AMERICAN CAPITAL HIGH YIELD INVESTMENTS INC, 497, 1995-05-04

AMERICAN CAPITAL HIGH YIELD INVESTMENTS INC
497, 1995-05-04

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<PAGE> 1

SUPPLEMENT, DATED MAY 1, 1995 TO
PROSPECTUSES OF:

AMERICAN CAPITAL CORPORATE BOND FUND, INC.
AMERICAN CAPITAL EMERGING GROWTH FUND, INC.
AMERICAN CAPITAL GLOBAL EQUITY FUND
AMERICAN CAPITAL GLOBAL GOVERNMENT SECURITIES FUND
AMERICAN CAPITAL GROWTH AND INCOME FUND, INC.
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
AND
AMERICAN CAPITAL PACE FUND, INC.

1. Effective today, the Distributor has increased the ongoing payments to
broker-dealers and other Service Organizations with respect to Class C shares.
The Distributor will now pay broker-dealers and other Service Organizations
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares for the second through tenth year after
purchase for Class C shares sold on or after May 1, 1995. Broker-dealers and
other Service Organizations will still be paid ongoing commissions and
transaction fees for the second through tenth year after purchase of up to 0.65%
for Class C shares sold before May 1, 1995.

2. The first two paragraphs of "Shareholder Services -- Shareholder
Services Applicable to all Classes -- Exchange Privilege" are amended to read in
their entirety as follows:

EXCHANGE PRIVILEGE. Shares of the 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,
and the American Capital Global Government Securities Fund of World
Portfolio are subject to a 30-day holding period requirement. Shares of
Government Target may be exchanged for Class A shares of the Fund without
sales charge. Class A shares of Reserve that were not acquired in exchange
for Class B or Class C shares of a Participating Fund may be exchanged for
Class A shares of the Fund upon payment of the excess, if any, of the sales
charge rate applicable to the shares being acquired over the sales charge
rate previously paid. Shares of Reserve acquired through an exchange of
Class B or Class C shares may be exchanged only for the same class of
shares of a Participating Fund without incurring a contingent deferred
sales charge. Shares of any Participating Fund or Reserve may be exchanged
for shares of any other Participating Fund if shares of that Participating
Fund are available for sale; however, during periods of suspension of
sales, shares of a Participating Fund may be available for sale only to
existing shareholders of the Participating Fund. Additional Funds may be
added from time to time as a Participating Fund.
<PAGE> 2

Class B and Class C shareholders of the Fund have the ability to
exchange their shares ("original shares") for the same class of shares of
any other American Capital fund that offers such class of shares ("new
shares") in an amount equal to the aggregate net asset value of the
original shares, without the payment of any contingent deferred sales
charge otherwise due upon redemption of the original shares. For purposes
of computing the contingent deferred sales charge payable upon a
disposition of the new shares, the holding period for the original shares
is added to the holding period of the new shares. Class B and Class C
shareholders would remain subject to the contingent deferred sales charge
imposed by the original fund upon their redemption from the American
Capital complex of funds. The contingent deferred sales charge is based on
the holding period requirements of the original fund.

3. The following should be added under the section entitled "Purchase of
Shares -- General":

Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by registered
representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
<PAGE> 3
SUPPLEMENT, DATED JANUARY 16, 1995 TO
PROSPECTUSES OF:

AMERICAN CAPITAL CORPORATE BOND FUND, INC.
AMERICAN CAPITAL GLOBAL GOVERNMENT FUND
AMERICAN CAPITAL GLOBAL MANAGED ASSETS FUND, INC.
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
AMERICAN CAPITAL REAL ESTATE SECURITIES FUND, INC.
AMERICAN CAPITAL TAX-EXEMPT TRUST
AMERICAN CAPITAL TEXAS MUNICIPAL SECURITIES, INC.
AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
AND
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.

1. Effective January 16, 1995, for full service participant directed profit
sharing and money purchase plans administered by Van Kampen/American Capital
Trust Company, no sales charge is payable at the time of purchase for plans
with at least 50 eligible employees or investing at least $250,000 in American
Capital funds, which includes Participating Funds as described in the
Prospectus under "Purchase of Shares--Class A Shares--Volume Discounts," and
American Capital Reserve Fund, Inc. For such investments the Fund imposes a
contingent deferred sales charge of 1% in the event of certain redemptions
within one year of the purchase.

Effective January 16, 1995, the Fund will also begin imposing a
contingent deferred sales charge of 1% in the event of certain redemptions
within one year of the purchase with respect to those qualified 401(k)
retirement plans that are administered under Van Kampen/American Capital Trust
Company's (k) Advantage Program, or similar recordkeeping programs made
available through Van Kampen/American Capital Trust Company purchasing shares
of the Fund at net asset value.

2. Effective January 16, 1995, the Distributor will no longer pay any
commission on accounts opened for shareholders where the amounts invested
represent the redemption proceeds from investment companies distributed by an
entity other than the Distributor.

3. Effective January 16, 1995, the sales charge structure for Class A shares
has been modified as follows:

SALES CHARGE TABLE

<TABLE>
<CAPTION>
REALLOWED
TO DEALERS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.99% 4.75% 4.00%
$100,000 but less than $250,000 3.90% 3.75% 3.25%
$250,000 but less than $500,000 2.83% 2.75% 2.25%
$500,000 but less than $1,000,000 2.04% 2.00% 1.75%
$1,000,000 and over (see herein) (see herein) (see herein)
- --------------------------------------------------------------------------------
</TABLE>

No sales charge is payable at the time of purchase on investments of
$1 million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses.
A commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.

4. Effective January 16, 1995, the Fund may sell Class A shares of the Fund at
net asset value to Service Organizations for the benefit of their clients who
are participating in such Service Organizations' "wrap accounts." Service
Organizations must execute supplemental agreements to their existing selling
agreement with the Distributor in order to qualify for the program.

999 STK-008

<PAGE> 4
SUPPLEMENT, DATED DECEMBER 20, 1994 TO
PROSPECTUSES OF:

AMERICAN CAPITAL COMSTOCK FUND, INC.
AMERICAN CAPITAL CORPORATE BOND FUND, INC.
AMERICAN CAPITAL EMERGING GROWTH FUND, INC.
AMERICAN CAPITAL EQUITY INCOME FUND, INC.
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
AMERICAN CAPITAL GROWTH AND INCOME FUND, INC.
AMERICAN CAPITAL HARBOR FUND, INC.
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
AMERICAN CAPITAL PACE FUND, INC.
AMERICAN CAPITAL REAL ESTATE SECURITIES FUND, INC.
AMERICAN CAPITAL TAX-EXEMPT TRUST
AMERICAN CAPITAL TEXAS MUNICIPAL SECURITIES, INC.
AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
AND
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.

1. On December 20, 1994, The Van Kampen Merritt Companies, Inc. (the "Buyer")
acquired from The Travelers Inc. ("Travelers") 100% ownership (the
"Acquisition") of American Capital Management & Research, Inc. (the "Company"),
the parent corporation of American Capital Asset Management, Inc. (the
"Adviser"), the Funds' investment adviser, and American Capital Marketing, Inc.
(the "Distributor"), the Funds' distributor. The Company was merged with and
into the Buyer after the Acquisition. The combined parent company was renamed
Van Kampen/American Capital, Inc. ("VKAC"). The Adviser and the Distributor are
wholly owned subsidiaries of VKAC, which is a wholly owned subsidiary of VK/AC
Holding, Inc. Prior to the Acquisition, the Company was an indirect wholly owned
subsidiary of Travelers.

The Adviser was renamed Van Kampen/American Capital Asset Management, Inc.
and will continue to provide investment advisory services to the Fund. The
Distributor was renamed Van Kampen/American Capital Marketing, Inc. and will
continue to provide distribution services to the Funds until approximately
December 31, 1994 when the Buyer anticipates merging the Distributor into Van
Kampen/American Capital Distributors, Inc. a registrered broker-dealer that
currently serves as distributor to the Van Kampen Merritt family of mutual
funds.

On December 16, 1994, in connection with the Acquisition, the
shareholders of each Fund approved a new investment advisory agreement with the
Adviser providing for the same terms and services as the investment advisory
agreement between each Fund and the Adviser that was in effect before the
Acquisition.

The Buyer is a wholly owned subsidiary of VK/AC Holding, Inc. which is
controlled by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership, ("C&D L.P."). C&D L.P. is managed by Clayton, Dubilier & Rice,
Inc., a private investment firm. It is anticipated that members of senior
management of the Buyer who were members of senior management of the Company
prior to the Acquisition will acquire minority interests (totaling less than 5%
in the aggregate) in VK/AC Holding, Inc. As part of the Acquisition, Travelers
also acquired a minority non-voting interest (representing less than 5%) in
VK/AC Holding, Inc. and was granted an option entitling Travelers, upon the
satisfaction of certain conditions, to purchase from VK/AC Holding, Inc.
additional non-voting shares representing up to 5% of outstanding VK/Holding,
Inc. common shares. 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.

As of September 30, 1994, subsidiaries of VKAC on a pro forma basis would
have managed or supervised $51.8 billion of assets, including assets of 66
open-end investment companies and 38 closed-end investment companies having
aggregate total assets of $32.4 billion.

<PAGE> 5
2. Effective December 20, 1994, shares of each Fund will no longer be offered
at net asset value to accounts opened for shareholders by dealers where the
amounts invested represent the redemption proceeds from investment companies
distributed by either the Distributor or Van Kampen/American Capital
Distributors, Inc. This change does not affect any exchange or reinstatement
privilege described in each Fund's Prospectus.

3. Other agreements entered into in connection with the acquisition provide,
among other things and subject to certain conditions, for certain favorable
distribution arrangements for shares of the Fund(s) with subsidiaries of
Travelers.

4. For all Funds except American Capital Municipal Bond Fund, Inc., American
Capital Tax-Exempt Trust, and American Capital Texas Municipal Securities,
Inc.: The Distributor is sponsoring a sales incentive program for A.G. Edwards
& Sons, Inc. ("A.G. Edwards"). The Distributor will reallow its portion of the
Fund's sales concession to A.G Edwards on sales of Class A Shares of the Fund
relating to the "rollover" of any savings into an Individual Retirement Account
("IRA"), the transfer of assets into an IRA and contributions to an IRA,
commencing on January 1, 1995 and terminating on April 15, 1995.

5. The description in the Prospectus found at Purchase of Shares--Class A Shares
regarding the purchase of Class A shares at net asset value by directors of the
Fund and employees and officers of the Adviser and certain affiliates of the
Adviser and certain of their family members is replaced by the following:

6. For all Funds except American Capital Comstock Fund, Inc., American Capital
Emerging Growth Fund, Inc., American Capital Equity Income Fund, Inc., American
Capital Growth and Income Fund, Inc., American Capital Harbor Fund, Inc., and
American Capital Pace Fund, Inc.: The Adviser may utilize at its own expense
credit analysis, research and trading support services provided by its
affiliate, Van Kampen/American Capital Investment Advisory Corp. (formerly Van
Kampen Merritt Investment Advisory Corp.).

7. 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.
<PAGE> 6

- --------------------------------------------------------------------------------
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.
- --------------------------------------------------------------------------------

2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
December 15, 1994

American Capital High Yield Investments, Inc. (the "Fund") is a mutual fund
seeking as its primary objective maximum current income. Capital appreciation is
a secondary objective which is sought only when consistent with the primary
objective. The Fund attempts to achieve these investment objectives by investing
primarily in high yielding high risk fixed-income securities. SUCH SECURITIES
ARE REGARDED BY THE RATING AGENCIES AS SPECULATIVE WITH RESPECT TO THE ISSUER'S
CONTINUING ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS. See "Investment
Objectives and Policies--Risk Factors of Investing in Lower Rated Debt
Securities."

The Fund is designed for investors willing to assume additional risk in return
for above average income. Investors should assess carefully the risks associated
with an investment in the Fund.

There is no assurance that the Fund will achieve its investment objectives.

This Prospectus tells investors briefly the information they should know
before investing in the Fund. Investors should read and retain this Prospectus
for future reference.

A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and contains
further information about the Fund. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Fund at the
telephone number and address printed above. The Statement of Additional
Information is incorporated by reference into this Prospectus.

THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 7

CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110

SHAREHOLDER SERVICE AGENT:
American Capital Companies
Shareholder Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256

INVESTMENT ADVISER:
American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056

DISTRIBUTOR:
Asset Management, Inc.
Marketing, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056

- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Prospectus Summary................ 2
Expense Synopsis.................. 4
Financial Highlights.............. 5
Multiple Pricing System........... 6
Investment Objectives and
Policies........................ 7
Investment Practices and
Restrictions.................... 11
The Fund and Its Management....... 13
Purchase of Shares................ 14
Distribution Plans................ 19
Shareholder Services.............. 20
Redemption of Shares.............. 23
Dividends, Distributions and
Taxes........................... 24
Prior Performance Information..... 25
Additional Information............ 26
Appendix -- Description of Bond
Ratings......................... 27
Investment Holdings............... 29
</TABLE>

- --------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or by the Distributor. This Prospectus does
not constitute an offering by the Distributor in any jurisdiction in which such
offering may not lawfully be made.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------

SHARES OFFERED. Common Stock.

MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").

TYPE OF COMPANY. Diversified, open-end management investment company.

INVESTMENT OBJECTIVES. Maximize current income with a secondary objective of
capital appreciation.

INVESTMENT POLICY. Investing at least 80% of the Fund's total assets in a
diversified portfolio of high yielding, high risk debt securities and preferred
stocks. The Fund may, from time to time, purchase common stocks and other equity
securities and non-income producing securities.

INVESTMENT RESULTS. The investment results of the Fund are shown in the
"Financial Highlights" table.

RISK FACTORS. The lower rated debt securities in which the Fund may invest are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Because investment in lower
rated securities (commonly referred to as junk bonds) involves greater
investment risk, achievement of the Fund's investment objectives may be more
dependent on the investment adviser's credit analysis than would be the case if
the Fund were investing in higher rated securities. Lower rated securities may
be more susceptible to real or perceived adverse economic and competitive
industry conditions than investment grade securities and thus be subject to
greater risk. A projection of an economic downturn, for example, could cause a
decline in lower rated securities prices because the advent of a recession could
lessen the ability of a

2
<PAGE> 8

highly leveraged company to make principal and interest payments on its debt
securities. In addition, the secondary trading market for lower rated securities
may be less liquid than the market for higher grade securities. The market
prices of debt securities also generally fluctuate with changes in interest
rates so that the Fund's net asset value can be expected to decrease as
long-term interest rates rise and to increase as long-term interest rates fall.
The above risks may be increased by investments in debt securities not producing
immediate cash income, such as zero-coupon securities. See "Investment
Objectives and Policies." The Fund may seek to hedge investments through
transactions in options, futures contracts and related options. Such
transactions involve certain risks. See "Investment Practices and
Restrictions -- Options, Futures Contracts and Related Options."

INVESTMENT ADVISER. American Capital Asset Management, Inc. (the "Adviser")
serves as investment adviser to the Fund. The Adviser provides investment advice
to 45 investment company portfolios. See "The Fund and Its Management."

DISTRIBUTOR. American Capital Marketing, Inc. (the "Distributor").

MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Multiple Pricing
System -- Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."

CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."

CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first and second year, declining each year thereafter to 0%
after the fifth year. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class B
Shares" and "Distribution Plans." Class B shares will convert automatically to
Class A shares six years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."

CLASS C SHARES. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of 1% on redemptions made within
one year of purchase. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution Plans." Class C shares will convert automatically to
Class A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."

DIVIDENDS AND DISTRIBUTIONS. Income dividends are distributed monthly. All
dividends and distributions are automatically reinvested in shares of the Fund
at net asset value per share (without sales charge) unless payment in cash is
requested. See "Dividends, Distributions and Taxes."

3
<PAGE> 9

- --------------------------------------------------------------------------------
EXPENSE SYNOPSIS
- --------------------------------------------------------------------------------

The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price)..... 4.75%(a) None None
Sales charge imposed on dividend
reinvestments........................... None None None
Deferred sales charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None* 4% during the first and 1.0% during the
second year, 3% during first year(b)
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........................... .56% .56% .56%
Rule 12b-1 fees(d)........................ .21% 1.00%(f) 1.00%(f)
Other expenses(e)......................... .33% .34% .35%
Total fund operating expenses............. 1.10% 1.90% 1.91%
</TABLE>

- ------------
(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares" -- page 15.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- pages
18 and 19.
(c) Not charged in certain circumstances. See "Shareholder
Services -- Shareholder Services Applicable to All Classes -- Systematic
Exchange" and ". . . -- Automatic Exchange" -- page 20.
(d) Up to .25% for Class A shares and 1% for Class B and C shares. See
"Distribution Plans" -- page 19.
(e) See "The Fund and Its Management" -- page 13.
(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 1% may be
imposed on certain redemptions made within one year of the purchase.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum $47.50
front-end sales charge and for Class B and Class C shares, a
contingent deferred sales charge assuming (1) an operating
expense ratio of 1.10% for Class A shares, 1.90% for Class B
shares and 1.91% for Class C shares, (2) a 5% annual return
throughout the period and (3) redemption at the end of the
period:
Class A.................................................... $ 58 $ 81 $105 $175
Class B.................................................... $ 61 $ 93 $120 $182**
Class C.................................................... $ 30 $ 60 $103 $223
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A.................................................... $ 58 $ 81 $105 $175
Class B.................................................... $ 19 $ 60 $103 $182**
Class C.................................................... $ 19 $ 60 $103 $223
---------------------------------------------------------------------------------------------------------
</TABLE>

** Based on conversion to Class A shares after six years.

The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. See "Purchase of Shares," "The Fund and Its Management" and
"Redemption of Shares." The example is included to provide a means for the
investor to compare expense levels of funds with different fee structures over
varying investment periods. To facilitate such comparison, all funds are
required to utilize a five percent annual return assumption. This assumption is
unrelated to the Fund's prior performance and is not a projection of future
performance. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.

4
<PAGE> 10

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(Selected data for a share of capital stock outstanding throughout each of the
periods indicated)

The following information for each of the last five years has been audited by
Price Waterhouse LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31
---------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
-------- --------- ---------- --------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period..... $6.61 $6.40 $5.71 $5.78 $7.96 $9.09 $9.86 $10.02
-------- --------- ---------- --------- --------- ---------- ---------- --------
Income from investment operations
Investment income........................ .71 .71 .79 .86 1.00 1.22 1.27 1.27
Expenses................................. (.08) (.07) (.065) (.06) (.07) (.07) (.07) (.07)
-------- --------- ---------- ----------- --------- ---------- ---------- --------
Net investment income.................... .63 .64 .725 .80 .93 1.15 1.20 1.20
Net realized and unrealized gain or loss
on securities........................... (.47) .27 .6775 (.055) (2.165) (1.0775) (.7025) (.12)
-------- --------- ---------- ---------- --------- ---------- ---------- --------
Total from investment operations......... .16 .91 1.4025 .745 (1.235) .0725 .4975 1.08
-------- --------- ---------- ---------- --------- ---------- ---------- --------
Less dividends and distributions
Dividends from net investment income..... (.65) (.70) (.7125) (.815) (.945) (1.2025) (1.2675) (1.23)
Distribution from net realized gain on
securities.............................. -- (.01) -- -- -- -- -- --
-------- --------- ---------- ---------- --------- ---------- ---------- --------
Total distributions...................... (.65) (.70) (.7125) (.815) (.945) (1.2025) (1.2675) (1.24)
-------- --------- ---------- ---------- --------- ---------- ---------- --------
Net asset value, end of period........... $6.12 $6.61 $6.40 $5.71 $5.78 $7.96 $9.09 $9.86
======== ========= =========== ========== ========= ========== =========== ========
TOTAL RETURN (5)......................... 2.34% 15.20% 25.82% 15.66% (15.88%) .81% 6.32% 11.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..... $364.2 $452.4 $435.1 $341.9 $331.4 $554.4 $582.6 $578.8
Ratios to average net assets
Expenses................................ 1.10% 1.09% 1.05% 1.06% 1.02% .77% .73% .69%
Net investment income................... 9.03% 10.10% 11.77% 15.20% 14.23% 13.27% 13.14% 12.19%
Portfolio turnover rate.................. 66% 75% 73% 114% 59% 45% 58% 66%

CLASS B CLASS C (2)
-------------------------------- -----------------------
JULY 2, JULY 6,
1992 (1) YEAR 1993 (1)
YEAR ENDED AUGUST 31 THROUGH ENDED THROUGH
-------------------- AUGUST 31, AUGUST 31, AUGUST 31,
1986 (3) 1985 (3) 1994 1993 (2) 1992 (2) 1994 1993
---------- ---------- -------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period..... $10.21 $9.31 $6.63 $6.41 $ 6.33 $ 6.61 $ 6.63
---------- ---------- -------- -------- ----------- ---------- ----------
Income from investment operations
Investment income........................ 1.35 1.40 .71 .70 .11 .65 .08
Expenses................................. (.07) (.07) (.13) (.12) (.02) (.12) (.02)
---------- ---------- -------- -------- ----------- ---------- ----------
Net investment income.................... 1.28 1.33 .58 .58 .09 .53 .06
Net realized and unrealized gain or loss
on securities........................... (.1375) .8475 (.468) .292 .097 (.428) .0195
---------- ---------- -------- -------- ----------- ---------- ----------
Total from investment operations......... 1.1425 2.1775 .112 .872 .187 .102 .0795
---------- ---------- -------- -------- ----------- ---------- ----------
Less dividends and distributions
Dividends from net investment income..... (1.3325) (1.2775) (.602) (.652) (.107) (.602) (.0995)

Distribution from net realized gain on
securities.............................. -- -- -- -- -- -- --
---------- ---------- -------- -------- ----------- ---------- ----------
Total distributions...................... (1.3325) (1.2775) (.602) (.652) (.107) (.602) (.0995)

---------- ---------- -------- -------- ----------- ---------- ----------
Net asset value, end of period........... $10.02 $10.21 $6.14 $6.63 $ 6.41 $ 6.11 $ 6.61
=========== =========== ======== ======== =========== ========== ==========
TOTAL RETURN (5)......................... 11.46% 25.03% 1.59% 14.49% 2.97% 1.43% 1.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..... $535.3 $456.5 $71.0 $37.7 $ 3.1 $ 13.2 $ 1.0
Ratios to average net assets
Expenses................................ .66% .70% 1.90% 1.90% 2.08% (5) .91% 2.34% (5)

Net investment income................... 12.23% 13.66% 8.25% 9.10% 10.30% (5) 8.25% 8.05% (5)

Portfolio turnover rate.................. 86% 82% 66% 75% 73% 66% 75%
</TABLE>

- ------------

(1) Commencement of offering of sales.

(2) Based on the average month-end shares outstanding.

(3) Effective for the year ended August 31, 1987, the Fund adopted for financial
reporting purposes an accounting method of amortizing debt discounts and
premiums on the same basis as is used for federal income tax reporting. The
effect of the change in accounting method, on a pro forma basis, would have
been to increase net investment income with a corresponding decrease in net
realized and unrealized gains or losses in the amounts of $.02 and $.01, for
the years 1986 and 1985, respectively. Similarly, the ratios of net
investment income to average net assets would have been 12.38% and 13.80%,
respectively.

(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.

(5) Annualized.

5
<PAGE> 11

- --------------------------------------------------------------------------------
MULTIPLE PRICING SYSTEM
- --------------------------------------------------------------------------------

The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.

CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Purchase of Shares -- Class A Shares."

CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of Shares --
Class B Shares." Class B shares will automatically convert to Class A shares six
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. See "Conversion Feature" below for discussion on
applicability of the conversion feature to Class B shares.

CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will 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
compensated for distribution expenses related to the Class B shares or Class C
shares as the case may be, from the burden of the ongoing distribution fee.

For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.

The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six years or ten years, respectively, after the end of the calendar month
in which the shareholder's order to purchase was accepted.

FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share on Class A
shares. To assist investors in making this determination, the table under the
caption "Expense Synopsis" sets forth examples of the charges applicable to each
class of shares. In this regard, Class A shares may be more beneficial to the
investor who qualifies for

6
<PAGE> 12

reduced initial sales charges or purchases at net asset value, as described
herein under "Purchase of Shares -- Class A Shares." For these reasons, the
Distributor will reject any order of $250,000 or more for Class B shares or any
order of $1 million or more for Class C shares.

Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors in
Class A shares do not have all their funds invested initially and, therefore,
initially own fewer shares. Other investors might determine that it is more
advantageous to purchase either Class B shares or Class C shares and have all
their funds invested initially, although remaining subject to ongoing
distribution fees and, for a five-year or one-year period, respectively, being
subject to a contingent deferred sales charge. Ongoing distribution fees on
Class B shares and Class C shares will be offset to the extent of the additional
funds originally invested and any return realized on those funds. However, there
can be no assurance as to the return, if any, which will be realized on such
additional funds. For investments held for ten years or more, the relative value
upon liquidation of the three classes tends to favor Class A or Class B shares,
rather than Class C shares.

Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (see "Shareholder Services Applicable to Class A Shareholders
Only -- Check Writing Privilege"). Class B shares may be appropriate for
investors who wish to avoid a front-end shares charge, put 100% of their
investment dollars to work immediately, and/or have a longer-term investment
horizon. Class C shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.

Under most circumstances, for investments aggregating less than $100,000 at
the time of purchase, investments originally made in Class C shares will tend to
have a slightly higher value upon liquidation than investments originally made
in either Class A or Class B shares if liquidated within approximately the first
six years after the date of the original investment and investments originally
made in Class B shares will tend to have a slightly higher value upon
liquidation than investments originally made in either Class A or Class C shares
for investments held longer. Under most circumstances, for investments
aggregating $100,000 or more at the time of purchase, investments originally
made in Class C shares will tend to have a slightly higher value upon
liquidation than either investments originally made in Class A or Class B shares
if liquidated within approximately the first two to the first six years after
the date of the original investment, but investments originally made in Class A
and Class B shares will tend to have a slightly higher value upon liquidation
for investments held longer. The foregoing will not, however, be true in all
cases. Particularly, if the Fund experiences a consistently negative or widely
fluctuating total return, results may differ.

The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling Class A, Class B or Class C shares. INVESTORS SHOULD UNDERSTAND THAT THE
PURPOSE AND FUNCTION OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING
DISTRIBUTION FEE WITH RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE
SAME AS THOSE OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. SEE
"DISTRIBUTION PLANS."

GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
"Dividends, Distributions and Taxes." Shares of the Fund may be exchanged,
subject to certain limitations, for shares of the same class of other mutual
funds advised by the Adviser. See "Shareholder Services -- Exchange Privilege."

The Directors of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 (the "1940 Act") and state laws, will seek to ensure that no
such conflict arises.

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

The Fund's primary objective is to maximize current income. Capital
appreciation is a secondary objective which will be sought only when consistent
with its primary objective. The Fund attempts to achieve these investment
objectives by investing in high yielding fixed-income securities (commonly
referred to as junk bonds), which are subject to high risk as described below.
Fixed-income securities appropriate for the Fund may include

7
<PAGE> 13

both convertible and non-convertible debt securities and preferred stocks. The
Fund's investment objectives may be changed by the Fund's Board of Directors
without shareholder approval, but no change is anticipated. If there is a change
in investment objectives, shareholders should consider whether the Fund remains
an appropriate investment in light of their then current financial position and
needs. There is no assurance that these objectives will be achieved and yields
may fluctuate over time.

The Fund generally invests at least 80% of its total assets in fixed-income
securities rated Baa or lower by Moody's Investors Service ("Moody's"), or BBB
or lower by Standard & Poor's Corporation ("S&P"). See the Appendix for a
description of corporate bond ratings. Since some issuers do not seek ratings
for their securities, nonrated securities are also considered for investment by
the Fund.

In general, the prices of debt securities vary inversely with interest rates.
If interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price (gaining
or losing more in value) than shorter-maturity debt securities, and generally
offer higher yields than shorter-maturity debt securities, all other factors,
including credit quality, being equal. This potential for a decline in prices of
debt securities due to rising interest rates is referred to herein as "market
risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of two to six years.
Duration is a measure of the expected life of a debt security that was developed
as a more precise alternative to the concept of "term to maturity." Duration
incorporates a debt security's yield, coupon interest payments, final maturity
and call features into one measure.

Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and "term to maturity" are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest, the shorter the
maturity or the higher the yield-to-maturity of a debt security, the shorter its
duration.

There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At August 31, 1994, the average
maturity of the debt securities owned by the Fund was approximately 8.08 years
and the duration of the portfolio was approximately 5.2 years. The duration is
likely to vary from time to time as the Adviser pursues its strategy of striving
to maintain an active balance between seeking to maximize income and endeavoring
to maintain the value of the Fund's capital. Thus, the objective of providing
high current return to shareholders is tempered by seeking to avoid undue market
risk and thus provide reasonable total return as well as high distributed
return. There is, of course, no assurance that the Adviser will be successful in
achieving such results for the Fund.

The higher yields sought by the Fund are generally obtainable from securities
rated in the lower categories by recognized rating services. These securities
generally are subordinated to the prior claims of banks and other senior
lenders. The lower rated debt securities in which the Fund may invest are
regarded as predominately speculative with respect to the issuers continuing
ability to meet principal and interest payments. The ratings of Moody's and S&P
represent their opinions of the quality of the debt securities they undertake to
rate, but not the market value risk of such securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, debt securities with the same maturity, coupon and rating may have
different yields while debt securities of the same maturity and coupon with
different ratings may have the same yield.

8
<PAGE> 14

During the fiscal year ended August 31, 1994, the average percentage of the
Fund's assets invested in debt securities within the various rating categories
(based on the higher of the S&P or Moody's ratings), and the nonrated debt
securities, determined on a dollar weighted average, were as follows:

- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
BBB/Baa................................................................ 1.40%
BB/Ba.................................................................. 13.63%
B...................................................................... 57.86%
CCC/Caa................................................................ 5.34%
*Nonrated.............................................................. 9.67%
Preferred Stocks....................................................... 3.58%
Common Stocks/Warrants................................................. 1.51%
Cash and Equivalents................................................... 7.01%
-------
Total Net Assets............................................. 100%
</TABLE>

- --------------------------------------------------------------------------------
* The nonrated securities and private placements as a percentage of total net
assets were considered by the Adviser to be comparable to securities rated by
Moody's as follows: BB--.42%; B--8.28%; CCC--.85%; and D--.12%.

LOWER RATED DEBT SECURITIES. The securities in which the Fund may invest
include the following:

-- STRAIGHT FIXED-INCOME DEBT SECURITIES. These include bonds and other debt
obligations which bear a fixed or variable rate of interest payable at regular
intervals and have a fixed or resettable maturity date. The particular terms
of such securities vary and may include features such as call provisions and
sinking funds.

-- PAY-IN-KIND DEBT SECURITIES. These pay interest in additional debt
securities rather than cash.

-- ZERO-COUPON DEBT SECURITIES. These bear no interest obligation but are
issued at a discount from their value at maturity. When held to maturity,
their entire return equals the difference between their issue price and their
maturity value.

-- ZERO-FIXED-COUPON DEBT SECURITIES. These are zero-coupon debt securities
which convert on a specified date to interest-bearing debt securities.

The Fund may invest in debt instruments not producing immediate cash income,
such as zero-coupon securities, when their effective yield premiums over
comparable instruments producing cash income make these investments attractive.
Prices on non-cash-paying instruments may be more sensitive to changes in the
issuer's financial condition, fluctuations in interest rates and market
demand/supply imbalances than cash-paying securities with similar credit
ratings, and thus may be more speculative. In addition, the non-cash interest
income earned on such instruments is included in investment company taxable
income, thereby increasing the minimum required distributions to shareholders
(without providing the corresponding cash flow with which to pay such
distributions). See "Dividends, Distributions and Taxes." The Adviser will weigh
these concerns against the expected total returns for such instruments.

The Fund may invest in debt securities rated below B by both Moody's and S&P,
common stocks or other equity securities and income bonds on which interest is
not being paid when such investments are consistent with the Fund's investment
objectives or are acquired as part of a unit consisting of a combination of
fixed-income or equity securities. Equity securities as referred to herein do
not include preferred stocks. The Fund will not purchase any such securities
which will cause more than 20% of its total assets to be so invested or which
would cause more than 10% of its total assets to be invested in common stocks,
warrants and options on equity securities. This limitation does not require the
sale of a portfolio security whose rating has been changed.

Fixed-income securities rated below B by both Moody's and S&P include debt
obligations or other securities of companies that are financially troubled, in
default or are in bankruptcy or reorganization ("Deep Discount Securities").
These securities may be rated C, CI or D by S&P and C by Moody's. Debt
obligations of such companies are usually available at a deep discount from the
face value of the instrument. The Fund will invest in Deep Discount Securities
when the Adviser believes that existing factors are likely to restore the
company to a healthy financial condition. Such factors include a restructuring
of debt, management changes, existence of adequate assets, or other unusual
circumstances.

A debt instrument purchased at a deep discount may currently pay a very high
effective yield. In addition, if the financial condition of the issuer improves,
the underlying value of the security may increase, resulting in a capital gain.
If the company defaults on its obligations or remains in default, or if the plan
of reorganization is insufficient for debtholders, the Deep Discount Securities
may stop generating income and lose value or become worthless. The Adviser will
balance the benefits of Deep Discount Securities with their risks. While a
diversified portfolio may reduce the overall impact of a Deep Discount Security
that is in default or loses its value, the risk cannot be eliminated.

9
<PAGE> 15

OTHER INVESTMENTS. The Fund may invest up to 20% of its total assets in United
States currency denominated debt issues of foreign governments and other foreign
issuers. See "Investment Practices and Restrictions -- Securities of Foreign
Issuers." In order to hedge against changes in interest rates, the Fund may
invest in or write options on U.S. Government securities and engage in
transactions involving interest rate futures contracts and options on such
contracts. See "Investment Practices and Restrictions --Options, Futures
Contracts and Related Options" and the Statement of Additional Information for
discussion of options, futures contracts and related options.

When market conditions dictate a more "defensive" investment strategy, the
Fund may invest on a temporary basis up to all of its assets in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
prime commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. See "Investment Practices and Restrictions -- Repurchase
Agreements." Under normal market conditions, the yield on these securities will
tend to be lower than the yield on other securities owned by the Fund.

RISK FACTORS OF INVESTING IN LOWER RATED DEBT SECURITIES. Past experience may
not provide an accurate indication of future performance of the market for lower
rated debt securities, particularly during periods of economic recession. An
economic downturn or increase in interest rates is likely to have a greater
negative effect on this market, the value of lower rated debt securities in the
Fund's portfolio, the Fund's net asset value and the ability of the bonds'
issuers to repay principal and interest, meet projected business goals and
obtain additional financing than on higher rated securities. These circumstances
also may result in a higher incidence of defaults than with respect to higher
rated securities. An investment in this Fund may be considered more speculative
than investment in shares of a fund which invests primarily in higher rated debt
securities.

Prices of lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of lower rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash. Where
it deems it appropriate and in the best interests of Fund shareholders, the Fund
may incur additional expenses to seek recovery on a debt security on which the
issuer has defaulted and to pursue litigation to protect the interests of
security holders of its portfolio companies.

Because the market for lower rated securities may be thinner and less active
than for higher rated securities, there may be market price volatility for these
securities and limited liquidity in the resale market. Nonrated securities are
usually not as attractive to as many buyers as rated securities are, a factor
which may make nonrated securities less marketable. These factors may have the
effect of limiting the availability of the securities for purchase by the Fund
and may also limit the ability of the Fund to sell such securities at their fair
value either to meet redemption requests or in response to changes in the
economy or the financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of lower rated debt securities, especially in a thinly traded market.
To the extent the Fund owns or may acquire illiquid or restricted lower rated
securities, these securities may involve special registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties. Changes in
values of debt securities which the Fund owns will affect its net asset value
per share. If market quotations are not readily available for the Fund's lower
rated or nonrated securities, these securities will be valued by a method that
the Fund's Board of Directors believes accurately reflects fair value. Judgment
plays a greater role in valuing lower rated debt securities than with respect to
securities for which more external sources of quotations and last sale
information are available.

New and proposed laws may have an impact on the market for lower rated debt
securities. For example, as a result of the Financial Institution's Reform,
Recovery, and Enforcement Act of 1989, savings and loan associations must
dispose of their high yield bonds no later than July 1, 1994. Qualified
affiliates of savings and loan associations, however, may purchase and retain
these securities, and savings and loan associations may divest these securities
by sale to their qualified affiliates. The Adviser is unable at this time to
predict what effect, if any, the legislation may have on the market for lower
rated debt securities.

Special tax considerations are associated with investing in lower rated debt
securities structured as zero coupon or pay-in-kind securities. The Fund accrues
income on these securities prior to the receipt of cash payments. The Fund must
distribute substantially all of its income to its shareholders to qualify for
pass-through treatment under the tax laws and may, therefore, have to dispose of
its portfolio securities to satisfy distribution requirements.

While credit ratings are only one factor the Adviser relies on in evaluating
lower rated debt securities, certain risks are associated with using credit
ratings. Credit rating agencies may fail to timely change the credit ratings to
reflect subsequent events; however, the Adviser continuously monitors the
issuers of lower rated debt securities in its portfolio in an attempt to
determine if the issuers will have sufficient cash flow and profits to meet
required

10
<PAGE> 16

principal and interest payments. Achievement of the Fund's investment objectives
may be more dependent upon the Adviser's credit analysis than is the case for
higher quality debt securities. Credit ratings for individual securities may
change from time to time and the Fund may retain a portfolio security whose
rating has been changed.

Investors should consider carefully the additional risks associated with
investment in securities which carry lower ratings.

- --------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RESTRICTIONS
- --------------------------------------------------------------------------------

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or
broker-dealers in order to earn a return on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the holding period. Repurchase Agreements involve certain risks
in the event of default by the other party. The Fund will not invest in
repurchase agreements maturing in more than seven days if any such investment,
together with any other illiquid securities held by the Fund, exceeds 15% of the
value of its net assets. In the event of the bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and loss including: (a) possible decline
in the value of the underlying security during the period while the Fund seeks
to enforce its rights thereto, (b) possible lack of access to income on the
underlying security during this period, and (c) expenses of enforcing its
rights. See the Statement of Additional Information.

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.

OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies of the
Fund permit the Fund to invest in or write options, futures contracts and
related options. Thus, the Fund may engage in transactions in futures contracts
on U.S. Government securities.

The Fund presently expects to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of the Fund's
portfolio and the Adviser's expectations concerning the securities markets. See
the Statement of Additional Information for discussion of options, futures
contracts and related options.

POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments may be advantageous to the
Fund, if the Adviser is not successful in employing such instruments in managing
the Fund's investments, the Fund's performance will be worse than if the Fund
did not make such investments. In addition, the Fund would pay commissions and
other costs in connection with such investments, which may increase the Fund's
expenses and reduce its return.

The Fund may write or purchase options in privately negotiated transactions
("OTC Options") as well as listed options. OTC Options can be closed out only by
agreement with the other party to the transaction. Thus, any OTC 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 are considered
illiquid to the extent that the formula price exceeds the intrinsic value of the
option. The Fund may not purchase or sell futures contracts or related options
for which the aggregate initial margin and premiums exceed five percent of the
fair market value of the Fund's assets. In order to prevent leverage in
connection with the purchase of futures contracts or call options thereon by the
Fund, an amount of cash, cash equivalents or liquid high grade debt securities
equal to the market value of the obligation under the futures contracts or
options (less any related margin deposits) will be maintained in a segregated
account with the Custodian. The Fund may not invest more than 15% 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, futures contracts and related options is contained in the Statement of
Additional Information.

11
<PAGE> 17

PORTFOLIO TURNOVER. Although the Fund does not intend to engage in substantial
short-term trading, it may sell portfolio securities without regard to the
length of time they have been held in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions or the financial
condition of the issuer. The Fund's portfolio turnover rate (the lesser of the
value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown on page five.
Since portfolio changes are deemed appropriate due to market or other
conditions, such turnover rate may be expected to vary from year to year. A
higher rate of turnover results in increased transaction costs to the Fund.

LENDING OF SECURITIES. The Fund may lend its portfolio securities to
broker-dealers and other financial institutions in an amount up to ten percent
of the total assets, provided that such loans are callable at any time by the
Fund, and are at all times secured by cash collateral that is at least equal to
the market value, determined daily, of the loaned securities. During the period
of the loan, the Fund receives the income on both the loaned securities and the
collateral and thereby increases its yield after payment of lending fees.

RESTRICTED SECURITIES. The Fund may invest up to 15% of the value of its net
assets in restricted securities (i.e., securities which may not be sold without
registration or an exemption from registration under the Securities Act of 1933)
and in other illiquid securities and repurchase agreements maturing in more than
seven days. Restricted securities are generally purchased at a discount from the
market price of unrestricted securities of the same issuer. Investments in
restricted securities are not readily marketable without some time delay.
Investments in securities which have no ready market are valued at fair value as
determined in good faith by the Fund's Board of Directors. Ordinarily, the Fund
would invest in restricted securities only when it receives the issuer's
commitment to register the securities without expense to the Fund. However,
registration and underwriting expenses (which may range from seven percent to
15% of the gross proceeds of the securities sold), may be paid by the Fund. A
Fund position in restricted securities might adversely affect the liquidity and
marketability of such securities, and the Fund might not be able to dispose of
its holdings in such securities at reasonable price levels.

PORTFOLIO TRANSACTIONS AND BROKERAGE. The Adviser is responsible for the
placement of orders for the purchase and sale of portfolio securities for the
Fund and the negotiation of brokerage commissions on such transactions. Most
transactions made by the Fund are with dealers acting as principals. 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 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.

SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 20% of its total
assets in United States currency denominated debt issues of foreign governments
and other foreign issuers. The Adviser believes that in many instances such
foreign debt securities may provide higher yields than securities of domestic
issuers which have similar maturities. Such securities may be subject to foreign
government taxes which would reduce the effective yield. Such securities may be
less liquid than the securities of the U.S. corporations, and are certainly less
liquid than securities issued by the U.S. Government or its agencies.

The above-described foreign investments involve certain risks, which should be
considered carefully by an investor in the Fund. These risks include changes in
currency exchange rates, political or economic instability of the issuer or of
the country of issue, the difficulty of predicting international trade patterns
and the possibility of imposition of exchange controls. Such securities may also
be subject to greater fluctuations in price than securities of U.S. corporations
or of the U.S. Government. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of stock exchanges,
brokers and listed companies abroad

12
<PAGE> 18

than in the United States, and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Finally, in the
event of a default on any such foreign debt obligations, it may be more
difficult for the Fund to obtain or to enforce judgment against the issuers of
such securities. Such investments will be made only when the Adviser believes
that higher yields justify the attendant risks.

INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which 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 15% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements which have a
maturity of longer than seven days;

2. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except the U.S. Government) or
purchase more than ten percent of the outstanding voting securities, or
more than ten percent of any class of securities, of any one issuer;

3. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the U.S.
Government);

4. Invest more than five percent of its total assets in companies having a
record, together with predecessors, of less than three years of continuous
operation; and

5. Invest more than 20% of its total assets in U.S. currency denominated
issues of foreign governments and other foreign issuers, or invest more
than ten percent of its total assets in securities which are payable in
currencies other than U.S. dollars.

- --------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------

The Fund is an open-end, diversified management investment company originally
incorporated in Texas on July 11, 1978. The Fund was reincorporated in Maryland
on July 2, 1992. 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 its inception. As of October 31,
1994, the Adviser provides investment advice to 45 investment company portfolios
with total net assets of approximately $16.6 billion.

The Adviser and the Distributor are wholly owned subsidiaries of American
Capital Management & Research, Inc. ("ACMR"), an indirect wholly owned
subsidiary of The Travelers Inc. ("Travelers"). Travelers is a financial
services holding company engaged, through its subsidiaries, principally in three
business segments -- investment services, consumer finance services, and
insurance services. Mr. Don G. Powell is President and Director of the Fund,
President, Chief Executive Officer and Director of the Adviser, and Executive
Vice President and Director of the Distributor. Most other officers of the Fund
are also officers and/or directors of the Adviser, and a number are also
officers and directors of the Distributor.

The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated June 15, 1993 (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 0.6250% of the first $150 million of net assets;
0.55% of the next $150 million of net assets; 0.50% of the excess over $300
million of net assets. 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) fee, and total operating expense, ratios are shown under the
caption "Expense Synopsis" herein.

Ellis J. Bigelow is primarily responsible for the day-to-day management of the
Fund's investment portfolio. Ms. Bigelow is Vice President of the Fund and
Senior Investment Vice President of the Adviser. Ms. Bigelow has been an officer
of the Fund since 1989, and was previously a Research Analyst with the Adviser.

13
<PAGE> 19

- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------

GENERAL

The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B shares and Class C shares are
sold without an initial sales charge and are subject to a contingent deferred
sales charge upon certain redemptions. See "Multiple Pricing System" for a
discussion of factors to consider in selecting which class of shares to
purchase. Contact the American Capital Service Department at (800) 421-5666 for
further information and appropriate forms.

Shares of the Fund are offered continuously for sale by the Distributor and
are available through authorized dealers. Initial investments must be at least
$500 and subsequent investments must be at least $25. Both minimums may be
waived by the Distributor for plans involving periodic investments. Shares of
the Fund may be sold in foreign countries where permissible. The Fund and the
Distributor reserve the right to refuse any order for the purchase of shares.
The Fund also reserves the right to suspend the sale of the Fund's shares to the
public in response to conditions in the securities markets or for other reasons.

Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application included in this Prospectus
and forwarding the application, through the designated dealer, to the
shareholder service agent, American Capital Companies Shareholder Services, Inc.
("ACCESS"). When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A, Class B or Class C shares.

Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time)
each day the Exchange is open. Net asset value per share for each class is
determined by dividing the value of the Fund's securities, cash and other assets
(including accrued interest) attributable to such class, less all liabilities
(including accrued expenses) attributable to such class, by the total number of
shares of the class outstanding. Portfolio securities that are actively traded
in the over-the-counter market are valued at the most recently quoted bid price.
Any security for which the primary market is on an exchange is valued at the
last reported sales price on the exchange where principally traded or at the
last reported bid price if there was no sale reported that day. If no sale or
bid price is reported that day, the security is valued at the most recent sale
price. The value of any other securities or other assets is fair value as
determined in good faith by the Fund's Board of Directors. 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 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 net asset value plus applicable Class A sales charges after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. Orders
received by dealers after the close of the Exchange are priced based on the next
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
orders received by them to the Distributor so they will be received prior to
such time. Orders of less than $500 are mailed by the dealer and processed at
the offering price next calculated after acceptance by ACCESS.

Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges and certain different shareholder service options available. See
"Distribution Plans" and "Shareholder Services -- Exchange Privilege." The net
income attributable to Class B and Class C shares and the dividends payable on
Class B and Class C shares will be reduced by the amount of the distribution fee
and incremental expenses associated with such distribution fees. Sales personnel
of broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A, Class B or Class C shares.

14
<PAGE> 20

CLASS A SHARES

The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.

SALES CHARGE TABLE

<TABLE>
<CAPTION>
SIZE OF AS % OF NET AS % OF REALLOWED TO DEALERS
INVESTMENT AMOUNT INVESTED OFFERING PRICE (AS A % OF OFFERING PRICE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

Less than $100,000............... 4.99% 4.75% 4.00%
$100,000 but less than
$250,000....................... 4.17% 4.00% 3.50%
$250,000 but less than
$500,000....................... 3.09% 3.00% 2.50%
$500,000 but less than
$1,000,000..................... 2.04% 2.00% 1.75%
$1,000,000 and over.............. (See herein) (See herein) (See herein)
- ------------------------------------------------------------------------------------------------------
</TABLE>

No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.

For qualified 401(k) retirement plans administered under American Capital
Trust Company's (k) Advantage Program, or similar recordkeeping programs made
available through American Capital Trust Company, no sales charge is payable at
the time of purchase for plans with at least 50 eligible employees or investing
at least $250,000 in American Capital funds, which include Participating Funds
as described herein under "Volume Discounts," and American Capital Reserve Fund,
Inc. ("Reserve"). For such investments the Fund imposes a contingent deferred
sales charge of 1% in the event of certain redemptions within one year of the
purchase. No such charge will be imposed unless and until appropriate relief is
granted by the SEC. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A commission will be paid to dealers who initiate and are responsible
for such purchases as follows: 1% on sales to $5 million, plus 0.50% on the next
$5 million, plus 0.25% on the excess over $10 million.

In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. The Distributor may pay
dealers through whom purchases are made at net asset value as described in
clause (e) below an amount equal to 0.40% of the amount invested. Dealers which
are reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.

The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.

Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the shares
will not be resold except through redemption by the Fund, by (a) current or
retired directors of the Fund; current or retired employees of ACMR and any of
its affiliates; spouses, minor children and grandchildren of the above persons;
and parents of employees and parents of spouses of employees of ACMR and any of
its affiliates; (b) employees of an investment subadviser to any fund in the
same "group of investment companies" (as defined in Rule 11a-3 under the 1940
Act) as the Fund or an affiliate of the subadviser; employees and registered
representatives of Service Organizations with selling group agreements with the
Distributor; employees of financial institutions that have arrangements with
Service Organizations having selling group agreements with the Distributor, and
spouses and minor children of such persons; (c) any trust, pension, profit
sharing or other benefit plan for such persons; and (d) trustees and other
fiduciaries purchasing shares for retirement plans of organizations with
retirement plan assets of $10 million or more. Shares are offered at net asset
value to such persons because of anticipated economies in sales efforts and
sales related expenses. Such shares are also offered at net asset value to (e)
accounts opened for shareholders by deal-

15
<PAGE> 21

ers where the amounts invested represent the redemption proceeds from investment
companies distributed by an entity other than the Distributor if such redemption
has occurred no more than 15 days prior to the purchase of shares of the Fund
and the shareholder paid an initial sales charge and was not subject to a
deferred sales charge on the redeemed account. Shares are also offered at net
asset value to (f) registered investment advisers, trust companies and bank
trust departments exercising discretionary investment authority with respect to
the money to be invested in the Fund, provided that the aggregate amount
invested in the Fund alone, or in any combination of shares of the Fund and
shares of certain other participating American Capital mutual funds as described
herein under "Purchase of Shares--Class A--Volume Discounts," during the
13-month period commencing with the first investment pursuant hereto at net
asset value, equals at least $1 million. Purchase orders made pursuant to clause
(f) may be placed either through authorized dealers as described above or
directly with ACCESS by the investment adviser, trust company or bank trust
department, provided that ACCESS receives federal funds for the purchase by the
close of business on the next business day following acceptance of the order. An
authorized dealer or financial institution may charge a transaction fee for
placing an order to purchase shares pursuant to this provision or for placing a
redemption order with respect to such shares. Service Organizations will be paid
a service fee as described herein under "Distribution Plans" on purchases made
on behalf of registered investment advisers, trust companies and bank trust
departments described in clause (f) above, retirement plans described in clause
(d) above and for registered representatives' accounts.

- --------------------------------------------------------------------------------
NINE REASONS TO CHOOSE . . .
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.
- --------------------------------------------------------------------------------

American Capital High Yield Investments, Inc. (the "Fund") offers you, the
individual investor, the opportunity to participate in the benefits of owning a
diversified portfolio of fixed-income securities offering above average yields
while avoiding many of the problems and difficulties of individual ownership of
such securities. Of course, higher yielding securities entail higher risks. The
primary investment objective of the Fund is to maximize current income through
investment in a diversified portfolio at least 80% of which is in lower rated
fixed-income securities. The Adviser to the Fund, American Capital Asset
Management, Inc., serves as investment adviser to the American Capital family of
funds, and, manages approximately $16.6 billion in total assets as of October
31, 1994.

Fixed-income securities offer a stated level of income, with current yields
that are generally higher than the yields on common stocks. Holders of these
securities have a claim on the assets of the issuer which is prior to that of
owners of the common stock of the same company.

While generally providing greater income than higher rated debt securities,
investments in lower rated fixed-income securities entail increased risks of
loss of income and principal and may be subject to greater fluctuations in
market price and yield. Accordingly, an investment in the Fund does not
constitute a complete investment program, and is not appropriate for all
investors, investors should review the objectives and policies of the Fund and
consider their ability to assume the risks involved before making an investment
in the Fund. See "Investment Objectives and Policies."

1 HIGH INCOME Consistent with its primary objective of seeking to maximize
current income through investment in a diversified portfolio of higher yield,
higher risk fixed-income securities, th e Fund normally seeks securities which
either are rated in the lower categories by recognized rating services (Baa or
lower by Moody's Investors Service, Inc. or BBB or lower by Standard & Poor's
Corporation) or are nonrated, which in the Adviser's opinion are of similar or
comparable investment quality. Such securities are regarded by the rating
agencies as predominately speculative with respect to the issuer's continuing
ability to meet principal and interest payments.

2 PROFESSIONAL MANAGEMENT There are many issues of fixed-income securities,
and each potential investment has characteristics which must be evaluated and
reviewed regularly, relative to a particular investment objective. Ordinarily,
the individual investor has neither the time, the expertise, nor the resources
to research the market properly. The Adviser manages the assets of 45 open-end
investment company portfolios and four closed-end investment companies (three of
which are listed on the New York Stock Exchange). The portfolios of the
investment companies advised by the Adviser reflect varying investment
objectives.

3 DIVERSIFICATION All investments entail some degree of risk. High yielding
fixed-income securities involve more risk than other debt securities. The Fund
attempts to reduce these risks by investing its assets among a number of
different companies and industries. In this way, and by pooling the funds of
many investors with similar investment objectives, the Fund can give each
investor an opportunity to participate in the higher yield fixed-income market
on a diversified basis and with only a relatively small investment.

4 AUTOMATIC INVESTMENT OF MONTHLY DIVIDENDS Monthly dividends are
automatically invested in additional shares without sales charge unless a
shareholder elects in writing to receive distributions in cash. See

16
<PAGE> 22

"Dividends, Distributions and Taxes." This feature enables investors constantly
to increase the number of shares on which further dividends can be paid. Of
course, there can be no assurance of any particular rate of return on shares of
the Fund or any constant return over any period of time, and the principal upon
which the return is based will be subject to market price fluctuations.

5 CHECK WRITING The Fund offers a Check Writing Privilege allowing Class A
shareholders to write checks in the amount of $100 or more against their Fund
accounts. This feature provides Class A shareholders with quick liquidity for
major purchases and emergency needs. See "Shareholder Services -- Check Writing
Privilege."

6 CERTAIN ECONOMIES OF SIZE The high yield segment of the debt securities
market is characterized by disproportionately large unit costs on small
transactions. Because the Fund is able to pool investors' monies, it generally
should be able to realize better net prices on transactions compared to most
transactions for individuals.

7 LIQUIDITY Class A shares of the Fund are redeemable upon request and without
charge at net asset value; Class B and Class C shares are redeemable upon
request and are subject to a contingent deferred sales charge or redemptions
made within a specified period of time. The net asset value of Class A, Class B
and Class C shares will be listed in the financial sections of many newspapers
and is also available through brokers and the Fund. See "Purchase of Shares" and
"Redemption of Shares."

8 CHANGING INVESTMENT OBJECTIVES The Fund offers all shareholders an exchange
privilege, under which shares of the Fund which have been held for 30 days may
be exchanged for shares of any other fund without sales charge. Shares of the
Fund may not be exchanged for shares of American Capital Government Target.
Class A, Class B and Class C shareholders will have an exchange privilege only
with the respective class of shares of other American Capital Funds and American
Capital Reserve Fund, Inc. This exchange privilege, which may have tax
consequences for the investor, provides investors with a broad spectrum of
investment portfolios which can be used to meet changing objectives and needs.
See "Shareholder Services -- Exchange Privilege."

9 SPECIAL SERVICES Various shareholder services are available, including a
monthly, quarterly, semiannual or annual withdrawal plan, automatic investment
in additional shares through a pre-authorized check plan, various tax-qualified
prototype pension and profit-sharing plans, and retirement plans for use by
corporations, the self-employed (Keogh plans) and Individual Retirement
Accounts. See "Shareholder Services."

These features should be read in conjunction with the more detailed
information in the Prospectus.

The Distributor may pay commissions of up to 1% for purchases described in
clause (d). The Distributor may pay Service Organizations through which
purchases are made as described in clause (f) above for transactions of $1
million or more an amount up to 0.50% of the amount invested, over a twelve
month period following the pertinent transaction. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.

Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described herein.

VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc., American Capital Enterprise Fund, Inc., American Capital Equity
Income Fund, Inc., American Capital Federal Mortgage Trust ("Federal Mortgage"),
American Capital Global Managed Assets Fund, Inc. ("Global Managed"), American
Capital Government Securities, Inc., American Capital Government Target Series
("Government Target"), American Capital Growth and Income Fund, Inc., American
Capital Harbor Fund, Inc., American Capital High Yield Investments, Inc.,
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.

CUMULATIVE PURCHASE DISCOUNT. The size of investment in the preceding table
may also be determined by combining the amount being invested in shares of the
Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's

17
<PAGE> 23

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 table herein. The size
of investment shown in the preceding table also includes purchases of shares of
the Participating Funds over a 13-month period based on the total amount of
intended purchases plus the value of all shares of the Participating Funds
previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charges applicable to the purchases made and the charges previously paid. The
initial purchase must be for an amount equal to at least five percent of the
minimum total purchase amount of the level selected. If trades not initially
made under a Letter of Intent subsequently qualify for a lower sales charge
through the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
adjustment in sales charge will be used to purchase additional shares for the
shareholder at the applicable discount category. Additional information is
contained in the application form included in this Prospectus.

CLASS B SHARES

Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.

The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- ------------------------------------------------------------------------------------------
<S> <C>

First................................................... 4%
Second.................................................. 4%
Third................................................... 3%
Fourth.................................................. 2.5%
Fifth................................................... 1.5%
Sixth................................................... None
- ------------------------------------------------------------------------------------------
</TABLE>

In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge, second, of shares held for over five years
or shares acquired pursuant to reinvestment of dividends or distributions and
third, of shares held longest during the five-year period. The charge is not
applied to dollar amounts representing an increase in the net asset value since
the time of purchase.

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4% (the applicable rate in the second year after purchase).

A commission or transaction fee of 4% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.

18
<PAGE> 24

CLASS C SHARES

Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1%. The charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price. In addition, no charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.

In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.

A commission or transaction fee of 1% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.65% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation to Service Organizations
that sell Class C shares of the Fund.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." 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 costs
and service fees that a mutual fund may impose on a class of shares. The NASD
Rules also limit the aggregate amount which the Fund may pay for such
distribution costs. Under the Class A Plan, the Fund pays a service fee to the
Distributor at an annual rate of up to 0.25% of the Fund's aggregate average
daily net assets attributable to the Class A shares. Such payments to the
Distributor under the Class A Plan are based on an annual percentage of the
value of Class A shares held in shareholder accounts for which such Service
Organizations are responsible at the rates of 0.15% annually with respect to
Class A shares in such accounts on September 29, 1989 and 0.25% annually with
respect to Class A shares issued after that date. Under the Class B Plan and the
Class C Plan, the Fund pays a service fee to the Distributor at an annual rate
of up to 0.25% and a distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B or Class C
shares to reimburse the Distributor for service fees paid by it to Service
Organizations and for its distribution costs.

The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to 4% of
the purchase price for 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 0.65% of the average daily net

19
<PAGE> 25

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.

Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward without
interest charges, unless permitted under SEC regulations, and may be reimbursed
by the Fund or its shareholders from payments received through contingent
deferred sales charges in future years and from payments under the Class B Plan
and Class C Plan so long as such Plans are in effect. For example, if in a
fiscal year the Distributor incurred distribution expenses under the Class B
Plan of $1 million, of which $500,000 was recovered in the form of contingent
deferred sales charges paid by investors and $400,000 was reimbursed in the form
of payments made by the Fund to the Distributor under the Class B Plan, the
balance of $100,000, would be subject to recovery in future fiscal years from
such sources. For the plan year ended June 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B Plan and carried forward were
approximately $2.4 million or 3.43% of the Class B shares' net assets. The
unreimbursed expenses incurred by the Distributor under the Class C Plan and
carried forward were approximately $189,000 or 1.42% of the Class C shares' net
assets.

If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.

- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of these services.

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by
ACCESS. Stock certificates are not issued except upon shareholder request. Most
shareholders elect not to receive certificates in order to facilitate
redemptions and transfers. A shareholder may incur an expense to replace a lost
certificate. Except as described herein, after each share transaction in an
account, the shareholder receives a statement showing the activity in the
account. Each shareholder who has an account in any of the Participating Funds
listed under "Purchase of Shares -- Class A Shares -- Volume Discounts", or
Reserve, may receive statements quarterly from ACCESS showing any reinvestments
of dividends and capital gains distributions and any other activity in the
account since the preceding statement. Such shareholders also will receive
separate confirmations for each purchase or sale transactions other than
reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized investment dealers or by mailing a
check directly to ACCESS.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (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

20
<PAGE> 26

capital gains distributions be reinvested at net asset value, or that both
dividends and capital gains distributions be paid in cash.

AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized 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. American
Capital Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh
plans. Details regarding fees, as well as full plan administration for profit
sharing, pension and 401(k) plans, are available from the Distributor.

FUND TO FUND DIVIDENDS. A shareholder may, upon written request or by
completing the appropriate section of the application form in this Prospectus,
elect to have all dividends and other distributions paid on a Class A, Class B
or Class C account in the Fund invested into a pre-existing Class A, Class B or
Class C account in any of the Participating Funds listed under "Purchase of
Shares -- Class A Shares -- Volume Discounts," or Reserve. Both accounts must be
of the same class and of the same type, either non-retirement or retirement. Any
two non-retirement accounts can be used. If the accounts are retirement
accounts, they must both be for the same class and of the same type of
retirement plan ( e.g., IRA, 403(b)(7), 401(k), Keogh) and for the benefit of
the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value as of
the payable date of the distribution only if shares of such selected fund have
been registered for sale in the investor's state.

EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts"), other
than Government Target, may be exchanged for shares of the same class of the
Fund without sales charge, provided that shares of the Fund and shares of
Corporate Bond, Federal Mortgage, Global Managed, Government Trust, Municipal
Bond, Real Estate, Tax-Exempt, Texas Municipal, Utilities Income and the Global
Government Securities Fund of World Portfolio are subject to a 30-day holding
period requirement. Shares of Government Target may be exchanged for Class A
shares of the Fund without sales charge. Shares of Reserve may be exchanged for
Class A shares of any Participating Fund upon payment of the excess, if any, of
the sales charge rate applicable to the shares being acquired over the sales
charge rate previously paid. Shares of any Participating Fund or Reserve may be
exchanged for shares of any other Participating Fund if shares of that
Participating Fund are available for sale; however, during periods of suspension
of sales, shares of a Participating Fund may be available for sale only to
existing shareholders of the Participating Fund. Additional funds may be added
from time to time as Participating Funds.

Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other
American Capital fund that offers such shares ("new shares") in an amount equal
to the aggregate net asset value of the original shares, without the payment of
any contingent deferred sales charge otherwise due upon redemption of the
original shares. For purposes of computing the contingent deferred sales charge
payable upon a disposition of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B and
Class C shareholders may exchange their shares for shares of Reserve without
incurring the contingent deferred sales charge that otherwise would be due upon
redemption of such Class B or Class C shares. Class B or Class C shareholders
remain subject to the contingent deferred sales charge imposed by the fund
initially purchased by the shareholder upon their redemption from the American
Capital complex of funds. Shares of Reserve acquired through an exchange of
Class B or Class C shares may be exchanged only for the same class of shares of
a Participating Fund without incurring a contingent deferred sales charge.

Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described herein under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held for
less than 91 days, the sales charge paid on such shares is not included in the
tax basis of the exchanged shares, but is carried over and included in the tax
basis of the shares acquired. See the Statement of Additional Information.

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. ACMR
and its subsidiaries, including ACCESS (collectively, "American Capital"), and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape

21
<PAGE> 27

recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. American Capital and
the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. See "Purchase of
Shares" and "Redemption of Shares." If the exchanging shareholder does not have
an account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except fund to fund dividends) and dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
file a specific written request. The Fund reserves the right to reject any order
to acquire its shares through exchange, or otherwise to modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.

A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.

SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
above under "Shareholder Services -- Exchange Privilege" will be waived for such
systematic exchanges. Additional information on how to establish this option is
available from the Distributor.

AUTOMATIC EXCHANGE. The exchange fee described above under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the American
Capital Service Department at (800) 421-5666 for further information on how to
utilize this option.

SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any investor whose shares
in a single account total $5,000 or more may establish a withdrawal plan on a
quarterly, semiannual or annual basis. This plan provides for the orderly use of
the entire account, not only the income but also the capital, if necessary. Each
withdrawal constitutes a redemption of shares on which any capital gain or loss
will be recognized. The planholder may arrange for monthly, quarterly,
semiannual or annual checks in any amount, not less than $25. Such a systematic
withdrawal plan may also be maintained by an investor purchasing shares for a
retirement plan established on a form made available by the Fund. See
"Shareholder Services -- Retirement Plans."

Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.

Under 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 plans 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.

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY CHECK
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.

When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the shareholder's Class A account by ACCESS at the next deter-

22
<PAGE> 28

mined net asset value. Check writing redemptions represent the sale of Class A
shares. Any gain or loss realized on the sale of shares is a taxable event. See
"Redemption of Shares."

Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or
State Street Bank. Retirement Plans and accounts that are subject to backup
withholding are not eligible for the privilege. A "stop payment" system is not
available on these checks. See the Statement of Additional Information for
further information regarding the establishment of the privilege.

- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------

REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized dealer.
Orders received from dealers must be at least $500 unless transmitted via the
FUNDSERV network. The redemption price for such shares is the net asset value
next calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.

As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of 1% may be imposed on certain redemptions of
Class A shares made within one year of purchase for investment of $1 million or
more. The contingent deferred sales charge incurred upon redemption is paid by
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 independent fee schedule.

The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.

Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where American Capital Trust Company
serves as custodian, special IRA, 403(b)(7), or Keogh distribution forms must be
obtained from and be forwarded to American Capital Trust Company, P.O. Box 944,
Houston, Texas 77001-0944. Contact the custodian for information.

In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until the purchase check has cleared, usually a period of up to
15 days. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.

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 applicable contingent
deferred sales charge will be deducted from the proceeds of this redemption.

23
<PAGE> 29

TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth, the Fund permits shareholders and the dealer
representative of record to redeem shares by telephone and to have redemption
proceeds sent to the address of record for the account or to the bank account of
record as described below. To establish such privilege, a shareholder must
complete the appropriate section of the application form in this Prospectus or
call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares,
contact the telephone transaction line at (800) 421-5684. American Capital and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither American Capital nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's regular redemption
procedure previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If an account has multiple
owners, ACCESS may rely on the instructions of any one owner.

For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed once in each 30-day period. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account or
wired directly to their predesignated bank account. This privilege is not
available if the address of record has been changed within 60 days prior to a
telephone redemption request. Proceeds from redemptions are expected to be wired
on the next business day following the date of redemption. The Fund reserves the
right at any time to terminate, limit or otherwise modify this redemption
privilege.

REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.

- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------

In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.

DIVIDENDS. Interest earned from investments is the Fund's main source of
income. Substantially all of this income, less expenses, is distributed monthly
as dividends to shareholders. 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 will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
incremental transfer agency fees applicable to such classes of shares.

CAPITAL GAINS. When the Fund sells portfolio securities, it may realize
capital gains or losses, depending on whether the prices of the securities sold
are higher or lower than the prices the Fund paid to purchase them. Net realized
capital gains represent the total profit from sales of securities minus total
losses from sales of securities including losses carried forward from prior
years. The Fund distributes any taxable net realized capital gains to
shareholders annually. 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 Internal Revenue 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.

24
<PAGE> 30

All such dividends and distributions are taxable to the shareholder whether or
not reinvested in shares. However, shareholders not subject to tax on their
income will not be required to pay tax on amounts distributed to them.

Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions.

To avoid being subject to a 31% federal back-up withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.

Dividends or distributions paid by the Fund will have the effect of reducing
the 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 that it is paid on the shares so purchased) even
though subject to income taxes as discussed herein.

The Fund may purchase debt securities (such as zero-coupon debt securities and
zero-fixed-coupon debt securities, see "Investment Objectives and
Policies -- Lower Rated Debt Securities") that have original issue discount,
which generally is included in income ratably over the term of the security. The
discount that accrues each year on such securities thus will increase the Fund's
investment company taxable income, thereby increasing the amount that must be
distributed to satisfy the Distribution Requirement, without providing the cash
with which to make the distribution. Accordingly, the Fund may have to dispose
of other securities, thereby realizing gain or loss at a time when the Fund
otherwise might not want to do so, in order to provide the cash necessary to
make distributions to those shareholders who do not reinvest dividends.

Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures generally are treated as 60% long-term and 40%
short-term, and positions held by the Fund at the end of its fiscal year
generally are required to be marked to market, with the result that unrealized
gains and losses are treated as realized. Gains and losses realized by the Fund
from writing over-the-counter options constitute short-term capital gains or
losses unless the option is exercised, in which case the character of the gain
or loss is determined by the holding period of the underlying security. The Code
contains certain "straddle" rules which require deferral of losses incurred in
certain transactions involving hedged positions to the extent the Fund has
unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.

The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisers for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or citizenship tax consequences of receipt of
dividends and distributions from the Fund.

PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund obtained a written letter of
determination from the Pennsylvania Department of Revenue that the Fund will be
subject to the Pennsylvania foreign franchise and corporate net income tax upon
initiating its intended business activities in Pennsylvania, and that
accordingly, Fund shares will be exempt from the Pennsylvania personal property
taxes. The Fund anticipates that it will continue such business activities but
reserves the right to suspend them at any time, resulting in the termination of
the exemption.

- --------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one, five, and ten year periods. Other total return quotations,
aggregate or average, over other time periods may also be included.

The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Since shares of the Fund were offered at a maximum sales charge of 6.75% prior
to June 12, 1989, 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 or to
reflect the fact no 12b-1 fees were incurred prior to October 1, 1989.

25
<PAGE> 31

Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.

In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.

For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.

The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.

Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. For example, the high yields of lower rated
bonds in which the Fund invests reflect the risk that the value of the bonds may
be impaired in a financial restructuring or default by the issuer. The
investment return and principal value of an investment in the Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.

Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%; Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.

In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds, with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Investor's Business Daily, Kiplinger's Personal Finance Magazine,
Money, Mutual Fund Forcaster, 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.

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 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 Texas on July 11, 1978,
and reincorporated by merger into a Maryland corporation on July 2, 1992. The
Fund may offer three classes of shares: Class A, Class B and Class C shares.
Each class of shares represents interests in the assets of the Fund and has
identical voting, dividend, liquidation and other rights on the same terms and
conditions except that distribution fees and/or ser-

26
<PAGE> 32

vice fees related to each class of shares are borne solely by that class and
each class of shares has exclusive voting rights with respect to provisions of
the Fund's Class A Plan, Class B Plan and Class C Plan which pertain to that
class. An order has been received from the SEC permitting the issuance and sale
of multiple classes of shares representing interests in the Fund's existing
portfolio. Shares issued are fully paid, non-assessable and have no preemptive
or conversion rights.

PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, officers and employees to
buy and sell securities for their personal accounts subject to preclearance and
other procedures designed to prevent conflicts of interest.

VOTING RIGHTS. The Bylaws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the 1940 Act. Such
event is likely to occur infrequently. In addition, a special meeting of the
shareholders will be called, if requested by the holders of ten percent of the
Fund's outstanding shares, for the purposes, and to act upon the matters,
specified in the request (which may include election or removal of directors).
When matters are submitted for a shareholder vote, each shareholder is entitled
to one vote for each share owned. The shares have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so,
and in such an event, the holders of the remaining less than 50% of the shares
voting for the election of directors will not be able to elect any person to the
Board of Directors.

SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund at
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.

SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256, serves as transfer agent, shareholder service agent and dividend
disbursing agent for the Fund. ACCESS, a wholly owned subsidiary of the
Adviser's parent, provides these services at cost plus a profit.

LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Fund.

27
<PAGE> 33

- --------------------------------------------------------------------------------
APPENDIX -- DESCRIPTION OF BOND RATINGS
- --------------------------------------------------------------------------------

MOODY'S INVESTORS SERVICE

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Nonrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities that are not rated as
a matter of policy.

3. There is a lack of essential data pertaining to the issue or issuer.

4. The issue was privately placed, in which case the rating is not published
in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.

STANDARD & POOR'S CORPORATION

AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

28
<PAGE> 34

A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation.While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.

CI: The rating CI is reserved for income bonds on which no interest is being
paid.

D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.

PREFERRED STOCK RATINGS

Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.

29
<PAGE> 35

- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------
August 31, 1994
CORPORATE OBLIGATIONS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
CONSUMER DISTRIBUTION
$ 2,000,000 Apparel Retailers, Inc.,
Step Bonds (0% to 12.75%
at 8/15/98), 5/15/05
5,500,000 Big 5 Holdings, 13.625%,
9/15/02
5,310,000 Bry Lane Capital, 10.00%,
9/1/03
3,250,000 Dairy Mart Convenience
Store, Inc., 10.25%,
3/15/04
3,081,580 F F Holdings Corp.,
14.25%, Payment-In-Kind,
10/1/02
4,250,000 Farm Fresh, Inc., 12.25%,
10/1/00
1,000,000 Finlay Enterprises, Inc.,
Step Bonds (0% to 12.00%
at 5/1/98), 5/1/05
3,250,000 Finlay Fine Jewelry Corp.,
10.625%, 5/1/03
5,315,000 Food 4 Less Supermarkets,
Inc., 13.75%, 6/15/01
6,500,000 Grand Union Co., 12.25%,
7/15/02
**4,350,000 Kash N Karry Food Stores,
Inc., 14.00%, 2/1/01
3,900,000 Levitz Furniture Corp.,
9.625%, 7/15/03
PATHMARK STORES, INC.
3,000,000 11.625%, 6/15/02
4,500,000 Step Bonds (0% to 10.75%
at 11/1/99), 11/1/03
SPECIALTY RETAILERS, INC.
2,000,000 10.00%, 8/15/00
1,750,000 11.00%, 8/15/03
3,605,000 Wickes Lumber Co.,
11.625%, 12/15/03
CONSUMER DURABLES
3,000,000 Aftermarket Tech Corp.,
12.00%, 8/1/04
4,550,000 Continental Homes Holding
Corp., 12.00%, 8/1/99
3,500,000 Del Webb Corp., 9.00%,
2/15/06 Exide Corp.
2,000,000 10.75%, 12/15/02
1,000,000 Step Bonds (0% to 12.25%
at 12/15/97), 12/15/04
2,000,000 Forecast Group, 11.375%,
12/15/00
1,250,000 Lear Seating, Inc., 8.25%,
2/1/02
4,500,000 MDC Holdings, Inc.,
11.125%, 12/15/03
1,500,000 NVR, Inc., 11.00%, 4/15/03
3,595,000 Oriole Homes Corp.,
12.50%, 1/15/03
1,750,000 Penda Corp., Inc., 10.75%,
3/1/04

<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
$ 1,300,000 UDC Homes, Inc., 11.75%,
4/30/03
4,000,000 Venture Holdings, Inc.,
9.75%, 4/1/04
CONSUMER NON-DURABLES
3,900,000 Consoltex Group, Inc.,
11.00%, 10/1/03
4,870,000 Dan River, Inc., 10.125%,
12/15/03
3,125,000 Dr Pepper Bottle Holdings,
Inc., Step Bonds (0% to
11.625% at 2/15/98),
2/15/03
3,000,000 Hartmarx Corp., 10.875%,
1/15/02
2,500,000 Health O Meter, Inc.,
13.00%, 8/15/02
1,150,000 Specialty Foods, 11.25%,
8/15/03
5,277,000 Synthetic Industries,
Inc., 12.75%, 12/1/02
3,750,000 Westpoint Stevens, 9.375%,
12/15/05
CONSUMER SERVICES
1,250,000 Act III Broadcasting,
9.625%, 12/15/03
1,500,000 Act III Theatres, Inc.,
11.875%, 2/1/03
2,200,000 AMC Entertainment, Inc.,
12.625%, 8/1/02
3,560,000 American Restaurant Group
Corp., 12.00%, 9/15/98
1,750,000 Bally Grand, Inc.,
10.375%, 12/15/03
4,000,000 California Hotel Finance
Corp., 11.00%, 2/1/02
3,750,000 Carrols Corp., 11.50%,
8/15/03
2,000,000 Continental Broadcasting,
10.625%, 7/1/03
CONTINENTAL CABLEVISION, INC.
2,750,000 9.50%, 8/1/13
1,100,000 11.00%, 6/1/07
2,300,000 El Commandante Capital
Corp., 11.75%, 12/15/03
4,500,000 Flagstar Corp., 11.25%,
11/1/04
1,500,000 Louisiana Casino, 11.50%,
12/1/98
3,000,000 News America Holdings,
Inc., 10.125%, 10/15/12
3,125,000 Outlet Broadcasting, Inc.,
10.875%, 7/15/03
4,000,000 PRT Funding Corp.,
11.625%, 4/15/04
4,250,000 Resorts International,
Inc., Variable Rate Notes,
(7.89% at 8/31/94),
6/30/00
</TABLE>

30
<PAGE> 36

CORPORATE OBLIGATIONS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
$ 1,750,000 SFX Broadcasting, Inc.,
11.375%, 10/1/00
ENERGY
4,500,000 Clark (R&M) Holdings,
Inc., Zero Coupon, 2/15/00
1,750,000 Dual Drilling Co., 9.875%,
1/15/04
1,000,000 Energy Ventures, Inc.,
10.25%, 3/15/04
4,000,000 Forest Oil Corp., 11.25%,
9/1/03
3,500,000 Giant Industries, Inc.,
9.75%, 11/15/03
1,500,000 Global Marine, Inc.,
12.75%, 12/15/99
2,500,000 HS Resource, Inc., 9.875%,
12/1/03
4,730,000 Maxus Energy Corp.,
11.50%, 11/15/15
MESA CAPITAL CORP.
1,750,000 Step Bonds (0% to 12.75%
at 6/30/95), 6/30/96
1,292,000 Step Bonds (0% to 12.75%
at 6/30/95), 6/30/98
PETROLEUM HEAT & POWER, INC.
2,500,000 9.375%, 2/1/06
1,500,000 10.125%, 4/1/03
4,400,000 Transco Energy Co.,
11.25%, 7/1/99
1,000,000 Tuboscope Vetco
International, Inc.,
10.75%, 4/15/03
2,325,000 Wainoco Oil Corp., 12.00%,
8/1/02
3,000,000 Wilrig, 11.25%, 3/15/04
FINANCE
2,500,000 American Annuity Group,
Inc., 11.125%, 2/1/03
AMERICAN FINANCIAL CORP.
5,000,000 12.00%, 9/3/99
1,636,000 12.25%, 9/15/03
4,000,000 Americo Life, Inc., 9.25%,
6/1/05
4,800,000 Blue Bell Funding, Inc.,
11.85%, 5/1/99
3,000,000 Guinness Petroleum
Aviation, Variable Rate
Notes (3.825% at 8/31/94),
4/10/95
1,750,000 Phoenix Re Corp., 9.75%,
8/15/03
2,000,000 Reliance Group Holdings,
9.75%, 11/15/03
HEALTH CARE
2,981,487 Alco Health Distribution
Corp., 11.25%,
Payment-In-Kind, 7/15/05
5,000,000 Charter Medical Corp.,
11.25%, 4/15/04

<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
$ 3,500,000 Continental Medical
Systems, 10.875%, 8/15/02
3,500,000 Hillhaven Corp., 10.125%,
9/1/01
1,750,000 OrNda Healthcorp.,
11.375%, 8/15/04
4,000,000 Paracelsus Healthcare
Corp., 9.875%, 10/15/03
2,000,000 Quorum Health Group,
11.875%, 12/15/02
1,000,000 Total Renal Care, Step
Bonds (0% to 12.00% at
2/15/98), 2/15/04
1,000,000 Wright Medical Technology,
10.75%, 7/1/00
PRODUCER MANUFACTURING
2,300,000 Allied Waste Industries,
Inc., 10.75%, 2/1/04
1,500,000 American Standard, Inc.,
9.875%, 6/1/01
4,700,000 EnviroSource, Inc., 9.75%,
6/15/03
3,548,000 Fairchild Corp., 13.00%,
3/1/07
3,500,000 Federal Industries, Ltd.,
10.25%, 6/15/00
5,558,000 Formica Corp., Step Bonds
(0% to 15.75% at 10/1/94),
10/1/01
IMO INDUSTRIES, INC.
2,750,000 12.00%, 11/1/01
500,000 12.25%, 8/15/97
4,150,000 Jordan Industries, Inc.,
Step Bonds (0% to 11.75%
at 8/1/98), 8/1/05
4,416,220 Robertson Ceco Corp.,
10.00%, Payment-In-Kind,
11/30/99
1,500,000 Spreckles Industries,
11.50%, 9/1/00
2,500,000 Talley Manufacturing &
Technical, Inc., 10.75%,
10/15/03 Thermadyne
Industries, Inc.
3,285,524 10.25%, 5/1/02
1,572,436 10.75%, 11/1/03
2,750,000 USG Corp., 10.25%,
12/15/02
RAW MATERIALS/PROCESSING INDUSTRIES
2,500,000 Associated Materials,
Inc., 11.50%, 8/15/03
3,450,000 Buckeye Cellulose Corp.,
10.25%, 5/15/01
CONTAINER CORP. OF AMERICA
1,000,000 11.25%, 5/1/04
*1,000,000 15.50%, 12/1/04
3,500,000 Crown Packaging, Series
B., 10.75%, 11/1/00
2,250,000 Florida Steel Corp.,
11.50%, 12/15/00
4,500,000 Fort Howard Corp., Step
Bonds (0% to 14.125% at
11/1/94), 11/01/04
</TABLE>

31
<PAGE> 37

CORPORATE OBLIGATIONS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
GAYLORD CONTAINER CORP.
$ 3,250,000 11.50%, 5/15/01
2,250,000 Step Bonds (0% to 12.75%
at 5/15/96), 5/15/05
GENEVA STEEL CO.
1,350,000 9.50%, 1/15/04
1,000,000 11.125%, 3/15/01
4,650,000 Harris Chemical North
America, Inc., Step Bonds
(0% to 10.25% at 1/15/96),
7/15/01
3,000,000 Huntsman Corp., 11.00%,
4/15/04
IMC Fertilizer Group, Inc.
2,000,000 9.45%, 12/15/11
2,000,000 10.75%, 6/15/03
4,000,000 Indspec Chemical Corp.,
Step Bonds (0% to 11.50%
at 12/1/98), 12/1/03
**2,400,000 Lanesborogh Corp.,
12.375%, 3/15/97
2,000,000 Mail-Well Corp., 10.50%,
2/15/04
4,000,000 NL Industries, Inc., Step
Bonds (0% to 13.00% at
10/15/98), 10/15/05
3,250,000 Plastic Specialty &
Technology Corp., 11.25%,
12/1/03
1,750,000 Republic Engineered Steel,
9.875%, 12/15/01
RIVERWOOD INTERNATIONAL CORP.
500,000 10.375%, 6/30/04
4,000,000 11.25%, 6/15/02
2,000,000 Sherritt, Inc., 10.50%,
3/31/14
1,450,000 Silgan Corporation,
11.75%, 6/15/02
5,000,000 Silgan Holdings, Inc.,
Step Bonds (0% to 13.25%
at 6/15/96), 2/15/02
3,000,000 Sweetheart Cup, Inc.,
10.50%, 9/1/03
3,000,000 UCC Investors Holdings,
Inc., 11.00%, 5/1/03
2,000,000 U.S. Can Co., 13.50%,
1/15/02
TECHNOLOGY
3,355,000 Anacomp, Inc., 15.00%,
11/1/00
3,500,000 Harmon International
Industries, Inc., 12.00%,
8/1/02
3,100,000 MFS Communications Co.
Inc., Step Bonds (0% to
9.375% at 11/15/99),
1/15/04
3,008,000 Unisys Corp., 13.50%,
7/1/97
TRANSPORTATION
1,500,000 International Shipholding
Corp., 9.00%, 7/1/03

<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
SEA CONTAINERS, LTD.
$ 2,750,000 9.50%, 7/1/03
1,000,000 12.50%, 12/1/04
2,750,000 12.50%, 12/1/04
2,500,000 Southern Pacific Rail
Corp., 9.375%, 8/15/05
4,500,000 Trism, Inc., 10.75%,
12/15/00
USAIR, INC.
2,000,000 10.00%, 7/1/03
835,060 Series 1989-A1, 9.33%,
1/1/06
UTILITIES
4,500,000 PanAmSat L.P., Step Bonds
(0% to 11.375% at 8/1/98),
8/1/03
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON STOCK
- ------------------------------------------
<S> <C>
7,357 Arcadian Corp.
*364,633 Concurrent Computer Corp.
*14,000 Dr Pepper/Seven-Up
Companies, Inc.
*14,790 EnviroSource, Inc.
*2,000 Finlay Enterprises, Inc.
*37,572 Healthcare America Inc.
*607,107 Robertson Ceco Corp.
*13,617 Thermadyne Industries,
Inc.
PREFERRED STOCK
*244,101 Supermarkets General
Holdings Corp., $3.52,
Payment-In-Kind
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF
UNITS/WARRANTS UNITS
- ------------------------------------------
<S> <C>
1,000 Casino America, Inc., each
unit consists of a $1,000
par bond, 11.50%, 11/15/01
and 3 warrants (expiring
11/15/98)
250 Empire Gas Corp., each
unit consists of a $10,000
par bond, Zero Coupon,
7/15/04 and 13.8 warrants
(expiring 7/15/04)
2,000 ICF Kaiser International,
each unit consists of a
$1,000 par note, 12.00%,
12/31/03 and 5 warrants
(expiring 12/31/98)
750 Santa Fe, Inc., each unit
consists of a $1,000 par
bond, 11.00%, 12/15/00 and
1 warrant (expiring
12/15/96)
WARRANTS
*3,125 Capital Gaming, expiring
2/1/99
*2,300 HDA Management Corp.,
expiring 12/15/98
*4,500 Louisiana Casino, expiring
12/1/98
*30,000 Southdown, Inc., expiring
10/15/96
*200 Trump Plaza, expiring
6/15/96
</TABLE>

32
<PAGE> 38

CORPORATE OBLIGATIONS

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT PRIVATE PLACEMENTS
- ------------------------------------------
<S> <C>
CORPORATE OBLIGATIONS
$ *1,500,000 Guinness Petroleum
Aviation, 9.25%, 6/15/95
(purchased 7/28/93)
3,304,500 Hemmeter Enterprises,
Inc., 12.00%,
Payment-In-Kind, 12/15/00
(purchased 2/1/94)
*2,500,000 Smitty's Supervalue,
12.75%, 6/15/04 (purchased
6/22/94)
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF
UNITS
- ------------------------------------------
<S> <C>
UNITS
*1,250 Capital Gaming, each unit
consists of a $1,000 par
bond, 11.50%, 2/1/01, 27
shares of common stock and
20 warrants (expiring
2/1/99) (purchased
1/10/94)
2,250 Hemmeter Enterprises,
Inc., each unit consists
of a $1,000 par
Payment-In-Kind note,
12.00%, 12/15/00 and 15
warrants (expiring
12/15/99) (purchased
12/14/93)
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF
SHARES/WARRANTS
- ------------------------------------------
<S> <C>
COMMON STOCK
*40,000 F F Holdings Corp.,
purchased 10/6/92
*84,445 Triangle Wire & Cable,
Inc., purchased 1/13/92
Warrant
*412 Wright Medical Technology,
expiring 6/30/03
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL FOREIGN GOVERNMENT
AMOUNT OBLIGATIONS
- ------------------------------------------
<S> <C>
$ 980,000 Federative Republic of
Brazil, 6.0625%, 1/1/01
2,000,000 Republic of Argentina,
4.25%, 3/31/23
1,000,000 United Mexican States,
6.25%, 12/31/19
REPURCHASE AGREEMENT
21,850,000 Salomon Brothers, Inc.,
dated 8/31/94, 4.90%, due
9/1/94 (collateralized by
U.S. Government
obligations in a pooled
cash account) repurchase
proceeds $21,852,974
</TABLE>

* Non-income producing security.
** Security is in default and is non-income producing. Valuation is based on
information provided by brokers trading in this security.

33
<PAGE> 39

SUPPLEMENT DATED DECEMBER 15, 1994
TO PROSPECTUS OF
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.

On August 24, 1994, The Travelers Inc. ("Travelers") entered into a stock
purchase agreement with The Van Kampen Merritt Companies, Inc. (the "Buyer")
pursuant to which the Buyer may acquire 100% ownership of American Capital
Management & Research, Inc. (the "Company"), a wholly owned subsidiary of
Travelers and the parent corporation of American Capital Asset Management, Inc.
(the "Adviser"). Sale of the Company may be deemed to cause an assignment,
within the meaning of the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, of the investment advisory agreement between the Adviser
and American Capital High Yield Investments, Inc. (the "Fund"). However, the
sale of the Company is contingent upon, among other things and subject to
certain exceptions, the approval of new investment advisory agreements with the
Adviser by both the boards of trustees or directors and the shareholders of
investment companies advised or subadvised by the Adviser, including the Fund,
representing a certain minimum amount of assets under management. The Fund
anticipates that the new advisory agreement with the Adviser proposed for the
Fund will provide for substantially the same terms and services as the current
investment advisory agreement between the Fund and the Adviser.

On October 7, 1994, the Board of Directors of the Fund approved the proposed
new investment advisory agreement between the Adviser and the Fund. Shareholders
of record as of October 26, 1994 will be entitled to vote on such approval by
proxy or at a shareholders' meeting to be held on or about December 16, 1994.

The Buyer is a wholly owned subsidiary of VKM Holding, Inc., which is
controlled by The Clayton & Dubilier Private Equity Fund IV Limited Partnership
("C&D L.P."). C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a private
investment firm. It is anticipated that senior members of management of the
Company and the Buyer will own a minority interest in VKM Holding, Inc. and that
Travelers will also own a minority non-voting interest in VKM Holding, Inc. The
general partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, Alberto Cribiore, Donald J. Gogel and
Hubbard C. Howe.

As of June 30, 1994, subsidiaries of the Buyer managed or supervised $35.9
billion of assets, including assets of 20 open-end investment companies and 34
closed-end investment companies having aggregate total assets of $16.0 billion,
representing over one million shareholder accounts.

34
<PAGE> 40

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:

Give Social Security Number or Tax
Account Type 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
- --------------------------------------------------------------------------------

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> 41

AMERICAN CAPITAL
HIGH YIELD INVESTMENTS, INC.

Prospectus
December 15, 1994
National Distributor
American Capital Marketing, Inc.
2800 Post Oak Blvd.
Houston, TX 77056

Investment Adviser
American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056

Disbursing, Redemption
and Shareholder Service Agent
American Capital Companies
Shareholder Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256

Independent Accountants
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002

Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110

Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent,
American Capital Companies Shareholder
Services, Inc. (ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor, American
Capital Marketing, Inc., P.O. Cox 1411,
Houston, TX 77251-1411.

American Capital C/O ACCESS
High Yield P.O. Box 418256
Investments, Inc. Kansas City, MO 64141-9256

[AMERICAN CAPITAL LOGO]
PRINTED MATTER
Printed in U.S.A./029-PRO-001
<PAGE> 42

AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.

DECEMBER 15, 1994

This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated December 15,
1994. A Prospectus may be obtained without charge by calling or writing American
Capital Marketing, Inc. at 2800 Post Oak Boulevard, Houston, Texas 77056 at
(800) 421-5666.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION......................................................... 2
INVESTMENT OBJECTIVES AND POLICIES.......................................... 2
INVESTMENT RESTRICTIONS..................................................... 8
DIRECTORS AND EXECUTIVE OFFICERS............................................ 10
INVESTMENT ADVISORY AGREEMENT............................................... 12
DISTRIBUTOR................................................................. 14
DISTRIBUTION PLANS.......................................................... 14
TRANSFER AGENT.............................................................. 15
PORTFOLIO TURNOVER.......................................................... 15
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 15
DETERMINATION OF NET ASSET VALUE............................................ 16
PURCHASE AND REDEMPTION OF SHARES........................................... 17
EXCHANGE PRIVILEGE.......................................................... 21
CHECK WRITING PRIVILEGE..................................................... 21
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.................................. 21
PRIOR PERFORMANCE INFORMATION............................................... 23
OTHER INFORMATION........................................................... 24
FINANCIAL STATEMENTS........................................................ 24
</TABLE>

<PAGE> 43

GENERAL INFORMATION

The Fund was originally incorporated in Texas on July 11, 1978. The Fund
was reincorporated in Maryland on July 2, 1992.

American Capital Asset Management, Inc. (the "Adviser"), American Capital
Marketing, Inc. (the "Distributor") and Advantage Capital Corporation, a retail
broker-dealer affiliate of the Distributor, are wholly owned subsidiaries of
American Capital Management & Research, Inc. ("ACMR"). All of the outstanding
voting stock of ACMR is owned by Primerica Finance Corporation, which is a
wholly owned subsidiary of Associated Madison Companies, Inc. ("Associated
Madison"). Associated Madison is a wholly owned subsidiary of The Travelers Inc.
See "The Fund and Its Management" in the Prospectus.

As of December 2, 1994, no person was known by the Fund to own beneficially
or of record as much as five percent of the Class A, Class B or Class C shares
of the Fund except as follows: 18.22% of the outstanding Class B shares and
36.83% of the outstanding Class C shares of the Fund were owned of record by
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013-2375; 8.76% of
the outstanding Class B shares and 10.75% of the outstanding Class C shares of
the Fund were owned of record by DLJP (Donaldson Lufkin), 1 Pershing Plaza, 5th
Floor, Jersey City, New Jersey 07399-0002; 5.68% of the outstanding Class C
shares of the Fund were owned of record by Merrill Lynch Pierce Fenner, P.O. Box
30341, New Brunswick, New Jersey 08989-0341; and 23.62% of the outstanding Class
A shares and 14.51% of the outstanding Class B shares were owned of record by
American Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056,
acting as Custodian for certain employee benefit plans and individual retirement
accounts.

INVESTMENT OBJECTIVES AND POLICIES

The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.

Lower rated and comparable nonrated securities tend to offer higher yields
than higher rated securities with the same maturities because the historical
conditions of the issuers of lower rated securities may not have been as strong
as that of other issuers. The Adviser, however, believes that such ratings are
not necessarily an accurate reflection of the current financial condition of the
issuers because they may be based upon considerations taken into account at the
time such ratings were assigned, rather than upon subsequent developments
affecting such issuers. Moreover, ratings categories tend to be broad, so that
there may be significant variations among the financial condition of issuers
within the same category. For these reasons, the Adviser may rely more on its
own analysis in determining which securities offer the best opportunities for
higher yields without unreasonable risks. Therefore, the achievement of the
Fund's objectives will depend more on the Adviser's analytical and portfolio
management skills than would be the case if greater reliance were placed on
ratings assigned by the rating services. The Adviser's analysis will focus on a
number of factors affecting the financial condition of a company; including the
strength of its management; the financial soundness of the company and the
outlook of its industry; the security's responsiveness to changes in interest
rates and business conditions; the cash flow of the company; dividend or
interest coverage; and the fair market value of the company's assets. In making
portfolio decisions for the Fund, the Adviser will attempt to identify higher
yielding securities of companies whose financial condition has improved since
the issuance of such securities, or is anticipated to improve in the future.

The Fund may invest up to 20% of its total assets in common stocks or other
equity securities and in non-income producing securities. See "Investment
Objectives and Policies" in the Prospectus.

When market conditions dictate a more "defensive" investment strategy, the
Fund may invest on a temporary basis up to all of its assets in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
prime commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
short-term money market instruments. Under normal market conditions the yield on
these securities will tend to be lower than the yield on other securities to be
purchased by the Fund.

2
<PAGE> 44

As noted above, the Fund may invest in securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities which are supported by
any of the following: (a) the full faith and credit of the U.S. Government, (b)
the right of the issuer to borrow an amount limited to a specific line of credit
from the U.S. Government, (c) discretionary authority of the U.S. Government
agency or instrumentality, or (d) the credit of the instrumentality. Such
agencies or instrumentalities include, but are not limited to, the Federal
National Mortgage Association, the Government National Mortgage Association,
Federal Land Banks, and the Farmer's Home Administration.

ADDITIONAL RISKS OF LOWER RATED DEBT SECURITIES

Additional risks of lower rated debt securities include limited liquidity
and secondary market support. As a result, the prices of lower rated debt
securities may decline rapidly in the event a significant number of holders
decide to sell. Changes in expectations regarding an individual issuer, an
industry or lower rated debt securities generally could reduce market liquidity
for such securities and make their sale by the Fund more difficult, at least in
the absence of price concessions. Reduced liquidity could also create
difficulties in accurately valuing such securities at certain times. An economic
downturn or an increase in interest rates could severely disrupt the market for
high yield bonds and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. The Fund will take such
actions as it considers appropriate in the event of anticipated financial
difficulties, default or bankruptcy of either the issuer or any debt security
owned by the Fund or the underlying source of funds for debt service. Such
action may include retaining the services of various persons and firms to
evaluate or protect any real estate, facilities or other assets securing any
such obligation or acquired by the Fund as a result of any such event. The Fund
incurs additional expenditures in taking protective action with respect to Fund
obligations in default and assets securing such obligations. Investment in lower
rated debt securities are not generally meant for short-term investment.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to broker-dealers and other financial institutions provided
that such loans are callable at any time by the Fund, and are at all times
secured by cash collateral that is at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the interest and dividends on the loaned
securities, while at the same time earning interest on the collateral which will
be invested in short-term obligations. The Fund pays lending fees and custodial
fees in connection with loans of its securities. There is no assurance as to the
extent to which securities loans can be effected.

A loan may be terminated by the borrower on one business day's notice, or
by the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the consideration which can be
earned from such loans is believed to justify the attendant risks. On
termination of the loan, the borrower is required to return the securities to
the Fund; any gain or loss in the market price during the loan would inure to
the Fund.

When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, whole or in part
as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.

3
<PAGE> 45

SECURITIES OF FOREIGN ISSUERS

In addition to the policies set forth in the Prospectus, the Fund may also
invest up to ten percent of its total assets in foreign currency denominated
debt securities; however, the Fund will not engage in such activity unless it
has been first authorized to do so by its Board of Directors.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities mark to market daily at not less than the repurchase
price. The underlying securities (securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. See "Investment
Practices and Restrictions -- Repurchase Agreements" in the Prospectus for
further information.

BRADY BONDS

The Fund may invest in "Brady Bonds," which are debt restructurings that
provide for the exchange of cash and loans for newly issued bonds. Brady Bonds
recently have been issued by the governments of Costa Rica, Mexico, Nigeria,
Uruguay and Venezuela, and are expected to be issued by Argentina, Brazil and
the Philippines and other emerging market countries. Brady Bonds issued by
Mexico and Venezuela currently are rated below investment grade. Investors
should recognize that Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt. The Salomon Brothers Brady Bond Index provides a benchmark that
can be used to compare returns of emerging market Brady Bonds with returns in
other bond markets, e.g., the U.S. bond market.

The Fund may invest in either collateralized or uncollateralized Brady
Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
Brady Bonds. Interest payments on such bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year of rolling interest payments
based on the applicable interest rate at that time, and is adjusted at regular
intervals thereafter.

OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS

WRITING CALL AND PUT OPTIONS

Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option writing program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Actively writing options on portfolio securities is likely to result in
a substantially higher portfolio turnover rate than that of most other
investment companies.

Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund

4
<PAGE> 46

would write call options only on a covered basis, which means that, at all times
during the option period, the Fund would own or have the right to acquire
securities of the type that it would be obligated to deliver if any outstanding
option were exercised.

The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or U.S. Government securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.

Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.

The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, with would not
close out its position as a writer, but would provide an asset of equal value to
its obligations under the option written. If the Fund is not able to enter into
a closing purchase transaction or to purchase an offsetting option with respect
to an option it has written, it will be required to maintain the securities
subject to the call or the collateral underlying the put until a closing
purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.

Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.

Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others, regardless of whether such options are written on one or
more accounts or through one or more brokers. An exchange may order the
liquidation of positions found to be in violation of those limits, and it may
impose other sanctions or restrictions. These position limits may restrict the
number of options the Fund may be able to write.

PURCHASING CALL AND PUT OPTIONS

The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital appreciation. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant 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

5
<PAGE> 47

corresponding increase in the value of the put option. The purchase of put
options for capital appreciation involves the same significant risk of loss as
described above for call options.

In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.

FUTURES CONTRACTS

The Fund 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."

An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.

Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities 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 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 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, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.

In the event of the bankruptcy of a broker through which the Fund engages
in transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.

Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in

6
<PAGE> 48

the price of the futures contracts and of the underlying securities, the risk of
market distortion, the illiquidity risk and the risk or error in anticipating
price movement.

There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.

There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depository requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities underlying the
futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.

There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and bonds of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.

Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.

CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed five percent of the fair market value of the Fund's assets. In
order to minimize leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the Custodian.

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<PAGE> 49

OPTIONS ON FUTURES CONTRACTS

The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as, it could sell a futures contract. The purchase of call
options on futures contracts would be intended to serve the same purpose as the
actual purchase of the futures contract.

Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the price of the underlying security, when the use of
any option on a future would result in a loss to the Fund when the use of a
future would not.

ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS

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 may not be changed
without the approval of the holders of a majority of its outstanding shares.
Such majority is defined 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. Borrow money, except that the Fund may borrow for temporary purposes in
amounts not exceeding five percent of the market or other fair value
(taken at the lower of cost or current value) of its total assets (not
including the amount borrowed). Secured temporary borrowings may take
the form of reverse repurchase agreements, pursuant to which the Fund
would sell portfolio securities for cash and simultaneously agree to
repurchase such securities at a specified date for the same amount of
cash plus an interest component. Pledge its assets or assign or
otherwise encumber them in excess of 3.25% of its net assets (taken at
market value at the time of pledging) and then only to secure
borrowings effected within the limitations set forth in the preceding
sentence. Notwithstanding the

8
<PAGE> 50

foregoing, the Fund may engage in transactions in options, futures
contracts and related options and make margin deposits and payments in
connection therewith.

2. Engage in the underwriting of securities except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security.

3. Make short sales of securities, but it may engage in transactions in
options, futures contracts, and related options.

4. Purchase securities on margin, except for such short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities, and it may engage in transactions in options, futures
contracts and related options and make margin deposits and payments in
connection therewith.

5. Purchase or sell real estate, although it may purchase securities of
issuers which engage in real estate operations, securities which are
secured by interests in real estate, or securities representing
interests in real estate.

6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may enter into transactions in futures contracts and
related options.

7. Make loans of money or securities, except (a) by the purchase of debt
obligations in which the Fund may invest consistent with its investment
objectives and policies; (b) by investment in repurchase agreements
(see "Repurchase Agreements"); or (c) by lending its portfolio
securities, subject to limitations described elsewhere in this
Statement of Additional Information (see "Investment Objectives and
Policies -- Lending of Securities").

8. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest
in the securities of companies which invest in or sponsor such
programs.

9. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.

10. Invest for the purpose of exercising control or management of another
company.

11. Invest in securities of any company if, to the knowledge of the Fund,
any officer or director of the Fund or of the Adviser owns more than
one half of one percent of the outstanding securities of such company,
and such officers and directors who own more than one half of one
percent own in the aggregate more than five percent of the outstanding
securities of such company.

12. Invest more than five percent of the market or other fair value of its
assets in warrants, or more than two percent of such value in warrants
which are not listed on the New York or American Stock Exchanges.
Warrants attached to other securities are not subject to these
limitations.

13. Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements which have
a maturity of longer than seven days.

14. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except the U.S. Government)
or purchase more than ten percent of the outstanding voting securities,
or more than ten percent of any class of securities, of any one issuer.

15. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the U.S.
Government).

16. Invest more than five percent of its total assets in companies having a
record, together with predecessors, of less than three years of
continuous operation.

17. Invest more than 20% of its total assets in U.S. currency denominated
issues of foreign governments and other foreign issuers, or invest more
than ten percent of its total assets in securities which are payable in
currencies other than U.S. dollars.

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<PAGE> 51

18. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of "cover".

In addition to the foregoing, the Fund has undertaken to a certain state
that at least 30 days prior to any change by the Fund in its investment
objective, the Fund will provide written notice to all of its shareholders in
that state regarding such proposed change.

DIRECTORS AND EXECUTIVE OFFICERS

The Fund's directors and executive officers and their principal occupations
during the past five years are listed below. All persons named as Directors also
serve in similar capacities for other funds advised by the Adviser as indicated
below.

FERNANDO SISTO, Chairman of the Board and Director. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991. George M. Bond
Professor and formerly Dean of Graduate School and Chairman, Department of
Mechanical Engineering, Stevens Institute of Technology; Director, Dynalysis of
Princeton (engineering research).(1)

J. MILES BRANAGAN, Director. 2300 205th Street, Torrance, California
90501-1452. Co-Founder, Chairman and President, MDT Corporation (medical
equipment).(1)

RICHARD E. CARUSO, Director. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive Officer,
Integra LifeSciences Corporation (biotechnology/life sciences); Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of Art
(community art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business Performance
Group, London School of Economics; formerly Director, First Sterling Bank;
formerly Director and Executive Vice President, LFC Financial Corporation (lease
financing).(1)

ROGER HILSMAN, Director. 251-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly Professor of Government and International Affairs, Columbia
University.(1)

*DON G. POWELL, President and Director. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. Chairman, Chief Executive Officer and Director of ACMR;
President, Chief Executive Officer and Director of the Adviser; Executive Vice
President and Director of the Distributor.(1)(2)(4)

DAVID REES, Director. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(3)

**LAWRENCE J. SHEEHAN, Director. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner
(1969 -- 1994) of the law firm of O'Melveny & Myers, legal counsel to the
Fund.(1)(3)(5)

WILLIAM S. WOODSIDE, Director. 712 Fifth Avenue, 40th Floor, New York, New
York 10019. Vice Chairman of the Board, Sky Chefs, Inc. (airline food catering);
formerly Director, Primerica Corporation (currently known as Travelers);
formerly Chairman of the Board and Chief Executive Officer, old Primerica
Corporation (American Can Company); Trustee and formerly President, Whitney
Museum of American Art; Chairman, Institute for Educational Leadership, Inc.,
Board of Visitors, Graduate School of The City University of New York; Academy
of Political Science; Committee for Economic Development; Director, Public
Education Fund Network, Fund for New York City Public Education; Trustee,
Barnard College; Member, Dean's Council, Harvard School of Public Health;
Member, Mental Health Task Force, Carter Center; formerly Director, James River
Corporation (paper products).(1)

10
<PAGE> 52

ELLIS S. BIGELOW, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Investment Vice President of the Adviser; also serves as Vice
President of American Capital Income Trust, and the Corporate Bond Portfolio of
American Capital Life Investment Trust.(4)

NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate Secretary
of the Adviser.(4)

PAUL A. HILSTAD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President, General Counsel, Corporate Secretary and Director of
ACMR; Senior Vice President and General Counsel of the Adviser; Vice President
of the Distributor; formerly Vice President and Deputy General Counsel, IDS
Financial Services Inc.(4)

PETER G. KAPOURELOS, Vice President. 1591 McDaniel Drive, West Chester,
Pennsylvania 19380. Division Manager, Advantage Capital Corporation. (4)

TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/ Assistant Controller.(4)

CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)

ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President-Chief Investment Officer/Fixed Income Department
and Director of the Adviser; Executive Vice President and Director of ACMR.(4)

J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, TX 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. Executive Vice President and Director of ACMR; Senior Vice President of
the Adviser; President, Chief Operating Officer and Director of American Capital
Services, Inc.; Executive Vice President, Chief Operating Officer and Director
of American Capital Trust Company; Executive Vice President and Director of
American Capital Companies Shareholder Services, Inc. ("ACCESS"); Executive Vice
President, Chief Operating Officer and Director of the Distributor.(4)
- ---------------
* Director who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act, by virtue of his affiliation with the Adviser.

** Director who is an interested person of the Fund within the meaning of the
1940 Act by virtue of his affiliation with legal counsel of the Fund.

(1) Also a director or trustee of American Capital Comstock Fund, Inc., American
Capital 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 Life
Investment Trust, American Capital Municipal Bond Fund, Inc., American
Capital Pace Fund, Inc., American Capital Real Estate Securities Fund, Inc.,
American Capital Reserve Fund, Inc., American Capital Small Capitalization
Fund, Inc., American Capital Tax-Exempt Trust, American Capital Texas
Municipal Securities, Inc., American Capital U.S. Government Trust for
Income, American Capital Utilities Income Fund, Inc. and American Capital
World Portfolio Series, Inc.

(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser, and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as subadviser for eight of
the portfolios.

11
<PAGE> 53

(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 the Directors
who were not affiliated with the Adviser or its parent received as a group
$18,832 in directors' fees from the Fund in addition to certain out-of-pocket
expenses. Such directors also received compensation for serving as directors or
trustees of other investment companies advised by the Adviser as identified in
the notes to the foregoing table. For legal services rendered during the last
fiscal year the Fund paid legal fees of $14,410 to the law firm of O'Melveny &
Myers, of which Mr. Sheehan is Of Counsel. The firm also serves as legal counsel
to the American Capital Funds listed in Footnote 1 above.

INVESTMENT ADVISORY AGREEMENT

The Fund and the Adviser are parties to an investment advisory agreement,
dated June 15, 1993 (the "Advisory Agreement"). Under the Advisory Agreement,
the Fund retains the Adviser to manage the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities. The Adviser obtains and evaluates economic, statistical and
financial information to formulate and implement the Fund's investment
objectives. The Adviser also furnishes the services of the Fund's President and
such other executive and clerical personnel as are necessary to prepare the
various reports and statements and conduct the Fund's day-to-day operations. The
Fund, however, bears the cost of its accounting services, which include
maintaining its financial books and records and calculating its daily net asset
value. The costs of such accounting services include the salaries and overhead
expenses of the Fund's Treasurer and the personnel operating under his
direction. Charges are allocated among the investment companies advised or
subadvised by the Adviser. A portion of these amounts is paid to the Adviser or
its parent in reimbursement of personnel, office space, facilities and equipment
costs attributable to the provision of accounting services to the Fund. The Fund
also pays shareholder service agency fees, distribution fees, service fees,
custodian fees, legal and auditing fees, the costs of reports to shareholders,
and all other ordinary business expenses not specifically assumed by the
Adviser. The Advisory Agreement also provides that the Adviser shall not be
liable to the Fund for any actions or omissions if it acted without willful
misfeasance, bad faith, negligence or reckless disregard of its obligations.

Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a fee
payable monthly, computed on average daily net assets of the Fund at annual rate
of: 0.625% on the first $150 million average net assets; 0.55% on the next $150
million of average net assets; and 0.50% on the net assets over $300 million.

The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser will be reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of ACMR in
connection with the purchase and sale of portfolio investments less any direct
expenses incurred by such subsidiary of ACMR, in connection with obtaining such
commissions, fees, brokerage or similar payments. Although Smith Barney Inc.
("Smith Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey") are
affiliates, not subsidiaries of ACMR and thus are not subject to the foregoing
sentence. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Fund's benefit and to advise
the Board of Directors of the Fund of any other commissions, fees, brokerage or
similar payments which may be possible for the Adviser or any other direct or
indirect

12
<PAGE> 54

majority owned subsidiary of ACMR to receive in connection with the Fund's
portfolio transactions or other arrangements which may benefit the Fund.

The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, 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).

Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million and 1 1/2% of the remaining
average net assets.

The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's 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 30 days' written notice.

During the fiscal years ended August 31, 1992, 1993 and 1994, the Adviser
received $2,085,355, $2,383,044 and $2,718,712, respectively, in advisory fees
from the Fund. For such periods the Fund paid $91,153, $112,725 and $109,694,
respectively, for accounting services.

DISTRIBUTOR

American Capital Marketing, Inc. (the "Distributor"), acts as the principal
underwriter of the Fund's shares pursuant to a written agreement, dated October
1, 1993 (the "Underwriting Agreement"). The Distributor has the exclusive right
to distribute shares of the Fund through affiliated and unaffiliated dealers.
The Distributor's obligation is an agency or "best efforts" arrangement under
which the Distributor is required to take and pay for only such shares of the
Fund as may be sold to the public. The Distributor is not obligated to sell any
stated number of shares. The Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost and
expense of supplemental sales literature, promotion and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Fund's Board of Directors or by a vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Directors who
are not parties to the Underwriting Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.

During the fiscal years ended August 31, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $1,346,302,
$1,128,520 and $826,415. Of such totals, the amount retained by the Distributor
was $106,022, $94,921 and $125,969. The remainder was reallowed to dealers. Of
such dealer reallowances, $504,516, $428,350 and $238,856, respectively, was
received by Advantage Capital Corporation, an affiliated dealer of the
Distributor.

DISTRIBUTION PLANS

The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution Plan (the "Class A Plan", "Class B Plan" and "Class C
Plan", respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").

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<PAGE> 55

The Directors have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payment to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of Class B shares
purchased by the clients of broker-dealers and other Service Organizations, (2)
out-of-pocket expenses of printing and distributing prospectuses and annual and
semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, and (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses.
With respect to the Class C Plan, authorized payments by the Fund also include
payments at an annual rate of up to 0.75% of the net assets of the Class C
shares to reimburse the Distributor for (1) upfront commissions and transaction
fees of up to 0.75% of the purchase price of Class C shares purchased by the
clients of broker-dealers and other Service Organizations and ongoing
commissions and transaction fees paid to broker-dealers and other Service
Organizations in an amount up to 0.65% of the average daily net assets of the
Fund's Class C shares, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, and (5) advertising and promotion expenses, including conducting
and organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses. Such reimbursements are subject to the maximum sales
charge limits specified by the National Association of Securities Dealers, Inc.
("NASD").

Banks are currently prohibited under the Glass-Stegall 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 and selling group agreements were approved by the Board of
Directors, including a majority of the Directors who are not interested persons
(as defined in the 1940 Act) of the Fund and who have no direct or indirect
financial interest in the operation of any of the Plans or in any agreements
related to each Plan ("Independent 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 Board of 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
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

14
<PAGE> 56

separately by class; otherwise, it may be amended by a majority of the
Directors, including a majority of the Independent Directors, by vote cast in
person at a meeting called for the purpose of voting upon such amendment. So
long as the Plan is in effect, the selection or nomination of the Independent
Directors is committed to the discretion of the Independent Directors.

For the fiscal year ended August 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $882,219 or .21% of the Class A shares' average net
assets. Such expenses were paid to reimburse the Distributor for payments made
to Service Organizations for servicing Fund shareholders and for administering
the Class A Plan. For the fiscal year ended August 31, 1994, the Fund's
aggregate expenses under the Class B Plan were $567,889 or 1.00% of the Class B
shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $425,917 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 $141,972 for fees paid to Service
Organizations for servicing Class B shareholders and administering the Class B
Plan. For the fiscal year ending August 31, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B Plan and carried forward were
approximately $2.5 million. For the fiscal year ended August 31, 1994, the
Fund's aggregate expenses under the Class C Plan were $83,590 or 1.00% of the
Class C shares' average daily net assets. Such expenses were paid to reimburse
the Distributor for the following payments: $63,693 for commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class C shares of the Fund and $20,897 for fees paid to
Service Organizations for servicing Class C shareholders and administering the
Class C Plan. For the fiscal year ended August 31, 1994, the unreimbursed
expenses incurred by the Distributor under the Class C Plan and carried forward
were approximately $193,000.

TRANSFER AGENT

During the fiscal years ending August 31, 1992, 1993 and 1994, American
Capital Companies Shareholder Services, Inc. ("ACCESS"), shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$777,112, $820,450 and $891,737, respectively, for these services. Since April
1, 1991, these services have been provided at cost plus a profit.

PORTFOLIO TURNOVER

The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate for prior
years is shown under "Financial Highlights" in the Prospectus. The turnover rate
will fluctuate over time depending upon the Adviser's investment strategy and
the higher volatility of the market for high yielding fixed-income securities.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of any
commissions, if any, paid on such transactions. As most transactions made by the
Fund are principal transactions at net prices, the Fund incurs little or no
brokerage costs. Portfolio securities are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter and purchases from dealers serving as market
makers include the spread between the bid and asked price. Sales to dealers are
effected at bid prices.

The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to

15
<PAGE> 57

meet these criteria, preference may be given to firms which also provide
research services to the Fund or the Adviser. No specific value can be assigned
to such research services which are furnished without cost to the Adviser. The
investment advisory fee is not reduced as a result of the Adviser's receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities; (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and the
performance of accounts; and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody). Research services furnished by firms through which the Fund effects
its securities transactions may be used by the Adviser in servicing all of its
advisory accounts; not all of such services may be used by the Adviser in
connection with the Fund. Consistent with the Rules of Fair Practice of the NASD
and subject to seeking best execution and such other policies as the Board of
Directors may determine, the Adviser may consider sales of shares of the Fund as
a factor in the selection of firms to execute portfolio transactions for the
Fund.

The Adviser places portfolio transactions for other advisory accounts,
including other investment companies. The Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities for the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations among the Fund and other
advisory accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.

The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, Travelers.
Such affiliated persons currently are Smith Barney, a wholly owned subsidiary of
Travelers. Effective August 2, 1993, Robinson Humphrey, a wholly owned
subsidiary of Smith Barney, became an affiliate of Travelers. In addition, from
December 15, 1988 through February 21, 1992, Dain Bosworth, Inc. ("Dain
Bosworth") and Rauscher Pierce, Refsnes, Inc. ("Rauscher Pierce") were
affiliates of Travelers; from September 10, 1987 to March 27, 1992, The
Fox-Pitt, Kelton Group S.A. ("Fox-Pitt") was an affiliate of Travelers; and from
1985 to September 30, 1992, Jefferies & Company, Inc. ("Jefferies") was deemed
an affiliate of Travelers (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 conducted
no affiliated brokerage transactions with Dain Bosworth, Fox-Pitt, Jefferies,
Rauscher Pierce, or Smith Barney during the last fiscal year. During the year
ended August 31, 1994, the Fund paid $12,574 in brokerage commissions on
transactions totalling $7,205,548 to brokers selected primarily on the basis of
research services provided to the Adviser.

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 August 31,
1992, 1993 and 1994, totalled $4,548, $17,588, and $20,823, respectively.

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.

Such computation is made by dividing the value of the Fund's securities
plus all cash and other assets (including accrued interest) less all liabilities
(including accrued expenses) by the number of shares outstanding. Portfolio
securities that are traded in the over-the-counter market are valued at the most
recently quoted bid price. Any security for which the primary market is on an
exchange is valued at the last reported sales price on the exchange where
principally traded or at the last reported bid price if there was no sale
reported that day. If no sale or bid price is reported that day, the security is
valued at the most recent sale

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<PAGE> 58

price. Short-term investments with a maturity of 60 days or less when purchased
are valued at cost plus interest earned (amortized cost), which approximates
market value. Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days to
maturity become less than 61 days. From such time, until maturity, the
investments are valued at amortized cost using the value of the investment on
the 61st day. The value of any other securities or other assets is fair value as
determined in good faith by the Fund's Board of Directors.

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 apply to purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single purchaser,

17
<PAGE> 59

as is a director or other fiduciary purchasing for a single fiduciary account.
An aggregate investment includes all shares of the Fund and all shares of
certain other participating American Capital mutual funds described in the
Prospectus (the "Participating Funds"), which have been previously purchased and
are still owned, plus the shares being purchased. The current offering price is
used to determine the value of all such shares. If, for example, an investor has
previously purchased and still holds Class A shares of the Fund and shares of
other Participating Funds having a current offering price of $40,000, and that
person purchases $65,000 of additional Class A shares of the Fund, the charge
applicable to the $65,000 purchase would be 4.00% of the offering price. The
same reduction is applicable to purchases under a Letter of Intent as described
in the next paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN
ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE
BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN
SUCH AN ORDER IS PLACED BY MAIL. The reduced sales charge will not be applied if
such notification is not furnished at the time of the order. The reduced sales
charge will also not be applied should a review of the records of the
Distributor or ACCESS fail to confirm the investor's representations concerning
his holdings.

LETTER OF INTENT

Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can become subject to the
Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the investor is required to pay the
difference between sales charges otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient 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
charge, if any, paid during the 13-month period.

VOLUME DISCOUNTS

The schedule of volume discounts in the Prospectus applies to purchases of
shares made at one time by any purchaser, which term includes (1) an
individual -- or an individual, his or her spouse and children under the age of
21 -- purchasing securities for his or her or their own account; (2) a trustee
or other fiduciary of a single trust estate or a single fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code (the
"Code")), although more than one beneficiary is involved; and (3) a tax-exempt
organization enumerated in Section 501(c)(3) or (13) of the Code.

REDEMPTION OF SHARES

Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.

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<PAGE> 60

CONTINGENT DEFERRED SALES CHARGE-CLASS A

For investments in the amount of $1,000,000 or more of Class A shares of
the Fund ("Qualified Purchaser"), there is no front-end sales charge, but a
contingent deferred sales charge ("CDSC-Class A") of one percent is imposed in
the event of certain redemptions within one year of the purchase. If a
CDSC-Class A is imposed upon redemption, the amount of the CDSC-Class A will be
equal to the lesser of one percent of the net asset value of the shares at the
time of purchase, or one percent of the net asset value of the shares at the
time of redemption.

The CDSC-Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The CDSC-Class
A will be waived in connection with redemptions by certain Qualified Purchasers
(e.g., in retirement plans qualified under Section 401(a) of the Code and
deferred compensation plans under Section 457 of the Code) required to obtain
funds to pay distributions to beneficiaries pursuant to the terms of the plans.
Such payments include, but are not limited to, death, disability, retirement, or
separation from service. No CDSC-Class A will be imposed on exchanges between
funds. For purposes of the CDSC-Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a
CDSC-Class A rather than a front-end load sales charge. In determining whether a
CDSC-Class A is payable, it is assumed that shares held the longest are the
first to be redeemed.

Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of American Capital Reserve Fund, Inc.
with shares of certain other participating American Capital mutual funds
described as "Participating Funds" in the Prospectus.

As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.

WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC-CLASS B
AND C")

The CDSC-Class B and C is waived on redemptions of Class B and Class C
shares in the circumstances described below:

(a) Redemption Upon Disability or Death

The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC-Class B and C.

In cases of disability or death, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.

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<PAGE> 61

(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.

A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.

The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.

(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance

The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC upon such involuntary
redemption.

(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption

A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C shares of the Fund, provided that the reinvestment is effected
within 120 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.

(f) Redemption by Adviser

The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.

20
<PAGE> 62

EXCHANGE PRIVILEGE

The following supplements the discussion of "Shareholder Services-Exchange
Privilege" in the Prospectus:

By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. ACMR and its subsidiaries, including ACCESS
(collectively, "American Capital"), and the Fund employ procedures considered by
them to be reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither
American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. American Capital and
the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed.

For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.

Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.

A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.

CHECK WRITING PRIVILEGE

To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.

The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.

DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES

The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders of Class A, Class B and Class C shares and meet certain
diversification and other requirements. The per share dividends on Class B and
Class C shares will be lower than the per share dividends on Class A shares as a
result of the distribution fee and incremental transfer agency fees applicable
to the Class B and Class C shares. By qualifying as a regulated investment
company, the Fund is

21
<PAGE> 63

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 gain net income for the twelve months ended October 31 of such calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax.

Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Any loss on the sale of Fund shares held for less than six months is
treated as a long-term capital loss to the extent of any long-term capital gain
distribution paid on such shares, subject to any exception that may be provided
by IRS regulations for losses incurred under certain systematic withdrawal
plans. All dividends and distributions are taxable to the shareholder whether or
not reinvested in shares. Shareholders are notified annually by the Fund as to
the federal tax status of dividends and distributions paid by the Fund.

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.

A portion of the dividends taxable as ordinary income qualify for the 70%
dividends received deduction for corporations. To qualify for the dividends
received deduction, a corporate shareholder must hold the shares on which the
dividend is paid for more than 45 days.

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 adviser
concerning the applicability of the United States withholding tax.

If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.

Dividends and capital gains distributions may also be subject to state and
local taxes.

Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.

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.

22
<PAGE> 64

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Code includes special rules applicable to certain listed options,
futures contracts, and options on futures contracts which the Fund may write,
purchase or sell. Such options and contracts are classified as Section 1256
contracts under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other terminations of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, when held by the Fund at the end of a
fiscal year, generally are required to be treated as sold at market value on the
last day of such fiscal year for federal income tax purposes
("marked-to-market"). Over-the-counter options are not classified as Section
1256 contracts and are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses recognized by the Fund from transactions
in over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by the Fund are exercised, the gain or loss realized on the
sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.

A substantial portion of the Fund's transactions in options, futures
contracts, and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle in which at
least one (but not all) of the positions are Section 1256 contracts is a "mixed
straddle" under the Code if certain identification requirements are met.

The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.

The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.

PRIOR PERFORMANCE INFORMATION

The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for the one-year, five-year, and
ten-year periods ended August 31, 1994 was - 2.53%, 6.55%, and 8.56%,
respectively. The average annual total return for Class B shares of the Fund for
the one-year, and the life of the Fund was -2.12% and 7.47%, respectively. The
average annual total return for Class C shares of the Fund for the one year, and
the life of the Fund was 0.50% and 2.30%, 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
the Fund's investment practices.

The annualized current yield for Class A, Class B and Class C shares of the
Fund for the 30-day period ending August 31, 1994 was 9.99%, 9.77% and 9.83%.
The yield for Class A shares, Class B shares and Class C shares are not fixed
and will fluctuate in response to prevailing interest rates and the market value
of portfolio securities, and as a function of the type of securities owned by
the Fund, portfolio maturity and the Fund's expenses.

Yield and total return are computed separately for Class A, Class B and
Class C shares.

23
<PAGE> 65

From time to time ACMR will announce the results of their monthly polls of
U.S. investor intentions -- the American Capital Index of Investor Intentions
and the American Capital Mutual Fund Index -- which polls measure how Americans
plan to use their money.

The Funds may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
and (3) in reports or other communications to shareholders or in advertising
material, illustrate the benefits of compounding at various assumed rates of
return. Such illustrations may be in the form of charts or graphs and will not
be based on historical returns experienced by the Funds.

OTHER INFORMATION

CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.

SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.

INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, perform an annual audit of the
Fund's financial statements.

FINANCIAL STATEMENTS

The attached financial statements in the form in which they appear in the
Annual Report to shareholders, including the related report of independent
accountants on the August 31, 1994 financial statements, are hereby included in
the Statement of Additional Information.

The following information is not included in the Annual Report. This
assumes a purchase of Class A shares of the Fund aggregating less than $100,000
subject to the schedule of sales charges set forth in the Prospectus at a price
based upon the net asset value of Class A shares of the Fund.

<TABLE>
<CAPTION>
AUGUST 31,
1994
----------
<S> <C>
Net Asset Value Per Class A Share................................. $ 6.12
Class A Per Share Sales Charge -- 4.75% of offering price (4.99%
of net asset value per share)................................... $ .31
----------
Class A Per Share Offering Price the Public....................... $ 6.43
</TABLE>

24
<PAGE> 66
INVESTMENT PORTFOLIO
AUGUST 31, 1994

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE OBLIGATIONS 85.8%

CONSUMER DISTRIBUTION 11.8%
$ 2,000,000 Apparel Retailers, Inc., Step Bonds (0% to 12.75% at 8/15/98),
5/15/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,200,000
5,500,000 Big 5 Holdings, 13.625%, 9/15/02 . . . . . . . . . . . . . . . . . 5,610,000
5,310,000 Bry Lane Capital, 10.00%, 9/1/03 . . . . . . . . . . . . . . . . . 4,991,400
3,250,000 Dairy Mart Convenience Store, Inc., 10.25%, 3/15/04 . . . . . . . 2,608,125
3,081,580 F F Holdings Corp., 14.25%, Payment-In-Kind, 10/1/02 . . . . . . . 2,650,158
4,250,000 Farm Fresh, Inc., 12.25%, 10/1/00 . . . . . . . . . . . . . . . . 3,952,500
1,000,000 Finlay Enterprises, Inc., Step Bonds (0% to 12.00% at 5/1/98),
5/1/05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582,500
3,250,000 Finlay Fine Jewelry Corp., 10.625%, 5/1/03 . . . . . . . . . . . . 3,095,625
5,315,000 Food 4 Less Supermarkets, Inc., 13.75%, 6/15/01 . . . . . . . . . 5,766,775
6,500,000 Grand Union Co., 12.25%, 7/15/02 . . . . . . . . . . . . . . . . . 5,200,000
**4,350,000 Kash N Karry Food Stores, Inc., 14.00%, 2/1/01 . . . . . . . . . . 1,261,500
3,900,000 Levitz Furniture Corp., 9.625%, 7/15/03 . . . . . . . . . . . . . 3,480,750
Pathmark Stores, Inc.
3,000,000 11.625%, 6/15/02 . . . . . . . . . . . . . . . . . . . . . . . 2,955,000
4,500,000 Step Bonds (0% to 10.75% at 11/1/99), 11/1/03 . . . . . . . . . . 2,160,000
Specialty Retailers, Inc.
2,000,000 10.00%, 8/15/00 . . . . . . . . . . . . . . . . . . . . . . . . 1,920,000
1,750,000 11.00%, 8/15/03 . . . . . . . . . . . . . . . . . . . . . . . . 1,680,000
3,605,000 Wickes Lumber Co., 11.625%, 12/15/03 . . . . . . . . . . . . . . . 3,695,125
-------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . 52,809,458
-------------

CONSUMER DURABLES 7.1%
3,000,000 Aftermarket Tech Corp., 12.00%, 8/1/04 . . . . . . . . . . . . . . 3,067,500
4,550,000 Continental Homes Holding Corp., 12.00%, 8/1/99 . . . . . . . . . 4,652,375
3,500,000 Del Webb Corp., 9.00%, 2/15/06 . . . . . . . . . . . . . . . . . . 2,940,000
Exide Corp.
2,000,000 10.75%, 12/15/02 . . . . . . . . . . . . . . . . . . . . . . . . 2,060,000
1,000,000 Step Bonds (0% to 12.25% at 12/15/97), 12/15/04 . . . . . . . . . 725,000
2,000,000 Forecast Group, 11.375%, 12/15/00 . . . . . . . . . . . . . . . . 1,660,000
1,250,000 Lear Seating, Inc., 8.25%, 2/1/02 . . . . . . . . . . . . . . . . 1,137,500
4,500,000 MDC Holdings, Inc., 11.125%, 12/15/03 . . . . . . . . . . . . . . 4,207,500
1,500,000 NVR, Inc., 11.00%, 4/15/03 . . . . . . . . . . . . . . . . . . . . 1,406,250
3,595,000 Oriole Homes Corp., 12.50%, 1/15/03 . . . . . . . . . . . . . . . 3,559,050
1,750,000 Penda Corp., Inc., 10.75%, 3/1/04 . . . . . . . . . . . . . . . . 1,653,750
1,300,000 UDC Homes, Inc., 11.75%, 4/30/03 . . . . . . . . . . . . . . . . . 1,183,000
4,000,000 Venture Holdings, Inc., 9.75%, 4/1/04 . . . . . . . . . . . . . . 3,660,000
-------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . 31,911,925
-------------

CONSUMER NON-DURABLES 5.6%
3,900,000 Consoltex Group, Inc., 11.00%, 10/1/03 . . . . . . . . . . . . . . 3,685,500
4,870,000 Dan River, Inc., 10.125%, 12/15/03 . . . . . . . . . . . . . . . . 4,431,700
3,125,000 Dr Pepper Bottle Holdings, Inc., Step Bonds (0% to 11.625%
at 2/15/98), 2/15/03 . . . . . . . . . . . . . . . . . . . . . . 2,093,750
3,000,000 Hartmarx Corp., 10.875%, 1/15/02 . . . . . . . . . . . . . . . . . 2,760,000
2,500,000 Health O Meter, Inc., 13.00%, 8/15/02 . . . . . . . . . . . . . . 2,475,000
1,150,000 Specialty Foods, 11.25%, 8/15/03 . . . . . . . . . . . . . . . . . 954,500
5,277,000 Synthetic Industries, Inc., 12.75%, 12/1/02 . . . . . . . . . . . 5,435,310
3,750,000 Westpoint Stevens, 9.375%, 12/15/05 . . . . . . . . . . . . . . . 3,384,375
-------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . 25,220,135
-------------
</TABLE>

F-1
<PAGE> 67
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES 10.0%
$ 1,250,000 Act III Broadcasting, 9.625%, 12/15/03 . . . . . . . . . . . . . . $ 1,175,000
1,500,000 Act III Theatres, Inc., 11.875%, 2/1/03 . . . . . . . . . . . . . 1,601,250
2,200,000 AMC Entertainment, Inc., 12.625%, 8/1/02 . . . . . . . . . . . . . 2,409,000
3,560,000 American Restaurant Group Corp., 12.00%, 9/15/98 . . . . . . . . . 3,399,800
1,750,000 Bally Grand, Inc., 10.375%, 12/15/03 . . . . . . . . . . . . . . . 1,513,750
4,000,000 California Hotel Finance Corp., 11.00%, 2/1/02 . . . . . . . . . . 3,910,000
3,750,000 Carrols Corp., 11.50%, 8/15/03 . . . . . . . . . . . . . . . . . . 3,525,000
2,000,000 Continental Broadcasting, 10.625%, 7/1/03 . . . . . . . . . . . . 2,020,000
Continental Cablevision, Inc.
2,750,000 9.50%, 8/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . 2,488,750
1,100,000 11.00%, 6/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . 1,122,000
2,300,000 El Commandante Capital Corp., 11.75%, 12/15/03 . . . . . . . . . . 2,116,000
4,500,000 Flagstar Corp., 11.25%, 11/1/04 . . . . . . . . . . . . . . . . . 3,870,000
1,500,000 Louisiana Casino, 11.50%, 12/1/98 . . . . . . . . . . . . . . . . 1,305,000
3,000,000 News America Holdings, Inc., 10.125%, 10/15/12 . . . . . . . . . . 3,216,900
3,125,000 Outlet Broadcasting, Inc., 10.875%, 7/15/03 . . . . . . . . . . . 3,093,750
4,000,000 PRT Funding Corp., 11.625%, 4/15/04 . . . . . . . . . . . . . . . 2,760,000
4,250,000 Resorts International, Inc., Variable Rate Notes, (7.89% at
8/31/94), 6/30/00 . . . . . . . . . . . . . . . . . . . . . . . 3,590,935
1,750,000 SFX Broadcasting, Inc., 11.375%, 10/1/00 . . . . . . . . . . . . . 1,798,125
-------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . 44,915,260
-------------

ENERGY 8.5%
4,500,000 Clark (R&M) Holdings, Inc., Zero Coupon, 2/15/00 . . . . . . . . . 2,475,000
1,750,000 Dual Drilling Co., 9.875%, 1/15/04 . . . . . . . . . . . . . . . . 1,548,750
1,000,000 Energy Ventures, Inc. 10.25%, 3/15/04 . . . . . . . . . . . . . . 970,000
4,000,000 Forest Oil Corp., 11.25%, 9/1/03 . . . . . . . . . . . . . . . . . 3,940,000
3,500,000 Giant Industries, Inc., 9.75%, 11/15/03 . . . . . . . . . . . . . 3,246,250
1,500,000 Global Marine, Inc., 12.75%, 12/15/99 . . . . . . . . . . . . . . 1,635,000
2,500,000 HS Resource, Inc., 9.875%, 12/1/03 . . . . . . . . . . . . . . . . 2,350,000
4,730,000 Maxus Energy Corp., 11.50%, 11/15/15 . . . . . . . . . . . . . . . 4,730,000
Mesa Capital Corp.
1,750,000 Step Bonds (0% to 12.75% at 6/30/95), 6/30/96 . . . . . . . . . 1,540,000
1,292,000 Step Bonds (0% to 12.75% at 6/30/95), 6/30/98 . . . . . . . . . 1,143,420
Petroleum Heat & Power, Inc.
2,500,000 9.375%, 2/1/06 . . . . . . . . . . . . . . . . . . . . . . . . 2,250,000
1,500,000 10.125%, 4/1/03 . . . . . . . . . . . . . . . . . . . . . . . . 1,421,250
4,400,000 Transco Energy Co., 11.25%, 7/1/99 . . . . . . . . . . . . . . . . 4,668,400
1,000,000 Tuboscope Vetco International, Inc. 10.75%, 4/15/03 . . . . . . . 990,000
2,325,000 Wainoco Oil Corp., 12.00%, 8/1/02 . . . . . . . . . . . . . . . . 2,418,000
3,000,000 Wilrig, 11.25%, 3/15/00 . . . . . . . . . . . . . . . . . . . . . 2,730,000
-------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . 38,056,070
-------------

FINANCE 5.4%
2,500,000 American Annuity Group, Inc., 11.125%, 2/1/03 . . . . . . . . . . 2,543,750
American Financial Corp.
5,000,000 12.00%, 9/3/99 . . . . . . . . . . . . . . . . . . . . . . . . . 5,012,500
1,636,000 12.25%, 9/15/03 . . . . . . . . . . . . . . . . . . . . . . . . 1,685,080
4,000,000 Americo Life, Inc., 9.25%, 6/1/05 . . . . . . . . . . . . . . . . 3,520,000
4,800,000 Blue Bell Funding, Inc., 11.85%, 5/1/99 . . . . . . . . . . . . . 4,968,000
3,000,000 Guinness Petroleum Aviation, Variable Rate Notes (3.825% at
8/31/94), 4/10/95 . . . . . . . . . . . . . . . . . . . . . . . 2,887,500
</TABLE>

F-2
<PAGE> 68
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE--continued
$ 1,750,000 Phoenix Re Corp., 9.75%, 8/15/03 . . . . . . . . . . . . . . . . . $ 1,736,875
2,000,000 Reliance Group Holdings, 9.75%, 11/15/03 . . . . . . . . . . . . . 1,800,000
-------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . 24,153,705
-------------

HEALTH CARE 5.4%
2,981,487 Alco Health Distribution Corp., 11.25%, Payment-In-Kind, 7/15/05 . 2,988,940
5,000,000 Charter Medical Corp., 11.25%, 4/15/04 . . . . . . . . . . . . . . 5,150,000
3,500,000 Continental Medical Systems, 10.875%, 8/15/02 . . . . . . . . . . 3,377,500
3,500,000 Hillhaven Corp., 10.125%, 9/1/01 . . . . . . . . . . . . . . . . . 3,500,000
1,750,000 OrNda Healthcorp., 11.375%, 8/15/04 . . . . . . . . . . . . . . . 1,763,125
4,000,000 Paracelsus Healthcare Corp., 9.875%, 10/15/03 . . . . . . . . . . 3,765,000
2,000,000 Quorum Health Group, 11.875%, 12/15/02 . . . . . . . . . . . . . . 2,125,000
1,000,000 Total Renal Care, Step Bonds (0% to 12.00% at 2/15/98), 2/15/04 . 710,000
1,000,000 Wright Medical Technology, 10.75%, 7/1/00 . . . . . . . . . . . . 990,000
-------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . 24,369,565
-------------

PRODUCER MANUFACTURING 9.0%
2,300,000 Allied Waste Industries, Inc., 10.75%, 2/1/04 . . . . . . . . . . 2,104,500
1,500,000 American Standard, Inc., 9.875%, 6/1/01 . . . . . . . . . . . . . 1,488,750
4,700,000 EnviroSource, Inc., 9.75%, 6/15/03 . . . . . . . . . . . . . . . . 4,218,250
3,548,000 Fairchild Corp., 13.00%, 3/1/07 . . . . . . . . . . . . . . . . . 3,264,160
3,500,000 Federal Industries, Ltd., 10.25%, 6/15/00 . . . . . . . . . . . . 3,412,500
5,558,000 Formica Corp., Step Bonds (0% to 15.75% at 10/1/94), 10/1/01 . . . 5,634,421
IMO Industries, Inc.
2,750,000 12.00%, 11/1/01 . . . . . . . . . . . . . . . . . . . . . . . . 2,825,625
500,000 12.25%, 8/15/97 . . . . . . . . . . . . . . . . . . . . . . . . 505,000
4,150,000 Jordan Industries, Inc., Step Bonds (0% to 11.75% at 8/1/98), 8/1/05 2,241,000
4,416,220 Robertson Ceco Corp., 10.00%, Payment-In-Kind, 11/30/99 . . . . . 3,422,571
1,500,000 Spreckles Industries, 11.50%, 9/1/00 . . . . . . . . . . . . . . . 1,455,000
2,500,000 Talley Manufacturing & Technical, Inc., 10.75%, 10/15/03 . . . . . 2,250,000
Thermadyne Industries, Inc.
3,285,524 10.25%, 5/1/02 . . . . . . . . . . . . . . . . . . . . . . . . . 3,154,103
1,572,436 10.75%, 11/1/03 . . . . . . . . . . . . . . . . . . . . . . . . 1,509,538
2,750,000 USG Corp., 10.25%, 12/15/02 . . . . . . . . . . . . . . . . . . . 2,808,437
-------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . 40,293,855
-------------

RAW MATERIALS/PROCESSING INDUSTRIES 15.7%
2,500,000 Associated Materials, Inc., 11.50%, 8/15/03 . . . . . . . . . . . 2,487,500
3,450,000 Buckeye Cellulose Corp., 10.25%, 5/15/01 . . . . . . . . . . . . . 3,320,625
Container Corp. of America
1,000,000 11.25%, 5/1/04 . . . . . . . . . . . . . . . . . . . . . . . . . 1,045,000
*1,000,000 15.50%, 12/1/04 . . . . . . . . . . . . . . . . . . . . . . . . 2,010,000
3,500,000 Crown Packaging, Series B., 10.75%, 11/1/00 . . . . . . . . . . . 3,473,750
2,250,000 Florida Steel Corp., 11.50%, 12/15/00 . . . . . . . . . . . . . . 2,317,500
4,500,000 Fort Howard Corp., Step Bonds (0% to 14.125% at 11/1/94),
11/01/04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,398,750
Gaylord Container Corp.
3,250,000 11.50%, 5/15/01 . . . . . . . . . . . . . . . . . . . . . . . . 3,323,125
2,250,000 Step Bonds (0% to 12.75% at 5/15/96), 5/15/05 . . . . . . . . . . 1,856,250
Geneva Steel Co.
1,350,000 9.50%, 1/15/04 . . . . . . . . . . . . . . . . . . . . . . . . . 1,228,500
1,000,000 11.125%, 3/15/01 . . . . . . . . . . . . . . . . . . . . . . . . 1,015,000
</TABLE>

F-3
<PAGE> 69
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES--CONTINUED
$ 4,650,000 Harris Chemical North America, Inc., Step Bonds (0% to 10.25% at
1/15/96), 7/15/01 . . . . . . . . . . . . . . . . . . . . . . . $ 3,714,187
3,000,000 Huntsman Corp., 11.00%, 4/15/04 . . . . . . . . . . . . . . . . . 3,135,000
IMC Fertilizer Group, Inc.
2,000,000 9.45%, 12/15/11 . . . . . . . . . . . . . . . . . . . . . . . . 1,770,000
2,000,000 10.75%, 6/15/03 . . . . . . . . . . . . . . . . . . . . . . . . 2,065,000
4,000,000 Indspec Chemical Corp., Step Bonds (0% to 11.50% at 12/1/98),
12/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,360,000
**2,400,000 Lanesborogh Corp., 12.375%, 3/15/97 . . . . . . . . . . . . . . . 1,536,000
2,000,000 Mail-Well Corp., 10.50%, 2/15/04 . . . . . . . . . . . . . . . . . 1,760,000
4,000,000 NL Industries, Inc., Step Bonds (0% to 13.00% at 10/15/98), 10/15/05 2,545,000
3,250,000 Plastic Specialty & Technology Corp., 11.25%, 12/1/03 . . . . . . 3,022,500
1,750,000 Republic Engineered Steel, 9.875%, 12/15/01 . . . . . . . . . . . 1,645,000
Riverwood International Corp.
500,000 10.375%, 6/30/04 . . . . . . . . . . . . . . . . . . . . . . . . 508,750
4,000,000 11.25%, 6/15/02 . . . . . . . . . . . . . . . . . . . . . . . . 4,200,000
2,000,000 Sherritt, Inc., 10.50%, 3/31/14 . . . . . . . . . . . . . . . . . 1,980,000
1,450,000 Silgan Corporation, 11.75%, 6/15/02 . . . . . . . . . . . . . . . 1,493,500
5,000,000 Silgan Holdings, Inc., Step Bonds (0% to 13.25% at 6/15/96),
12/15/02 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,050,000
3,000,000 Sweetheart Cup, Inc., 10.50%, 9/1/03 . . . . . . . . . . . . . . . 2,865,000
3,000,000 UCC Investors Holdings, Inc., 11.00%, 5/1/03 . . . . . . . . . . . 3,060,000
2,000,000 U.S. Can Co., 13.50%, 1/15/02 . . . . . . . . . . . . . . . . . . 2,220,000
-------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . 70,405,937
-------------

TECHNOLOGY 2.8%
3,355,000 Anacomp, Inc., 15.00%, 11/1/00 . . . . . . . . . . . . . . . . . . 3,724,050
3,500,000 Harmon International Industries, Inc., 12.00%, 8/1/02 . . . . . . 3,815,000
3,100,000 MFS Communications Co. Inc., Step Bonds (0% to 9.375% at
11/15/99), 1/15/04 . . . . . . . . . . . . . . . . . . . . . . . 1,813,500
3,008,000 Unisys Corp., 13.50%, 7/1/97 . . . . . . . . . . . . . . . . . . . 3,248,640
-------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . 12,601,190
-------------

TRANSPORTATION 3.8%
1,500,000 International Shipholding Corp., 9.00%, 7/1/03 . . . . . . . . . . 1,395,000
Sea Containers, Ltd.
2,750,000 9.50%, 7/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . 2,543,750
1,000,000 12.50%, 12/1/04 . . . . . . . . . . . . . . . . . . . . . . . . 1,050,000
2,750,000 12.50%, 12/1/04 . . . . . . . . . . . . . . . . . . . . . . . . 2,873,750
2,500,000 Southern Pacific Rail Corp., 9.375%, 8/15/05 . . . . . . . . . . . 2,443,750
4,500,000 Trism, Inc., 10.75%, 12/15/00 . . . . . . . . . . . . . . . . . . 4,455,000
USAir, Inc.
2,000,000 10.00%, 7/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . 1,440,000
835,060 Series 1989-A1, 9.33%, 1/1/06 . . . . . . . . . . . . . . . . . 713,977
-------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . 16,915,227
-------------

UTILITIES 0.7%
4,500,000 PanAmSat L.P., Step Bonds (0% to 11.375% at 8/1/98), 8/1/03 . . . 2,891,250
-------------
TOTAL CORPORATE OBLIGATIONS (Cost $400,786,231) . . . . . . . . 384,543,577
-------------
</TABLE>

F-4
<PAGE> 70
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 0.9%

7,357 Arcadian Corp. . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,426
*364,633 Concurrent Computer Corp. . . . . . . . . . . . . . . . . . . . . 774,847
*14,000 Dr Pepper/Seven-Up Companies, Inc. . . . . . . . . . . . . . . . 323,750
*14,790 EnviroSource, Inc. . . . . . . . . . . . . . . . . . . . . . . . 51,765
*2,000 Finlay Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . 24,000
*37,572 Healthcare America Inc. . . . . . . . . . . . . . . . . . . . . . 51,662
*607,107 Robertson Ceco Corp. . . . . . . . . . . . . . . . . . . . . . . 2,428,428
*13,617 Thermadyne Industries, Inc. . . . . . . . . . . . . . . . . . . . 160,638
-------------
TOTAL COMMON STOCK (Cost $10,147,926) . . . . . . . . . . . . . 3,947,516
-------------

PREFERRED STOCK 1.4%

*244,101 Supermarkets General Holdings Corp., $3.52, Payment-In-Kind
(Cost $4,795,442) . . . . . . . . . . . . . . . . . . . . . . . 6,285,601
-------------
NUMBER OF
UNITS/WARRANTS UNITS 1.2%
- --------------
1,000 Casino America, Inc., each unit consists of a $1,000 par bond,
11.50%, 11/15/01 and 3 warrants (expiring 11/15/98) . . . . . . 900,000
250 Empire Gas Corp., each unit consists of a $10,000 par bond,
Zero Coupon, 7/15/04 and 13.8 warrants (expiring 7/15/04) . . . 1,950,000
2,000 ICF Kaiser International, each unit consists of a $1,000 par note,
12.00%, 12/31/03 and 5 warrants (expiring 12/31/98) . . . . . . 1,800,000
750 Santa Fe, Inc., each unit consists of a $1,000 par bond,
11.00%, 12/15/00 and 1 warrant (expiring 12/15/96) . . . . . . . 675,000
-------------
TOTAL UNITS (Cost $5,688,379) . . . . . . . . . . . . . . . . . 5,325,000
-------------

WARRANTS 0.1%

*3,125 Capital Gaming, expiring 2/1/99 . . . . . . . . . . . . . . . . . 17,188
*2,300 HDA Management Corp., expiring 12/15/98 . . . . . . . . . . . . . 13,800
*4,500 Louisiana Casino, expiring 12/1/98 . . . . . . . . . . . . . . . . 45,000
*30,000 Southdown, Inc., expiring 10/15/96 . . . . . . . . . . . . . . . . 120,000
*200 Trump Plaza, expiring 6/15/96 . . . . . . . . . . . . . . . . . . 8,000
-------------
TOTAL WARRANTS (Cost $202,819) . . . . . . . . . . . . . . . . . 203,988
-------------

PRINCIPAL
AMOUNT PRIVATE PLACEMENTS 2.5%
- -------------
CORPORATE OBLIGATIONS 1.4%
$ *1,500,000 Guinness Petroleum Aviation, 9.25%, 6/15/95
(purchased 7/28/93) . . . . . . . . . . . . . . . . . . . . . . 1,485,000
3,304,500 Hemmeter Enterprises, Inc., 12.00% Payment-in-Kind, 12/15/00
(purchased 2/1/94) . . . . . . . . . . . . . . . . . . . . . . . 2,313,150
*2,500,000 Smitty's Supervalue, 12.75%, 6/15/04 (purchased 6/22/94) . . . . . 2,512,500
-------------
TOTAL CORPORATE OBLIGATIONS (Cost $6,133,150) . . . . . . . . . 6,310,650
-------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-5
<PAGE> 71
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
NUMBER OF MARKET
UNITS AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITS 0.6%
*1,250 Capital Gaming, each unit consists of a $1,000 par bond, 11.50%,
2/1/01, 27 shares of common stock and 20 warrants
(expiring 2/1/99) (purchased 1/10/94) . . . . . . . . . . . . . $ 1,100,000
2,250 Hemmeter Enterprises, Inc., each unit consists of a
$1,000 par Payment-in-Kind note, 12.00%, 12/15/00 and
15 warrants (expiring 12/15/99) (purchased 12/14/93) . . . . . . 1,687,500
-------------
TOTAL UNITS (Cost $3,101,188) . . . . . . . . . . . . . . . . . 2,787,500
-------------

NUMBER OF
SHARES/WARRANTS COMMON STOCK 0.5%
- ---------------
*40,000 F F Holdings Corp., purchased 10/6/92 . . . . . . . . . . . . . . 1,620,000
*84,445 Triangle Wire & Cable, Inc., purchased 1/13/92 . . . . . . . . . . 760,005
-------------
TOTAL COMMON STOCK (Cost $2,162,180) . . . . . . . . . . . . . . 2,380,005
-------------
WARRANT 0.0%
*412 Wright Medical Technology, expiring 6/30/03 (Cost $80) . . . . . . 51,471
-------------
TOTAL PRIVATE PLACEMENTS (Cost $11,396,598) . . . . . . . . . . 11,529,626
-------------

PRINCIPAL
AMOUNT FOREIGN GOVERNMENT OBLIGATIONS 0.6%
--------
$ 980,000 Federative Republic of Brazil, 6.0625%, 1/1/01 . . . . . . . . . . 781,550
2,000,000 Republic of Argentina, 4.25%, 3/31/23 . . . . . . . . . . . . . . 1,052,500
1,000,000 United Mexican States, 6.25%, 12/31/19 . . . . . . . . . . . . . . 672,500
-------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $2,805,209) . . . . . 2,506,550
-------------

REPURCHASE AGREEMENT 4.9%

21,850,000 Salomon Brothers, Inc, dated 8/31/94, 4.90%,
due 9/1/94 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase
proceeds $21,852,974 (Cost $21,850,000) . . . . . . . . . . . . 21,850,000
-------------
TOTAL INVESTMENTS (Cost $457,672,604) 97.4% . . . . . . . . . . . 436,191,858
Other assets and liabilities, net 2.6% . . . . . . . . . . . . . . 12,165,857
-------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . $ 448,357,715
=============
</TABLE>

* NON-INCOME PRODUCING SECURITY.
** SECURITY IS IN DEFAULT AND IS NON-INCOME PRODUCING. VALUATION IS BASED ON
INFORMATION PROVIDED BY BROKERS TRADING IN THIS SECURITY.

SEE NOTES TO FINANCIAL STATEMENTS.

F-6
<PAGE> 72
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1994

<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $457,672,604) . . . . . . . . . . . . . . . . . . $ 436,191,858
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . 6,445,280
Dividends and interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . 10,080,137
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . 992,991
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,376
-------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453,717,642
-------------

LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . 1,201,522
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . 1,807,902
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,560,557
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,195
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,290
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . . . . . . . 96,850
Accrued expenses and other payables . . . . . . . . . . . . . . . . . . . . . . . . . 262,611
-------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,359,927
-------------

NET ASSETS, equivalent to $6.12 per share for Class A shares, $6.14 per share
for Class B shares and $6.11 per share for Class C shares . . . . . . . . . . . . $ 448,357,715
=============

NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 59,466,967 Class A, 11,564,985 Class B and
2,163,475 Class C shares outstanding . . . . . . . . . . . . . . . . . . . . . . . $ 731,954
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 719,302,016
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . . (250,952,639)
Net unrealized depreciation of securities . . . . . . . . . . . . . . . . . . . . . . (21,480,746)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 757,130
-------------
NET ASSETS at August 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 448,357,715
=============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-7
<PAGE> 73
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1994

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,312,710
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,807,364
-------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,120,074
-------------

EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,718,712
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . . 1,077,757
Service fees-Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 882,219
Distribution and service fees-Class B . . . . . . . . . . . . . . . . . . . . . . . . 567,889
Distribution and service fees-Class C . . . . . . . . . . . . . . . . . . . . . . . . 83,590
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,613
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,694
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,955
State franchise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,468
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,258
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,709
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,410
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,780
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,389
-------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,833,443
-------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,286,631
-------------

NET REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,147,682
Net unrealized depreciation of securities during the year . . . . . . . . . . . . . . (43,219,168)
-------------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . . (31,071,486)
-------------
Increase in net assets resulting from operations . . . . . . . . . . . . . . . . . $ 12,215,145
=============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-8
<PAGE> 74
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
-------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . $ 491,103,694 $ 438,107,537
-------------- --------------

OPERATIONS
Net investment income . . . . . . . . . . . . . . . . 43,286,631 44,741,275
Net realized gain on securities . . . . . . . . . . . 12,147,682 26,159,452
Net unrealized depreciation of securities
during the year . . . . . . . . . . . . . . . . . . (43,219,168) (7,105,646)
-------------- --------------
Increase in net assets resulting from operations . . 12,215,145 63,795,081
-------------- --------------

DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A . . . . . . . . . . . . . . . . . . . . . . (41,922,518) (46,334,410)
Class B . . . . . . . . . . . . . . . . . . . . . . (5,284,881) (1,856,854)
Class C . . . . . . . . . . . . . . . . . . . . . . (784,158) (9,685)
-------------- --------------
(47,991,557) (48,200,949)
-------------- --------------
NET EQUALIZATION CREDITS (DEBITS) . . . . . . . . . . . 5,389 (98,476)
-------------- --------------

FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . 135,925,898 124,538,149
Class B . . . . . . . . . . . . . . . . . . . . . . 57,873,861 35,373,573
Class C . . . . . . . . . . . . . . . . . . . . . . 16,675,131 984,358
-------------- --------------
210,474,890 160,896,080
-------------- --------------

Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . 23,629,016 26,984,165
Class B . . . . . . . . . . . . . . . . . . . . . . 2,576,495 930,661
Class C . . . . . . . . . . . . . . . . . . . . . . 504,457 7,845
-------------- --------------
26,709,968 27,922,671
-------------- --------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . (218,294,071) (148,498,842)
Class B . . . . . . . . . . . . . . . . . . . . . . (21,997,246) (2,794,212)
Class C . . . . . . . . . . . . . . . . . . . . . . (3,868,497) (25,196)
-------------- --------------
(244,159,814) (151,318,250)
-------------- --------------

Increase (decrease) in net assets resulting from Fund
share transactions . . . . . . . . . . . . . . (6,974,956) 37,500,501
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . (42,745,979) 52,996,157
-------------- --------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . $ 448,357,715 $ 491,103,694
============== ==============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-9
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES

American Capital High Yield Investments, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.

A. INVESTMENT VALUATIONS

Securities actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued at the most recently quoted bid price.
Securities and options for which the primary market is on an exchange or
NASDAQ are valued at the last reported sale price, or if no sale is
reported, at the last reported bid price. If no sale or bid price is
reported, securities are valued at the most recent sale price. Private
placements are valued at fair value under a method approved by the Board
of Directors.

Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are
valued based on market quotations, until the remaining days to maturity
becomes less than 61 days. From such time, until maturity, the
investments are valued at amortized cost.

Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade
holdings. These securities are often subordinated to the prior claims of
other senior lenders and uncertainties exist as to an issuer's ability to
meet principal and interest payments. At August 31, 1994, debt securities
rated below investment grade and comparable unrated securities
represented approximately 91% of the investment portfolio.

B. REPURCHASE AGREEMENTS

A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Fund may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised or sub-advised by American Capital Asset Management, Inc. (the
"Adviser"), the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are collateralized by the underlying
debt security. The Fund will make payment for such securities only upon
physical delivery or evidence of book entry transfer to the account of
the custodian bank. The seller is required to maintain the value of the
underlying security at not less than the repurchase proceeds due the
Fund.

C. PRIVATE PLACEMENTS

The Fund owns securities purchased in private placement transactions,
which have not been registered under the Securities Act of 1933. Such
securities generally may be resold only in a privately negotiated
transaction with a limited number of purchasers or in a public offering
after they have been registered under the Securities Act of 1933. The
issuers of privately placed debt securities held by the Fund generally
have agreed to register the securities within specified time periods or
increase the interest paid on such securities. The Fund may not invest
more than 15% of its net assets (determined at the time of purchase) in
private placements and other illiquid securities.

D. FEDERAL INCOME TAXES

No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized gains to its shareholders. It is anticipated that no
distributions of capital gains will be made until tax basis capital loss
carryforwards expire or are offset by net realized capital gains.

F-10
<PAGE> 76
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME

Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of identified
cost. Dividend income is recorded on the ex-dividend date. Interest
income is accrued daily. Issuers of Payment-in-Kind (PIK) securities may
make dividend or interest payments by issuing additional stocks or bonds
in lieu of cash payments.

Effective September 1, 1993, the Fund adopted Statement of Position 93-1,
Financial Accounting and Reporting for High-Yield Debt Securities by
Investment Companies, which establishes the use of the effective interest
method for reporting interest income on PIK bonds, whereby interest
income on PIK bonds is recorded ratably by the Fund at a constant yield
to maturity. The statement also provides guidance on accounting for, and
reporting of, costs incurred in support of defaulted debt securities. As
a result of this statement, the Fund changed the method by which interest
income is reported on PIK bonds; however, implementation of this
statement did not have a significant effect on the financial statements
of the Fund.

F. DIVIDENDS AND DISTRIBUTIONS

Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which may
result in dividends or distributions in excess of financial statement
earnings. At August 31, 1994, such excess was due to a dividend paid in
the current year, which relates to net investment income of the prior
year.

Effective September 1, 1993, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result of this statement, the Fund changed the classification of
distributions to shareholders to better disclose the differences between
financial statement amounts and distributions determined in accordance
with income tax regulations. The cumulative effect caused by adopting
this statement was to decrease undistributed net investment income and to
increase capital surplus by $32,763. Current year net investment income,
net realized gains, net assets and net asset value per share were not
affected by this change.

G. DEBT DISCOUNT AND PREMIUM

The Fund accounts for original issue discounts and premiums on the same
basis as is used for federal income tax reporting. Accordingly, original
issue discounts on long-term debt securities purchased are amortized over
the life of the security. Premiums on debt securities are not amortized.
Market discounts are recognized at the time of sale as realized gains for
book purposes, and ordinary income for tax purposes.

H. EQUALIZATION

A portion of the proceeds from sales and costs of repurchases of Fund
shares, equivalent on a per share basis to the amount of undistributed
net investment income, is credited or charged to undistributed net
investment income so that undistributed net investment income per share
is not affected by sales or repurchases of Fund shares.

NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES

The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.625% of the first $150 million, .55% of the next $150 million, and .50% of the
amount in excess of $300 million.

Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or

F-11
<PAGE> 77
sub-advised by the Adviser. For the year ended August 31, 1994, these charges
included $11,794 as the Fund's share of the employee costs attributable to the
Fund's accounting officers. A portion of the accounting services expense was
paid to the Adviser in reimbursement of personnel, facilities and equipment
costs attributable to the provision of accounting services to the Fund. The
services provided by the Adviser are at cost.

American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended August 31, 1994, the fees
for such services were $891,737.

The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $125,969 and $238,856, respectively, as
their portion of the commissions charged on sales of Fund shares during the
year.

Under the Distribution Plans, the Fund pays up to .25% per annum of its average
net assets to the Distributor for expenses and service fees incurred. Class B
shares and Class C shares pay an additional fee of up to .75% per annum of
their average daily net assets to reimburse the Distributor for its
distribution costs. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At August 31, 1994, the unreimbursed expenses incurred
by the Distributor under the Class B plan and Class C plan aggregated
approximately $2.5 million and $193,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent deferred
sales charges from share redemptions or, subject to the annual renewal of the
plans, future Fund reimbursements of distribution fees.

Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.

Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.

NOTE 3--INVESTMENT ACTIVITY

During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $301,317,867 and $310,245,120,
respectively.

For federal income tax purposes, the identified cost of investments owned at
August 31, 1994 was $457,685,989. Net unrealized depreciation of investments
aggregated $21,494,131, gross unrealized appreciation of investments aggregated
$12,098,667 and gross unrealized depreciation of investments aggregated
$33,592,798.

The net realized capital loss carryforward for federal income tax purposes of
approximately $251 million at August 31, 1994, may be utilized to offset future
gains until expiration in 1997 through 2000.

NOTE 4--DIRECTOR COMPENSATION

Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,540 plus a fee of $40 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $580. During the year, such fees aggregated $18,832.

The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At August 31, 1994, the liability for the Plan aggregated
$64,268. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.

F-12
<PAGE> 78
NOTE 5--CAPITAL

The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income, and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.

The Fund has 400 million Class A and 300 million each of Class B and Class C
shares of $.01 par value capital stock authorized. Transactions in shares of
capital stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
----------------------------
1994 1993
----------- -----------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . 21,000,805 19,663,066
Class B . . . . . . . . . . . . . . . . . . . . . . 8,862,056 5,473,366
Class C . . . . . . . . . . . . . . . . . . . . . . 2,547,363 148,193
----------- -----------
32,410,224 25,284,625
----------- -----------
Shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . 3,647,442 4,224,623
Class B . . . . . . . . . . . . . . . . . . . . . . 400,994 143,281
Class C . . . . . . . . . . . . . . . . . . . . . . 79,079 1,186
----------- -----------
4,127,515 4,369,090
----------- -----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . (33,625,821) (23,399,487)
Class B . . . . . . . . . . . . . . . . . . . . . . (3,395,061) (432,898)
Class C . . . . . . . . . . . . . . . . . . . . . . (608,555) (3,791)
----------- -----------
(37,629,437) (23,836,176)
----------- -----------
Increase (decrease)in Fund shares outstanding . . (1,091,698) 5,817,539
=========== ===========
</TABLE>

NOTE 6--SUBSEQUENT DIVIDEND

The Board of Directors of the Fund declared dividends from net investment
income of $.0475 per share for Class A shares and $.0435 per share for Class B
shares and Class C shares, payable October 15, 1994 to shareholders of record
on September 30, 1994.

F-13
<PAGE> 79
FINANCIAL HIGHLIGHTS

SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH OF THE
PERIODS INDICATED.

<TABLE>
<CAPTION>
CLASS A
------------------------------------------------
YEAR ENDED AUGUST 31
------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . . . $ 6.61 $ 6.40 $ 5.71 $ 5.78 $ 7.96
------ ------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . .71 .71 .79 .86 1.00
Expenses . . . . . . . . . . . . . . . . . . . . . . . (.08) (.07) (.065) (.06) (.07)
------ ------ ------ ------ -------

Net investment income . . . . . . . . . . . . . . . . . .63 .64 .725 .80 .93
Net realized and unrealized gain or
loss on securities . . . . . . . . . . . . . . . . . . (.47) .27 .6775 (.055) (2.165)
------ ------ ------ ------ -------
Total from investment operations . . . . . . . . . . . .16 .91 1.4025 .745 (1.235)
------ ------ ------ ------ -------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . . . (.65) (.70) (.7125) (.815) (.945)
------ ------ ------ ------ -------
Net asset value, end of period . . . . . . . . . . . . $ 6.12 $ 6.61 $ 6.40 $ 5.71 $ 5.78
====== ====== ====== ====== =======
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . . 2.34% 15.20% 25.82% 15.66% (15.88%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period (millions) . . . . . . . $364.2 $452.4 $435.1 $341.9 $ 331.4
Average net assets (millions) . . . . . . . . . . . . . $419.8 $426.8 $390.7 $298.2 $ 408.2
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . . . . . . 1.10% 1.09% 1.05% 1.06% 1.02%
Net investment income . . . . . . . . . . . . . . . . 9.03% 10.10% 11.77% 15.20% 14.23%
Portfolio turnover rate . . . . . . . . . . . . . . . . 66% 75% 73% 114% 59%
</TABLE>

(1) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.

SEE NOTES TO FINANCIAL STATEMENTS.

F-14
<PAGE> 80
FINANCIAL HIGHLIGHTS, continued

SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH OF THE
PERIODS INDICATED.
<TABLE>
<CAPTION>
CLASS B CLASS C(2)
---------------------------- -------------------------
YEAR JULY 2, JULY 6,
ENDED 1992(1) YEAR 1993(1)
AUGUST 31 THROUGH ENDED THROUGH
---------------- AUGUST 31, AUGUST 31, AUGUST 31,
1994 1993(2) 1992(2) 1994 1993
------ ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period . . . . . . . . . $ 6.63 $ 6.41 $ 6.33 $ 6.61 $ 6.63
------ ------ ------ ------ -------
INCOME FROM INVESTMENT
OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . .71 .70 .11 .65 .08
Expenses . . . . . . . . . . . . . . . . . . . . . . . (.13) (.12) (.02) (.12) (.02)
------ ------ ------ ------ -------
Net investment income . . . . . . . . . . . . . . . . . .58 .58 .09 .53 .06

Net realized and unrealized gain or
loss on securities . . . . . . . . . . . . . . . . . . (.468) .292 .097 (.428) .0195
------ ------ ------ ------ -------
Total from investment operations . . . . . . . . . . . .112 .872 .187 .102 .0795
------ ------ ------ ------ -------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . . . (.602) (.652) (.107) (.602) (.0995)
------ ------ ------ ------ -------
Net asset value, end of period . . . . . . . . . . . . $ 6.14 $ 6.63 $ 6.41 $ 6.11 $ 6.61
====== ====== ====== ====== =======
TOTAL RETURN(3) . . . . . . . . . . . . . . . . . . . 1.59% 14.49% 2.97% 1.43% 1.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period (millions) . . . . . . . $71.0 $37.7 $ 3.1 $ 13.2 $ 1.0
Average net assets (millions) . . . . . . . . . . . . . $56.8 $18.0 $ 1.1 $ 8.4 $ 0.3
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . . . . . . 1.90% 1.90% 2.08%(4) 1.91% 2.34%(4)
Net investment income . . . . . . . . . . . . . . . . 8.25% 9.10% 10.30%(4) 8.25% 8.05%(4)
Portfolio turnover rate . . . . . . . . . . . . . . . . 66% 75% 73% 66% 75%
</TABLE>

(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

SEE NOTES TO FINANCIAL STATEMENTS.

F-15
<PAGE> 81
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.

In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital High Yield
Investments, Inc., at August 31, 1994, the results of its operations, the
changes in its net assets and the selected per share data and ratios for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share
data and ratios (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at August 31, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

PRICE WATERHOUSE LLP

Houston, Texas
October 17, 1994

F-16