<PAGE> 1
SUPPLEMENT, DATED MAY 1, 1995 TO
AMERICAN CAPITAL TAX-EXEMPT TRUST PROSPECTUS
1. Effective today, the Distributor has increased the ongoing payments to
broker-dealers and other Service Organizations with respect to Class C shares.
The Distributor will now pay broker-dealers and other Service Organizations
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares for the second through tenth year after
purchase for Class C shares sold on or after May 1, 1995. Broker-dealers and
other Service Organizations will still be paid ongoing commissions and
transaction fees for the second through tenth year after purchase of up to 0.65%
for Class C shares sold before May 1, 1995.
2. The first two paragraphs of "Shareholder Services -- Shareholder Services
Applicable to all Classes -- Exchange Privilege" are amended to read in their
entirety as follows:
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, Tax-Exempt, 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 Class A shares of the Fund without sales charge. Class
A shares of Reserve that were not acquired in exchange for Class B or Class
C shares of a Participating Fund may be exchanged for Class A shares of the
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 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 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 a Participating Fund.
Class B and Class C shareholders of the Fund have the ability to
exchange their shares ("original shares") for the same class of shares of
any other American Capital fund that offers such class of shares ("new
shares") in an amount equal to the aggregate net asset value of the original
shares, without
<PAGE> 2
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 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.
3. Effective today, the dividend procedures for the Fund have been changed so
that all shares earn daily dividends through the day such shares are processed
for payment on redemption rather than through the day before such shares are
processed for payment.
4. The following should be added as the last paragraph under the section
entitled "The Fund and Its Management":
The Adviser may utilize at its own expense credit analysis, research and
trading support services provided by its affiliate, Van Kampen American
Capital Investment Advisory Corp. (formerly Van Kampen Merritt Investment
Advisory Corp.).
5. The following should be added under the section entitled "Purchase of
Shares -- General":
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by registered representatives and
members of their families to locations within or outside of the United
States for meetings or seminars of a business nature.
<PAGE> 3
- ------------------------------------------------------------------------------
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> 4
- ------------------------------------------------------------------------------
AMERICAN CAPITAL TAX-EXEMPT TRUST
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary............ 3
Expense Synopsis.............. 6
Financial Highlights.......... 8
Multiple Pricing System....... 12
Investment Objectives and
Policies.................... 15
High Yield Municipal
Portfolio.................. 17
Insured Municipal
Portfolio.................. 20
Municipal Securities.......... 21
Investment Practices and
Restrictions................. 23
The Fund and Its Management... 28
Purchase of Shares............ 30
Distribution Plans............ 38
Shareholder Services.......... 40
Redemption of Shares.......... 44
Dividends, Distributions
and Taxes.................... 47
Prior Performance
Information................. 50
Additional Information........ 52
</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. *
* *
***************************************************************************
2
<PAGE> 5
- ------------------------------------------------------------------------------
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
political subdivisions, 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").
3
<PAGE> 6
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
4
<PAGE> 7
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."
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.
5
<PAGE> 8
- --------------------------------------------------------------------------------
EXPENSE SYNOPSIS
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
<TABLE>
<CAPTION>
HIGH YIELD MUNICIPAL INSURED MUNICIPAL
--------------------------------------------------------- ---------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES(f) CLASS A SHARES CLASS B SHARES CLASS C SHARES(f)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum sales
charge
imposed on
purchases
(as a
percentage
of offering
price)...... 4.75%(a) None None 4.75%(a) None None
Sales charge
imposed on
dividend
reinvestments... None None None None None 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* 4% during the first 1% during the
and second year, 3% first year(b) and second year, 3% first year(b)
during the third year, during the third year,
2.5% during the fourth 2.5% during the fourth
year, 1.5% during the year, 1.5% during the
fifth year and 0% fifth year and 0%
after the fifth after the fifth
year(b) year(b)
Exchange
fee......... $5.00 $5.00 $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% .57% .57%
Rule 12b-1
fees(c)..... .25% 1.00%(e) 1.00%(e) .24% 1.00%(e) 1.00%(e)
Other
expenses(d)... .20% .20% .18% .34% .34% .32%
Total fund
operating
expenses.... 1.02% 1.77% 1.75% 1.15% 1.91% 1.89%
</TABLE>
- --------------------------------------------------------------------------------
(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares" -- page 32.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- pages
36 and 37.
(c) Up to .25% for Class A shares, and 1% for Class B and C shares. See
"Distribution Plans" -- page 38.
(d) See "The Fund and Its Management" -- page 28.
(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.
6
<PAGE> 9
- --------------------------------------------------------------------------------
EXPENSE SYNOPSIS -- CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH YIELD MUNICIPAL INSURED MUNICIPAL
------------------------------------- -------------------------------------
CUMULATIVE EXPENSES PAID CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF: FOR THE PERIOD OF:
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <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 $59 $82 $108 $181
Class B....................................... $59 $89 $114 $170** $61 $93 $121 $185**
Class C....................................... $28 $55 $ 95 $206 $30 $59 $102 $221
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of the period:
Class A....................................... $57 $78 $101 $166 $59 $82 $108 $181
Class B....................................... $18 $56 $ 96 $170** $19 $60 $103 $185**
Class C....................................... $18 $55 $ 95 $206 $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.
7
<PAGE> 10
- --------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------- JANUARY 2,
YEAR ENDED NOVEMBER 30 1986(2) THROUGH
HIGH YIELD ------------------------------------------------------------------------------------------------ NOVEMBER 30,
PORTFOLIO 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........ $11.19 $10.95 $10.78 $10.72 $10.91 $10.72 $10.85 $12.08 $11.91
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
INCOME FROM
INVESTMENT
OPERATIONS
Investment
income....... .87 .931 .93 .885 1.005 1.03 1.05 1.0754 1.0014
Expenses....... (.11) (.1178) (.115) (.115) (.105) (.09) (.09) (.0903) (.0615)
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
Net investment
income....... .76 .8132 .815 .77 .90 .94 .96 .9851 .9399
Net realized
and unrealized
gain or loss
on
securities.... (.744) .2303 .195 .13 (.23) .1418 (.105) (1.2751) .1735
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
Total from
investment
operations.... .016 1.0435 1.01 .90 .67 1.0818 .855 (.29) 1.1134
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
DIVIDENDS FROM
NET INVESTMENT
INCOME........ (.766) (.8035) (.84) (.84) (.86) (.8918) (.985) (.94) (.9434)
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
Net asset
value, end of
period........ $10.44 $11.19 $10.95 $10.78 $10.72 $10.91 $10.72 $10.85 $12.08
======== ========= ======== ======== ======== ========= ======== ========== ==============
TOTAL
RETURN(3).... .10% 9.65% 9.77% 8.73% 6.43% 10.39% 8.12% (2.51%) 9.64%
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 $ 152.2
Ratios to
average net
assets
Expenses..... 1.02% 1.03% 1.07% 1.06% .97% .85% .85% .78% .55%(4)
Expenses
without expense
reimbursement... -- -- -- -- 1.06% 1.04% 1.07% 1.05% 1.02%(4)
Net investment
income...... 6.98% 7.13% 7.45% 7.20% 8.34% 8.86% 8.84% 8.55% 8.39%(4)
Net investment
income,
without expense
reimbursement... -- -- -- -- 8.27% 8.65% 8.62% 8.28% 7.92%(4)
Portfolio
turnover rate... 33% 27% 24% 20% 29% 19% 36% 137% 32%
</TABLE>
(Table continued on following page)
8
<PAGE> 11
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------------ ---------------
JULY 20, DECEMBER 10,
YEAR ENDED NOVEMBER 30, 1992(2) THROUGH 1993(2) THROUGH
------------------------------- NOVEMBER 30, NOVEMBER 30,
HIGH YIELD PORTFOLIO 1994 1993(1) 1992(1) 1994(1)
----------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......................... $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 period................................ $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 period (millions).......................... $159.3 $104.8 $21.0 $15.3
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 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.
9
<PAGE> 12
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------- JANUARY 2,
YEAR ENDED NOVEMBER 30 1986(2) THROUGH
--------------------------------------------------------------------------------------------- NOVEMBER 30,
INSURED PORTFOLIO 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%
</TABLE>
(Table continued on following page)
10
<PAGE> 13
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C(1)
--------------------------------------------- --------------
DECEMBER 10,
JULY 20, 1993(2)
YEAR ENDED NOVEMBER 30, 1992(2) THROUGH THROUGH
--------------------------- 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.
11
<PAGE> 14
- ------------------------------------------------------------------------------
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.
12
<PAGE> 15
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 accumulated distribution fees and contingent deferred sales
charges on Class B shares or Class C shares prior to conversion would be less
than the initial sales charge on Class A shares purchased at the same time, and
to what extent such differential would be offset by the higher dividends per
share 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
13
<PAGE> 16
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
14
<PAGE> 17
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.
- ------------------------------------------------------------------------------
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
15
<PAGE> 18
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
16
<PAGE> 19
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 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
17
<PAGE> 20
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%
-------
Total Net Assets............................. 100%
</TABLE>
- ------------------------------------------------------------------------------
* 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
18
<PAGE> 21
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 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
19
<PAGE> 22
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%
-------
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" 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
20
<PAGE> 23
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.
- ------------------------------------------------------------------------------
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
21
<PAGE> 24
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.
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.
22
<PAGE> 25
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.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RESTRICTIONS
- ------------------------------------------------------------------------------
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.
23
<PAGE> 26
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 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.
24
<PAGE> 27
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
25
<PAGE> 28
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 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
26
<PAGE> 29
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
27
<PAGE> 30
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.
- ------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- ------------------------------------------------------------------------------
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.
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.
28
<PAGE> 31
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.
29
<PAGE> 32
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.
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
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
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
30
<PAGE> 33
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.
31
<PAGE> 34
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>
REALLOWED TO
DEALERS (AS
AS % OF AS % OF A %
SIZE OF NET AMOUNT OFFERING OF OFFERING
INVESTMENT INVESTED PRICE 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>
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
32
<PAGE> 35
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.
(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.
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<PAGE> 36
(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
34
<PAGE> 37
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 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.
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<PAGE> 38
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).
36
<PAGE> 39
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.
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.
37
<PAGE> 40
- ------------------------------------------------------------------------------
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
38
<PAGE> 41
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.
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.
39
<PAGE> 42
- ------------------------------------------------------------------------------
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 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 invest-
40
<PAGE> 43
ment 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
41
<PAGE> 44
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.
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
42
<PAGE> 45
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
43
<PAGE> 46
("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.
- ------------------------------------------------------------------------------
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.
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<PAGE> 47
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
45
<PAGE> 48
application form in this Prospectus or call the Fund at (800) 421-5666 to
request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Van Kampen American Capital and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's regular redemption
procedure 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
46
<PAGE> 49
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
47
<PAGE> 50
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.
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
48
<PAGE> 51
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
49
<PAGE> 52
calendar year. Dividends 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
50
<PAGE> 53
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.
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,
51
<PAGE> 54
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
52
<PAGE> 55
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. 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.
53
<PAGE> 56
BACKUP WITHHOLDING INFORMATION
STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with
the following guidelines:
Account Type Give Social Security Number or Tax
Identification Number of:
- --------------------------------------------------------------------------------
Individual Individual
- --------------------------------------------------------------------------------
Joint (or Joint Tenant) Owner who will be paying tax
- --------------------------------------------------------------------------------
Uniform Gifts to Minors Minor
- --------------------------------------------------------------------------------
Legal Guardian Ward, Minor or Incompetent
- --------------------------------------------------------------------------------
Sole Proprietor Owner of Business
- -------------------------------------------------------------------------------
Trust, Estate, Pension Trust, Estate, Pension Plan Trust (not
Plan Trust personal TIN of fiduciary)
- --------------------------------------------------------------------------------
Corporation, Partnership, Corporation, Partnership, Other
Other Organization Organization
- --------------------------------------------------------------------------------
Broker/Nominee Broker/Nominee
- --------------------------------------------------------------------------------
STEP 2. If you do not have a TIN or you do not know your TIN, you must obtain
Form SS-5 (Application for Social Security Number) or Form SS-4 (Application
for Employer Identification Number) from your local Social Security or IRS
office and apply for one. Write "Applied For" in the space on the application.
STEP 3. If you are one of the entities listed below, you are exempt from
backup withholding and should not check the box on the Application in Section
2, Taxpayer Identification.
* A corporation
* Financial institution
* Section 501 (a) exempt organization (IRA, Corporate Retirement Plan,
403(b), Keogh)
* United States or any agency or instrumentality thereof
* A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof
* International organization or any agency or instrumentality thereof
* Registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
* Real estate investment trust
* Common trust fund operated by a bank under section 584 (a)
* An exempt charitable remainder trust, or a non-exempt trust described in
section 4947 (a) (1)
If you are in doubt as to whether you are exempt, please contact the Internal
Revenue Service.
STEP 4. IRS PENALTIES -- If you do not supply us with your TIN, you will be
subject to an IRS $50 penalty unless your failure is due to reasonable cause
and not willful neglect. If you fail to report interest, dividend or
patronage dividend income on your federal income tax return, you will be
treated as negligent and subject to an IRS 5% penalty tax on any resulting
underpayment of tax unless there is clear and convincing evidence to the
contrary. If you falsify information on this form or make any other false
statement resulting in no backup withholding on an account which should be
subject to backup withholding, you may be subject to an IRS $500 penalty and
certain criminal penalties including fines and imprisonment.
<PAGE> 57
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 Steet 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/O ACCESS
Tax-Exempt Trust, Inc. P.O. Box 418256
Kansas City, MO 64141-9256
For investors seeking interest
income exempt from federal income
taxes.
PRINTED MATTER
Printed in U.S.A./021 PRO-001
