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AMERICAN CAPITAL TEXAS MUNICIPAL SECURITIES, INC.
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2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
January 31, 1995
American Capital Texas Municipal Securities, Inc. (the "Fund") is a mutual
fund whose objective is to provide as high a level of interest income exempt
from federal income tax and Texas state income tax, if any, as is consistent
with the Fund's investment policies. The Fund invests principally in Texas
state, municipal and local government obligations and obligations of other
qualifying issuers which are tax-exempt. The Fund currently is available for
sale only in Texas and other selected states specified under "Shareholder
Services -- Exchange Privilege."
There can be no assurance that the objective of the Fund will be achieved.
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 (the "SEC") and
contains further information about the Fund. A copy of the Statement of
Additional Information may be obtained without charge by calling or writing the
Fund at the telephone number and address printed above. The Statement of
Additional Information is incorporated by reference into this Prospectus.
THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE SHARES OF THIS FUND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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AMERICAN CAPITAL TEXAS MUNICIPAL SECURITIES, INC.
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CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICE AGENT:
Van Kampen/American Capital
Shareholder Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
INVESTMENT ADVISER:
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
DISTRIBUTOR:
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus Summary............... 2
Expense Synopsis................. 4
Financial Highlights............. 5
Multiple Pricing System.......... 6
Investment Objective and
Policies....................... 8
Investment Practices and
Restrictions................... 10
Municipal Securities............. 13
The Fund and Its Management...... 14
Purchase of Shares............... 14
Distribution Plans............... 19
Shareholder Services............. 20
Redemption of Shares............. 22
Dividends, Distributions and
Taxes.......................... 24
Prior Performance Information.... 25
Additional Information........... 26
Investment Holdings.............. 28
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any
representations other than those contained in this Prospectus or in the
Statement of Additional Information, and, if given or made, such other
information or representations must not be relied upon as having been
authorized by the Fund or by the Distributor. This Prospectus does not
constitute an offering by the Distributor in any jurisdiction in which such
offering may not lawfully be made.
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PROSPECTUS SUMMARY
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SHARES OFFERED. Capital Stock.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
TYPE OF COMPANY. Non-diversified, open-end management investment company.
INVESTMENT OBJECTIVE. Interest income exempt from federal income taxes and
Texas state income taxes.
INVESTMENT POLICIES. The Fund invests principally in Texas state, municipal
and local government obligations and obligations of other qualifying issuers
which are tax-exempt.
INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights." See also "Prior Performance
Information."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") has served as investment adviser to the Fund since its inception. The
Adviser serves as investment adviser to 45 investment company portfolios. See
"The Fund and Its Management."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").
MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circum-
2
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stances and objectives. See "Multiple Pricing System -- Factors for
Consideration." Each class of shares represents an interest in the same
portfolio of investments of the Fund. The per share dividends on Class B and
Class C shares will be lower than the per share dividends on Class A shares. See
"Multiple Pricing System." For information on redeeming shares see "Redemption
of Shares."
CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."
CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first and second years, declining each year thereafter to 0%
after the fifth year. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class B
Shares" and "Distribution Plans." Class B shares will convert automatically to
Class A shares six years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing System --
Conversion Feature."
CLASS C SHARES. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of 1% on redemptions made within
one year of purchase. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution Plans." Class C shares will convert automatically to
Class A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing System --
Conversion Feature."
DIVIDENDS AND DISTRIBUTIONS. The Fund declares dividends from net investment
income on each business day. Such dividends are distributed monthly. The daily
dividend is a fixed amount determined at least monthly which is not expected to
exceed the net income of the Fund for the month divided by the number of
business days during the month. Capital gains, if any, are distributed at least
annually. All dividends and distributions are automatically reinvested in shares
of the Fund at net asset value per share (without sales charge) unless payment
in cash is requested. See "Dividends, Distributions and Taxes."
3
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EXPENSE SYNOPSIS
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<TABLE>
<CAPTION>
CLASS C
CLASS A SHARES CLASS B SHARES SHARES(1)
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases
(as a percentage of offering
price).............................. 4.75%(a None None
Sales charge imposed on dividend
reinvestments....................... None None None
Deferred sales charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)................. None* 4% during the first 1.0% during the
and second year, first year(b)
3% during the third
year, 2.5% during the
fourth year, 1.5%
during the fifth year
and 0% after the
fifth year(b)
Exchange fee(c)....................... $5.00 $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees (after
reimbursement)...................... .60% .60% .60%
Rule 12b-1 fees(d).................... .24% 1.00%(g) 1.00%(g)
Other expenses (after
reimbursement)(e)................... .86% .87% .86%(f)
Total fund operating expenses......... 1.70% 2.47% 2.46%
</TABLE>
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(a) Reduced for purchases of $100,000 and over. See "Purchase of
Shares -- Class A Shares" -- page 16.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- page
18.
(c) Not charged in certain circumstances. See "Shareholder
Services -- Systematic Exchange" and "-- Automatic Exchange" -- page 21.
(d) Up to .25% for Class A shares and 1.00% for Class B and Class C shares. See
"Distribution Plans" -- page 19.
(e) See "The Fund and Its Management" -- page 14.
(f) "Other Expenses" is based on estimated amounts for the current fiscal year.
(g) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges otherwise permitted by NASD Rules.
* Investments of $1 million or more are not subject to any sales charge at
the time of purchase, but a contingent deferred sales charge of 1% may
be imposed on certain redemptions made within one year of the purchase.
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<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
1 3
EXAMPLE YEAR YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum $47.50
front-end sales charge and for Class B shares and Class C
shares, a contingent deferred sales charge assuming (1) an
operating expense ratio of 1.70% for Class A shares, 2.47% for
Class B shares and 2.46% for Class C shares, (2) a 5% annual
return throughout the period and (3) redemption at the end of
the period:
Class A..................................................... $64 $ 99 $135 $239
Class B..................................................... $66 $109 $149 $244**
Class C..................................................... $35 $ 77 $131 $280
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A..................................................... $64 $ 99 $135 $239
Class B..................................................... $25 $ 77 $132 $244**
Class C..................................................... $25 $ 77 $131 $280
</TABLE>
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** Based on conversion to Class A shares after six years.
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. See "Purchase of Shares," "The Fund and Its Management" and
"Redemption of Shares." The example is included to provide a means for the
investor to compare expense levels of funds with different fee structures over
varying investment periods. To facilitate such comparison, all funds are
required to utilize a five percent annual return assumption. This assumption is
unrelated to 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.
4
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FINANCIAL HIGHLIGHTS
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(Selected data for a share of capital stock outstanding throughout the period
indicated)
The following financial highlights have been audited by the Fund's
independent accountants, Price Waterhouse LLP, whose report thereon was
unqualified. This summary should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------- -------------------------------------
MARCH 2, JULY 27,
YEAR ENDED 1992(1) YEAR ENDED 1992(1)
SEPTEMBER 30 THROUGH SEPTEMBER 30 THROUGH
------------------- SEPTEMBER 30, ------------------- SEPTEMBER 30,
1994 1993(2) 1992(2) 1994 1993(2) 1992(2)
------- ------- -------------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $10.36 $ 9.74 $ 9.45 $10.35 $ 9.74 $ 9.91
------- ------- -------------- ------- ------- --------------
INCOME FROM OPERATIONS
Investment income............................ .64 .63 .42 .65 .63 .09
Expenses..................................... (.17) (.19) (.09) (.25) (.26) (.04)
Expense reimbursement........................ .07 .13 .03 .07 .13 .015
------- ------- -------------- ------- ------- --------------
Net investment income........................ .54 .57 .36 .47 .50 .065
Net realized and unrealized gains or losses
on securities.............................. (.7025) .65 .23 (.7065) .633 (.103)
------- ------- -------------- ------- ------- --------------
Total from investment operations............. (.1625) 1.22 .59 (.2365) 1.133 (.038)
------- ------- -------------- ------- ------- --------------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.545) (.5875) (.30) (.461) (.5105) (.132)
Distributions from net realized gains on
securities................................. (.0125) (.0125) -- (.0125) (.0125) --
------- ------- -------------- ------- ------- --------------
Total distributions.......................... (.5575) (.60) (.30) (.4735) (.523) (.132)
------- ------- -------------- ------- ------- --------------
Net asset value, end of period............... $ 9.64 $10.36 $ 9.74 $ 9.64 $10.35 $ 9.74
======== ======== ============= ======== ======== =============
TOTAL RETURN(4).............................. (1.62%) 12.94% 6.30% (2.35%) 11.97% (.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)......... $12.8 $18.0 $ 14.1 $ 8.6 $ 7.1 $ 0.9
Ratios to average net assets
Expenses................................... 1.03% .61% .93%(3) 1.80% 1.30% 1.41%(3)
Expenses, without expense reimbursement.... 1.70% 1.86% 1.41%(3) 2.47% 2.55% 2.15%(3)
Net investment income...................... 5.41% 5.74% 5.94%(3) 4.66% 4.92% 3.83%(3)
Net investment income, without expense
reimbursement............................ 4.74% 4.49% 5.45%(3) 3.99% 3.67% 3.07%(3)
Portfolio turnover rate...................... 10% 5% 4% 10% 5% 4%
<CAPTION>
CLASS C
--------------------------------
AUGUST 30,
1993(1)
YEAR ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1994(2) 1993(2)
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<S> <<C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $10.36 $10.28
------------- ---------------
INCOME FROM OPERATIONS
Investment income............................ .64 .05
Expenses..................................... (.25) (.02)
Expense reimbursement........................ .07 .01
------------- ---------------
Net investment income........................ .46 .04
Net realized and unrealized gains or losses
on securities.............................. (.6965) .121
------------- ---------------
Total from investment operations............. (.2365) .161
------------- ---------------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.461) (.081)
Distributions from net realized gains on
securities................................. (.0125) --
------------- ---------------
Total distributions.......................... (.4735) (.081)
------------- ---------------
Net asset value, end of period............... $ 9.65 $10.36
============ =============
TOTAL RETURN(4).............................. (2.35%) 1.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)......... $ 1.2 $ 0.1
Ratios to average net assets
Expenses................................... 1.79% .66%(3)
Expenses, without expense reimbursement.... 2.46% 1.89%(3)
Net investment income...................... 4.59% 4.17%(3)
Net investment income, without expense
reimbursement............................ 3.92% 2.92%(3)
Portfolio turnover rate...................... 10% 5%
</TABLE>
(1) Commencement of operations.
(2) Based on the average month-end outstanding.
(3) Annualized.
(4) Total return for periods of less than one full year are not annualized.
Total return does not reflect sales charges.
5
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MULTIPLE PRICING SYSTEM
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The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of Shares --
Class B Shares." Class B shares will automatically convert to Class A shares six
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. See "Conversion Feature" herein for discussion on
applicability of the conversion feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will convert automatically to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding for
a period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares as the case may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six years or ten years, respectively, after the end of the calendar month
in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share 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 a reduced initial sales charges or purchases at net
asset value, as described herein under "Purchase of Shares --
6
<PAGE> 7
Class A Shares." For these reasons, the Distributor will reject any order of
more than $250,000 for Class B shares or any order of more than $1 million for
Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors in
Class A shares do not have all their funds invested initially and, therefore,
initially own fewer shares. Other investors might determine that it is more
advantageous to purchase either Class B shares or Class C shares and have all
their funds invested initially, although remaining subject to a contingent
deferred sales charge. Ongoing distribution fees on Class B shares and Class C
shares will be offset to the extent of the additional funds originally invested
and any return realized on those funds. However, there can be no assurance as to
the return, if any, which will be realized on such additional funds. For
investments held for ten years or more, the relative value upon liquidation of
the three classes tends to favor Class A or Class B shares, rather than Class C
shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (see "Shareholder Services -- Shareholder Services Applicable to Class A
Shareholders Only -- Check Writing Privilege"). Class B shares may be
appropriate for investors who wish to avoid a front-end shares charge, put 100%
of their investment dollars to work immediately, and/or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish to
avoid a front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
Under most circumstances, for investments aggregating less than $100,000 at
the time of purchase, investments originally made in Class C shares will tend to
have a slightly higher value upon liquidation than investments originally made
in either Class A or Class B shares if liquidated within approximately the first
six years after the date of the original investment and investments originally
made in Class B shares will tend to have a slightly higher value upon
liquidation than investments originally made in either Class A or Class C shares
for investments held longer. Under most circumstances, for investments
aggregating $100,000 or more at the time of purchase, investments originally
made in Class C shares will tend to have a slightly higher value upon
liquidation than either investments originally made in Class A or Class B shares
if liquidated within approximately the first two to the first six years after
the date of the original investment, but investments originally made in Class A
and Class B shares will tend to have a slightly higher value upon liquidation
for investments held longer. The foregoing will not, however, be true in all
cases. Particularly, if the Fund experiences a consistently negative or widely
fluctuating total return, results may differ.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
"Dividends, Distributions and Taxes." Shares of the Fund may be exchanged,
subject to certain limitations, for shares of the same class of other mutual
funds advised by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Directors of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 (the "1940 Act") and state laws, will seek to ensure that no
such conflict arises.
7
<PAGE> 8
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INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund is a non-diversified, open-end management investment company,
generally known as a mutual fund, organized as a Maryland corporation on
September 6, 1991, with an investment objective of providing as high a level of
interest income exempt from federal income tax and Texas state income tax, if
any, as is consistent with its investment policies. However, there can be no
assurance that the objective of the Fund will be achieved. The Fund invests
primarily in obligations issued by or on behalf of states, territories or
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which,
in the opinion of bond counsel for the issuer, is exempt from federal income tax
("Municipal Securities").
Among the various types of Municipal Securities are general obligation bonds,
revenue or special obligation bonds, industrial development bonds, pollution
control bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes. General obligations are backed by
the taxing power of the issuing municipality. Revenue obligations are backed by
the revenues of a project or facility -tolls from a toll-bridge, for example.
Industrial development revenue obligations are a specific type of revenue
obligation backed by the credit and security of a private user. Variable rate
demand notes and the risks thereof are described under "Investment Practices and
Restrictions -- Variable Rate Demand Notes."
The Fund maintains at least 80% of its net assets invested in Municipal
Securities except as a temporary defensive measure during periods of adverse
market conditions. At least 65% of the Fund's total assets will be invested in
securities issued by the State of Texas, its political subdivisions, agencies
and instrumentalities ("Texas Securities"). This is a fundamental policy and may
not be changed without the approval of at least a majority of the outstanding
shares of the Fund. The Fund does not invest in any securities except Municipal
Securities and Temporary Investments as defined below, except that the Fund may
seek to hedge against changes in interest rates through transactions in listed
futures contracts related to U.S. Government securities or based upon the Bond
Buyers Municipal Bond Index and options thereon. See "Investment Practices and
Restrictions -- Futures Contracts and Related Options."
On a temporary basis, to provide cash reserves or pending investment in
Municipal Securities, the Fund may invest up to 20% of its net assets in taxable
securities rated at the time of purchase by either Moody's Investor Service
("Moody's") as follows: Aaa through A by Moody's for bonds, MIG 1 through MIG 4,
or VMIG 1 through VMIG 4 for notes and Prime-1 through Prime-3 for commercial
paper; or by Standard & Poor's Corporation ("S&P") as follows: AAA through A for
bonds, SP-1 or SP-2 for notes and A-1 through A-3 for commercial paper; or, if
non-rated, are in the opinion of the Adviser, of comparable quality ("Temporary
Investments"). The Fund also may invest temporarily a greater proportion of its
assets in Temporary Investments for defensive purposes, when, in the judgment of
the Adviser, market conditions warrant. Temporary Investments include but are
not limited to securities issued or guaranteed by the U.S. 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; repurchase agreements; and shares of tax-exempt
money market investment companies. See "Investment Practices and
Restrictions -- Money Market Investment Companies."
Interest received on certain otherwise tax-exempt securities which are
classified as "private activity bonds" (in general bonds that benefit
non-governmental entities) may be subject to an alternative minimum tax. The
percentage of the Fund's assets invested in "private activity bonds" will vary
during the year, but will not exceed 20%. See "Dividends, Distributions and
Taxes -- Federal Income Taxes" for further discussion.
The Fund may invest up to ten percent of its net assets 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 ten percent limitation applies at the time the
purchase commitments are made. See "Investment Practices and Restrictions --
Repurchase Agreements."
Differences with respect to the quality and maturity of portfolio investments
can be expected to affect the yield on the Fund and the degree of market and
financial risk to which the Fund 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 Fund 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 the
8
<PAGE> 9
Fund and such average maturity is likely to change from time to time based on
the Adviser's view of market conditions. The average maturity of the Municipal
Securities owned by the Fund on September 30, 1994, was 19.86 years. Municipal
Securities ratings of Moody's and of S&P are described in the Statement of
Additional Information. See also "Municipal Securities" herein.
At least 80% of the Municipal Securities purchased by the Fund are rated at
the time of purchase as determined by Moody's in the following quality grades:
Aaa through Baa for bonds, MIG 1 through MIG 4, or VMIG 1 through VMIG 4 for
notes and Prime-1 through Prime-3 for commercial paper; or as determined by S&P
in the following grades: AAA through BBB for bonds, SP-1 or SP-2 for notes and
A-1 through A-3 for commercial paper; or, if non-rated, are in the opinion of
the Adviser of comparable quality. The lowest rating in each category described
above is considered by the rating agency to be of adequate quality.
During the fiscal period ended September 30, 1994, the average percentage of
the Fund'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
non-rated debt securities, determined on a dollar weighted average, were as
follows:
<TABLE>
<S> <C>
AAA/Aaa........................................................ 25.00%
AA/Aa.......................................................... 15.96%
A/A............................................................ 17.11%
BBB/Baa........................................................ 19.74%
BB/Ba.......................................................... 1.46%
*Non-rated..................................................... 17.39%
Other Net Assets............................................... 3.34%
--------
Total Net Assets..................................... 100.00%
</TABLE>
- ------------
* The non-rated debt securities as a percentage of total net assets were
considered by the Adviser to be comparable to securities rated by Moody's as
follows: BBB - 17.39%.
Up to 20% of the Municipal Securities purchased by the Fund may be obligations
rated BB or lower by S&P and Moody's or non-rated obligations which in the
opinion of the Adviser are of comparable quality. Such securities, (sometimes
referred to as high-yield, lower rated securities) are predominantly speculative
with respect to the capacity to pay interest and repay principal in accordance
with the terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. The market prices of
high-yielding, lower-rated securities may fluctuate more than higher-rated
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. In purchasing
such securities, the Fund will rely on the Adviser's judgment, analysis and
experience in evaluating the creditworthiness of the issuer of such securities.
The Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of its management and regulatory matters. The
Adviser has extensive experience in high-yield tax-exempt asset management. See
in the Statement of Additional Information "Municipal Securities -- Additional
Risks of Lower Rated Municipal Securities" and in the Appendix "Ratings of
Investments" for additional information regarding ratings of debt securities.
The Fund does not invest in obligations which are not currently paying interest
or which are rated C (lowest grade by Moody's) or which are rated C or D by S&P
or which are non-rated obligations considered by the Adviser to be of comparable
quality.
The Fund is registered as a "non-diversified" company under the 1940 Act. The
Fund intends to comply with Subchapter M of the Code which limits the aggregate
value of all holdings (except U.S. Government and cash items, as defined in the
Code), each of which exceeds 5% of the Fund's total assets, to an aggregate
amount of 50% of such assets. Also, holdings of a single issuer (with the same
exceptions) may not exceed 25% of the Fund's total assets. These limits are
measured at the end of each quarter. Under the Subchapter M limits, "non-
diversification" allows up to 50% of the total assets to be invested in as few
as two single issuers. In the event of a decline in the creditworthiness of or
default upon, the obligations of one or more such issuers exceeding five
percent, an investment in the Fund will entail greater risk than in funds which
have a policy of "diversification" because a high percentage of the Fund assets
may be invested in Municipal Securities of one or two issuers. Furthermore, a
high percentage of investments among few issuers may result in a greater degree
of fluctuation in the market value of the assets of the Fund because the Fund
will be more susceptible to economic, political, or regulatory developments
affecting these securities than would be the case with a fund composed of more
varied obligations of issuers. Also, the net asset value per share of the Fund
will tend to increase more when, for example, the assets invested in a limited
number of single issuers increase in value, and decrease more when such assets
decrease in value.
The Fund ordinarily will invest at least 65% of its total assets in Texas
Securities, and, therefore, it is more susceptible to factors adversely
affecting issuers of Texas Securities than is a municipal bond mutual fund that
is not concentrated in issuers of Texas Securities to this degree. Such factors
include the economic condition of the State of Texas (the "State") and its
regions, pressures on the State budget, and litigation affecting issuers of
9
<PAGE> 10
Texas Securities. Any circumstances that adversely affect the State's credit
standing may also affect the market value of securities of other issuers in the
State, either directly or indirectly, as a result of a dependency of local
governments and other authorities upon State aid and reimbursement programs.
Texas' economy continues to recover from the recession that began in the
mid-1980s due to declining oil prices and a collapse in the real estate
industry. The economy has become more stable due to increased diversification,
with the oil and gas industry diminishing in relative importance and the
service-producing sectors providing the major sources of job growth. Based on
information from the Texas Employment Commission, the unemployment rate averaged
6.4% in 1994. The Comptroller of Public Accounts predicts that the overall Texas
economy will outpace national economic growth in the long term by an annual
average of one-half percentage point.
The 73rd State Legislature passed a balanced 1994-95 biennial State budget in
May of 1993 without increasing State taxes. This was accomplished by
implementing savings proposals, cutting spending and increasing federal funding.
The 74th State Legislature has just begun the process of establishing the
1996-97 biennial State budget. The Comptroller of Public Accounts has estimated
that the State will have 19.9 percent more revenues available for general
purpose spending in 1996-97 than it had in 1994-95, including a surplus of $3
billion from the 1994-95 biennium.
On May 31, 1993, the Texas Governor signed a comprehensive legislative
revision to the school finance provisions of the Texas Education Code. The
legislative revisions resulted from a series of court decisions commonly
referred to as Edgewood v. Kirby, in which Texas courts have declared the Texas
school finance system unconstitutional under Texas law. Previous legislative
efforts to correct the school finance system were declared unconstitutional. The
Texas Supreme Court has ruled that the legislative revision is constitutional,
but suggested that further changes may be needed in the near future to provide
equal access to funding for facility needs. The legislative revision and further
efforts to equalize school funding may affect the financial condition of the
Texas State Government and certain Texas school districts.
The Adviser does not believe that the factors described above will have a
significant adverse effect on the Fund's investment in investment grade Texas
Securities or Municipal Securities. Because the Fund's portfolio will consist
primarily of investment grade securities, the Fund is expected to be less
subject to market and credit risks than a fund that invests in lower quality
Texas Securities or Municipal Securities. See the Statement of Additional
Information.
- --------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RESTRICTIONS
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and 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. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by the Fund,
exceeds ten percent of the value of its net assets. In the event of the
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes ("VRDNs") are
tax-exempt obligations which contain a floating or variable interest rate
adjustment formula and which are subject to an unconditional right of demand on
the part of the holder thereof to receive payment of the principal balance plus
accrued interest upon a specified notice period (usually seven to 30 days).
There is, however, the possibility that because of default or insolvency, the
demand feature of VRDNs or Participating VRDNs, described below, may not be
honored. The in-
10
<PAGE> 11
terest 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 set at a rate determined by the remarketing agent or
based upon the prime rate of a bank or some other appropriate interest rate
adjustment index.
Investments by the Fund 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. The Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a bank or
dealer from which Municipal Securities are acquired agrees to purchase from the
Fund, at the Fund's option, the Municipal Securities at a specified price. Such
commitments are sometimes called "liquidity puts."
The amount payable to the Fund upon its exercise of a "stand-by commitment" is
normally (i) the Fund's acquisition cost of the Municipal Securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during that period.
"Stand-by commitments" generally can be acquired when the remaining maturity of
the underlying Municipal Securities is not greater than one year, and are
exercisable by the Fund at any time before the maturity of such obligations.
The Fund's right to exercise "stand-by commitments" is unconditional and
unqualified. A "stand-by commitment" generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Securities to a third party
at any time.
The Fund expects that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield-to-maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding "stand-by commitments" held in the Fund will not exceed
1/2 of 1% of the value of the Fund's total assets calculated immediately after
each "stand-by commitment" is acquired. The Fund intends to enter into "stand-by
commitments" only with banks and dealers which, in the Adviser's opinion,
present minimal credit risks.
The Fund would acquire "stand-by commitments" solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a "stand-by commitment" would not affect the
valuation of the underlying Municipal Securities which would continue to be
valued in accordance with the method of valuation employed for the Fund in which
they are held. "Stand-by commitments" acquired by the Fund would be valued at
zero in determining net asset value. Where the Fund paid any consideration
directly or indirectly for a "stand-by commitment," its costs would be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.
DELAYED DELIVERY AND WHEN-ISSUED SECURITIES. Municipal 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 the Fund with
payment and delivery taking place in the future, often a month or more after the
purchase. The payment obligation and the interest rate are each fixed at the
time the Fund enters into the commitment. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to settlement date if
it is deemed advisable. Purchasing Municipal 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. The Fund 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.
MONEY MARKET INVESTMENT COMPANIES. The Fund may invest in shares of open-end
investment companies which are tax-exempt money market funds. Such investment
would not exceed 3% of the total outstanding voting stock of the acquired
company; 5% of the value of the total assets of the Fund; or 10% of the total
assets of the acquired company as held by the Fund and all American Capital
funds. When the Fund invests in a tax-exempt money market fund, the Adviser will
reduce its advisory fee by the amount of any investment advisory and admin-
11
<PAGE> 12
istrative services fees paid to the investment adviser of the money market fund.
Such investments may however result in a duplication of other operating
expenses.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund 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, a price
weighted measure of the market value of 40 large sized, recent issues of
tax-exempt bonds or in listed contracts based on U.S. Government securities.
Futures contracts and options thereon may be used for defensive hedging or
anticipatory hedging purposes, depending upon the composition of the Fund and
the Adviser's expectations concerning the securities markets. See the Statement
of Additional Information for discussion of futures contracts and related
options.
Potential Risks of Futures Contracts and Related Options. The purchase and
sale of futures contracts and related options involve risks different from those
involved with direct investments in securities. While utilization of futures
contracts and related options may be advantageous to the Fund, if the Adviser is
not successful in employing such instruments in managing the Fund's investments,
the Fund's performance will be worse than if the Fund did not make such
investments. In addition, the Fund would pay commissions and other costs in
connection with such investments, which may increase the Fund's expenses and
reduce its return. The Fund may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceed five
percent of the fair market value of the Fund's assets. In order to prevent
leverage in connection with the purchase of futures contracts or call options
thereon by the Fund, an amount of cash, cash equivalent or liquid high grade
debt securities equal to the market value of the obligation under the futures
contracts or options (less any related margin deposits) will be maintained in a
segregated account with the custodian.
PORTFOLIO TURNOVER. The Fund may purchase or sell securities without regard to
the length of time the security has been held to take advantage of short-term
differentials in bond yields consistent with its objective of seeking tax-exempt
interest income. The Fund 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 the Fund is expected to vary from year to year depending on
market conditions. The annual turnover rate for the Fund is not expected to
exceed 100%. A 100% turnover rate would occur, for example, if all the
securities in the Fund 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. Such gains are taxable to
shareholders as ordinary income except to the extent such gains are offset by
any capital losses. Portfolio turn-
over is not a limiting factor in making portfolio decisions, except as limited
by the 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 the
Fund. The Municipal Securities and other obligations in which the Fund invests
are traded primarily in the over-the-counter market. Such securities are
generally traded on a net basis with dealers acting as principal for their own
accounts without a stated commission, although the prices of the securities
usually include a profit to the dealers. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
It is the policy of the Fund to obtain the best net results taking into account
such factors as price (including the applicable dealer spread), the size, type
and difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While the Fund generally seeks reasonably competitive spreads or commissions,
the Fund will not necessarily be paying the lowest spread or commission
available. Brokerage commissions are paid on transactions in futures contracts
and options thereon. The Adviser is authorized to place portfolio transactions
with broker-dealers participating in the distribution of shares of the Fund and
other American Capital funds if it reasonably believes 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 it 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 without approval by a
majority (as defined in the 1940 Act) vote of the shareholders of the Fund.
These restrictions provide, among other things, the Fund 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 the Fund
may purchase, hold and sell listed futures contracts related to U.S.
Government securities, Municipal Securities or to an index of
Municipal Securities;
12
<PAGE> 13
3. Borrow money, except the Fund may borrow from banks to meet redemptions
or for other temporary or emergency purposes, with such borrowing not to
exceed five percent of the total assets of the Fund at market value at
the time of borrowing. Any such borrowing may be secured provided that
not more than ten percent of the total assets of the Fund at market
value at the time of pledging may be used as security for such
borrowings; or
4. Purchase any securities which would cause more than 25% of the value of
the Fund'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 tax-exempt securities issued by governmental bodies or agencies
or instrumentalities thereof; so that industrial development bonds that
are considered to be issued by non-governmental users are subject to
this industry limitation.
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 securities 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.
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- --------------------------------------------------------------------------------
Municipal Securities include debt obligations of a state, territory or
possession of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public purposes for
which Municipal Securities may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and obtaining funds
to lend to other public institutions and facilities. Certain types of Municipal
Securities are issued to obtain funding for privately operated facilities.
Many new issues of Municipal Securities are sold on a "when-issued" basis.
While the Fund has ownership rights to such Municipal Securities, the Fund does
not have to pay for them until they are delivered, normally 15 to 45 days later.
To meet that payment obligation, the Fund sets aside with the Custodian
sufficient cash or liquid securities equal to the amount that will be due. See
"Investment Practices and Restrictions -- Delayed Delivery and When-Issued
Securities."
The yields of Municipal Securities depend on, among other things, general
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.
The Fund considers investments in Municipal Securities not to be subject to
concentration policies and may invest a relatively high percentage of the assets
of the Fund 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
Fund's investments more susceptible to similar economic, political or regulatory
occurrences. As the similarity in issuers increases, the potential for
fluctuation in the Fund's per share net asset value also increases. The Fund may
invest more than 25% of its total assets in Municipal Securities with similar
characteristics, such as industrial development revenue bonds, including
pollution control revenue bonds, housing finance agency bonds, or hospital
bonds. In such circumstances, economic, business, political or other changes
affecting one bond (such as proposed legislation affecting the financing of a
project; shortages or price increases of needed materials; or declining markets
or needs for the projects) may also affect other bonds in the same segment,
thereby potentially increasing market risk. The Fund may not, however, invest
more than 25% of its total assets in industrial development revenue bonds,
including pollution control bonds, issued for companies in the same industry.
See restriction 4 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.
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 Fund to pay "exempt-interest" dividends may be adversely affected
and the Fund would re-evaluate its investment objective and policies and
consider changes in its structure.
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<PAGE> 14
- --------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
The Fund is an open-end, non-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
non-diversified portfolio of securities by combining their resources in an
effort to achieve such goals.
A board of eight directors 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. As of
December 31, 1994, the Adviser provides investment advice to 45 investment
company portfolios with total net assets of approximately $15.8 billion.
The Adviser and the Distributor are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates LP."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.
Mr. Don G. Powell is President and Director of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chairman, Chief Executive
Officer and Director of the Distributor. Most other officers of the Fund are
also officers and/or directors of the Adviser.
The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated December 20, 1994 (the "Advisory
Agreement"), the Fund pays the Adviser an annual fee of 0.60% of the first $300
million of the average net assets of the Fund; 0.55% of the next $300 million of
the average net assets of the Fund; and 0.50% of the average net assets in
excess of $600 million. 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 the Fund. Operating expenses paid
by the Fund include shareholder service agency fees, service fees, distribution
fees, custodial fees, legal and accounting fees, the costs of reports and
proxies to shareholders, directors' fees, and all other business expenses not
specifically assumed by the Adviser. Advisory (management) fees and total
operating expense ratios are shown under the caption "Expense Synopsis" herein.
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.
Robert B. Evans has been primarily responsible for the day-to-day management
of the Fund's investment portfolio since its inception. Mr. Evans is Vice
President of the Fund. Mr. Evans has been associated with the Adviser since
1987.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B and Class C shares are sold
without an initial sales charge and are subject to a contingent deferred sales
charge upon certain redemptions. See "Multiple Pricing System" for a discussion
of factors to consider in selecting which class of shares to purchase. Contact
the Service Department at (800) 421-5666 for further information and appropriate
forms.
Shares of the Fund are offered continuously for sale by the Distributor, and
are available through authorized investment dealers. Initial investments in the
Fund 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
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
14
<PAGE> 15
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 Van
Kampen/American Capital Shareholder Services, Inc. ("ACCESS"). When purchasing
shares of the Fund, investors must specify whether the purchase is for Class A,
Class B or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is computed as of the close of trading (currently 4:00
p.m. New York time) on the New York Stock Exchange (the "Exchange") on each day
such exchange is open for trading. Net asset value per share for each class is
determined by dividing the value of all portfolio securities held by the Fund,
cash and other assets (including accrued interest), attributable to such class
less all liabilities (including accrued expenses) by the total number of shares
of the class outstanding. The Fund's investments are valued by an independent
pricing service.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the net asset
value next computed (plus applicable Class A sales charges) after an order is
received by a dealer provided such order is transmitted to the Distributor prior
to the Distributor's close of business on such day. Orders received by dealers
after the close of the Exchange are priced based on the next close provided they
are received by the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit orders received by
them to the Distributor so they will be received prior to such time. Orders of
less than $500 are mailed by the dealer and processed at the offering price next
calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges and certain different shareholder service options available. See
"Distribution Plans" and "Shareholder Services -- Exchange Privilege." The net
income attributable to Class B and Class C shares and the dividends payable on
Class B and Class C shares will be reduced by the amount of the distribution fee
and incremental expenses associated with such distribution fees. Sales personnel
of broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund, with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on sales generated by the broker or
dealer during such programs. Also, the Distributor in its discretion may from
time to time, pursuant to objective criteria established by it, pay fees to, and
sponsor business seminars for, qualifying brokers, dealers or financial
intermediaries for certain services or activities which are primarily intended
to result in sales of shares of the Fund. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis.
15
<PAGE> 16
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
REALLOWED TO
AS % OF AS % OF DEALERS (AS 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 herein) (see herein) (see herein)
- ----------------------------------------------------------------------------------
</TABLE>
No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
For full service participant directed profit sharing and money purchase plans
and qualified 401(k) retirement plans administered by Van Kampen American
Capital Trust Company's (k) Advantage Program, or similar recordkeeping programs
made available through the Van Kampen American Capital Trust Company, no sales
charge is payable at the time of purchase for plans with at least 50 eligible
employees or investing at least $250,000 in American Capital funds, which
include Participating Funds as described herein under "Purchase of
Shares -- Class A Shares -- Volume Discounts," and American Capital Reserve
Fund, Inc. ("Reserve"). For such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for such
purchases as follows: 1% on sales to $5 million, plus 0.50% on the next $5
million, plus 0.25% on the excess over $10 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. The Distributor is
sponsoring a sales incentive program for A.G. Edwards & Sons, Inc. ("A.G.
Edwards"). The Distributor will reallow its portion of the Fund's sales
concession to A.G. Edwards on sales of Class A shares of the Fund relating to
the "rollover" of any savings into an Individual Retirement Account ("IRA"), the
transfer of assets into an IRA and contributions to an IRA, commencing on
January 1, 1995 and terminating on April 15, 1995.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described in the preceding table.
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
interpretation of federal law expressed herein and banks and other financial
institutions may be required to register as dealers pursuant to certain state
laws.
Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the shares
will not be resold except through redemption by the Fund, by (a) current or
retired Directors of the Fund; current or retired employees of VK/AC Holding,
Inc. or any of its subsidiaries; spouses, minor children and grandchildren of
the above persons; and parents of employees and parents of spouses of employees
of VK/AC Holding, Inc. and any of its subsidiaries; trustees, directors and
employees of Clayton, Dubilier & Rice, Inc.; (b) employees of an investment
subadviser to any Fund in the same "group of investment companies" (as defined
in Rule 11a-3 under the 1940 Act) as the Fund or an affiliate of the subadviser;
employees and registered representatives of Service Organizations with selling
group agreements with the Distributor; employees of financial institutions that
have arrangements with Service Organizations having selling group agreements
with the Distributor, and spouses and minor children of such persons; (c) any
trust, pension, profit sharing or other benefit plan for such persons; (d)
trustees and other fiduciaries purchasing
16
<PAGE> 17
shares for retirement plans of organizations with retirement plan assets of $10
million or more; and (e) clients of Service Organizations that are participating
in such Service Organizations' wrap accounts. Service Organizations must execute
supplemental agreements to their existing selling agreement with the Distributor
in order to qualify for the program. Shares are offered at net asset value to
such persons because of anticipated economies in sales efforts and sales related
expenses. Such shares are also offered at net asset value to (f) accounts opened
for shareholders by dealers where the amounts invested represent the redemption
proceeds from investment companies distributed by an entity other than the
Distributor if such redemption has occurred no more than 15 days prior to the
purchase of shares of the Fund and the shareholder paid an initial sales charge
and was not subject to a deferred sales charge on the redeemed account. Shares
are also offered at net asset value to (g) registered investment advisers, trust
companies and bank trust departments exercising discretionary investment
authority with respect to the money to be invested in the Fund, provided that
the aggregate amount invested in the Fund alone, or in any combination of shares
of the Fund and shares of certain other participating American Capital mutual
funds as described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing with the first investment
pursuant hereto at net asset value, equals at least $1 million. Purchase orders
made pursuant to clause (g) may be placed either through authorized dealers as
described above or directly with ACCESS by the investment adviser, trust company
or bank trust department, provided that ACCESS receives federal funds for the
purchase by the close of business on the next business day following acceptance
of the order. An authorized dealer or financial institution may charge a
transaction fee for placing an order to purchase shares pursuant to this
provision or for placing a redemption order with respect to such shares. Service
Organizations will be paid a service fee as described herein under "Distribution
Plans" on purchases made on behalf of registered investment advisers, trust
companies and bank trust departments described under clause (g) above,
retirement plans described in clause (d) above and for registered
representatives' accounts.
The Distributor may pay commissions of up to 1% for purchases described in
clause (d). The Distributor may pay Service Organizations through which
purchases are made as described in clause (g) above for transactions of $1
million or more an amount up to 0.50% of the amount invested, over a
twelve-month period following the pertinent transaction. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc. ("Emerging Growth"), American Capital Enterprise Fund, Inc., American
Capital Equity Income Fund, Inc., American Capital Federal Mortgage Trust
("Federal Mortgage"), American Capital Global Managed Assets Fund, Inc. ("Global
Managed"), American Capital Government Securities, Inc., American Capital
Government Target Series ("Government Target"), American Capital Growth and
Income Fund, Inc., American Capital Harbor Fund, Inc., American Capital High
Yield Investments, Inc. ("High Yield"), American Capital Municipal Bond Fund,
Inc. ("Municipal Bond"), American Capital Pace Fund, Inc., American Capital Real
Estate Securities Fund, Inc. ("Real Estate"), American Capital Tax-Exempt Trust
("Tax-Exempt"), American Capital Texas Municipal Securities, Inc., American
Capital U.S. Government Trust for Income ("Government Trust"), American Capital
Utilities Income Fund, Inc. ("Utilities Income") and American Capital World
Portfolio Series, Inc. ("World Portfolio"). A person eligible for a volume
discount includes an individual; members of a family unit comprising husband,
wife and minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's dealer at the time an
order is placed for a purchase which would qualify for 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 Participating Funds over a 13-month period based on the total
amount of intended purchases plus the value of all shares of the Participating
Funds previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
17
<PAGE> 18
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 purchase amount of the level selected. If trades not initially
made under a Letter of Intent subsequently qualify for a lower sales charge
through the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
adjustment in sales charge will be used to purchase additional shares for the
shareholder at the applicable discount category. Additional information is
contained in the application included in this Prospectus.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
- --------------------------------------------------------------------------------
<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 Fund account that are
not subject to a contingent deferred sales charge, second, of shares held for
over five years or shares acquired pursuant to reinvestment of dividends or
distributions and third, of shares held longest during the five-year period. The
charge is not applied to dollar amounts representing an increase in the net
asset value since the time of purchase.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has
acquired ten additional shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 shares (proceeds of $600), ten
shares will not be subject to charge because of dividend reinvestment. With
respect to the remaining 40 shares, the charge is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per
share. Therefore, $400 of the $600 redemption proceeds is subject to a deferred
sales charge at a rate of 4% (the applicable rate in the second year after
purchase).
A commission or transaction fee of 4% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1%. The charge is assessed on an amount
equal to the lower 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.
18
<PAGE> 19
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 (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." A contingent deferred sales
charge is waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company board of directors and approved by
its shareholders. Pursuant to such Rule, the Directors of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") applicable to
mutual fund sales charges. The NASD Rules limit the annual distribution charges
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 the Fund'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
the Fund's aggregate average daily net assets attributable to the Class B shares
or Class C shares to reimburse the Distributor for service fees paid by it to
Service Organizations and for its distribution costs.
The Distribution Plans provide that the Distributor shall use the Class A,
Class B and Class C service fees to compensate Service Organizations for
personal services and/or the maintenance of shareholder accounts. Under the
Class B Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class B shares as reimbursement for (i) upfront commissions and
transaction fees of up to 4% of the purchase price of Class B shares purchased
by the clients of broker-dealers and other Service Organizations, and (ii) other
distribution expenses as described in the Statement of Additional Information.
Under the Class C Plan, the Distributor receives additional payments from the
Fund at the annual rate of up to 0.75% of the net assets of the Class C shares
as reimbursements for (i) upfront commissions and transaction fees of up to
0.75% of the purchase price of Class C shares purchased by the clients of
broker-dealers and other Service Organizations and ongoing commissions and
transaction fees of up to 0.65% of the average daily net assets of the Fund's
Class C shares and (ii) other distribution expenses as described in the
Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Directors of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with respect
to distribution and service revenues and expenses is presented to the Directors
each year for their consideration in connection with their deliberations as to
the continuance of the Distribution Plans. In their review of the Distribution
Plans, the Directors are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B shares 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 Distrib-
19
<PAGE> 20
utor 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 SEC regulations, and may be reimbursed
by the Fund or its shareholders from payments received through contingent
deferred sales charges in future years and from payments under the Class B Plan
and Class C Plan so long as such Plans are in effect. For example, if in a
fiscal year the Distributor incurred distribution expenses under the Class B
Plan of $1 million, of which $500,000 was recovered in the form of contingent
deferred sales charges paid by investors and $400,000 was reimbursed in the form
of payments made by the Fund to the Distributor under the Class B Plan, the
balance of $100,000 would be subject to recovery in future fiscal years from
such sources. For the plan year ended June 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B Plan and carried forward were
approximately $377,000 or 4.29% of the Class B shares' net assets. For the plan
year ended June 30, 1994, the unreimbursed expenses incurred by the Distributor
under the Class C Plan and carried forward were approximately $20,000 or 1.75%
of the Class C shares' net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor.
Below 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 Reserve, may receive statements quarterly from ACCESS
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized investment dealers or
by mailing a check directly to ACCESS.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the record date. The reinvestment privilege is automatic unless the
shareholder instructs otherwise. 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 the Fund. 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 investment and other requirements of the fund into
which distributions would be invested. Distributions are invested into the
selected fund at its net asset value as of the payable date of the distribution
only if shares of such selected fund have been registered for sale in the
investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts") other
than Government Target, may be exchanged for shares of the same class of the
Fund without sales charge, provided that shares of the Fund and shares of
Corporate
20
<PAGE> 21
Bond, Federal Mortgage, Global Managed, Government Trust, High Yield, Municipal
Bond, Real Estate, Tax-Exempt, Utilities Income and the Global Government
Securities Fund of World Portfolio are subject to a 30-day holding period
requirement. Shares of Government Target may be exchanged for Class A shares of
the Fund without sales charge. Shares of Reserve may be exchanged for Class A
shares of 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. Exchanges may only be made for funds that are eligible for sale in the
shareholder's state of residence. The Fund is only available for sale in
Arkansas, Louisiana, New Mexico, Oklahoma and Texas. All other Participating
Funds are available for sale in all 50 states. 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 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
remain subject to the contingent deferred sales charge imposed by the fund
initially purchased by the shareholder upon their redemption from the American
Capital complex of funds. Shares of Reserve acquired through an exchange of
Class B or Class C shares may be exchanged only for the same class of shares of
a Participating Fund without incurring a contingent deferred sales charge.
Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described herein under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held for
less than 91 days, the sales charge paid on such shares is not included in the
tax basis of the exchanged shares, but is carried over and included in the tax
basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at
(800)421-5684. A shareholder automatically has telephone exchange privileges
unless otherwise designated in the application form included in this Prospectus.
VKAC and its subsidiaries, including ACCESS (collectively, "Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Exchanges are effected at the net asset value per
share next calculated after the request is received in good order with
adjustment for any additional sales charge. See 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 its shares through exchange, or otherwise to modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
A prospectus of any of the Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
above under "Shareholder Services -- Exchange Privilege" will be waived for such
systematic exchanges. Additional information on how to establish this option is
available from the Distributor.
AUTOMATIC EXCHANGE. The exchange fee described 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.
21
<PAGE> 22
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 who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchase of additional shares ordinarily will
be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon the
redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY CHECK
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to ACCESS, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the 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. Since the net
asset value per share of the Fund is likely to fluctuate daily, check writing
redemptions can result in such a taxable event. See "Redemption of Shares."
Checks will not be honored for redemption of Class A shares held less than 15
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 the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized investment
dealer. Orders received from dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by a dealer provided such order
is transmitted to the Distributor prior to the Distributor's close of business
on such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B or
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.
22
<PAGE> 23
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. IRA redemption requests should be sent to the
IRA custodian and forwarded to ACCESS. Where Van Kampen American Capital Trust
Company serves as IRA custodian, special IRA, 403(b)(7) or Keogh distribution
forms must be obtained from and be forwarded to Van Kampen American Capital
Trust Company, P.O. Box 944, Houston, Texas 77001-0944. Contact the custodian
for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share of the Fund next determined after the
request is received in proper form. Payment for shares redeemed is made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until the purchase check has cleared, usually a period of up to
15 days. 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 on the date
of the notice of redemption less than the minimum initial investment as
specified by the Board of Directors. Any involuntary redemption may only occur
if the shareholder account is less than the minimum initial investment due to
shareholder redemptions. At least 60 days' advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value without sales charge. Any applicable contingent deferred sales
charge will be deducted from the proceeds of this redemption.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth, the Fund permits shareholders and the dealer
representative of record to redeem shares by telephone and to have redemption
proceeds sent to the address of record for the account or to the bank account of
record as described below. To establish such privilege, a shareholder must
complete the appropriate section of the application form in this Prospectus or
call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares
contact the telephone transaction line at (800) 421-5684. Van Kampen American
Capital and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Telephone redemptions may not be available if the
shareholder cannot reach ACCESS by telephone, whether because all telephone
lines are busy or for any other reason; in such case, a shareholder would have
to use the Fund's regular redemption procedure previously described. Requests
received by ACCESS prior to 4:00 p.m., New York time, on a regular business day
will be processed at the net asset value per share determined that day. These
privileges are available for 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 the Fund. A Class C share-
23
<PAGE> 24
holder who has redeemed shares of the Fund may reinstate any portion or all of
the proceeds of such redemption in Class C shares of the Fund with credit given
for any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value (without sales charge except as
described under "Shareholder Services -- Exchange Privilege") next determined
after the order is received, which must be within 120 days after the date of the
redemption. See "Purchase of Shares -- Waiver of Contingent Deferred Sales
Charge" and the Statement of Additional Information. Reinstatement at net asset
value is also offered to participants in those eligible retirement plans held or
administered by Van Kampen American Capital Trust Company for repayment of
principal (and interest) on their borrowings on such plans.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDEND POLICY. The Fund declares dividends from net investment income on
each business day. Such dividends are distributed monthly. The daily dividend is
a fixed amount determined at least monthly which is not expected to exceed the
net income of the Fund for the month divided by the number of business days
during the month. The Fund intends to distribute after the end of a fiscal year
the net capital gains, if any, realized during the fiscal year except to the
extent that such gains are offset by capital loss carryovers. Unless the
shareholder instructs otherwise, dividends and distributions are automatically
reinvested in additional shares of the Fund. 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 or redemption.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
incremental transfer agency fees applicable to such classes of shares.
FEDERAL INCOME TAXES. The Fund has qualified and intends to be taxed as a
"regulated investment company" under the Code by meeting certain requirements of
the Code. In addition, the Fund intends to invest in sufficient Municipal
Securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
Municipal 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 Fund consists of Municipal Securities. See "Federal Tax Information" in
the Statement of Additional Information.
Exempt-interest dividends paid to shareholders are not includable in the
shareholders' gross income for federal income tax purposes. The percentage of
the total dividends paid by the Fund during any taxable year that qualify as
exempt-interest dividends will be the same for all shareholders of the Fund
receiving dividends during such year. Shareholders not subject to tax on their
income will not be required to pay tax on amounts distributed to them.
Interest on certain "private-activity bonds" issued after August 7, 1986, is
an item of tax preference subject to the alternative minimum tax on individuals
and corporations. The Fund invests a portion of its assets in Municipal
Securities subject to this provision so that a portion of its exempt-interest
dividends will be an item of tax preference to the extent such dividends
represent interest received from these private-activity bonds. For the fiscal
period ending September 30, 1993, approximately 12.23% of the Fund's income
consisted of interest on private-activity bonds. The Tax Reform Act also imposes
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.
The Fund 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.
Distributions of net investment income received by the Fund from investments
in debt securities other than Municipal Securities, and any net realized
short-term capital gains distributed by the Fund are taxable to shareholders as
ordinary income. Any distribution of net long-term capital gains by the Fund is
subject to capital gains tax rates. Interest on indebtedness which is incurred
to purchase or carry shares of a mutual fund which distributes exempt-interest
dividends during the year is not deductible for federal income tax purposes.
24
<PAGE> 25
Shareholders are notified annually of the federal tax status of dividends and
any distributions paid by the Fund 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 a brief summary of some of the important tax considerations
generally affecting the Fund and its investors who are U.S. residents or U.S.
corporations. Additional tax information of relevance to particular investors,
including 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. Foreign investors should consult
their own counsel for further information as to the U.S. and their country of
residence or citizenship tax consequences of receipt of dividends and
distributions from the Fund.
FEDERAL INCOME TAX ASPECTS OF FUTURES AND OPTIONS. The Fund's ability to
engage in transactions in listed futures contracts and related options may be
limited by provisions of the Code, including the requirement that the Fund
derive less than 30% of its gross income from the sale or other disposition of
securities held for less than three months. Gains and losses recognized by the
Fund from transactions in futures contracts and options 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. Dividends and distributions paid by the Fund from sources other than
tax-exempt interest are generally subject to taxation at the state and local
levels. Dividends or distributions paid by the Fund to Texas residents are not
subject to taxation by Texas, because Texas does not impose a personal income
tax at this time.
- --------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five and ten-year periods or for the life of the Fund.
Other total return quotations, aggregate or average, over other time periods may
also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%. Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution and other fees, the total returns for each of the classes will
differ.
25
<PAGE> 26
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding. The Fund's "tax-equivalent
yield" is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the aftertax equivalent of the
Fund's yield, assuming certain tax brackets for a Fund shareholder.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
To increase the Fund'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 the Fund'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 Securities or
with the Consumer Price Index, Dow Jones Industrial Average, Standard & Poor's,
NASDAQ, other appropriate indices of investment securities, or with investment
or savings vehicles. The performance information may also include evaluations of
the Fund published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Business Week, Forbes,
Fortune, Institutional Investor, Investor's Business Daily, Kiplinger's Personal
Finance Magazine, Money, Mutual Fund Forecaster, Stanger's Investment Advisor,
USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement would also
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Fund, as well as the
performance of other mutual funds or indices, do not reflect sales charges, the
inclusion of which would reduce Fund performance. The Fund will include
performance data for Class A, Class B and Class C shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION OF THE FUND. The Fund was incorporated in the State of Maryland
on September 6, 1991. The Fund may offer three classes of shares: Class A, Class
B and Class C shares. Each class of shares represents interests in the assets of
the Fund and has identical voting, dividend, liquidation and other rights on the
same terms and conditions except that the distribution fees and/or service fees
related to each class of shares are borne solely by that class and each class of
shares has exclusive voting rights with respect to provisions of the Fund's
Class A Plan, Class B Plan and Class C Plan, which pertain to a particular
class. An order has been received from
26
<PAGE> 27
the SEC permitting the issuance and sale of multiple classes of shares
representing interest in the Fund's existing portfolio. Shares issued are fully
paid, non-assessable and have no preemptive or conversion rights.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, officers and employees to
buy and sell securities for their personal accounts subject to preclearance and
other procedures designed to prevent conflicts of interest.
VOTING RIGHTS. The Bylaws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the 1940 Act. Such
event is likely to occur infrequently. In addition, a special meeting of the
shareholders will be called, if requested by the holders of ten percent of the
Fund's outstanding shares, for the purposes, and to act upon the matters,
specified in the request (which may include election or removal of directors).
When matters are submitted for a shareholder vote, each shareholder is entitled
to one vote for each share owned. The shares have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so,
and in such an event, the holders of the remaining less than 50% of the shares
voting for the election of directors will not be able to elect any person to the
Board of Directors.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund at
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256, serves as transfer agent, shareholder service agent and dividend
disbursing agent for the Fund. ACCESS, a wholly owned subsidiary of the
Adviser's parent, provides these services at cost plus a profit.
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.
27
<PAGE> 28
- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------
September 30, 1994
MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
EDUCATION
$ 375,000 Clear Creek Texas,
Independent School District,
G.O., 6.25%, 2/1/11
500,000 Houston, Texas, Higher
Education Finance Corp.,
Rev. (University of
St. Thomas Project), 7.25%,
12/1/07
500,000 North Texas Higher Education
Authority Inc., Texas
Student Loan Rev.,
Refunding, Series D, 6.30%,
4/1/09
500,000 Victoria, Texas, Independent
School District, Refunding,
Zero Coupon, 2/15/08
HOSPITALS
105,000 Abilene, Texas, Health
Facilities Development Corp.
(Hendrick Medical
Center Project), FGIC,
9.50%, 9/1/13
170,000 Bell County, Texas, Health
Facilities Development Corp.
(King's Daughters Hospital),
9.25%, 7/1/08
500,000 Bexar County, Texas, Health
Facilities Development
Corp., Rev. Southwest Texas
Methodist Hospital, AMBAC,
6.75%, 11/1/21
750,000 Denton, Texas, Health
Facilities Development
Corp., Refunding (Lutheran
Good Samaritan Hospitals),
AMBAC, 6.00%, 6/1/18
500,000 Ector County, Texas,
Hospital District, Medical
Center Hospital, 7.125%,
4/15/02
175,000 Edinburg, Texas, Hospital
Authority, Rev. (Edinburg
General Hospital Project
86), 10.00%, 7/1/11
Harris County, Texas, Health
Facilities Development
Corp., Health Care System
Rev.
250,000 Memorial Hospital System
Project,
7.125%, 6/1/15
375,000 Sisters of Charity, 7.10%,
7/1/21
90,000 Jefferson County, Texas,
Health Facility Authority
(Baptist Health Care
Project), 8.30%, 10/1/14
185,000 Lubbock, Texas, Health
Facilities Development
Corp., Rev. (Methodist
Hospital), AMBAC, 7.25%,
12/1/19
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 155,000 Montgomery County, Texas,
Health Facilities
Development Corp., Hospital
Mortgage Rev. (Woodlands
Medical Center Project),
8.85%, 8/15/14
500,000 Richardson, Texas, Hospital
Authority, Refunding &
Improvement Rev. (Richardson
Medical Center), 6.75%,
12/1/23
300,000 Rusk County, Texas, Health
Facility Corp., Refunding,
Hospital Rev. (Henderson
Memorial Hospital Project),
7.75%, 4/1/13
500,000 Tarrant County, Texas,
Health Facilities
Development Corp., Refunding
& Improvement, Hospital Rev.
(Fort Worth Osteopathic
Hospital), 7.00%, 5/15/28
250,000 Texas Health Facilities
Development Corp., Hospital
Rev., (Fort Worth Childrens
Center), FGIC, 6.25%,
12/1/12
Tyler, Texas, Health
Facilities Development
Corp., Refunding Rev.
(East Texas Medical
Center -- Regional Health)
150,000 Series A, 8.25%, 11/1/06
500,000 Series B, 6.75%, 11/1/25
210,000 Weslaco, Texas, Health
Facilities Development
Corp., Hospital Rev.
(Weslaco Health Facility),
10.375%, 6/1/16
HOUSING
500,000 Austin, Texas, Housing
Finance Corp., Multi-family
Mtg., 6.50%, 10/1/10
500,000 Baytown, Texas, Property
Management & Development
Corp., Series A (Baytown
Terrace Project), 6.10%,
8/15/21
355,000 Bexar County, Texas, Housing
Finance Corp., Rev., Series
B, 9.25%, 4/1/16
115,000 East Texas Housing Finance
Corp., Single Family Mtg.
Rev., 7.20%, 1/1/26
250,000 El Paso, Texas, Housing
Authority, Multi-Family Mtg.
Rev., Series A, 6.25%,
12/1/09
150,000 El Paso, Texas, Property
Finance Authority, Inc.,
Single Family Mtg. Rev.,
Series A, 8.70%, 12/1/18
</TABLE>
28
<PAGE> 29
MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 165,000 Galveston, Texas, Property
Finance Authority, Inc.,
Single Family Mtg. Rev.,
Series A, 8.50%, 9/1/11
Harris County, Texas,
Housing Financing Corp.,
Single Family Mtg. Rev.,
30,000 Series 1983-A, 10.125%,
7/15/03
110,000 Series 1983-A, 10.375%,
7/15/14
15,000 11.25%, 4/15/06
25,000 Houston, Texas, Housing
Finance Corp., Single Family
Mtg. Rev., 10.00%, 9/15/14
240,000 Texas Housing Agency, Single
Family Mtg. Rev., Refunding,
Series A, 7.15%, 9/1/12
190,000 Travis County, Texas,
Housing Finance Corp.,
Single Family Mtg. Rev.,
8.20%, 4/1/22
MISCELLANEOUS
60,000 Fort Bend County, Texas,
Levee Improvement, District
No. 11, G.O., 8.70%, 3/1/10
250,000 Lockhart, Texas,
Correctional Facilities
Rev., Financing Corp., MBIA,
6.625%, 4/1/12
250,000 Garland, Texas, Economic
Development Authority, IDR
(Yellow Freight System, Inc.
Project), 8.00%, 12/1/16
Sabine River Authority,
Texas, Refunding, PCR (Texas
Utilities Co.)
60,000 Series 1986, 9.00%, 9/1/07
500,000 7.75%, 4/1/16
295,000 Texas General Services
Community Partner Interests,
(Office Building
and Land Acquisition
Project),
7.00%, 8/1/09
Texas State, G.O.,
250,000 National Research Lab
Commission,
7.125%, 4/1/20
1,000,000 Public Financing
Authorities,
Series A, 5.60%, 10/1/06
500,000 Refunding (Superconducting
Project), Series C, 6.00%,
4/1/12
250,000 Refunding, Veterans Land,
6.50%, 12/1/21
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 250,000 Travis County, Texas, G.O.,
Refunding, Series A, MBIA,
5.50%, 3/1/03
MUNICIPAL UTILITY DISTRICT (MUD)
250,000 Brazoria County, Texas, MUD
No. 2, Refunding, 7.00%,
9/1/08
60,000 Fort Bend County, Texas, MUD
No. 25, Refunding, 8.00%,
10/1/15
250,000 Harris County, Texas, MUD
No. 120, Refunding, 8.00%,
8/1/14
500,000 Harris County, Texas, MUD
No. 322, 6.25%, 5/1/18
500,000 Mills Road, Texas, MUD,
Refunding, 6.50%, 9/1/14
125,000 Mission Bend, Texas, MUD No.
2, 10.00%, 9/1/00
Montgomery County, Texas,
MUD,
250,000 MBIA, 6.25%, 3/1/10
50,000 No. 4 (Water Works System),
8.90%, 9/1/02
250,000 6.00%, 9/1/16
250,000 6.00%, 9/1/19
100,000 West Harris County, Texas,
MUD No. 1, Refunding, 7.00%,
4/1/05
300,000 Woodlands, Texas, Metro
Center, MUD, Refunding,
Series B, 7.10%, 4/1/07
NURSING HOMES
250,000 San Antonio, Texas, Health
Facilities Development
Corp., Rev. (Encore Nursing
Center Partner), 8.25%,
12/1/19
TRANSPORTATION
Dallas-Fort Worth, Texas,
International Airport
Facility, Inc., Rev.
60,000 American Airlines Inc.,
7.50%, 11/1/25
140,000 Delta Airlines, Inc.,
7.60%, 11/1/11
250,000 Harris County, Texas, Toll
Road Rev., 6.75%, 8/1/94
250,000 Texas State Turnpike
Authority, Dallas North Toll
Road, Tollway Rev., 6.00%,
1/1/20
UTILITIES -- COMBINATION ELECTRIC, GAS
AND/OR WATER
Austin, Texas, Utility
System Rev.
500,000 Refunding, 6.00%, 5/15/15
220,000 Series B, 7.80%, 11/15/12
</TABLE>
29
<PAGE> 30
MUNICIPAL BONDS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 435,000 City of Brownsville, Texas,
Utilities System Priority
Rev., Series 1990, AMBAC,
6.50%, 9/1/17
250,000 Colorado River, Texas,
Municipal Water District
(Water Transmission
Facilities Project -- A),
AMBAC, 6.625%, 1/1/21
250,000 Guadalupe Blanco River
Authority, Texas, IDR,
6.35%, 7/1/22
Port of Corpus Christi,
Texas, IDR (Valero Refining
& Marketing Co.)
385,000 Series A, 10.25%, 6/1/17
100,000 Series B, 10.625%, 6/1/08
220,000 San Antonio, Texas, Electric
and Gas Rev., Series A,
6.50%, 2/1/12
500,000 Willow Fork, Texas, Drainage
District, 7.00%, 3/1/11
UTILITIES -- ELECTRIC
125,000 Brazos River Authority
Texas, PCR (Texas Utilities
Electric Co. Project A),
9.875%, 10/1/17
<CAPTION>
PRINCIPAL
AMOUNT
- -----------------------------------------
<C> <S>
$ 100,000 Matagorda County, Texas,
Navigation District I,
Control Rev. (Central Power
& Light Co. Project),
7.875%, 12/1/16
435,000 Texas Municipal Power
Agency, Rev., 5.50%, 9/1/13
UTILITIES -- WATER AND SEWER
250,000 Coastal Water Authority,
Texas Water Rev., AMBAC,
6.25%, 12/15/17
250,000 Dallas, Texas, Waterworks
and Sewer System, Rev.,
Series A, 5.50%, 10/1/06
100,000 Harris County, Texas, Water
Control and Improvement
District No. 75, 7.00%,
3/1/14
500,000 Houston, Texas, Water and
Sewer System, Refunding
Rev., Series B, 6.375%,
12/1/14
250,000 Tarrant County, Texas, Water
Control and Improvement
Rev., 6.00%, 3/1/10
</TABLE>
- ---------------
G.O. -- General Obligation bond
IDR -- Industrial Development Revenue bond
PCR -- Pollution Control Revenue bond
Rev. -- Revenue bond
Insurers:
AMBAC -- AMBAC Indemnity Corp.
FGIC -- Financial Guaranty Insurance Co.
MBIA -- Municipal Bond Investor's Assurance Corp.
30
<PAGE> 31
BACKUP WITHHOLDING INFORMATION
STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with the
following guidelines:
<TABLE>
<CAPTION>
Account Type Give Social Security Number or Tax Identification Number of:
- --------------------------------------- -----------------------------------------------------------------
<S> <C>
Individual Individual
- --------------------------------------- -----------------------------------------------------------------
Joint (or Joint Tenant) Owner who will be paying tax
- --------------------------------------- -----------------------------------------------------------------
Uniform Gifts to Minors Minor
- --------------------------------------- -----------------------------------------------------------------
Legal Guardian Ward, Minor or Incompetent
- --------------------------------------- -----------------------------------------------------------------
Sole Proprietor Owner of Business
- --------------------------------------- -----------------------------------------------------------------
Trust, Estate, Pension Plan Trust Trust, Estate, Pension Plan Trust (not personal TIN of fiduciary)
- --------------------------------------- -----------------------------------------------------------------
Corporation, Partnership,
Other Organization Corporation, Partnership, Other Organization
- --------------------------------------- -----------------------------------------------------------------
Broker/Nominee Broker/Nominee
- --------------------------------------- -----------------------------------------------------------------
</TABLE>
STEP 2. If you do not have a TIN or you do not know your TIN, you must obtain
Form SS-5 (Application for Social Security Number) or Form SS-4 (Application
for Employer Identification Number) from your local Social Security or IRS
office and apply for one. Write "Applied For" in the space on the application.
STEP 3. If you are one of the entities listed below, you are exempt from
backup withholding and should not check the box on the Application in Section
2, Taxpayer Identification.
o A corporation
o Financial institution
o Section 501(a) exempt organization (IRA, Corporate Retirement Plan,
403(b), Keogh)
o United States or any agency or instrumentality thereof
o A State, the District of Columbia, a possession of the United States,
or any subdivision or instrumentality thereof
o International organization or any agency or instrumentality thereof
o Registered dealer in securities or commodities registered in the U.S.
or a possession of the U.S.
o Real estate investment trust
o Common trust fund operated by a bank under section 584(a)
o An exempt charitable remainder trust, or a non-exempt trust described
in section 4947(a)(1)
If you are in doubt as to whether you are exempt, please contact the Internal
Revenue Service.
STEP 4. IRS Penalties -- If you do not supply us with your TIN, you will be
subject to an IRS $50 penalty unless your failure is due to reasonable cause
and not willful neglect. If you fail to report interest, dividend or patronage
dividend income on your federal income tax return, you will be treated as
negligent and subject to an IRS 5% penalty tax on any resulting underpayment of
tax unless there is clear and convincing evidence to the contrary. If you
falsify information on this form or make any other false statement resulting in
no backup withholding on an account which should be subject to backup
withholding, you may be subject to an IRS $500 penalty and certain criminal
penalties including fines and imprisonment.
<PAGE> 32
AMERICAN CAPITAL
TEXAS MUNICIPAL SECURITIES, INC.
================================================================================
NATIONAL DISTRIBUTOR PROSPECTUS
Van Kampen American Capital Distributors, Inc. JANUARY 31, 1995
One Parkview Plaza
Oakbrook Terrace, IL 60181
INVESTMENT ADVISER
Van Kampen/American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056
DISBURSING, REDEMPTION
AND SHAREHOLDER SERVICE AGENT
Van Kampen/American Capital
Shareholder Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent,
Van Kampen/American Capital Shareholder
Services, Inc. (ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor, Van Kampen American
Capital Distributors, Inc., One Parkview Plaza,
Oakbrook Terrace, IL 60181.
AMERICAN CAPITAL C/O ACCESS
MUNICIPAL BOND P.O. BOX 418256
FUND, INC. KANSAS CITY, MO 64141-9256
FOR INVESTORS SEEKING INTEREST INCOME
EXEMPT FROM FEDERAL INCOME TAXES
[AMERICAN CAPITAL LOGO]
PRINTED MATTER
Printed in U.S.A./###-##-####
<PAGE> 33
Part B: Statement of Additional Information
AMERICAN CAPITAL TEXAS MUNICIPAL SECURITIES, INC.
JANUARY 31, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The
Statement of Additional Information and the related Prospectus are both dated
January 31, 1995. A Prospectus may be obtained without charge by calling or
writing Van Kampen American Capital Distributors, Inc. at One Parkview Plaza,
Oakbrook Terrace, IL 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
MUNICIPAL SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
TEMPORARY INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
REPURCHASE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FUTURES CONTRACTS AND RELATED OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INVESTMENT ADVISORY AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CHECK WRITING PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
FEDERAL TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
TEXAS TAX INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PRIOR PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
<PAGE> 34
GENERAL INFORMATION
The Fund was organized as a Maryland corporation on September 6, 1991 as
American Capital Texas Municipal Bond Fund, Inc. On February 18, 1992, the
name of the Fund was changed to American Capital Texas Municipal Securities,
Inc.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor") and Van Kampen/
American Capital Shareholder Services, Inc. ("ACCESS") are wholly owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is a wholly
owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled,
through the ownership of a substantial majority of its common stock, by The
Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a
Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier &
Rice, Inc. a New York based private investment firm. The General Partner of
C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D
Associates L.P."). The general partners of C&D Associates L.P. are Joseph L.
Rice, III, B. Charles Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C.
Howe, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In
addition, certain officers, directors and employees of VKAC own, in the
aggregate, not more than 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. Advantage Capital Corporation,
a retail broker-dealer affiliate of the Distributor, is a wholly owned
subsidiary of VK/AC Holding, Inc. See "The Fund and Its Management" in the
Prospectus.
<TABLE>
<CAPTION>
Amount and Nature Class
Name and Address of Ownership at of Percentage
of Holder January 18, 1995 Shares Ownership
------------- ---------------- -------- ------------
<S> <C> <C> <C>
Van Kampen American Capital Asset 64,070 shares Class A 5.13%
Management, Inc.
P.O. Box 1411
Houston, TX 77251-1411
DLJP (Donaldson Lufkin) 240,077 shares Class B 29.97%
1 Pershing Plaza 5th Floor
Jersey City, NJ 07399-0001
Merrill Lynch Pierce Fenner & Smith Inc. 89,446 shares Class B 11.16%
P.O. Box 45286
Jacksonville, FL 32232-5286 12,002 shares Class C 9.90%
Smith Barney Inc. 213,049 shares Class A 17.06%
388 Greenwich Street, 11th Floor
New York, NY 10013-2375 98,798 shares Class B 12.33%
95,292 shares Class C 78.61%
</TABLE>
2
<PAGE> 35
MUNICIPAL SECURITIES
The Fund invests, under normal market conditions, at least 80% of its net
assets in obligations issued by or on behalf of the states, territories or
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which
is exempt from federal income tax ("Municipal Securities").
Municipal Securities include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development obligations
are issued by or on behalf of public authorities to finance various
privately-operated facilities. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from Federal income
tax. Municipal Securities also include short-term tax-exempt municipal
obligations such as tax anticipation notes, bond anticipation notes, revenue
anticipation notes, and variable rate demand notes.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as from the user of the facility being
financed. Industrial development bonds, including pollution control bonds, are
revenue bonds and do not constitute the pledge of the credit or taxing power of
the issuer of such bonds. The payment of the principal and interest on such
industrial revenue bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. The Fund may also include "moral obligation" bonds which are normally
issued by special purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of such bonds becomes a
moral commitment but not a legal obligation of the state or municipality in
question.
When the Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the
trade. Failure of the buyer or seller to do so may result in the Fund's
missing the opportunity of obtaining a price considered to be advantageous.
The Fund may invest in Municipal Notes which include demand notes and
short-term municipal obligations (such as tax anticipation notes, revenue
anticipation notes, construction loan notes and short-term discount notes) and
tax-exempt commercial paper provided that such obligations have the ratings
described in the Prospectus or if non-rated are of comparable quality as
determined by the Adviser. Demand notes are obligations which normally have a
stated maturity in excess of one year, but permit any holder to demand payment
of principal plus accrued interest upon a specified number of days' notice.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. The issuer of such notes normally has
a corresponding right, after a given period, to prepay at its discretion the
outstanding principal of the note plus accrued interest upon a specified number
of days' notice to the noteholders. Demand notes may also include Municipal
Securities subject to a Stand-By Commitment as described in the Prospectus.
The interest rate on a demand note may be based on a known lending rate, such
as a bank's prime rate, and may be adjusted when such rate changes, or the
interest rate on a demand note may be a market rate that is adjusted at
specified intervals. Participation interests in variable rate demand notes
will be purchased only if in the opinion of counsel interest income on such
interests will be tax-exempt when distributed as dividends to shareholders.
Yields on Municipal Securities are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities in which the Fund invests to meet their obligations
3
<PAGE> 36
for the payment of interest and principal when due. There are variations in
the risks involved in holding Municipal Securities, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of holders of Municipal Securities and the
obligations of the issuers of such Municipal Securities may be subject to
applicable bankruptcy, insolvency and similar laws and court decisions
affecting the rights of creditors generally, and such laws, if any, which may
be enacted by Congress or state legislatures imposing a moratorium on the
payment of principal and interest or imposing other constraints or conditions
on the payments of principal of and interest on Municipal Securities.
ADDITIONAL RISKS OF LOWER RATED MUNICIPAL SECURITIES
Up to 20% of the Municipal Securities purchased by the Fund may be
obligations rated BB or lower by Standard & Poor's Corporation ("S&P") and
Moody's Investor Service ("Moody's") or non-rated obligations which in the
opinion of the Adviser are of comparable quality ("high yield securities").
See Appendix - "Ratings of Investments" for additional information regarding
ratings of debt securities.
High yield securities are considered by S&P and Moody's to have varying
degrees of speculative characteristics. Consequently, although high yield
securities can be expected to provide higher yields, such securities may be
subject to greater market price fluctuations and risk of loss of principal than
lower yielding, higher rated debt securities. Investments in high yield
securities will be made only when, in the judgment of the Adviser, such
securities provide attractive total return potential relative to the risk of
such securities, as compared to higher quality debt securities. The Fund will
not invest in obligations which are not currently paying interest or which are
rated C (lowest grade by Moody's) or which are rated C or D by S&P or which are
non-rated obligations considered by the Adviser to be of comparable quality.
The Fund does not intend to purchase debt securities that are in default or
which the Adviser believes will be in default.
Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing.
Therefore, the risks associated with acquiring the securities of such issuers
or obligors generally are greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers or obligors of high yield securities may be more
likely to experience financial stress, especially if such issuers or obligors
are highly leveraged. In addition, the market for high yield municipal
securities is relatively new and has not weathered a major economic recession,
and it is unknown what effects such a recession might have on such securities.
During such periods, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield securities
because such securities may be unsecured and may be subordinated to other
creditors of the issuer.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends
to shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not
all dealers maintain markets in all high yield securities, there is no
established secondary market for many of these securities, and the Fund
anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent that a secondary trading
market for high yield securities does exist, it is generally not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of
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valuing the Fund's portfolio. Market quotations are generally available on
many high yield securities only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and, therefore, have the
opportunity to participate in structuring the terms of the offering. Although
this may enable the Fund to seek to protect itself against certain of such
risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely
affecting the market value of high yield securities are likely to adversely
affect the Fund's net asset value. In addition, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default on a
portfolio holding or participate in the restructuring of the obligation.
The Fund will take such actions as it considers appropriate in the event of
anticipated financial difficulties, default or bankruptcy of either the issuer
or any Municipal Securities owned by the Fund or the underlying source of funds
for debt service. Such action may include retaining the services of various
persons and firms to evaluate or protect any real estate, facilities or other
assets securing any such obligation or acquired by the Fund as a result of any
such event. The Fund incurs additional expenditures in taking protective
action with respect to Fund obligations in default and assets securing such
obligations. Investment in lower rated Municipal Securities are not generally
meant for short-term investment.
TEXAS SECURITIES
At least 65% of the Fund's total assets will be invested in Municipal
Securities issued by the State of Texas (the "State"), its agencies,
instrumentalities, and political subdivisions, and local governments of the
State ("Texas Securities"). Texas Securities could include general obligation
bonds of the State, counties, cities, towns, etc., revenue bonds of utility
systems, highways, bridges, port and airport facilities, colleges, hospitals,
etc. and industrial development and pollution control bonds.
The following information is from reports of state officials included in
official statements prepared in connection with Texas Securities and other
public records that are believed to be accurate. The Fund has not
independently verified this information.
The State is the second largest by size among the states of the United
States, covering approximately 266,807 square miles. It contains Houston,
Dallas, and San Antonio, which are respectively, the fourth, eighth, and tenth
largest cities by population in the United States. Texas' gross state product
accounts for more than 7% of the total economy of the United States. Because
the economic bases differ from region to region, economic developments, such as
the strength of the U.S. economy, a decline in oil prices, or changes in
defense spending, can be expected to affect the economy of each region
differently.
Employment in the State increased steadily through the 1970s and the early
1980s. In 1986, the Texas economy was battered by a recession induced by
declining oil prices and a collapse in its real estate industry. By the summer
of 1988, the State had replaced all the jobs lost during this recession,
although many were in lower-paying occupations. The Texas economy was slowed
by the nation's 1990-91 recession, but it did not fall into recession itself.
Employment growth sped up in 1992 and 1993, and the Texas Employment Commission
estimates that employment increased by 276,000 persons in 1994. The
Comptroller of Public Accounts predicts that the overall Texas economy will
outpace national economic growth in the long term by an annual average of
one-half percentage point.
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Most of Texas' new jobs have been in services. The services sector added
87,000 jobs in 1993. Employment in wholesale and retail trade advanced by
62,000, while the government sector added 30,000 jobs. Other service-producing
sectors (finance, insurance and real estate, transportation, communications and
public utilities) all showed increases.
Wholesale and retail trade play a significant part in the State's economy.
Houston has the third busiest port in the United States and ranks second in
export trade. Dallas is a major regional distribution center, serving Texas
and a number of surrounding states. Because of the State's proximity to
Mexico, international trade plays an important role in the Texas economy.
Several major U.S. corporations have established "sister plant" operations
along the Texas-Mexico border in which goods are partly manufactured in a plant
in Mexico and partly in a plant in the United States. The U.S. free trade
agreement with Mexico and Canada, the North American Free Trade Agreement
("NAFTA") took effect in 1994. NAFTA's effect on Texas will be greater than
the effect on the U.S. at large.
Manufacturing added 33,400 jobs, or 2.2 percent in 1993, despite a weak oil
and gas sector and the loss of 8,000 defense-related jobs in aircrafts and
parts. Most jobs were added in electronics, plastics, the apparel industry
along the border, and construction-related industries.
Construction, responding to an 18 percent increase in housing starts in
1993, added 18,000 jobs. Residential building permits throughout the state and
its major metropolitan areas have risen at double-digit annual rates since 1990
and have increased 23 percent in 1993, with most of the increase in
single-family residential building. Multifamily building activity has not
increased markedly and totaled about 8,900 units started in 1993. Even non-
residential real estate markets have seen some growth in recent years, although
at a slower pace than residential construction.
For Texas banks, the 1980s was a decade of sharp contrasts--from unrivaled
profits to unprecedented failures. The 1990s are a decade for reorganization
and consolidation, along with a renewal of profitability. Employment in
finance, insurance, and real estate mushroomed from 335,000 in 1980 to 450,000
in 1986, only to fall back to 418,000 in June 1992. A recovery since then
resulted in employment of 439,000 by April, 1994. Texas bank failures peaked
in 1989, reaching 134, or two-thirds of all bank closings in the nation. Texas
bank failures declined to 103 in 1990 and 31 in 1991. Another 31 failures
occurred in 1992, and 10 banks failed in 1993. The profitability of Texas'
banking industry is expected to improve throughout the 1990s, although the
number of banking organizations in the State is expected to shrink.
No industry, other than the real estate industry itself, was more severely
affected by the decline in Texas real estate values than the savings and loan
industry. There were 267 Texas savings and loans in 1984. By the end of 1993,
Texas had 62 institutions with assets of $42.9 billion. In terms of profits,
Texas savings and loans lost money each year from 1986 through 1991. But after
a nearly flat year in 1991, the State's thrifts posted a record $705 million
profit for 1992, the second highest in the nation. Unlike much of the nation,
Texas' savings and loans problems of recent years mostly have been resolved,
and steady progress is being made in increasing capital levels.
The State of Texas has long been identified with the oil and gas industry,
but the Texas economy has diversified. In 1981, drilling, production,
refining, chemicals, and energy-related manufacturing accounted for 27% of the
State's total output of goods and services. By 1992, these businesses
accounted for 12% of the State's economy. Job losses were experienced in oil
and gas (down 19,000 jobs in 1991 and 1992) due to a shift in drilling
activities overseas. In 1993, jobs declined by 2,000.
In 1993, agriculture output increased 6% over 1992 and contributed $5.9
billion, or 1.3%, to Texas' gross state product. The Comptroller of Public
Accounts forecasted that agriculture would contribute $6.2 billion in 1994, an
increase of 4% over the previous year. While the percent of total output is
relatively small, the State is second in agricultural income in the nation and
agriculture's economic impact affects all regions of the State.
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Estimated gross receipts from all agricultural enterprises totaled over
$2 billion in 1993 and have averaged over $11 billion annually during the
last ten years. The State typically leads the nation in the production of
livestock and cotton, in addition to being a major producer of peanuts and rice.
NAFTA is expected to enhance Texas' exports of beef, corn, cotton, rice,
sorghum and wheat, as well as consumer oriented food products. In the global
marketplace, Texas ranks first in agricultural exports to Mexico and is third
among other states in total agricultural exports.
Per capita personal income in Texas in 1993 stood at $19,189, compared to a
national average of $20,790. The rate of growth in personal income in Texas
exceeded the national average in 1990, 1991, and 1992. The Comptroller of
Public Accounts estimates that net migration into Texas was negative from 1987
to 1989, but turned positive in 1990. Net migration in 1991 was over 100,000,
almost 140,000 in 1992, and 160,000 in 1993. The median age of the State's
population was 30.8 years in the 1990 census, as compared to 32.9 years for the
United States. According to a 1991 survey by the U.S. Bureau of the Census,
76.6% of the State's population 25 years of age and older has completed four or
more years of high school, as compared to an average of 78.4% for the nation.
Only one other state, California, has a larger Hispanic population than Texas.
Due to the state's expansion in Medicaid spending and other Health and
Human Services programs requiring federal matching revenues, federal receipts
became the state's number one source of income in fiscal 1993, accounting for
29.2 percent of total revenues. Sales tax, which had been the main source of
revenue for the previous 12 years, dropped to second. Sales tax accounted for
27.0 percent of total revenue in fiscal 1993. Interest and investment income
is now the third largest revenue source to the state, contributing 6.4 percent
of total revenues in fiscal 1993. Motor fuels taxes, the state's fourth
largest revenue source and second largest tax, accounted for 6.2 percent of
total collections in fiscal 1993. Licenses, fees and permits are a close
fifth, accounting for 6.1 percent. The remainder of the state's revenues are
derived primarily from the motor vehicle, cigarette and tobacco, franchise, oil
and gas severance, and other taxes. The state has no personal or corporate
income tax, although the state does impose a corporate franchise tax based on
the amount of a corporation's capital and "earned surplus," which includes
corporate net income and officers' and directors' compensation.
The 73rd Legislature convened for its regular session on January 12, 1993,
and adjourned on May 31, 1993. During the session, the Legislature passed the
1994-95 biennial all funds budget of $71.2 billion without increasing State
taxes. This was accomplished by incorporating savings proposals in the budget,
cutting spending in certain areas, and increasing federal funding. The State
finished fiscal year 1993 with a $1,623 million positive cash balance in the
General Revenue Fund. This was the sixth consecutive year that Texas had ended
a fiscal year with a positive balance.
The 74th Legislature convened for its regular session on January 11, 1995.
The Legislature must adopt a budget for the 1996-97 biennium by the end of the
session. The Comptroller of Public Accounts has estimated that the State will
have 19.9 percent more revenues available for general purpose spending in
1996-97 than it had in 1994-95, including a surplus of $3 billion from the
1994-95 biennium. Major issues facing the Legislature include funding of
education and Medicaid, welfare and tort reform. The legislature will also
decide whether to permit concealed weapons and whether to forward to the voters
a constitutional amendment permitting casino gambling.
On May 31, 1993, the Texas governor signed a comprehensive legislative
revision to the school finance provisions of the Texas Education Code. The
legislative revisions resulted from a series of court decisions commonly
referred to as Edgewood v. Kirby, in which Texas courts have declared the Texas
school finance system unconstitutional under Texas law. Generally, the courts
declared the school finance system unconstitutional because there must be a
"direct and close correlation between a district's tax effort and the
educational resources available to it," and because districts must have
"substantially equal access to similar revenues per pupil at similar
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revenues per pupil at similar levels of tax effort." Previous legislative
efforts to correct the school finance system were declared unconstitutional.
The Texas school finance system is funded from a combination of local
school district ad valorem taxes, State funds from the Permanent School Fund
endowment and certain designated tax revenues, and State appropriation. "Tier
one" funding guarantees a school district a basic allotment per pupil; "tier
two" funding guarantees a school district a certain amount of "enrichment"
revenue per student to the extent the local school district levies property
taxes above $0.86 per $100 assessed valuation.
As under prior law, the reform legislation retains a two tier system of
finance; however, revenue levels guaranteed by the State under each tier are
lower than in previous legislative efforts to correct the school finance
system. Under the reform legislation, if a district's adjusted taxable
property wealth per student exceeds $280,000, the district must exercise one of
five options to reduce its wealth per student to that level: consolidate the
district with a property- poor district for all purposes; consolidate the
district with a property-poor district solely for purposes of levying and
distributing either maintenance taxes or both maintenance and debt service
taxes; detach property from the district for annexation by a property-poor
district; purchase an attendance credit by paying tax revenues to the State for
redistribution to property-poor districts; or contract to educate students in a
property-poor district at the wealthy district's expense. If a district fails
to exercise a permitted option, the Commissioner of Education must detach
mineral, utility, industrial, or commercial property from the district and
annex the property to a property-poor district or, if necessary, consolidate
the district with a property-poor district.
On January 30, 1995, the Texas Supreme Court ruled that the reform
legislation is constitutional in all respects. It did state, however, that the
State must provide all school districts with substantially equal access to
funding for both the operations and facilities necessary for a general
diffusion of knowledge, and that the evidence presented to it suggested that
the funding available to school districts under the reform legislation might
soon fail to meet that standard. The Court stated, "The districts must have
substantially equal access to the funding for a general diffusion of knowledge
for both operations and facilities needs. If the Legislature abdicates its duty
with respect to either of these needs, we will have no choice but to hold that
the school finance system is unconstitutional in its entirety."
TEMPORARY INVESTMENTS
The taxable securities in which the Fund may invest as temporary
investments include United States Government securities, corporate bonds and
debentures, domestic bank certificates of deposit and bankers' acceptances of
domestic banks with assets of $500 million or more and having deposits insured
by the Federal Deposit Insurance Corporation, commercial paper and repurchase
agreements. The Fund may also invest, as temporary investments, in shares of
tax-exempt money market investment companies.
United States Government securities include obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies and instrumentalities which are supported by any of the following:
(a) the full faith and credit of the United States Government, (b) the right of
the issuer to borrow an amount limited to a specific line of credit from the
United States Government, (c) discretionary authority of the United States
Government agency or instrumentality, or (d) the credit of the instrumentality.
Such agencies or instrumentalities include, but are not limited to, the Federal
National Mortgage Association, the Government National Mortgage Association,
Federal Land Banks, and the Farmer's Home Administration. A Fund may not
invest in any security issued by a commercial bank unless the bank is organized
and operating in the United States and has total assets of at least $500
million and is a member of the Federal Deposit Insurance Corporation.
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REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are
collateralized by the underlying debt securities and may be considered to be
loans under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund will make payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of a custodian or bank acting as
agent. The seller under a repurchase agreement is required to maintain the
value of the underlying securities marked to market daily at not less than the
repurchase price. The underlying securities (securities of the United States
Government, or its agencies and instrumentalities), may have maturity dates
exceeding one year. The Fund does not bear the risk of a decline in value of
the underlying security unless the seller defaults under its repurchase
obligation. The Fund will not invest in repurchase agreements maturing in more
than seven days if any such investment, together with any other illiquid
security owned by the Fund, exceeds ten percent of the value of its net assets.
See "Investment Practices and Restrictions - Repurchase Agreements" in the
Prospectus for further information.
FUTURES CONTRACTS AND RELATED OPTIONS
FUTURES CONTRACTS
A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index (the "Index") value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. The
Index is a priceweighted measure of the market value of 40 large sized, recent
issues of tax- exempt bonds.
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in securities
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract,
which is returned to the Fund upon termination of the futures contract and
satisfaction of its contractual obligations. Subsequent payments to and from
the broker, called variation margin, are made on a daily basis as the price of
the underlying securities or index fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
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At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposition position. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Fund and the Fund realizes a loss or gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as
a temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures
contracts substantially reduces the risk to the Fund of a market decline and,
by so doing, provides an alternative to the liquidation of securities positions
in the Fund with attendant transaction costs.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or related options, the Fund could experience delays
and/or losses in liquidating open positions purchased and/or incur a loss of
all or part of its margin deposits with the broker. Transactions are entered
into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in
a greater dollar amount than the dollar amount of securities being hedged if
the historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less then the historical
volatility of the securities underlying the futures contract. It is also
possible that the value of futures contracts held by the Fund could decline at
the same time as portfolio securities being hedged; if this occurred, the Fund
would lose money on the futures contract in addition to suffering a decline in
value in the portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities, or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore,
increased participation by speculators in the futures markets may cause
temporary price distortions. Due to the possibility of price distortion in the
futures markets and because of the imperfect correlation between movements in
futures contracts and movements in the securities underlying them, a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction judged over a very short time frame.
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There is also the risk that futures markets may not be sufficiently
liquid. Futures contracts may be closed out only on an exchange or board of
trade that provides a market for such futures contracts. Although the Fund
intends to purchase or sell futures only on exchanges and boards of trade where
there appears to be an active secondary market, there can be no assurance that
an active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movements, the
Fund would continue to be required to make daily payments of variation margin.
Since the securities being hedged would not be sold until the related futures
contract is sold, an increase, if any, in the price of the securities may to
some extent offset losses on the related futures contract. In such event, the
Fund would lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in future
contracts. In such cases, if the Fund has insufficient cash, it may have to
sell portfolio securities at a time when it is disadvantageous to do so in
order to meet the daily variation margin.
The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool." CFTC regulations require,
among other things, (i) that futures and related options be used solely for
bona fide hedging purposes (or meet certain conditions as specified in CFTC
regulations) and (ii) that the Fund not enter into futures and related options
for which the aggregate initial margin and premiums exceed five percent of the
fair market value of the Fund's assets. In order to minimize leverage in
connection with the purchase of futures contracts by the Fund, an amount of
cash, cash equivalents or liquid high grade debt securities equal to the market
value of the obligation under the futures contracts (less any related margin
deposits) will be maintained in a segregated account with the Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), at a
specified exercise price at any time during the option period. As a writer of
an option on a futures contract, the Fund would be subject to initial margin
and maintenance requirements similar to those applicable to futures contracts.
In addition, net option premiums received by the Fund are required to be
included in initial margin deposits. When an option on a futures contract is
exercised, delivery of the futures position is accompanied by cash representing
the difference between the current market price of the futures contract and the
exercise price of the option. The Fund could purchase put options on futures
contracts in lieu of, and for the same purpose as, it could sell a futures
contract. The purchase of call options on futures contracts would be intended
to serve the same purpose as the actual purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are
several special risks relating to options on futures. The Adviser will not
purchase options on futures on any exchange unless in the Adviser's opinion, a
liquid secondary exchange market for such options exists. Compared to the use
of futures, the purchase of options on futures involves less potential risk to
the Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the level of the index or in the price of the
underlying security, when the use of an option on a future would result in a
loss to the Fund when the use of a future would not.
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ADDITIONAL RISKS TO FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written
on one or more accounts or through one or more brokers). Option positions of
all investment companies advised by the Adviser are combined for purposes of
these limits. An Exchange may order the liquidation of positions found to be
in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Fund may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active
market will exist for the contracts at any particular time. Most United States
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit
has been reached in a particular contract, no trades may be made that day at a
price beyond that limit. It is possible that futures contract prices would
move to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses. In such event, and in
the event of adverse price movements, the Fund would be required to make daily
cash payments of variation margin. In such circumstances, an increase in the
value of the portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. However, as described above,
there is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of the outstanding shares of the Fund. Such majority is defined by
the 1940 Act as the lesser of (i) 67% or more of the voting securities present
in person or by proxy at the meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. In addition to the fundamental
investment limitations set forth in the Prospectus, the Fund shall not:
1. Purchase or hold securities of any issuer if, to the knowledge of
the Fund, any of the Fund's officers or directors, or officers or
directors of its investment adviser, owns more than 1/2% of 1% of
the outstanding securities of that issuer, and such officers and
directors who individually own more than such amount together own
more than five percent of the outstanding securities of such issuer.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of securities. The deposit or payment by the
Fund of an initial or maintenance margin in connection with futures
contracts or related option transactions is not considered the
purchase of a security on margin.
3. Sell securities short, except to the extent that the Fund
contemporaneously owns or has the right to acquire an equal amount
of such securities; provided that this prohibition does not apply to
the writing of options or the sale of futures or related options.
4. Make loans of money or securities to other persons except that the
Fund may purchase or hold debt instruments and enter into repurchase
agreements in accordance with its investment objective and policies.
12
<PAGE> 45
5. Purchase or sell real estate or invest in mortgage loans (but this
shall not prevent the Fund from investing in Municipal Securities or
Temporary Investments secured by real estate or interests therein);
or in interests in oil, gas, or other mineral exploration or
development programs; or in any security not payable in United
States currency.
6. Invest more than ten percent of the value of its net assets in
securities which are illiquid, including securities restricted as to
disposition under the Securities Act of 1933, and including
repurchase agreements maturing in more than seven days.
7. Invest in securities of any one issuer with a record of less than
three years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or
its agencies or Municipal Securities (except that in the case of
industrial revenue bonds, this restriction shall apply to the entity
supplying the revenues from which the issue is to be paid), if such
investments by the Fund would exceed five percent of the value of
its total assets (taken at market value).
8. Underwrite the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933
by virtue of disposing of portfolio securities.
9. Invest in securities other than Municipal Securities, Temporary
Investments (as defined in the Prospectus), stand-by commitments,
futures contracts described in the next paragraph, and options on
such contracts.
10. Purchase or sell commodities or commodity contracts except that the
Fund may purchase, hold and sell listed futures contracts related to
U.S. Government securities, Municipal Securities or to an index of
Municipal Securities.
11. Borrow money, except that the Fund may borrow from banks to meet
redemptions or for other temporary or emergency purposes, with such
borrowing not to exceed five percent of the total assets of the Fund
at market value at the time of borrowing. Any such borrowing may be
secured provided that not more than ten percent of the total assets
of the Fund at market value at the time of pledging may be used as
security for such borrowings.
12. Purchase any securities which would cause more than 25% of the value
of the Fund'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 tax-exempt securities issued by
governmental bodies or agencies or instrumentalities thereof; so
that industrial development bonds that are considered to be issued
by non-governmental users are subject to this industry limitation.
13. Issue senior securities as defined in the 1940 Act.
Because of the nature of the securities in which the Fund may invest, the
Fund may not invest in voting securities, or invest for the purpose of
exercising control or management, or invest in securities of other investment
companies. If a percentage restriction is satisfied at the time of investment,
a later increase or decrease in such percentage resulting from a change in
value will not constitute a violation of such restriction.
DIRECTORS AND EXECUTIVE OFFICERS
The Fund's directors and executive officers and their principal occupations
during the past five years are listed below. All persons named as Directors
also serve in similar capacities for other funds advised by the Adviser as
indicated below.
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<PAGE> 46
FERNANDO SISTO, Chairman of the Board and Director. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991. George
M. Bond Professor and formerly Dean of Graduate School and Chairman,
Department of Mechanical Engineering, Stevens Institute of Technology;
Director, Dynalysis of Princeton (engineering research).(1)
J. MILES BRANAGAN, Director. 2300 205th Street, Torrance, California
90501-1452. Co Founder, Chairman and President, MDT Corporation (medical
equipment).(1)
RICHARD E. CARUSO, Director. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive
Officer, Integra LifeSciences Corporation (biotechnology/lifesciences);
Trustee, Susquehanna University; Trustee and First Vice President, The Baum
School of Art (community art school); Founder and Director, Uncommon
Individual Foundation (youth development); Director, International Board of
Business Performance Group, London School of Economics; formerly Director,
First Sterling Bank; formerly Director and Executive Vice President, LFC
Financial Corporation (leasing/financing).(1)
ROGER HILSMAN, Director. 215-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly Professor of Government and International Affairs, Columbia
University.(1)
*DON G. POWELL, President and Director. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. President, Chief Executive Officer and Director of
VK/AC Holding, Inc., VKAC and the Adviser; Chairman, Chief Executive
Officer and Director of the Distributor.(1)(2)(4)
DAVID REES, Director. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(3)
**LAWRENCE J. SHEEHAN, Director. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner
(1969-1994) of the law firm of O'Melveny & Myers, legal counsel to the
Fund.(1)(3)(5)
WILLIAM S. WOODSIDE, Director. 712 Fifth Avenue, 40th Floor New York, New York
10019. Vice Chairman of the Board, Sky Chefs, Inc. (airline food
catering); formerly Director, Primerica Corporation (currently known as The
Travelers Inc.); formerly Chairman of the Board and Chief Executive
Officer, old Primerica Corporation (American Can Company); Trustee and
formerly President, Whitney Museum of American Art; Chairman, Institute for
Educational Leadership, Inc., Board of Visitors, Graduate School of The
City University of New York; Academy of Political Science; Committee for
Economic Development; Director, Public Education Fund Network, Fund for New
York City Public Education; Trustee, Barnard College; Member, Dean's
Council, Harvard School of Public Health; Member, Mental Health Task Force,
Carter Center; formerly Director, James River Corporation (paper
products).(1)
ROBERT B. EVANS, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of the Adviser; Mr. Evans also serves as
Vice President of American Capital Municipal Bond Fund, Inc., American
Capital Tax-Exempt Trust; Mosher, Inc., the Municipal Bond Portfolio of
American Capital Life Investment Trust, and the Municipal Bond Fund of
Common Sense Trust.(4)
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate
Secretary of the Adviser.(4)
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant
Controller.(4)
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<PAGE> 47
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President-Chief Investment Officer/Fixed-Income
Department of the Adviser.(4)
J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel,
Compliance Review Officer and Assistant Corporate Secretary of the
Adviser.(4)
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; President and Chief Operating
Officer of Van Kampen American Capital Services, Inc.; Executive Vice
President and Chief Operating Officer of Van Kampen American Capital Trust
Company; Executive Vice President of ACCESS.(4)
* Director who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act, by virtue of his affiliation with the Adviser.
** Director who is an interested person of the Fund within the meaning of the
1940 Act by virtue of his affiliation with the legal counsel of the Fund.
(1) Also a director or trustee of American Capital Comstock Fund, Inc.,
American Capital Corporate Bond Fund, Inc., American Capital Emerging
Growth Fund, Inc., American Capital Enterprise Fund, Inc., American Capital
Equity Income Fund, Inc., American Capital Federal Mortgage Trust, American
Capital Global Managed Assets Fund, Inc., American Capital Government
Securities, Inc., American Capital Government Target Series, American
Capital Growth and Income Fund, Inc., American Capital Harbor Fund, Inc.,
American Capital High Yield Investments, Inc., American Capital Life
Investment Trust, American Capital Municipal Bond Fund, Inc., American
Capital Pace Fund, Inc., American Capital Real Estate Securities Fund,
Inc., American Capital Reserve Fund, Inc., American Capital Small
Capitalization Fund, Inc., American Capital Tax-Exempt Trust, American
Capital U.S. Government Trust for Income, American Capital Utilities Income
Fund, Inc. and American Capital World Portfolio Series, Inc.
(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as adviser for eight of the
portfolios.
(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.
(4) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.
(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc. and FPA
Perennial Fund, Inc., investment companies not advised by the Adviser, and
TCW Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.
The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto, may act for the Directors between meetings except where board action is
required by law.
The directors and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the fiscal year ended September
30, 1994, the directors who were not affiliated with the Adviser or its parent
received as a group $8,167 in directors' fees from the Fund in addition to
certain out-of-pocket
15
<PAGE> 48
expenses. Such directors also received compensation for serving as directors
or trustees of other investment companies advised by the Adviser as identified
in the notes to the foregoing table. For legal services rendered during the
fiscal year ended September 30, 1994, the Fund paid legal fees of $8,956 to
the law firm of O'Melveny & Myers of which Mr. Sheehan is Of Counsel. The
Firm also serves as legal counsel to the American Capital funds listed in
Footnote 1 above.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement,
dated December 20, 1994 (the "Advisory Agreement"). Under the Advisory
Agreement, the Fund retains the Adviser to manage the investment of its assets
and to place orders for the purchase and sale of its portfolio securities. The
Adviser is responsible for obtaining and evaluating economic, statistical, and
financial data and for formulating and implementing investment programs in
furtherance of the Fund's investment objectives. The Adviser also furnishes at
no cost to the Fund (except as noted herein) the services of sufficient
executive and clerical personnel for the Fund as are necessary to prepare
registration statements, prospectuses, shareholder reports, and notices and
proxy solicitation materials. In addition, the Adviser furnishes at no cost to
the Fund the services of a President of the Fund, one or more Vice Presidents
as needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of the Fund. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer
or other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among the
investment companies advised by the Adviser. The Fund also pays transfer
agency fees, distribution fees, service fees, custodial fees, legal fees, the
costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets at an annual rate of 0.60%
of the first $300 million of the Fund's average net assets, 0.55% of the next
$300 million of the Fund's average net assets and 0.50% of the Fund's average
net assets in excess of $600 million.
The average daily net assets is determined by taking the average of all of
the determinations of the net assets for each business day during a given
calendar month. Such fees are payable for each calendar month as soon as
practicable after the end of that month. The Adviser shall use its best
efforts to recapture all available tender solicitation fees and exchange offer
fees in connection with each of the Fund's transactions and shall advise the
Directors of the Fund of any other commissions, fees, brokerage or similar
payments which may be possible under applicable laws for the Adviser or any
other direct or indirect majority owned subsidiary of VK/AC Holding, Inc. to
receive in connection with the Fund's portfolio transactions or other
arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, the Adviser's monthly compensation will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory
fee is insufficient, the Adviser will pay the Fund an amount sufficient to make
up the deficiency, subject to readjustment during the year. Ordinary business
expenses do not include (1) interest and taxes, (2) brokerage commissions, (3)
payments made pursuant to distribution plans (described herein), and (4)
certain litigation and indemnification expenses as described in the Advisory
Agreement. The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any actions or omissions if it acted in good faith
without negligence or misconduct.
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<PAGE> 49
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Directors or (ii) by vote of a
majority of the Fund's outstanding voting securities, and (b) by the
affirmative vote of a majority of the Directors who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement provides that it shall
terminate automatically if assigned and that it may be terminated without
penalty by either party on 30 days' written notice.
During the fiscal years ended September 30, 1992, 1993 and 1994, the
Adviser received $7,692, $-0- and $-0- in advisory fees from the Fund. For
such period the Fund paid $5,288, $67,451 and $67,241 for accounting services.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the Fund
pursuant to a written agreement, dated December 20, 1994 (the "Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of
the Fund through affiliated and unaffiliated dealers. The Distributor's
obligation is an agency or "best efforts" arrangement under which the
Distributor is required to take and pay for only such shares of the Fund as may
be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Directors or by a vote of a majority of the Fund's
outstanding voting securities, and (b) by the affirmative vote of a majority of
Directors who are not parties to the Underwriting Agreement or interested
persons of any party, by votes cast in person at a meeting called for such
purpose. The Underwriting Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
During the fiscal years ended September 30, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $176,863,
$205,498 and $52,218. Of such total, the amount retained by the Distributor
was $4,899, $30,599 and $7,912. The remainder was reallowed to dealers. Of
such dealer reallowances, $10,564, $8,835 and $3,346 were received by Advantage
Capital Corporation, an affiliated dealer of the Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan", "Class B Plan" and "Class
C Plan", respectively) to permit the Fund directly or indirectly to pay
expenses associated with servicing shareholders and in the case of the Class B
Plan and Class C Plan the distribution of its shares (the Class A Plan, Class B
Plan and Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Directors have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible.
With respect to the Class A Plan, the Distributor intends to make payments
thereunder only to compensate Service Organizations for personal service and/or
the maintenance of shareholder accounts. With respect to the Class B and Class
C Plans, authorized payments by the Fund include payments at an annual rate of
up to 0.25% of the net assets of the shares of the respective class to
reimburse the Distributor for payments for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B Plan,
authorized payments by the Fund also include payments
17
<PAGE> 50
at an annual rate of up to 0.75% of the net assets of the Class B shares to
reimburse the Distributor for (1) commissions and transaction fees of up to 4%
of the purchase price of Class B shares purchased by the clients of broker-
dealers and other Service Organizations, (2) out-of-pocket expenses of printing
and distributing prospectuses and annual and semi-annual shareholder reports to
other than existing shareholders, (3) out-of-pocket and overhead expenses for
preparing, printing and distributing advertising material and sales literature,
(4) expenses for promotional incentives to broker-dealers and financial and
industry professionals, and (5) advertising and promotion expenses, including
conducting and organizing sales seminars, marketing support salaries and
bonuses, and travel-related expenses. With respect to the Class C Plan,
authorized payments by the Fund also include payments at an annual rate of up
to 0.75% of the net assets of the Class C shares to reimburse the Distributor
for (1) upfront commissions and transaction fees of up to 0.75% of the purchase
price of Class C shares purchased by the clients of broker-dealers and other
Service Organizations and ongoing commissions and transaction fees paid to
broker-dealers and other Service Organizations in an amount up to 0.65% of the
average daily net assets of the Fund's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professionals, and (5) advertising and promotion
expenses, including seminars, marketing support salaries and bonuses, and
travel-related expenses. Such reimbursements are subject to the maximum sales
charge limits specified by the National Association of Securities Dealers, Inc.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreements were approved by the Directors, including a majority of
the Directors who are not affiliated persons (as defined in the 1940 Act) of
the Fund and who have no direct or indirect financial interest in the operation
of any of the Plans or in any agreements related to each Plan ("Independent
Directors"). In approving each Plan in accordance with the requirements of
Rule 12b-1, the Directors determined that there is a reasonable likelihood that
each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Fund's Directors at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner
terminated in accordance with its terms, the Plans will continue in effect for
a period of one year and thereafter will continue in effect so long as such
continuance is specifically approved at least annually by the Directors,
including a majority of the Independent Directors.
Each Plan may be terminated by vote of a majority of the Independent
Directors, or by a vote of a majority of the outstanding voting shares of the
respective class. Any change in any of the Plans that would materially
increase the distribution or service expenses borne by the Fund requires
shareholder approval voting separately by class; otherwise, it may be amended
by a majority of the Directors, including a majority of the Independent
Directors, by vote cast in person at a meeting called for the purpose of voting
upon such amendment. So long as the Plan is in effect, the selection or
nomination of the Independent Directors is committed to the discretion of the
Independent Directors.
For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $37,620 or .24% of the Class A shares' average net
assets. Such expenses were paid to reimburse the Distributor for payments made
to Service Organizations for servicing Fund shareholders and for administering
the Class A Plan. The Fund's aggregate expenses under the Class B Plan were
$83,663 or 1.00% of the Class B shares'
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<PAGE> 51
average net assets. Such expenses were paid to reimburse the Distributor for
the following payments: $62,747 for commissions and transaction fees paid to
broker-dealers and other Service Organizations in respect of sales of Class B
shares of the Fund and $20,916 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B Plan. For the
fiscal year ended September 30, 1994, the Fund's aggregate expenses under the
Class C Plan were $9,075 or 1.00% of the Class C shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $6,806 for commissions and transaction fees paid to broker- dealers
and other Service Organizations in respect of sales of Class C shares of the
Fund and $2,269 for fees paid to Service Organizations for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
During the fiscal year ended September 30, 1994, ACCESS, shareholder
service agent and dividend disbursing agent for the Fund, received fees
aggregating $27,023 for these services. The services of ACCESS are provided at
cost plus a profit.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate for the
fiscal period ended September 30, 1993 is shown under "Financial Highlights" in
the Prospectus. The annual turnover rate is not expected to exceed 100%. A
100% turnover rate would occur if all the Fund's portfolio securities were
replaced during one year.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of any
commissions, if any, paid on such transactions. As most transactions made by
the Fund are principal transactions at net prices, the Fund incurs little or no
brokerage costs except for commissions paid with respect to transactions in
future contracts and options. Portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include the spread between the bid and
asked price. Sales to dealers are effected at bid prices.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, consideration may be given to firms which also provide research
services to the Fund or the Adviser. No specific value can be assigned to such
research services which are furnished without cost to the Adviser. The
investment advisory fee is not reduced as a result of the Adviser's receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of the securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of the accounts, and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody). Research services furnished by firms through which the Fund effects
its securities transactions may be used by the Adviser in servicing all of its
advisory accounts; not all of such services may be used by the Adviser in
connection with the Fund. Consistent with the Rules of Fair Practice of
19
<PAGE> 52
the National Association of Securities Dealers, Inc. and subject to seeking
best execution of such other policies as the Directors may determine, the
Adviser may consider sales of shares of the Fund as a factor in the selection
of dealers to execute portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. The Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations among the Fund and other
advisory accounts, the main factors considered by the Adviser are the
respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Directors who are not affiliated
persons (as defined in the 1940 Act) of the Adviser. During the fiscal years
ended September 30, 1992, 1993 and 1994, the Fund paid no brokerage
commissions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is computed by dividing the
value of all securities held by the Fund plus other assets, less liabilities
(including accrued expenses), by the number of shares outstanding. Such
computation is made as of the close of the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York time) on each business day on which
the Exchange is open. The Exchange is currently closed on weekends and on the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's investments are valued by an independent pricing service
("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at such quoted bid prices (as obtained by
the Service from dealers in such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. Any assets which
are not valued by the Service would be valued at fair value using methods
determined in good faith by the Directors. Expenses and fees, including the
management fee are accrued daily and taken into account for the purpose of
determining the net asset value of Fund shares. Short-term instruments having
remaining maturities of 60 days or less are valued at amortized cost.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
The Fund's shares are sold in a continuous offering and may be purchased on
any business day through authorized dealers, including Advantage Capital
Corporation.
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<PAGE> 53
MULTIPLE PRICING SYSTEM
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements,
distribution fees, and any expenses (including higher transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distribution
fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be
underwriters for purposes of the Securities Act of 1933.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141- 6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more in the Fund, in the
form of a check payable to the Fund, must accompany the application. This
minimum may be waived by the Distributor for plans involving continuing
investments. Subsequent investments of $25 or more may be mailed directly to
ACCESS. All such investments are made at the public offering price of the
Fund's shares next computed following receipt of payment by ACCESS.
Confirmations of the opening of an account and of all subsequent transactions
in the account are forwarded by ACCESS to the investor's dealer of record,
unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases
to act as such, a successor company named by the Fund will act in the same
capacity so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to the purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single purchaser, as is a director or other fiduciary purchasing for a
single fiduciary account. An aggregate investment includes all shares of the
Fund and all shares of certain other participating American Capital mutual
funds described in the Prospectus (the "Participating Funds"), which have been
previously purchased and are still owned, plus the shares being purchased. The
current offering price is used to determine the value of all such shares. If,
for example, an investor has previously purchased and still holds Class A
shares of the Fund and/or shares of other Participating Funds having a current
offering price of $50,000 and that person purchases $60,000 of additional Class
A shares of the Fund, the charge applicable to the $60,000 purchase would be
3.75% of the offering price. The same reduction is applicable to purchases
under a Letter of Intent as described in the next paragraph. THE DEALER MUST
NOTIFY THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH
WOULD QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES.
SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY
MAIL. The reduced sales charge will not be applied if such notification is not
furnished at the time of the order. The reduced sales charge will also not be
applied should a review of the records of the Distributor or ACCESS fail to
confirm the investor's represented holdings.
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LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
still owned, are also included in determining the applicable quantity discount.
A Letter of Intent permits an investor to establish a total investment goal to
be achieved by any number of investments over a 13-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal as if it were a single
investment. Escrowed shares totaling five percent of the dollar amount of the
Letter of Intent are held by ACCESS in the name of the shareholder. The
effective date of a Letter of Intent may be back-dated up to 90 days in order
that any investments made during this 90-day period, valued at the investor's
cost, can become subject to the Letter of Intent. The Letter of Intent does
not obligate the investor to purchase the indicated amount. If the Letter of
Intent goal is not achieved within the 13-month period, the investor is
required to pay the difference between sales charges otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrow shares to obtain such difference.
If the goal is exceeded in an amount which qualifies for a lower sales charge,
a price adjustment is made by refunding to the investor in shares of the Fund,
the amount of excess sales charges, if any, paid during the 13-month period.
VOLUME DISCOUNTS
The schedule of volume discounts in the Prospectus applies to purchases of
Class A shares made at one time by any purchaser, which term includes (1) an
individual -- or an individual, his or her spouse and children under the age of
21 -- purchasing securities for his or her or their own account; (2) a trustee
or other fiduciary of a single trust estate or a single fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code
[the "Code"]), although more than one beneficiary is involved; and (3)
tax-exempt organization enumerated in Section 501(c)(3) or (13) of the Code.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practical for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE - CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments of
$1,000,000 or more of Class A shares of the Fund ("Qualified Purchaser"), the
front-end sales charge will be waived and a contingent deferred sales charge
("CDSC-Class A") of one percent is imposed in the event of certain redemptions
within one year of the purchase. If a CDSC-Class A is imposed upon redemption,
the amount of the CDSC-Class A will be equal to the lesser of one percent of
the net asset value of the shares at the time of purchase, or one percent of
the net asset value of the shares at the time of redemption.
The CDSC-Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The
CDSC-Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., in retirement plans qualified under Section 401(a) of the
Code and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such payments include, but are not limited to, death, disability,
retirement, or separation from service. No CDSC-Class A will be imposed on
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<PAGE> 55
exchanges between funds. For purposes of the CDSC-Class A, when shares of one
fund are exchanged for shares of another fund, the purchase date for the shares
of the fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged
shares themselves are acquired through an exchange, the purchase date is
assumed to carry over from the date of the original election to purchase shares
subject to a CDSC-Class A rather than a front-end load sales charge. In
determining whether a CDSC-Class A is payable, it is assumed that shares held
the longest are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more,
a Qualified Purchaser may aggregate shares of American Capital Reserve Fund,
Inc. with shares of certain other participating American Capital mutual funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares", redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC - CLASS B
AND C")
The CDSC - Class B and C is waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC - Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will
be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Code, which in pertinent part defines a
person as disabled if such person "is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or to be of long-continued
and indefinite duration." While the Fund does not specifically adopt the
balance of the Code's definition which pertains to furnishing the Secretary of
Treasury with such proof as he or she may require, the Distributor will require
satisfactory proof of death or disability before it determines to waive the
CDSC - Class B and C.
In cases of disability or death, the CDSC - Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC - Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC - Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of American Capital
Funds; in such event, as described below, the Fund will "tack" the period for
which the original shares were held onto the holding period of the shares
acquired in the transfer or rollover for purposes of determining what, if any,
CDSC - Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge also will be waived on any minimum distribution required
to be distributed in accordance with Code Section 401(a)(9).
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<PAGE> 56
The Fund does not intend to waive the CDSC - Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC - Class B and C will be waived
on redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC - Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and
conditions of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC - Class B and Class C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund
Within 120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC - Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount
necessary to acquire a fractional share to round off his or her purchase to the
nearest full share) in Class C shares of the Fund, provided that the
reinvestment is effected within 120 days after such redemption and the
shareholder has not previously exercised this reinvestment privilege with
respect to Class C shares of the Fund. Shares acquired in this manner will be
deemed to have the original cost and purchase date of the redeemed shares for
purposes of applying the CDSC - Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC - Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
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<PAGE> 57
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder Services -
Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset
value per share next determined on the date of receipt. Shares of the new fund
into which the shareholder is investing will also normally be purchased at the
net asset value per share, plus any applicable sales charge, next determined on
the date of receipt. Exchange requests received on a business day after the
time shares of the funds involved in the request are priced will be processed
on the next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to
one of such funds should refer to the Prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must
accompany the authorization card. The documents must be certified in original
form, and the certificates must be dated within 60 days of their receipt by
ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
FEDERAL TAX INFORMATION
The following is only a summary of certain additional federal, state and
local tax considerations generally affecting the Fund and its shareholders that
are not described in the Prospectus. No attempt is made to present
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<PAGE> 58
a detailed explanation of the tax treatment of the Fund or its shareholders,
and the discussion here and in the Prospectus is not intended as a substitute
for careful tax planning. Investors are urged to consult their tax advisers
with specific reference to their own tax situation.
GENERAL. By maintaining its qualification as a "regulated investment
company" under the Internal Revenue Code, the Fund will not incur any liability
for federal income taxes to the extent its taxable ordinary income and any
capital gain net income is distributed in accordance with Subchapter M of the
Internal Revenue Code of 1986 (the "Code"), as amended.
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable (net
investment) income for the twelve months ended December 31, plus 98% of its
capital gain net income for the twelve months ended October 31 of such calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax. The per share dividends on Class B and Class C shares will be
lower than the per share dividends on Class A shares as a result of the
distribution fee and higher transfer agency fees applicable to the Class B and
Class C shares. By qualifying as a regulated investment company, the Fund is
not subject to Federal income taxes to the extent it distributes its taxable
net investment income and taxable net realized capital gains. If for any
taxable year the Fund does not qualify for the special tax treatment afforded
regulated investment companies, all of its taxable income, including any net
realized capital gains, would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders).
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Securities to pass through to its investors,
tax-exempt, net Municipal Securities interest income. In order for the Fund to
be eligible to pay exempt-interest dividends during any taxable year, at the
close of each fiscal quarter, at least 50% of the aggregate value of the Fund's
assets must consist of exempt-interest obligations. In addition, the Fund must
distribute at least (i) 90% of the excess of its exempt-interest income over
certain disallowed deductions, and (ii) 90% of its "investment company taxable
income" (i.e., its ordinary taxable income and the excess, if any, of its net
short-term capital gains over any net long-term capital losses) recognized by
the Fund during the taxable year (the "Distribution Requirements").
Not later than 60 days after the close of its taxable year, the Fund will
notify its shareholders of the portion of the dividends paid by the Fund to the
shareholders for the taxable year which constitutes exempt-interest dividends.
The aggregate amount of dividends so designated cannot exceed, however, the
amount of interest exempt from tax under Section 103 of the Code received by
the Fund during the year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are "exempt-interest" dividends is determined on an average annual method
for the fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his or her tax adviser with respect to
whether exempt-interest dividends retain this exclusion if the purchaser would
be treated as a "substantial user" or a "related person" with respect to any of
the tax-exempt obligations held the Fund if it is required to qualify as a
regulated investment company as described below. "Substantial user" is defined
under U.S. Treasury Regulations to include a non-exempt person who regularly
uses in his or her trade or business a part of any facilities financed with the
tax-exempt obligations and whose gross revenues derived from such facilities
exceed five percent of the total revenues derived from the facilities by all
users, or who occupies more than five percent
26
<PAGE> 59
of the useable area of the facilities or for whom the facilities or a part
thereof were specifically constructed, reconstructed or acquired. Examples of
"related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund is not deductible for federal income tax purposes if the
Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to
any shares and such shares are held for six months or less, any short-term
capital loss on the sale or exchange of the shares will be disallowed to the
extent of the amount of such exempt-interest dividend.
If, during any taxable year, the Fund realizes net capital gains (the
excess of net long-term capital gains over net short-term capital losses) from
the sale or other disposition of Municipal Securities or other assets, the Fund
will have no tax liability with respect to such gains if they are distributed
to shareholders. Distributions designated as capital gains dividends are
taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held his shares. Not later than 60 days after the close of the
Fund's taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during the year which
constitute capital gain.
A capital gain dividend received after the purchase of the shares of the
Fund reduces the net asset value of the shares by the amount of the
distribution and will be subject to income taxes. A loss on the sale of shares
held for less than six months (to the extent not disallowed on account of the
receipt of exempt-interest dividends) attributable to a capital gain dividend
is treated as a long-term capital loss for Federal income tax purposes.
TAX TREATMENT OF FUTURES CONTRACTS AND RELATED OPTIONS. In connection with
its operations, the Fund may effect transactions in U.S. Government securities
and municipal bond futures contracts ("Futures Contracts") and in options
thereon ("Futures Options"). Gains or losses recognized by the Fund from
transactions in such Futures Contracts and Futures Options constitute capital
gains and losses for federal income tax purposes and do not therefore qualify
as exempt-interest income.
With respect to a Futures Contract closed out by the Fund, any realized
gain or loss will be treated as long-term capital gain or loss to the extent of
60% thereof and short-term capital gain or loss to the extent of 40% thereof
(hereinafter "60/40 gain or loss"). Open Futures Contracts held by the Fund at
the end of any fiscal year will be required to be treated as sold at market
value on the last day of such fiscal year for federal income tax purposes (i.e.
"marked-to-market"). Gain or loss recognized under this marked-to-market rule
is 60/40 gain or loss. The federal income tax treatment accorded to Futures
Options will be the same as that accorded Futures Contracts. The Distribution
Requirements may limit the Fund's ability to hold Futures Contracts and Futures
Options at the end of a year.
A portion of the Fund's transactions in Futures Contracts and Futures
Options, particularly its hedging transactions, may constitute "straddles" with
respect to the Fund's holdings of Municipal Securities. Straddles are defined
in Section 1092 of the Code as offsetting positions with respect to personal
property. A straddle in which at least one (but not all) of the positions are
Section 1256 contracts is a "mixed straddle" under the Code if certain
identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone a recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period, and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are
established and which may convert certain losses from short-term to long-term.
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<PAGE> 60
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other
elections are also provided in the Code. No determination has been made
whether the Fund will make any of these elections.
The Fund may acquire an option to "put" specified portfolio securities to
banks or municipal bond dealers from whom the securities are purchased. See
"Stand-By Commitments," in the Prospectus. The Fund has been advised by its
legal counsel that it will be treated for federal income tax purposes as the
owner of the Municipal Securities acquired subject to the put; and the interest
on the Municipal Securities will be tax-exempt to the Fund. Counsel has
pointed out that although the Internal Revenue Service has issued a favorable
published ruling on a similar but not identical situation, it could reach a
different conclusion from that of counsel. Counsel has also advised the Fund
that the Internal Revenue Service presently will not ordinarily issue private
letter rulings regarding the ownership of securities subject to stand-by
commitments.
RESTRICTIONS ON FUTURES CONTRACTS AND RELATED OPTIONS. Among the
requirements for qualification as a regulated investment company under the
Code, the Fund must derive less than 30% of its gross income each year from
sales of securities held for less than three months. This requirement and the
marked-to-market rule may restrict the Fund's ability to: (i) effect closing
purchase transactions in futures contracts and futures options which have been
held for less than three months and (ii) enter into various other short-term
transactions.
In addition, the Code requires that the Fund satisfy certain portfolio
diversification requirements at the end of each fiscal quarter of its taxable
year in order to maintain its qualification as a regulated investment company.
In general, no more than 25% of the value of the Fund's assets may be invested
in the securities of any one issuer and at least 50% of the value of the Fund's
assets must be represented by securities of issuers each of which separately
represents not more than five percent of the value of the total assets of the
Fund. Consequently, the Fund's ability to invest in futures contracts and
futures options may be limited.
TREATMENT OF DIVIDENDS. While the Fund expects that a major portion of its
investment income will constitute tax-exempt interest, a significant portion
may consist of "investment company taxable income" and "net capital gains." As
pointed out above, a Fund will be subject to tax for any year on its
undistributed investment company taxable income and net capital gains.
It is anticipated that substantially all of the Fund's taxable income and
capital gain net income will be distributed by the Fund in order to meet the
Distribution Requirements and to avoid taxation at the Fund level.
Distributions that are not designated as capital gain dividends will be taxable
to shareholders as ordinary income. Dividends and distributions declared
payable to shareholders of record after September 30 of any year and paid
before February 1 of the following year, are considered taxable income to
shareholders on the record date even though paid in the next year.
Since none of the Fund's net investment income will arise from dividends on
common or preferred stock, none of its distributions will be eligible for the
70% dividends received deduction available to corporations. To qualify for the
dividends received deduction, a corporate shareholder must hold the shares on
which the dividend is paid for more than 45 days.
The Tax Reform Act of 1986 (the "Tax Reform Act") added a provision that,
for taxable years beginning after December 31, 1989, 75% of the excess of a
corporation's adjusted current earnings (generally, earning and profits, with
adjustments) over its other alternative minimum taxable income is an item of
tax preference for corporations. All tax-exempt interest is included in the
definition of "adjusted current earnings" so a portion of such interest is
included in computing the alternative minimum tax on corporations. For
shareholders that are financial institutions, the Tax Reform Act eliminated
their ability to deduct interest payments to the extent allocated on a pro rata
basis to the purchase of Fund shares.
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BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.)
The 31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TEXAS TAX INFORMATION
Dividends and distributions paid by the Fund to Texas residents are not
taxable by Texas because Texas presently has no personal income tax.
Therefore, at the present time, Texas residents enjoy no special State income
tax benefits by investing in the Fund.
The State of Texas does not have a corporate income tax. Under present
laws, the Fund will not be subject to the Texas franchise tax.
The foregoing are only summaries of the applicable provisions of the Code,
Treasury regulations and Texas tax laws presently in effect. For complete
provisions, reference should be made to the pertinent Code sections, Treasury
regulations promulgated thereunder and the Texas tax laws. The Code, Treasury
regulations and Texas tax laws are subject to change by legislative or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisers with specific
reference to their own tax situation.
PRIOR PERFORMANCE INFORMATION
The average annual total return (computed in the manner described in the
Prospectus) for Class A shares of the Fund for the one-year and
two-and-one-half-year periods ended September 30, 1994 was -6.33% and 4.67%,
respectively. The average annual total return (computed in the manner
described in the Prospectus) for Class B shares of the Fund for the one-year
and two-years and two-month periods ended September 30, 1994 was -6.17% and
2.54%, respectively. The average annual total return (computed in the manner
described in the Prospectus) for Class C shares of the Fund for the one-year
and one-year and one-month period ended September 30, 1994 was -3.38% and
- -0.75%, respectively. These results are based on historical earnings and asset
value fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objective
and policies as well as the risks incurred by the Fund's investment practices.
The annualized current yield for Class A, Class B and Class C shares of the
Fund for the 30-day period ending September 30, 1994 was 4.98%, 4.40%, and
4.40%, respectively. The tax equivalent yield is based on an assumption of a
tax rate of 36% for the same period for Class A, Class B and Class C shares of
the Fund was 7.79%, 6.87% and 6.87%, respectively. The yield for Class A,
Class B and Class C shares are not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as
a function of the type of securities owned by the Fund, portfolio maturity and
the Fund's expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time VKAC will announce the results of its monthly polls of
U.S. investor intentions - the American Capital Index of Investor Intentions
(SM) and the American Capital Mutual Fund Index (SM) - which polls measure how
Americans plan to use their money.
29
<PAGE> 62
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Funds' transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by American Capital in 1994.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising
market; (3) illustrate allocations among different types of mutual funds for
investors at different stages of their lives; and (4) in reports or other
communications to shareholders or in advertising material, illustrate the
benefits of compounding at various assumed rates of return. Such illustrations
may be in the form of charts or graphs and will not be based on historical
returns experienced by the Fund.
OTHER INFORMATION
DIVIDENDS AND DISTRIBUTIONS - Shareholders are informed as to the sources
of distributions at the time of payment. Any capital gain distribution paid
shortly after a purchase of shares by an investor will have the effect of
reducing the per share net asset value of the shares owned by the amount of the
distribution. See "Dividends, Distributions and Taxes" in the Prospectus for
further information.
CUSTODY OF ASSETS - All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS - Semiannual statements are furnished to shareholders,
and annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS - Price Waterhouse LLP, 1201 Louisiana, Houston,
Texas 77002, the independent -accountants for the Fund, perform an annual
audit of the Fund's financial statements.
FINANCIAL STATEMENTS
Financial Statements including Investment Portfolio, Statement of Assets
and Liabilities, Statement of Operations, Statement of Changes in Net Assets,
Notes to Financial Statements, Financial Highlights and Report of Independent
Accountants on such financial statements, are hereby incorporated by reference
to the Fund's Annual Report previously filed with the SEC on or about December
1, 1994.
The following information is not included in the Annual Report. This
assumes a purchase of Class A shares of the Fund aggregating less than $100,000
subject to the schedule of sales charges set forth in the Prospectus at a price
based upon the net asset value of Class A shares of the Fund.
<TABLE>
<CAPTION>
September 30,
1994
-------------
<S> <C>
Net Asset Value per Class A Share $ 9.64
Class A Per Share Sales Charge - 4.75%
of offering price (4.99%
of net asset value per share) $ .49
Class A Per Share Offering Price to
the Public $10.12
</TABLE>
30
<PAGE> 63
APPENDIX
RATINGS OF INVESTMENTS
Ratings of Municipal Securities
Descriptions of Moody's Investors Service ("Moody's") Municipal Bond Ratings:
Aaa - Securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Securities which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A - Securities which are rated A possess many favorable investment
attributes and are to be considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Securities which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Securities which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B - Securities which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of time
may be small.
Caa - Securities which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca - Securities which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C - Securities which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Conditional Rating: Securities for which the security depends upon
the completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects
31
<PAGE> 64
under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion of construction or
elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and
3 in each generic rating classification from Aa through B in its municipal
bond rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and a modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Short-term Notes: The four ratings of Moody's for short-term notes
are MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying
strong protection from established cash flows"; MIG 2 denotes "high
quality" with "ample margins of protection"; MIG 3 notes are of "favorable
quality...but lacking the undeniable strength of the preceding grades"; MIG
4 notes are of "adequate quality, carrying specific risk but having
protection...and not distinctly or predominantly speculative."
Beginning on February 5, 1985, Moody's started new rating categories
for variable rate demand obligations ("VRDO's"). VRDO's receive two
ratings. The first rating, depending on the maturity of the VRDO, is
assigned either a bond or MIG rating which represents an evaluation of the
risk associated with scheduled principal and interest payments. The second
rating, designated as "VMIG," represents an evaluation of the degree of
risk associated with the demand feature. The new VRDO's demand feature
ratings and symbols are:
VMIG 1: strong protection by established cash flows, superior
liquidity support, demonstrated access to the market
for refinancing.
VMIG 2: ample margins of protection, high quality.
VMIG 3: favorable quality, liquidity and cash flow protection
may be narrow, market access for refinancing may be
less well established.
VMIG 4: adequate quality, not predominantly speculative but
there is risk.
Descriptions of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
32
<PAGE> 65
Description of Standard & Poor's Corporation's Municipal ("S&P") Debt Ratings:
A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources S&P considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
for other reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
BB Debt rated "BB", "B", "CCC" or "CC" is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest
CCC and repay principal in accordance with the terms of the obligation.
CC "BB" indicates the lowest degree of speculation and "CC" the highest
degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C This rating is reserved for income bonds on which no interest is
being paid.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
33
<PAGE> 66
Provisional Ratings: The letter "p" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Ratings are applicable to both
taxable and tax-exempt commercial paper. The four categories are as follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designation 1, 2 and 3 to indicate the
relative degree of safety.
A-1 This designation indicates that the degree of safety
regarding timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer and obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
S&P may continue to rate note issues with a maturity greater than three years
in accordance with the same rating scale currently employed for municipal bond
ratings.
34
<PAGE> 67
S&P assigns dual ratings to all long-term debt issues that have a demand or
put feature. The first rating addresses the likelihood of repayment of
principal and interest as due, and the second rating addresses the demand
feature alone. Long-term debt rating symbols are used for the long-term
maturity and commercial paper rating symbols are used for the put option (for
example, AAA/A-1+). For demand notes, S&P's note rating symbols are used with
the commercial paper symbols (for example, SP-1+/a-1+).
Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split
rated securities (i.e. different ratings by Moody's and S&P) and dual rated
securities as described above.
35
<PAGE> 68
===============================================================================
AMERICAN CAPITAL
FAMILY OF FUNDS
- ---------------------------------------- ---------------------------------
NEW ACCOUNT
APPLICATION*
FOR CLASS A, CLASS B, AND CLASS C SHARES
FOR ASSISTANCE CALL 1-800-421-5666
*IF YOU WISH TO OPEN A RETIREMENT PLAN WITH
AMERICAN CAPITAL TRUST COMPANY AS CUSTODIAN,
PLEASE CALL US FOR AN APPROPRIATE APPLICATION.
- -----------------------------------------------
{AMERICAN CAPITAL LOGO}
999APL-007 REV 1294
================================================================================
<PAGE> 69
AMERICAN CAPITAL'S CHECK-WRITING PRIVILEGE
(AVAILABLE ON CLASS A SHARES, FIXED-INCOME ACCOUNTS ONLY)
American Capital offers a check-writing privilege to provide you with
quick liquidity for major purchases and emergency needs. Simply complete the
AUTHORIZATION FOR REDEMPTION BY CHECK below.
When your application for this privilege has been received and
processed, you will receive a supply of special checks which you may write
against your fund account made payable to any person in amounts of $100 or
more. When a check is presented to the Custodian for payment, full and
fractional shares required to cover the amount of the check will be redeemed
from your account at the next determined net asset value.
Please note that, since the share prices of the selected income funds
fluctuate daily, use of the check-writing privilege in these funds can result
in the liquidation of shares at a profit or a loss from the time of your
purchase and may be considered a taxable event. Consequently, while this
privilege can provide you with easy liquidity, it is not meant to be used as
a regular checking account.
- -If the amount of your check is greater than the value of your fund account
at the time the redemption is processed by ACCESS (the fund's service agent),
the check will be returned and you may be subject to additional charges.
- -You may not liquidate your entire account by means of a check.
- -No check will be accepted if written for an amount less than $100.
- -A "stop payment" system is not available with this privilege.
- -Checks will not be honored for redemption of shares held less than 15 days,
unless these shares were paid for by bank wire.
- -Any shares which are escrowed due to Letter of Intent requirements or which
are represented by outstanding certificates may not be redeemed by check.
- -If the shareholder is a corporation, partnership, trust, fiduciary, executor
or administrator, the appropriate documents appointing authorized signers
(corporate resolutions, partnership or trust agreements) must accompany the
Authorization Card. The documents must be certified in original form and the
certifications must be dated within 60 days of their receipt by ACCESS.
- -All signatures on the Authorization Card must be guaranteed if any of the
signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its
records.
- -This privilege is not available to accounts with missing social security
numbers, uncertified TIN numbers, accounts subject to backup withholding or
retirement plan accounts.
- -The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
- -For additional information on the Check-Writing Privilege, call the American
Capital Service Line toll-free at 1-800-421-5666. This line is available from
7a.m. to 7p.m. central time any business day.
CUT ON PERFORATED LINE
- --------------------------------------------------------------------------------
AUTHORIZATION FOR REDEMPTION BY CHECK - CLASS A SHARES, FIXED INCOME ACCOUNT
ONLY
- ----------------------------------- -------------------- ------------------
American Capital Fund Name ("Fund") Acct # (If Existing) # of signatures
required on checks
- --------------------------------------------------------------------------------
Name(s) of all authorized persons as they will appear on checks: (Please Print)
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
- --------------------------------------------------------------------------------
Signature(s) of all registrants as they appear on the account:
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
- --------------------------------------------------------------------------------
By signing, the signator(s) agrees to the conditions on the reverse side
hereof. If multiple signatures, each signatory guarantees the other's
signature. If the account has been established for more than 30 days or any
signator is not referenced in the account registration, all signatures must
be guaranteed.
SIGNATURE GUARANTEE
All signatures must be guaranteed.
GUARANTEE STAMP HERE
- ---------------------------------------------
SIGNATURE GUARANTEED BY (a Bank or Trust
Company; a Broker/Dealer; a Credit Union;
a National Securities Association or Clearing
Agency; a Savings and Loan Association; or a
Federal Savings Bank.)
<PAGE> 70
EASY TEAROUT
APPLICATION
- --------------------------
DETACH APPLICATION
FROM THE PERFORATED EDGE
- --------------------------
ENCLOSE CHECK WITH
THE COMPLETED APPLICATION
AND MAIL TO:
AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 419319
KANSAS CITY, MO 64141-6319
- --------------------------
{AMERICAN CAPITAL LOGO}
<PAGE> 71
TELEPHONE TRANSACTION AUTHORIZATION
AUTHORIZATION AND AGREEMENT
The registrant hereby authorizes ACCESS to accept and act conclusively upon
telephone instructions from me, anyone other than me representing himself to
be me, or any person purporting to represent me in effecting a redemption of
specified share or dollar amount or in effecting exchanges of shares of one
(or more) American Capital managed fund(s) (the "Fund" or "Fund(s)" or
"Funds") for which such an exchange is available. American Capital Management
& Research, Inc. and its subsidiaries, including Access (collectively,
"American Capital"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither
American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. American Capital and
the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. I understand and agree
to indemnify and hold harmless American Capital and the Funds from any
liability (including attorney's fees) arising directly or indirectly from any
act or omission to act hereunder not occasioned by their gross negligence or
willful misconduct. I understand that the redemption and/or exchange
privilege may be modified or terminated at any time. I also understand that
these privileges are subject to the conditions and provisions set forth
herein and in the current prospectuses of the Funds. For each exchange, I
will have received and perused a copy of the then current prospectus of the
Fund being purchased. In the case of a registrant other than an individual, I
certify that the organization has the authority to transact telephone
exchanges. I will notify ACCESS of any change in such authority. Telephone
Redemptions may be executed on all accounts other than retirement accounts.
This Authorization shall be effective upon receipt by ACCESS. It
shall in all respects be interpreted, enforced and governed under the laws of
the State of Missouri. Any suit, claim or action hereunder against American
Capital and the Funds shall have as its sole venue the County of Harris,
State of Texas.
If any provision of this Authorization is declared by any court to
be illegal or invalid, the validity of the remaining parts shall not be
affected thereby, and the illegal or invalid portion shall be deemed stricken
from this Authorization.
CONDITIONS
1. Telephone redemption and/or exchange instructions received before the
pricing of the Fund on any day on which the New York Stock Exchange is
open for business (a "Business Day"), but not later than 3:00 p.m. central
time, will be processed at that day's closing net asset value. For each
exchange my account shall be charged an exchange fee noted in the then
current prospectus. There is no fee for telephone redemption; however,
redemptions of Class B and Class C shares are subject to a contingent
deferred sales charge (See "Redemption of Shares" in the appropriate
Funds' prospectus.
2. Telephone redemption and/or exchange instructions should be made by
dialing 1-800-421-5684.
3. A waiting period as described in each Fund's Prospectus may apply to
exchanges. Exchanges will not be requested prior to the expiration of any
waiting period or in violation of any of the terms and conditions of any
of the Funds' prospectuses and I agree to indemnify American Capital and
the Funds against any harm occasioned by their compliance with an improper
order under any of the Funds' prospectus.
4. Telephone redemption requests in excess of $50,000 will not be allowed.
To transact redemptions over this dollar amount, a written request must be
directed to ACCESS. (See "Redemption of Shares" in the appropriate
Funds' prospectus for any additional requirements.)
5. Telephone redemption requests must meet the following conditions to be
accepted by ACCESS:
(a) Proceeds of the redemption may be directly deposited into
predetermined bank account, or the current address on the
registration. This address cannot reflect any change within the
previous sixty (60) days.
(b) Certain account information will need to be provided for verification
purposes before the redemption will be executed.
(c) Only one telephone redemption can be processed within a 30 day
period.
6. If the Fund to which an exchange of Class A Shares is made has a sales
charge greater than the Fund from which the exchange is made, either a
full, partial or no sales charge may be imposed depending on the
particular Fund from which such exchange has occurred. See the current
prospectus.
7. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Fund being acquired.
8. Any new account established through the exchange privilege will have
the same account information and options except as stated in the current
prospectus and be subject to this authorization.
9. Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to ACCESS and deposited into the customer's account
before any transaction may be processed.
10. If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares of
the Fund to be purchased on the exchange having the same aggregate net
asset value as the shares being exchanged shall be substituted in the
escrow account. Shares held in escrow may not be redeemed until the Letter
of Intent has expired and/or the appropriate adjustments have been made to
the account.
11. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to each Fund's current
prospectus.
12. I agree that my ability to exchange and/or redeem under this
authorization may be cancelled, modified or restricted at any time
indiscriminately at the sole discretion of American Capital or by the
Fund(s).
INFORMATION PERTAINING TO THIS LETTER OF INTENT
Subject to conditions specified below, each purchase of shares of the Fund or
shares of one or more of the Participating Funds within the American Capital
family of funds during the 13-month period subsequent to the effective date
of this Application will be made at the public offering price applicable to a
single transaction of the dollar amount indicated, as described in the then
effective prospectus. The offering price may be further reduced under the
Cumulative Purchase Discount if ACCESS is advised of any shares of this or
other American Capital fund(s) previously purchased and still owned. The
purchaser may at any time during the period revise upward the stated
intention by submitting a written request to this effect. Such revision shall
provide for the escrowing of additional shares. The original period of the
Letter, however, shall remain unchanged. Each separate purchase made pursuant
to the Letter is subject to the terms and conditions contained in the
prospectus in effect at the time of that particular purchase. It is
understood that the purchaser makes no commitment to purchase additional
shares, but that if those shares previously purchased at public offering
price under the Cumulative Purchase Discount, together with purchases so made
within thirteen months from this date do not aggregate the amount specified
when valued at the public offering price, the purchaser will pay the
increased amount of sales charge prescribed in the terms of escrow. The
purchaser(s) or the purchaser's dealer must refer to this Letter of Intent in
placing each future order for shares while this Letter is in effect. It is
understood that, when remitting funds directly to ACCESS for investment in an
account, specific reference must be made to this Letter. This cancels and
supersedes any previous instructions which the purchaser may have given
inconsistent with the above.
TERMS OF ESCROW
1. To assure compliance with provisions of the Investment Company Act of
1940, out of the initial purchase 5% of the dollar amount indicated on the
Application will be held in escrow in the form of shares (computed to the
nearest full share at the applicable public offering price) registered in
the purchaser's name. These shares will be held at ACCESS and be subject
to the terms of escrow.
2. If total purchases pursuant to this Letter equal the amount specified at
the expected aggregate purchases, escrow shares will be released from
restriction.
3. If the total purchases pursuant to this Letter are less than the amount
specified, the purchaser shall remit to ACCESS an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases
if all such purchases had been made at a single time. If ACCESS, within 10
business days after request, does not receive said difference in sales
charge, ACCESS will redeem an appropriate number of escrow shares to
realize such difference. If the proceeds from this redemption are
inadequate, the purchaser will be liable to ACCESS for the difference. The
remaining shares after the redemption will be deposited to the purchaser's
account unless otherwise instructed.
4. The purchaser hereby irrevocably constitutes and appoints ACCESS as
attorney to surrender for redemption any or all shares on the books of the
Fund, under the conditions previously outlined, with full power of
substitutions in the premises.
PROVISIONS FOR PRICE ADJUSTMENT
If total purchases made under this Letter of Intent and the Cumulative
Purchase Discount are large enough to qualify for a lower sales charge than
that applicable to the amount initially specified, or if trades not initially
made under this Letter subsequently qualify for a lower sales charge through
the 90-day back-dating provisions, an adjustment will be made at the
expiration of this Letter to give effect to the lower charge. Such adjustment
in sales charge will be used to purchase additional shares for the shareowner
at the applicable discount category.
CANCELLATION OR LIQUIDATION
If at any time prior to or after completion of this Letter of Intent the
purchaser wishes to cancel this Letter, the purchaser must notify ACCESS in
writing. If at any time prior to the completion of this Letter of Intent the
purchaser requests ACCESS to liquidate his total shares, a cancellation of
this Letter will be effected automatically. Under either of the above
conditions the total purchased pursuant to this Letter may be less than the
amount specified as the expected aggregate purchases. If so, ACCESS will
redeem at net asset value an appropriate number of escrow shares to remit to
the Distributor and to the appropriate dealer an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases if
all such purchases would have been made at a single time.
REDUCED SALES CHARGES
Some defined individuals may qualify for a reduced sales charge. (See the
"Purchase of Shares -- Volume Discounts" in the prospectus.)
DEALER AGREEMENT
Under these plans, the dealer signing the application acts as principal in
all purchases of Fund shares and appoints ACCESS as its agent to execute the
purchases and to confirm each purchase to the investor. ACCESS remits monthly
to the dealer the amount of its commissions. The dealer hereby guarantees the
genuineness of the signature(s) on the application and represents that he is
a duly licensed dealer and may lawfully sell Fund shares in the state
designated by the investor's mailing address, and that he has entered into a
Selling Group Agreement with the Distributor with respect to the sale of Fund
shares. The dealer signature on the Application, signifies acceptance of the
concession terms, and acceptance of responsibility for obtaining additional
sales charges if specified purchases are not completed.
CUT ON PERFORATED LINE
- -------------------------------------------------------------------------------
I/WE HAVE READ AND UNDERSTAND THE CONDITIONS THAT FOLLOW:
When a check is presented to the Bank for payment, the Bank will present
the check to the Fund as authority to redeem a sufficient number of shares
presently or hereafter registered in the previous account name on the
shareholder records of the Fund to cover the amount of the check. Checks may
not be for less than $100. The Fund is hereby authorized and directed to
accept and act upon checks presented by the Bank and to redeem a sufficient
number of shares presently or hereafter registered in the previous account
name on the shareholder records of the Fund and forward the proceeds of such
redemption to the Bank. The signator(s) understands and agrees that the Fund
and/or its agents will not be liable for any loss, expense or cost arising
out of check redemptions. The signator(s) will be subject to the terms of the
Fund's current offering prospectus and the Bank's rules and regulations, as
now in effect and as amended from time to time, including the right of the
Bank not to honor checks in amounts exceeding the value of the account at the
time the check is presented for payment. The Bank has reserved the right to
change, modify or terminate this check-writing privilege at any time. Checks
will not be honored for redemption of shares held less than fifteen (15) days
unless such shares have been paid for by bank wire.
I/We certify and agree that the certifications, authorizations and
appointments contained in this document will continue in effect until ACCESS,
the Fund's service agent, receives actual written notice of any change
thereof, and, to the extent of the amount of any check accepted by the Fund
for the purchase of shares or as authorization to redeem shares, the Fund
shall have a security interest in such shares.
<PAGE> 72
ALL SECTIONS ON THIS PAGE MUST BE COMPLETED FOR ACCOUNT TO BE ESTABLISHED.
AMERICAN CAPITAL FAMILY OF FUNDS {AMERICAN
NEW ACCOUNT APPLICATION CAPITAL LOGO}
SEND COMPLETED APPLICATION TO: AMERICAN CAPITAL COMPANIES SHAREHOLDER
SERVICES, INC., P.O. Box 419319, Kansas City, Missouri 64141-6319
================================================================================
1. ACCOUNT OWNER INFORMATION
TYPE OF ACCOUNT
(Check one only)
/ / INDIVIDUAL __________ ______________ ___________ _______________________
First Name Middle Initial Last Name Social Security Number
(first individual only)
/ / JOINT ______________ ______________ __________________________
TENANT Joint Tenant's Middle Initial Last Name
First Name
/ / GIFT/
TRANSFER
TO MINOR __________________________________ __________________________
Custodian's Name (one only) Minor's Name (one only)
/ / GUARDINSHIP/
CONSERVATOR-
SHIP ____________________ ___________________ ___________________
Guardian/Conservator Ward/Incompetent Ward/Incompetent
or Minor's Name or Minor's Social
(one only) Security Number
/ / CORPORATION,
PARTNERSHIP, __________________________________________ __________________
TRUST OR Exact Name of Corporation, Tax Identification
OTHER Partnership or other Organization Number
ORGANIZATION _______________________________________________________________
Trustee Accounts Only: Name of all Trustees required by trust
agreement to sell/purchase shares
______________ _________________ _________________________
Date of Trust Name of Trust Tax Identification Number
/ / OTHER _______________________________________________________________
/ / CHECK HERE IF YOU ARE SUBJECT TO BACKUP WITHHOLDING
================================================================================
2. MAILING ADDRESS
____________ ____________ ____________ ____________ ____________
Street Apartment City State Zip Code
Address Number
( ) ( )
______________ ____________ Citizenship ______________________
Business Phone Home Phone / / U.S. / / Other Indicate County
================================================================================
3. FUND SECTION
PLEASE INDICATE DOLLAR AMOUNT IN SPACE PROVIDED, $500 MINIMUM FOR EACH
FUND. IF MORE THAN ONE FUND IS SELECTED, ACCOUNTS MUST HAVE IDENTICAL
REGISTRATIONS, CLASS OF SHARES AND OPTIONS.
FIXED INCOME FUNDS
$________ AC Corporate Bond Fund
$________ AC Federal Mortgage Trust
$________ AC Global Government Securities Fund
$________ AC Government Securities
$________ AC High Yield Investments
$________ AC Municipal Bond Fund
$________ AC Reserve Fund (A shares only)
$________ AC Tax-Exempt Trust High Yield Municipal Portfolio
$________ AC Tax-Exempt Trust Insured Municipal Portfolio
$________ AC Texas Municipal Securities
$________ AC U.S. Government Trust for Income
$________ Other ______
$________ TOTAL AMOUNT ENCLOSED
EQUITY FUNDS
$________ AC Comstock Fund
$________ AC Emerging Growth Fund
$________ AC Enterprise Fund
$________ AC Equity Income Fund
$________ AC Global Equity Fund
$________ AC Global Managed Assets Fund
$________ AC Growth & Income Fund
$________ AC Harbor Fund
$________ AC Pace Fund
$________ AC Real Estate Securities Fund
$________ AC Utilities Income Fund
$________ Other
$________ TOTAL AMOUNT ENCLOSED
CLASS OF SHARES
(Must select one only)
/ / A SHARES
(front-end sales charge)
/ / B SHARES
(contingent deferred sales charge)
Class B shares are not available for
purchases of $250,000 or more
/ / C SHARES
(contingent deferred sales charge)
Class C shares are not available for
purchases of $1 million or more
-----------------------------------------------------------------
MAKE CHECK PAYABLE TO THE SPECIFIC AMERICAN CAPITAL FUND. IF MORE
THAN ONE FUND IS SELECTED, MAKE CHECK PAYABLE TO "AMERICAN CAPITAL
FAMILY OF FUNDS."
================================================================================
4. DISTRIBUTION OPTIONS
(Check one only) -- If no option is selected, all distributions will be
reinvested into the Fund that pays them.
/ / Reinvest all dividend and capital gains into the Fund that pays them.
/ / Reinvest all dividends and capital gains into an existing account in
another American Capital Fund. (Must be like class of shares.)
__________________________________ _____________________________________
Fund Name Account Number
/ / Pay all dividends and reinvest capital gains.
OR
/ / Pay all dividends and capital gains.
(IF EITHER PAY OPTION IS SELECTED,
COMPLETE INFORMATION AT RIGHT)
I request the payable distributions be: (Check one.)
/ / Sent to the address in Section 2.
/ / Directly deposited in my bank account. (Please attach a voided check to
Section 6.) If voided check is not enclosed, will be sent to address in
Section 2.
/ / Sent to special payee listed in Section 10.
===============================================================================
5. INVESTMENT PROFESSIONAL
____________________________________ ______________________________________
Broker/Dealer Name Investment Professional's Name
____________________________________ ______________________________________
Branch Office Address Investment Professional's
Representative Number
____________________________________ ________________ __________________
City State Zip Code
____________________________________ ______________________________________
Investment Professional's Phone Authorized Signature of Broker/dealer
===============================================================================
6. SIGNATURES
I have read the prospectus and application for the Fund in which I am
investing and agree to its terms. I am also aware that a Telephone
Exchange Privilege exists and that this privilege is automatically
available unless affirmatively declined. I also understand that if the
Fund fails to follow the procedures outlined in the prospectus and in the
Telephone Transaction Authorization hereto, it may be liable for any
losses due to unauthorized or fraudulent instructions. See Telephone
Transaction Authorization section for procedures. I am of legal age.
Sign below exactly as printed in registration. For joint registration,
both must sign. Under penalty of perjury, I certify with my signature
below that the number shown in section one is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
__________________________________________________________________________
Signature Date
__________________________________________________________________________
Signature Date
ATTACH VOIDED CHECK HERE _____________________
(IF APPROPRIATE)
For Corporations, Trusts, or Partnerships: We hereby certify that each of
the persons listed below has been duly elected, and is now legally holding
the office set forth opposite his/her name and has the authority to make
this authorization.
Please print titles below if signing on behalf of a business or trust to
establish this account.
__________________________________________________________________________
President, Trustee, General Partner or Title
__________________________________________________________________________
Co-owner, Secretary of Corporation, Co-trustee, etc.
================================================================================
7. ACCOUNT OPTIONS
For account options, please complete the reverse side of this account
application. Account options are:
- Cumulative Purchase Discount
- Letter of Intent
- Automatic Investment Plan (AIP)
- Systematic Exchange
- Telephone Exchange
- Checkwriting (Available on Class A shares, Fixed Income Accounts Only)
- Dividend Mail
- Interested Party Mail
- Systematic Withdrawal (for Class B and Class C shares see prospectus)
- Telephone Redemption
================================================================================
THIS APPLICATION IS NOT A PART OF THE PROSPECTUS.
<PAGE> 73
================================================================================
8. PURCHASE OPTIONS
CUMULATIVE PURCHASE DISCOUNT
/ / I qualify for cumulative discount with the account(s) listed below.
_____________________________________ _____________________________________
Fund Name Account Number
_____________________________________ _____________________________________
Fund Name Account Number
- --------------------------------------------------------------------------------
LETTER OF INTENT (Check one only)
/ / I wish to establish a new letter of intent. (If cumulative discount or
90-day backdate privilege is applicable, provide the amount and
account(s) information below.)
/ / Please apply this purchase to an existing Letter of Intent with the
account(s) listed below.
/ / Please amend my existing Letter of Intent with the new amount indicated
below.
If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the prospectus.
The aggregate amount of these purchases will be at least equal to the amount
listed below:
/ / $50,000* / / $100,000 / / $250,000 / / $500,000 / / $1,000,000
*Equity Funds Only
_____________________________________ _____________________________________
Fund Name Account Number
_____________________________________ _____________________________________
Fund Name Account Number
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN (AIP)--AUTOMATIC MONTHLY INVESTING
/ / I wish to invest on a monthly basis, directly from my checking account into
the following fund(s).
(PLEASE ATTACH A VOIDED CHECK TO SECTION 6.)
____________________ ____________________ _____________________
Fund Name Fund Name Fund Name
Amount $____________, to start _____________ of _____________, _____________
Minimum $25 Day Month Year
- --------------------------------------------------------------------------------
STEP UP PLAN OPTION -- THIS OPTION IS AVAILABLE WHEN AN AUTOMATIC INVESTMENT
PLAN IS SELECTED. (ALL SECTIONS MUST BE COMPLETED TO ESTABLISH OPTION)
A. I wish to increase my AIP / / Quarterly / / Semi-Annually / / Annually
B. To start ______________ of ___________.
Month Year
C. Check one only:
Amount Increase / / $10 / / $25 / / $50 Other (Specify amount-
min. $10) _________________
OR
Percentage Increase / / 10% / / 25% / / 50% Other (Specify percentage-
min. 10%) _________________
===============================================================================
9. ADDITIONAL OPTIONS
SYSTEMATIC EXCHANGE--ACCOUNTS MUST HAVE THE SAME CLASS OF SHARES.
/ / I wish to establish a systematic monthly exchange
from ______________ into the ______________ Fund.
Fund Name Fund Name
/ / Exchange $___________ monthly into my existing account ______________.
Minimum $25 Account Number
/ / Exchange $____________ monthly into a new account.
Minimum $100
Start the exchanges on _______________ of _______________, _______________.
Day Month Year
- --------------------------------------------------------------------------------
TELEPHONE EXCHANGE--IF ACCEPTED ACCOUNTS MUST HAVE THE SAME ACCOUNT
INFORMATION, OPTIONS AND CLASS OF SHARES.
/ / I decline telephone exchange, and do not want this privilege. (See
Telephone Transaction Authorization section for procedures.)
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN--FOR CLASS B AND CLASS C SHARE LINITATIONS,
SEE PROSPECTUS.
(Minimum account balance for monthly SWP is $10,000 and quaterly SWP is
$5,000.)
/ / I wish to automatically withdraw $_____________ from this account.
Minimum $25
/ / Monthly / / Quarterly / / Semi-Annually / / Annually
I request this distribution be: (Check One)
/ / Sent to the address listed in Section 2. To begin ____________
Month
of __________. (Will occur about the 21st of the month.)
Year
/ / Sent to the special payee listed in Section 10. to begin __________
Month
of __________. (Will occur about the 21st of the month.)
Year
/ / Directly deposited in my bank account. (PLease attach a voided check
to Section 6.) To begin __________ of __________, __________.
Day Month Year
- -------------------------------------------------------------------------------
TELEPHONE REDEMPTION--AVAILABLE ON ALL NON-RETIREMENT ACCOUNTS.
/ / I wish to redeem shares by telephone and request that the redemption
proceeds be sent to the address listed in Section 2.
/ / I wish to redeem shares by telephone and request that the proceeds be
directly deposited into my bank account. (Please attach a voided
check to Section 6.) (if voided check is not enclosed, will be sent
to address in Section 2.)
/ / I decline telephone redemption, and do not want this privilege.
See Telephone Authorization section for procedures.
- --------------------------------------------------------------------------------
CHECKWRITING--AVAILABLE ON CLASS A SHARES, FIXED-INCOME ACCOUNTS ONLY.
/ / I wish to redeem shares by check ($100 minimum per check).
Please complete the Authorization for Redemption by Check (on back
cover) and attach to the application in Section 6.
================================================================================
10. INTERESTED PARTY MAIL/DIVIDENDS MAIL
/ / I wish to have my distributions sent to the address listed below.
/ / I wish to have duplicate confirmation statements sent to the
interested party listed below.
___________________________________________________________________________
Name of Individual
___________________________________________________________________________
Street Address
___________________________ _____________________ ___________________
City State Zip Code
===============================================================================
THIS APPLICATION IS NOT A PART OF THIS PROSPECTUS.
<PAGE> 74
EASY TEAROUT
APPLICATION
- --------------------------
DETACH APPLICATION
FROM THE PERFORATED EDGE
- --------------------------
ENCLOSE CHECK WITH
THE COMPLETED APPLICATION
AND MAIL TO:
AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 419319
KANSAS CITY, MO 64141-6319
- --------------------------
{AMERICAN CAPITAL LOGO}
