<PAGE> 1
SUPPLEMENT DATED APRIL 3, 1995
TO THE PROSPECTUSES OF
AMERICAN CAPITAL CORPORATE BOND FUND, INC.
AMERICAN CAPITAL ENTERPRISE FUND, INC.
AND
AMERICAN CAPITAL EQUITY INCOME FUND, INC.
The Section "Purchase of Shares -- General" is Supplemented as follows:
In addition, the Distributor is sponsoring a sales contest for INVEST
Financial Corporation ("Invest") relating to the Fund and certain other funds or
investment products sponsored by the Distributor. Under the terms of the
contest, an Invest broker may receive an award valued up to $750.00 for sales
during the period April 1, 1995 through May 31, 1995.
<PAGE> 2
SUPPLEMENT DATED DECEMBER 15, 1994
TO PROSPECTUS OF
AMERICAN CAPITAL CORPORATE BOND FUND, INC.
On August 24, 1994, The Travelers Inc. ("Travelers") entered into a stock
purchase agreement with The Van Kampen Merritt Companies, Inc. (the "Buyer")
pursuant to which the Buyer may acquire 100% ownership of American Capital
Management & Research, Inc. (the "Company"), a wholly owned subsidiary of
Travelers and the parent corporation of American Capital Asset Management, Inc.
(the "Adviser"). Sale of the Company may be deemed to cause an assignment,
within the meaning of the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, of the investment advisory agreement between the Adviser
and American Capital Corporate Bond Fund, Inc. (the "Fund"). However, the sale
of the Company is contingent upon, among other things and subject to certain
exceptions, the approval of new investment advisory agreements with the Adviser
by both the boards of trustees or directors and the shareholders of investment
companies advised or subadvised by the Adviser, including the Fund, representing
a certain minimum amount of assets under management. The Fund anticipates that
the new advisory agreement with the Adviser proposed for the Fund will provide
for substantially the same terms and services as the current investment advisory
agreement between the Fund and the Adviser.
On October 7, 1994, the Board of Directors of the Fund approved the proposed
new investment advisory agreement between the Adviser and the Fund. Shareholders
of record as of October 26, 1994 will be entitled to vote on such approval by
proxy or at a shareholders' meeting to be held on or about December 16, 1994.
The Buyer is a wholly owned subsidiary of VKM Holding, Inc., which is
controlled by The Clayton & Dubilier Private Equity Fund IV Limited Partnership
("C&D L.P."), C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a private
investment firm. It is anticipated that senior members of management of the
Company and the Buyer will own a minority interest in VKM Holding, Inc. and that
Travelers will also own a minority nonvoting interest in VKM Holding, Inc. 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.
As of June 30, 1994, subsidiaries of the Buyer managed or supervised $35.9
billion of assets, including assets of 20 open-end investment companies and 34
closed-end investment companies having aggregate total assets of $16.0 billion,
representing over one million shareholder accounts.
<PAGE> 3
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AMERICAN CAPITAL CORPORATE BOND FUND, INC.
- --------------------------------------------------------------------------------
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
December 15, 1994
American Capital Corporate Bond Fund, Inc. (the "Fund") is a mutual fund whose
primary objective is to seek to provide current income with preservation of
capital. Capital appreciation is a secondary objective which is sought only when
consistent with the Fund's primary objective. The Fund invests primarily in a
diversified portfolio of corporate debt securities.
There is no assurance that the Fund will achieve its investment objectives.
This Prospectus tells investors briefly the information they should know
before investing in the Fund. Investors should read and retain this Prospectus
for future reference.
A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and contains
further information about the Fund. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Fund at the
telephone number and address printed above. The Statement of Additional
Information is incorporated by reference into this Prospectus.
THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
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AMERICAN CAPITAL CORPORATE BOND FUND, INC.
- --------------------------------------------------------------------------------
CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICE AGENT:
American Capital Companies
Shareholder Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
INVESTMENT ADVISER:
American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
DISTRIBUTOR:
American Capital
Marketing, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus Summary................ 2
Expense Synopsis.................. 4
Financial Highlights.............. 5
Multiple Pricing System........... 6
Investment Objectives and
Policies........................ 7
Investment Practices and
Restrictions.................... 9
The Fund and Its Management....... 11
Purchase of Shares................ 12
Distribution Plans................ 16
Shareholder Services.............. 17
Redemption of Shares.............. 20
Dividends, Distributions and
Taxes........................... 21
Prior Performance Information..... 22
Additional Information............ 23
Appendix -- Ratings of Commercial
Paper and Senior Securities..... 25
Investment Holdings............... 27
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or by the Distributor. This Prospectus does
not constitute an offering by the Distributor in any jurisdiction in which such
offering may not lawfully be made.
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
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. Diversified, open-end management investment company.
INVESTMENT OBJECTIVES. Current income consistent with preservation of capital.
Capital appreciation is a secondary objective. There is, however, no assurance
that the Fund will be successful in achieving its objectives.
INVESTMENT POLICY. Investing primarily in a diversified portfolio of corporate
debt securities which in the opinion of the investment adviser will provide an
adequate return and yet be subject to reasonable credit risk.
RISK FACTORS. The market prices of corporate debt securities generally
fluctuate with changes in interest rates, and the Fund's net asset value per
share will increase and decrease with changes in the value of its portfolio.
Generally corporate bonds with longer maturities tend to produce higher yields
and are subject to greater market fluctuation as a result of changes in interest
rates ("market risk") than corporate bonds with shorter maturities. Lower rated
corporate debt securities (commonly referred to as junk bonds) generally provide
a higher yield than higher rated corporate debt securities of similar maturity
but are subject to a greater degree of risk with respect to the ability of the
issuer to meet its principal and interest obligations ("credit risk"). Up to 40%
of the Fund's total assets may be invested in securities rated Ba by Moody's
Investors Service ("Moody's") or BB by
2
<PAGE> 5
Standard and Poor's Corporation ("S&P"). Such securities are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The Fund may
seek to hedge market risk through transactions in options, futures contracts and
related options. Such transactions involve certain risks. See "Investment
Practices and Restrictions."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table
of "Financial Highlights."
INVESTMENT ADVISER. American Capital Asset Management, Inc. (the "Adviser")
serves as investment adviser to the Fund. The Adviser provides investment advice
to 45 investment company portfolios. See "The Fund and Its Management."
DISTRIBUTOR. American Capital Marketing, Inc. (the "Distributor").
MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Multiple Pricing
System -- Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."
CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."
CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first and second year, declining each year thereafter to 0%
after the fifth year. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class B
Shares" and "Distribution Plans." Class B shares will convert automatically to
Class A shares six years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."
CLASS C SHARES. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of 1% on redemptions made within
one year of purchase. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution Plans." Class C shares will convert automatically to
Class A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."
DIVIDENDS AND DISTRIBUTIONS. Income dividends are distributed monthly; any
capital gains 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
<PAGE> 6
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EXPENSE SYNOPSIS
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES(1) CLASS C SHARES(1)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price).... 4.75%(a) None None
Sales charge imposed on dividend
reinvestments.......................... None None None
Deferred sales charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower).......... None* 4% during the first and second 1.0% during the
years, 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.......................... .49% .49% .49%
Rule 12b-1 fees(d)....................... .20% 1.00%(g) 1.00%(g)
Other expenses(e)........................ .40% .41% .44%(f)
Total fund operating expenses............ 1.09% 1.90% 1.93%
</TABLE>
- ------------
<TABLE>
<S> <C>
(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class A Shares" -- page 13.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares"-- page 15 and 16.
(c) Not charged in certain circumstances. See "Shareholder Services -- Shareholder Services Applicable to All
Classes -- Systematic Exchange" and "... -- Automatic Exchange" .. and page 19.
(d) Up to .25% for Class A shares and 1.00% for Class B and C shares. See "Distribution Plans" -- page 16.
(e) See "The Fund and Its Management" -- page 11.
(f) "Other expenses" is based on estimated amounts for the current fiscal year.
(g) Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges
permitted by NASD Rules.
* Investments of $1 million or more are not subject to any sales charge at the time of purchase, but a
contingent deferred sales charge of 1% may be imposed on certain redemptions made within one year of the
purchase.
(1) On an annualized basis.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum $47.50
front-end sales charge and for Class B and Class C shares, a
contingent deferred sales charge assuming (1) an operating
expense ratio of 1.09% for Class A shares, 1.90% for Class B
shares and 1.93% for Class C shares, (2) a 5% annual return
throughout the period and (3) redemption at the end of the
period:
Class A.................................................... $ 58 $ 81 $105 $174
Class B.................................................... $ 61 $ 93 $120 $182**
Class C.................................................... $ 30 $ 61 $104 $225
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A.................................................... $ 58 $ 81 $105 $174
Class B.................................................... $ 19 $ 60 $103 $182**
Class C.................................................... $ 20 $ 61 $104 $225
</TABLE>
- --------------------------------------------------------------------------------
** Based on conversion to Class A shares after six years.
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. See "Purchase of Shares," "The Fund and Its Management" and
"Redemption of Shares." The example is included to provide a means for the
investor to compare expense levels of funds with different fee structures over
varying investment periods. To facilitate such comparison, all funds are
required to utilize a five percent annual return assumption. This assumption is
unrelated to the Fund's prior performance and is not a projection of future
performance. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
4
<PAGE> 7
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(Selected data for a share of capital stock outstanding throughout each of the
periods indicated)
The following information for each of the five most recent fiscal years has
been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------
1994 1993(1) 1992 1991 1990 1989 1988 1987
--------- ---------- -------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period.............................. $7.36 $6.98 $6.57 $6.34 $6.78 $7.04 $7.12 $7.23
------- -------- ------- -------- ------- ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .57 .58 .60 .64 .715 .77 .78 .81
Expenses.............................. (.08) (.07) (.07) (.06) (.06) (.05) (.05) (.05)
------- -------- ------- -------- ------- ------ ------- -------
Net investment income................. .49 .51 .53 .58 .655 .72 .73 .76
Net realized and unrealized gains or
losses on securities................ (.745) .3875 .44 .2425 (.46) (.25) (.035) (.06)
------- -------- ------- -------- ------- ------ ------- -------
Total from investment operations...... (.255) .8975 .97 .8225 .195 .47 .695 .70
------- -------- ------- -------- ------- ------ ------- -------
DIVIDENDS FROM NET INVESTMENT
INCOME.............................. (.485) (.5175) (.56) (.5925) (.635) (.73) (.775) (.81)
------- -------- ------- -------- ------- ------ ------- -------
Net asset value, end of period........ $6.62 $7.36 $6.98 $6.57 $6.34 $6.78 $7.04 $7.12
======= ======== ======= ======== ======= ====== ======= =======
TOTAL RETURN(4)....................... (3.55%) 13.48% 15.38% 13.61% 2.94% 7.00% 10.37% 10.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions).......................... $160.0 $190.8 $191.8 $184.6 $191.2 $239.6 $206.8 $156.4
Ratios to average net assets
Expenses............................ 1.09% 1.05% 1.00% 1.00% .94% .75% .74% .72%
Net investment income............... 7.06% 7.24% 7.90% 9.03% 10.07% 10.21% 10.46% 10.63%
Portfolio turnover rate............... 0% 19% 37% 15% 54% 18% 56% 28%
<CAPTION>
CLASS B
------------------------- CLASS C
SEPTEMBER 28, ----------
YEAR 1992(2) YEAR
ENDED THROUGH ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
1986(6) 1985(6) 1994 1993(1) 1994(1)
-------- ------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period.............................. $7.03 $6.31 $7.36 $7.05 $7.36(3)
------- ------ ------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .86 .87 .57 .56 .57
Expenses.............................. (.05) (.05) (.13) (.13) (.13)
------- ------ ------- --------- --------
Net investment income................. .81 .82 .44 .43 .44
Net realized and unrealized gains or
losses on securities................ .20 .72 (.755) .3465 (.755)
------- ------ ------- --------- --------
Total from investment operations...... 1.01 1.54 (.315) .7765 (.315)
------- ------ ------- --------- --------
DIVIDENDS FROM NET INVESTMENT
INCOME.............................. (.81) (.82) (.425) (.4665) (.425)
------- ------ ------- --------- --------
Net asset value, end of period........ $7.23 $7.03 $6.62 $7.36 $6.62
TOTAL RETURN(4)....................... 14.85% 25.76% (4.38%) 11.54% (4.51%)
======= ====== ======= ========= ========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions).......................... $123.3 $91.4 $13.5 $8.4 $2.3
Ratios to average net assets
Expenses............................ .72% .76% 1.90% 1.96%(5) 1.93%
Net investment income............... 11.17% 12.29% 6.29% 6.21%(5) 6.49%
Portfolio turnover rate............... 30% 62% 0% 19% 0%
</TABLE>
- ---------------
(1) Based on average month-end shares outstanding.
(2) Commencement of offering of sales.
(3) Sales of Class C shares commenced on August 30, 1993 at a net asset value of
$7.40 per share. At August 31, 1993, there were 68 Class C shares
outstanding with a per share net asset value of $7.36. The decrease in net
asset value was due principally to a $.0375 dividend, which was declared as
of August 31, 1993. Other financial highlights for the Class C shares for
this short period are not presented as they are not meaningful.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(5) Annualized.
(6) Effective for the year ended August 31, 1987, the Fund adopted for financial
reporting purposes an accounting method of amortizing debt discounts and
premiums on the same basis as is used for federal income tax reporting. The
effect of the change in accounting method, on a pro forma basis would have
been to increase net investment income with a corresponding decrease in net
realized and unrealized gains or losses in the amounts of $.01 and $.03 for
the years 1986 and 1985, respectively. Similarly, the ratios of net
investment income to average net assets would have been 11.30% and 12.69%,
respectively.
5
<PAGE> 8
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MULTIPLE PRICING SYSTEM
- --------------------------------------------------------------------------------
The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of Shares --
Class B Shares." Class B shares will automatically convert to Class A shares six
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. See "Conversion Feature" below 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 re-
6
<PAGE> 9
duced initial sales charges or purchases at net asset value, as described herein
under "Purchase of Shares -- Class A Shares." For these reasons, the Distributor
will reject any order of $250,000 or more for Class B shares or any order of $1
million or more for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors in
Class A shares do not have all their funds invested initially and, therefore,
initially own fewer shares. Other investors might determine that it is more
advantageous to purchase either Class B shares or Class C shares and have all
their funds invested initially, although remaining subject to ongoing
distribution fees and, for a five-year or one-year period, respectively, being
subject to a contingent deferred sales charge. Ongoing distribution fees on
Class B shares and Class C shares will be offset to the extent of the additional
funds originally invested and any return realized on those funds. However, there
can be no assurance as to the return, if any, which will be realized on such
additional funds. For investments held for ten years or more, the relative value
upon liquidation of the three classes tends to favor Class A or Class B shares,
rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (See "Shareholder Services -- Shareholder Services Applicable to Class A
Shareholders Only -- Check Writing Privilege"). Class B shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, and/or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish to
avoid a front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
Under most circumstances, for investments aggregating less than $100,000 at
the time of purchase, investments originally made in Class C shares will tend to
have a slightly higher value upon liquidation than investments originally made
in either Class A or Class B shares if liquidated within approximately the first
six years after the date of the original investment and investments originally
made in Class B shares will tend to have a slightly higher value upon
liquidation than investments originally made in either Class A or Class C shares
for investments held longer. Under most circumstances, for investments
aggregating $100,000 or more at the time of purchase, investments originally
made in Class C shares will tend to have a slightly higher value upon
liquidation than either investments originally made in Class A or Class B shares
if liquidated within approximately the first two to the first six years after
the date of the original investment, but investments originally made in Class A
and Class B shares will tend to have a slightly higher value upon liquidation
for investments held longer. The foregoing will not, however, be true in all
cases. Particularly, if the Fund experiences a consistently negative or widely
fluctuating total return, results may differ.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares 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.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The Fund's primary objective is to seek to provide current income consistent
with preservation of capital. Capital appreciation is a secondary objective
which is sought only when consistent with the Fund's primary objective.
7
<PAGE> 10
The Fund attempts to achieve these objectives by investing primarily in
corporate debt securities, including convertible securities. There is no
assurance that these objectives will be achieved and yields may fluctuate over
time.
The Fund expects that at all times at least 65% of its total assets will be
invested in corporate bonds. For these purposes a corporate bond is defined as
any corporate debt security with an original term to maturity of greater than
one year. The Fund may invest up to ten percent of its assets in preferred
stocks. See "Investment Practices and Restrictions -- Preferred Stocks." The
Fund may invest up to 20% of its assets in convertible securities which includes
convertible debentures as well as convertible preferred stocks. In order to
hedge against changes in interest rates, the Fund may invest in or write options
on U.S. Government securities and engage in transactions involving interest rate
futures and options on such contracts. See "Investment Practices and
Restrictions -- Options, Futures Contracts and Related Options" and the
Statement of Additional Information for discussion of options, futures contracts
and related options.
The Fund is not limited as to the maturities of the corporate debt securities
in which it invests. Most preferred stocks have no stated maturity. The weighted
average maturity, which is likely to vary from time to time, of the corporate
bonds owned by the Fund on August 31, 1994, was 16.22 years. Corporate bonds
with longer maturities generally tend to produce higher yields and are subject
to greater market risk than debt securities with shorter maturities. When
interest rates increase, prices of outstanding corporate bonds and preferred
stocks generally decline. Conversely, prices of outstanding corporate bonds and
preferred stocks generally increase when interest rates fall.
The Fund invests in three categories of securities:
I. (a) securities rated at the time of purchase Baa or higher by Moody's or
BBB or higher by S&P;
(b) securities issued, or guaranteed by the U. S. Government, its agencies
or instrumentalities;
(c) commercial paper rated Prime by Moody's or A by S&P; and
(d) cash and cash equivalents.
II. Securities rated Ba by Moody's or BB by S&P.
III. Securities rated B or below by Moody's and S&P or nonrated (excluding
nonrated U.S. Government agency obligations).
The above specified ratings apply to preferred stocks as well as corporate
bonds.
At least 60% of the Fund's assets must, and up to 100% may, be invested in
category I securities. No more than 20% may be invested in category III
securities. The remaining zero percent to 40% of the Fund's assets are invested
in category II securities (commonly referred to as junk bonds). Although the
Fund may invest up to 40% of its assets in securities rated Ba by Moody's or BB
by S&P, it currently intends to limit such investments to less than 35% of its
assets.
The above percentage limitations apply to the Fund's investment portfolio
excluding options, futures contracts and related options. This is a fundamental
policy of the Fund which may not be changed without approval by a majority (as
defined in the 1940 Act) of the Fund's shareholders.
During the fiscal year ended August 31, 1994, the average percentage of the
Fund's assets invested in debt securities (or preferred stocks) within the
various rating categories (based on the higher of the S&P or Moody's ratings),
and the nonrated debt securities, determined on a dollar weighted average, were
as follows:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
AA/Aa................................................................ 2.57%
A/A.................................................................. 22.02%
BBB/Baa.............................................................. 63.91%
BB/Ba................................................................ 4.47%
Cash and Equivalents................................................. 7.03%
--------
Total Net Assets................................................ 100.00%
</TABLE>
- --------------------------------------------------------------------------------
Generally, lower rated debt securities provide a higher yield than higher
rated debt securities of similar maturity but are subject to greater market risk
and credit risk. Lower rated debt securities generally are more speculative with
respect to the capacity of the issuer to make interest and principal payments.
For example, debt securities rated BB/Ba or B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. It is the current
operating policy of the Fund not to purchase debt securities rated below B by
both Moody's and S&P or nonrated securities considered by the Adviser to be of
comparable quality. The ratings of Moody's and S&P represent their opinions of
the quality of the securities they undertake to rate, but not the market value
risk of such securities. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Credit ratings are also
subject to a risk that the rating agencies may fail to timely change the ratings
to reflect subsequent events. A
8
<PAGE> 11
description of the bond, commercial paper and preferred stock ratings of Moody's
and S&P is contained in the Appendix. Investors should consider carefully the
additional risks associated with investment in lower rated securities, which are
not generally meant for short-term investment.
The market value of lower rated securities may fluctuate more than the market
value of higher rated securities, since the former tend to reflect short-term
corporate and market developments to a greater extent than higher rated
securities, which fluctuate primarily in response to the general level of
interest rates, assuming that there has been no change in the fundamental
quality of such securities. Investment results of the Fund's lower rated
securities may be more dependent upon the Adviser's credit analysis than the
results from investments in higher rated securities. Lower rated securities may
be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities. A projection of an
economic downturn, for example, could cause a decline in prices of lower rated
securities because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its senior
securities. In addition, the secondary trading market for lower rated securities
may be less liquid than the market for higher grade securities.
Prices of lower rated debt securities may decline rapidly in the event a
significant number of holders decide to sell. Changes in expectations regarding
an individual issuer, an industry or lower rated debt securities generally could
reduce market liquidity for such securities and make their sale by the Fund more
difficult, at least in the absence of price concessions. An economic downturn or
an increase in interest rates could severely disrupt the market for high yield
bonds and adversely affect the value of outstanding bonds and the ability of the
issuers to repay principal and interest. See "Risk Factors" in the Statement of
Additional Information for a further discussion of risk factors associated with
investments in lower rated securities.
Common stocks may be temporarily acquired in the portfolio as a result of
conversion of convertible securities into such common stocks or upon exercise of
warrants attached to or included in a unit with a debt security purchased by the
Fund.
The Fund may also invest up to 20% of its total assets in United States dollar
denominated securities of foreign governments and other foreign issuers.
- --------------------------------------------------------------------------------
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 purchaser's holding period. 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, would
exceed ten percent of the value of its net assets. In the event of a bankruptcy
or other default of a seller of a repurchase agreement, the Fund could
experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights.
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.
PREFERRED STOCKS. Preferred stocks may provide a higher dividend rate than the
interest yield on debt securities of the same issuer, but are subject to greater
risk of fluctuation in market value and greater risk of non-receipt of income.
Preferred stocks are in many ways like perpetual debt securities, providing a
stream of income but without stated maturity date. Because they lack a fixed
maturity date, preferred stocks are likely to fluctuate substantially in price
when interest rates change. Such fluctuations generally are comparable to or
exceed those of long-term government or corporate bonds (those with maturities
of fifteen to thirty years).
9
<PAGE> 12
Preferred stocks have claims on assets and earnings of the issuer which are
subordinate to the claims of all creditors but senior to the claims of common
stockholders. A preferred stock rating differs from a bond rating because it
applies to an equity issue which is intrinsically different from, and
subordinated to, a debt issue. Preferred stock ratings generally represent an
assessment of the capacity and willingness of an issuer to pay preferred stock
dividends and any applicable sinking fund obligations.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies of the
Fund permit the Fund to invest in or write options, futures contracts and
related options. Thus, the Fund may engage in transactions in futures contracts
on U.S. Government securities.
The Fund presently expects to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of the Fund's
portfolio and the Adviser's expectations concerning the securities markets. See
the Statement of Additional Information for discussion of options, futures
contracts and related options.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments 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 write or purchase options in privately negotiated transactions
("OTC Options") as well as listed options. OTC Options can be closed out only by
agreement with the other party to the transaction. Thus, any OTC Options
purchased by the Fund will be considered an illiquid security. Any OTC Options
written by the Fund will be with a qualified dealer pursuant to an agreement
under which the Fund may repurchase the option at a formula price. Such options
will be considered illiquid to the extent that the formula price exceeds the
intrinsic value of the option. 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 equivalents 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. The Fund may not invest
more than ten percent of its net assets in illiquid securities and repurchase
agreements which have a maturity of longer than seven days. A more complete
discussion of the potential risks involved in transactions in options or futures
contracts and related options is contained in the Statement of Additional
Information.
LOANS OF PORTFOLIO SECURITIES. The Fund is authorized to lend portfolio
securities to broker-dealers and financial institutions in an amount up to ten
percent of its net assets, provided that such loans are at all times callable by
the Fund and are at all times secured by cash collateral that is at least equal
to the market value, determined daily, of the loaned securities. During the
period of the loan, the Fund receives the income on both the loaned securities
and the collateral and thereby increases its yield after payment of lending
fees.
PORTFOLIO TRANSACTIONS AND BROKERAGE. The Adviser is responsible for the
placement of orders for the purchase and sale of portfolio securities for the
Fund and the negotiation of the price of, and any commissions on, such
transactions. Most transactions made by the Fund are with dealers acting as
principals. Broker-dealers are selected on the basis of their professional
capability for the type of transaction and the value and quality of execution
services rendered on a continuing basis. The Adviser is authorized to place
portfolio transactions with broker-dealers participating in the distribution of
shares of the Fund and other American Capital mutual 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 place
portfolio transactions with broker-dealers that provide it with investment and
research information and to pay higher than the lowest available commission if
the Adviser determines that the cost is reasonable in relation to the overall
services provided. The information received may be used by the Adviser in
managing the assets of other advisory accounts as well as in the management of
the assets of the Fund.
The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, The Travelers
Inc. ("Travelers"). Such affiliated persons include Smith Barney Inc. ("Smith
Barney"), a wholly owned subsidiary of Travelers, and Robinson Humphrey, Inc., a
wholly owned subsidiary of Smith Barney. When such transactions are made, in
accordance with Rule 17e-1 under the 1940 Act, commissions paid must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 20% of its total
assets in United States dollar denominated debt issues of foreign governments
and other foreign issuers.
10
<PAGE> 13
The Adviser believes that in many instances such foreign debt securities may
provide higher yields than securities of domestic issuers which have similar
maturities. Such securities may be subject to foreign government taxes which
would reduce the effective yield. Such securities may be less liquid than the
securities of the U.S. corporations, and are certainly less liquid than
securities issued by the U.S. Government or its agencies.
The above-described foreign investments involve certain risks, which should be
considered carefully by an investor in the Fund. These risks include political
or economic instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of U.S. corporations or of the U.S. Government. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United States, and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Finally, in the
event of a default on any such foreign debt obligations, it may be more
difficult for the Fund to obtain or to enforce a judgment against the issuers of
such securities. Such investments will be made only when the Adviser believes
that higher yields justify the attendant risks.
INVESTMENT RESTRICTIONS. The Fund is subject to the following restrictions
which, like the investment objective, may not be changed without the approval of
a majority (as defined in the 1940 Act) of the Fund's shareholders. These
restrictions provide, among other things, that the Fund may not:
1. Invest more than five percent of its total assets at market value in any
one issuer or purchase more than ten percent of any class of securities of
any issuer (excluding in both cases the U.S. Government).
2. Invest more than five percent of the value of its total assets in companies
having a record, together with predecessors, of less than three years of
continuous operation.
3. Borrow money, except for temporary or emergency purposes, and then not in
excess of five percent of its total assets taken at cost, or mortgage,
pledge or hypothecate its assets to secure such borrowing except in an
amount taken at market not exceeding ten percent of its total assets taken
at cost. Notwithstanding the foregoing, the Fund may engage in transactions
in options, futures contracts and related options, segregate or deposit
assets to cover or secure options written and make margin deposits and
payments for futures contracts and related options.
4. Underwrite securities of other issuers, except insofar as the Fund may be
deemed to be an underwriter for purposes of the Securities Act of 1933 in
the resale of any unregistered securities owned by the Fund; provided,
however, the Fund shall not purchase any unregistered securities if
immediately after and as a result of such purchase of such securities,
together with any other illiquid securities held by the Fund, would
constitute more than ten percent of the Fund's total assets.
5. Lend any of its assets except for the following types of transactions: (a)
loans of portfolio securities up to ten percent of the value of the Fund's
net assets, taken at market, collateralized at 100% each business day,
subject to immediate termination if the collateral is not maintained, or on
five business days' notice by the Fund or not less than one business day's
notice by the borrower, on which the Fund will receive all income accruing
on the borrowed securities during the loan as described under "Investment
Practices and Restrictions -- Loans of Portfolio Securities"; (b) the
purchase of debt securities publicly distributed or of a type customarily
purchased by institutional investors; and (c) the purchase of securities
subject to repurchase agreements. See "Investment Practices and
Restrictions -- Repurchase Agreements."
- --------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company
incorporated in Delaware on July 18, 1963 and reincorporated by merger into a
Maryland corporation on September 19, 1973. A mutual fund provides a practical
and convenient way for those who have similar investment goals to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
A board of eight directors has the responsibility for overseeing the affairs
of the Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056,
determines the investment of the Fund's assets, provides administrative services
and manages the Fund's business and affairs. The Adviser, together with its
predecessors, has been in the investment advisory business since 1926 and has
served as investment adviser to the Fund since 1971. As of November 30, 1994,
the Adviser manages the assets of 45 investment company portfolios with total
net assets of approximately $16.1 billion.
11
<PAGE> 14
The Adviser and the Distributor are wholly owned subsidiaries of American
Capital Management & Research, Inc. ("ACMR"), an indirect wholly owned
subsidiary of The Travelers Inc. ("Travelers"). Travelers is a financial
services holding company engaged, through its subsidiaries, principally in three
business segments -- investment services, consumer finance services, and
insurance services. Mr. Don G. Powell is President and Director of the Fund,
President, Chief Executive Officer and Director of the Adviser, and Executive
Vice President and Director of the Distributor. Most other officers of the Fund
are also officers and/or directors of the Adviser, and a number are also
officers and directors of the Distributor.
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 September 6, 1989 (the "Advisory
Agreement"), the Fund pays the Adviser a monthly fee computed on average daily
net assets of the Fund at the annual rate of 0.50% of the first $150 million of
net assets; 0.45% of the next $100 million of net assets; 0.40% of the next $100
million of net assets; and 0.35% of net assets over $350 million. Under the
Advisory Agreement, the Fund also reimburses the Adviser for the cost of the
Fund's accounting services, which include maintaining its financial books and
records and calculating its daily net asset value. Operating expenses paid by
the Fund include shareholder service agency fees, service fees, distribution
fees, 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.
David R. Troth is primarily responsible for the day-to-day management of the
Fund's investment portfolio. He has served in that role since 1979. Mr. Troth is
Vice President of the Fund and Senior Investment Vice President of the Adviser.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B shares and Class C shares are
sold without an initial sales charge and are subject to a contingent deferred
sales charge upon certain redemptions. See "Multiple Pricing System" for a
discussion of factors to consider in selecting which class of shares to
purchase. Contact the American Capital 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 dealers. Initial investments must be at least
$500 and subsequent investments must be at least $25. Both minimums may be
waived by the Distributor for plans involving periodic investments. Shares of
the Fund may be sold in foreign countries where permissible. The Fund and the
Distributor reserve the right to refuse any order for the purchase of shares.
The Fund also reserves the right to suspend the sale of the Fund's shares in
response to conditions in the securities markets or for other reasons.
Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application included in this Prospectus
and forwarding the application, through the designated dealer, to the
shareholder service agent, American Capital Companies Shareholder Services, Inc.
("ACCESS"). When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A, Class B or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time)
each day the Exchange is open. Net asset value per share for each class is
determined by dividing the value of the Fund's securities, cash and other assets
(including accrued interest) attributable to such class, less all liabilities
(including accrued expenses) attributable to such class, by the total number of
shares of the class outstanding. Securities listed or traded principally on a
national securities exchange are valued at the last sale price. Unlisted
securities and listed securities for which the last sale price is not available
are valued at the mean between the last reported bid and asked price. Securities
for which market quotations are not readily available and other assets are
valued at fair value as determined in good faith by the Board of Directors of
the Fund. Short-term securities are valued in the manner described in the notes
to the financial statements included in the Statement of Additional Information.
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
12
<PAGE> 15
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 next calculation of the net
asset value plus applicable Class A sales charges after an order is received by
a dealer provided such order is transmitted to the Distributor prior to the
Distributor's close of business on such day. Orders received by dealers after
the close of the 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.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
SIZE OF AS % OF NET AS % OF REALLOWED TO DEALERS
INVESTMENT AMOUNT INVESTED OFFERING PRICE (AS A % OF OFFERING PRICE)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000............... 4.99% 4.75% 4.00%
$100,000 but less than
$250,000....................... 4.17% 4.00% 3.50%
$250,000 but less than
$500,000....................... 3.09% 3.00% 2.50%
$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 qualified 401(k) retirement plans administered under American Capital
Trust Company's (k) Advantage Program, or similar recordkeeping programs made
available through 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. No such charge
will be imposed unless and until appropriate relief is granted by the SEC. 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 reallowance 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 may pay
dealers through whom purchases are made at net asset value as described in
clause (e) herein an amount equal to 0.40% of the amount invested. Dealers which
are reallowed all or substantially all of the sales commissions may be deemed to
be underwriters for purposes of the Securities Act of 1933 (the "1933 Act").
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry profes-
13
<PAGE> 16
sionals and dealers are hereinafter referred to as "Service Organizations."
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the shares
will not be resold except through redemption by the Fund, by (a) current or
retired Directors of the Fund; current or retired employees of ACMR and any of
its affiliates; spouses, minor children and grandchildren of the above persons;
and parents of employees and parents of spouses of employees of ACMR and any of
its affiliates; (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 and (d) trustees or other
fiduciaries purchasing shares for retirement plans of organizations with
retirement plan assets of $10 million or more. 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 (e)
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 (f) 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 (f) may be placed
either through authorized dealers as described above or directly with ACCESS by
the investment adviser, trust company or bank trust department, provided that
ACCESS receives federal funds for the purchase by the close of business on the
next business day following acceptance of the order. An authorized dealer or
financial institution may charge a transaction fee for placing an order to
purchase shares pursuant to this provision or for placing a redemption order
with respect to such shares. Service Organizations will be paid a service fee as
described herein under "Distribution Plans" on purchases made on behalf of
registered investment advisers, trust companies and bank trust departments
described in clause (f) 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 (f) above for transactions of $1
million or more an amount up to 0.50% of the amount invested, over a
twelve-month period following the pertinent transaction. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described herein.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc., American Capital Emerging Growth Fund, Inc., American
Capital Enterprise Fund, Inc., American Capital Equity Income Fund, Inc.,
American Capital Federal Mortgage Trust ("Federal Mortgage"), American Capital
Global Managed Assets Fund, Inc. ("Global Managed"), American Capital Government
Securities, Inc., American Capital Government Target Series ("Government
Target"), American Capital Growth and Income Fund, Inc., American Capital Harbor
Fund, Inc., American Capital High Yield Investments, Inc. ("High Yield"),
American Capital Municipal Bond Fund, Inc. ("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. ("Texas Municipal"), American Capital U.S.
Government Trust for Income ("Government Trust"), American Capital Utilities
Income Fund, Inc. ("Utilities Income") and American Capital World Portfolio
Series, Inc. ("World Portfolio"). A person eligible for a volume discount
includes an individual; members of a family unit comprising husband, wife and
minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account.
14
<PAGE> 17
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's dealer at the time an
order is placed for a purchase which would qualify for a reduced sales charge on
the basis of previous purchases and if sufficient information is furnished to
permit confirmation of such purchases.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the 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
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 form included in this Prospectus.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE 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 pro-
15
<PAGE> 18
motional incentives, in the form of cash or other compensation, to Service
Organizations that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1%. The charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price. In addition, no charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
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.
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. The contingent
deferred sales charge is also waived on redemptions of Class C shares as it
relates to the reinvestment of redemption proceeds in shares of the same class
of the Fund within 120 days after redemption. See the Statement of Additional
Information for further discussion of waiver provisions.
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing of its shareholders in accordance
with a plan adopted by the investment company board of directors and approved by
its shareholders. Pursuant to such Rule, the Directors of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") applicable to
mutual fund sales charges. The NASD Rules limit the annual distribution charges
that a mutual fund may impose on a class of shares. The NASD Rules also limit
the aggregate amount which the Fund may pay for such distribution costs. Under
the Class A Plan, the Fund pays a service fee to the Distributor at an annual
rate of up to 0.25% of the Fund's aggregate average daily net assets
attributable to the Class A shares. Such payments to the Distributor under the
Class A Plan are based on an annual percentage of the value of Class A shares
held in shareholder accounts for which such Service Organizations are
responsible at the rates of 0.15% annually with respect to Class A shares in
such accounts on September 30, 1989 and 0.25% annually with respect to Class A
shares issued after that date. Under the Class B Plan and the Class C Plan, the
Fund pays a service fee to the Distributor at an annual rate of up to 0.25% and
a distribution fee at an annual rate of up to 0.75% of the Fund's aggregate
average daily net assets attributable to the Class B shares or Class C shares to
reimburse the Distributor for service fees paid by it to Service Organizations
and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to 4% of
the purchase price of Class B shares purchased by the clients of broker-dealers
and other Service Organizations and (ii) other distribution expenses as
described in the Statement of Additional Information. Under the Class C Plan,
the Distributor receives additional payments from the Fund in the form of a
distribution fee at the annual rate of up to 0.75% of the net assets of the
Class C shares as reimbursement for (i) upfront commissions and transaction
16
<PAGE> 19
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 Distributor to compensate
Service Organizations with respect to such shares. In this regard, the purpose
and function of the combined contingent deferred sales charge and distribution
fee are the same as those of the initial sales charge with respect to the Class
A shares of the Fund in that in both cases such charges provide for the
financing of the distribution of the Fund's shares.
Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward without
interest charges unless permitted under 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 $591,000 or 4.66% of the Class B shares' net assets. The
unreimbursed expenses incurred by the Distributor under the Class C Plan from
August 30, 1993 (inception of Class C shares) through June 30, 1994, and carried
forward were approximately $31,000 or 1.64% of the Class C shares' net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. The
following is a description of those services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Stock certificates are not issued except upon
shareholder request. Most shareholders elect not to receive certificates in
order to facilitate redemptions and transfers. A shareholder may incur an
expense to replace a lost certificate. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds listed under "Purchase of Shares -- Class A Shares -- Volume
Discounts," or Reserve, may receive statements quarterly from ACCESS showing any
reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized investment dealers or by mailing a
check directly to ACCESS.
17
<PAGE> 20
REINVESTMENT PLAN. A convenient way for shareholders to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. The shareholder may on the initial application or prior to
any declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. American
Capital Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh
plans. Details regarding fees, as well as full plan administration for profit
sharing, pension and 401(k) plans, are available from the Distributor.
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. Both accounts must be
of the same class and of the same type, either non-retirement or retirement. Any
two non-retirement accounts can be used. If the accounts are retirement
accounts, they must both be for the same class and of the same type of
retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh) and for the benefit of the
same individual. 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 in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts") other
than Government Target, may be exchanged for the same class of shares of any
other fund without sales charge, provided that shares of the Fund and shares of
Federal Mortgage, Global Managed, Government Trust, High Yield, Municipal Bond,
Real Estate, Tax-Exempt, Texas Municipal, Utilities Income and the Global
Government Securities Fund of World Portfolio are subject to a 30-day holding
period requirement. Shares of Government Target may be exchanged for Class A
shares of the Fund without sales charge. Shares of Reserve may be exchanged for
Class A shares of any Participating Fund upon payment of the excess, if any, of
the sales charge rate applicable to the shares being acquired over the sales
charge rate previously paid. Shares of any Participating Fund or Reserve may be
exchanged for shares of any other Participating Fund if shares of that
Participating Fund are available for sale; however, during periods of suspension
of sales, shares of a Participating Fund may be available for sale only to
existing shareholders 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
would remain subject to the contingent deferred sales charge imposed by the
original fund upon their redemption from the American Capital complex of funds.
Shares of Reserve acquired through an exchange of Class B or Class C shares may
be exchanged only for the same class of shares of a Participating Fund without
incurring a contingent deferred sales charge.
Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described herein under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held for
less than 91 days, the sales charge paid on such shares is not included in the
tax basis of the exchanged shares, but is carried over and included in the tax
basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. ACMR
and its subsidi-
18
<PAGE> 21
aries, 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. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. See "Purchase of
Shares" and "Redemption of Shares." If the exchanging shareholder does not have
an account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gain options
(except fund to fund dividends) and dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
file a specific written request. The Fund reserves the right to reject any order
to acquire its shares through exchange, or otherwise to modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
above under "Shareholder Services -- Exchange Privilege" will be waived for such
systematic exchanges. Additional information on how to establish this option is
available from the Distributor.
AUTOMATIC EXCHANGE. The exchange fee description above under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the American
Capital Service Department at (800) 421-5666 for further information on how to
utilize this option.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any investor whose shares
in a single account total $5,000 or more may establish a withdrawal plan on a
quarterly, semiannual or annual basis. This plan provides for the orderly use of
the entire account, not only the income but also the capital, if necessary. Each
withdrawal constitutes a redemption of shares on which any capital gain or loss
will be recognized. The planholder may arrange for monthly, quarterly,
semiannual or annual checks in any amount not less than $25. Such a systematic
withdrawal plan may also be maintained by an investor purchasing shares for a
retirement plan established on a form made available by the Fund. See
"Shareholder Services -- Retirement Plans."
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 this 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 this 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 purchases 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
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 (the "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.
19
<PAGE> 22
When a check is presented to the 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 shares. Any gain or loss
realized on the sale of shares is a taxable event. See "Redemption of Shares."
Checks will not be honored for redemption of Class A shares held less than 15
days, unless such Class A shares have been paid for by bank wire. Any Class A
shares for which there are outstanding certificates may not be redeemed by
check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or the
Bank. Retirement plans and 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 dealer.
Orders received from dealers must be at least $500 unless transmitted via the
FUNDSERV network. The redemption price for such shares is the net asset value
next calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of 1% may be imposed on certain redemptions of
Class A shares made within one year of purchase for investments of $1 million or
more. The contingent deferred sales charge incurred upon redemption is paid to
the Distributor in reimbursement for distribution-related expenses. See
"Purchase of Shares." A custodian of a retirement plan account may charge fees
based on the custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker/dealer; a
credit union; a savings and loan association; a member firm of a national
securities exchange, registered securities association or clearing agency; 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 to be forwarded to ACCESS. Where 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 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 next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until the purchase check has cleared, usually a period of up to
15 days. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
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 redemp-
20
<PAGE> 23
tion 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. 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. 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 proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "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 American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. Interest earned from investments is the Fund's main source of
income. Substantially all of this income, less expenses, is distributed monthly
as dividends to shareholders. The Fund has paid consecutive monthly dividends
since its first monthly dividend in November, 1971. Dividends are automatically
applied to purchase shares of the Fund at the next determined net asset value.
See "Shareholder Services -- Reinvestment Plan."
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
higher incremental transfer agency fees applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund annually distributes to
shareholders the excess, if any, of its total profits on the sale of securities
during the year over its total losses on the sale of securities, including
capital losses carried forward from prior years under tax laws. As in the case
of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value. See "Shareholder
Services -- Reinvestment Plan."
TAXES. The Fund has qualified and intends to be taxed as a regulated
investment company under the Code. By qualifying as a regulated investment
company, the Fund is not subject to federal income taxes to the extent it
distributes its net investment income and net realized capital gains. Dividends
from net investment income and distributions from any net realized short-term
capital gains are taxable to shareholders as ordinary income. Long-term capital
gains distributions constitute long-term capital gains for federal income tax
purposes. All such
21
<PAGE> 24
dividends and distributions are taxable to the shareholder whether or not
reinvested in shares. However, shareholders not subject to tax on their income
will not be required to pay tax on amounts distributed to them.
Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Dividends and distributions paid by the Fund have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution paid shortly after the purchase of shares
by an investor would represent, in substance, a return of capital to the
shareholder (to the extent it is paid on the shares so purchased) even though
subject to income taxes as discussed herein.
Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures generally are treated as 60% long-term and 40%
short-term, and positions held by the Fund at the end of its fiscal year
generally are required to be marked to market, with the result that unrealized
gains and losses are treated as realized. Gains and losses realized by the Fund
from writing over-the-counter options generally constitute short-term capital
gains or losses unless the option is exercised, in which case the character of
the gain or loss is determined by the holding period of the underlying security.
The Code contains certain "straddle" rules which require deferral of losses
incurred in certain transactions involving hedged positions to the extent the
Fund has unrealized gains in offsetting positions and generally terminate the
holding period of the subject position. Additional information is set forth in
the Statement of Additional Information.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisers for more detailed
tax advice including state and local tax considerations. 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.
- --------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one, five, and ten year periods. Other total return quotations,
aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A Shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund or to reflect the fact no 12b-1 fees were incurred prior to October 1,
1989.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
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.
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
lesser than the Fund's then current dividend rate.
22
<PAGE> 25
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.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%; Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
In 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, with the Consumer Price Index, Salomon Brothers
Corporate Bond Index, Shearson-Lehman Corporate Bond Index, Merrill Lynch
Corporate Master Index, Merrill Lynch Corporate and Government Index, Bloomberg
Financial Markets Indices, 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 Delaware on July 18,
1963, and reincorporated by merger into a Maryland corporation on September 19,
1973. The Fund may offer three classes of shares: Class A, Class B and Class C
shares. Each class of shares represents interests in the assets of the Fund and
has identical voting, dividend, liquidation and other rights on the same terms
and conditions except that the distribution fees and/or service fees related to
each class of shares are borne solely by that class, and each class of shares
has exclusive voting rights with respect to provisions of the Fund's Class A
Plan, Class B Plan and Class C Plan which pertain to that class. An order has
been received from the SEC permitting the issuance and sale of multiple classes
of shares representing interests in the Fund's existing portfolio. Shares issued
are fully paid, 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,
23
<PAGE> 26
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.
24
<PAGE> 27
- --------------------------------------------------------------------------------
APPENDIX -- RATINGS OF COMMERCIAL PAPER AND SENIOR SECURITIES
- --------------------------------------------------------------------------------
Description of Standard & Poor's Corporation ("S&P") and Moody's Investors
Service ("Moody's") commercial paper and senior securities ratings.
A AND PRIME COMMERCIAL PAPER RATINGS:
Commercial paper rated A by S&P has the following characteristics. Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated
"A" or better, although in some cases "BBB" credits may be allowed. The issuer
has access to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. The rating A is described by S&P as the investment grade category,
the highest rating classification. Relative strength or weakness of the above
factors determine whether the issuer's commercial paper is rated A-1, A-2 or
A-3. The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong. Issues rated "A-1+" are those of an overwhelming degree
of credit protection. The "A-2" designation indicates that the capacity for
timely payment is strong.
Among the factors considered by Moody's in assigning commercial paper ratings
are the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative differences in
strengths and weaknesses in respect of these criteria establish a rating in one
of three classifications. The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Its other two ratings, Prime-2 and Prime-3 are
designated Higher Quality and High Quality, respectively. Issuers rated
"Prime-1" are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers rated "Prime-2" have a strong capacity for
repayment of short-term promissory obligations.
MOODY'S CORPORATE BOND RATINGS:
AAA -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
period of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
25
<PAGE> 28
CA -- Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate 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 mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
S&P'S CORPORATE BOND RATINGS:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -- B -- CCC -- CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PREFERRED STOCK RATINGS:
Both Moody's and S&P use the same designations for corporate bonds as they do
for preferred stock except in the case of Moody's preferred stock ratings the
initial letter rating is not capitalized. While the descriptions are tailored
for preferred stocks the relative quality distinctions are comparable to those
described above for corporate bonds.
26
<PAGE> 29
- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------
August 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
CORPORATE OBLIGATIONS
CONSUMER DISTRIBUTION
$2,000,000 Grand Metropolitan
Investment Corp., 8.00%,
9/15/22
CONSUMER NON-DURABLES
2,000,000 Coca-Cola Enterprises, Inc.,
8.50%, 2/1/12
CONSUMER SERVICES
6,215,000 Columbia Pictures
Entertainment, Inc., 9.875%,
2/1/98
1,250,000 Harcourt General, Inc.,
8.875%, 6/1/22
6,000,000 News America Holdings, Inc.,
8.875%, 4/26/23
ENERGY
6,300,000 Ashland Oil, Inc., 8.80%,
11/15/12
8,500,000 Coastal Corp., 11.75%,
6/15/06
9,000,000 Occidental Petroleum Corp.,
9.625%, 7/1/99
6,300,000 PDV America, Inc., 7.875%,
8/1/03
5,000,000 Phillips Petroleum Corp.,
8.86%, 5/15/22
Union Oil Co. of California
4,000,000 9.125%, 2/15/06
3,000,000 9.25%, 2/1/03
FINANCE
39,360 Bank of America, 11.875%,
4/1/10
5,000,000 Beaver Valley II Funding
Corp., 9.00%, 6/1/17
4,500,000 First PV Funding Corp.,
10.30%, 1/15/14
3,819,000 PNPP II Funding Corp.,
8.51%, 11/30/06
4,500,000 Ryder Systems, Inc., 9.25%,
5/15/01
1,500,000 United Illuminating Co.,
10.24%, 1/2/20
PRODUCER MANUFACTURING
5,000,000 John Deere Credit Corp.,
9.625%, 11/1/98
RAW MATERIAL/PROCESSING INDUSTRIES
4,000,000 Crown Cork & Seal Co., Inc.,
8.00%, 4/15/23
4,000,000 Federal Paper Board, Inc.,
8.875%, 7/1/12
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
$3,000,000 Georgia-Pacific Corp.,
9.50%, 2/15/18
500,000 James River Corp., 8.375%,
11/15/01
300,000 Owens-Corning Fiberglass
Corp., 9.375%, 6/1/12
1,300,000 Scott Paper Co., 8.80%,
5/15/22
TECHNOLOGY
5,000,000 International Business
Machines Corp., 7.50%,
6/15/13
2,000,000 Tele-Communications, Inc.,
9.25%, 1/15/23
TRANSPORTATION
*3,000,000 AMR Corp., 9.50%, 5/15/01
750,000 CSX Corp., 8.625%, 5/15/22
Kansas City Southern
Industries, Inc.
1,500,000 7.875%, 7/1/02
700,000 8.80%, 7/1/22
5,000,000 United Airlines, Series
1991-A, 10.02%, 3/22/14
UTILITIES
Arizona Public Service Co.
1,000,000 8.75%, 1/15/24
2,000,000 9.50%, 4/15/21
2,300,000 Cleveland Electric
Illuminating Co., 10.00%,
6/1/20
9,800,000 Commonwealth Edison Co.,
8.25%, 12/1/07
1,720,000 Connecticut Yankee Atomic
Power, Series A, 12.00%,
6/1/00
1,605,000 Consumers Power Co., 8.875%,
11/15/99
1,000,000 Gulf States Utilities,
8.94%, 1/1/22
Long Island Lighting Co.,
1,000,000 9.00%, 11/1/22
4,000,000 9.75%, 5/1/21
1,500,000 Niagra Mohawk Power Corp.,
8.50%, 7/15/23
2,500,000 Texas Utilities Electric
Co., 8.875%, 2/1/22
1,500,000 Union Electric Co., 8.00%,
12/15/22
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
CANADIAN GOVERNMENT OBLIGATIONS
$4,000,000 Province of Newfoundland,
9.00%, 10/15/21
4,650,000 Province of Nova Scotia,
8.25%, 7/30/22
Province of Saskatchewan
650,000 8.00%, 2/1/13
2,000,000 8.50%, 7/15/22
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS
$7,825,000 Repurchase Agreement with
Salomon Brothers, Inc.,
dated 8/31/94, 4.90% due
9/1/94 (collateralized by
U.S. Government obligations
in a pooled cash account)
repurchase proceeds
$7,826,065
1,000,000 United States Treasury Bill,
4.40%, 9/22/94
</TABLE>
* A portion of this security, with a market value of approximately $2.1 million
was maintained in a segregated account and placed as collateral for futures
contracts
<PAGE> 31
PART B: STATEMENT OF ADDITIONAL INFORMATION
AMERICAN CAPITAL CORPORATE BOND FUND, INC.
DECEMBER 15, 1994
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 December 15,
1994. A prospectus may be obtained without charge by calling or writing American
Capital Marketing, Inc. at 2800 Post Oak Boulevard, Houston, Texas 77056 at
(800) 421-5666.
TABLE OF CONTENTS
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GENERAL INFORMATION........................................................... 2
RISK FACTORS.................................................................. 2
U.S. GOVERNMENT SECURITIES.................................................... 3
REPURCHASE AGREEMENTS......................................................... 3
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS................................ 3
INVESTMENT RESTRICTIONS....................................................... 8
DIRECTORS AND EXECUTIVE OFFICERS.............................................. 9
INVESTMENT ADVISORY AGREEMENT................................................. 11
DISTRIBUTOR................................................................... 12
DISTRIBUTION PLANS............................................................ 13
TRANSFER AGENT................................................................ 14
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 14
DETERMINATION OF NET ASSET VALUE.............................................. 15
PURCHASE AND REDEMPTION OF SHARES............................................. 16
EXCHANGE PRIVILEGE............................................................ 19
CHECK WRITING PRIVILEGE....................................................... 20
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.................................... 20
PRIOR PERFORMANCE INFORMATION................................................. 22
OTHER INFORMATION............................................................. 23
FINANCIAL STATEMENTS.......................................................... 23
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GENERAL INFORMATION
American Capital Asset Management, Inc. (the "Adviser"), American Capital
Marketing, Inc. (the "Distributor") and Advantage Capital Corporation, a retail
broker-dealer affiliate of the Distributor, are wholly owned subsidiaries of
American Capital Management & Research, Inc. ("ACMR"). All of the outstanding
voting stock of ACMR is owned by Primerica Finance Corporation, which is a
wholly owned subsidiary of Associated Madison Companies, Inc. ("Associated
Madison"). Associated Madison is a wholly owned subsidiary of The Travelers Inc.
See "The Fund and Its Management" in the Prospectus.
As of December 2, 1994, no person was known to own beneficially or to hold
of record five percent or more of the outstanding Class A shares of the Fund,
except the following: 23.25% of the outstanding Class A shares of the Fund were
held of record by American Capital Trust Company, 2800 Post Oak Boulevard,
Houston, Texas 77056.
As of December 2, 1994, no person was known to own beneficially or to hold
of record five percent or more of the outstanding Class B shares of the Fund,
except the following: 24.70% of the outstanding Class B shares of the Fund were
held of record by American Capital Trust Company, 2800 Post Oak Boulevard,
Houston, Texas 77056; 5.68% of the outstanding Class B shares of the Fund were
held of record by National Financial Services, 200 Liberty, One World Financial
Center, New York, New York 10281-1003; and 14.99% of the outstanding Class B
shares of the Fund were held of record by Smith Barney Inc. ("Smith Barney"),
388 Greenwich Street, New York, New York 10013-2375.
As of December 2, 1994, no person was known to own beneficially or to hold
of record five percent or more of the outstanding Class C shares of the Fund
except the following: 21.90% of the outstanding Class C shares of the Fund were
held of record by Merrill Lynch Pierce Fenner & Smith, Inc., Mutual Fund
Operations, 4800 Deer Lake Drive East, 3rd Floor, Jacksonville, Florida
32246-6484; and 50.04% of the outstanding Class C shares of the Fund were held
of record by Smith Barney, 388 Greenwich Street, New York, New York 10013-2375.
RISK FACTORS
The following special considerations are additional risk factors associated
with the Fund's investments in lower rated debt securities.
1. Youth and Growth of the Lower Rated Debt Securities Market. Past
experience may not provide an accurate indication of future performance
of the market for lower-rated debt securities, particularly during
periods of economic recession. An economic downturn or increase in
interest rates is likely to have a greater negative effect on this
market, the value of lower rated debt securities in the Fund's
portfolio, the Fund's net asset value and the ability of the bonds'
issuers to repay principal and interest, meet projected business goals
and obtain additional financing than on higher rated securities. These
circumstances also may result in a higher incidence of defaults than
with respect to higher rated securities. An investment in this Fund may
be considered more speculative than investment in shares of a fund which
invests only in higher rated debt securities.
2. Sensitivity to Interest Rate and Economic Changes. Prices of lower rated
debt securities may be more sensitive to adverse economic changes or
corporate developments than higher rated investments. Debt securities
with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities.
Market prices of lower rated debt securities structured as zero coupon
or pay-in-kind securities are affected to a greater extent by interest
rate changes and may be more volatile than securities which pay interest
periodically and in cash. Where it deems it appropriate and in the best
interests of Fund shareholders, the Fund may incur additional expenses
to seek recovery on a debt security on which the issuer has defaulted
and to pursue litigation to protect the interests of security holders of
its portfolio companies.
3. Liquidity and Valuation. Because the market for lower rated securities
may be thinner and less active than for higher rated securities, there
may be market price volatility for these securities and limited
liquidity in the resale market. Nonrated securities are usually not as
attractive to as many buyers as
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rated securities are, a factor which may make nonrated securities less
marketable. These factors may have the effect of limiting the
availability of the securities for purchase by the Fund and may also
limit the ability of the Fund to sell such securities at their fair
value either to meet redemption requests or in response to changes in
the economy or the financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of lower rated debt securities, especially in a
thinly traded market. To the extent the Fund owns or may acquire
illiquid or restricted lower rated securities, these securities may
involve special registration responsibilities, liabilities and costs,
and liquidity and valuation difficulties. Changes in values of debt
securities which the Fund owns will affect its net asset value per
share. If market quotations are not readily available for the Fund's
lower rated or nonrated securities, these securities will be valued by a
method that the Fund's Board of Directors believes accurately reflects
fair value. Judgment plays a greater role in valuing lower rated debt
securities than with respect to securities for which more external
sources of quotations and last sale information are available.
4. Congressional Action. New and proposed laws may have an impact on the
market for lower rated debt securities.
5. Taxation. Special tax considerations are associated with investing in
lower rated debt securities structured as zero coupon or pay-in-kind
securities. The Fund accrues income on these securities prior to the
receipt of cash payments. The Fund must distribute substantially all of
its income to its shareholders to qualify for pass-through treatment
under the tax laws and may, therefore, have to dispose of its portfolio
securities to satisfy distribution requirements.
U.S. GOVERNMENT SECURITIES
The U. S. Government securities in which the Fund may invest include
obligations issued or guaranteed as to principal and interest by the U. S.
Government, its agencies and instrumentalities which are supported by any of the
following: (a) the full faith and credit of the U. S. Government, (b) the right
of the issuer to borrow an amount limited to a specific line of credit from the
U. S. Government, (c) discretionary authority of the U.S. Government agency or
instrumentality, or (d) the credit of the instrumentality. Such agencies or
instrumentalities include, but are not limited to, the Federal National Mortgage
Association, the Government National Mortgage Association, Federal Land Banks,
and the Farmer's Home Administration.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities marked to market daily at not less than the repurchase
price. The underlying securities (normally securities of the U.S. Government, or
its agencies and instrumentalities), may have maturity dates exceeding one year.
The Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. See "Investment
Practices and Restrictions -- Repurchase Agreements" in the Prospectus for
further information.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option writing program and dividend or interest
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income yields on portfolio securities vary as economic and market conditions
change. Actively writing options on portfolio securities is likely to result in
a substantially higher portfolio turnover rate than that of most other
investment companies.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund would write call
options only on a covered basis, which means that, at all times during the
option period, the Fund would own or have the right to acquire securities of the
type that it would be obligated to deliver if any outstanding option were
exercised.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or U.S. Government securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, which would not
close out its position as a writer, but would provide an asset of equal value to
its obligations under the option written. If the Fund is not able to enter into
a closing purchase transaction or to purchase an offsetting option with respect
to an option it has written, it will be required to maintain the securities
subject to the call or the collateral underlying the put until a closing
purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others, regardless of whether such options are written on one or
more accounts or through one or more brokers. An exchange may order the
liquidation of positions found to be in violation of those limits, and it may
impose other sanctions or restrictions. These position limits may restrict the
number of options the Fund may be able to write.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital appreciation. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant
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risk of losing the entire premium if the price of the underlying security did
not rise sufficiently, or if it did not do so before the option expired.
Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. Alternatively, put options could be purchased
for capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
FUTURES CONTRACTS
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."
A corporate 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 difference between the corporate bond index
value at the close of the last trading day of the contract and the price at
which the futures contract is originally struck.
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 will be 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, will be made on a daily basis as the price of the underlying
securities 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 has purchased a futures contract and the price
of the underlying security has risen, that position will have increased in
value, and the Fund will receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the value of the underlying security has declined, the
position would be less valuable, and the Fund would be required to make a
variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract would serve
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
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underlying security, the sale of futures contracts would substantially reduce
the risk to the Fund of a market decline and, by so doing, provide 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 listed options, 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 or 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 than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities 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 underlying the
futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures markets 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.
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 bonds 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 movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it
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may have to sell portfolio securities at a time when it is disadvantageous to do
so in order to meet the daily variation margin.
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 as 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 price of the underlying security, when the use of
any option on a future would result in a loss to the Fund when the use of a
future would not.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS
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 U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the
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price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of its outstanding shares. Such majority is defined by the 1940 Act as
the lesser of (i) 67% or more of the voting securities present in person or by
proxy at the meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities. In addition to the fundamental investment
limitations set forth in the Fund's Prospectus, the Fund shall not:
1. Invest more than five percent of the value of its total assets in
companies having a record, together with predecessors, of less than
three years of continuous operation.
2. Borrow money, except for temporary or emergency purposes, and then not
in excess of five percent of its total assets taken at cost, or
mortgage, pledge or hypothecate its assets to secure such borrowing
except in an amount taken at market not exceeding ten percent of its
total assets taken at cost. Notwithstanding the foregoing, the Fund may
engage in transactions in options, futures contracts and related
options, segregate or deposit assets to cover or secure options written
and make margin deposits and payments for futures contracts and related
options.
3. Underwrite securities of other issuers, except insofar as the Fund may
be deemed to be an underwriter for purposes of the Securities Act of
1933 (the "1933 Act") in the resale of any unregistered securities owned
by the Fund; provided, however, the Fund shall not purchase any
unregistered securities if immediately after and as a result of such
purchase of such securities, together with any other illiquid securities
held by the Fund, would constitute more than ten percent of the Fund's
total assets.
4. Lend any of its assets except for the following types of transactions:
(a) loans of portfolio securities up to ten percent of the value of the
Fund's net assets, taken at market, collateralized at 100% each business
day, subject to immediate termination if the collateral is not
maintained, or on five business days' notice by the Fund or not less
than one business day's notice by the borrower, on which the Fund will
receive all income accruing on the borrowed securities during the loan
as described under "Investment Practices and Restrictions -- Loans of
Portfolio Securities"; (b) the purchase of debt securities publicly
distributed or of a type customarily purchased by institutional
investors; and (c) the purchase of securities subject to repurchase
agreements. See "Investment Practices and Restrictions -- Repurchase
Agreements" in the Prospectus.
5. Purchase real estate or interests in real estate (except through the
purchase of liquid securities of real estate investment trusts) or
commodities or commodity contracts, except that the Fund may enter into
transactions in futures contracts or related options.
6. Purchase securities on margin, but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities, and it may engage in transactions in options, futures
contracts and related options and make margin payments in connection
therewith.
7. Make short sales of securities or maintain a short position, but it may
engage in transactions in options, futures contracts and related
options.
8. Invest more than 25% of the value of its total assets in the securities
of issuers all of which conduct their principal business activities in
the same industry; provided that neither all utility companies, as a
group, nor all finance companies, as a group, are considered a single
industry for purposes of this policy.
9. Purchase the securities of any other investment company except in
connection with a merger with another investment company.
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10. Issue any bonds, notes, debentures or other obligations senior to
shares of its capital stock. Notwithstanding the foregoing, the Fund
may engage in transactions in options, futures contracts and related
options and make margin deposits and payments in connection therewith.
11. Hold the securities of a company if any officer or director of the Fund
or its investment adviser owns more than 1/2% interest in it, or if
the officers and directors together own more than a five percent
interest.
12. Invest for the purpose of exercising control or management.
13. Invest more than five percent of its total assets at market value in
any one issuer or purchase more than ten percent of any class of
securities of any issuer (excluding in both cases the United States
Government).
14. Invest more than ten percent of its net assets (determined at the time
of investment) in illiquid securities and repurchase agreements which
have a maturity of longer than seven days.
The Fund shall not buy from or sell to any of its officers or directors or
their affiliated firms any securities other than Fund shares, but they or their
firms may serve the Fund as brokers for standard commissions if the affiliation
is disclosed and a majority of the directors who have no such interest approve
it.
In addition to the fundamental policies which may only be changed by
shareholders, commitments have been made to certain states that, while the
Fund's shares are registered for sale there, the Fund will not invest in
securities of limited marketability and the Fund will not mortgage, pledge or
hypothecate more than one and one-half percent of its assets to secure temporary
borrowings. Consistent with its investment objectives, the Fund may make
additional commitments more restrictive than its fundamental policies. Should
the Fund determine in the future that a commitment is no longer in the best
interests of the Fund and its shareholders, it will revoke its commitment by
withdrawing its shares from sale in the state to which the commitment was made.
DIRECTORS AND EXECUTIVE OFFICERS
The Fund's Directors and executive officers and their principal occupations
during the past five years are listed below. All persons named as Directors also
serve in similar capacities for other funds advised by the Adviser as indicated
below.
FERNANDO SISTO, Chairman of the Board and Director. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991. 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/life sciences); Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of Art
(community art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business Performance
Group, London School of Economics; formerly Director, First Sterling Bank;
formerly Director and Executive Vice President, LFC Financial Corporation (lease
financing).(1)
ROGER HILSMAN, Director. 251-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly Professor of Government and International Affairs, Columbia
University.(1)
*DON G. POWELL, President and Director. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. Chairman, Chief Executive Officer and Director of ACMR;
President, Chief Executive Officer and Director of the Adviser; Executive Vice
President and Director of the Distributor.(1)(2)(4)
9
<PAGE> 40
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 Travelers);
formerly Chairman of the Board and Chief Executive Officer, old Primerica
Corporation (American Can Company); formerly Director, James River Corporation
(paper products); Trustee and formerly President, Whitney Museum of American
Art; Chairman, Institute for Educational Leadership, Inc., Board of Visitors,
Graduate School of The City University of New York, Academy of Political
Science; Committee for Economic Development; Director, Public Education Fund
Network, Fund for New York City Public Education; Trustee, Barnard College;
Member, Dean's Council, Harvard School of Public Health; Member, Mental Health
Task Force, Carter Center.(1)
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)
PAUL A. HILSTAD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President, General Counsel, Corporate Secretary and Director of
ACMR; Senior Vice President and General Counsel of the Adviser; Vice President
of the Distributor; formerly Vice President and Deputy General Counsel of IDS
Financial Services Inc.(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)
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President-Chief Investment Officer/Fixed Income Department
and Director of the Adviser; Executive Vice President and Director of ACMR.(4)
DAVID R. TROTH, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of the Adviser; also serves as Vice President
of American Capital Bond Fund, Inc., American Capital Reserve Fund, Inc., the
Money Market Portfolio of American Capital Life Investment Trust and the Money
Market Fund of Common Sense Trust.(4)
J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel and Compliance
Review Officer of the Adviser.(4)
PAUL R. WOLKENBERG, Vice President, 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; Executive Vice President and
Director of ACMR; President, Chief Operating Officer and Director of American
Capital Services, Inc.; Executive Vice President, Chief Operating Officer and
Director of American Capital Trust Company; Executive Vice President and
Director of American Capital Companies Shareholder Services, Inc. ("ACCESS");
Executive Vice President, Chief Operating Officer and Director of the
Distributor.(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 legal counsel of the Fund.
(1) Also a director or trustee of American Capital Comstock Fund, Inc., American
Capital Emerging Growth Fund, Inc., American Capital Enterprise Fund, Inc.,
American Capital Equity Income Fund,
10
<PAGE> 41
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 Texas Municipal Securities, Inc.,
American Capital U.S. Government Trust for Income, American Capital
Utilities Income Fund, Inc. and American Capital World Portfolio Series,
Inc.
(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser, and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as subadviser for eight of
the portfolios.
(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.
(4) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.
(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc. and FPA Perennial
Fund, Inc., investment companies not advised by the Adviser, and TCW
Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.
The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto, may act for the Board of Directors between Board meetings except where
board action is required by law.
The directors and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the last fiscal year ended August
31, 1994 the directors who were not affiliated with the Adviser or its parent
received as a group $11,854 in directors' fees from the Fund in addition to
certain out-of-pocket 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 last fiscal year the Fund paid legal fees of $13,025 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 September 6, 1989 (the "Advisory Agreement"). Under the Advisory
Agreement, the Fund retains the Adviser to manage the investment of the Fund's
assets including the placing of orders for the purchase and sale of portfolio
securities. The Adviser obtains and evaluates economic, statistical and
financial information to formulate and implement the Fund's investment programs.
The Adviser also furnishes the services of the Fund's President and such other
executive and clerical personnel as are necessary to prepare the various reports
and statements and conduct the Fund's day-to-day operations. The Fund, however,
bears the cost of its accounting services, which includes maintaining its
financial books and records and calculating its daily net asset value. The costs
of such accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser. A
portion of these amounts is paid to the Adviser or its parent in reimbursement
of personnel, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services provided by the Adviser are at
cost. The Fund also pays shareholder service agency fees, distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders and all other ordinary expenses not specifically assumed by the
Adviser. The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any actions or omissions if it acted without willful
misfeasance, bad faith, negligence or reckless disregard of its obligations.
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 at the following annual rates:
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<PAGE> 42
0.50% on the first $150 million of average daily net assets; 0.45% on the next
$100 million of average daily net assets; 0.40% on the next $100 million of
average daily net assets; and 0.35% on the excess over $350 million of average
daily net assets.
The Fund's average net assets are determined by taking the average of all
determinations of the net assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser will be reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of ACMR in
connection with the purchase and sale of portfolio investments of the Fund, less
any direct expenses incurred by such subsidiary of ACMR, in connection with
obtaining such payments. Although Smith Barney and Robinson Humphrey, Inc.
("Robinson Humphrey") are affiliates, they are not subsidiaries of ACMR and thus
are not subject to the foregoing sentence. The Adviser agrees to use its best
efforts to recapture tender solicitation fees and exchange offer fees for the
Fund's benefit and to advise the Board of Directors of the Fund of any other
commissions, fees, brokerage or similar payments which may be possible under
applicable laws for the Adviser or any other direct or indirect majority owned
subsidiary of ACMR 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 one and one-half
percent of the first $30 million of the Fund's average net assets, plus one
percent of any excess over $30 million, the compensation due the Adviser will be
reduced by the amount of such excess and that, if a reduction in and refund of
the advisory fee is insufficient, the Adviser will pay the Fund monthly an
amount sufficient to make up the deficiency, subject to readjustment during the
year. Ordinary business expenses do not include (1) interest and taxes, (2)
brokerage commissions, (3) certain litigation and indemnification expenses as
described in the Advisory Agreement and (4) payments made by the Fund pursuant
to the distribution plans (described herein). 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.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Directors or (ii) by
vote of a majority of the Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of the Directors who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement provides that it shall
terminate automatically if assigned and that it may be terminated without
penalty by either party on not more than 60 days', nor less than 30 days'
written notice.
During the fiscal years ended August 31, 1992, 1993 and 1994, the Adviser
received $914,498, $934,571 and $922,111, respectively, in advisory fees from
the Fund. For such periods the Fund paid $60,539, $65,046 and $76,774,
respectively, for accounting services.
DISTRIBUTOR
American Capital Marketing, Inc. (the "Distributor"), acts as the principal
underwriter of the Fund's shares pursuant to a written agreement, dated October
1, 1993 (the "Underwriting Agreement"). The Distributor has the exclusive right
to distribute shares of the Fund through affiliated and unaffiliated dealers.
The Distributor's obligation is an agency or "best efforts" arrangement under
which the Distributor is required to take and pay for only such shares of the
Fund as may be sold to the public. The Distributor is not obligated to sell any
stated number of shares. The Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost and
expense of supplemental sales literature, promotion and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Fund's Board of Directors or by a vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Directors who
are not parties to the Underwriting Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
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<PAGE> 43
During the fiscal years ended August 31, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $326,657,
$340,101 and $225,051, respectively. Of such totals, the amount retained by the
Distributor was $37,664, $50,942 and $31,573, respectively. The remainder was
reallowed to dealers. Of such dealer reallowances, $97,110, $107,761 and
$59,712, respectively, was received by Advantage Capital Corporation, an
affiliated dealer of the Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan", "Class B Plan" and "Class C
Plan", respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Directors have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payment to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares 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 conducting
and organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses. Such reimbursements are subject to the maximum sales
charge limits specified by the National Association of Securities Dealers, Inc.
("NASD").
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and form of
servicing agreement and selling group agreement was approved by the Directors,
including a majority of the Directors who are not interested
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<PAGE> 44
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 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 Independent Directors.
Each Plan may be terminated by vote of a majority of the Independent
Directors, or by vote of a majority of the outstanding voting shares of the
Fund. 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 August 31, 1994, the Fund's aggregate expenses
under the Class A Plan were respectively $343,858 or .20% 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 offering of Class B shares commenced on
September 28, 1992. For the fiscal year ended August 31, 1994, the Fund's
aggregate expenses under the Class B Plan were $115,341 or 1.00% of the Class B
shares' average net assets. Such expenses were paid to reimburse the Distributor
for the following payments: $86,506 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 $28,835 for fees paid to Service Organizations for
servicing Class B shareholders and for administering the Class B Plan. The
offering of Class C shares commenced August 30, 1993. For the fiscal year ended
August 31, 1994, the Fund's aggregate expenses under the Class C Plan were
$11,962 or 1.00% of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $8,972 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 $2,990 for
fees paid to Service Organizations for servicing Class C shareholders and for
administering the Class C Plan.
TRANSFER AGENT
For the fiscal year ended August 31, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$363,842 for these services. These services are provided at cost plus a profit.
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 paid on such transactions. As most transactions made by the Fund are
principal transactions at net prices, the Fund incurs little or no brokerage
costs. Portfolio securities are normally purchased directly from the issuer or
from an underwriter or market maker for the securities. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter and purchases from dealers serving as market
makers include the spread between the bid and asked price. Sales to dealers are
effected at bid prices.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to
14
<PAGE> 45
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 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.
Subject to seeking best execution and such other policies as the Board of
Directors may determine, the Adviser may consider sales of shares of the Fund as
a factor in the selection of dealers to execute portfolio transactions for the
Fund.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution and such other policies as the Board of Directors may
determine, the Adviser may consider sales of shares of the Fund and of the other
American Capital mutual funds as a factor in the selection of firms to execute
portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. The Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations among the Fund and other
advisory accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and opinions of the persons responsible
for recommending the investment.
The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, Travelers.
Smith Barney, a wholly owned subsidiary of Travelers, is such an affiliated
person. Effective August 2, 1993, Robinson Humphrey, a wholly owned subsidiary
of Smith Barney, became an affiliate of Travelers (then known as Primerica). In
addition, from December 15, 1988 through February 21, 1992, Dain Bosworth, Inc.
("Dain Bosworth") and Rausher Pierce Refsnes, Inc. ("Rauscher Pierce") were
affiliates of Travelers (then known as Primerica); from September 10, 1987 to
March 27, 1992, The Fox-Pitt, Kelton Group S.A. ("Fox-Pitt") was an affiliate of
Travelers (then known as Primerica); and from 1985 to September 30, 1992,
Jefferies & Company, Inc. ("Jefferies") was deemed an affiliate of Travelers
(then known as Primerica). During the fiscal year ended August 31, 1994, the
Fund conducted no affiliated brokerage transactions with Dain Bosworth,
Fox-Pitt, Jefferies, Rauscher Pierce, Robinson Humphrey or Smith Barney. The
negotiated commission paid to an affiliated broker on any transaction would be
comparable to that payable to a non-affiliated broker in a similar transaction.
The 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. For the fiscal years ended
August 31, 1992, 1993 and 1994, the Fund paid $-0-, $-0- and $626, respectively,
in brokerage commissions. During the year ended August 31, 1994 the Fund paid
$-0- in brokerage commissions on transactions totalling $-0- to brokers selected
primarily on the basis of research services provided to the Adviser.
DETERMINATION OF NET ASSET VALUE
The net asset value of Fund shares is computed by dividing the value of all
securities, cash and other assets (including accrued interest), less liabilities
(including accrued expenses), by the number of shares outstanding. Such
computation is made as of the close of business each day the New York Stock
Exchange (the "Exchange") is open (currently 4:00 p.m., New York time). The
Exchange is currently closed on
15
<PAGE> 46
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 assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.
MULTIPLE PRICING SYSTEM
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements,
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 1933 Act.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of Fund shares next computed
following receipt of payment by ACCESS. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purpose of determining eligibility
for volume discounts, spouses and their minor children are treated as a single
purchaser, as is a trustee or other fiduciary purchasing for a single fiduciary
account. An aggregate investment includes all shares of the Fund and all shares
of certain other participating American Capital mutual funds described in the
Prospectus (the "Participating Fund"), 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
16
<PAGE> 47
example, an investor has previously purchased and still holds Class A shares of
the Fund and shares of other Participating Funds having a current offering price
of $80,000, and that person purchases $30,000 of additional Class A shares of
the Fund, the charge applicable to the $30,000 purchase would be 4.00% of the
offering price. The same reduction is applicable to purchases under a Letter of
Intent as described in the next paragraph. THE DEALER MUST NOTIFY THE
DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY
FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION
MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. THE REDUCED SALES
CHARGE WILL NOT BE APPLIED IF SUCH NOTIFICATION IS NOT FURNISHED AT THE TIME OF
THE ORDER. The reduced sales charge will also not be applied should a review of
the records of the Distributor or ACCESS fail to confirm the investor's
representations concerning his holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can become subject to the
Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the investor is required to pay the
difference between sales charges otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrow shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the investor in shares of the Fund, the amount of excess sales
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) a tax-exempt
organization enumerated in Section 501(c)(3) or (13) of the Code.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For investments in the amount of $1,000,000 or more of Class A shares of
the Fund ("Qualified Purchaser"), the front-end sales charge will be waived and
a contingent deferred sales charge ("CDSC -- Class A") of 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
17
<PAGE> 48
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 Qualified Purchasers
(e.g., in retirement plans qualified under Section 401(a) of the Code and
deferred compensation plans under Section 457 of the Code) required to obtain
funds to pay distributions to beneficiaries pursuant to the terms of the plans.
Such payments include, but are not limited to, death, disability, retirement or
separation from service. No CDSC -- Class A will be imposed on exchanges between
funds. For purposes of the CDSC -- Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales-charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent will 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 are 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 on to the holding period of the shares
acquired in the transfer or rollover for purposes of determining what, if any,
CDSC -- Class B and C is applicable in the event that such acquired shares are
redeemed following the
18
<PAGE> 49
transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("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) 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.
(e) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder Services Exchange
Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. ACMR 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.
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
19
<PAGE> 50
predecessors shall be included. If the exchanged security was acquired through
reinvestment, that security is deemed to have been sold with a sales charge rate
equal to the rate previously paid on the security on which the dividend or
distribution was paid. If a shareholder exchanges less than all of his
securities, the security upon which the highest sales charge rate was previously
paid is deemed exchanged first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnership or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
its Class A, Class B and Class C shareholders and meet certain diversification
and other requirements. The per share dividends on Class B and Class C shares
will be lower than the per share dividends on Class A as a result of the
distribution fees 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).
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 gains net income for the twelve months ended October 31 of such year.
The Fund intends to distribute sufficient amounts to avoid liability for the
excise tax.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Any loss on the sale of Fund shares held for less than six months is
treated as a long-term capital loss to the extent of any long-term capital gain
distribution paid on such shares, subject to any exception that may be provided
by IRS regulations for losses incurred under certain systematic withdrawal
plans. All dividends and distributions are taxable to the shareholder whether or
not reinvested in shares. Shareholders are notified annually by the Fund as to
the federal tax status of dividends and distributions paid by the Fund.
20
<PAGE> 51
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 most of the Fund's net investment income is attributable to interest
income, none of its dividends qualify for the 70% dividends received deduction
for corporations. To qualify for the dividends received deduction, a corporate
shareholder must hold the shares on which the dividend is paid for more than 45
days.
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.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
law. Non-resident shareholders are urged to consult their own tax adviser
concerning the applicability of the United States withholding tax.
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 foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Code includes special rules applicable to certain listed options,
futures contracts and options on futures contracts which the Fund may write,
purchase or sell. Such options and contracts are classified as Section 1256
contracts under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other terminations of Section 1256
contracts is generally 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
("60/40 gain or loss"). Such contracts, when held by the Fund at the end of a
fiscal year, generally are required to be treated as sold at market value on the
last day of such fiscal year for federal income tax purposes
("marked-to-market"). Over-the-counter options are not classified as Section
1256 contracts and are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses recognized by the Fund from transactions
in over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by the Fund are exercised, the gain or loss realized on the
sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.
21
<PAGE> 52
A substantial portion of the Fund's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in 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 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.
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 reached to make any of
these elections.
PRIOR PERFORMANCE INFORMATION
The Fund's average annual total return for Class A shares of the Fund
(computed in the manner described in the Prospectus) for the one-year, five-year
and ten-year periods ended August 31, 1994, was -8.17%, 7.06% and 10.20%,
respectively. The Fund's average annual total return (computed in the manner
described in the Prospectus) for Class B shares of the Fund for the one-year and
the one-year and eleven month period (the initial offering of Class B shares)
ended August 31, 1994 was -7.98% and 1.50%, respectively. The Fund's average
annual total return (computed in the manner described in the Prospectus) for
Class C shares of the Fund for the one-year period ended August 31, 1994 was
- -5.28%. 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 objectives
and policies as well as the risks incurred in the Fund's investment practices.
The annualized current yield for Class A shares, Class B shares and Class C
shares of the Fund for the 30-day period ending August 31, 1994 was 6.72%, 6.19%
and 6.22%, respectively. The yield for Class A, Class B and Class C shares 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 and total return are computed separately for Class A, Class B and
Class C shares.
From time to time ACMR will announce the results of its monthly polls of
U.S. investor intentions -- the American Capital Index of Investor Intentions
and the American Capital Mutual Fund Index -- which polls measure how Americans
plan to use their money.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by American Capital in 1994.
The 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;
and (3) 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.
22
<PAGE> 53
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders
and annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston,
Texas 77002, the independent accountants for the Fund, perform an annual audit
of the Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual Report to shareholders, including the related report of independent
accountants on the August 31, 1994 financial statements, are hereby included in
the Statement of Additional Information.
The following information is not included in the Annual Report. This
example 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 on August
31, 1994.
<TABLE>
<CAPTION>
AUGUST 31,
1994
----------
<S> <C>
Net Asset Value Per Class A Share $ 6.62
Class A Per Share Sales Charge -- 4.75% of offering price
(4.99% of net asset value per share) $ .33
Class A Per Share Offering Price the Public $ 6.95
</TABLE>
23
<PAGE> 54
INVESTMENT PORTFOLIO
August 31, 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Obligations 83.9%
CONSUMER DISTRIBUTION 1.1%
$ 2,000,000 Grand Metropolitan Investment Corp., 8.00%, 9/15/22.............. $ 1,955,800
-------------
CONSUMER NON-DURABLES 1.2%
2,000,000 Coca-Cola Enterprises, Inc., 8.50%, 2/1/12....................... 2,085,200
-------------
CONSUMER SERVICES 7.9%
6,215,000 Columbia Pictures Entertainment, Inc., 9.875%, 2/1/98............ 6,761,299
1,250,000 Harcourt General, Inc., 8.875%, 6/1/22........................... 1,313,875
6,000,000 News America Holdings, Inc., 8.875%, 4/26/23..................... 5,813,400
-------------
TOTAL CONSUMER SERVICES........................................ 13,888,574
-------------
ENERGY 25.0%
6,300,000 Ashland Oil, Inc., 8.80%, 11/15/12.............................. 6,573,420
8,500,000 Coastal Corp., 11.75%, 6/15/06.................................. 9,479,880
9,000,000 Occidental Petroleum Corp., 9.625%, 7/1/99...................... 9,455,400
6,300,000 PDV America, Inc., 7.875%, 8/1/03............................... 5,807,970
5,000,000 Phillips Petroleum Corp., 8.86%, 5/15/22........................ 5,093,000
Union Oil Co. of California
4,000,000 9.125%, 2/15/06............................................... 4,344,400
3,000,000 9.25%, 2/1/03................................................. 3,277,500
-------------
TOTAL ENERGY.................................................. 44,031,570
-------------
FINANCE 10.7%
39,360 Bank of America, 11.875%, 4/1/10................................ 39,950
5,000,000 Beaver Valley II Funding Corp., 9.00%, 6/1/17................... 4,058,500
4,500,000 First PV Funding Corp., 10.30%, 1/15/14 ........................ 4,387,500
3,819,000 PNPP II Funding Corp., 8.51%, 11/30/06.......................... 3,770,881
4,500,000 Ryder Systems, Inc., 9.25%, 5/15/01............................. 4,866,750
1,500,000 United Illuminating Co., 10.24%, 1/2/20......................... 1,596,750
-------------
TOTAL FINANCE ............................................... 18,720,331
-------------
PRODUCER MANUFACTURING 3.1%
5,000,000 John Deere Credit Corp., 9.625%, 11/1/98........................ 5,418,500
-------------
RAW MATERIAL/PROCESSING INDUSTRIES 7.5%
4,000,000 Crown Cork & Seal Co., Inc., 8.00%, 4/15/23..................... 3,841,200
4,000,000 Federal Paper Board, Inc., 8.875%, 7/1/12....................... 4,105,600
3,000,000 Georgia-Pacific Corp., 9.50%, 2/15/18........................... 3,128,400
500,000 James River Corp., 8.375%, 11/15/01............................. 510,410
300,000 Owens-Corning Fiberglass Corp., 9.375%, 6/1/12.................. 321,870
1,300,000 Scott Paper Co., 8.80%, 5/15/22................................. 1,304,550
-------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES..................... 13,212,030
-------------
TECHNOLOGY 3.8%
5,000,000 International Business Machines Corp., 7.50%, 6/15/13 .......... 4,678,000
2,000,000 Tele-Communications, Inc., 9.25%, 1/15/23....................... 1,977,600
-------------
TOTAL TECHNOLOGY.............................................. 6,655,600
-------------
</TABLE>
F-1
<PAGE> 55
INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION 6.3%
$ *3,000,000 AMR Corp., 9.50%, 5/15/01........................................ $ 3,184,800
750,000 CSX Corp., 8.625%, 5/15/22....................................... 779,700
Kansas City Southern Industries, Inc.
1,500,000 7.875%, 7/1/02................................................. 1,513,050
700,000 8.80%, 7/1/22.................................................. 698,600
5,000,000 United Airlines, Series 1991-A, 10.02%, 3/22/14.................. 4,814,000
-------------
TOTAL TRANSPORTATION........................................... 10,990,150
-------------
UTILITIES 17.3%
Arizona Public Service Co.
1,000,000 8.75%, 1/15/24................................................. 987,900
2,000,000 9.50%, 4/15/21................................................. 2,069,720
2,300,000 Cleveland Electric Illuminating Co., 10.00%, 6/1/20.............. 2,236,060
9,800,000 Commonwealth Edison Co., 8.25%, 12/1/07.......................... 10,161,620
1,720,000 Connecticut Yankee Atomic Power, Series A, 12.00%, 6/1/00........ 1,868,607
1,605,000 Consumers Power Co., 8.875%, 11/15/99............................ 1,665,910
1,000,000 Gulf States Utilities, 8.94%, 1/1/22............................. 1,006,850
Long Island Lighting Co.
1,000,000 9.00%, 11/1/22................................................. 960,300
4,000,000 9.75%, 5/1/21.................................................. 4,140,000
1,500,000 Niagra Mohawk Power Corp., 8.50%, 7/15/23........................ 1,421,670
2,500,000 Texas Utilities Electric Co., 8.875%, 2/1/22..................... 2,552,750
1,500,000 Union Electric Co., 8.00%, 12/15/22.............................. 1,440,255
-------------
TOTAL UTILITIES................................................ 30,511,642
-------------
TOTAL CORPORATE OBLIGATIONS ($143,369,288)..................... 147,469,397
-------------
CANADIAN GOVERNMENT OBLIGATIONS 6.5%
4,000,000 Province of Newfoundland, 9.00%, 10/15/21........................ 4,221,600
4,650,000 Province of Nova Scotia, 8.25%, 7/30/22.......................... 4,564,905
Province of Saskatchewan
650,000 8.00%, 2/1/13.................................................. 634,992
2,000,000 8.50%, 7/15/22................................................. 2,002,020
-------------
TOTAL CANADIAN GOVERNMENT OBLIGATIONS
(Cost $11,202,259)........................................... 11,423,517
-------------
SHORT-TERM INVESTMENTS 5.0%
7,825,000 Repurchase Agreement with Salomon Brothers, Inc., dated 8/31/94,
4.90% due 9/1/94 (collateralized by U.S. Government obligations
in a pooled cash account) repurchase proceeds $7,826,065....... 7,825,000
1,000,000 United States Treasury Bill, 4.40%, 9/22/94...................... 997,323
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost $8,822,323)................. 8,822,323
-------------
TOTAL INVESTMENTS (Cost $163,393,870) 95.4%................... 167,715,237
Other assets and liabilities, net 4.6%........................ 7,999,620
-------------
NET ASSETS 100%.................................................. $ 175,714,857
-------------
</TABLE>
* A PORTION OF THIS SECURITY, WITH A MARKET VALUE OF APPROXIMATELY $2.1
MILLION, WAS MAINTAINED IN A SEGREGATED ACCOUNT AND PLACED AS COLLATERAL
FOR FUTURES CONTRACTS (SEE NOTE 1B)
F-2
<PAGE> 56
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $163,393,870) ......................... $167,715,237
Cash ..................................................................... 2,210
Receivable for investments sold .......................................... 5,321,944
Interest receivable ...................................................... 3,194,028
Receivable for Fund shares sold .......................................... 667,273
Other assets ............................................................. 5,583
------------
TOTAL ASSETS ........................................................... 176,906,275
------------
LIABILITIES
Payable for Fund shares redeemed ......................................... 490,078
Dividends payable......................................................... 425,014
Due to Distributor ....................................................... 78,380
Due to Adviser ........................................................... 71,854
Due to shareholder service agent ......................................... 37,108
Due to broker-variation margin ........................................... 5,000
Accrued expenses ......................................................... 83,984
------------
TOTAL LIABILITIES ...................................................... 1,191,418
------------
NET ASSETS, equivalent to $6.62 per share for Class A, Class B, and
Class C shares ......................................................... $175,714,857
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 24,173,867 Class A, 2,034,718 Class B and
345,070 Class C shares outstanding...................................... $ 265,536
Capital surplus........................................................... 195,614,472
Accumulated net realized loss on securities............................... (25,081,283)
Net unrealized appreciation (depreciation) of:
Investments............................................................. 4,321,367
Futures contracts....................................................... (33,688)
Undistributed net investment income....................................... 628,453
------------
NET ASSETS at August 31, 1994............................................. $175,714,857
============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 57
STATEMENT OF OPERATIONS
Year Ended August 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.................................................................. $ 15,344,209
------------
EXPENSES
Management fees ........................................................... 922,111
Shareholder service agent's fees and expenses.............................. 454,649
Service fees-Class A....................................................... 343,858
Distribution and service fees-Class B...................................... 115,341
Distribution and service fees-Class C ..................................... 11,962
Registration and filing fees .............................................. 94,294
Accounting services........................................................ 76,774
Reports to shareholders.................................................... 62,801
Audit fees................................................................. 36,989
Directors' fees and expenses .............................................. 13,543
Legal fees................................................................. 13,025
Custodian fees............................................................. 2,201
Miscellaneous.............................................................. 8,275
------------
Total expenses........................................................... 2,155,823
------------
Net investment income.................................................... 13,188,386
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on investments........................................... 554,255
Net realized gain on futures contracts..................................... 62,344
Net unrealized depreciation of investments during the year................. (20,879,602)
Net unrealized depreciation of futures contracts during the year........... (33,688)
------------
Net realized and unrealized loss on securities .......................... (20,296,691)
------------
Decrease in net assets resulting from operations........................ $ (7,108,305)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE> 58
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
------------------------------------
1994 1993
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of year................................ $199,175,777 $191,808,174
------------ ------------
OPERATIONS
Net investment income....................................... 13,188,386 13,793,865
Net realized gain on securities............................. 616,599 2,492,764
Net unrealized appreciation (depreciation) of securities
during the year............................................ (20,913,290) 8,075,550
------------ ------------
Increase (decrease) in net assets resulting from operations (7,108,305) 24,362,179
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A.................................................... (12,131,907) (13,787,341)
Class B.................................................... (720,427) (212,097)
Class C.................................................... (80,110) (3)
------------ ------------
(12,932,444) (13,999,441)
------------ ------------
NET EQUALIZATION DEBITS...................................... (98,274) (119,469)
------------ ------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A.................................................... 20,186,241 17,302,615
Class B.................................................... 11,819,720 8,559,815
Class C.................................................... 2,728,483 500
------------ ------------
34,734,444 25,862,930
------------ ------------
Proceeds from shares issued for dividends reinvested
Class A.................................................... 7,494,419 8,286,348
Class B.................................................... 495,396 154,180
Class C.................................................... 52,439 3
------------ ------------
8,042,254 8,440,531
------------ ------------
Cost of shares redeemed
Class A.................................................... (39,698,456) (36,571,503)
Class B.................................................... (6,040,076) (607,624)
Class C.................................................... (360,063) --
------------ ------------
(46,098,595) (37,179,127)
------------ ------------
Decrease in net assets resulting from Fund
share transactions....................................... (3,321,897) (2,875,666)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS............................ (23,460,920) 7,367,603
------------ ------------
NET ASSETS, end of year ..................................... $175,714,857 $199,175,777
============ ============
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS
Note 1-Significant Accounting Policies
American Capital Corporate Bond Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. Investment Valuations
Securities listed or traded principally on a national securities
exchange are valued at the last sale price. Unlisted securities and
listed securities for which the last sale price is not available are
valued at the mean between the last reported bid and asked prices.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days
when purchased are valued based on market quotations, until the
remaining days to maturity becomes less than 61 days. From such time,
until maturity, the investments are valued at amortized cost.
B. Futures Contracts
Transactions in futures contracts are utilized in strategies to
manage the market risk of the Fund's investments by increasing or
decreasing the percentage of assets effectively invested. The purchase
of a futures contract increases the impact of changes in the market
price of investments on net asset value. There is also a risk that the
market movement of such instruments may not be in the direction
forecasted.
Upon entering into futures contracts, the Fund maintains, in a
segregated account with its custodian, securities with a value equal
to its obligation under the futures contracts. A portion of these
funds is held as collateral in an account in the name of the broker,
the Fund's agent in acquiring the futures position. During the period
the futures contract is open, changes in the value of the contract
("variation margin") are recognized by marking the contract to market
on a daily basis. As unrealized gains or losses are incurred,
variation margin payments are received from or made to the broker.
Upon the closing or cash settlement of a contract, gains and losses
are realized.
C. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund
may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised or sub-advised by American Capital Asset
Management, Inc. (the "Adviser"), the daily aggregate of which is
invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Fund makes payment
for such securities only upon physical delivery or evidence of book
entry transfer to the account of the custodian bank. The seller is
required to maintain the value of the underlying security at not less
than the repurchase proceeds due the Fund.
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of capital gains will be made until
tax basis capital loss carryforwards expire or are offset by net
realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Dividend income is recorded on the ex-dividend date.
Interest income is accrued daily.
F-6
<PAGE> 60
F. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which
may result in dividends or distributions in excess of financial
statement earnings.
Effective September 1, 1993, the Fund adopted Statement of Position
93-2, Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies. As a result of this statement, the Fund changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions
determined in accordance with income tax regulations. The cumulative
effect caused by adopting this statement was to decrease undistributed
net investment income and increase capital surplus by $2,033. Current
year net investment income, net realized gains, net assets and net asset
value per share were not affected by this change.
G. Debt Discount or Premium
The Fund accounts for original issue discounts and premiums on the same
basis as is followed for federal income tax reporting. Accordingly,
original issue discounts on long-term debt securities purchased are
amortized over the life of the security. Premiums on debt securities are
not amortized. Market discounts are recognized at the time of sale as
realized gains for book purposes, and ordinary income for tax purposes.
H. Equalization
A portion of the proceeds from sales and costs of repurchases of Fund
shares, equivalent on a per share basis to the amount of undistributed
net investment income, is credited or charged to undistributed net
investment income so that undistributed net investment income per
share is not affected by sales or repurchases of Fund shares.
Note 2-Management Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Fund. Management fees
are paid monthly, based on the average daily net assets of the Fund at an
annual rate of .50% of the first $150 million, .45% of the next $100 million,
.40% of the next $100 million, and .35% of the amount in excess of $350
million.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the
Adviser. For the year ended August 31, 1994, these charges included $8,192 as
the Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the
Adviser in reimbursement of personnel, facilities and equipment costs
attributable to the provision of accounting services to the Fund. The
services provided by the Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended August 31, 1994, the fees
for such services were $363,842.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $31,573 and $59,712, respectively, as
their portion of the commissions charged on sales of Fund shares during the
year.
Under the Distribution Plans, the Fund pays up to .25% per annum of its
average daily net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average net assets to reimburse the Distributor for
its distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts
reimbursed to the Distributor by the Fund. At August 31, 1994, the unreim-
F-7
<PAGE> 61
bursed expenses incurred by the Distributor under the Class B plan and
Class C plan aggregated approximately $618,000 and $31,000, respectively, and
may be carried forward and reimbursed through either the collection of the
contingent deferred sales charges from share redemptions or, subject to the
annual renewal of the plans, future Fund reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the
Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
Note 3-Investment Activity
During the year, the proceeds from sales of investments, excluding short-term
investments, were $11,680,675. There were no purchases during the year.
At August 31, 1994, the Fund held 20 United States Treasury Bond futures
contracts expiring in September 1994. The market value of such contracts was
$2,074,375 and the unrealized depreciation was $33,688.
The cost of investments owned at August 31, 1994 was the same for federal
income tax and financial reporting purposes. Gross unrealized appreciation of
investments aggregated $6,853,220 and gross unrealized depreciation of
investments aggregated $2,531,853.
The net realized capital loss carryforward for federal income tax purposes of
approximately $25.1 million at August 31, 1994 may be utilized to offset future
capital gains until expiration in 1997 through 2000.
Note 4-Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,020 plus a fee of $25 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $380. During the year, such fees aggregated
$11,854.
The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At August 31, 1994, the liability for the Plan aggregated
$38,094. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
Note 5-Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of distribution fees and certain other class specific expenses. Realized
and unrealized gains or losses, investment income and expenses (other than
class specific expenses) are allocated daily to each class of shares based
upon the relative proportion of net assets of each class. Class B shares and
Class C shares automatically convert to Class A shares six years and ten
years after purchase, respectively, subject to certain conditions.
F-8
<PAGE> 62
The Fund has 200 million shares of each class of $.01 par value capital stock
authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
----------------------------
1994 1993
---------- ----------
<S> <C> <C>
Shares sold
Class A ........................................... 2,874,913 2,499,737
Class B ........................................... 1,679,847 1,206,768
Class C ........................................... 391,322 68
---------- ----------
4,946,082 3,706,573
---------- ----------
Shares issued for dividends reinvested
Class A ........................................... 1,081,127 1,175,413
Class B ........................................... 71,673 21,573
Class C ........................................... 7,742 --
---------- ----------
1,160,542 1,196,986
---------- ----------
Shares redeemed
Class A ........................................... (5,704,287) (5,236,056)
Class B ........................................... (861,542) (83,601)
Class C ........................................... (54,062) --
---------- ----------
(6,619,891) (5,319,657)
---------- ----------
Decrease in Fund shares outstanding............ (513,267) (416,098)
========== ==========
</TABLE>
Note 6-Subsequent Dividend
The Board of Directors of the Fund declared a dividend of $.04 per share for
Class A shares and $.035 per share for Class B shares and Class C shares from
net investment income, payable October 14, 1994 to shareholders of record on
September 30, 1994.
F-9
<PAGE> 63
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------
YEAR ENDED AUGUST 31
---------------------------------------------------
1994 1993(1) 1992 1991 1990
------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ........ $7.36 $6.98 $6.57 $6.34 $6.78
------ ------- ----- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................ .57 .58 .60 .64 .715
Expenses..................................... (.08) (.07) (.07) (.06) (.06)
------ ------- ----- ------- ------
Net investment income........................ .49 .51 .53 .58 .655
Net realized and unrealized gains or
losses on securities....................... (.745) .3875 .44 .2425 (.46)
------ ------- ----- ------- ------
Total from investment operations............. (.255) .8975 .97 .8225 .195
------ ------- ----- ------- ------
DIVIDENDS FROM NET INVESTMENT INCOME ........ (.485) (.5175) (.56) (.5925) (.635)
------ ------- ----- ------- ------
Net asset value, end of period .............. $6.62 $7.36 $6.98 $6.57 $6.34
====== ======= ===== ======= ======
TOTAL RETURN(2) ............................. (3.55%) 13.48% 15.38% 13.61% 2.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)......... $160.0 $190.8 $191.8 $184.6 $191.2
Average net assets (millions)................ $175.5 $188.0 $186.5 $189.0 $215.1
Ratios to average net assets
Expenses .................................. 1.09% 1.05% 1.00% 1.00% .94%
Net investment income ..................... 7.06% 7.24% 7.90% 9.03% 10.07%
Portfolio turnover rate...................... 0% 19% 37% 15% 54%
</TABLE>
(1) Based on average month-end shares outstanding
(2) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-10
<PAGE> 64
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of capital stock outstanding throughout each
of the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------- -----------
SEPTEMBER 28,
YEAR ENDED 1992(1) THROUGH YEAR ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
1994 1993(2) 1994(2)
--------- ------------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $7.36 $7.05 $7.36(3)
------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................ .57 .56 .57
Expenses..................................................... (.13) (.13) (.13)
------ ------- ------
Net investment income........................................ .44 .43 .44
Net realized and unrealized gains or losses on securities.... (.755) .3465 (.755)
------ ------- ------
Total from investment operations............................. (.315) .7765 (.315)
------ ------- ------
DIVIDENDS FROM NET INVESTMENT INCOME ........................ (.425) (.4665) (.425)
------ ------- ------
Net asset value, end of period............................... $6.62 $7.36 $6.62
====== ======= ======
TOTAL RETURN(4) ............................................. (4.38%) 11.54% (4.51%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)......................... $13.5 $8.4 $2.3
Average net assets (millions)................................ $11.5 $3.2 $1.2
Ratios to average net assets
Expenses................................................... 1.90% 1.96%(5) 1.93%
Net investment income...................................... 6.29% 6.21%(5) 6.49%
Portfolio turnover rate...................................... 0% 19% 0%
</TABLE>
(1) Commencement of offering of sales
(2) Based on average month-end shares outstanding
(3) Sales of Class C Shares commenced on August 30, 1993 at a net asset
value of $7.40 per share. At August 31, 1993, there were 68 Class C Shares
outstanding with a per share net asset value of $7.36. The decrease in net
asset value was due principally to a $.0375 dividend, which was declared as
of August 31, 1993. Other financial highlights for the Class C Shares for
this short period are not presented as they are not meaningful.
(4) Total return for periods of less than one full year are not
annualized. Total return does not consider the effect of sales charges.
(5) Annualized
See Notes to Financial Statements.
F-11
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
American Capital Corporate Bond Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Corporate Bond
Fund, Inc. at August 31, 1994, the results of its operations, the changes in
its net assets and the selected per share data and ratios for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and selected per share data and ratios
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
October 17, 1994
F-12
