets of any Portfolio in Municipal
Securities with similar characteristics, such as industrial development revenue
bonds, including pollution control revenue bonds, housing finance agency bonds,
or hospital bonds. The Fund may not, however, invest more than 25% of the total
assets of any Portfolio in industrial development revenue bonds, including
pollution control bonds, issued for companies in the same industry. See
restriction 5 under "Investment Practices and Restrictions -- Investment
Restrictions." Sizeable investments in such obligations could involve an
increased risk to the Fund should any of such issuers or any such related
projects or facilities experience financial difficulties.
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<PAGE> 15
The Fund has no fundamental policy limiting its investments in securities
whose issuers are located in the same state. However, it is not the present
intention of the Fund to invest more than 25% of the value of the total assets
of any Portfolio in securities whose issuers are located in the same state.
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 Securities. It may be expected that similar proposals may
be introduced in the future. If any such proposal were to be enacted, the
ability of the Portfolios 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.
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INVESTMENT PRACTICES AND RESTRICTIONS
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With respect to High Yield Municipal Portfolio, the term "Adviser" refers to
both the Adviser, American Capital Asset Management, Inc. ("ACAM"), and the
Subadviser, American Capital Advisors, Inc. With respect to Insured Municipal
Portfolio, the term "Adviser" refers only to ACAM.
REPURCHASE AGREEMENTS. Each Portfolio 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 the 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. Each Portfolio 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 Portfolio,
exceeds 10% 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 each Portfolio than would
be available to each Portfolio 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.
Investments by a Portfolio in VRDNs may also be made 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.
STAND-BY COMMITMENTS. Each Portfolio 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 Portfolio, at the Portfolio's option, the Municipal Securities at a
specified price. Such commitments are sometimes called "liquidity puts."
The amount payable to a Portfolio upon its exercise of a stand-by commitment
is normally (i) the Portfolio's acquisition cost of the Municipal Securities
(excluding any accrued interest which the Portfolio paid on their acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during
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<PAGE> 16
the period the Portfolio 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 Portfolio at any time before the maturity of such
obligations.
The Portfolio's right to exercise stand-by commitments is unconditional and
unqualified. A stand-by commitment generally is not transferable by the
Portfolio, although the Portfolio 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, a Portfolio 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 any Portfolio will not exceed 1/2 of 1%
of the value of such Portfolio'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.
A Portfolio 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 Portfolio in
which they are held. Stand-by commitments acquired by a Portfolio would be
valued at zero in determining net asset value. Where a Portfolio 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 Portfolio.
DELAYED DELIVERY AND WHEN-ISSUED SECURITIES. Municipal Securities 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 a Portfolio 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 Securities on a when-issued basis
involves the risk that the yields 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. Each Portfolio maintains 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.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Portfolio may 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 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 a Portfolio, if the Adviser
is not successful in employing such instruments in managing a Portfolio's
investments, a Portfolio's performance will be worse than if a Portfolio did not
make such investments. In addition, a Portfolio would pay commissions and other
costs in connection with such investments, which may increase a Portfolio'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 thereon 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
contract or option (less any related margin deposits) will be maintained in a
segregated account with the Custodian.
PORTFOLIO TURNOVER. Each Portfolio 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. A Portfolio may engage in short-term trading if the
anticipated benefits are expected by the Adviser to exceed the transaction
costs. The annual turnover rate for each Portfolio is expected to vary from year
to year depending on market conditions. A 100% turnover rate would occur, for
example, if all the securities in a Portfolio were replaced in a period of one
year. Municipal Securities with remaining maturities of less than one year are
excluded in the computation of the portfolio turnover rate. Higher
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<PAGE> 17
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 any capital losses. Portfolio turnover is not a
limiting factor in making portfolio decisions, except as limited by the Internal
Revenue Code's requirements for qualification as a regulated investment company.
See "Federal Tax Information" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE. The Adviser is responsible for the
placement of orders for the purchase and sale of portfolio securities for each
Portfolio. The Municipal Securities and other obligations in which each
Portfolio invests are traded primarily in the over-the-counter market. Such
securities are generally traded on a net basis with dealers acting as principal
for their own accounts without a stated commission, although the prices of the
securities usually include a profit to the dealers. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. It is the policy of the Fund to obtain the best net
results taking into account such factors as price (including the applicable
dealer spread), the size, type and difficulty of the transaction involved, the
firm's general execution and operational facilities, and the firm's risk in
positioning the securities involved and the provision of supplemental investment
research by the firm. While the Fund generally seeks reasonably competitive
spreads or commissions, the Fund will not necessarily be paying the lowest
spread or commission available. Brokerage commissions are paid on transactions
in futures contracts and options thereon. The Adviser is authorized to place
portfolio transactions with broker-dealers participating in the distribution of
shares of the Fund and other American Capital funds if they reasonably believe
that the quality of the execution and any commission are comparable to that
available from other qualified firms. The Adviser is authorized to pay higher
commissions to brokerage firms that provide them with investment and research
information than to firms which do not provide such services if the Adviser
determines that such commissions are reasonable in relation to the overall
services provided.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed with respect to any
Portfolio without approval by a majority (as defined in the 1940 Act) vote of
the shareholders of such Portfolio. These restrictions provide, among other
things, that a Portfolio may not:
1. Invest in securities other than Municipal Securities, Temporary Investments
(as defined herein), stand-by commitments, futures contracts described in
the next paragraph, and options on such contracts;
2. Purchase or sell commodities or commodity contracts except that a Portfolio
may purchase, hold and sell listed futures contracts related to U.S.
Government securities, Municipal Securities or to an index of Municipal
Securities;
3. Invest more than 5% 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 any agency or instrumentality thereof);
4. Borrow money, except that a Portfolio may borrow from banks to meet
redemptions or for other temporary or emergency purposes, with such
borrowing not to exceed 5% of the total assets of the Portfolio at market
value at the time of borrowing. Any such borrowing may be secured provided
that not more than 10% of the total assets of the Portfolio at market value
at the time of pledging may be used as security for such borrowings; or
5. Purchase any securities which would cause more than 25% of the value of the
Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry; provided that this limitation shall not
apply to Municipal Securities or governmental guarantees of Municipal
Securities; and provided, further, that for the purpose of this limitation
only, industrial development bonds that are considered to be issued by
non-governmental users shall not be deemed to be Municipal Securities.
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 this Prospectus. The non-government user of
facilities financed by industrial development or pollution control bonds is also
considered as a separate issuer. In certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in connection with
such guarantee.
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THE FUND AND ITS MANAGEMENT
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The Fund is an open-end, diversified, management investment company, generally
known as a mutual fund. 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. Each Portfolio has elected to be subject to the diversification
requirements of the 1940 Act.
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<PAGE> 18
Eight Trustees have 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. The Subadviser, 40
Broad Street, Boston, Massachusetts 02110, is responsible for the provision of
advisory services in relation to High Yield Municipal Portfolio. As of February
28, 1995, the Adviser provides investment advice to 47 investment company
portfolios with total net assets of approximately $16.6 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 0.60% of the first $300
million of the aggregate average net assets of the High Yield Municipal
Portfolio and the Insured Municipal Portfolio, 0.55% of the next $300 million of
the two Portfolios' and 0.50% of the two Portfolios' aggregate average net
assets in excess of $600 million. Each of the Portfolios will pay the same
percentage of its average net assets. The fees are payable monthly. Under the
Advisory Agreement, the Fund also reimburses the Adviser for the costs of the
Fund's accounting services, which include maintaining its financial books and
records and calculating the daily net asset value of each Portfolio. Operating
expenses paid by the Fund include shareholder service agency fees, distribution
fees, service fees, custodian fees, legal and accounting fees, the costs of
reports and proxies to shareholders, trustees' fees, and all other business
expenses not specifically assumed by the Adviser. Advisory (management) fees,
and total operating expense ratio are shown under the caption "Expense Synopsis"
herein. The Adviser has entered into a subadvisory agreement dated as of
December 20, 1994 (the "Subadvisory Agreement") with the Subadviser to assist it
in performing its investment advisory function with respect to High Yield
Municipal Portfolio. Pursuant to the Subadvisory Agreement, the Subadviser
receives an annual fee, payable monthly, of 0.40% of the first $20 million of
High Yield Municipal Portfolio's average daily net assets, 0.25% of the next $30
million of such Portfolio's average daily net assets and 0.15% of the excess
over $50 million.
From time to time, as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
Mr. Wayne D. Godlin is primarily responsible for the day-to-day management of
the High Yield Municipal Portfolio's investment portfolio. Mr. Godlin is Vice
President of the Fund and has been Vice President of the Subadviser since
September 1993. He was previously a securities analyst and portfolio manager
with the Adviser. Mr. Godlin has been primarily responsible for managing the
High Yield Municipal Portfolio's investments since March 1990.
Joseph A. Piraro is primarily responsible for the day-to-day management of the
Insured Municipal Portfolio's investment portfolio. Mr. Piraro is Vice President
of the Fund and an agent of the Adviser. Mr. Piraro has been employed by Van
Kampen American Capital Investment Advisory Corp., an affiliate of the Adviser,
since 1992. Prior to that time, Mr. Piraro was employed by First Chicago Capital
Markets. Mr. Piraro has been primarily responsible for managing the Insured
Municipal Portfolio's investments since April 1995.
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PURCHASE OF SHARES
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GENERAL
Each Portfolio 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
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<PAGE> 19
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.
Shares of beneficial interest in each Portfolio are offered continuously for
sale by the Distributor, and are available through authorized investment
dealers. Initial investments in a Portfolio must be at least $500 and subsequent
investments must be at least $25. Both minimums may be waived by the Distributor
for shares involving periodic investments. Shares of the Fund may be sold in
foreign countries where permissable. The Fund and the Distributor reserve the
right to refuse any order for the purchase of shares of either Portfolio. The
Fund also reserves the right to suspend the sale of each Portfolio's shares in
response to conditions in the securities markets or for other reasons.
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, ACCESS. When purchasing shares of any Portfolio,
investors must specify whether the purchase is for Class A, Class B or Class C
shares.
Shares of each Portfolio 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 of each Portfolio is computed 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 of each
Portfolio for each class is determined by dividing the value of all portfolio
securities held by such Portfolio, 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. Each Portfolio'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 of each Portfolio 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 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. With respect to the Portfolios, the
price paid for shares purchased is based on the next calculation of net asset
value (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 New York Stock 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 of each Portfolio represents an interest in the same
portfolio of investments of such Portfolio, 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 of each Portfolio 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 of each Portfolio 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 fee. Sales personnel of broker-dealers
distributing each Portfolio'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.
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<PAGE> 20
CLASS A SHARES
With respect to each Portfolio, 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 below) (See below) (See below)
</TABLE>
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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.
In addition to the reallowances from the applicable public offering price
described herein, 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. Dealers which are
reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
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 herein. 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 a Portfolio 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 such Portfolio, by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any such fund or an affiliate of
such subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients 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 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 which equals at least $1 million. The
Distributor may pay Service Organizations through which purchases are made
of an amount up to 0.50% of the amount invested, over a twelve month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1% for such purchases.
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<PAGE> 21
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in
Participating Funds (as hereinafter defined) or American Capital Reserve
Fund, Inc. ("Reserve"). For such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of redemptions within one year of
the purchase other than redemptions required to make payments to
participants under the terms of the plan. The contingent deferred sales
charge incurred upon certain redemptions 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.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) 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 as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Portfolios
at net asset value to such groups at any time. Contact the Service Department at
(800) 421-5666 for further information and appropriate forms.
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
indicated Portfolio, or in any combination of shares of such Portfolios 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. ("Emerging Growth"), 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. ("Municipal Bond"), American Capital Pace Fund, Inc.,
American Capital Real Estate Securities Fund, Inc. ("Real Estate") American
Capital Tax-Exempt Trust, 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"), 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 High Yield Municipal Portfolio and the Insured Municipal Portfolio and the
Participating Funds plus the current offering price of all shares of such
Portfolios and 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 preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the High Yield Municipal Portfolio and the Insured Municipal Portfolio
and of the Participating Funds over a 13-month period based on the total amount
of intended purchases plus the value of all shares of such Portfolios and 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
21
<PAGE> 22
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 subsequently
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 included in this
Prospectus.
CLASS B SHARES
Class B shares of any Portfolio are offered at the next determined net asset
value. Class B shares of any Portfolio 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.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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 Portfolio 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.
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 of each Portfolio are offered at the next determined net asset
value. Class C shares of each Portfolio 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.
22
<PAGE> 23
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
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.
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 C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares of each Portfolio (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 each Portfolio 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 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 Trustees of the Fund, and the
shareholders of each class of each Portfolio 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")
as amended July 7, 1993. The NASD Rules limit the annual distribution costs and
service fees 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 each Portfolio's aggregate average daily net
assets attributable to the Class A shares. 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 each
Portfolio's aggregate average daily net assets attributable to the Class B or
Class C shares of such Portfolio 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 of each
Portfolio 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 of each Portfolio 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
Trustees 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 Trustees 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 Trustees 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.
23
<PAGE> 24
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fee 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 the 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 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 applicable 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 previous plan year ended June 30, 1994, the
unreimbursed expenses incurred by the Distributor under the Class B Plan and
carried forward were approximately $5.9 million or 3.98% of the Class' net
assets. The unreimbursed expenses incurred by the Distributor under the Class C
Plan from December 10, 1993 (inception of Class C shares) through June 30, 1994,
and carried forward were approximately $100,000 or 1.02% of the Class' 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 such services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Share certificates are not issued except upon
shareholder requests. 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 American Capital Reserve Fund, Inc. ("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 a
Portfolio. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
privilege 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 shares of a Portfolio. Additional
information is available from the Distributor or authorized investment 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 invested into a pre-existing Class A, Class B or
Class C account in
24
<PAGE> 25
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
fund have been registered for sale in the investor's state.
EXCHANGE PRIVILEGE. Shares of the High Yield Municipal Portfolio, Insured
Municipal Portfolio or of any Participating Fund (listed herein under "Purchase
of Shares -- Class A Shares -- Volume Discounts"), other than Government Target,
may be exchanged for shares of the same class of any other fund without sales
charge, provided that shares of the High Yield Municipal Portfolio and Insured
Municipal Portfolio and shares of Corporate Bond, Federal Mortgage, Global
Managed, Government Trust, High Yield, Municipal Bond, Real Estate, Texas
Municipal, Utilities, and the American Capital Global Government Securities Fund
of World Portfolio are subject to a 30-day holding period requirement. Shares of
Government Target may be exchanged for shares of Reserve or Class A shares of
any other Participating 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 of the Participating Fund. Additional funds may be
added from time to time as Participating Funds.
Class B and Class C shareholders of each Portfolio 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.
The contingent deferred sales charge is based on the holding period requirements
of the original fund without regard to the length of time such shares were held
in Reserve. 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 both "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 gains 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 either Portfolio's 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.
25
<PAGE> 26
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 either Portfolio 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 above 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 investor 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 of any Portfolio 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 each Portfolio 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 a Portfolio 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 any Portfolio
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 shareholder's Class A account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of Class A 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 value 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.
26
<PAGE> 27
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of any Portfolio 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 1% may be imposed on certain redemptions of
Class A shares made within one year of purchase for investments of $1 million or
more. 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.
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 of the Portfolio next determined after
the request is received in proper form. Payment for shares redeemed will be 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. Any taxable gain or loss will be recognized by the
shareholder upon redemption of shares.
The Fund may redeem any shareholder account with a net asset value of less
than $500. The Fund would redeem a shareholder's account falling below $500 only
if this results from shareholder withdrawals and not from market decline. Three
months' advance 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 of the account or to the bank account of
record as described herein. 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
27
<PAGE> 28
Fund's regular redemption procedure described herein. 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 all accounts other than retirement accounts. 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 any Portfolio 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 each Portfolio 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 "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. Reinstatement at net asset
value is also offered to participants in those eligible retirement plans held or
administered by Van Kampen American Capital Trust Company for repayment of
principal (and interest) on their borrowings on such plans.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDEND POLICY. Each Portfolio declares dividends from net investment income
on each business day. Such dividends are distributed monthly. The Fund intends
to distribute after the end of a fiscal year the net capital gains, if any,
realized during the fiscal year by each Portfolio except to the extent that such
gains are offset by capital loss carryovers of such Portfolio. The daily
dividend is a fixed amount determined at least monthly which is not expected to
exceed the net income of the Portfolio for the month divided by the number of
business days during the month. Realized capital gains and losses of the two
Portfolios will not be combined for the purpose of determining capital
distributions. Unless the shareholder instructs otherwise, dividends and
distributions are automatically reinvested in additional shares of each
Portfolio unless the shareholder instructs otherwise. See "Shareholder
Services -- Reinvestment Plan."
Shares become entitled to daily dividends declared on the business day of
receipt by ACCESS of payment for the shares. A check order or draft will
normally be converted into federal funds on the second business day following
receipt of payment by ACCESS. It is the investor's responsibility to see that
the dealer promptly forwards payment for shares purchased through the dealer.
All shares earn daily dividends through the day before such shares are processed
for payment on redemption.
The per share dividends on Class B and Class C shares of each Portfolio will
be lower than the per share dividends on Class A shares of such Portfolio as a
result of the distribution fees and higher incremental transfer agency fees
applicable to such classes of shares.
FEDERAL INCOME TAXES. Each Portfolio has qualified and intends to be taxed as
a regulated investment company under the Internal Revenue Code (the "Code") by
meeting certain requirements of the Code. In addition, each Portfolio intends to
invest in sufficient Municipal Securities to permit payment of "exempt-interest
dividends" (as defined in the Code). Dividends paid by each Portfolio from the
net tax-exempt interest earned from Municipal Securities qualify as
exempt-interest dividends if, at the close of each quarter of the fiscal year,
at least 50% of the value of the total assets of the Portfolio consists of
Municipal Securities. See "Federal Tax Information" in the Statement of
Additional Information.
The Tax Reform Act of 1986 (the "Tax Reform Act") may have an adverse impact
upon the Fund and its shareholders. The Tax Reform Act imposed new limitations
on the use and investment of the proceeds of state and local governmental bonds
and other funds, which limitations must be satisfied in order to maintain the
exclusion from gross income for interest on such bonds. The provisions of the
Tax Reform Act generally apply to bonds issued after August 15, 1986. In light
of these requirements, bond counsel qualify their opinions as to the federal tax
status of bonds issued after August 15, 1986 by making them contingent on the
issuer's future compliance with these limitations. Any failure on the part of an
issuer to comply could cause the interest on its bonds to become taxable to
investors retroactive to the date the bonds were issued.
28
<PAGE> 29
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 each Portfolio were exempt-interest dividends. The percentage
of the total dividends paid by each Portfolio during any taxable year that
qualify as exempt-interest dividends will be the same for all shareholders of
such Portfolio receiving dividends during such year.
The Tax Reform Act also makes interest on certain "private-activity bonds"
issued after August 7, 1986, an item of tax preference subject to the
alternative minimum tax on individuals and corporations. The Fund invests a
portion of its assets in Municipal Securities subject to this provision 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. The Tax Reform Act 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.
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.
Each Portfolio is subject to the requirement that at least 80% of its assets
be invested in securities, the income from which is exempt from both regular
federal income tax and the federal alternative minimum tax. For the fiscal year
ended November 30, 1994, approximately 6.99% and 16.28% of the interest income
earned by the High Yield Municipal Portfolio and the Insured Municipal
Portfolio, respectively, consisted of interest on private-activity bonds which
is an item of tax preference.
Distributions of net investment income received by each Portfolio from
investments in debt securities other than Municipal Securities, and any net
realized short-term capital gains distributed by the Portfolio, are taxable to
shareholders as ordinary income. Any distribution of net long-term capital gains
by a Portfolio is subject to capital gains tax rates. Interest on indebtedness
which is incurred to purchase or carry shares of a mutual fund which distributes
exempt-interest dividends during the year is not deductible for federal income
tax purposes.
Shareholders are notified annually of the federal tax status of dividends and
any distributions paid by a Portfolio during the fiscal year.
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 tax on dividends
(except exempt-interest dividends), capital gains distributions and redemption
payments, shareholders must furnish the Fund with a certification of their
correct taxpayer identification number.
The foregoing is only a brief summary of some of the important tax
considerations generally affecting each Portfolio and its shareholders.
Additional tax information of relevance to particular investors, including
corporations and investors who may be "substantial users" of facilities financed
by Municipal Securities, is contained in the Statement of Additional
Information. Investors are urged to consult their tax advisers with specific
reference to their own tax situation.
FEDERAL INCOME TAX ASPECTS OF FUTURES AND OPTIONS. A Portfolio's ability to
engage in transactions in listed futures contracts and related options may be
limited by provisions of the Internal Revenue Code, including the requirement
that each Portfolio 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 a Portfolio from transactions in futures contracts and
options thereon 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 investors consult their tax advisers for information in this
regard. Each Portfolio will report annually to its shareholders the percentage
and source, on a state-by-state basis, of interest income earned on Municipal
Securities received by such Portfolio during the preceding calendar year.
Dividends
29
<PAGE> 30
and distributions paid by each Portfolio 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 a Portfolio 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 or for the life of the
Portfolio. Other total return quotations, aggregate or average, over other time
periods may also be included.
The total return of a Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio 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 Portfolio shares at net asset value; and that any
applicable contingent deferred sales charge has been paid. Each Portfolio's
total return will vary depending on market conditions, the securities comprising
each Portfolio's portfolio, each Portfolio'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 Portfolio.
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 of each Portfolio. 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 Portfolios may also advertise
their current "yield." Yield figures are based on historical earnings and are
not intended to indicate future performance. Yield is determined by analyzing
the Portfolio'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. A Portfolio'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 Portfolio'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 a Portfolio 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 a Portfolio's then current dividend rate.
A Portfolio'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 a Portfolio, portfolio maturity and a
Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
A yield quotation which reflects an expense reimbursement or subsidization by
the Adviser will be accompanied by a hypothetical yield quotation excluding such
reimbursement.
To increase a Portfolio's yield, the Adviser may, from time to time, absorb a
certain amount of the future ordinary business expenses. The Adviser may stop
absorbing these expenses at any time without prior notice.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in a Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions.
30
<PAGE> 31
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., CDA,
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 Bonds, 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, U.S. News & World Report, USA Today 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 any Portfolio 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 organized on December 5, 1984 under the
laws of the Commonwealth of Massachusetts and is a business entity commonly
known as a "Massachusetts business trust." It is a diversified, open-end
investment company. Each Portfolio is a diversified portfolio. The Fund is
authorized to issue an unlimited number of Class A, Class B and Class C shares
of beneficial interest of $.01 par value, respectively, in one or more
Portfolios. Other classes of shares may be established from time to time in
accordance with provisions of the Fund's Declaration of Trust. Shares issued are
fully paid, non-assessable and have no preemptive or conversion rights. In the
event of liquidation of any Portfolio, shareholders of such Portfolio are
entitled to share pro rata in the net assets of the Portfolio available for
distribution to shareholders.
Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Trustees (to the
extent hereafter provided) and on other matters submitted to the vote of
shareholders. Each class of shares represents interests in the assets of each
Portfolio 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 of each Portfolio are borne solely by that
class, and each class of shares of each Portfolio 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 of each Portfolio. An order has been received
from the SEC permitting the issuance and sale of multiple classes of shares
representing interest in each Portfolio's existing portfolio. All shares have
equal voting rights, except that only shares of the respective Portfolio are
entitled to vote on matters concerning only that Portfolio. There will normally
be no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders may, in
accordance with the Declaration of Trust, cause a meeting of shareholders to be
held for the purpose of voting on the removal of Trustees. Except as set forth
above, the Trustees shall continue to hold office and appoint successor
Trustees.
The Declaration of Trust establishing the Fund, dated December 5, 1984, a copy
of which together with all amendments thereto (the "Declaration"), is on file in
the office of the Secretary of the Commonwealth of Massachusetts, provides that
the name "American Capital Tax-Exempt Trust" refers to the Trustees under the
Declaration collectively as Trustees, not as individuals or personally; and
provides that no Trustee, officer or shareholder of the Fund shall be held to
any personal liability, nor shall resort be had to their private property for
the satisfaction of any obligation or liability of any Portfolio but the assets
of the applicable Portfolio only shall be liable.
PERSONAL INVESTMENT 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 certain
restrictions.
31
<PAGE> 32
Persons with access to certain sensitive information are subject to
pre-clearance and other procedures designed to prevent conflicts of interest.
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.
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.
32
<PAGE> 33
AMERICAN CAPITAL
TAX-EXEMPT
TRUST, INC.
PROSPECTUS
April 3, 1995
NATIONAL DISTRIBUTOR
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
INVESTMENT ADVISOR
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056
TRANSFER, DISBURSING, REDEMPTION
AND SHAREHOLDER SERVICE AGENT
ACCESS Investor 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,
ACCESS Investor 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/0 ACCESS
TAX-EXEMPT P.O. BOX 418256
TRUST, INC. KANSAS CITY, MO 64141-9256
FOR INVESTORS SEEKING GROWTH
AND INCOME.
[AMERICAN CAPITAL LOGO]
PRINTED MATTER
Printed in U.S.A./021 PRO-001
<PAGE> 34
PART B: STATEMENT OF ADDITIONAL INFORMATION
AMERICAN CAPITAL TAX-EXEMPT TRUST
APRIL 3, 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 April 3,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, IL 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
MUNICIPAL SECURITIES.......................................................... 3
TEMPORARY INVESTMENTS......................................................... 5
REPURCHASE AGREEMENTS......................................................... 5
FUTURES CONTRACTS AND RELATED OPTIONS......................................... 6
INVESTMENT RESTRICTIONS....................................................... 8
TRUSTEES AND EXECUTIVE OFFICERS............................................... 10
INVESTMENT ADVISORY AGREEMENT................................................. 13
DISTRIBUTOR................................................................... 14
DISTRIBUTION PLANS............................................................ 15
TRANSFER AGENT................................................................ 16
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 17
DETERMINATION OF NET ASSET VALUE.............................................. 18
PURCHASE AND REDEMPTION OF SHARES............................................. 18
EXCHANGE PRIVILEGE............................................................ 22
CHECK WRITING PRIVILEGE....................................................... 22
FEDERAL TAX INFORMATION....................................................... 23
PRIOR PERFORMANCE INFORMATION................................................. 26
OTHER INFORMATION............................................................. 27
FINANCIAL STATEMENTS.......................................................... 28
APPENDIX...................................................................... 29
</TABLE>
<PAGE> 35
GENERAL INFORMATION
The Fund was organized as a trust under the laws of Massachusetts on
December 5, 1984.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor 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.
As of March 21, 1995, no person was known by management to own beneficially
or of record as much as five percent of the outstanding shares of any portfolio
except the following:
HIGH YIELD MUNICIPAL PORTFOLIO
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER MARCH 20, 1995 SHARES OWNERSHIP
------------------------------------------------ --------------------- -------- ---------
<S> <C> <C> <C>
PaineWebber for the benefit of Briarwood IPA 879,153 shares of Class B 5.19%
Inc. #2 beneficial interest
4051 Doneva Road
Moorpark, CA 93021-2910
Smith Barney, Inc. 8,513,752 shares Class A 20.95%
388 Greenwich Street, 22nd Floor owned of record
New York, NY 10013-2375
7,721,881 shares Class B 45.63%
owned of record
1,538,948 shares Class C 78.11%
owned of record
Merrill Lynch Pierce Fenner & Smith 1,223,251 shares Class B 7.22%
4800 Deer Lake Drive East, 3rd Floor owned of record
Jacksonville, FL 32246-6484
INSURED MUNICIPAL PORTFOLIO
Frederick Scott Miles 33,398.934 shares of Class C 16.34%
Box 7099 beneficial interest
Myrtle Beach, SC 29577-0102
Melissa Marsh Rufty 33,398.934 shares of Class C 16.34%
P.O. Box 7099 beneficial interest
Myrtle Beach, SC 29577-0102
R. T. Kelley 21,932.951 shares Class C 10.73%
P.O. Box 237 of beneficial
Canadian, TX 79014-0237 interest
</TABLE>
2
<PAGE> 36
<TABLE>
AMOUNT AND NATURE
OF OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER MARCH 20, 1994 SHARES OWNERSHIP
----------------------------------------------- --------------------- -------- ---------
<S> <C> <C> <C>
B&C Construction 18,848.805 shares Class C 9.22%
A Corporation of beneficial
4950 Valenty interest
Chubbuck, ID 83202-1850
DLJP (Donaldson Lufkin) 261,678 shares Class B 7.92%
Jersey City, NJ owned of record
1 Pershing Plaza 5th Fl.
Jersey City, NJ 07399-0001
National Financial Services 295,980 shares Class B 8.95%
200 Liberty One owned of record
World Financial Center
New York, NY 10281-1003
Smith Barney, Inc. 573,964 shares Class A 9.46%
388 Greenwich Street, 22nd Floor owned of record
New York, NY 10013-2375
266,811 shares Class B 8.07%
owned of record
35,957 shares Class C 17.60%
owned of record
Merrill Lynch Pierce Fenner & Smith 349,013 shares Class A 5.75%
4800 Deer Lake Drive East, 3rd Floor owned of record
Jacksonville, FL 32246-6484
</TABLE>
With respect to the High Yield Municipal Portfolio, the term "Adviser"
refers to both the Adviser, Van Kampen American Capital Asset Management, Inc.
("VKAC"), and the Subadviser, Van Kampen American Capital Advisors, Inc. With
respect to the Insured Municipal Portfolio, the term "Adviser" refers only to
VKAC.
MUNICIPAL SECURITIES
Municipal Securities 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 Securities
if the interest paid thereon is exempt from federal income tax. Municipal
Securities 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 Securities are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of 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 other specific
revenue source such as from 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 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 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 in question.
3
<PAGE> 37
When a Portfolio engages in when-issued and delayed delivery transactions,
the Portfolio 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 Portfolio
missing the opportunity of obtaining a price considered to be advantageous.
Each Portfolio 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 for such Portfolio or if unrated are of comparable
quality as determined by the Adviser. 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. Demand notes may also
include Municipal Securities subject to a Stand-By Commitment as described in
the Prospectus. 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 interests will be tax-exempt when distributed as dividends to shareholders.
Yields on Municipal Securities 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 a Portfolio to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities in which the Portfolio invests to meet their obligations
for the payment of interest and principal when due. There are variations in the
risks involved in holding Municipal Securities, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of holders of Municipal Securities and the obligations
of the issuers of such Municipal Securities 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 of and interest on Municipal Securities.
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 Securities. It may be expected that similar proposals may
be introduced in the future. If such a proposal were 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.
ADDITIONAL RISKS OF LOWER RATED MUNICIPAL SECURITIES
Additional risks of lower rated Municipal Securities include limited
liquidity and secondary market support. As a result, the prices of lower rated
Municipal Securities may decline rapidly in the event a significant number of
holders decide to sell. Changes in expectations regarding an individual issuer,
an industry or lower rated Municipal Securities generally could reduce market
liquidity for such securities and make their sale by the Portfolio more
difficult, at least in the absence of price concessions. Reduced liquidity could
also create difficulties in accurately valuing such securities at certain times.
The high yield bond market has grown primarily during a period of long economic
expansion and it is uncertain how it would perform during an economic downturn.
An economic downturn or an increase in interest rates could severely disrupt the
market for high yield bonds and adversely affect the value of outstanding bonds
and the ability of the issuers to repay principal and interest. The Portfolio
will take such actions as it considers appropriate in the event of anticipated
financial difficulties, default or bankruptcy of either the issuer or any
Municipal Security owned by the Portfolio or the underlying source of funds for
debt service. Such action may include retaining the services of various persons
and firms to evaluate or protect any real estate, facilities or other assets
securing any such obligation or acquired by the Portfolio as a result of any
such event. The Portfolio incurs additional
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expenditures in taking protective action with respect to Portfolio obligations
in default and assets securing such obligations. Investment in lower rated
Municipal Securities are not generally meant for short-term investment.
TEMPORARY INVESTMENTS
The taxable securities in which the Portfolios may invest as temporary
investments include United States Government securities, corporate bonds and
debentures, domestic bank certificates of deposit and bankers' acceptances of
domestic banks with assets of $500 million or more and having deposits insured
by the Federal Deposit Insurance Corporation, commercial paper and repurchase
agreements. In the case of each Portfolio, the taxable securities are subject to
the same rating requirements applicable to the Municipal Securities in which the
Portfolio invests, including, in the case of unrated securities, that such
obligations be in the opinion of the Adviser of comparable quality.
United States Government securities include obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies and instrumentalities which are supported by any of the following: (a)
the full faith and credit of the United States Government, (b) the right of the
issuer to borrow an amount limited to a specific line of credit from the United
States Government, (c) discretionary authority of the United States 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. A Portfolio may not
invest in any security 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.
REPURCHASE AGREEMENTS
Each Portfolio of 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 is required to
maintain the value of the underlying securities marked to market daily at not
less than the repurchase price. The underlying securities (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.
In the event of a 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. A Portfolio will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid security owned by such Portfolio,
exceeds ten percent of the value of its net assets. See "Investment Practices
and Restrictions -- Repurchase Agreements" in the 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 price-weighted measure of the market value of 40 large sized, recent
issues of tax-exempt bonds.
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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, a Portfolio 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 Portfolio upon termination of the futures contract 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 a Portfolio purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Portfolio receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Portfolio purchases a futures contract
and the value of the underlying security or index declines, the position is less
valuable, and the Portfolio is required to make a variation margin payment to
the broker.
At any time prior to expiration of the futures contract, the Portfolio 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 Portfolio, and the Portfolio realizes a loss or a
gain.
Futures Strategies. When the Portfolio 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 Portfolio 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. A Portfolio 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 Portfolio's securities ("defensive
hedge"). To the extent that the Portfolio'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 Portfolio of a market decline
and, by so doing, provides an alternative to the liquidation of securities
positions in the Portfolio with attendant transaction costs.
In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in futures or related options, the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of
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<PAGE> 40
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 Portfolio could decline at the same time as portfolio securities being
hedged; if this occurred, the Portfolio 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.
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 Portfolio 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
Portfolio 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 Portfolio 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
Portfolio hedges against a decline in the market, and market prices instead
advance, the Portfolio 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 Portfolio 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.
A Portfolio 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 Portfolio 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 that the underlying commodity value of the Portfolio's long
futures positions not exceed the sum of certain identified liquid investments)
and (ii) that the Portfolio 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 Portfolio's assets. In order to minimize leverage in connection
with the purchase of futures contracts by the Portfolio, 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
A Portfolio could also purchase and write options on futures contracts. An
option on a futures contract gives the purchase 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 Portfolio would be subject to
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<PAGE> 41
initial margin and maintenance requirements similar to those applicable to
futures contracts. In addition, net option premiums received by the Portfolio
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. A Portfolio 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
Portfolio 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
Portfolio when the use of a future would not.
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 others (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
Portfolio 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 with respect to any Portfolio without
approval by the holders of a majority of the outstanding shares of such
Portfolio. 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. In addition to the fundamental investment limitations set forth in
the Prospectus, a Portfolio shall not:
1. Purchase or hold securities of any issuer if any of the Fund's officers
or trustees, or officers or directors of its investment adviser, who
beneficially owns more than 1/2% of the securities of that issuer,
together own beneficially more than five percent of the securities of
such issuer;
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2. Purchase securities on margin, except that a Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Fund of an
initial or maintenance margin in connection with futures contracts or
related option transactions is not considered the purchase of a
security on margin;
3. Sell securities short, except to the extent that the Portfolio
contemporaneously owns or has the right to acquire at no additional
cost securities identical to those sold short;
4. Make loans of money or securities to other persons except that a
Portfolio may purchase or hold debt instruments and enter into
repurchase agreements in accordance with its investment objective and
policies;
5. Invest in real estate or mortgage loans (but this shall not prevent a
Portfolio from investing in Municipal Securities or Temporary
Investments secured by real estate or interests therein); or in
interests in oil, gas, or other mineral exploration or development
programs; or in any security not payable in United States currency;
6. Invest more than ten percent of the value of its net assets in
securities which are illiquid, including securities restricted as to
disposition under the Securities Act of 1933, and including repurchase
agreements maturing in more than seven days;
7. Invest in securities of any one issuer with a record of less than three
years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or its
agencies or Municipal Securities (except that in the case of industrial
revenue bonds, this restriction shall apply to the entity supplying the
revenues from which the issue is to be paid), if such investments by
any Portfolio would exceed five percent of the value of its total
assets (taken at market value);
8. Underwrite the securities of other issuers, except insofar as a
Portfolio may be deemed an underwriter under the Securities Act of 1933
by virtue of disposing of portfolio securities;
9. Invest in securities other than Municipal Securities, Temporary
Investments (as defined herein), stand-by commitments, futures
contracts described in the next paragraph, and options on such
contracts;
10. Purchase or sell commodities or commodity contracts except that a
Portfolio may purchase, hold and sell listed futures contracts related
to U.S. Government securities, Municipal Securities or to an index of
Municipal Securities;
11. 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 any agency or
instrumentality thereof);
12. Borrow money, except that a Portfolio may borrow from banks to meet
redemptions or for other temporary or emergency purposes, with such
borrowing not to exceed five percent of the total assets of the
Portfolio 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 of the Portfolio at market value at the time of pledging may be
used as security for such borrowings;
13. Purchase any securities which would cause more than 25% of the value of
the Portfolio's total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal
business activities in the same industry; provided that this limitation
shall not apply to Municipal Securities or governmental guarantees of
Municipal Securities; and provided, further, that for the purpose of
this limitation only, industrial development bonds that are considered
to be issued by non-governmental users shall not be deemed to be
Municipal Securities; or
14. 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
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options, 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".
Because of the nature of the securities in which the Fund may invest, no
Portfolio may invest in voting securities, or invest for the purpose of
exercising control or management, or invest in securities of other investment
companies. If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
will not constitute a violation of such restriction.
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and executive officers and their principal occupations
during the past five years are listed below. All persons named as Trustees also
serve in similar capacities for other funds advised by the Adviser as indicated
below.
FERNANDO SISTO, Chairman of the Board and Trustee. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030. 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, Trustee. 2300 205th Street, Torrance, California
90501-1452. Co-Founder, Chairman and President, MDT Corporation (medical
equipment).(1)
RICHARD E. CARUSO, Trustee. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive Officer,
Integra LifeSciences 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 Corp. (leasing
financing).(1)
ROGER HILSMAN, Trustee. 420 West 118th Street, New York, New York 10027.
Formerly Professor of Government and International Affairs, Columbia
University.(1)
*DON G. POWELL, President and Trustee. 2800 Post Oak Blvd., Houston, Texas
77056. Chairman, President, Chief Executive Officer and Director of VK/AC
Holding, Inc., VKAC; President, Chief Executive Officer and Director of the
Adviser; Chairman, Chief Executive Officer and Director of the
Distributor.(1)(2)(4)
DAVID REES, Trustee. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(3)
**LAWRENCE J. SHEEHAN, Trustee. 1999 Avenue of the Stars, Los Angeles,
California 90067. 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, Trustee. Sky Chefs, Inc., Suite 4710 9 West 57th
Street, New York, New York 10019. 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; Mental
Health Task Force, Carter Center.(1)
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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WAYNE D. GODLIN, Vice President. 40 Broad Street, Boston, Massachusetts
02110. Vice President of Van Kampen American Capital Advisors, Inc.; formerly
securities analyst and associate portfolio manager of the Adviser.(4)
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)
DENNIS J. MCDONNELL, Vice President. One Parkview Plaza, Oakbrook Terrace,
IL 60181. Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.,
President, Chief Operating Officer and Director of Van Kampen American Capital
Investment Advisory Corp.; and Director of McCarthy, Crisanti & Maffei, Inc.
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)
RONALD A. NYBERG, Vice President. One Parkview Plaza, Oakbrook Terrace, IL
60181. Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc., Vice President of ACCESS Investor Services, Inc. and Van Kampen American
Services Inc., Vice President, General Counsel and Assistant Secretary of Van
Kampen American Capital Advisors, Inc., Senior Vice President and General
Counsel of the Adviser, Executive Vice President and General Counsel and
Director of VKAC Distributors, Inc.
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; Executive Vice President and Director of VKAC.(4)
JOSEPH A. PIRARO, Vice President. One Parkview Plaza, Oakbrook Terrace, IL
60181. Agent of the Adviser. Employed since 1992 with Van Kampen American
Capital Investment Advisory Corp., an affiliate of the Adviser. Prior to that
time Mr. Piraro was employed by First Chicago Capital Markets.
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 Executive Officer
and Director of Van Kampen American Capital Services, Inc.; President and
Director of Van Kampen American Capital Trust Company; President and Chief
Executive Officer and Director of ACCESS Investor Services, Inc. ("ACCESS").(4)
- ---------------
* Trustee 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.
** Trustee who is an interested person of the Fund within the meaning of the
1940 Act by virtue of his affiliation with the Adviser.
(1) 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 Municipal Bond Fund, Inc., American Capital Pace 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., and American Capital
Income Trust, American Capital Exchange Fund,
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investment companies advised by the Adviser, and a Trustee of Common Sense
Trust, an open-end investment company 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 Trustees between meetings except where board action is
required by law.
The Trustees and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the fiscal year ending November
30, 1994, Trustees who were not affiliated with the Adviser or its parent
received as a group $15,738 and $10,514 in Trustees' fees from the High Yield
Municipal Portfolio ("High Yield Muni") and Insured Municipal Portfolio
("Insured Muni"), respectively, in addition to certain out-of-pocket expenses.
Such Trustees also received compensation for serving as directors or trustees 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 ended
November 30, 1994, the Fund paid legal fees of $24,750 and $11,762 for the High
Yield Municipal Portfolio and Insured Municipal Portfolio, respectively, 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.
DIRECTORS COMPENSATION TABLE
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Directors serve as directors or trustees
noted in Footnote 1 above. The compensation shown for the Fund is for the fiscal
year ended November 30, 1994 and the total compensation shown for the Fund and
other related mutual funds is for the calendar year ended December 31, 1994, is
set forth below. Mr. Powell is not compensated for his service as Director
because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL
FROM REGISTRANT PENSION OR COMPENSATION
---------------------- RETIREMENT FROM REGISTRANT
TET TET BENEFITS ACCRUED AND FUND
HIGH YIELD INSURED AS PART OF FUND COMPLEX PAID TO
NAME OF PERSONS MUNI MUNI EXPENSES DIRECTORS(1)(5)
- ----------------------------------------- ---------- ------- ---------------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan........................ $2,470 $ 1,465 -0- $64,000
Dr. Richard E. Caruso(2)(3).............. 2,470 1,465 -0- 64,000
Dr. Roger Hilsman........................ 2,590 1,540 -0- 66,000
David Rees............................... 2,470 1,465 -0- 64,000
Lawrence J. Sheehan...................... 2,590 1,540 -0- 67,000
Dr. Fernando Sisto(3).................... 3,200 1,890 -0- 82,000
William S. Woodside(4)................... 2,150 1,265 -0- 54,000
</TABLE>
- ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $2,470 and $1,465 for High Yield
Municipal Portfolio and Insured Municipal Portfolio, respectively.
(3) The cumulative deferred compensation paid by the Portfolios is as follows
for Dr. Caruso: High Yield Muni, $6,448; Insured Muni, $4,054; and as
follows for Dr. Sisto; High Yield Muni, $1,525; Insured Muni, $1,086.
(Notes continued on following page)
12
<PAGE> 46
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
registrant's adviser. As a result of the amounts reflected in columns 1, 2,
and 4, $690, $395 and $17,000, respectively, were paid by the registrant.
(5) Includes the following amounts for which the various Portfolios were
reimbursed by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman,
$1,000; Rees, $2,000; Sheehan, $2,000; Sisto, $2,000.
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 each Portfolio's investment objectives. 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 the daily net asset value of each Portfolio. 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. The services are provided at cost which is allocated among the
investment companies advised by the Adviser. The Fund also pays transfer agency
fees, distribution fees, service fees, custodian fees, legal fees, the costs of
reports to shareholders and all other ordinary expenses not specifically assumed
by the Adviser.
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 High Yield Municipal
Portfolio and the Insured Municipal Portfolio, at an annual rate of 0.60% of the
first $300 million of such Portfolios' aggregate average net assets, 0.55% of
the next $300 million of such Portfolios' aggregate average net assets and 0.50%
of such Portfolios' aggregate average net assets in excess of $600 million. Each
of the Portfolios will pay the same percentage of its average net assets.
The Adviser has entered into a subadvisory agreement dated December 20,
1994 (the "Subadvisory Agreement") with the Subadviser to assist it in
performing its investment advisory function with respect to High Yield Municipal
Portfolio. Pursuant to the Subadvisory Agreement, the Subadviser receives an
annual fee, payable monthly, of 0.40% of the first $20 million of High Yield
Municipal Portfolio's average daily net assets, 0.25% of the next $30 million of
such Portfolio's average daily net assets and 0.15% of the excess over $50
million. The Adviser and Subadviser are hereinafter referred to as the
"Advisers."
The average daily net assets is determined by taking the average of all of
the determinations of the net assets for each business day during a given
calendar month. Such fees are payable for each calendar month as soon as
practicable after the end of that month. The fee payable to the Adviser is
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the Adviser or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the Fund, less any direct expenses
incurred by such subsidiary of VK/AC Holding, Inc. in connection with obtaining
such payments. The Adviser shall use its best efforts to recapture all available
tender solicitation fees and exchange offer fees in connection with each of the
Fund's transactions and shall advise the Trustees 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 ordinary
business expenses of the Fund for any fiscal year exceed 0.95% of the average
daily net assets, the compensation due the Adviser will be reduced by the amount
of such excess and that, if a reduction in and refund of the advisory fee is
insufficient, the
13
<PAGE> 47
Adviser will pay the Fund monthly an amount sufficient to make up the
deficiency, subject to readjustment during the year. Ordinary business expenses
do not include (1) interest and taxes, (2) brokerage commissions, (3) payments
made pursuant to distribution plans (described below), (4) certain litigation
and indemnification expenses as described in the Advisory Agreement, and (5)
insurance premiums paid by the Fund to insure the timely payment of principal
and interest on its portfolio obligations. The Advisory Agreement 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.
For the period ended December 1, 1987 to March 31, 1990, in addition to the
contractual expense limitation, the Adviser elected to reimburse each Portfolio
for all ordinary business expenses, exclusive of taxes and interest, in excess
of .85% of the average daily net assets.
The following table shows expenses payable under the Advisory Agreement
during the fiscal years ending November 30, 1992, 1993 and 1994.
<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/92: PORTFOLIO PORTFOLIO
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $1,562,047 $ 355,391
Accounting Services $ 102,088 $ 58,211
Contractual Expense Reimbursement $ -0- $ 41,687
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/93: PORTFOLIO PORTFOLIO
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $2,390,833 $ 555,067
Accounting Services $ 132,407 $ 82,231
Contractual Expense Reimbursement $ -0- $ -0-
Voluntary Expense Reimbursement $ -0- $ 96,000
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/94: PORTFOLIO PORTFOLIO
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $3,172,407 $ 641,145
Accounting Services $ 163,929 $ 86,031
Contractual Expense Reimbursement $ 0 $ 0
</TABLE>
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees 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 Trustees 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 30 days' written notice.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the Fund
pursuant to a written agreement, dated December 20, 1994 (the "Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of
each Portfolio 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 Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the Fund's
outstanding voting securities, and (b) by the affirmative vote of a majority of
Trustees 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.
14
<PAGE> 48
For the fiscal years ending November 30, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the High Yield Municipal
Portfolio and Insured Municipal Portfolio were $3,499,659, $4,146,051, and
$2,667,572, and $531,280, $427,753 and $176,026, respectively. Of such totals,
the amount retained by the Distributor was $226,654, $635,449, and $27,152, and
$41,203, $61,827 and $406,466, respectively. The remainder was reallowed to
dealers. Of such dealer reallowances, $164,406, $168,470, and $81,508, and
$62,735, $35,042, and $8,526, respectively, was received by Advantage Capital
Corporation.
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 each Portfolio 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 Trustees 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
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 of each Portfolio 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
by the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class C shares of each Portfolio 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. 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.
15
<PAGE> 49
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreements and selling group agreements were approved by the Trustees,
including a majority of the trustees who are not interested 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 Trustees"). In approving each Plan in accordance with
the requirements of Rule 12b-1, the Trustees 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 Fund's Trustees 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, the Plans 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 Trustees, including a majority of
the Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by a vote of a majority of the outstanding voting shares of the
respective class of any Portfolio. Any change in any of the Plans that would
materially increase the distribution or service expenses borne by the Fund
requires shareholder approval, voting separately by class of any Portfolio;
otherwise, it may be amended by a majority of the Trustees, including a majority
of the Independent Trustees, by vote cast in person at a meeting called for the
purpose of voting upon such amendment. So long as the Plans are in effect, the
selection or nomination of the Independent Trustees is committed to the
discretion of the Independent Trustees.
For the fiscal year ending November 30, 1994, the High Yield Municipal
Portfolio's and Insured Municipal Portfolio's gross aggregate expenses under the
Class A Plan were $1,029,318 and $180,174, or .25% and .24%, respectively, of
the Portfolios' average daily 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.
For the fiscal year ended November 30, 1994, the aggregate expenses under
the Class B Plan for the High Yield Portfolio and the Insured Municipal
Portfolio were $1,335,592 and $378,659, or 1.00% and 1.00%, respectively, of the
Portfolios' average daily net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $1,001,694 and $283,994, respectively,
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 $333,898 and
$94,665, respectively, for fees paid to Service Organizations for servicing
Class B shareholders and administering the Class B Plan.
The offering of Class C shares commenced on December 10, 1993. For the
Fiscal Year ended November 30, 1994, the aggregate expenses under the Class C
Plan for the High Yield Portfolio and the Insured Municipal Portfolio were
$65,351 and $15,952, or .97% and .97%, respectively, of the Portfolios' average
daily net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $49,013 and $11,964, respectively, for the commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class C shares of the Fund and $16,338 and $3,988
respectively, for fees paid to Service Organizations for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
During the fiscal years ended November 30, 1992, 1993 and 1994, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $253,855, $374,757 and $561,481, and $48,150, $75,541 and
$92,670 from the High Yield Municipal Portfolio and Insured Municipal Portfolio,
respectively. Since April 1, 1991, these services have been provided at cost
plus a profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are 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 except for commissions paid with respect to transactions in
future contracts and options. Portfolio
16
<PAGE> 50
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 Advisers are responsible for placing portfolio transactions and do 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 Advisers consider
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, consideration may be given to firms which also provide research
services to the Fund or the Advisers. No specific value can be assigned to such
research services which are furnished without cost to the Advisers. The
investment advisory fee is not reduced as a result of the Advisers' receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of the 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 Advisers in servicing all of
their advisory accounts; not all of such services may be used by the Advisers in
connection with the Fund.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution of such other
policies as the Trustees may determine, the Advisers may consider sales of
shares of the Fund as a factor in the selection of firms to execute portfolio
transactions for the Fund.
The Advisers place portfolio transactions for other advisory accounts
including other investment companies. The Advisers seek 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 Advisers 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 Trustees who are not interested
persons (as defined in the 1940 Act) of the Adviser.
During the fiscal years ended November 30, 1992, 1993 and 1994, the High
Yield Municipal Portfolio paid $17,325, $5,481 and $79,957, respectively, in
brokerage commissions on portfolio transactions and Insured Municipal Portfolio
paid no 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.
The Fund conducted no affiliated brokerage transactions through affiliated
brokers during the last three fiscal years.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Portfolio is computed by dividing
the value of all securities held by the Portfolio plus other assets, less
liabilities (including accrued expenses), by the number of shares outstanding.
Such computation is made as of the close of the New York Stock Exchange
(currently 4:00 p.m., New York time) on each business day on which the New York
Stock Exchange is open. The New York Stock
17
<PAGE> 51
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.
Each Portfolio's investments in bonds are valued by an independent pricing
service ("Service"). When, in the judgment of the Service, quoted bid prices for
bonds are readily available and are representative of the bid side of the
market, these bonds are valued at such quoted bid prices (as obtained by the
Service from dealers in such securities). Other bonds 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. Options are valued at the last sale price or, if no
sales are reported, at the mean between the bid and asked prices. Any bonds
which are not valued by the independent pricing service would be valued at fair
value using methods determined in good faith by the Trustees. Expenses and fees,
including the investment advisory fee are accrued daily and taken into account
for the purpose of determining the net asset value of shares of each Portfolio.
Short-term instruments having remaining maturities of 60 days or less are valued
at amortized cost.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares of any Portfolio 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 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
Each Portfolio's shares 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 for each Portfolio: 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, distribution fees, 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 Securities Act of 1933.
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 any Portfolio, 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 the
Portfolio's 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.
18
<PAGE> 52
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 capacity
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 under "Sales Charge Table" apply to purchases of Class A shares
of each Portfolio 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 purchaser, as is a trustee or other
fiduciary purchasing for a single fiduciary 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 charge applicable to the
$65,000 purchase would be 4.00% 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 represented 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
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. If 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 charges, if any,
paid during the 13-month period.
VOLUME DISCOUNTS
The schedule of volume discounts in the Prospectus applies to purchases of
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 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) tax-exempt organization
enumerated in Section 501(c)(3) or (13) of the Code.
19
<PAGE> 53
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock 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 New York Stock
Exchange is closed for other than customary weekends or holidays; (b) trading on
the New York Stock 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 practical for the Fund to fairly determine
the value of its net assets; or (d) the Securities and Exchange Commission, by
order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
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 1% 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 1% of the net asset value of shares at the time of purchase, or 1% 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 herein under "Purchase and 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 may be 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
20
<PAGE> 54
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 or C will be waived
where the descendent 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 death or initial determination of disability.
This waiver of the CDSC -- Class B or 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 may 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.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan (the
"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 -- Class B and C
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 at net
asset value, 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 Class C 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
21
<PAGE> 55
the Fund. Shares acquired 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 and return both documents 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, partnership or trust agreements) must 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.
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<PAGE> 56
FEDERAL TAX INFORMATION
The following is only a summary of certain additional federal, state and
local tax considerations generally affecting the Portfolios and their
shareholders that are not described in the Prospectus. No attempt is made to
present a detailed explanation of the tax treatment of a Portfolio 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.
GENERAL
By maintaining its qualification as a "regulated investment company" under
the Internal Revenue Code, a Portfolio will not incur any liability for federal
income taxes to the extent its taxable ordinary income and any capital gain net
income are distributed in accordance with Subchapter M of the Code.
A Portfolio 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. Each Portfolio intends to distribute sufficient amounts to avoid liability
for the excise tax. By qualifying as a regulated investment company, a Portfolio
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 a Portfolio 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 on
the basis of the subsequent shares.
The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Securities to pass through to its investors,
tax-exempt, net Municipal Securities interest income. In order for a Portfolio
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
Portfolio's assets must consist of exempt-interest obligations. In addition, the
Portfolio 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 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 Portfolio during the taxable year (the "Distribution
Requirements").
Not later than 60 days after the close of its taxable year, each Portfolio
will notify its shareholders of the portion of the dividends paid by the
Portfolio 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 Portfolio 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 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 Portfolio's income that was tax exempt
during the period covered by the dividend.
Although exempt-interest dividends generally may be treated by Portfolio
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 purchaser would be
treated as a "substantial user" or a "related person" with respect to any of the
tax-exempt obligations held by the Portfolio, or by the Fund if it is required
to qualify as a regulated investment company as described below. "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
23
<PAGE> 57
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 useable
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 a Portfolio is not deductible for federal income tax purposes if the
Portfolio 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, a Portfolio 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 Securities or other assets, the
Portfolio 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
Portfolio's taxable year, the Portfolio 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 shares of any
one of the Portfolios 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.
TAX TREATMENT OF FUTURES CONTRACTS AND RELATED OPTIONS
In connection with its operations, a Portfolio 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 a Portfolio 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 a Portfolio, any realized
gain or loss will be treated as long-term capital gain or loss to the extent of
60% thereof and short-term capital gain or loss to the extent of 40% thereof
(hereinafter "60/40 gain or loss"). Open Futures Contracts held by a Portfolio
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 Futures Contracts. The Distribution
Requirements may limit a Portfolio's ability to hold Futures Contracts and
Futures Options at the end of a year.
A portion of a Portfolio's transactions in Futures Contracts and Futures
Options, particularly its hedging transactions, may constitute "straddles" with
respect to the Portfolio'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 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 a Portfolio when offsetting positions are
established and which may convert certain losses from short-term to long-term.
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<PAGE> 58
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. No determination has been made whether any
Portfolio will make any of these elections.
A Portfolio 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, a Portfolio 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 a Portfolio'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 the 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 the 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, the Fund's ability to invest in Futures Contracts and
Futures Options may be limited.
TREATMENT OF DIVIDENDS
While each Portfolio expects that a major portion of its investment income
will constitute tax-exempt interest, a significant portion may consist of
"investment company taxable income" and "net capital gains." As pointed out
above, a Portfolio 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 a Portfolio's taxable income
and capital gain net income will be distributed by the Portfolio in order to
meet the Distribution Requirements and to avoid taxation at the Portfolio level.
Distributions that are not designated as capital gain dividends will be taxable
to shareholders as ordinary income. Dividends and distributions declared payable
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 a Portfolio's net investment income arises from dividends on
common or preferred stock, none of its distributions are eligible for the 70%
dividends received deduction available to corporations.
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.
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<PAGE> 59
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.
PRIOR PERFORMANCE INFORMATION
The average annual total return for Class A shares of each Portfolio for
the one-year, five-year and eight-year periods ending November 30, 1994 was
- -4.68%, 5.83% and 6.11% for the High Yield Municipal Portfolio, and -8.47%,
4.44% and 4.61% for the Insured Municipal Portfolio, respectively. Results from
inception through April 1, 1990, reflect expense reimbursement described under
"Investment Advisory Agreement." The average annual total return for Class B
shares of each Portfolio one-year period and the 28 month period ending November
30, 1994, was -4.49% and 2.80% for the High Yield Municipal Portfolio and -8.24%
and 0.48% for the Insured Municipal Portfolio, respectively. The aggregate total
return for Class C shares of each Portfolio for the period December 10, 1993
through November 30, 1994 was -2.73% and -6.29% for the High Yield Municipal
Portfolio and Insured Municipal Portfolio, respectively. These results are based
on historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Portfolio's investment objectives and policies as well as the risks incurred
in the Portfolio's investment practices.
The following chart lists the High Yield Municipal Portfolio's and Insured
Municipal Portfolio's annualized current yield and tax equivalent yield for the
30-day period ending November 30, 1994.
<TABLE>
<CAPTION>
HIGH YIELD MUNICIPAL INSURED MUNICIPAL
---------------------------- ---------------------------
CLASS CLASS CLASS CLASS CLASS CLASS
A B C A B C
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Current yield 6.60% 6.19% 6.17% 4.68% 4.16% 4.15%
Tax-equivalent
yield 10.31% 9.66% 9.64% 7.31% 6.49% 6.48%
</TABLE>
Neither the High Yield Municipal Portfolio's nor the Insured Municipal
Portfolio's yield is 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 Portfolio, Portfolio maturity and the
Portfolio's expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
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
and the American Capital Mutual Fund Index -- which polls measure how Americans
plan to use their money.
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.
The Funds 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
26
<PAGE> 60
return. Such illustrations may be in the form of charts or graphs and will not
be based on historical returns experienced by the Funds.
OTHER INFORMATION
Dividends and Distributions -- Shareholders are informed as to the sources
of distributions at the time of payment. Any capital gain distribution paid
shortly after a purchase of shares by an investor will have the effect of
reducing the per share net asset value of the shares owned by the amount of the
distribution. See "Dividends, Distributions and Taxes" in the Prospectus for
further 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 portfolios, 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.
Shareholder and Trustee Responsibility -- Under the laws of certain states,
including Massachusetts, where the Trust was organized, and Texas, where the
Trust's principal office is located, shareholders of a Massachusetts business
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. However, the risk of a shareholder incurring
any financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of the Trust and provides that notice of the disclaimer
may be given in each agreement, obligation, or instrument which is entered into
or executed by the Trust or Trustees. The Declaration of Trust provides for
indemnification out of Trust property to any shareholder held personally liable
for the obligations of the Trust and also provides for the Trust to reimburse
such shareholder for all legal and other expenses reasonably incurred in
connection with any such claim or liability.
Under the Declaration of Trust, the Trustees or officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Trust will
provide indemnification to its Trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual Report to Shareholders, including the related Report of Independent
Accountants on the November 30, 1994 Financial Statements are hereby included in
the Statement of Additional Information.
Set forth below is an example of the method of computing the offering price
of the Fund's Class A shares. The example assumes a purchase of Class A shares
of a Portfolio 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 such Portfolio on November 30, 1994.
<TABLE>
<CAPTION>
HIGH YIELD INSURED
MUNICIPAL MUNICIPAL
PORTFOLIO PORTFOLIO
------------ ------------
NOVEMBER 30, NOVEMBER 30,
1994 1994
------------ ------------
<S> <C> <C>
Net Asset Value Per Class A Share $10.44 $10.55
Class A Per Share Sales Charge -- 4.75% of offering price
(4.99% of net asset value per share) $ .52 $ .53
------------ ------------
Class A Per Share Offering Price to the Public $10.96 $11.08
</TABLE>
27
<PAGE> 61
APPENDIX
RATINGS OF INVESTMENTS
RATINGS OF MUNICIPAL BONDS
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE ("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.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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
28
<PAGE> 62
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."
Beginning in 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 the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
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.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL ("S&P") 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> 63
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 it is 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-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC" or "C" 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 and "C" the highest 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.
CI This rating is reserved for income bonds on which no interest is
being paid.
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 Standard & Poor's 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.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Ratings are applicable to both
taxable and tax-exempt commercial paper. The four categories are as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designation 1, 2 and 3 to indicate the relative degree of
safety.
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".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
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
30
<PAGE> 64
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
S&P ratings of certain municipal note issues with a maturity of less than
three years 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.
31
<PAGE> 65
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO
November 30, 1994
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Municipal Bonds 96.7%
AIR FREIGHT 1.5%
(3)$ 7,625,000 Dayton, Ohio, Special Facilities Rev. (Emery Air Freight Corp.)
Series A, 12.50%, 10/1/09 .............................................. $ 8,797,115
------------
EDUCATION 2.1%
2,610,000 California Educational Facilities Authority Rev. (College of
Osteopathic Medicine) 7.50%, 6/1/18 .................................... 2,493,881
5,000,000 New Hampshire Higher Education & Health (Daniel Webster
College Issue) 7.625%, 7/1/16 .......................................... 4,613,750
1,500,000 New Jersey State Educational Facilities Authority Rev. (Fairleigh
Dickinson University) Series C, 6.625%, 7/1/23 ......................... 1,256,250
1,500,000 New York, New York, City Industrial Development Agency,
Marymount-Manhattan College, 7.00%, 7/1/23 ............................. 1,355,415
Pennsylvania State Higher Educational Facilities Authority,
College and University Rev., (College of Science & Agriculture)
645,000 6.90%, 4/1/14 .......................................................... 595,870
1,000,000 7.00%, 4/1/22 .......................................................... 902,710
1,000,000 Vermont Educational & Health Buildings Finance Authority,
7.15%, 4/15/14 ......................................................... 939,190
------------
TOTAL EDUCATION......................................................... 12,157,066
------------
GENERAL OBLIGATIONS 8.3%
1,000,000 Arrowhead Metropolitan District, Colorado, 8.125%, 12/1/11 ............... 978,420
2,000,000 Beaver Creek Metropolitan District, Colorado, 9.25%, 12/1/05 ............. 2,178,200
1,060,000 Berry Creek Metropolitan District, Colorado, Refunding,
7.30%, 12/1/12 ......................................................... 1,000,406
1,000,000 Brush Creek Village, Colorado, Water District, 8.875%, 11/15/09 .......... 1,161,490
(3)6,720,000 California State, Veterans Bonds, 7.375%, 4/1/19 ......................... 6,900,028
1,250,000 Cordillera Metropolitan District, Colorado, Eagle County,
8.25%, 12/1/13 ......................................................... 1,210,525
470,000 Detroit, Michigan, Local Development Finance Authority, Series A
9.50%, 5/1/21 .......................................................... 493,726
1,650,000 Dove Valley Metropolitan District, Arapahoe County, Colorado,
9.50%, 12/1/08 ......................................................... 1,717,287
4,000,000 Fairlake Metropolitan District, City & County of Denver, Colorado,
Series 1991, 9.625%, 12/1/10 ........................................... 4,450,000
2,000,000 Greenwood Metropolitan District, Colorado, 7.30%, 12/1/06 ................ 1,988,960
2,000,000 Highlands Ranch, Colorado, Metropolitan District 1,
7.30%, 9/1/12 ........................................................ 2,021,920
2,000,000 Illinois Development Finance Authority,
(Debt Restructure - East St. Louis), 7.375%, 11/15/11 .................. 1,917,940
2,175,000 Jefferson County, Colorado, Section 14 Metropolitan District,
Refunding, 9.00%, 12/1/09 .............................................. 2,522,522
1,000,000 Landmark Metropolitan District, Colorado, 8.75%, 12/1/05 ................ 1,005,280
Mountain Village Metropolitan District, San Miguel County,
Colorado
225,000 10.50%, 12/1/05 ........................................................ 237,866
355,000 11.00%, 12/1/04 ........................................................ 377,017
(3)3,000,000 11.00%, 12/1/07, Pre-refunded, 12/1/98 ................................. 3,621,870
3,000,000 New York, New York, Series B, 7.30%, 8/15/10 ............................. 2,988,450
Panorama Metropolitan District, Colorado
500,000 Series B, 9.00%, 12/1/09 ............................................... 514,540
265,000 9.50%, 12/1/05 ......................................................... 273,255
</TABLE>
F-1
<PAGE> 66
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Prinicpal Market
Amount Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
GENERAL OBLIGATIONS--continued
$ 200,000 Skyland Metropolitan District, Colorado Facilities,
Zero Coupon, 12/1/08 ....................................... $ 59,612
Southtech Metropolitan District, Colorado, Refunding
1,500,000 6.875%, 12/1/11 ............................................ 1,360,695
2,175,000 9.50%, 12/1/11 ............................................. 2,437,697
Superior, Colorado, Metropolitan District No. 2,
Refunding, Series A
660,000 7.25%, 12/1/02 ............................................. 636,035
840,000 7.75%, 12/1/13 ............................................. 779,629
University of the Virgin Islands, Public Finance Authority,
Series A
1,210,000 7.50%, 10/1/09 ............................................. 1,171,014
1,965,000 7.65%, 10/1/14 ............................................. 1,874,394
3,000,000 Virgin Islands, Public Finance Authority, 7.25%, 10/1/18 ..... 2,853,180
-------------
TOTAL GENERAL OBLIGATIONS................................. 48,731,958
-------------
HEALTH CARE 3.5%
Brevard County, Florida, Health Facilities Authority Rev.,
1,730,000 7.375%, 11/15/04 ........................................... 1,634,573
2,200,000 7.75%, 11/15/17 (Courtenay Springs Village) ................ 2,102,584
Colorado Health Facilities Authority Rev.
1,000,000 Cleo Wallace Center Project, 7.00%, 8/1/15 ................. 919,330
400,000 Mile High Transplant Bank, 8.50%, 6/1/07 ................... 394,272
2,460,000 Presbyterian/St. Luke Healthcare System Project, Series A,
6.75%, 2/15/13 ........................................... 2,195,377
1,000,000 Connecticut State Development Authority, Health Care Rev.
(Independent Living Project) Series B, 8.00%, 7/1/17 ....... 941,470
1,000,000 Lowndes County, Mississippi, Hospital Rev., Refunding
(Golden Triangle Medical Center) 8.50%, 2/1/10 ............. 1,054,510
Massachusetts State, Industrial Finance Rev.,
1,250,000 7.10%, 11/15/18 ........................................... 1,112,650
3,785,000 8.80%, 6/1/14 ............................................. 4,092,796
New Jersey Economic Development Authority, 1st Mtg. Gross Rev.
(1)1,240,000 Dover Residential Healthcare Facilities, 13.375%, 11/1/14 .. 1,199,638
1,000,000 Franciscan Oaks Project, Series A, 8.50%, 10/1/23 .......... 981,890
1,000,000 The Evergreens, 9.25%, 10/1/22 ............................. 966,920
1,000,000 North Canton, Ohio, Health Care Facilities Rev. (Waterford at
St. Luke Project) 8.625%, 11/15/21 ......................... 964,770
Pinal County, Arizona, Industrial Development Authority
(Casa Grande Regional Medical Center Project)
1,025,000 Series A, 8.125%, 12/1/22 ................................... 973,197
475,000 Series B, 8.125%, 12/1/22 .................................. 426,764
715,000 9.00%, 12/1/13 ............................................. 728,120
-------------
TOTAL HEALTH CARE........................................... 20,688,861
-------------
</TABLE>
F-2
<PAGE> 67
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS 14.3%
(3)$ 2,000,000 Alabama Special Care Facilities Financing Authority Rev.
(Montgomery Hospital) 10.25%, 11/1/15 ................................ $ 2,105,060
1,470,000 Arizona Health Facilities Authority, Hospital System Rev.,
Refunding (St. Lukes Health System) 7.25%, 11/1/14 ................... 1,336,568
1,500,000 Athens County, Ohio, Hospital Facilities Rev. (O'Bleness
Memorial Hospital Project) 7.10%, 11/15/23 ............................ 1,289,205
Bay County, Florida, Hospital Systems Rev.,
1,500,000 8.00%, 10/1/12 ........................................................ 1,484,325
500,000 8.00%, 10/1/19 ........................................................ 488,855
1,130,000 Bell County, Texas, Health Facilities Development Corp.
(King's Daughters Hospital) 9.25%, 7/1/08 ............................. 1,218,625
1,500,000 Bexar County, Texas, Health Facilities Development Rev.
(St. Lukes Hospital Project) 7.90%, 5/1/18 ............................ 1,513,575
3,150,000 Clark County, Ohio, Hospital Improvement Rev., Refunding
(Community Hospital) Series A, 9.375%, 4/1/08 ......................... 3,332,164
1,990,000 Clearfield, Pennsylvania, Hospital Authority Rev. (Clearfield
Hospital Project) Series 1994, 6.875%, 6/1/16 ......................... 1,787,099
Delaware State Economic Development Authority Rev.,
(Osteopathic Hospital Association of Delaware) Series A
3,000,000 6.90%, 1/1/18 ......................................................... 2,565,660
980,000 9.50%, 1/1/22 ......................................................... 1,006,117
(2)1,000,000 Dickinson County, Michigan, Memorial Hospital,
8.00%, 11/1/14 ........................................................ 987,170
1,350,000 Doylestown, Pennsylvania, Hospital Authority Rev. (Pine Run)
Series A, 7.20%, 7/1/23 ............................................... 1,234,805
385,000 Edinburg, Texas, Hospital Authority Rev., Project 86 (Edinburg
General Hospital) 10.00%, 7/1/11 ...................................... 398,910
1,500,000 Glendale, California, Hospital Rev., Refunding (Glendale
Memorial Hospital & Health) Series A, 9.00%, 11/1/17 .................. 1,567,500
Illinois Health Facilities Authority Rev. (Holy Cross Hospital
Project)
500,000 6.25%, 3/1/04 ......................................................... 472,105
1,250,000 6.70%, 3/1/14 ......................................................... 1,120,763
Illinois Health Facilities Authority Rev. (St. Elizabeths Hospital)
1,250,000 7.625%, 7/1/10 ........................................................ 1,181,488
1,500,000 7.75%, 7/1/16 ......................................................... 1,416,180
1,000,000 Jackson County, Oklahoma, Memorial Hospital Authority Rev.
(Jackson Memorial Hospital) 9.00%, 8/1/15 ............................. 1,105,600
(1)1,500,000 Jackson Park Hospital Foundation, Chicago, Illinois (Jackson
Park Hospital) 9.00%, 3/1/05 .......................................... 1,245,000
500,000 Leflore County, Oklahoma, Hospital Authority Improvement Rev.,
9.40%, 5/1/06 ......................................................... 525,620
2,000,000 Lorain, Ohio, Hospital Improvement Rev., Refunding (Lakeland
Community Hospital, Inc. Project) 9.50%, 11/1/12 ...................... 2,125,460
765,000 Loves Park, Illinois, 1st Mtg. Rev. (Hossier Care Project)
Series A, 9.75%, 8/1/19 ............................................... 799,547
470,000 Maine Health & Higher Educational Facilities Authority Rev.
(Franklin Memorial Hospital) 9.875%, 7/1/13 ........................... 532,322
Massachusetts State Health & Educational Facilities Authority Rev.,
Series B
1,080,000 Holyoke Hospital, 6.50%, 7/1/15 ......................................... 942,116
1,000,000 Milford-Whitinsville Regional Project, 7.75%, 7/15/17 ................... 906,550
</TABLE>
F-3
<PAGE> 68
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOSPITALS-CONTINUED
$ 500,000 Massachusetts State Industrial Finance Agency, Rev. (Atlanticare
Medical Center) Series B, 10.125%, 11/1/14.............................. $ 540,680
400,000 McCormick County, South Carolina, Hospital Facilities Rev.,
Series 88 (McCormick Hospital) 10.50%, 3/1/18........................... 421,356
2,585,000 Mercer County, West Virginia, Commercial Development Rev.
(Rehabilitation Hospital) 12.00%, 12/1/15............................... 2,744,133
2,900,000 Michigan State Hospital Finance Authority Rev., Refunding
(Saratoga Community Hospital) 8.75%, 6/1/10............................. 3,003,878
Missouri State Health & Educational Facilities, Series A
1,075,000 Bethesda Health Group, Inc. Project, 7.50%, 8/15/12..................... 981,841
1,500,000 6.625%, 8/15/05......................................................... 1,362,270
820,000 Montgomery County, Texas, Health Facilities Development Corp.,
Hospital Mortgage Rev. (Woodlands Medical Center Project)
8.85%, 8/15/14........................................................... 861,353
1,495,000 Newark-Wayne Community Hospital, Inc., New Jersey, Hospital Rev.,
Refunding & Improvement, Series A, 7.60%, 9/1/15......................... 1,440,492
1,455,000 New Hampshire Higher Educational & Health Facility Authority
Hospital Rev. (Monadnock Community Hospital),
Series 1990, 9.125%, 10/1/20............................................. 1,597,925
2,500,000 New Jersey Health Care Facilities Authority Rev., (Raritan Bay
Medical Center), 7.25%, 7/1/14 ......................................... 2,288,225
Newton, Kansas, Hospital Rev., Series A,
2,000,000 7.375%, 11/15/14........................................................ 1,865,920
1,500,000 7.75%, 11/15/24......................................................... 1,409,205
170,000 Ohio County, Kentucky, Hospital Facilities Rev. (Ohio County
Hospital) 12.00%, 10/1/15 .............................................. 178,709
Philadelphia, Pennsylvania, Hospitals & Higher Education
750,000 Children's Seashore House, Series B, 7.00%, 8/15/12..................... 713,460
2,000,000 Facilities Authority, Hospital Rev. (Roxborough Memorial
Hospital) Series 2, 7.25%, 3/1/24....................................... 1,712,400
500,000 Facilities Authority, Hospital Rev. (Temple University Hospital)
Series A, 6.625%, 11/15/23.............................................. 440,835
500,000 Randolph County, West Virginia, Building Commission, Refunding
& Improvement (Davis Memorial Hospital Project)
7.65%, 11/1/21.......................................................... 500,590
3,255,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital Project) 7.75%, 4/1/13..................... 3,096,091
Scranton-Lackawanna, Pennsylvania, Health & Welfare Authorities
Rev. (Allied Services Rehabilition Hospital), Series A
1,500,000 7.125%, 7/15/05......................................................... 1,422,900
3,000,000 7.375%, 7/15/08......................................................... 2,823,210
300,000 Scranton-Lackawanna, Pennsylvania, Health & Welfare Authorities
Rev. (Moses Taylor Hospital Project) Series B, 8.25%, 7/1/09............ 308,868
400,000 Selma, Alabama, Special Care Facilities Financing Authority
Hospital Rev. (Vaughan Regional Medical Center Project)
9.50%, 6/1/14........................................................... 448,416
South Dakota State Health and Educational Authority Rev.
(Huron Regional Medical Center)
1,000,000 7.00%, 4/1/10........................................................... 920,650
1,000,000 7.25%, 4/1/20........................................................... 910,170
</TABLE>
F-4
<PAGE> 69
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOSPITALS-CONTINUED
$ 1,000,000 Southwestern Illinois Development Authority, Medical Facilities
Rev. (Andersen Hospital Project) Series A, 7.00%, 8/15/12 .............. $ 936,440
2,000,000 Tulsa, Oklahoma, Industrial Authority, Hospital Rev. (Tulsa
Regional Medical Center) 7.20%, 6/1/17 ................................. 1,834,220
1,880,000 Tyler, Texas, Health Facilities Development Corp. (East Texas
Medical Center Regional Health) Series A, 6.625%, 11/1/11 ............. 1,676,584
2,000,000 Valley Health System, California, Refunding, 6.875%, 5/15/23 ............. 1,702,680
800,000 Vermont Educational & Health Buildings Financing Agency Rev.
(Northwestern Medical Center) 9.75%, 9/1/18 ............................ 871,264
1,000,000 Warren County, Pennsylvania, Hospital Authority Rev. (Warren
General Hospital Project) Series A, 6.90%, 4/1/11 ...................... 921,850
2,000,000 Washington County, Pennsylvania, Hospital Authority Rev.
(Canonsburg General Hospital Project) 7.35%, 6/1/13 ................... 1,777,240
Wells County, Indiana, Hospital Authority Rev. (Caylor-Nickel
Medical Center, Inc.)
400,000 8.50%, 4/15/03 ......................................................... 392,924
3,600,000 8.75%, 4/15/12 ......................................................... 3,771,216
790,000 Weslaco, Texas, Health Facilities Development Corp., Hospital
Rev. (Weslaco Health Facility) 10.375%, 6/1/16 ......................... 914,867
1,000,000 West Virginia State, Hospital Finance Authority, Refunding
& Improvement (Fairmont General Hospital) Series A,
6.75%, 3/1/14........................................................... 885,220
Wilmington, Delaware, Hospital Rev. (Osteopathic Hospital,
Association of Delaware/Riverside Hospital)
300,000 Series A, 10.00%, 10/1/03............................................... 317,454
500,000 Series A, 10.20%, 10/1/18............................................... 586,430
500,000 Woodward, Oklahoma, Municipal Authority Hospital, Rev.,
9.25%, 11/1/14.......................................................... 528,595
------------
TOTAL HOSPITALS......................................................... 83,798,950
------------
HOTELS 0.5%
1,575,000 Gulf Shores, Alabama, Rev. (Quality Inn, Beachsiding Project)
Series 1986, 11.00%, 6/1/16............................................. 1,597,097
800,000 Minneapolis, Minnesota, Commercial Development Rev.
(Holiday Inn Metrodome Project) 10.50%, 6/1/03.......................... 805,000
(1)650,000 Minneapolis, Minnesota, Community Development Agency,
Commercial Development Rev. (Standard Mill Whitney Hotel
Project) 12.00%, 4/1/10................................................. 515,125
------------
TOTAL HOTELS............................................................ 2,917,222
------------
HOUSING 10.4%
(1)1,000,000 Atlanta, Georgia, Urban Residential Finance Authority, Multi-family
Mtg. Rev. (Peachtree Apartments) 10.50%, 12/1/10........................ 840,830
Austin, Minnesota, Multi-family Rev., Refunding
(Cedars of Austin Project)
1,020,000 7.50%, 4/1/17........................................................... 974,100
2,000,000 7.50%, 4/1/18........................................................... 1,915,000
1,710,000 Austin, Texas, Housing Finance Corp., Multi-family Rev.
(Stassey Woods Apartments Project) 6.75%, 4/1/19........................ 1,563,709
2,500,000 Berks County, Pennsylvania, Municipal Authority Rev. (Phoebe
Berks Village, Inc. Project) 8.25%, 5/15/22............................. 2,420,925
</TABLE>
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<TABLE>
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<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOUSING-CONTINUED
Harris County, Texas, Housing Finance Corp., Single Family Mtg. Rev.
$ 355,000 Series 1983-A, 10.125%, 7/15/03......................................... $ 349,934
1,800,000 Series 1983-A, 10.375%, 7/15/14......................................... 1,755,522
300,000 9.875%, 3/15/14......................................................... 300,378
80,000 11.25%, 4/15/06......................................................... 79,222
2,770,000 Iowa Finance Authority, Multi-family Rev., Refunding (Park West
Project) 8.00%, 10/1/23................................................. 2,785,152
Lebanon County, Pennsylvania, Health Facilities Authority Rev.,
(Church of Christ Homes Project)
1,250,000 7.00%, 10/1/14.......................................................... 1,128,813
1,250,000 7.25%, 10/1/19.......................................................... 1,119,825
1,500,000 Massachusetts State Health & Educational Facilities Authority Rev.
(Independent Living) 8.10%, 7/1/18...................................... 1,461,435
Massachusetts State Housing Finance Agency,
1,000,000 Series 38, 7.20%, 12/1/26............................................... 983,750
2,750,000 Single family, 6.75%, 6/1/26............................................ 2,554,063
3,780,000 Montgomery County, Pennsylvania, Industrial Development
Authority, Rev., (Assisted Living Facilities), 8.25%, 5/1/23............ 3,578,715
New Hampshire State Housing Finance Authority (Single Family
Residential Mortgage)
500,000 6.85%, 7/1/16........................................................... 480,000
190,000 6.95%, 1/1/26........................................................... 180,975
New Hope, Minnesota, Multi-family Rev., Refunding (Broadway
Lanel Project)
950,000 7.75%, 9/1/07........................................................... 912,741
2,320,000 8.00%, 9/1/18........................................................... 2,215,600
2,615,000 North Miami, Florida, Health Care Facilities Rev. (Imperial Club
Project) Series A, 9.25%, 1/1/13........................................ 2,679,957
North St. Paul, Minnesota, Multi-family, Refunding
(Cottages North St. Paul)
980,000 9.00%, 2/1/09........................................................... 997,150
2,220,000 9.25%, 2/1/22........................................................... 2,328,225
2,000,000 North Syracuse, New York, Housing Authority Rev., (Janus Park
Project), 8.00%, 6/1/14................................................. 1,876,740
1,430,000 Oklahoma Housing Finance Agency, Single Family, Class A,
7.997%, 8/1/18.......................................................... 1,508,650
675,000 Rhode Island Housing & Mortgage Finance, 7.60%, 10/1/21................... 675,959
3,105,000 Richmond, California, Redevelopment Agency, 7.50%, 9/1/23................. 2,930,344
300,000 Richmond County, Georgia, Development Authority, Nursing
Home Rev., Refunding (Beverly Enterprises, Inc.-
Georgia Project) 8.75%, 6/1/11.......................................... 309,978
(1)7,000,000 Richmond, Virginia, Redevelopment & Housing Authority,
Multi-family Mtg. Rev. (Triton/Richmond) Series A, 10.50%, 12/1/05...... 6,020,000
3,000,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd.
Project) Series A, 7.75%, 12/1/15....................................... 2,767,650
Santa Rosa, California, (Fountaingrove Parkway Extension)
500,000 7.40%, 9/2/13........................................................... 465,535
1,000,000 7.625%, 9/2/19.......................................................... 931,780
750,000 Snowmass Village, Colorado, Multi-family, Refunding, Series A,
8.00%, 9/1/14........................................................... 699,383
</TABLE>
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<TABLE>
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<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOUSING-CONTINUED
$ 2,000,000 Spring Lake Park, Minnesota, Multi-family Rev., Refunding,
8.375%, 1/1/22.......................................................... $ 1,965,000
4,000,000 St. Charles, Illinois, Multi-family Rev. (Wessel Court Project)
7.60%, 4/1/24........................................................... 3,738,520
Telluride, Colorado, Housing Authority, Housing Rev.
2,000,000 Refunding (Shandoka Apartments Project) 7.875%, 6/1/17.................. 1,915,000
1,500,000 Series 1991, 9.10%, 6/1/01.............................................. 1,677,255
------------
TOTAL HOUSING........................................................... 61,087,815
------------
INDUSTRIAL DEVELOPMENT REVENUE 14.4%
500,000 Casa Grande, Arizona, Industrial Development Authority,
Refunding, 8.25%, 12/1/15............................................... 477,995
Chandler, Arizona, Industrial Development Authority Rev.
(Chandler Financial Center Project) Series 1986,
2,955,000 7.125%, 12/1/16......................................................... 3,008,071
(1)875,000 10.75%, 12/1/15......................................................... 798,691
200,000 Charlotte County, Florida, Industrial Development Authority,
Refunding (Beverly Enterprises) 10.00%, 6/1/11.......................... 216,364
1,000,000 Chartiers Valley, Pennsylvania, Inc., 1st Mtg. Rev.
(United Methodist Health Center) Series A, 9.50%, 12/1/15............... 1,154,160
1,500,000 Chesterfield, Missouri, Industrial Development Authority Rev.
(St. Andrews Episcopal-Presbyterian) Series A, 8.50%, 12/1/19........... 1,510,005
1,820,000 Collier County, Florida, Industrial Development Authority Rev.,
Retirement Rent Housing, Refunding (Beverly Enterprises,
Inc.) 10.75%, 3/1/03.................................................... 2,009,061
400,000 Connecticut State Development Authority, Industrial Development
(Stone Container Corp.) 11.625%, 6/1/11................................. 411,140
1,095,000 Covington-Alleghany County, Virginia, Industrial Development
Authority Rev., Refunding (Beverly Enterprises, Inc. Project)
9.375%, 9/1/01.......................................................... 1,156,123
(4)915,000 Decatur, Georgia, Downtown Development Authority,
(Decatur Hotel Association Project) 7.125%, 11/1/16..................... 621,834
2,925,000 Delaware State, Economic Development Authority, Refunding,
1st Mtg. (Dover Health Care) 7.875%, 4/1/08............................. 2,893,673
Denver, Colorado, City and County, Industrial Development Rev.,
(Jewish Community Centers Project)
1,055,000 7.375%, 3/1/09.......................................................... 1,003,178
1,130,000 7.50%, 3/1/14........................................................... 1,069,477
815,000 7.875%, 3/1/19.......................................................... 768,798
875,000 Fort Walton Beach, Florida, 1st Mtg. (Shoney's Inn & Restaurant)
10.50%, 12/1/16......................................................... 893,139
2,030,000 Harrison, Ohio, Refunding (Harrison Avenue K Mart Corp.
Project) Series A, 8.125%, 12/1/02...................................... 2,003,123
285,000 Hernando County, Florida, Refunding (Beverly Enterprises, Inc.)
10.00%, 9/1/11.......................................................... 308,664
2,500,000 Hialeah Gardens, Florida, (Waterford Convalescent) Series A,
8.25%, 12/1/14.......................................................... 2,367,175
1,500,000 Homestead, Florida, (Brookwood Gardens Center Project)
Series A, 8.25%, 12/1/14................................................ 1,420,305
860,000 Lee County, Virginia, Industrial Development Authority Hospital
Facility Rev. (Lee County Community Hospital) 10.50%, 8/1/11............ 917,990
4,000,000 Lehigh County, Pennsylvania, (Allentown Interstate Motel)
8.00%, 8/1/12........................................................... 3,849,720
</TABLE>
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<TABLE>
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<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
INDUSTRIAL DEVELOPMENT REVENUE-CONTINUED
$ 1,300,000 Marion County, Florida, Industrial Development Authority Rev.
(Marion Ross Corp.) 11.875%, 8/1/11..................................... $ 1,315,015
1,000,000 Martin County, Florida, Industrial Development Rev. (Indiantown
Cogeneration Project), Series A, 7.875%, 12/15/25....................... 1,001,480
910,000 Montgomery County, Pennsylvania (Pennsburg Nursing &
Rehabilitation Center) 7.625%, 7/1/18................................... 784,711
Montgomery County, Pennsylvania, Industrial Development
Authority Rev., 1st Mtg. (Meadowood Corp. Project)
1,550,000 Series A, 9.25%, 12/1/00................................................ 1,583,434
2,025,000 Series A, 10.00%, 12/1/19............................................... 2,154,762
2,199,150 Series B, Zero Coupon, 12/1/20.......................................... 162,649
2,660,000 7.75%, 9/1/14........................................................... 2,477,285
2,500,000 10.25%, 12/1/20......................................................... 2,688,825
3,595,000 Montgomery County, Pennsylvania, Industrial Development
Authority Rev., Health Care (Advanced Geriatric) Series A,
8.375%, 7/1/23.......................................................... 3,370,133
New Jersey Economic Development Authority
1,000,000 Electric Energy Facilities Rev. (Vineland Cogeneration L.P.
Project) 7.875%, 6/1/19............................................... 1,016,680
1,000,000 Series E (Borg Warner Corp.) 11.20%, 8/1/04............................. 1,080,560
North Hampton County, Pennsylvania, Industrial Development
Authority Rev., 1st Mtg. (Kirkland Village Project)
750,000 7.375%, 12/15/18........................................................ 658,223
750,000 7.50%, 12/15/23......................................................... 653,820
2,000,000 Ohio State, Refunding, 1st Mtg. (Swifton Commons)
8.125%, 12/1/15......................................................... 1,852,860
480,000 Orange County, Florida, Industrial Development Authority Rev.,
Refunding (Beverly Enterprises, Inc.) 9.25%, 8/1/10..................... 504,605
Philadelphia, Pennsylvania (FFE/Maplewood)
2,000,000 8.00%, 1/1/14........................................................... 1,839,300
1,000,000 8.00%, 1/1/24........................................................... 900,160
Philadelphia, Pennsylvania, Industrial Development Authority Rev.
1,500,000 Cathedral Village, 7.25%, 4/1/15........................................ 1,362,630
1,000,000 Lutheran Retirement Home, Series B, 5.00%, 1/1/17....................... 639,470
1,185,000 1st Mtg., RHA/Care Pavilion Project, 10.25%, 2/1/18..................... 1,203,782
1,000,000 Pittsylvania County, Virginia, Series A, 7.45%, 1/1/09.................. 934,760
510,000 Pocahontas, Iowa (International Harvester Co.) 10.25%, 10/1/00.......... 531,711
Port of Corpus Christi, Texas (Valero Refining & Marketing Co.)
500,000 Series B, 10.625%, 6/1/08............................................... 556,950
4,505,000 10.25%, 6/1/17.......................................................... 4,977,034
2,000,000 Port of New Orleans, Louisiana (Avondale Industries Inc., Project)
8.25%, 6/1/04........................................................... 2,003,900
Port of New Orleans, Louisiana (Continental Grain Co.)
3,000,000 Refunding, 7.50%, 7/1/13................................................ 2,716,680
1,000,000 Series A, 14.50%, 2/1/02................................................ 1,115,870
1,000,000 14.50%, 1/1/02.......................................................... 1,111,910
735,000 Santa Fe, New Mexico, Refunding (Casa Real Nursing Home)
9.75%, 1/1/13........................................................... 754,632
250,000 Santa Rosa County, Florida, Industrial Development Authority
Rev., 1st Mtg. (Sandy Ridge Care Center) 10.50%, 4/1/16................. 252,208
1,380,000 Scott County, Tennessee (Fruehauf Corp.) 10.75%, 1/1/09................... 1,429,997
2,540,000 Scottsdale, Arizona, Industrial Development Authority Rev.,
1st Mtg. (Westminister Village) 10.00%, 6/1/17.......................... 2,710,434
</TABLE>
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<TABLE>
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<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
INDUSTRIAL DEVELOPMENT REVENUE-CONTINUED
$ 3,190,000 St. Charles, Illinois (Tri-City Center Project) 7.50%, 11/1/13............ $ 2,911,545
St. John's County, Florida, Industrial Development Authority,
Refunding (Vicars Landing Project) Series A
500,000 6.25%, 2/15/04.......................................................... 458,280
2,080,000 6.75%, 2/15/12 ......................................................... 1,842,464
St. Louis, Missouri, Industrial Development Authority Rev.,
1st Mtg. (Deaconess Manor Association)
500,000 7.50%, 6/1/16........................................................... 435,575
500,000 7.50%, 6/1/23........................................................... 430,190
470,000 Sunrise, Florida, Series 86 (Sunshine Palms Adult Congregate
Living Facility) 10.75%, 12/1/16........................................ 471,058
1,400,000 Tempe, Arizona, Industrial Development Authority Rev.
(Friendship Village Temple) Series A, 6.75%, 12/1/13.................... 1,244,194
750,000 Vincent, Alabama, Industrial Development Board (Shelby Motel
Group, Inc. Project) 10.50%, 9/1/16..................................... 744,375
(4)1,500,000 Walton County, Florida, Industrial Development Authority
(International Medical Institute) 10.50%, 1/1/17........................ 589,380
------------
TOTAL INDUSTRIAL DEVELOPMENT REVENUE.................................... 84,332,217
------------
LIFE CARE 5.7%
Atlantic Beach, Florida, Rev., Series A,
1,590,000 7.50%, 10/1/02.......................................................... 1,539,644
2,085,000 7.875%, 10/1/08......................................................... 1,991,946
Chartiers Valley, Pennsylvania, Industrial & Commercial
Development Authority (Ashbury Health Center Project)
500,000 6.70%, 12/1/05.......................................................... 474,685
500,000 6.75%, 12/1/06.......................................................... 471,410
1,000,000 7.25%, 12/1/11.......................................................... 954,090
2,000,000 7.40%, 12/1/15.......................................................... 1,882,720
1,150,000 Cumberland County, Pennsylvania, Municipal Authority Rev.,
1st Mtg. (Carlisle Hospital & Health) 6.80%, 11/15/14................... 1,011,425
500,000 Fayetteville, Arkansas, Public Facilities Board Rev. (Butterfield
Trail Village Project) Series B, 9.50%, 9/1/14.......................... 517,340
1,350,000 Hanover Park, Illinois, 1st Mtg. Rev. (Windsor Park Manor
Project) 9.50%, 12/1/14................................................. 1,433,268
Illinois Health Facilities Authority Rev.
1,000,000 Covenant Retirement Communities, Series A, 7.60%, 12/1/12............... 912,650
1,000,000 Fairview Obligated Group Project, Series A, 9.50%, 10/1/22.............. 1,003,550
Illinois Health Facilities Authority Rev. (Friendship Village)
1,000,000 6.65%, 12/1/06.......................................................... 936,490
1,645,000 6.75%, 12/1/08.......................................................... 1,529,751
Massachusetts State Industrial Finance Agency Rev., 1st Mtg.
1,000,000 Brookhaven Community, Series A, 7.00%, 1/1/15........................... 933,750
500,000 Brookhaven Community, 10.25%, 1/1/18.................................... 577,660
500,000 Orchard Cove, Inc., 8.00%, 5/1/99....................................... 499,085
2,000,000 Orchard Cove, Inc., 9.00%, 5/1/22....................................... 2,082,000
130,000 Pioneer Valley, 7.00%, 10/1/01.......................................... 131,399
500,000 Pioneer Valley, 7.00%, 10/1/20.......................................... 496,250
3,000,000 Reeds Landing Project, 8.625%, 10/1/23.................................. 2,882,700
500,000 Montgomery County, Pennsylvania, Higher Education & Health
Authority Rev., Retirement Community (GDL Farms) Series A,
9.50%, 1/1/20........................................................... 585,500
</TABLE>
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<TABLE>
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Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
LIFE CARE-CONTINUED
$ 3,000,000 Palm Beach County, Florida, Health Facilities Authority Rev.,
Refunding (Waterford Project) 7.75%, 10/1/15............................ $ 2,868,570
(1)1,083,000 Peoria, Arizona, Industrial Development Authority (Sierra Winds
Life Care Community Project) 10.75%, 11/1/17............................ 893,962
Plantation, Florida, Health Facilities Authority Rev. (Covenant
Retirement Communities, Inc.)
1,000,000 7.625%, 12/1/12......................................................... 945,010
750,000 7.75%, 12/1/22.......................................................... 717,908
2,500,000 Riverside County, California, Refunding (Air Force Village West,
Inc.) Series A, 8.125%, 6/15/20......................................... 2,445,025
Salem, Oregon, Hospital Facility Authority Rev.,
700,000 7.25%, 12/1/15.......................................................... 643,692
2,000,000 7.50%, 12/1/24.......................................................... 1,886,880
------------
TOTAL LIFE CARE......................................................... 33,248,360
------------
MISCELLANEOUS 4.2%
1,800,000 Brea & Olinda, California, University School District, Certificate
of Participation (High School Refunding Program) Series B,
7.00%, 8/1/18........................................................... 1,645,290
500,000 Brevard County, Florida, Tourist Development Tax Rev.,
6.875%, 3/1/13.......................................................... 434,975
3,500,000 District of Columbia Rev. (National Public Radio) Series A,
7.70%, 1/1/23........................................................... 3,401,895
1,250,000 Erlanger, Kentucky, Assessment Rev. (Public Improvement
Project) 7.50%, 8/1/18.................................................. 1,104,850
2,960,000 Fresno, California, Certificates of Participation, 8.50%, 5/1/16.......... 3,001,440
500,000 Hopewell, Virginia, Industrial Development Authority, Resource
Recovery Rev., Refunding (Stone Container Corp. Project)
8.25%, 6/1/16........................................................... 500,700
2,500,000 Hyland Hills Metropolitan Park & Recreation District, Colorado,
Special Rev., Series A, 8.625%, 12/15/12................................ 2,529,900
(3)4,000,000 Lake Charles, Louisiana, Harbor & Terminal Facilities Rev.
(Trunkline Liquified Natural Gas Co. Project) 7.75%, 8/15/22............ 4,051,480
Pennsylvania Convention Center Authorities Rev., Refunding, Series A
1,000,000 6.60%, 9/1/09........................................................... 912,050
1,555,000 6.70%, 9/1/14........................................................... 1,393,871
700,000 6.75%, 9/1/19........................................................... 624,022
1,000,000 South Orange County, California, Public Funding Authority Rev.,
Series B, 7.00%, 9/1/07.................................................. 955,300
Texas General Services, Community Partner Interests (Office
Building and Land Acquisition Project)
1,000,500 7.00%, 8/1/09............................................................ 945,282
1,090,500 7.00%, 8/1/19............................................................ 1,014,492
1,400,500 7.00%, 8/1/24............................................................ 1,297,199
790,000 Virgin Islands Port Authority, Marine Division Rev. (Marine
Terminal) Series A, 10.125%, 11/1/05..................................... 816,465
------------
TOTAL MISCELLANEOUS...................................................... 24,629,211
------------
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</TABLE>
<TABLE>
<CAPTION>
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Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL UTILITY DISTRICT 0.4%
$ 750,000 Clarksburg, West Virginia, Water Rev., 10.875%, 2/1/20,
Pre-refunded, 2/1/95.................................................... $ 772,582
275,000 Fort Bend County, Texas, Refunding, #25, 8.00%, 10/1/15................... 280,063
955,000 Hawaii County, Hawaii, Improvement District No. 17, Special
Assessment--Kaloko Subdivision, 9.50%, 8/1/11........................... 967,663
200,000 Northwest Harris County, Texas, Municipal Utility #22, Refunding,
Combined Tax and Rev., Water Works and Sewer System,
8.00%, 10/1/15.......................................................... 203,932
------------
TOTAL MUNICIPAL UTILITY DISTRICT........................................ 2,224,240
------------
NURSING HOMES 8.1%
720,000 Albuquerque, New Mexico, Nursing Home Rev., Refunding
(Albuquerque Health Care) 9.75%, 12/1/14................................ 765,050
500,000 Carmel, Indiana, Retirement Rental Housing Rev., Refunding
(Beverly Enterprises, Inc.) 8.75%, 12/1/08.............................. 523,750
Charleston County, South Carolina, Health Facilities Rev.,
Refunding, 1st Mtg.
750,000 Episcopal Project, 9.75%, 4/1/16........................................ 805,800
1,500,000 Roper Geriatric Center, Inc. Project, 7.75%, 5/1/17..................... 1,476,375
Colorado Health Facilities Authority Rev. (Beth Israel at Shalom,
Park Project)
585,000 7.40%, 12/15/07......................................................... 575,868
250,000 8.00%, 12/15/22......................................................... 254,215
1,025,000 Columbia County, Pennsylvania, Industrial Development Authority,
Refunding (1st Street Association Project) 9.00%, 5/1/14................ 1,071,812
Cuyahoga County, Ohio, Health Care Facilities Rev. (Jennings Hall)
1,000,000 7.20%, 11/15/14......................................................... 889,130
1,500,000 7.30%, 11/15/23......................................................... 1,328,940
2,500,000 DeSoto, Texas, Health Facilities Development Corp. Rev. (Park
Manor Senior Care, Inc. Project) 11.00%, 12/1/16........................ 2,588,150
500,000 Fairfield, Ohio, Economic Development Rev., Refunding (Beverly
Enterprises, Inc.) 8.50%, 1/1/03........................................ 508,680
1,000,000 Gardendale, Alabama, Hospital & Nursing Home Medical Clinic
Board Rev., Series A, 9.50%, 4/1/20..................................... 1,034,090
Indiana Health Facilities Authority (St. Anthony Home)
1,500,000 7.00%, 5/15/17.......................................................... 1,337,520
1,000,000 7.25%, 5/15/24.......................................................... 920,750
250,000 Lee County, Florida, Industrial Development Authority, Economic
Development Rev., Refunding (Encore Nursing Center Partner)
8.125%, 12/1/07......................................................... 240,715
Lehigh County, Pennsylvania, 1st Mtg, (Bible Fellowship Project)
250,000 7.15%, 12/15/08......................................................... 230,478
1,700,000 8.00%, 12/15/23......................................................... 1,584,757
710,000 Louisiana Public Facilities Authority Rev., Refunding
Industrial Development (Beverly Enterprises, Inc.)
8.25%, 9/1/08........................................................... 703,539
2,000,000 Luzerne County, Pennsylvania, Industrial Development Authority,
1st Mtg. Rev., Refunding (Birchwood Nursing Center Project)
Series A, 7.875%, 12/1/13............................................... 1,896,600
1,200,000 Maplewood, Minnesota, Health Care Facilities Rev.,
(VOA Care Centers Project) 7.45%, 10/1/16............................... 1,114,752
</TABLE>
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
NURSING HOMES-CONTINUED
$ 500,000 Massachusetts Industrial Finance Agency, Industrial Development
Authority, Refunding (Beverly Enterprises, Inc.)
8.375%, 5/1/09........................................................ $ 502,350
1,500,000 Massachusetts State Industrial Finance Agency Rev., 1st Mtg.,
7.70%, 1/1/14 ........................................................ 1,449,075
Massachusetts State Industrial Finance, Refunding, 1st Mtg.,
Series A
2,000,000 Evanswood Bethzatha, 7.625%, 1/15/14.................................. 1,870,440
1,000,000 Healthcare Corp Project, 7.625%, 4/1/13............................... 945,300
1,005,000 7.40%, 1/15/09........................................................ 942,298
Minneapolis, Minnesota, Health Care Facilities Authority Rev.
1,950,000 Ebenezer Society Project, Series A, 7.20%, 7/1/23 .................... 1,716,644
1,000,000 St. Olaf Residence, Inc. Project, 7.10%, 10/1/23...................... 886,230
2,410,000 Nevada State Department Community Health Facilities, Rev.,
Refunding (Washoe Convalescent Center Project)
8.125%, 6/1/03........................................................ 2,386,792
New Jersey Economic Development Authority Rev., Refunding
500,000 Burnt Tavern Convalescent, Series A, 9.00%, 11/15/13.................. 516,370
840,000 Stone Arch Nursing Home Project, 8.75%, 12/1/10....................... 855,649
1,500,000 United Methodist Homes of New Jersey, 6.50%, 7/1/23................... 1,196,880
500,000 Zirbser-Greenbriar, Inc., Series A, 7.375%, 7/15/03................... 472,565
915,000 Zirbser-Greenbriar, Inc., Series A, 7.75%, 7/15/08.................... 855,214
750,000 1st Mtg., Delaire Nursing, Series A, 8.75%, 11/1/10................... 755,888
New Jersey, Economic Development Rev., Series A
500,000 8.00%, 1/1/09......................................................... 470,290
1,000,000 8.25%, 1/1/17......................................................... 929,360
500,000 Oakland County, Michigan, Economic Development (Pontiac
Osteopathic Hospital Project) 9.625%, 1/1/20 ......................... 588,100
500,000 San Antonio, Texas, Health Facilities Development Corp. Rev.
(Encore Nursing Center Partner) 8.25%, 12/1/19........................ 492,210
Sherman, Illinois (Villa Health Care) 1st Mtg., Series A
500,000 8.25%, 10/1/14........................................................ 474,760
500,000 8.50%, 10/1/24........................................................ 471,675
Smith County, Tennessee, Health and Educational Facilities,
(Healthcare Corporation Project) Refunding
250,000 7.00%, 4/1/08......................................................... 232,393
500,000 7.40%, 4/1/13......................................................... 459,660
South Carolina Jobs Economic Dev. Authority, Health Facilities
Rev., 1st Mtg. (Lutheran Homes South Carolina Project)
250,000 7.75%, 10/1/12........................................................ 240,523
750,000 8.00%, 10/1/22........................................................ 719,175
1,000,000 St. Paul, Minnesota, Housing & Redevelopment Authority,
Commercial Development Rev., Refunding (Beverly
Enterprises, Inc.) 7.75%, 11/1/02..................................... 978,750
470,000 Truth or Consequences, New Mexico, Nursing Home Rev.,
Refunding & Improvement (Sierra Health Care)
9.75%, 12/1/14........................................................ 502,515
4,030,000 Valparaiso, Indiana, Economic Development Rev., Refunding,
1st Mtg. (Whispering Pines) 9.50%, 1/1/07............................. 4,240,688
250,000 Warren County, Pennsylvania, Industrial Development Authority
Rev., Refunding (Beverly Enterprises, Inc.) 9.00%, 11/1/12............ 258,913
</TABLE>
<PAGE> 77
High Yield Municipal Portfolio Investment Portfolio, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NURSING HOMES-CONTINUED
Westmoreland County, Virginia, Industrial Development Authority,
Health Facilities Rev., 1st Mtg. (Mary Washington Health Center)
$ 250,000 7.00%, 2/1/13.................................................... $ 221,228
1,500,000 7.00%, 2/1/23 ................................................... 1,281,450
------------
TOTAL NURSING HOMES.............................................. 47,764,356
------------
POLLUTION CONTROL REVENUE 10.3%
Baltimore County, Maryland (Bethlehem Steel Corp.
Project), Series A
500,000 7.50%, 6/1/15.................................................... 474,525
560,000 7.55%, 6/1/17.................................................... 532,212
Beaver County, Pennsylvania, Industrial Development Authority
2,500,000 Cleveland Electric Illuminating Co., 10.50%, 9/1/15.............. 2,629,525
2,000,000 Cleveland Electric Illuminating Co., 11.125%, 11/15/14........... 2,110,540
(3)4,075,000 Ohio Edison, 10.50%, 10/1/15..................................... 4,339,100
650,000 Toledo Edison, Series A, 10.75%, 11/15/15........................ 688,766
(3)6,235,000 Toledo Edison, 13.25%, 11/15/14 ................................. 6,588,960
565,000 Brazos River Authority, Texas (Texas Utilities Electric Co.
Project A) 9.875%, 10/1/17....................................... 626,652
Clairborne County, Mississippi (Middle South Energy)
1,355,000 Series D, 12.50%, 6/15/15........................................ 1,442,424
1,500,000 9.50%, 4/1/16.................................................... 1,597,770
(3)5,575,000 9.875%, 12/1/14.................................................. 6,283,526
1,300,000 Hodge, Louisiana, Utility Rev. (Stone Container) Series 1990,
9.00%, 3/1/10.................................................... 1,320,345
Illinois Development Finance Authority (Illinois Power Co. Project)
1,500,000 Refunding, Series A, 8.30%, 4/1/17 .............................. 1,598,265
1,245,000 10.75%, 3/1/15................................................... 1,283,956
3,000,000 Monroe County, Georgia Development Authority (Georgia
Power Co. Project) 10.50%, 9/1/15................................ 3,172,890
New Hampshire State Industrial Development Authority Rev.
3,420,000 Public Service Co. of New Hampshire Project, Series A,
7.65%, 5/1/21 ................................................... 3,288,877
4,000,000 United Illuminating Co., Series B, 10.75%, 10/1/12............... 4,566,960
2,500,000 New York State Energy Research & Development Authority
(Long Island Lighting) Series B, 7.15%, 2/1/22................... 2,296,375
Ohio State Air Quality Development Authority Rev.
3,000,000 Cincinnati Gas & Electric, 10.125%, 12/1/15...................... 3,205,830
4,930,000 Toledo Edison, Series B, 9.875%, 11/1/22......................... 5,344,465
2,000,000 Ohio State Water Development Authority Pollution Control
Facilities Rev., Series A, 8.00%, 10/1/23........................ 1,872,400
Parish of West Feliciana, Louisiana (Gulf States Utilities Project)
500,000 Series A, 7.50%, 5/1/15.......................................... 488,735
440,000 Series A, 10.625%, 5/1/14........................................ 454,947
500,000 Series D, 12.00%, 5/1/14......................................... 517,995
600,000 12.00%, 5/1/14................................................... 621,594
1,515,000 Pope County, Arkansas (Arkansas Power & Light Project)
11.00%, 12/1/15.................................................. 1,620,823
1,500,000 Sabine River Authority, Texas, Refunding (Texas Utilities Co.
Project) 7.75%, 4/1/16........................................... 1,552,530
------------
TOTAL POLLUTION CONTROL REVENUE.................................. 60,520,987
------------
</TABLE>
<PAGE> 78
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUBLIC IMPROVEMENT 1.9%
$ 1,300,000 Emeryville, California, Improvement Bonds, 7.30%, 9/2/21.................. $ 1,212,094
Fresno, California, JT Powers Financing Authority, Local
Agency Rev.
2,000,000 Series A, 6.55%, 9/2/12................................................. 1,814,900
2,600,000 Series B, 6.75%, 9/2/01................................................. 2,513,680
1,000,000 Series B, 7.35%, 9/2/12................................................. 931,610
Las Vegas, Nevada, Local Improvement Bonds
990,000 Special Improvement District No. 404, 7.30%, 11/1/09.................... 909,236
1,000,000 Special Improvement District No. 505 (Elkhorn Springs) 8.00%, 9/15/13... 925,180
Rancho Cucamonga, California, Community Facilities District
100,000 8.00%, 9/1/20........................................................... 97,640
1,500,000 8.25%, 9/1/19........................................................... 1,458,165
Riverside County, California, Improvement Bonds
500,000 7.40%, 9/2/09........................................................... 477,515
1,000,000 7.625%, 9/2/14.......................................................... 949,140
------------
TOTAL PUBLIC IMPROVEMENT................................................ 11,289,160
------------
RETIREMENT CENTERS 0.4%
1,055,000 Albuquerque, New Mexico, Retirement Facilities Rev., Refunding
(La Vida Liena Project) Series A, 8.85%, 2/1/23......................... 1,056,171
1,130,000 Jefferson County, Missouri, Industrial Development Authority,
1st Mtg., Rev. (Cedar Hills Retirement Village Project)
12.00%, 12/1/15......................................................... 1,184,104
------------
TOTAL RETIREMENT CENTERS................................................ 2,240,275
------------
SALES TAX REVENUE 4.5%
Bedford Park, Illinois, Tax Increment Rev.
1,000,000 Bedford City Project, 9.25%, 2/1/12..................................... 1,061,260
1,500,000 Mark IV Project, 9.75%, 3/1/12.......................................... 1,639,035
3,000,000 Broadview, Illinois, Tax Increment Rev., 8.25%, 7/1/13.................... 2,988,360
3,000,000 Crestwood, Cook County, Illinois, Tax Increment Rev., 7.25%, 12/1/08...... 2,767,560
2,000,000 Denver, Colorado, Urban Renewal Authority, Tax Increment Rev.,
8.50%, 5/1/16........................................................... 2,002,500
1,315,000 Edgewater, Colorado, Redevelopment Rev., 6.75%, 12/1/08................... 1,212,246
2,000,000 Hodgkins, Illinois, Tax Increment Rev., 9.50%, 12/1/09.................... 2,150,020
1,500,000 Huntington Park, California, Series C, 7.60%, 9/1/18...................... 1,424,190
1,000,000 Moreno Valley, California, Special Tax Rev., Towngate Community
Facilities District 87-1, 7.125%, 10/1/23............................... 882,100
4,250,000 New York City, New York, Industrial Development Agency,
8.50%, 12/30/22......................................................... 4,282,938
1,500,000 Richmond, California, JT Powers Financing Authority,
Improvement District No. 851 & No. 853, Series A, 7.40%, 9/2/19......... 1,414,095
Round Lake Beach, Illinois, Tax Increment Rev., Series 1993
1,900,000 7.20%, 12/1/04.......................................................... 1,797,932
500,000 7.50%, 12/1/13.......................................................... 420,035
2,000,000 St. Louis, Missouri, Tax Increment Rev. (Scullin Redevelopment
Area) Series A, 10.00%, 8/1/10.......................................... 2,182,128
------------
TOTAL SALES TAX REVENUE................................................. 26,224,399
------------
</TABLE>
F-14
<PAGE> 79
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION 3.1%
$ 1,000,000 Chicago, Illinois, O'Hare International Airport,
Special Facilities Rev. (American Airlines,
Inc. Project) 8.25%, 12/1/24.................. $ 1,003,780
Chicago, Illinois, Skyway Tollbridge Rev.,
Refunding
2,000,000 6.50%, 1/1/10.................................. 1,846,380
2,000,000 6.75%, 1/1/17.................................. 1,823,160
(3)3,000,000 Cleveland, Ohio, Parking Facilities Rev., 8.00%,
9/15/12........................................ 3,019,620
Dallas-Fort Worth, Texas, International Airport
Facilities Improvement Corp. Rev.
500,000 American Airlines, Inc., 7.50%, 11/1/25........ 453,105
1,500,000 American Airlines, Inc., 7.25%, 11/1/30........ 1,327,995
1,000,000 Delta Airlines, Inc., 7.625%, 11/1/21.......... 917,170
1,195,000 Kenton County, Kentucky, Airport Board, Special
Facilities, Rev. (Delta Airlines, Inc.
Project) 8.10%, 12/1/15........................ 1,166,786
2,000,000 New Jersey, Economic Development Authority Rev.
(Holt Hauling) Series D, 10.25%, 9/15/14....... 2,136,840
1,000,000 New York City, New York, Industrial Development
Agency, 6.90%, 8/1/24.......................... 923,310
Philadelphia, Pennsylvania, Parking Authority,
Parking Rev.
500,000 8.75%, 3/1/05.................................. 502,405
1,785,000 8.875%, 3/1/10................................. 1,794,104
1,000,000 Port Authority of New York & New Jersey,
Consolidated Board, 53rd Series, 8.70%,
7/15/20........................................ 1,051,540
------------
TOTAL TRANSPORTATION........................... 17,966,195
------------
UTILITIES 2.0%
3,000,000 Luzerne County, Pennsylvania, Industrial
Development Authority, Exempt Facilities Rev.,
Refunding (Pennsylvania Gas & Water Co.
Project) Series A, 7.20%, 10/1/17............... 2,861,070
Massachusetts Municipal Wholesale Electric Co.,
Power Supply Systems Rev.
1,515,000 Seabrook Plant, Series B, 13.625%, 7/1/17,
Pre-refunded 1/1/95............................. 1,571,661
5,000 13.625%, 7/1/17, Pre-refunded, 7/1/94........... 5,038
5,000 13.625%, 7/1/17, Pre-refunded, 1/1/95........... 5,257
4,110,000 New Hampshire State Business Finance Authority,
Electric Facilities Rev. (Plymouth Cogeneration
Light Power) 7.75%, 6/1/14...................... 3,931,462
Norco, California, Sewer and Water Rev., Refunding
1,530,000 7.20%, 10/1/19.................................. 1,415,541
935,000 6.70%, 10/1/13.................................. 869,831
1,000,000 Swanton Village, Vermont, Electric Systems
Rev., 6.70%, 12/1/23............................ 842,160
-----------
TOTAL UTILITIES................................. 11,502,020
-----------
WASTE DISPOSAL 1.1%
1,750,000 Greater Detroit, Michigan, Resource Recovery
Agency Rev. Series C, 9.25%, 12/13/08........... 1,836,590
1,500,000 Parish of St. James, Louisiana, Solid Waste
Disposal Rev. (Kaiser Aluminum Project)
7.75%, 8/1/22................................... 1,454,970
1,500,000 Rockdale County, Georgia, Development Authority
Rev., Solid Waste Disposal (Visy Paper, Inc.
Project) 7.50%, 1/1/26.......................... 1,393,365
</TABLE>
F-15
<PAGE> 80
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<Caption)
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C>
WASTE DISPOSAL-CONTINUED
$ 1,825,000 Sweetwater County, Wyoming, Solid Waste
Disposal Rev. (FMC Corporate Project)
Series A, 7.00%, 6/1/24....................... $ 1,684,858
------------
TOTAL WASTE DISPOSAL.......................... 6,369,783
------------
TOTAL MUNICIPAL BONDS (Cost $585,729,914)..... 566,490,190
------------
Private Placement 0.4%
2,425,000 New Hampshire, Higher Educational & Health Care,
7.25%, 9/1/23, purchased 9/23/93
(Cost $2,381,908)............................. 2,183,713
------------
Repurchase Agreement 0.9%
5,100,000 Salomon Brothers, Inc., dated 11/30/94, 5.70%
due 12/1/94 (collateralized by U.S. Government
obligations in a pooled cash account)
repurchase proceeds $5,100,808
(Cost $5,100,000)............................. 5,100,000
------------
TOTAL INVESTMENTS (Cost $593,211,822) 98.0%..... 573,773,903
Other assets and liabilities, net 2.0%......... 11,944,408
------------
NET ASSETS 100%................................. $585,718,311
</TABLE> ============
(1) SECURITY IS NOT ACCRUING AT THE STATED RATE, BUT A LESSER INTEREST RATE.
(2) WHEN ISSUED SECURITY (NOTE 1H)
(3) SECURITIES WITH A MARKET VALUE OF APPROXIMATELY $39.8 MILLION WERE PLACED
AS COLLATERAL FOR FUTURES CONTRACTS (NOTE 1C).
(4) NON-INCOME PRODUCING SECURITY
REV.--REVENUE BOND.
See Notes to Financial Statements.
F-16
<PAGE> 81
HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $593,211,822)................. $573,773,903
Interest receivable.............................................. 14,996,820
Receivable for investments sold.................................. 9,979,675
Receivable for Fund shares sold.................................. 2,828,465
Other assets..................................................... 2,678
------------
601,581,541
------------
LIABILITIES
Payable for investments purchased................................ 10,967,185
Dividends payable................................................ 1,959,605
Payable for Fund shares redeemed................................. 1,680,399
Accrued expenses and other payables.............................. 351,585
Due to Distributor............................................... 344,067
Due to Adviser................................................... 270,239
Due to broker-variation margin................................... 239,150
Due to shareholder service agent................................. 51,000
------------
15,863,230
------------
NET ASSETS, equivalent to $10.44 per share for Class A shares,
$10.43 per share for Class B shares and $10.42 per share for
Class C shares................................................. $585,718,311
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 39,398,176 Class A and
15,273,330 Class B and 1,465,808 Class C shares outstanding.... $ 561,373
Capital surplus.................................................. 632,480,720
Accumulated net realized loss on securities...................... (27,601,474)
Net unrealized depreciation of securities
Investments.................................................... (19,437,919)
Futures contracts.............................................. (506,300)
Undistributed net investment income.............................. 221,911
------------
NET ASSETS at November 30, 1994.................................. $585,718,311
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-17
<PAGE> 82
HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF OPERATIONS
Year Ended November 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.................................................................. $ 44,680,531
------------
EXPENSES
Management fees........................................................... 3,172,407
Service fees-Class A...................................................... 1,029,318
Distribution and service fees-Class B..................................... 1,335,592
Distribution and service fees-Class C..................................... 65,351
Shareholder service agent's fees and expenses............................. 676,716
Accounting services....................................................... 163,929
Registration and filing fees.............................................. 93,269
Reports to shareholders................................................... 91,596
Audit fees................................................................ 30,582
Legal fees................................................................ 24,750
Trustees' fees and expenses............................................... 18,546
Custodian fees............................................................ 16,424
Miscellaneous............................................................. 30,424
------------
Total expenses........................................................... 6,748,904
------------
Net investment income.................................................... 37,931,627
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments.............................................................. (11,274,136)
Futures contracts........................................................ 4,523,306
Net unrealized depreciation of securities during the year
Investments.............................................................. (30,992,247)
Futures transactions..................................................... (279,550)
------------
Net realized and unrealized loss on securities.......................... (38,022,627)
------------
Decrease in net assets resulting from operations........................ $ (91,000)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-18
<PAGE> 83
HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of year........................... $512,768,709 $330,485,088
------------ ------------
OPERATIONS
Net investment income................................. 37,931,627 28,908,357
Net realized gain (loss) on securities................ (6,750,830) 104,748
Net unrealized appreciation (depreciation) of
securities during the year....... ................. (31,271,797) 5,397,218
------------ ------------
Increase (decrease) in net assets resulting
from operations .................................... (91,000) 34,410,323
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A............................................... (29,486,022) (25,476,080)
Class B............................................... (8,334,914) (3,395,580)
Class C............................................... (399,671) --
------------ ------------
(38,220,607) (28,871,660)
------------ ------------
SHARE TRANSACTIONS
Proceeds from shares sold
Class A............................................. 98,704,070 136,200,777
Class B............................................. 70,654,239 86,185,026
Class C............................................. 15,954,972 --
------------ ------------
185,313,281 222,385,803
------------ ------------
Proceeds from shares issued for dividends reinvested
Class A............................................. 11,857,412 10,482,082
Class B............................................. 3,702,608 1,527,476
Class C............................................. 230,780 --
------------ ------------
15,790,800 12,009,558
------------ ------------
Cost of shares redeemed
Class A............................................. (78,622,401) (54,058,845)
Class B............................................. (10,751,774) (3,591,558)
Class C............................................. (468,697) --
------------ ------------
(89,842,872) (57,650,403)
------------ ------------
Increase in net assets resulting from
share transactions.................................. 111,261,209 176,744,958
------------ ------------
INCREASE IN NET ASSETS.................................. 72,949,602 182,283,621
------------ ------------
NET ASSETS, end of year................................. $585,718,311 $512,768,709
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-19
<PAGE> 84
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bonds 96.6%
EDUCATION 4.7%
$ 500,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07.................... $ 587,605
1,000,000 Corona-Norco, California, University School District Lease Rev., FSA,
6.00%, 4/15/19........................................................ 868,080
425,000 Earlimart, California, Elementary School District, Series 1, AMBAC,
6.70%, 8/1/21......................................................... 397,056
500,000 Indiana State University Rev., Building 3 (Student Fee) Series E,
MBIA, 7.375%, 10/1/10................................................. 540,505
1,000,000 Pennsylvania State Higher Education, Assistance Agency, Student
Loan Rev., Series D, AMBAC, 6.05%, 1/1/19............................. 875,440
1,000,000 University of Washington, Housing & Dining Rev., MBIA, 7.00%, 12/1/21.... 1,006,620
750,000 Wisconsin State Health & Educational Facilities Rev.,
FGIC 6.25%, 12/1/10................................................... 695,685
------------
TOTAL EDUCATION....................................................... 4,970,991
------------
GENERAL OBLIGATIONS 6.9%
1,000,000 Berwyn Illinois Corp., MBIA, 7.00%, 11/15/10............................. 1,002,370
1,075,000 Cicero, Illinois, Refunding, Tax Increment, Series A, MBIA,
5.70%, 12/1/13........................................................ 921,318
245,000 Henderson, Texas, Limited Tax, AMBAC, 9.125%, 5/15/04.................... 295,499
1,000,000 Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series-92, 8.10%, 12/1/11........................ 1,026,280
800,000 Regional Transportation Authority, Illinois, Series A, AMBAC,
6.125%, 6/1/22........................................................ 696,296
1,000,000 St. Clair County, Illinois, FGIC, 5.75%, 10/1/15......................... 843,680
965,000 Texas State Veterans Housing Assistance, MBIA, 6.80%, 12/1/23............ 925,049
500,000 Travis County, Texas, Series A, MBIA, 5.50%, 3/1/03...................... 480,095
1,000,000 Webb County, Texas, Limited Tax, CGIC, Series-89,
7.25%, 2/15/09........................................................ 1,053,340
------------
TOTAL GENERAL OBLIGATIONS............................................. 7,243,927
------------
HOSPITALS 28.5%
500,000 Ames, Iowa, Hospital Rev. (Mary Greeley Medical Center Project)
AMBAC, 5.75%, 8/15/22................................................. 412,400
1,000,000 Charleston County, South Carolina, Hospital Facilities Rev.
(Bon Secours Health System Project) FSA, 5.625%, 8/15/25.............. 801,320
190,000 Clermont County, Ohio, Hospital Facilities Rev. (Mercy Health Care
System) Series A, AMBAC, 9.75%, 9/1/13................................ 200,805
750,000 Decatur, Illinois, Health Care Facilities Rev. (DMH Community
Services Corp. Project) BIG, 8.10%, 11/15/18.......................... 793,597
750,000 District of Columbia Hospital Rev. (National Rehabilitation Hospital
MedLantic) Series A, MBIA, 7.10%, 11/1/11............................. 756,037
500,000 Florence County, South Carolina, Hospital Rev. (McLeod Regional
Medical Center Project) Series B, FGIC, 8.75%, 11/1/09,
Pre-refunded, 11/1/95................................................. 528,030
1,650,000 Fort Wayne, Indiana, Hospital Authority Rev. (Ancilla Health
Systems, Inc.) Series C, BIG, 8.125%, 7/1/18, Pre-refunded, 1/1/99 ... 1,826,550
1,250,000 Harris County, Texas Health Facilities, (Development Corp. Thermal
Utility Rev.), Series A, AMBAC, 7.25%, 2/15/15........................ 1,275,050
1,500,000 Harris County, Texas, Hospital District Mtg. Rev., BIG,
8.50%, 4/1/15, Pre-refunded, 4/1/96.................................... 1,594,950
</TABLE>
F-20
<PAGE> 85
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS-continued
Illinois Health Facilities Authority Rev.
$ 1,685,000 Brokaw Mennonite Association, FGIC, 8.00%, 8/15/17.................. $ 1,843,441
775,000 Franciscan Sisters Health Project, MBIA, 7.875%, 9/1/18............. 836,644
1,695,000 Sisters of St. Mary's Health Care, Series B, MBIA, 8.00%, 6/1/14.... 1,850,703
Indiana Health Facility Financing Authority (Lutheran Hospital
Indiana, Inc.)
1,000,000 MBIA, 6.85%, 7/1/22................................................. 964,000
1,000,000 AMBAC, 7.00%, 2/15/19............................................... 995,230
500,000 Kent Hospital Finance Authority, Michigan Hospital Facility Rev.
(Pine Rest Christian Hospital Association) FGIC, 9.00%, 11/1/10..... 529,140
1,000,000 Laramie County, Wyoming, Hospital Rev. (Memorial Hospital
Project) AMBAC, 6.70%, 5/1/12....................................... 970,970
1,000,000 Louisiana Public Facilities Authority, Health & Educational Capital
Facilities Rev. (Our Lady of the Lake Medical Center) Series A,
BIG, 8.20%, 12/1/15................................................. 1,075,660
Louisiana Public Facilities Authority, Hospital Rev.
500,000 Southern Baptist Hospital Project, FSA, 6.80%, 5/15/12.............. 493,940
500,000 Touro Infirmary Project, Series A, BIG, 8.00%, 6/1/02............... 545,930
500,000 Maine Health & Higher Educational Facilities Authority Rev.,
Series-91, FSA, 6.375%, 7/1/21...................................... 455,490
250,000 Marion County, Florida, Hospital District Rev., Refunding, Ocala,
Florida (Munroe Regional Medical Center) FGIC,
6.25%, 10/1/12...................................................... 230,798
Massachusetts State Health & Educational Facilities Authority Rev.
1,000,000 Children's Hospital Corp., Series B, 11.00%, 1/1/05................. 1,024,270
1,000,000 University Hospital, Series C, MBIA, 7.25%, 7/1/19.................. 1,017,370
500,000 Mississippi, Hospital Equipment & Facilities (Wesley Health
System, Inc.) CONN, Series A, 6.05%, 4/1/12......................... 436,805
475,000 Missouri State Health & Educational Facilities Authority Rev.,
Heartland Health Systems Project, AMBAC, 6.35%, 11/15/17............ 437,428
500,000 North Central Texas, Health Facility Development Corp. Rev.
(Presbyterian Healthcare Project) Series B, BIG,
8.875%, 12/1/15, Pre-refunded, 12/1/97.............................. 556,025
1,000,000 Parish of Jefferson, Louisiana, Hospital Services (West Jefferson
General Hospital Project) FGIC, 9.875%, 1/1/10...................... 1,024,280
1,000,000 Sayre, Pennsylvania, Health Care Facility Authority Rev., Series H-2,
AMBAC, 7.625%, 12/1/15.............................................. 1,068,360
1,000,000 St. Joseph County, Indiana, Hospital Authority, Hospital Facilities
Rev. (Memorial Hospital South Bend Project) MBIA,
6.25%, 8/15/12...................................................... 924,320
280,000 Waco, Texas, Health Facilities Development Corp., Hospital Rev.
(Hillcrest Baptist Medical Center) MBIA, 9.20%, 9/1/14,
Pre-refunded, 9/1/95................................................ 294,798
Washington State Health Care Facilities Authority Rev.,
Refunding, MBIA
1,395,000 Empire Health Services Spokane, 8.375%, 11/1/06..................... 1,529,311
1,000,000 Virginia-Mason Medical Center, 8.00%, 7/1/15........................ 1,060,380
500,000 West Virginia State Hospital Finance Authority, Hospital Rev.
(Monongalia General Hospital) BIG, 8.60%, 7/1/17,
Pre-refunded, 7/1/97................................................ 538,100
1,000,000 Wisconsin State Health & Educational Rev. (Milwaukee Regional
Medical Center, Inc. Project) AMBAC, 7.50%, 8/1/11.................. 1,012,400
------------
TOTAL HOSPITALS..................................................... 29,904,532
------------
</TABLE>
F-21
<PAGE> 86
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING 4.3%
$ 265,000 Bexar County, Texas, Housing Finance Corp., Rev., Series B,
9.25%, 4/1/16..................................................... $ 271,503
1,280,000 Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.,
Series A, FSA, 5.95%, 12/1/10..................................... 1,170,214
960,000 Louisiana Public Facilities Authority, Multi-family Housing Rev.
(One Lakeshore Place Apartments) 9.25%, 7/20/20................... 993,658
1,195,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev.,
6.75%, 1/1/26..................................................... 1,121,209
1,000,000 South Dakota State Housing Development Authority, 6.85%, 5/1/26...... 971,250
------------
TOTAL HOUSING..................................................... 4,527,834
------------
INDUSTRIAL DEVELOPMENT REVENUE 4.0%
2,000,000 Clark County, Nevada (Nevada Power Co. Project), AMBAC,
7.20%, 10/1/22.................................................... 2,019,340
850,000 Manatee County, Florida (Manatee Hospital & Health System) MBIA,
8.25%, 8/15/14.................................................... 907,996
720,000 Pima County, Arizona, Refunding, FSA, 7.25%, 7/15/10................. 723,542
500,000 Parish of St. Charles, Louisiana, Solid Waste Disposal Rev.,
7.05, 4/1/22...................................................... 498,730
------------
TOTAL INDUSTRIAL DEVELOPMENT REVENUE.............................. 4,149,608
------------
MISCELLANEOUS 6.9%
600,000 Arizona State Municipal Financing Program, Certificates of
Participation, Series 17, BIG, 8.125%, 8/1/17..................... 635,088
1,000,000 Charleston County, South Carolina, Certificates of Participation,
Charleston Public Facilities Corp., MBIA, 7.10%, 6/1/11........... 1,072,130
875,000 Chicago, Illinois, Public Building Commission, Building Rev.
(Community College, District #508) Series B, BIG,
8.75%, 1/1/07..................................................... 937,807
1,000,000 Dade County, Florida, Special Obligation (Miami Beach Convention
Center Project) Series B, FGIC, 8.80%, 12/1/02.................... 1,097,280
310,000 Louisiana Public Facilities Authority Rev. (Medical Center Louisiana
at New Orleans Project) CONN, 6.25%, 10/15/10..................... 290,148
1,000,000 Pennsylvania Convention Center Authority Rev., Series A, FGIC,
6.00%, 9/1/19..................................................... 906,920
1,500,000 Philadelphia, Pennsylvania, Municipal Authority Rev., Refunding
Lease, Series A, FGIC, 5.625%, 11/15/14........................... 1,289,190
1,000,000 South Dakota, Lease Rev., Series A, CGIC, 6.625%, 9/1/12............. 956,690
------------
TOTAL MISCELLANEOUS............................................... 7,185,253
------------
MUNICIPAL UTILITY DISTRICT 0.7%
425,000 Maple Run at Austin, Texas Contract, Rev., FGIC, 8.25%, 11/15/05..... 456,238
250,000 Montgomery County, Texas, MBIA, 6.25%, 3/1/14........................ 235,838
------------
TOTAL MUNICIPAL UTILITY DISTRICT.................................. 692,076
------------
POLLUTION CONTROL REVENUE 14.2%
Beaver County, Pennsylvania, Industrial Development Authority,
Refunding (Ohio Edison Co. Mansfield), Series A, FGIC
1,000,000 7.10%, 6/1/18..................................................... 990,980
500,000 7.75%, 9/1/24..................................................... 531,030
</TABLE>
F-22
<PAGE> 87
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE-continued
Brazos River Authority, Texas, Rev.
$ 1,870,000 Houston Lighting & Power, Refunding, Series B, FGIC,
7.20%, 12/1/18...................................................... $ 1,941,153
1,000,000 Series C, BIG, 8.10%, 5/1/19........................................ 1,074,210
1,270,000 Texas Utilities Electric Co., FGIC, 9.875%, 10/1/17................. 1,419,136
1,000,000 Emery County, Utah, Refunding (Pacificorp Project) Series A,
AMBAC, 5.65%, 11/1/23............................................... 808,160
1,000,000 Lehigh County, Pennsylvania, Industrial Development Authority
(Pennsylvania Power & Light Co. Project) Series A, MBIA,
6.40%, 11/1/21...................................................... 908,650
1,000,000 Matagorda County, Texas, Navigation District #1 (Houston
Lighting & Power) Series D, FGIC, 7.60%, 10/1/19.................... 1,072,490
Monroe County, Michigan (Detroit Edison Co.)
750,000 Series A, AMBAC, 9.625%, 12/1/15.................................... 805,065
1,000,000 Series I-B, MBIA, 6.55%, 9/1/24..................................... 905,940
1,500,000 Ohio State Air Quality Development Authority Rev. (Cleveland Co.
Project) FGIC, 8.00%, 12/1/13....................................... 1,659,780
200,000 Parish of West Feliciana, Louisiana (Gulf State Utilities) Series A,
7.50%, 5/1/15....................................................... 195,494
1,000,000 Pope County, Arkansas (Arkansas Power & Light Co. Project) FSA,
10.625%, 12/1/15.................................................... 1,072,820
1,000,000 Rockport, Indiana (Indiana & Michigan Electric Co.) Series A,
BIG, 9.25%, 8/1/14.................................................. 1,041,100
500,000 Warren County, New Jersey, Pollution Control Financing Authority,
Series A, FGIC, 9.00%, 12/1/06...................................... 550,920
------------
TOTAL POLLUTION CONTROL REVENUE..................................... 14,976,928
------------
PUBLIC IMPROVEMENT 0.5%
465,000 Dallas, Texas, Civic Center, Sr. Lien, AMBAC, 7.00%, 1/1/10............ 479,554
------------
SALES TAX REVENUE 2.4%
Arvada, Colorado, Sales & Use Tax Rev., Refunding & Improvement,
FGIC
250,000 6.25%, 12/1/12...................................................... 235,597
500,000 6.25%, 12/1/17...................................................... 463,330
250,000 Broken Arrow, Oklahoma, Municipal Authority Utility System &
Sales Tax Rev., FGIC, 9.75%, 5/1/05................................. 262,620
1,000,000 Marion County, Indiana, Convention & Recreational Facilities,
Series A, AMBAC, 7.00%, 6/1/21...................................... 1,012,090
500,000 Rhode Island, Depositors Economic Corp., Special Obligation,
Series A, FSA, 6.625%, 8/1/19, Pre-refunded, 8/1/02................. 521,990
------------
TOTAL SALES TAX REVENUE............................................. 2,495,627
------------
TRANSPORTATION 6.3%
Chicago, Illinois, O'Hare International Airport, Special Facility Rev.
(International Terminal) Series A, MBIA
500,000 7.50%, 1/1/17....................................................... 505,135
500,000 7.625%, 1/1/10...................................................... 516,480
500,000 Harris County, Texas, Refunding, Toll Road Sr. Lien, Series B,
AMBAC, 6.625%, 8/15/17.............................................. 516,970
Hawaii State, Airports System Rev.
350,000 AMBAC, 7.375%, 7/1/11............................................... 356,052
500,000 2nd Series, MBIA, 7.00%, 7/1/18..................................... 498,810
1,250,000 Louisville & Jefferson County, Kentucky, Regional Airport Authority
Rev., Series A, MBIA, 8.50%, 7/1/17................................. 1,339,900
</TABLE>
F-23
<PAGE> 88
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION-CONTINUED
$ 500,000 Memphis-Shelby County, Tennessee, Airport Authority Rev., MBIA,
8.125%, 2/15/12 ......................................................... $ 536,490
1,700,000 Palm Beach County, Florida, Airport System Rev., MBIA,
7.75%, 10/01/10.......................................................... 1,829,710
500,000 Tulsa, Oklahoma, Airport Improvement, General Rev., MBIA,
7.50%, 6/1/08............................................................ 525,585
------------
TOTAL TRANSPORTATION...................................................... 6,625,132
------------
UTILITIES 16.4%
1,000,000 Austin, Texas, Utility Systems Rev., BIG, 8.625%, 11/15/12 ................. 1,149,170
1,000,000 Chicago, Illinois, Waste Water Transmission, Rev., FGIC,
6.30%, 1/1/12 ............................................................ 1,018,420
565,000 City of Brownsville, Texas, Utilities System Priority Rev., Series 1990,
AMBAC, 6.50%, 9/1/17 ..................................................... 539,790
1,000,000 Colorado River, Texas, Municipal Water District (Water
Transmission Facilities Project-A) AMBAC, 6.625%, 1/1/21 ................. 1,031,150
100,000 Farmington, New Mexico, Utility System Rev., FGIC,
9.75%, 5/15/13, Pre-refunded, 5/15/96 .................................... 108,458
2,000,000 Lower Colorado River Authority, Texas, Rev., Refunding, FSA,
5.625%, 1/1/17 ........................................................... 1,704,565
700,000 Missouri State Environmental Improvement & Energy Resource
Authority, Environment Improvement Rev., AMBAC,
7.40%, 5/1/20 ............................................................ 730,303
2,000,000 M-S-R Public Power Agency, California, San Juan Project Rev.,
Refunding, Series F, AMBAC, 6.00%, 7/1/20 ................................ 1,741,980
200,000 New York City, New York, Municipal Water Finance Authority,
Water & Sewer System Rev., Series A, 9.00%, 6/15/17,
Pre-refunded, 6/15/97 .................................................... 220,624
1,000,000 North Carolina Municipal Power Agency, Catawba Electric Rev.,
MBIA, 5.75%, 1/1/20 ...................................................... 842,820
1,000,000 Northern Minnesota, Municipal Power Agency, Series A, AMBAC,
7.25%, 1/1/16 ............................................................ 1,039,670
215,000 Piedmont Municipal Power Agency, South Carolina Electric Rev.,
Refunding, Series A, AMBAC, 9.25%, 1/1/19, Pre-refunded,
1/1/96 ................................................................... 230,639
500,000 Provo City, Utah, Energy System Rev., Series A, AMBAC,
9.50%, 11/1/10 ........................................................... 536,160
1,500,000 Reedy Creek, Florida, Improvement District Utilities Rev., Series 1,
MBIA, 9.00%, 10/1/07 ..................................................... 1,646,280
400,000 Rock Hill, South Carolina, Utility Systems Rev., FGIC,
8.00%, 1/1/18 ............................................................ 433,580
600,000 Tacoma, Washington, Electric Systems Rev., AMBAC,
8.00%, 1/1/11, Pre-refunded, 1/1/98 ...................................... 650,370
Washington State Public Power Supply System Rev. (Nuclear
Project No. 3)
450,000 BIG, 7.25%, 7/1/16 ....................................................... 482,841
2,000,000 MBIA, 5.60%, 7/1/15 ...................................................... 1,647,900
1,500,000 MBIA, 5.60%, 7/1/17 ...................................................... 1,218,330
250,000 Refunding, Rev., BIG, 6.00%, 7/1/18 ...................................... 213,170
------------
TOTAL UTILITIES........................................................... 17,186,220
------------
WASTE DISPOSAL 0.8%
1,000,000 Montgomery County, Maryland, Solid Waste System Rev., Series A,
AMBAC, 5.875%, 6/1/13 .................................................... 867,010
------------
TOTAL MUNICIPAL BONDS (Cost $105,401,512)................................. 101,304,692
------------
</TABLE>
F-24
<PAGE> 89
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Variable Rate Demand Notes+ 1.2%
$ 200,000 California Statewide Communities Development Corp. Rev., Series A,
3.60%, 8/1/19 ........................................................... $ 200,000
100,000 Dearborn, Michigan, Economic Development Corp. Rev. (Oakbrook
Project) 3.75%, 3/1/23 .................................................. 100,000
400,000 Panola County, Mississippi (Moog Automotive, Inc. Project),
3.75%, 9/1/10 ........................................................... 400,000
600,000 Tarrant County, Texas, Health Facilities Development Corp.,
3.80%, 9/1/18 ........................................................... 600,000
------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES
(Cost $1,300,000) ....................................................... 1,300,000
------------
TOTAL INVESTMENTS (Cost $106,701,512) 97.8%................................ 102,604,692
Other assets and liabilities, net 2.2% .................................... 2,249,797
------------
NET ASSETS 100%........................................................... $104,854,489
============
</TABLE>
+ Interest rates are as of November 30, 1994
Rev.--Revenue bond
Insurers:
AMBAC--AMBAC Indemnity Corp.
BIG--Bond Investors Guaranty Insurance Corp.
CGIC--Capital Guaranty Insurance Corp.
CONN--Connie Lee
FGIC--Financial Guaranty Insurance Corp.
FSA--Financial Security Assurance Corp.
MBIA--Municipal Bond Investors' Assurance Corp.
See Notes to Financial Statements
F-25
<PAGE> 90
INSURED MUNICIPAL PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $106,701,512)................ $102,604,692
Interest receivable............................................. 2,431,085
Receivable for investments sold................................. 541,086
Receivable for Fund shares sold................................. 79,996
Other assets.................................................... 16,979
------------
105,673,838
------------
LIABILITIES
Payable for Fund shares redeemed................................ 364,842
Dividends payable............................................... 234,220
Due to Distributor.............................................. 68,938
Due to Adviser.................................................. 49,969
Bank overdraft.................................................. 47,535
Accrued expenses................................................ 45,995
Due to shareholder service agent................................ 7,850
------------
819,349
------------
NET ASSETS, equivalent to $10.55 per share for Class A and
Class B shares, and $10.54 per share for Class C shares....... $104,854,489
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 6,379,617 Class A and
3,379,577 Class B and 180,188 Class C shares outstanding...... $ 99,394
Capital surplus................................................. 114,706,725
Accumulated net realized loss on securities..................... (5,876,339)
Net unrealized depreciation of securities....................... (4,096,820)
Undistributed net investment income............................. 21,529
------------
NET ASSETS at November 30, 1994................................. $104,854,489
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-26
<PAGE> 91
INSURED MUNICIPAL PORTFOLIO STATEMENT OF OPERATIONS
Year Ended November 30, 1994
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest..................................................... $7,473,020
----------
EXPENSES
Management fees.............................................. 641,145
Service fees-Class A......................................... 180,174
Distribution and service fees-Class B........................ 378,659
Distribution and service fees-Class C........................ 15,952
Shareholder service agent's fees and expenses................ 118,640
Registration and filing fees................................. 92,838
Accounting services.......................................... 86,031
Reports to shareholders...................................... 28,650
Audit fees................................................... 22,702
Trustees' fees and expenses.................................. 11,975
Legal fees................................................... 11,762
Custodian fees............................................... 6,915
Miscellaneous................................................ 7,096
------------
Total expenses............................................. 1,602,539
------------
Net investment income...................................... 5,870,481
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities.............................. (464,507)
Net unrealized depreciation of securities during the year.... (10,201,344)
------------
Net realized and unrealized loss on securities............. (10,665,851)
------------
Decrease in net assets resulting from operations...........$ (4,795,370)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-27
<PAGE> 92
INSURED MUNICIPAL PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------
1994 1993
------------ -------------
<S> <C> <C>
NET ASSETS, beginning of year............................... $109,719,511 $ 74,387,518
------------ -------------
OPERATIONS
Net investment income..................................... 5,870,481 5,137,222
Net realized loss on securities........................... (464,507) (228,375)
Net unrealized appreciation (depreciation) of securities
during the year......................................... (10,201,344) 2,393,531
------------ -------------
Increase (decrease) in net assets resulting
from operations........................................... (4,795,370) 7,302,378
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A................................................. (3,998,830) (4,006,512)
Class B................................................. (1,770,263) (1,129,616)
Class C................................................. (73,782) --
------------ -------------
(5,842,875) (5,136,128)
------------ -------------
In excess of net investment income
Class A................................................. -- (21,356)
Class B................................................. -- (9,946)
Class C................................................. -- --
------------ -------------
-- (31,302)
------------ -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS....................... (5,842,875) (5,167,430)
------------ -------------
SHARE TRANSACTIONS
Proceeds from shares sold
Class A................................................. 11,790,509 17,447,835
Class B................................................. 10,898,379 25,351,509
Class C................................................. 2,707,049 --
------------ -------------
25,395,937 42,799,344
------------ -------------
Proceeds from shares issued for dividends reinvested
Class A................................................. 2,032,068 2,050,353
Class B................................................. 1,023,631 657,194
Class C................................................. 58,216 --
------------ -------------
3,113,915 2,707,547
------------ -------------
Cost of shares redeemed
Class A................................................. (14,932,364) (10,204,699)
Class B................................................. (7,093,131) (2,105,147)
Class C................................................. (711,134) --
------------ -------------
(22,736,629) (12,309,846)
------------ ------------
Increase in net assets resulting from share transactions.. 5,773,223 33,197,045
------------ ------------
INCREASE (DECREASE) IN NET ASSETS........................... (4,865,022) 35,331,993
------------ ------------
NET ASSETS, end of year..................................... $104,854,489 $109,719,511
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-28
<PAGE> 93
NOTES TO FINANCIAL STATEMENTS
Note 1-Significant Accounting Policies
American Capital Tax-Exempt Trust (the "Fund") is comprised of two municipal
bond portfolios: High Yield Municipal Portfolio ("High Yield") and Insured
Municipal Portfolio ("Insured"), and is registered under the Investment
Company Act of 1940, as amended, as a diversified open-end management
investment company.
Each portfolio is accounted for as a separate entity. The following is a
summary of significant accounting policies consistently followed by the Fund
in the preparation of its financial statements.
A. Investment Valuations
Municipal bonds are valued at the most recently quoted bid prices or at
bid prices based on a matrix system (which considers such factors as
security prices, yields, maturities and ratings) furnished by dealers
and an independent pricing service. Securities for which market
quotations are not readily available are valued at a fair value as
determined in good faith by the Board of Directors of the Fund.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value.
Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days
to maturity becomes less than 61 days. From such time, until maturity,
the investments are valued at amortized cost.
High yield investments include lower rated and unrated debt securities
which may be more susceptible to adverse economic conditions than
investment grade holdings. These securities are often subordinated to
the prior claims of other senior lenders and uncertainties exist as to
an issuer's ability to meet principal and interest payments. Securities
rated below investment grade and comparable unrated securities
represented approximately 74% of High Yield's investment portfolio at
November 30, 1994.
Issuers of certain securities owned by Insured have obtained insurance
guaranteeing their timely payment of principal at maturity and interest.
The insurance reduces credit risk but not market risk of the security.
B. Repurchase Agreements
A repurchase agreement is a short-term investment in which a Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund
may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised by Van Kampen American Capital Asset
Manager, Inc. ("The Adviser"), the daily aggregate of which is invested
in repurchase agreements. Repurchase agreements are collateralized by
the underlying debt securities. The Fund will make payment for such
securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the
repurchase proceeds due the Fund.
C. Futures Contracts
Transactions in futures contracts are utilized in strategies to manage
the market risk of the Fund's investments by increasing or decreasing
the percentage of assets effectively invested. The purchase of a futures
contract increases the impact of changes in the market price of
investments on net asset value. There is also a risk that the market
movement of such instruments may not be in the direction forecasted.
Upon entering into futures contracts, the Fund maintains, in a
segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is
held as collateral in an account in the name of the broker, the Fund's
agent in acquiring the futures position. During the period the futures
contract is open, changes in the value of the contract ("variation
margin") are recognized by marking the contract to market on a daily
basis. As unrealized gains or losses are incurred, variation margin
payments are received from or made to the broker. Upon the closing or
cash settlement of a contract, gains and losses are realized. The cost
of securities acquired through delivery under a contract is adjusted by
the unrealized gain or loss on the contract.
<PAGE> 94
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as "regulated investment companies" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of capital gains will be made until
tax basis capital loss carryforwards, if any, expire or are offset by
net realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Interest income is accrued daily.
F. Dividends and Distributions
The Fund declares dividends from net investment income of each portfolio
on each business day. The Fund intends to continue to invest principally
in tax-exempt obligations sufficient in amount to qualify it to pay
"exempt-interest dividends" as defined in the Internal Revenue Code.
The Fund distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ
from generally accepted accounting principles. Such dividends or
distributions may exceed a portfolio's financial statement earnings.
G. Debt Discount or Premium
The Fund accounts for discounts and premiums on the same basis as is
used for federal income tax reporting. Accordingly, original issue debt
discounts and all premiums are amortized over the life of the security.
Market discounts are recognized at the time of sale as realized gains
for book purposes and ordinary income for tax purposes.
H. When-Issued Securities
Delivery and payment for securities purchased on a when-issued basis may
take place up to 45 days after the day of the transaction. The
securities purchased are subject to market fluctuation during this
period. To meet the payment obligations, sufficient cash or liquid
securities equal to the amount that will be due are set aside with the
custodian.
Note 2-Management Fees and Other Transactions with Affiliates
The Adviser serves as the investment manager of the Fund. Management fees are
paid monthly, based on the aggregate average daily net assets of the Fund at an
annual rate of .60% of the first $300 million of the aggregate average daily
net assets, .55% of the next $300 million, and .50% of the amount in excess of
$600 million, and are allocated on a pro-rata basis to each portfolio. From
time to time, the Adviser may voluntarily elect to subsidize a portion of the
Fund's expenses. The voluntary subsidy may be discontinued at any time without
prior notice. There were no subsidies during the fiscal year ended November 30,
1994.
Other transactions with affiliates during the year were as follows:
<TABLE>
<CAPTION>
High Yield Insured
---------- --------
<S> <C> <C>
Accounting services (accounting officers cost... $ 12,752 $ 7,296
Legal fees...................................... 19,142 10,864
Shareholder service agent's fees................ 561,481 92,670
Sales of Fund shares:
Distributor commissions....................... 406,466 27,152
Retail Dealer commissions..................... 81,508 8,526
</TABLE>
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
These charges included the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services. These services provided by the
Adviser are at cost.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a trustee of the Fund.
F-30
<PAGE> 95
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit.
The Fund was informed that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corporation (the "Retail Dealer"),
both affiliates of the Adviser, received commissions charged on sales of Fund
shares during the year.
Under the terms of the Distribution plans, each portfolio pays up to .25% per
annum of its average daily net assets to reimburse the Distributor for
expenses and service fees incurred. Class B and Class C shares pay an
additional distribution fee of up to .75% per annum of their average net
assets to reimburse the Distributor for its distribution expenses. Actual
distribution expenses incurred by the Distributor for Class B and Class C
shares may exceed the amounts reimbursed to the Distributor by the portfolios.
At November 30, 1994, the unreimbursed expenses by the Distributor under the
Class B and Class C plans aggregated approximately $5.8 million and $126,000,
respectively, for High Yield and approximately $1.5 million and $36,000,
respectively, for Insured and may be carried forward and reimbursed through
either the collection of the contingent deferred sales charges from share
redemptions or, subject to the annual renewal of the plans, future
reimbursements of distribution fees.
Certain officers and trustees of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service
agent.
NOTE 3-INVESTMENT ACTIVITY
During the year, the cost of purchases and proceeds from sales of
investments, excluding short-term investments were:
<TABLE>
<CAPTION>
High Yield Insured
------------ -----------
<S> <C> <C>
Purchases............................... $297,374,429 $16,297,871
Sales................................... 183,879,756 5,427,250
</TABLE>
The following table presents the identified cost of investments at November
30, 1994 for the federal income tax purposes with the associated net
unrealized depreciation and the net realized capital loss carryforward.
<TABLE>
<CAPTION>
High Yield Insured
------------ ------------
<S> <C> <C>
Identified cost......................... $593,217,322 $106,701,512
============ ============
Gross unrealized appreciation........... $ 9,456,793 $ 2,150,516
Gross unrealized depreciation........... (28,900,212) (6,247,336)
------------ ------------
Net unrealized depreciation............. $(19,443,419) $ (4,096,820)
============ ============
Net realized capital loss carryforward . $ 27,073,800 $ 5,876,339
============ ============
</TABLE>
The net realized capital loss carryforwards at November 30, 1994 may be
utilized to offset any future capital gains until expiration from 1995
through 2002. Additionally, approximately $1 million of financial
statement capital losses for High Yield are deferred for tax purposes
to the 1995 fiscal year.
At November 30, 1994, High Yield held 405 short United States Treasury Bond
financial futures contracts expiring in March 1995. The market value of such
contracts at November 30, 1994 was $39,715,313 and the unrealized
depreciation was $506,300.
During the year, the cost of purchases and proceeds from sales of investments
resulting from transactions between High Yield, Insured and other investment
companies advised by the Adviser were:
<TABLE>
<CAPTION>
High Yield Insured
------------ ------------
<S> <C> <C>
Purchases................................ $9,650,000 $1,240,000
Sales.................................... 2,450,000 6,185,000
</TABLE>
Such transactions were at current market prices on the dates of the
transactions for cash payment against prompt delivery, with no brokerage
commissions. The sales transactions did not result in a net realized gain or
loss to either High Yield or Insured.
F-31
<PAGE> 96
Note 4-Trustee Compensation
Trustee fees for the year and the liability for deferred compensation at
November 30, 1994 were:
<TABLE>
<CAPTION>
High Yield Insured
---------- -------
<S> <C> <C>
Trustee fees.............................. $15,738 $10,514
Deferred compensation liability........... 10,326 7,238
</TABLE>
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $2,510 plus a fee of $65 per day for the Board and Committee
meetings attended. The Chairman receives additional fees at an annual rate of
$940. The trustees may participate in a voluntary Deferred Compensation Plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will be
paid solely out of the general accounts. Funds for the payment of obligations
under the Plan will not be reserved or set aside by any form of trust or
escrow. Each director covered by the Plan has elected to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
Note 5-Capital
Each portfolio offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time
of purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of a higher distribution services fee and certain other class specific
expenses. Realized and unrealized gains or losses, investment income and
expenses (other than class specific expenses) are allocated daily to each class
of shares based upon the relative proportion of net assets of each class. Class
B shares and Class C shares automatically convert to Class A shares six years
and ten years after purchase, respectively, subject to certain conditions.
Each portfolio has an unlimited number of $.01 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
High Yield Insured
------------------------- ------------------------
Year Ended November 30 Year Ended November 30
------------------------- ------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares sold
Class A.............................. 9,122,951 12,107,184 1,040,502 1,513,883
Class B.............................. 6,562,885 7,638,462 959,397 2,200,973
Class C.............................. 1,487,816 -- 240,049 --
---------- ---------- ---------- ----------
17,173,652 19,745,646 2,239,948 3,714,856
---------- ---------- ---------- ----------
Shares issued for dividends reinvested
Class A.............................. 1,092,261 934,043 182,323 177,668
Class B.............................. 342,025 135,852 91,999 56,831
Class C.............................. 21,563 -- 5,302 --
---------- ---------- ---------- ----------
1,455,849 1,069,895 279,624 234,499
---------- ---------- ---------- ----------
Shares redeemed
Class A.............................. (7,290,648) (4,825,070) (1,344,232) (882,537)
Class B.............................. (999,142) (318,824) (640,367) (181,615)
Class C.............................. (43,571) -- (65,163) --
----------- ---------- ---------- ----------
(8,333,361) (5,143,894) (2,049,762) (1,064,152)
----------- ---------- ---------- ----------
Increase in shares outstanding......... 10,296,140 15,671,647 469,810 2,885,203
=========== ========== ========== ==========
</TABLE>
F-32
<PAGE> 97
HIGH YIELD MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
YEAR ENDED NOVEMBER 30
---------------------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year.......... $11.19 $10.95 $10.78 $10.72 $10.91
------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .87 .9310 .93 .885 1.005
Expenses................................... (.11) (.1178) (.115) (.115) (.105)
------- -------- ------- ------- -------
Net investment income...................... .76 .8132 .815 .77 .90
Net realized and unrealized gain
or loss on securities.................... (.744) .2303 .195 .13 (.23)
------- -------- ------- ------- -------
Total from investment operations........... .016 1.0435 1.01 .90 .67
------- -------- ------- ------- -------
DIVIDENDS FROM NET INVESTMENT INCOME....... (.766) (.8035) (.84) (.84) (.86)
------- -------- ------- ------- -------
Net asset value, end of year............... $10.44 $11.19 $10.95 $10.78 $10.72
======= ======== ======= ======= =======
TOTAL RETURN(1)............................ .10% 9.65% 9.77% 8.73% 6.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(millions).......... $411.1 $408.0 $309.5 $225.3 $222.3
Average net assets (millions).............. $419.5 $357.8 $257.5 $220.5 $226.8
Ratios to average net assets(2)
Expenses................................. 1.02% 1.03% 1.07% 1.06% 0.97%
Expenses, without expense reimbursement.. -- -- -- -- 1.06%
Net investment income.................... 6.98% 7.13% 7.45% 7.20% 8.34%
Net investment income, without expense...
reimbursement.......................... -- -- -- -- 8.27%
Portfolio turnover rate.................... 33% 27% 24% 20% 29%
</TABLE>
(1) Total return does not consider the effect of sales charges.
(2) See note 2.
See Notes to Financial Statements.
F-33
<PAGE> 98
HIGH YIELD MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------- -----------
JULY 20, DECEMBER
1992(2) 10, 1993(2)
YEAR ENDED NOVEMBER 30 THROUGH THROUGH
---------------------- NOVEMBER NOVEMBER
1994 1993(1) 30, 1992(1) 30, 1994(1)
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year............. $11.18 $10.96 $11.08 $11.29
------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .87 .8905 .35 .81
Expenses....................................... (.19) (.1986) (.08) (.18)
------- -------- -------- --------
Net investment income.......................... .68 .6919 .27 .63
Net realized and unrealized gain
or loss on securities......................... (.748) .2476 (.1122) (.8363)
------- -------- -------- --------
Total from investment operations............... (.068) .9395 .1578 (.2063)
------- -------- -------- --------
DIVIDENDS FROM NET INVESTMENT INCOME........... (.682) (.7195) (.2778) (.6637)
------- -------- -------- --------
Net asset value, end of year................... $10.43 $11.18 $10.96 $10.42
======= ======== ======== ========
TOTAL RETURN(3)................................ (.76%) 8.84% 1.45% (1.80%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)............. $159.3 $104.8 $21.0 $15.3
Average net assets (millions).................. $133.6 $54.9 $13.4 $6.7
Ratios to average net assets
Expenses...................................... 1.77% 1.77% 1.71%(4) 1.75%(4)
Net investment income......................... 6.19% 6.15% 5.88%(4) 6.07%(4)
Portfolio turnover rate........................ 33% 27% 24% 33%
</TABLE>
(1) Based on average month-end shares.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) Annualized.
See Notes to Financial Statements.
F-34
<PAGE> 99
INSURED MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEAR ENDED NOVEMBER 30
------------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year.... $11.59 $11.30 $11.07 $10.86 $10.95
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .74 .790 .810 .86 .84
Expenses.............................. (.13) (.127) (.135) (.13) (.12)
Net investment income................. .61 .663 .675 .73 .72
Net realized and unrealized gain or
loss on securities................... (1.0425) .274 .240 .19 (.07)
Total from investment operations...... (.4325) .937 .915 .92 .65
DIVIDENDS FROM NET INVESTMENT INCOME.. (.6075) (.647) (.685) (.71) (.74)
Net asset value, end of year.......... $10.55 $11.59 $11.30 $11.07 $10.86
TOTAL RETURN(1)....................... (3.88%) 8.47% 8.48% 8.73% 6.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions).... $67.3 $75.3 $64.3 $52.2 $42.3
Average net assets (millions)......... $73.6 $72.0 $57.8 $48.6 $39.3
Ratios to average net assets(2)
Expenses............................. 1.15% 1.07% 1.20% 1.20% 1.08%
Expenses, without expense
reimbursement ...................... -- 1.17% -- -- 1.20%
Net investment income................ 5.45% 5.57% 5.98% 6.59% 6.63%
Net investment income, without
expense reimbursement............... -- 5.47% -- -- 6.51%
Portfolio turnover rate............... 5% 5% 3% 5% 1%
</TABLE>
(1) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
(2) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
F-35
<PAGE> 100
INSURED MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------- ------------
JULY 20, DECEMBER
1992(2) 10, 1993(2)
YEAR ENDED NOVEMBER 30 THROUGH THROUGH
------------------------ NOVEMBER NOVEMBER
1994 1993(1) 30, 1992(1) 30, 1994(1)
-------- ------- ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year......... $11.58 $11.30 $11.39 $11.66
-------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .74 .754 .28 .77
Expenses................................... (.21) (.205) (.08) (.22)
-------- ------- ------ -------
Net investment income...................... .53 .549 .20 .55
Net realized and unrealized gain or
loss on securities....................... (1.0365) .294 (.07) (1.161)
-------- ------- ------ -------
Total from investment operations........... (.5065) .843 .13 (.611)
-------- ------- ------ -------
DIVIDENDS FROM NET INVESTMENT INCOME....... (.5235) (.563) (.22) (.509)
-------- ------- ------ -------
Net asset value, end of year............... $10.55 $11.58 $11.30 $10.54
======== ======= ======= =======
TOTAL RETURN(3)............................ (4.52%) 7.59% 1.16% (5.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)......... $35.6 $34.4 $10.1 $ 1.9
Average net assets (millions).............. $37.9 $23.8 $ 5.2 $ 1.6
Ratios to average net assets(4)
Expenses................................. 1.91% 1.77% 1.82%(5) 1.89%(5)
Expenses, without expense reimbursement.. -- 1.87% -- --
Net investment income.................... 4.71% 4.74% 4.33%(5) 4.64%(5)
Net investment income, without
expense reimbursement.................. -- 4.64% -- --
Portfolio turnover rate.................... 5% 5% 3% 5%
</TABLE>
(1) Based on average month-end shares.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) See Note 2.
(5) Annualized
See Notes to Financial Statements.
F-36
<PAGE> 101
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of American Capital Tax-Exempt Trust
In our opinion, the accompanying statements of assets and liabilities,
including the investment portfolios of High Yield Municipal Portfolio and
Insured Municipal Portfolio and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the two portfolios
constituting American Capital Tax-Exempt Trust (the "Trust") at November 30,
1994, the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the two years in the period
then ended and the selected per share data and ratios for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and selected per share data and ratios (hereafter referred
to as "financial statements") are the reponsibility of the Trust's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtian reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at November 30, 1994 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinon expressed above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
January 16, 1995
