AMERICAN CAPITAL HIGH YIELD INVESTMENTS INC, 497, 1995-05-22

AMERICAN CAPITAL HIGH YIELD INVESTMENTS INC
497, 1995-05-22

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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
<PAGE> 2

any other Participating Fund if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares
of a Participating Fund may be available for sale only to existing
shareholders of the Participating Fund. Additional Funds may be added from
time to time as a Participating Fund.

Class B and Class C shareholders of the Fund have the ability to
exchange their shares ("original shares") for the same class of shares of
any other American Capital fund that offers such class of shares ("new
shares") in an amount equal to the aggregate net asset value of the original
shares, without 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 FEBRUARY 6, 1995,
TO PROSPECTUSES 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 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
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
AND
AMERICAN CAPITAL WORLD PORTFOLIO SERIES, INC.

The description of the classes of investors entitled to purchase shares at net
asset value contained under the Section entitled "Purchase of Shares -- Class A
Shares" are hereby replaced in their entirety as follows:

(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.

(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any such fund or an affiliate of
such subadviser; and such persons' families and their beneficial accounts.

(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.

(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of certain other participating American
Capital funds as described herein under "Purchase of Shares -- Class A
Shares -- Volume Discounts", during the 13 month period commencing with
the first investment pursuant hereto equals at least $1 million. The
Distributor may pay Service Organizations through which purchases are made
an amount up to 0.50% of the amount invested, over a twelve month period
following such transaction.
<PAGE> 4

(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1% for such purchases.

(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.

(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.

(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000. For such
investments the Fund imposes a contingent deferred sales charge of 1% in
the event of redemptions within one year of the purchase. The contingent
deferred sales charge incurred upon redemption is paid to the Distributor
in reimbursement for distribution-related expenses. A commission will be
paid to dealers who initiate and are responsible for such purchases as
follows: 1% on sales to $5 million, plus 0.50% on the next $5 million,
plus 0.25% on the excess over $10 million.

The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.

999 STK-009
<PAGE> 5

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.
<PAGE> 6

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
SIZE OF AS % OF NET AS % OF DEALERS (AS A
INVESTMENT AMOUNT INVESTED OFFERING PRICE % OF OFFERING PRICE)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.99% 4.75% 4.25%
$100,000 but less
than $250,000 3.90% 3.75% 3.25%
$250,000 but less
than $500,000 2.83% 2.75% 2.25%
$500,000 but less
than $1,000,000 2.04% 2.00% 1.75%
$1,000,000 and over (see herein) (see herein) (see herein)
----------------------------------------------------------------------------
</TABLE>

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

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.
<PAGE> 7

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 registered 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
<PAGE> 8

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.

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
<PAGE> 9

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> 10

------------------------------------------------------------------------------
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> 11

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.......... 3
Expense Synopsis............ 5
Financial Highlights........ 7
Multiple Pricing System..... 9
Investment Objectives and
Policies.................. 12
Investment Practices and
Restrictions.............. 18
The Fund and Its
Management... 22
Purchase of Shares.......... 23
Distribution Plans.......... 36
Shareholder Services........ 38
Redemption of Shares........ 43
Dividends, Distributions and
Taxes..................... 46
Prior Performance
Information... 48
Additional Information...... 50
Appendix -- Description of
Bond Ratings.............. 52
Investment Holdings......... 55
</TABLE>

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

2
<PAGE> 12

------------------------------------------------------------------------------
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 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."

3
<PAGE> 13

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."

4
<PAGE> 14

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

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

<TABLE>
<S> <C> <C> <C>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
----------------------------------------------------------------------------------------------
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 25.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- pages
34 and 35.
(c) Not charged in certain circumstances. See "Shareholder
Services -- Shareholder Services Applicable to All Classes -- Systematic
Exchange" and ". . . -- Automatic Exchange" -- page 42.
(d) Up to .25% for Class A shares and 1% for Class B and C shares. See
"Distribution Plans" -- page 36.
(e) See "The Fund and Its Management" -- page 22.
(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.

5
<PAGE> 15

------------------------------------------------------------------------------
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:

<TABLE>
<CAPTION>
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.

6
<PAGE> 16

--------------------------------------------------------------------------------
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
-------- --------- ---------- --------- --------- ----------
<S> <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
-------- --------- ---------- --------- --------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................ .71 .71 .79 .86 1.00 1.22
Expenses................................................. (.08) (.07) (.065) (.06) (.07) (.07)
-------- --------- ---------- --------- --------- ----------
Net investment income.................................... .63 .64 .725 .80 .93 1.15
Net realized and unrealized gain or loss on securities... (.47) .27 .6775 (.055) (2.165) (1.0775)
-------- --------- ---------- --------- --------- ----------
Total from investment operations......................... .16 .91 1.4025 .745 (1.235) .0725
-------- --------- ---------- --------- --------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income..................... (.65) (.70) (.7125) (.815) (.945) (1.2025)
Distribution from net realized gain on securities........ -- -- -- -- -- --
-------- --------- ---------- --------- --------- ----------
Total distributions...................................... (.65) (.70) (.7125) (.815) (.945) (1.2025)
-------- --------- ---------- --------- --------- ----------
Net asset value, end of period........................... $6.12 $6.61 $6.40 $5.71 $5.78 $7.96
========= ========== =========== ========== ========== ===========
TOTAL RETURN (4)......................................... 2.34% 15.20% 25.82% 15.66% (15.88%) .81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..................... $364.2 $452.4 $435.1 $341.9 $331.4 $554.4
Ratios to average net assets
Expenses................................................ 1.10% 1.09% 1.05% 1.06% 1.02% .77%
Net investment income................................... 9.03% 10.10% 11.77% 15.20% 14.23% 13.27%
Portfolio turnover rate.................................. 66% 75% 73% 114% 59% 45%

<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED AUGUST 31
-----------------------------------------------------------------
1988 1987 1986(3) 1985(3)
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period..................... $9.86 $10.02 $10.21 $9.31
---------- -------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................ 1.27 1.27 1.35 1.40
Expenses................................................. (.07) (.07) (.07) (.07)
---------- -------- ---------- ----------
Net investment income.................................... 1.20 1.20 1.28 1.33
Net realized and unrealized gain or loss on securities... (.7025) (.12) (.1375) .8475
---------- -------- ---------- ----------
Total from investment operations......................... .4975 1.08 1.1425 2.1775
---------- -------- ---------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income..................... (1.2675) (1.23) (1.3325) (1.2775)
Distribution from net realized gain on securities........ -- (.01) -- --
---------- -------- ---------- ----------
Total distributions...................................... (1.2675) (1.24) (1.3325) (1.2775)
---------- -------- ---------- ----------
Net asset value, end of period........................... $9.09 $9.86 $10.02 $10.21
=========== ========= =========== ===========
TOTAL RETURN (4)......................................... 6.32% 11.45% 11.46% 25.03%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..................... $582.6 $578.8 $535.3 $456.5
Ratios to average net assets
Expenses................................................ .73% .69% .66% .70%
Net investment income................................... 13.14% 12.19% 12.23% 13.66%
Portfolio turnover rate.................................. 58% 66% 86% 82%
</TABLE>

(Table continued on following page)

7
<PAGE> 17

--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------
YEAR ENDED AUGUST 31 JULY 2, 1992 (1)
----------------------- THROUGH AUGUST 31,
1994 1993 (2) 1992 (2)
-------- -------- ------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............................................. $6.63 $6.41 $ 6.33
-------- --------- ----------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................................ .71 .70 .11
Expenses......................................................................... (.13) (.12) (.02)
-------- --------- ----------
Net investment income............................................................ .58 .58 .09
Net realized and unrealized gain or loss on securities........................... (.468) .292 .097
-------- --------- ----------
Total from investment operations................................................. .112 .872 .187
-------- --------- ----------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income............................................. (.602) (.652) (.107)
Distribution from net realized gain on securities................................ -- -- --
-------- --------- ----------
Total distributions.............................................................. (.602) (.652) (.107)
-------- --------- ----------
Net asset value, end of period................................................... $6.14 $6.63 $ 6.41
======== ========= ===========
TOTAL RETURN (4)................................................................. 1.59% 14.49% 2.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................................. $71.0 $37.7 $ 3.1
Ratios to average net assets
Expenses........................................................................ 1.90% 1.90% 2.08% (5)
Net investment income........................................................... 8.25% 9.10% 10.30% (5)
Portfolio turnover rate.......................................................... 66% 75% 73%

CLASS C (2)
--------------------------------
YEAR ENDED JULY 6, 1993 (1)
AUGUST 31, THROUGH AUGUST 31,
1994 1993
---------- ------------------

<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............................................. $ 6.61 $ 6.63
---------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................................ .65 .08
Expenses......................................................................... (.12) (.02)
---------- --------
Net investment income............................................................ .53 .06
---------- --------
Net realized and unrealized gain or loss on securities........................... (.428) .0195

Total from investment operations................................................. .102 .0795
---------- --------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income............................................. (.602) (.0995)
Distribution from net realized gain on securities................................ -- --
---------- --------
Total distributions.............................................................. (.602) (.0995)
---------- --------
Net asset value, end of period................................................... $ 6.11 $ 6.61
========== ========
TOTAL RETURN (4)................................................................. 1.43% 1.20%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................................. $ 13.2 $ 1.0
Ratios to average net assets
Expenses........................................................................ 1.91% 2.34% (5)
Net investment income........................................................... 8.25% 8.05% (5)
Portfolio turnover rate.......................................................... 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.

8
<PAGE> 18

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

9
<PAGE> 19

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 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

10
<PAGE> 20

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

11
<PAGE> 21

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 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.

12
<PAGE> 22

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

13
<PAGE> 23

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.

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%.

14
<PAGE> 24

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

15
<PAGE> 25

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.

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

16
<PAGE> 26

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.

17
<PAGE> 27

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 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

18
<PAGE> 28

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

19
<PAGE> 29

discussion of the potential risks involved in transactions in options, futures
contracts and related options is contained in the Statement of Additional
Information.

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

20
<PAGE> 30

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.

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 include Smith Barney Inc. ("Smith Barney"), a wholly
owned subsidiary of Travelers. In addition, effective August 2, 1993, Robinson
Humphrey, Inc., a wholly owned subsidiary of Smith Barney, became an affiliate
of Travelers. When such transactions are made, in accordance with Rule 17e-1 of
the Investment Company Act of 1940 (the "1940 Act"), commissions paid must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."

SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 20% of its total
assets in United States 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

21
<PAGE> 31

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

22
<PAGE> 32

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.

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

23
<PAGE> 33

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

24
<PAGE> 34

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.

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>
REALLOWED
TO DEALERS
AS % OF NET AS % OF (AS A % OF
SIZE OF 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.... 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>

25
<PAGE> 35

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.

26
<PAGE> 36

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 dealers where the amounts invested represent
the redemption proceeds from investment companies distributed by an entity other
than the Distributor if such redemption has occurred no more than 15 days prior
to the purchase of shares of the Fund and the shareholder paid an initial sales
charge and was not subject to a deferred sales charge on the redeemed account.
Shares are also offered at net asset value to (f) registered investment
advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to the money to be invested in the Fund,
provided that the aggregate amount invested in the Fund alone, or in any
combination of shares of the Fund and shares of certain other participating
American Capital mutual funds as described herein under "Purchase of
Shares--Class A--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.

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28
<PAGE> 38

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

29
<PAGE> 39

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 "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

30
<PAGE> 40

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.

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32
<PAGE> 42

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 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.

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<PAGE> 43

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.

34
<PAGE> 44

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

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
------------------------------------------------------------------------------
First....................................... 4%
Second...................................... 4%
Third....................................... 3%
Fourth...................................... 2.5%
Fifth....................................... 1.5%
Sixth....................................... None
------------------------------------------------------------------------------
</TABLE>

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

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

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

CLASS C SHARES

Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1%. The charge is assessed on an amount
equal to the 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

35
<PAGE> 45

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

36
<PAGE> 46

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 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.

37
<PAGE> 47

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.

38
<PAGE> 48

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 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

39
<PAGE> 49

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

40
<PAGE> 50

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 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.

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<PAGE> 51

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.

42
<PAGE> 52

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

Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the 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

43
<PAGE> 53

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

44
<PAGE> 54

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.

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

45
<PAGE> 55

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."

46
<PAGE> 56

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. 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

47
<PAGE> 57

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

48
<PAGE> 58

any income taxes payable by shareholders on dividends and distributions paid by
the Fund or to reflect the fact no 12b-1 fees were incurred prior to October 1,
1989.

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

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

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

49
<PAGE> 59

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

50
<PAGE> 60

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.

51
<PAGE> 61

------------------------------------------------------------------------------
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.

52
<PAGE> 62

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.

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

53
<PAGE> 63

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.

54
<PAGE> 64

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

<CAPTION>
PRINCIPAL
AMOUNT
-------------------------------------
<S> <C>

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
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
</TABLE>

55
<PAGE> 65

CORPORATE OBLIGATIONS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
-------------------------------------
<S> <C>
$ 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
1,750,000 SFX Broadcasting, Inc.,
11.375%, 10/1/00

<CAPTION>
PRINCIPAL
AMOUNT
-------------------------------------
<S> <C>
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
</TABLE>

56
<PAGE> 66

CORPORATE OBLIGATIONS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
-------------------------------------
<S> <C>
$ 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
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

<CAPTION>
PRINCIPAL
AMOUNT
-------------------------------------
<S> <C>
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
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
</TABLE>

57
<PAGE> 67

CORPORATE OBLIGATIONS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
-------------------------------------
<S> <C>
$ 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

<CAPTION>
PRINCIPAL
AMOUNT
-------------------------------------
<S> <C>
$ 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
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>

58
<PAGE> 68

CORPORATE OBLIGATIONS

<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>

<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
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF
SHARES/WARRANTS
-------------------------------------
<S> <C>
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
</TABLE>

59
<PAGE> 69

CORPORATE OBLIGATIONS

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT REPURCHASE AGREEMENT
-------------------------------------
<S> <C>
$ 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.

60
<PAGE> 70

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> 71

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. Box 1411,
Houston, TX 77251-1411.

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

PRINTED MATTER
Printed in U.S.A./029-PRO-001