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AMERICAN CAPITAL COMSTOCK FUND, INC.
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2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
May 1, 1995
American Capital Comstock Fund, Inc., (the "Fund") is a mutual fund seeking
capital growth and income through investments in equity securities including
common and preferred stocks and securities convertible into common and preferred
stocks.
There is no assurance that the Fund will achieve its investment objective.
This Prospectus tells investors briefly the information they should know
before investing in the Fund. Investors should read and retain this Prospectus
for future reference.
A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission (the "SEC") and
contains further information about the Fund. A copy of the Statement of
Additional Information may be obtained without charge by calling or writing the
Fund at the telephone number and address printed above. The Statement of
Additional Information is incorporated by reference into this Prospectus.
THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE SHARES OF THIS FUND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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AMERICAN CAPITAL COMSTOCK FUND, INC.
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CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICE AGENT:
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
INVESTMENT ADVISER:
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
DISTRIBUTOR:
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace,
Illinois 60181
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus Summary....... 2
Expense Synopsis......... 4
Financial Highlights..... 6
Multiple Pricing
System................. 8
Investment Objective and
Policies............... 11
Investment Practices and
Restrictions........... 11
The Fund and Its
Management............. 15
Purchase of Shares....... 16
Distribution Plans....... 24
Shareholder Services..... 26
Redemption of Shares..... 30
Dividends, Distributions
and Taxes.............. 32
Prior Performance
Information............ 34
Additional Information... 35
</TABLE>
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No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or by the Distributor. This Prospectus does
not constitute an offering by the Distributor in any jurisdiction in which
such offering may not lawfully be made.
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PROSPECTUS SUMMARY
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SHARES OFFERED. Capital Stock.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
TYPE OF COMPANY. Diversified, open-end management investment company.
INVESTMENT OBJECTIVE. Capital growth and income. There is, however, no
assurance that the Fund will be successful in achieving its objective.
2
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INVESTMENT POLICY. Principally in common and preferred stocks and securities
convertible into common and preferred stocks.
INVESTMENT RESULTS. The investment results of the Fund during the past ten
years are shown in the table of "Financial Highlights." See also "Prior
Performance Information."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") has served as investment adviser to the Fund since 1975. The Adviser
serves as investment adviser to 50 investment company portfolios. See "The Fund
and Its Management."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").
MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. 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 5.75% 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 five percent of
redemption proceeds during the first year, declining each year thereafter to
zero percent after the fifth year. See "Redemption of Shares." The Fund pays a
combined annual distribution fee and service fee of up to one percent 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 one percent 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 one percent 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. Dividends from net investment income are
distributed quarterly. Capital gains, if any, are distributed at least annually.
All dividends and distributions are automatically reinvested in shares of the
Fund at net asset value per share (without a sales charge) unless payment in
cash is requested. See "Dividends, Distributions and Taxes."
3
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EXPENSE SYNOPSIS
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The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales charge imposed
on purchases (as a
percentage of offering
price)...................... 5.75%(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* 5% during the first 1% during the
year, 4% during the first year (b)
second year, 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............... .50% .50% .50%
Rule 12b-1 fees(d)............ .18% 1.00%(f) 1.00%(f)
Other expenses(e)............. .33% .34% .35%
Total fund operating
expenses.................... 1.01% 1.84% 1.85%
</TABLE>
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(a) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares" -- page 19.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- page
22.
(c) Not charged in certain circumstances. See "Shareholder Services --
Systematic Exchange" and "-- Automatic Exchange" -- page 29.
(d) Up to .25% for Class A shares and up to 1.00% for Class B shares and Class C
shares. See "Distribution Plans" -- page 24.
(e) See "The Fund and Its Management" -- page 15.
(f) 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 one percent may
be imposed on certain redemptions made within one year of the purchase.
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<TABLE>
<CAPTION>
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CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including, for Class
A shares, the maximum $57.50 front-end sales
charge and for Class B shares, a contingent
deferred sales charge assuming (1) an
operating expense ratio of 1.01% for Class A
shares, 1.84% for Class B shares and 1.85%
for Class C shares, (2) a 5% annual return
throughout the period and (3) redemption at
the end of the period:
Class A................................... $ 67 $ 88 $110 $174
Class B................................... $ 70 $ 91 $117 $174**
Class C................................... $ 29 $ 58 $100 $217
An investor would pay the following expenses
on the same $1,000 investment assuming no
redemption at the end of the period:
Class A................................... $ 67 $ 88 $110 $174
Class B................................... $ 19 $ 58 $100 $174**
Class C................................... $ 19 $ 58 $100 $217
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</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.
5
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FINANCIAL HIGHLIGHTS
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(Selected data for a share of capital stock outstanding throughout each of the
periods indicated)
The following information for each of the five most recent years has been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified. This information should be read in conjunction with the
financial statements and notes thereto included in the Fund's Annual Report to
shareholders for the year ended December 31, 1994, which are incorporated by
reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A
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YEAR ENDED DECEMBER 31
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1994 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................. $16.38 $17.30 $17.52 $14.29 $15.29 $13.08 $11.83
---------- ---------- ---------- --------- ---------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income................... .47 .49 .48 .535 .59 .665 .45
Expenses............................ (.16) (.17) (.15) (.14) (.12) (.11) (.09)
---------- ---------- ---------- --------- ---------- ---------- ---------
Net investment income............... .31 .32 .33 .395 .47 .555 .36
Net realized and unrealized gains or
losses on securities............... (.92) 1.18 .795 4.065 (.9875) 3.4175 1.38
---------- ---------- ---------- --------- ---------- ---------- ---------
Total from investment operations.... (.61) 1.50 1.125 4.46 (.5175) 3.9725 1.74
---------- ---------- ---------- --------- ---------- ---------- ---------
LESS DISTRIBUTIONS
Dividends from net investment
income............................. (.3225) (.2975) (.3275) (.395) (.475) (.54) (.365)
Distributions from net realized
gains on securities................ (3.0475) (2.1225) (1.0175) (.835) (.0075) (1.2225) (.125)
---------- ---------- ---------- --------- ---------- ---------- ---------
Total distributions................. (3.37) (2.42) (1.345) (1.23) (.4825) (1.7625) (.49)
---------- ---------- ---------- --------- ---------- ---------- ---------
Net asset value, end of period...... $12.40 $16.38 $17.30 $17.52 $14.29 $15.29 $13.08
============ ============ ============ =========== ============ ============ ===========
TOTAL RETURN(3)..................... (3.67%) 9.09% 6.53% 31.96% (3.36%) 30.53% 14.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)......................... $871.6 $980.4 $959.0 $986.2 $812.1 $952.1 $838.9
Ratios to average net assets
Expenses........................... 1.01% .96% .87% .82% .79% .69% .71%
Net investment income.............. 1.93% 1.82% 1.84% 2.32% 2.99% 3.41% 2.61%
Portfolio turnover rate............. 136% 50% 36% 38% 30% 51% 61%
<CAPTION>
1987 1986 1985(2)
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<S> <<C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................. $14.60 $14.78 $12.96
--------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income................... .48 .47 .48
Expenses............................ (.10) (.09) (.08)
--------- ---------- ---------
Net investment income............... .38 .38 .40
Net realized and unrealized gains or
losses on securities............... (.26) 1.61 2.245
--------- ---------- ---------
Total from investment operations.... .12 1.99 2.645
--------- ---------- ---------
LESS DISTRIBUTIONS
Dividends from net investment
income............................. (.745) (.3825) (.55)
Distributions from net realized
gains
on securities...................... (2.145) (1.7875) (.275)
--------- ---------- ---------
Total distributions................. (2.89) (2.17) (.825)
--------- ---------- ---------
Net asset value, end of period...... $11.83 $14.60 $14.78
=========== ============ ===========
TOTAL RETURN(3)..................... (.19%) 13.15% 21.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)......................... $869.0 $912.9 $884.7
Ratios to average net assets
Expenses........................... .57% .60% .58%
Net investment income.............. 2.22% 2.47% 2.92%
Portfolio turnover rate............. 69% 68% 64%
</TABLE>
(Table continued on following page)
6
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<TABLE>
<CAPTION>
CLASS B CLASS C(2)
-------------------------------------------- ----------------------------
OCTOBER 19, OCTOBER 26,
1992(1) 1993(1)
YEAR ENDED YEAR ENDED THROUGH YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993(2) 1992(2) 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............... $16.40 $17.30 $17.62 $16.39 $18.16
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Investment income.................................. .43 .49 .105 .47 .07
Expenses........................................... (.27) (.31) (.075) (.29) (.05)
------------ ------------ ------------ ------------ ------------
Net investment income.............................. .16 .18 .03 .18 .02
Net realized and unrealized gains or losses on
securities........................................ (.905) 1.192 .9225 (.925) .1425
------------ ------------ ------------ ------------ ------------
Total from investment operations................... (.745) 1.372 .9525 (.745) .1625
------------ ------------ ------------ ------------ ------------
LESS DISTRIBUTIONS
Dividends from net investment
income............................................ (.1875) (.1495) (.29) (.1875) (.065)
Distributions from net realized gains
on securities..................................... (3.0475) (2.1225) (.9825) (3.0475) (1.8675)
------------ ------------ ------------ ------------ ------------
Total distributions................................ (3.235) (2.272) (1.2725) (3.235) (1.9325)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period..................... $12.42 $16.40 $17.30 $12.41 $16.39
============ ============ ============ ============ ============
TOTAL RETURN(3).................................... (4.41%) 8.25% 4.66% (4.43%) 1.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............... $22.0 $13.9 $0.8 $2.3 $0.5
Ratios to average net assets
Expenses.......................................... 1.84% 1.76% 1.88%(4) 1.85% 1.93%(4)
Net investment income............................. 1.12% 1.04% .74%(4) 1.15% .78%(4)
Portfolio turnover rate............................ 136% 50% 36% 136% 50%
</TABLE>
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(1) Commencement of offering of sales.
(2) Based on average month-end shares outstanding.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Annualized.
7
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MULTIPLE PRICING SYSTEM
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The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 5.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of
Shares -- Class B Shares." Class B shares will automatically convert to Class A
shares six years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "Conversion Feature" herein for discussion
on applicability of 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 automatically convert to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares 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
compen-
8
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sated for distribution expenses related to the Class B shares or Class C shares
as the case may be, of 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 reduced initial sales charges or purchases shares 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 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
9
<PAGE> 10
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. 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."
10
<PAGE> 11
The Directors of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the Director
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.
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INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The Fund seeks capital growth and income through investments in equity
securities including common and preferred stocks and securities convertible into
common and preferred stocks.
The Fund invests principally in common stocks. The Fund generally holds
between zero and ten percent of its assets in high quality short-term debt
securities and investment grade corporate or government bonds in order to
provide liquidity. Such investments may be increased up to 100% of the Fund's
assets when deemed appropriate by the Adviser for temporary defensive purposes.
Investment grade bonds include bonds rated Baa by Moody's Investors Service
("Moody's") or BBB by Standard & Poor's Corporation ("S&P"). Securities rated
Baa by Moody's or BBB by S&P are considered by the rating agencies to be medium
grade obligations which possess speculative characteristics so that changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
rated securities. Short-term investments may include repurchase agreements with
banks or broker-dealers. See "Investment Practices and
Restrictions -- Repurchase Agreements." The Fund may also invest up to 15% of
its total assets in securities of foreign issuers and may invest in investment
companies. See "Investment Practices and Restrictions -- Securities of Foreign
Issuers" and "Investment Practices and Restrictions -- Investment in Investment
Companies." The Fund may engage in portfolio management strategies and
techniques involving options, futures contracts and options on futures. Options,
futures contracts and related options are described in "Investment Practices and
Restrictions -- Options, Futures Contracts and Related Options" and the
Statement of Additional Information.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RESTRICTIONS
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (e.g., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. The Fund will not invest in
repurchase agreements maturing in more than seven days if any such investment,
together with any other illiquid securities held by the Fund, exceeds ten
percent of the value of its net assets. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience 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
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<PAGE> 12
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.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 15% of the value of
its total assets in securities of foreign governments and companies. Such
investments may be subject to special risks, including changes in currency
exchange rates, future political and economic developments, the possible
imposition of additional withholding taxes on dividend or interest income
payable on the securities, or the seizure or nationalization of companies, or
establishment of exchange controls or adoption of other restrictions which might
adversely affect the investment.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund expects to
utilize 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.
In times of stable or rising security prices, the Fund generally seeks to
obtain maximum exposure to the securities markets, i.e., to be "fully invested."
Nevertheless, even when the Fund is fully invested, prudent management requires
that at least a small portion of assets be available as cash to honor redemption
requests and for other short-term needs. The Fund may also have cash on hand
that has not yet been invested. The portion of the Fund's assets that is
invested in cash equivalents does not fluctuate with security market prices, so
that, in times of rising market prices, the Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
futures contracts, however, the Fund can "equitize" the cash portion of its
assets and obtain equivalent performance to investing 100% of its assets in
equity securities.
If the Adviser forecasts a market decline, the Fund may take a defensive
position, reducing its exposure to the securities markets by increasing its cash
position. By selling futures contracts instead of portfolio securities, a
similar result can be achieved to the extent that the performance of the stock
index futures contracts correlates to the performance of the Fund's portfolio
securities. Sale of futures contracts could frequently be accomplished more
rapidly and at less cost than the actual sale of securities. Once the desired
hedged position has been effected, the Fund could then liquidate securities in a
more deliberate manner, reducing its futures position simultaneously to maintain
the desired balance, or it could maintain the hedged position.
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<PAGE> 13
As an alternative to selling stock index futures contracts, the Fund can
purchase stock index puts (or stock index futures puts) to hedge the portfolio's
risk in a declining market. Since the value of a put increases as the index
declines below a specified level, the portfolio's value is protected against a
market decline to the degree the performance of the index correlates with the
performance of the Fund's investment portfolio. If the market remains stable or
advances, the Fund can refrain from exercising the put and its portfolio will
participate in the advance, having incurred only the premium cost for the put.
In certain cases the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed with greater ease and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities.
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. Any OTC Option purchased by the Fund is considered an illiquid
security. Any OTC Option written by the Fund is 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 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. 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 options on
futures contracts is contained in the Statement of Additional Information.
PORTFOLIO TURNOVER. The Fund purchases securities which are believed by the
Adviser to have above average potential for capital appreciation. Common stocks
are disposed of in situations where it is believed that potential for such
appreciation has lessened or that other common stocks have a greater potential.
Therefore, the Fund may purchase and sell securities without regard to the
length of time the security is to be, or has been held. The Fund's annual
portfolio turnover rate is shown in the table of "Financial Highlights." The
rate may exceed 100%, which is higher than that of many other investment
companies. A 100% turnover rate occurs, for example, if all the Fund's port-
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<PAGE> 14
folio securities are replaced during one year. High portfolio activity increases
the Fund's transaction costs, including brokerage commissions.
BROKERAGE PRACTICES. The Adviser is responsible for the placement of orders
for the purchase and sale of portfolio securities for the Fund and the
negotiation of brokerage commissions on such transactions. Brokerage firms 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
brokerage firms 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 the commission are comparable to that available from other
qualified brokerage firms. The Adviser is authorized to pay higher commissions
to brokerage firms that provide it with investment and research information than
to firms which do not provide such services if the Adviser determines that such
commissions are reasonable in relation to the overall services provided. The
information received may be used by the Adviser in managing the assets of other
advisory accounts as well as in the management of the assets of the Fund.
INVESTMENT IN INVESTMENT COMPANIES. The Fund may invest in a separate
investment company, American Capital Small Capitalization Fund, Inc. ("Small Cap
Fund") that invests in a broad selection of small capitalization securities. The
shares of the Small Cap Fund are available only to investment companies advised
by the Adviser. The Adviser believes that the use of the Small Cap Fund will
provide the Fund with the most effective exposure to the performance of the
small capitalization sector of the stock market while at the same time
minimizing costs. The Adviser charges no advisory fee for managing the Small Cap
Fund, nor is there any sales load or other charges associated with distribution
of its shares. Other expenses incurred by the Small Cap Fund are borne by it,
and thus indirectly by the American Capital funds that invest in it. With
respect to such other expenses, the Adviser anticipates that the efficiencies
resulting from use of the Small Cap Fund will result in cost savings for the
Fund and other American Capital funds. In large part these savings will be
attributable to the fact that administrative actions that would have to be
performed multiple times if each American Capital Fund held its own portfolio of
small capitalization stocks will need to be performed only once. The Adviser
expects that the Small Cap Fund will experience trading costs that will be
substantially less than the trading costs that would be incurred if small
capitalization stocks were purchased separately for the Fund and other American
Capital funds.
The securities of small and medium sized companies that the Small Cap Fund may
invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies.
The Fund will be deemed to own a pro rata portion of each investment of the
Small Cap Fund. For example, if the Fund's investment in the Small Cap Fund were
$10 million, and
14
<PAGE> 15
the Small Cap Fund had five percent of its assets invested in the electronics
industry, the Fund would be considered to have an investment of $500,000 in the
electronics industry.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the Fund's shareholders. These
restrictions provide, among other things that the Fund may not:
1. Invest more than 25% of its total net asset value in any one industry;
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata
portion of the securities and other assets owned by any such company.
2. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than five
percent of the Fund's assets would be invested in such securities;
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata
portion of the securities and other assets owned by any such company.
In addition to the foregoing, the Fund has adopted additional investment
restrictions which may be changed by the Board of Directors without a vote of
shareholders. These restrictions provide that the Fund may not:
1. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the value of the Fund's total assets would
be invested in such securities; or
2. Invest more than ten percent of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements that have a
maturity of longer than seven days.
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THE FUND AND ITS MANAGEMENT
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The Fund is an open-end, diversified management investment company
incorporated in Delaware on November 20, 1967, and reincorporated by merger into
a Maryland corporation on December 31, 1978. A mutual fund provides, for those
who have similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
A board of eight directors has the responsibility for overseeing the affairs
of the Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056,
determines the investment of the Fund's assets, provides administrative services
and manages the Fund's business and affairs. The Adviser, together with its
predecessors, has been in the investment advisory business since 1926 and has
served as investment adviser to the Fund since 1975. The Adviser presently
provides investment advice to 47 investment company portfolios with total net
assets of approximately $16.4 billion at March 31, 1995.
The Adviser and the Distributor are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its
15
<PAGE> 16
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton Dubilier & Rice, Inc. a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, Alberto Cribiore, Donald J. Gogel and
Hubbard C. Howe, each of whom is a principal of Clayton, Dubilier & Rice, Inc.
In addition, certain officers, directors and employees of VKAC own, in the
aggregate, not more than 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc.
Mr. Don G. Powell is President and Director of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chairman, Chief Executive
Officer and Director of the Distributor. Most other officers of the Fund are
also officers and/or directors of the Adviser.
The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated December 20, 1994 (the "Advisory
Agreement"), the Fund pays the Adviser a monthly fee computed on average daily
net assets of the Fund at the annual rate of 0.50% of the first $1 billion of
average net assets; 0.45% on the next $1 billion of average net assets; 0.40% on
the next $1 billion of average net assets; and 0.35% on average net assets in
excess of $3 billion. 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, distribution fees, service 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.
B. Robert Baker is primarily responsible for the day-to-day management of the
Fund's investment portfolio. Mr. Baker is Vice President of the Fund and has
been primarily responsible for managing the Fund's investment portfolio since
July 11, 1994. He has been an associate portfolio manager with the Adviser since
November, 1991. Prior to that he was Vice President -- Portfolio Manager with
Variable Annuity Life Insurance Co.
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PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B shares and Class C shares are
sold without an initial sales charge and are subject to a contingent deferred
sales charge upon certain redemptions. See "Multiple Pricing System" for a
discussion of factors to consider in selecting which class of shares to
purchase. Contact the Service Department at (800) 421-5666 for further
information and appropriate forms.
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<PAGE> 17
Shares of the Fund are offered continuously for sale by the Distributor and
are available through authorized investment dealers. Initial investments must be
at least $500, and subsequent investments must be at least $25.
Both minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Shares of the Fund may be purchased on any business day through authorized
dealers. Shares may also be purchased by completing the application included in
this Prospectus and forwarding the application, through the designated dealer,
to the shareholder service agent, ACCESS Investor 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, including options, listed or traded
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 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
17
<PAGE> 18
Class C shares bear the expenses of the deferred sales arrangement and any
expenses (including the higher 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, 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
fee. Sales personnel of broker-dealers distributing the Fund's shares and other
persons entitled to receive compensation for selling such shares may receive
differing compensation for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on sales generated by the broker or
dealer during such programs. Also, the Distributor in its discretion may from
time to time, pursuant to objective criteria established by it, pay fees to, and
sponsor business seminars for, qualifying brokers, dealers or financial
intermediaries for certain services or activities which are primarily intended
to result in sales of shares of the Fund. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature.
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<PAGE> 19
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 herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO
DEALERS
SIZE OF AS % OF NET AS % OF (AS A % OF
INVESTMENT AMOUNT INVESTED OFFERING PRICE OFFERING PRICE)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Less than $50,000........... 6.10% 5.75% 5.00%
$50,000 but less than
$100,000.................. 4.99% 4.75% 4.00%
$100,000 but less than
$250,000.................. 3.90% 3.75% 3.00%
$250,000 but less than
$500,000.................. 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000................ 2.04% 2.00% 1.75%
$1,000,000 and over......... (See herein) (See herein) (See herein)
- ------------------------------------------------------------------------------
</TABLE>
No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of one percent 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: one percent on sales to $2
million, plus 0.80% on the next million, plus 0.20% on the next $2 million and
0.08% on the excess over $5 million.
In addition to the reallowances from the applicable public offering price
described herein, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Dealers which are
reallowed all or substantially all of the sales commissions may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
19
<PAGE> 20
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:
(1) Current or retired Trustees/Directors of funds advised by the Advisor. Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any such fund or an affiliate of
such subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of certain other participating American
Capital funds as described herein under "Purchase of Shares -- Class A
Shares -- Volume Discounts," during the 13-month period commencing with
the first investment pursuant hereto equals at least $1 million. The
Distributor may pay Service Organizations through which purchases are made
an amount up to 0.50% of the amount invested, over a twelve month period
following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1% for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in
Participating Funds (as hereinafter defined) or American Capital Reserve
Fund, Inc. ("Reserve"). For such investments the Fund imposes a contingent
deferred sales charge of one percent in the event of redemptions within
one year of the purchase other than redemptions required to make payments
to participants under the terms of the
20
<PAGE> 21
plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: 1% on sales to $5 million,
plus 0.50 % on the next $5 million, plus 0.25% on the excess over
$10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the 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 charge. The circumstances under which such
investors may pay reduced sales charges are described herein.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc. ("Emerging Growth"), American Capital Enterprise Fund, Inc., American
Capital Equity Income Fund, Inc., American Capital Federal Mortgage Trust
("Federal Mortgage"), American Capital Global Managed Assets Fund, Inc. ("Global
Managed") American Capital Government Securities, Inc., American Capital
Government Target Series ("Government Target"), American Capital Growth and
Income Fund, Inc., American Capital Harbor Fund, Inc., American Capital High
Yield Investments, Inc. ("High Yield"), American Capital Municipal Bond Fund,
Inc. ("Municipal Bond"), American Capital Pace Fund, Inc., American Capital Real
Estate Securities Fund, Inc. ("Real Estate") American Capital Tax-Exempt Trust
("Tax-Exempt"), American Capital Texas Municipal Securities, Inc. ("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.
21
<PAGE> 22
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the sales charge
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
adjustments 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 below 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.
22
<PAGE> 23
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
- ---------------------------------------------------------------------------
First..................................... 5%
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 Class A 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.
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 four percent (the applicable rate in the second year after purchase).
A commission or transaction fee of four percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of one percent. 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 addi-
23
<PAGE> 24
tion, no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of one percent 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 0.75% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." 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 its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Directors of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") applicable to
mutual fund sales charges. The NASD Rules limit the annual distribution charges
that a mutual fund may impose on a class of shares. The NASD Rules also limit
the aggregate amount which the Fund may pay for such distribution costs. Under
the Class A Plan, the Fund pays a service fee to the Distributor at an annual
rate of up to 0.25% of the Fund's aggregate average daily net assets
attributable to the Class A shares. Such payments to the Distributor under the
Class A Plan are based on an annual percentage of the
24
<PAGE> 25
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 October 19, 1992 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 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 fee to
compensate Service Organizations for personal service 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 four
percent of the purchase price of Class B shares purchased by the clients of
broker-dealers and other Service Organizations and (ii) other distribution
expenses as described in the Statement of Additional Information. Under the
Class C Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class C shares as reimbursement for (i) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares and (ii) other distribution expenses as
described in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Directors of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with respect
to distribution and service revenues and expenses is presented to the Directors
each year for their consideration in connection with their deliberations as to
the continuance of the Distribution Plans. In their review of the Distribution
Plans, the Directors are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B or Class C shares is designed to
permit an investor to purchase such shares without the assessment of a front-end
sales load and at the same time permit the Distributor to compensate Service
Organizations with respect to such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and distribution fee
are the same as those of the initial sales charge with respect 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.
25
<PAGE> 26
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 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 and carried forward were approximately
$851,000 under the Class B Plan or 4.5% of daily net assets of the class and
$28,000 under the Class C Plan or 2.0% of daily net assets of the class.
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, 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.
26
<PAGE> 27
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the record date. Unless the shareholder instructs otherwise, the
reinvestment plan is automatic. The investor may, on the initial application or
prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized investment 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. Van Kampen
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 -- Volume Discounts," or Reserve.
Both accounts must be 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 for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts"), other
than Government Target, may be exchanged for shares of the same class of any
other fund without sales charge, provided that shares of Corporate Bond, 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 or Class A shares without sales charge. Class A Shares of Reserve that
were not acquired in exchange for Class B or Class C shares of a participating
fund may be exchanged for Class A shares of
27
<PAGE> 28
the Fund upon payment of the excess, if any, of the sales charge rate applicable
to the shares being acquired over the sales charge rate previously paid. Shares
of Reserve acquired through an exchange of Class B or Class C shares may be
exchanged only for the same class of shares of a Participating Fund without
incurring a contingent deferred sales charge. Shares of any Participating Fund
or Reserve may be exchanged for shares of any other Participating Fund if shares
of that Participating Fund are available for sale; however, during periods of
suspension of sales, shares of a Participating Fund may be available for sale
only to existing shareholders of the Participating Fund. Additional funds may be
added from time to time to 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 or
Class C shareholders would remain subject to the contingent deferred sales
charge imposed by the original fund upon their redemption from the American
Capital complex of funds. The contingent deferred sales charge is based upon the
holding requirement of the original fund.
Since the maximum sales charge rate applicable to purchases of Class A shares
of the Fund is at least one percent higher than the maximum sales charge rate
applicable to the purchase of Class A shares of American Capital fixed-income
funds, the foregoing exchange privilege may be utilized to reduce the sales
charge paid to purchase Class A shares of the Fund, subject to the exchange fee.
Shares of the Fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described herein under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held for
less than 91 days, the sales charge paid on such shares is not included in the
tax basis of the exchanged shares, but is carried over and included in the tax
basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS, or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. VKAC
and its subsidiaries, including ACCESS (collectively, "Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
28
<PAGE> 29
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Exchanges are effected at the net asset value per
share next calculated after the request is received in good order with
adjustment for any additional sales charge. See "Purchase of Shares" and
"Redemption of Shares." If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options (except fund to
fund dividends) and dealer of record as the account from which shares are
exchanged, unless otherwise specified by the shareholder. In order to establish
a systematic withdrawal plan for the new account or reinvest dividends from the
new account into another fund, however, an exchanging shareholder must file a
specific written request. The Fund reserves the right to reject any order to
acquire its shares through exchange or otherwise to modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
herein under "Shareholder Services -- Exchange Privilege" will be waived for
such systematic exchanges. Additional information on how to establish this
option is available from the Distributor.
AUTOMATIC EXCHANGE. The exchange fee described above under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the Service
Department at (800) 421-5666 for further information on how to utilize this
option.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any investor whose shares
in a single account total $5,000 or more may establish a withdrawal plan on a
quarterly, semi-annual 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 plan holder may arrange for monthly, quarterly,
semi-annual, 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 of election to participate
in the plan is made. See
29
<PAGE> 30
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge" and the
Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized investment
dealer. Orders received from dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by a dealer provided such order
is transmitted to the Distributor prior to the Distributor's close of business
on such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of one percent may be imposed on certain
redemptions of Class A shares made within one year of purchase for investments
of $1 million or more and for certain qualified 401(k) retirement plans. The
contingent deferred sales charge incurred upon redemption is paid to the
Distributor in reimbursement for distribution-related expenses. See "Purchase of
Shares." A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker/dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of share-
30
<PAGE> 31
holders 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 Van Kampen American
Capital Trust Company serves as Custodian, special IRA, 403(b)(7), or Keogh
redemption forms must be obtained from and be forwarded to Van Kampen American
Capital Trust Company, P. O. Box 944, Houston, Texas 77001-0944. Contact the
Custodian for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share 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 it confirms the purchase check has cleared, usually a
period of up to 15 days. Any taxable gain or loss will be recognized by the
shareholder upon redemption of shares.
The Fund may redeem any shareholder account with a net asset value of less
than $50, provided that there has been no purchase of shares for that account
during a continuous period of at least twelve months. Three months advance
notice of any such involuntary redemption is required and the shareholder is
given an opportunity to purchase the required value of additional shares at the
next determined net asset value without sales charge. Any involuntary redemption
may only occur if the shareholder account is less than $50 due to shareholder
redemptions. Any applicable contingent deferred sales charge will be deducted
from the proceeds of this redemption.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits shareholders and the dealer representative of
record to redeem shares by telephone and to have redemption proceeds sent to the
address of record for the account or to the bank account of record as described
below. To establish such privilege, a shareholder must complete the appropriate
section of the application form in this Prospectus or call the Fund at (800)
421-5666 to request that a copy of the Telephone Redemption Authorization form
be sent to them for completion. To redeem shares, contact the telephone
transaction line at (800) 421-5684. Van Kampen American Capital and the Fund
employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen American Capital nor the Fund will
be liable for following telephone instructions which it reasonably believes to
be genuine. Van Kampen American Capital and the Fund may be liable for any
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed. Telephone redemptions may not be available
31
<PAGE> 32
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 Van
Kampen 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. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed quarterly as dividends to shareholders. Unless the
shareholder instructs otherwise, dividends are automatically applied to purchase
additional 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 may 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.
32
<PAGE> 33
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 distributes to shareholders once a
year 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 income
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 dividends and distributions are taxable to the shareholder
whether or not reinvested in shares.
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 above.
Gains or losses on the Fund's transactions in listed options (except certain
equity options) on securities or indexes, 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 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 informa-
33
<PAGE> 34
tion 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 5.75% 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.
Since Class A shares of the Fund were offered at a maximum sales charge of 8.50%
prior to October 19, 1992, actual Fund total return would have been somewhat
less than that computed on the basis of the current maximum sales charge. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and distributions paid by the
Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
Total return is calculated separately for Class A, Class B and Class C shares.
Class A total return figures include the maximum sales charge of 5.75%; 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 rankings or ratings 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, the Dow Jones
Industrial Average Index, Standard & Poor's or NASDAQ, other appropriate indices
of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Investor's Business Daily, Kiplinger's Personal Finance Magazine,
34
<PAGE> 35
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 November
20, 1967, and reincorporated by merger into a Maryland corporation on December
31, 1978. The Fund may offer three classes of shares: Class A, Class B and Class
C shares. Each class of shares represents an interest 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.
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. Shares have cumulative voting rights which
means that in all elections of directors each shareholder has the right to cast
a number of votes equal to the number of shares owned multiplied by the number
of directors to be elected and each shareholder may cast the whole number of
votes for one candidate or distribute such votes among two or more candidates.
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 certain
restrictions. Persons with access
35
<PAGE> 36
to certain sensitive information are subject to pre-clearance and other
procedures designed to prevent conflicts of interest.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund at
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256 serves as transfer agent, shareholder service agent and dividend
disbursing agent for the Fund. ACCESS, a wholly owned subsidiary of the
Adviser's parent, provides these services at cost plus a profit.
LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Fund.
36
<PAGE> 37
BACKUP WITHHOLDING INFORMATION
STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with
the following guidelines:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Account Type Give Social Security Number or Tax
Identification Number of:
- --------------------------------------------------------------------------------
Individual Individual
- --------------------------------------------------------------------------------
Joint (or Joint Tenant) Owner who will be paying tax
- --------------------------------------------------------------------------------
Uniform Gifts to Minors Minor
- --------------------------------------------------------------------------------
Legal Guardian Ward, Minor or Incompetent
- --------------------------------------------------------------------------------
Sole Proprietor Owner of Business
- --------------------------------------------------------------------------------
Trust, Estate, Pension
Plan Trust Trust, Estate, Pension Plan Trust (NOT
personal TIN of fiduciary)
- --------------------------------------------------------------------------------
Corporation, Partnership,
Other Organization Corporation, Partnership, Other
Organization
- --------------------------------------------------------------------------------
Broker/Nominee Broker/Nominee
- --------------------------------------------------------------------------------
</TABLE>
STEP 2. If you do not have a TIN or you do not know your TIN, you must obtain
Form SS-5 (Application for Social Security Number) or Form SS-4 (Application
for Employer Identification Number) from your local Social Security or IRS
office and apply for one. Write "Applied For" in the space on the application.
STEP 3. If you are one of the entities listed below, you are exempt from
backup withholding and should not check the box on the Application in Section
2, Taxpayer Identification.
* A corporation
* Financial institution
* Section 501 (a) exempt organization (IRA, Corporate Retirement Plan,
403(b), Keogh)
* United States or any agency or instrumentality thereof
* A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof
* International organization or any agency or instrumentality thereof
* Registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
* Real estate investment trust
* Common trust fund operated by a bank under section 584 (a)
* An exempt charitable remainder trust, or a non-exempt trust described in
section 4947 (a) (1)
If you are in doubt as to whether you are exempt, please contact the Internal
Revenue Service.
STEP 4. IRS PENALTIES -- If you do not supply us with your TIN, you will be
subject to an IRS $50 penalty unless your failure is due to reasonable cause
and not willful neglect. If you fail to report interest, dividend or
patronage dividend income on your federal income tax return, you will be
treated as negligent and subject to an IRS 5% penalty tax on any resulting
underpayment of tax unless there is clear and convincing evidence to the
contrary. If you falsify information on this form or make any other false
statement resulting in no backup withholding on an account which should be
subject to backup withholding, you may be subject to an IRS $500 penalty and
certain criminal penalties including fines and imprisonment.
<PAGE> 38
AMERICAN CAPITAL
COMSTOCK FUND, INC.
PROSPECTUS
May 1, 1995
NATIONAL DISTRIBUTOR
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
INVESTMENT ADVISER
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056
TRANSFER, DISBURSING, REDEMPTION
AND SHAREHOLDER SERVICE AGENT
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent,
ACCESS Investor Services, Inc.
(ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor,
Van Kampen American Capital Distributors, Inc.,
One Parkview Plaza
Oakbrook Terrace, IL 60181
American Capital C/O ACCESS
Comstock Fund, Inc. P.O. Box 418256
Kansas City, MO 64141-9256
For investors seeking protection
of capital and current income
through investments in money
market instruments.
[AMERICAN CAPITAL LOGO]
PRINTED MATTER
Printed in U.S.A./023 PRO-001
<PAGE> 39
PART B: STATEMENT OF ADDITIONAL INFORMATION
AMERICAN CAPITAL COMSTOCK FUND, INC.
MAY 1, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated May 1, 1995.
A Prospectus may be obtained without charge by calling or writing Van Kampen
American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
REPURCHASE AGREEMENTS................................................................. 2
FOREIGN SECURITIES.................................................................... 3
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS........................... 3
INVESTMENT RESTRICTIONS............................................................... 7
DIRECTORS AND EXECUTIVE OFFICERS...................................................... 9
INVESTMENT ADVISORY AGREEMENT......................................................... 12
DISTRIBUTOR........................................................................... 13
DISTRIBUTION PLANS.................................................................... 14
TRANSFER AGENT........................................................................ 15
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 16
DETERMINATION OF NET ASSET VALUE...................................................... 17
PURCHASE AND REDEMPTION OF SHARES..................................................... 18
EXCHANGE PRIVILEGE.................................................................... 21
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 22
PRIOR PERFORMANCE INFORMATION......................................................... 24
OTHER INFORMATION..................................................................... 25
FINANCIAL STATEMENTS.................................................................. 25
</TABLE>
<PAGE> 40
GENERAL INFORMATION
The Fund was originally incorporated in Delaware on November 20, 1967 and
reincorporated by merger into a Maryland corporation on December 31, 1978.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than six percent
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional ten percent of the common
stock of VK/AC Holding, Inc. Advantage Capital Corporation, a retail
broker-dealer affiliate of the Distributor, is a wholly owned subsidiary of
VK/AC Holding, Inc.
As of April 12, 1995, no one person was known to own beneficially 5% or
more of the outstanding Class A, Class B or Class C shares. As of April 12,
1995, no one person was known to own of record 5% or more of the outstanding
Class A, Class B or Class C shares of the Fund except the following:
<TABLE>
<CAPTION>
CLASS OF PERCENTAGE OF
NAME AND ADDRESS OF HOLDER SHARES OWNERSHIP
---------------------------------------------------------- --------- -------------
<S> <C> <C>
(1)Smith Barney Shearson Inc. Class B 14.39%
22nd Floor Class C 55.05%
388 Greenwich Street
New York, NY 10013-2375
National Financial Services, Inc. Class B 6.16%
One World Financial Center
200 Liberty
New York, NY 10281-1003
American Capital Trust Company Class A 37.64%
2800 Post Oak Blvd.
Houston, TX 77056
PaineWebber Inc. Class C 5.56%
New York, NY
1285 Ave of America, 15th Fl.
New York, NY 10019
</TABLE>
- ---------------
(1) Represents the aggregate of a number of accounts held of record by Smith
Barney Inc. Certain individual accounts also represent the beneficial
ownership of over five percent of the outstanding shares of the class.
Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and individual retirement accounts.
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
2
<PAGE> 41
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
will make payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of a custodian or bank acting as agent. The
seller under a repurchase agreement is required to maintain the value of the
underlying securities marked to market daily at not less than the repurchase
price. The underlying securities (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.
FOREIGN SECURITIES
The Fund may invest up to 15% of the value of its total assets in
securities of foreign governments and companies. Such securities may be subject
to foreign government taxes which would reduce the income yield on such
securities. Foreign investments involve certain risks, such as political or
economic instability of the issuer or of the country of issue, changes in
currency exchange rates, 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 domestic
corporations or of the United States 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 such
foreign debt obligations, it may be more difficult for the fund to obtain or to
enforce judgment against the issuers of such securities.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
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
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities is likely to result in higher
portfolio turnover.
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.
3
<PAGE> 42
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 obligation 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
through 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 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.
Options on Stock Indexes. Options on stock indexes are similar to options
on stock, but the delivery requirements are different. Instead of giving the
right to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive an amount of cash upon
exercise of the option. Receipt of this cash amount will depend upon the closing
level of the stock index upon which the option is based being greater than (in
the case of a call) or less than (in the case of a put) the exercise price of
the option. The amount of cash received will be the difference between the
closing price of the index and the exercise price of the option, multiplied by a
specified dollar multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included
4
<PAGE> 43
in the index. Options are currently traded on The Chicago Board Options
Exchange, the American Stock Exchange and other exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
Futures Contracts. The Fund may 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 is
exempt from registration as a "commodity pool."
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contact and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
5
<PAGE> 44
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in 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 of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price 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 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 bonafide hedging purposes (or meet certain conditions
as specified in CFTC regulations) and (ii) that the
6
<PAGE> 45
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; at the same time, it could write put
options at a lower strike price (a "put bear spread") to offset part of the cost
of the strategy to the Fund. The purchase of call options on futures contracts
would be intended to serve the same purpose as the actual purchase of the
futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the level of the index or in the price of the underlying
security, when the use of an option on a future would result in a loss to the
Fund when the use of a future would not.
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 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
7
<PAGE> 46
the 1940 Act as the lesser of (i) 67% or more of the voting securities present
in person or by proxy at the meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except the United States
Government) or purchase more than ten percent of the outstanding voting
securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies to the
extent permitted by rule or order of the Securities and Exchange
Commission exempting the Fund from the limitations imposed by Section
12(d)(1) of the 1940 Act;
2. Make short sales or purchase securities on margin; but it 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 deposits
and payments in connection therewith;
3. Pledge any of its assets, except that the Fund may pledge assets having
a value of not more than ten percent of its total assets in order to
secure permitted borrowings from banks. Such borrowings may not exceed
five percent of the value of the Fund's assets and can be made only as
a temporary measure for extraordinary or emergency purposes.
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. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except
through purchase in the open market in a transaction involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission) or as part of a merger, consolidation or other
acquisition except to acquire shares of other open-end investment
companies to the extent permitted by rule or order of the Securities
and Exchange Commission exempting the Fund from the limitations imposed
by Section 12(d)(1) of the 1940 Act;
5. Invest in real estate, commodities or commodities contracts, except
that the Fund may engage in transactions in futures contracts and
related options;
6. Invest in securities of a company for the purpose of exercising
management or control, although the Fund retains the right to vote
securities held by it;
7. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed
to be an underwriter as that term is defined under the Securities Act
of 1933;
8. Purchase a restricted security or a security for which market
quotations are not readily available if as a result of such purchase
more than five percent of the Fund's assets would be invested in such
securities, provided, however, that this limitation excludes shares of
other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company;
9. Invest more than 25% of its total net asset value in any one industry,
provided, however, that this limitation excludes shares of other
open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such
company; or
10. Make loans except by the purchase of bonds or other debt obligations of
types commonly offered publicly or privately and purchased by financial
institutions, including investment in repurchase agreements, provided
that the Fund will not make any investment in repurchase agreements
maturing in more than seven days if such investments, together with any
illiquid securities held by the Fund, would exceed ten percent of the
value of its net assets.
8
<PAGE> 47
The Fund is subject to certain policies, which may be amended by its Board
of Directors. In addition to such policies set forth in the Fund's Prospectus,
the Fund shall not:
1. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the value of the Fund's total assets
would be invested in such securities;
2. Invest more than five percent of its net assets in warrants or rights
valued at the lower of cost or market, nor more than two percent of its
net assets in warrants or rights (valued on such basis) which are not
listed on the New York or American Stock Exchanges. Warrants or rights
acquired in units or attached to other securities are not subject to
the foregoing limitations;
3. Invest in interests in oil, gas, or other mineral exploration or
development programs;
4. Invest more than five percent of its assets in companies having a
record, together with predecessors, of less than three years continuous
operation and in securities not having readily available market
quotations except to acquire shares of other open-end investment
companies to the extent permitted by rule or order of the Securities
and Exchange Commission exempting the Fund from the limitations imposed
by Section 12(d)(1) of the 1940 Act;
5. Purchase or retain securities of any issuer if those officers and
directors of the Fund or its investment adviser who own individually
more than one half of one percent of the securities of such issuer
together own more than five percent of the securities of such issuer;
6. Invest more than five percent of its assets in the securities of any
one issuer other than the United States government except to acquire
shares of other open-end investment companies to the extent permitted
by rule or order of the Securities and Exchange Commission exempting
the Fund from the limitations imposed by Section 12(d)(1) of the 1940
Act;
7. Pledge, mortgage or hypothecate its portfolio securities to the extent
that at any time the percentage of pledged securities plus the sales
load will exceed ten percent of the offering price of the Fund's
shares. 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 or payments for futures contracts and related
options; or
8. Invest more than ten percent of its net assets (determined at the time
of investment) in illiquid securities and repurchase agreements that
have a maturity of longer than seven days.
The Fund has undertaken with a certain state that it will not invest
more than 10% of its assets in American Capital Small Capitalization
Fund, Inc. until it complies with NASAA Guidelines for Registration of
Master Fund/Feeder Fund.
DIRECTORS AND EXECUTIVE OFFICERS
The Fund's directors and executive officers and their principal occupations
during the past five years are listed below. All persons named as Directors also
serve in similar capacities for other funds advised by the Adviser as indicated
below:
FERNANDO SISTO, Chairman of the Board and Director. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991. Dean of
Graduate School, George M. Bond Professor and formerly Dean of Graduate School
and Chairman, Department of Mechanical Engineering, Stevens Institute of
Technology; Director, Dynalysis of Princeton (engineering research).(1)
J. MILES BRANAGAN, Director. 2300 205th Street, Torrance, California
90501-1452. Co-Founder, Chairman and President, MDT Corporation (medical
equipment).(1)
RICHARD E. CARUSO, Director. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive Officer,
Integra 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);
9
<PAGE> 48
Director, International Board of Business Performance Group, London School of
Economics; formerly Director, First Sterling Bank; formerly Director and
Executive Vice President, LFC Financial Corporation (leasing/financing)(1)
ROGER HILSMAN, Director. 251-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly, Professor of Government and International Affairs, Emeritus, Columbia
University.(1)
*DON G. POWELL, President and Director. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. Chairman, President, Chief Executive Officer of VK/AC
Holding, Inc.; VKAC and the Adviser; Chairman, Chief Executive Officer and
Director of the Distributor.(1)(2)(4)
DAVID REES, Director. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(2)
**LAWRENCE J. SHEEHAN, Director. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner (1969-1994)
of the law firm of O'Melveny & Myers, legal counsel to the Fund.(1)(3)(5)
WILLIAM S. WOODSIDE, Director. 712 Fifth Avenue, 40th Floor, New York, New
York 10019. Vice Chairman of the Board, Sky Chefs, Inc. (airline food catering);
formerly Director, Primerica Corporation (currently known as The Travelers
Inc.); formerly Chairman of the Board and Chief Executive Officer, old Primerica
Corporation (American Can Company); formerly Director, James River Corporation
(paper products); Trustee and formerly President, Whitney Museum of American
Art; Chairman, Institute for Educational Leadership, Inc., Board of Visitors,
Graduate School of The City University of New York, Academy of Political
Science; Committee for Economic Development; Director, Public Education Fund
Network, Fund for New York City Public Education; Trustee, Barnard College;
Member, Dean's Council, Harvard School of Public Health; Member, Mental Health
Task Force, Carter Center.(1)
B. ROBERT BAKER, Vice President, 2800 Post Oak Blvd., Houston, Texas 77056.
Associate portfolio manager with the Adviser.
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston
Texas 77056. Vice President, Associate General Counsel and Corporate Secretary
of the Adviser.(4)
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant Controller.(4)
DENNIS J. MCDONNELL, Vice President. One Parkview Plaza, Oakbrook Terrace,
IL 60181. Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.,
President, Chief Operating Officer and Director of Van Kampen American Capital
Investment Advisory Corp.; and Director of McCarthy, Crisanti & Maffei, Inc.(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)
RONALD A. NYBERG, Vice President. One Parkview Plaza, Oakbrook Terrace, IL
60181. Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc., Vice President of ACCESS Investor Services, Inc. and Van Kampen American
Capital Services, Inc., Vice President, General Counsel and Assistant Secretary
of Van Kampen American Capital Investment Advisory Corp., Senior Vice President
and General Counsel of the Adviser, Executive Vice President and General Counsel
and Director of VKAC Distributors, Inc.(4)
ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
the Adviser; Executive Vice President and Director, VKAC.(4)
10
<PAGE> 49
J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel, Compliance
Review Officer and Assistant Corporate Secretary of the Adviser.(4)
PAUL R. WOLKENBERG, Vice President, 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; President, Chief Operating Officer
and Director of Van Kampen American Capital Services, Inc.; Executive Vice
President, Chief Operating Officer and Director of Van Kampen American Capital
Trust Company; President, Executive Vice President and Director of ACCESS
Investor Services, Inc.(4)
- ---------------
* Director who is an interested person of the Advisor and of the Fund as
defined within the meaning of the 1940 Act by virtue of an affiliation with
the Adviser.
** Director who is an interested person of the Fund and may be an interested
person of the Adviser within the meaning of the 1940 Act, by virtue of his
affiliation with the legal counsel of the Fund.
(1) A director or trustee of American Capital Corporate Bond Fund, Inc.,
American Capital Emerging Growth Fund, Inc., American Capital Enterprise
Fund, Inc., American Capital Equity Income Fund, Inc., American Capital
Federal Mortgage Trust, American Capital Global Managed Assets Fund, Inc.,
American Capital Government Securities, Inc., American Capital Government
Target Series, American Capital Growth and Income Fund, Inc., American
Capital Harbor Fund, Inc., American Capital High Yield Investments, Inc.,
American Capital Life Investment Trust, American Capital Municipal Bond
Fund, Inc., American Capital Pace Fund, Inc., American Capital Reserve Fund,
Inc., American Capital Small Capitalization Fund, Inc., American Capital
Tax-Exempt Trust, American Capital Texas Municipal Securities, Inc.,
American Capital U.S. Government Trust for Income, American Capital
Utilities Income Fund, Inc. and American Capital World Portfolio Series,
Inc.
(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser, and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as adviser for nine 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
December 31, 1994, the Directors who were not affiliated with the Adviser or its
parent received as a group $26,425 in directors' fees from the Fund in addition
to certain out-of-pocket expenses. Such directors also received compensation for
serving as trustees or directors of other investment companies advised by the
Adviser as identified in the notes to the foregoing table. For legal services
rendered during the fiscal year ended December 31, 1994, the Fund paid legal
fees of $11,190 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.
11
<PAGE> 50
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Directors serve as directors or trustees
noted in Footnote 1 above is set forth below. The compensation shown for the
Fund and the total compensation shown for the Fund and other related mutual
Funds are for the year ended December 31, 1994. Mr. Powell is not compensated
for his service as Director, because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
BENEFITS REGISTRANT
AGGREGATE ACCRUED AND FUND
COMPENSATION AS PART COMPLEX
FROM OF FUND PAID TO
NAME OF PERSON REGISTRANT EXPENSES DIRECTORS(1)(5)
------------------------------------- ------------ ---------- ---------------
<S> <C> <C> <C>
J. Miles Branagan.................... $3,510 -0- $64,000
Dr. Richard E. Caruso(4)............. $3,400(2) -0- $64,000
Dr. Roger Hilsman.................... $3,625 -0- $66,000
David Rees(4)........................ $3,510 -0- $64,000
Lawrence J. Sheehan.................. $3,680 -0- $67,000
Dr. Fernando Sisto(4)................ $4,525(2) -0- $82,000
William S. Woodside(3)............... $3,000 -0- $54,000
</TABLE>
- ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $3,400 and $2,330 for Messrs.
Caruso and Sisto, respectively.
(3) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, of the amounts reflected in the second and fourth
columns, $915 and $17,000, respectively, were paid by the registrant or the
registrant and the fund complex, as the case may be.
(4) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation accrued by the Fund as of December 31,
1994 is as follows: Caruso, $10,213; Rees, $34,751; Sisto, $14,507.
(5) Includes the following amounts for which the various funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in footnote 3 above).
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement,
dated December 20, 1994 (the "Advisory Agreement"). Under the Advisory
Agreement, the Fund retains the Adviser to manage the investment of its assets
and to place orders for the purchase and sale of its portfolio securities. The
Adviser is responsible for obtaining and evaluating economic, statistical, and
financial data and for formulating and implementing investment programs in
furtherance of the Fund's investment objective. The Adviser also furnishes at no
cost to the Fund (except as noted herein) the services of sufficient executive
and clerical personnel for the Fund as are necessary to prepare registration
statements, prospectuses, shareholder reports, and notices and proxy
solicitation materials. In addition, the Adviser furnishes at no cost to the
Fund the services of a President of the Fund, one or more Vice Presidents as
needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Payments are
made to the Adviser or its parent in reimbursement of personnel, office space,
facilities and equipment costs attributable to the provision of accounting
services to the Fund. The services are provided at cost which is allocated among
the investment companies advised by the Adviser in the manner approved by the
Board of Directors from time to time. The Fund also pays shareholder service
agency fees, distribution fees, service fees, custodian fees, legal and
12
<PAGE> 51
auditing fees, the costs of reports to shareholders and all other ordinary
expenses not specifically assumed by the Adviser.
Under the Advisory Agreement the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at annual rate
of: 0.50% on the first $1 billion of average net assets; 0.45% on the next $1
billion of average net assets; 0.40% on the next $1 billion of average net
assets; and 0.35% on the average net assets in excess of $3 billion.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each business day during a given calendar month. Such fee is payable for
each calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any other
direct or indirect majority owned subsidiary of VK/AC Holding, Inc. in
connection with the purchase and sale of portfolio investments of the Fund, less
any direct expenses incurred by such subsidiary of VK/AC Holding, Inc. in
connection with obtaining such payments. The Adviser 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 a person under common control with the
Adviser or any other direct or indirect majority owned subsidiary of VK/AC
Holding, Inc. to receive in connection with the Fund's portfolio transactions or
other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed 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 include the investment advisory fee and other
operating costs paid by the Fund except (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 December 31, 1992, 1993 and 1994, the Adviser
received $4,659,292, $4,873,848 and $4,707,089, respectively, in advisory fees
from the Fund. For such periods, the Fund paid $118,160, $171,003, and $141,161,
respectively, for accounting services. A substantial portion of these amounts
was paid to the Adviser in reimbursement of personnel, facilities and equipment
costs attributable to the provision of accounting services to the Fund. The
Advisory Agreement in effect during these periods up to May 25, 1990 provided
fees at the annual rate of: 0.50% on the first $150 million of average net
assets; 0.45% on the next $100 million of average net assets; 0.40% on the next
$100 million of average net assets; and 0.35% on the average net assets over
$350 million.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, dated December 20, 1994 (the "Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of the
Fund through affiliated and unaffiliated dealers. The Distributor's obligation
is an agency or "best efforts" arrangement under which the Distributor is
required to take and pay for only such
13
<PAGE> 52
shares of the Fund as may be sold to the public. The Distributor is not
obligated to sell any stated number of shares. The Distributor bears the cost of
printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Board of Directors or by a vote of a majority of the
Fund's outstanding voting securities and (b) by the affirmative vote of a
majority of Directors who are not parties to the Underwriting Agreement or
interested persons of any party, by votes cast in person at a meeting called for
such purpose. The Underwriting Agreement provides that it will terminate if
assigned, and that it may be terminated without penalty by either party on 60
days' written notice.
During the fiscal years ended December 31, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $1,386,894,
$1,086,533 and $965,749, respectively. Of such totals, the amount retained by
the Distributor was $231,471, $145,620 and $119,806, respectively. The remainder
was reallowed to dealers. Of such dealer reallowances, $108,462, $130,565 and
$63,696, 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," or "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Directors have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
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 four percent 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 0.75% of the
average daily net assets of the Fund's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professionals, and (5) advertising and promotion
expenses, including conducting and organizing sales seminars, marketing support
salaries and bonuses, and travel-related expenses. Such reimbursements are
subject to the maximum sales charge limits specified by the National Association
of Securities Dealers, Inc. for asset-based charges.
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<PAGE> 53
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreements were approved by the Directors, including a majority of the
Directors who are not affiliated persons (as defined in the 1940 Act) of the
Fund and who have no direct or indirect financial interest in the operation of
any of the Plans or in any agreements related to each Plan ("Independent
Directors"). In approving each Plan in accordance with the requirements of Rule
12b-1, the Directors determined that there is a reasonable likelihood that each
Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the 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
respective class. Any change in any of the Plans that would materially increase
the distribution or service expenses borne by the Fund requires shareholder
approval voting separately by class, otherwise, it may be amended by a majority
of the Directors, including a majority of the Independent Directors, by vote
cast in person at a meeting called for the purpose of voting upon such
amendment. So long as the Plans are in effect, the selection or nomination of
the Independent Directors is committed to the discretion of the Independent
Directors.
For the fiscal year ended December 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $1,665,854 or .18% of the Class' average daily net
assets. Such expenses were paid to reimburse the Distributor for payments to
Service Organizations for servicing Fund shareholders and for administering the
Class A Plan. For the fiscal year ended December 31, 1994, the Fund's aggregate
expenses under the Class B Plan were $188,376 or 1.00% of the Class' average net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $141,282 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 $47,094 for fees paid to Service Organizations for servicing Class B
shareholders and administering the Class B Plan. For the fiscal year ended
December 31, 1994, the unreimbursed expenses incurred by the Distributor under
the Class B Plan and carried forward were approximately $943,000. The offering
of Class C shares commenced October 26, 1993. For the period ended December 31,
1994, the Fund's aggregate expenses under the Class C Plan were $16,789 or 1.00%
of the Class' average daily net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $12,592 for commissions and transaction
fees paid to broker-dealers and other service organizations in respect to sales
of Class C shares of the Fund and $4,197 for fees paid to servicing Class C
shareholders and administering the Class C Plan. For the fiscal period ended
December 31, 1994, the unreimbursed expenses incurred by the Distributor under
the Class C Plan and carried forward were approximately $33,000.
TRANSFER AGENT
For the fiscal years ended December 31, 1992, 1993 and 1994, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $2,233,874, $2,203,887 and $2,187,536, respectively, for these
services. Since April 1, 1991, these services have been provided at cost plus a
profit.
15
<PAGE> 54
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 the
commissions paid on such transactions. It is the policy of the Adviser to seek
the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services, as described below,
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting dealers and in negotiating commissions, the Adviser considers the
firm's reliability, the quality of its execution services on a continuing basis
and its financial condition. When more than one firm is believed to meet these
criteria, preference may be given to firms which also provide research services
to the Fund or the Adviser.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services 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 accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the investment advisory agreement, the Fund's
Board of Directors has authorized the Adviser to cause the Fund to incur
brokerage commissions in an amount higher than the lowest available rate in
return for research services provided to the Adviser. The Adviser is of the
opinion that the continued receipt of supplemental investment research services
from dealers is essential to its provision of high quality portfolio management
services to the Fund. The Adviser undertakes that such higher commissions will
not be paid by the Fund unless (a) the Adviser determines in good faith that the
amount is reasonable in relation to the services in terms of the particular
transaction or in terms of the Adviser's overall responsibilities with respect
to the accounts as to which it exercises investment discretion, (b) such payment
is made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected benefits
to the Fund over the long term. The investment advisory fee paid by the Fund
under the investment advisory agreement is not reduced as a result of the
Adviser's receipt of research services.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. 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 dealers to execute portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts, including the Fund,
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
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
16
<PAGE> 55
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and opinions of the persons responsible
for recommending the investment.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Directors who are not affiliated
persons (as defined in the 1940 Act) of the Adviser.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended December 31, 1992, 1993 and 1994, totaled $1,170,459,
$1,462,008 and $4,138,566, respectively. The increase in brokerage commissions
during these years was attributable principally to the growth of the Fund during
the period. During the year ended December 31, 1994 the Fund paid $1,505,708 in
brokerage commissions on transactions totalling $892,602,080 to brokers selected
primarily on the basis of research services provided to the Adviser.
Prior to December 20, 1994, the Fund placed brokerage transactions with
brokers who were considered affiliated persons of the Adviser's former parent,
The Travelers Inc. Such affiliated persons included Smith Barney Inc. ("Smith
Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey"). Effective December
20, 1994, Smith Barney and Robinson Humphrey ceased to be affiliates of the
Advisor. In addition, from December 15, 1988 through February 21, 1992, Rauscher
Pierce, Refsnes, Inc. ("Rauscher Pierce") was an affiliate of The Travelers Inc.
from 1985 through September 30, 1992, Jefferies & Company, Inc. ("Jefferies")
was an affiliate of The Travelers Inc. (then known as Primerica). The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction. The Fund
paid the following commissions to these brokers during the periods shown:
<TABLE>
<CAPTION>
SMITH RAUSCHER ROBINSON
JEFFERIES BARNEY PIERCE HUMPHREY
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Commissions Paid:
Fiscal 1992 $ 5,522 $ 40,710 $555 --
Fiscal 1993 -- $ 57,580 -- --
Fiscal 1994 -- $ 132,827 -- $3,577
Fiscal 1994 Percentages: -- $ 365,892 -- $3,423
Commissions with affiliates to total commissions -- 8.84% -- .08%
Value of brokerage transactions with affiliates to total
brokerage transactions -- 16.1% -- .09%
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value of Fund shares is computed by dividing the
value of all securities plus other assets, less liabilities, by the number of
shares outstanding, and adjusting to the nearest cent per share.
Such computation is made by using prices as of the close of trading on the
Exchange and (i) valuing securities traded on a national securities exchange at
the last reported sale price, or if there has been no sale that day, at the mean
between the last reported bid and asked quotations, (ii) valuing
over-the-counter securities for which the last sale price is available from the
National Association of Securities Dealers Automated Quotations ("NASDAQ") at
that price, (iii) valuing all other over-the-counter securities for which market
quotations are available at the mean between the most recent bid and asked
quotations supplied by NASDAQ or broker-dealers, and (iv) valuing any securities
for which market quotations are not readily available, and any other assets at
fair value as determined in good faith by the Board of Directors of the Fund.
Short-term investments are valued in the manner described in Note 1 to the
Financial Statements included in this Statement of Additional Information.
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<PAGE> 56
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 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 Securities Act of 1933.
INVESTMENTS BY MAIL
A Shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the 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 under "Purchase of Shares -- Sales Charge Table" apply to
purchases of Class A shares of the Fund where the aggregate investment is
$50,000 or more. For purposes of determining eligibility for volume discounts,
spouses and their minor children are treated as a single purchaser, as is a
trustee or other fiduciary purchasing for a single fiduciary account. An
aggregate investment includes all shares of the Fund and all shares of certain
other participating American Capital mutual funds described in the Prospectus
(the "Participating Funds") which have been previously purchased and are still
owned, plus the shares being purchased. The current offering price is used to
determine the value of all such shares. If, for example, an investor has
previously purchased and still holds Class A shares of the Fund and shares of
other Participating Funds having a current offering
18
<PAGE> 57
price of $25,000, and that person purchases $30,000 of additional Class A shares
of the Fund, the charge applicable to the $30,000 purchase would be 4.75% of the
offering price. The same reduction is applicable to purchases under a Letter of
Intent as described in the next paragraph. THE DEALER MUST NOTIFY THE
DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY
FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION
MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. The reduced sales
charge will not be applied if such notification is not furnished at the time of
the order. The reduced sales charge will also not be applied should a review of
the records of the Distributor or ACCESS fail to confirm the representations
concerning the investor's holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
the value of all shares of such Participating Funds previously purchased and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totalling 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 escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the investor in shares of the Fund, the amount of excess sales
charges, if any, paid during the 13-month period.
VOLUME DISCOUNTS
The schedule of volume discounts in the Prospectus applies to purchases of
Class A shares made at one time by any purchaser, which term includes (1) an
individual -- or an individual, his or her spouse and children under the age of
21 -- purchasing securities for his or her or their own account; (2) a trustee
or other fiduciary of a single trust estate or a single fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code (the
"Code")), although more than one beneficiary is involved; and (3) tax-exempt
organizations enumerated in Section 501(c)(3) or (13) of the Code.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC-Class A") of one percent is imposed in the event of certain
redemptions within one year of the purchase. If a CDSC-Class A is imposed upon
redemption, the amount of the CDSC-Class A will be equal to the lesser of one
percent of the net asset value of the shares at the time of purchase, or one
percent of the net asset value of the shares at the time of redemption.
The CDSC-Class A will only be imposed if a Qualified Purchaser redeems an
amount which caused the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The CDSC-Class
A will be waived in connection with redemptions by certain Qualified Purchasers
(e.g., in retirement plans qualified under Section 401(a) of the Code and
deferred compensation plans under Section 457 of the Code) required to obtain
funds to pay distributions to beneficiaries pursuant to the terms of the plans.
Such payments include, but are not limited to, death, disability, retirement or
separation from service. No CDSC-
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<PAGE> 58
Class A will be imposed on exchanges between funds. For purposes of the
CDSC-Class A, when shares of one fund are exchanged for shares of another fund,
the purchase date for the shares of the fund exchanged into will be assumed to
be the date on which shares were purchased in the fund from which the exchange
was made. If the exchanged shares themselves are acquired through an exchange,
the purchase date is assumed to carry over from the date of the original
election to purchase shares subject to a CDSC-Class A rather than a front-end
load sales charge. In determining whether a CDSC-Class A is payable, it is
assumed that shares held the longest are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of American Capital Reserve Fund, Inc.
with shares of certain other participating American Capital mutual funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC-CLASS B
AND C").
The CDSC-Class B and C may be waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may 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 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.
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<PAGE> 59
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan (the
"Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "Initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's Initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C shares of the Fund, provided that the reinvestment is effected
within 120 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C shares of the
Fund. Shared acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
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.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include
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<PAGE> 60
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen American Capital nor the Fund will
be liable for following telephone instructions which it reasonably believes to
be genuine. Van Kampen American Capital and the Fund may be liable for any
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Fund's policy is to distribute to its Class A, Class B and Class C
shareholders substantially all of its taxable net investment income quarterly.
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 higher distribution fees and
higher transfer agency fees applicable to the Class B and Class C shares. Any
taxable net realized capital gains are distributed annually. Taxable net
realized capital gains are the excess, if any, of the Fund's 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 in
accordance with the tax laws. Such capital gains, if any, are distributed at
least once a year. All income dividends and capital gains distributions are
reinvested in shares of the Fund at net asset value without sales commission on
the record date, except that any shareholder may otherwise instruct ACCESS in
writing and receive cash. Shareholders are informed as to the sources of
distributions at the time of payment.
The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders of Class A, Class B and Class C shares and meet certain
diversification and other requirements. 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 calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. To the extent
determined each year, a portion of dividends paid from net investment income
qualifies in the case of corporations, for the 70% dividends received deduction.
To qualify
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<PAGE> 61
for the dividends received deduction, a corporate shareholder must hold the
shares on which the dividend is paid for more than 45 days.
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.
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. Such distributions and distributions from short-term capital gains are
not eligible for the dividends received deduction referred to above. 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 an exception 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 unless such amount is less than $10.00, in which case no notice
is provided.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized on
the basis of the subsequent shares.
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
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
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.
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.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Code includes special rules applicable to certain listed options
(excluding equity options as defined in the Code), 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
marked-to-market rule or to 60/40 gain or loss treatment. Any
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<PAGE> 62
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.
Certain 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 December 31, 1994, was -9.21%, 6.12% and 10.68%,
respectively. The average annual total returns (computed in the manner described
in the Prospectus) for Class B shares of the Fund for the one-year period ended
December 31, 1994 and for the two-year two-month period beginning October 19,
1992 (the initial offering of Class B shares) through December 31, 1994 were
- -8.20% and 3.14%, respectively. The aggregate total return (computed in the
manner described in the Prospectus) for Class C shares for the one-year period
ended December 31, 1994 and for the one-year two-month period beginning October
26, 1993 to December 31, 1994 were -5.19% and -2.86%, respectively. These
results are based on historical earnings and asset value fluctuations and are
not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in investing primarily in convertible securities and common
stocks. Future results will be effected by changes in the general level of
prices of common stocks and fixed income securities for purchase and sale by the
Fund. The past one-year, five-year, and ten-year periods have been ones of
rising common stock prices, subject to interim fluctuations.
Total return is computed separately for Class A, Class B and Class C
shares.
From time to time, the VKAC will announce the results of their monthly
polls of U.S. investor intentions -- the Van Kampen American Capital Index of
Investor Intentions and the Van Kampen 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.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to
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<PAGE> 63
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
Funds.
OTHER INFORMATION
VOTING RIGHTS -- When matters are submitted for a shareholder vote, each
shareholder is entitled to one vote for each share owned. Shares have cumulative
voting rights, which means that each shareholder has the right to cast a number
of votes equal to the number of shares owned multiplied by the number of
directors to be elected, and each shareholder may cast the whole number of votes
for one candidate or distribute such votes among two or more candidates, as the
shareholder chooses.
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, performs an annual audit of the
Fund's financial statements.
FINANCIAL STATEMENTS
Financial statements, including Investment Portfolio, Statement of Assets
and Liabilities, Statement of Operations, Statement of Changes in Net Assets,
Notes to Financial Statements, Financial Highlights and Report of Independent
Accountants on such financial statements, are hereby incorporated by reference
to the Fund's Annual Report to shareholders for the year ended December 31, 1994
previously filed with the SEC on or about March 10, 1995. The Fund will furnish,
without charge, a copy of such Annual Report on request by calling or writing
the Fund at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
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
$50,000 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 December
31, 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Net Asset Value per Class A Share $12.40
Class A Per Share Sales Charge -- 5.75% of offering price
(6.10% of net asset value per share) $ .76
------------
Class A Per Share Offering Price to the Public $13.16
</TABLE>
25
