AMERICAN CAPITAL ENTERPRISE FUND INC, 497, 1995-04-04

AMERICAN CAPITAL ENTERPRISE FUND INC
497, 1995-04-04

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SUPPLEMENT DATED APRIL 3, 1995
TO THE PROSPECTUSES OF
AMERICAN CAPITAL CORPORATE BOND FUND, INC.
AMERICAN CAPITAL ENTERPRISE FUND, INC.
AND
AMERICAN CAPITAL EQUITY INCOME FUND, INC.

The Section "Purchase of Shares -- General" is Supplemented as follows:

In addition, the Distributor is sponsoring a sales contest for INVEST
Financial Corporation ("Invest") relating to the Fund and certain other funds or
investment products sponsored by the Distributor. Under the terms of the
contest, an Invest broker may receive an award valued up to $750.00 for sales
during the period April 1, 1995 through May 31, 1995.
<PAGE> 2

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AMERICAN CAPITAL ENTERPRISE FUND, INC.
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2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
February 25, 1994

American Capital Enterprise Fund, Inc., (the "Fund") is a mutual fund seeking
capital appreciation by investing in a portfolio of securities consisting
principally of common stocks. Any income received on such securities is
incidental to the objective of capital appreciation.

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

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

A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("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.

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> 3

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

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

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

DISTRIBUTOR:
American Capital
Marketing, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056

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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus Summary................ 2
Expense Synopsis.................. 4
Financial Highlights.............. 5
Multiple Pricing System........... 6
Investment Objective and
Policies........................ 7
The Fund and Its Management....... 8
Purchase of Shares................ 9
Distribution Plans................ 13
Shareholder Services.............. 14
Redemption of Shares.............. 16
Dividends, Distributions and
Taxes........................... 17
Investment Practices and
Restrictions.................... 18
Prior Performance Information..... 21
Additional Information............ 21
Investment Holdings............... 23
</TABLE>

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

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PROSPECTUS SUMMARY
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SHARES OFFERED. Capital Stock.

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

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

INVESTMENT OBJECTIVE. Capital appreciation. There is, however, no assurance
that the Fund will be successful in achieving its objective.

INVESTMENT POLICY. Principally in common stocks of companies which, in the
judgment of the Adviser, have above average potential for capital appreciation.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
The use of options, futures contracts and related options may include additional
risks. See "Investment Practices and Restrictions -- Using Options, Futures
Contracts and Options on Futures Contracts."

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

INVESTMENT ADVISER. American Capital Asset Management, Inc. (the "Adviser")
has served as investment adviser to the Fund since 1975. The Adviser also serves
as investment adviser to 39 investment company portfolios. See "The Fund and Its
Management."

2
<PAGE> 4

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. 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."

CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 5.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."

CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 5% of redemption
proceeds during the first 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. Dividends from net investment income and capital
gains, if any, are distributed at least annually. All dividends and
distributions are automatically reinvested in shares of the Fund at net asset
value per share (without sales charge) unless payment in cash is requested. See
"Dividends, Distributions and Taxes."

3
<PAGE> 5

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

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES(1)
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases (as a percentage of
offering price)................... 5.75%(a) None None
Sales charge imposed on dividend
reinvestments..................... None None None
Deferred sales charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)............... None* 5% during the first 1% during the first
year, year(b)
4% during the second
year,
3% during the third
year,
2.5% during the fourth
year,
1.5% during the fifth
year
and 0% after the fifth
year(b)
Exchange fee........................ $ 5.00** $5.00 $5.00

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management fees..................... .50% .50% .50%
Rule 12b-1 fees(c).................. .17% .99%(f) 1.00%(f)
Other expenses(d)................... .32% .32% .33%(e)
Total fund operating expenses....... .99% 1.81% 1.83%
</TABLE>

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(a) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares" -- page 10.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- pages
12 and 13.
(c) Up to .25% for Class A shares and 1% for Class B and Class C shares. See
"Distribution Plans" -- page 13.
(d) See "The Fund and Its Management" -- page 8.
(e) "Other Expenses" is based on estimated amounts for the current fiscal year.
(f) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
(1) Annualized.
* Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of 1% may be
imposed on certain redemptions made within one year of the purchase.
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<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum
$57.50 front-end sales charge and for Class B and Class C
shares, a contingent deferred sales charge assuming (1) an
operating expense ratio of .99% for Class A shares, 1.81%
for Class B shares and 1.83% for Class C shares (2) a 5%
annual return throughout the period and
(3) redemption at the end of the period:
Class A.................................................. $ 67 $ 87 $109 $172
Class B.................................................. $ 70 $ 90 $116 $171**
Class C.................................................. $ 29 $ 58 $ 99 $215
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of the
period:
Class A.................................................. $ 67 $ 87 $109 $172
Class B.................................................. $ 18 $ 57 $ 98 $171**
Class C.................................................. $ 18 $ 58 $ 99 $215
</TABLE>

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

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

4
<PAGE> 6

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

The following information for each of the five most recent fiscal years has
been audited by Price Waterhouse, 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 DECEMBER 31
---------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $12.64 $13.83 $10.76 $11.52 $10.33 $9.45 $12.78
---------- ---------- ---------- ---------- --------- ---------- ----------
INCOME FROM OPERATIONS
Investment income............................ .19 .27 .295 .35 .40 .29 .32
Expenses..................................... (.13) (.135) (.125) (.11) (.10) (.07) (.09)
---------- ---------- ---------- ---------- --------- ---------- ----------
Net investment income (loss)................. .06 .135 .17 .24 .30 .22 .23
Net realized and unrealized gain or loss on
securities.................................. 1.2525 .9325 3.9625 (.5475) 2.89 .9125 .095
---------- ---------- ---------- ---------- --------- ---------- ----------
Total from investment operations............. 1.3125 1.0675 4.1325 (.3075) 3.19 1.1325 .325
---------- ---------- ---------- ---------- --------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.0575) (.145) (.1725) (.23) (.295) (.2075) (.4475)
Distributions from net realized gain on
securities.................................. (1.665) (2.1125) (.89) (.2225) (1.705) (.045) (3.2075)
---------- ---------- ---------- ---------- --------- ---------- ----------
Total dividends and distributions............ (1.7225) (2.2575) (1.0625) (.4525) (2.00) (.2525) (3.655)
---------- ---------- ---------- ---------- --------- ---------- ----------
Net asset value, end of period............... $12.23 $12.64 $13.83 $10.76 $11.52 $10.33 $9.45
=========== =========== =========== =========== ========== =========== ===========
TOTAL RETURN**............................... 10.96% 8.39% 39.23% (2.87%) 31.17% 12.06% 1.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)......... $778.9 $736.4 $713.1 $542.4 $601.2 $504.4 $534.5
Ratios to average net assets
Expenses.................................... .99% .99% .97% .94% .78% .73% .58%
Net investment income (loss)................ .48% 1.00% 1.33% 2.13% 2.33% 2.07% 1.53%
Portfolio turnover rate...................... 196% 161% 103% 105% 95% 76% 56%

<CAPTION>
CLASS B (2) CLASS C
------------------- ------------
JULY 20,
YEAR ENDED 1993*
DECEMBER 31 THROUGH
------------------- DECEMBER 31,
1986 1985 1984 1993 1992 (1) 1993 (1)
---------- -------- --------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $14.14 $11.17 $15.51 $12.66 $13.82 $12.66
---------- -------- --------- -------- --------- ------------
INCOME FROM OPERATIONS
Investment income............................ .31 .36 .38 .16 .26 .08
Expenses..................................... (.09) (.08) (.08) (.20) (.245) (.11)
---------- -------- --------- -------- --------- ------------
Net investment income (loss)................. .22 .28 .30 (.04) .015 (.03)
Net realized and unrealized gain or loss on
securities.................................. 1.3325 2.98 (1.225) 1.24 .9675 .765
---------- -------- --------- -------- --------- ------------
Total from investment operations............. 1.5525 3.26 (.925) 1.20 .9825 .735
---------- -------- --------- -------- --------- ------------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.2675) (.29) (.35) (.005) (.03) --
Distributions from net realized gain on
securities.................................. (2.645) -- (3.065) (1.665) (2.1125) (1.165)
---------- -------- --------- -------- --------- ------------
Total dividends and distributions............ (2.9125) (.29) (3.415) (1.67) (2.1425) (1.165)
---------- -------- --------- -------- --------- ------------
Net asset value, end of period............... $12.78 $14.14 $11.17 $12.19 $12.66 $12.23
=========== ========= ========== ========= ========== ==============
TOTAL RETURN**............................... 9.82% 29.61% (5.21%) 10.00% 7.67% 6.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)......... $577.2 $656.6 $560.1 $66.2 $21.5 $2.1
Ratios to average net assets
Expenses.................................... .60% .61% .68% 1.81% 1.90% 1.83%***
Net investment income (loss)................ 1.44% 2.02% 2.56% (.37%) .12% (.48%)***
Portfolio turnover rate...................... 90% 114% 51% 196% 161% 196%
</TABLE>

- ------------
* Commencement of offering of shares.
** Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
*** Annualized.
(1) Based on average month-end shares outstanding.
(2) Class B shares commenced sales on December 20, 1991 at a net asset value of
$12.55 per share. At December 31, 1991, there were 763 shares outstanding
with a per share net asset value of $13.82. The increase in net asset value
was due principally to unrealized appreciation. There were no dividends or
distributions paid to shareholders during the period. Other financial
highlights for the Class B shares for this short period are not meaningful
and therefore are not presented.

5
<PAGE> 7

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

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

CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 5.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for a reduced initial sales charge. See
"Purchase of Shares -- Class A Shares."

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

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

CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding for
a period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares as the case may be, from the burden of the ongoing distribution fee.

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

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

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

6
<PAGE> 8

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

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

Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end shares charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contingent deferred sales charge schedule.

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

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

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

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

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INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

The Fund seeks capital appreciation through investments in securities believed
by the Adviser to have above average potential for capital appreciation. Any
income received on such securities is incidental to the objective of capital
appreciation.

The Fund invests principally in growth common stocks. Such securities
generally include those of companies with established records of growth in sales
or earnings, and companies with new products, new services, or new

7
<PAGE> 9

processes. The Fund may also invest in companies in cyclical industries during
periods when their securities appear attractive to the Adviser for capital
appreciation. In addition to common stocks of companies, the Fund may invest in
warrants and preferred stocks, and in investment companies. See "Investment
Practices and Restrictions -- Investment in Investment Companies."

For a discussion of the Fund's practices regarding investments in foreign
securities, see "Investment Practices and Restrictions -- Securities of Foreign
Issuers."

The Fund generally holds a portion of its assets in investment grade
short-term debt securities in order to provide liquidity. The Fund may also hold
investment grade corporate or government bonds. The market prices of such bonds
can be expected to vary inversely with changes in prevailing interest rates.
Such investments may be increased when deemed appropriate by the Adviser for
temporary defensive purposes. Short-term investments may include repurchase
agreements with domestic banks or broker-dealers. See "Investment Practices and
Restrictions -- Repurchase Agreements."

The Fund's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The Fund
may invest in securities that have above average price volatility. Because
prices of common stocks and other securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
The Fund attempts to reduce overall exposure to risk from declines in securities
prices by spreading its investments over many different companies in a variety
of industries. There is, however, no assurance that the Fund will be successful
in achieving its objective.

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

The Fund is an open-end, diversified management investment company which
commenced investment operations in 1954. 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. American Capital Asset Management, Inc., 2800 Post Oak Boulevard,
Houston, Texas 77056, determines the investment of the Fund's assets, provides
administrative services and manages the Fund's business and affairs. The
Adviser, together with its predecessors, has been in the investment advisory
business since 1926 and has served as investment adviser to the Fund since 1975.
As of January 31, 1994, the Adviser provides investment advice to 39 investment
company portfolios with total net assets of approximately $17.4 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 May 15, 1990 (the "Advisory Agreement"), the
Fund pays the Adviser a monthly fee computed on average daily net assets of the
Fund at the annual rate of 0.50% on the first $1 billion of average net assets;
0.45% on the next $1 billion of average net assets; 0.40% on the next $1 billion
of average net assets; and 0.35% on average net assets in excess of $3 billion.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the costs
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Operating expenses paid
by the Fund include shareholder service agency fees, distribution fees, service
fees, custodian 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.

Stephen Boyd is primarily responsible for the day-to-day management of the
Fund's investment portfolio and has been since May, 1989. Mr. Boyd is Vice
President of the Fund and Senior Investment Vice President -- Portfolio Manager
of the Adviser. Mr. Boyd was formerly Chief Investment Officer of Wertheim Asset
Management Services, Inc. from 1986 to 1989.

8
<PAGE> 10

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

GENERAL

The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B shares and Class C shares are
sold without an initial sales charge and are subject to a contingent deferred
sales charge upon certain redemptions. See "Multiple Pricing System" for a
discussion of factors to consider in selecting which class of shares to
purchase.

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

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

Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (currently 4:00 p.m., New York time) each day the
Exchange is open. Net asset value per share for each class is determined by
dividing the value of the Fund's securities, cash and other assets (including
accrued interest) attributable to such class less all liabilities (including
accrued expenses) attributable to such class by the total number of shares of
the class outstanding. Securities, including options, listed or traded on a
national securities exchange are valued at the last sale price. Unlisted
securities and listed securities for which the last sale price is not available
are valued at the mean between the last reported bid and asked price. Securities
for which market quotations are not readily available and other assets are
valued at fair value as determined in good faith by the Board of Directors of
the Fund. Short-term securities are valued in the manner described in the
Statement of Additional Information.

Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the next
calculation of net asset value plus applicable Class A sales charges after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. Orders
received by dealers after the close of the Exchange are priced based on the next
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
orders received by them to the Distributor so they will be received prior to
such time. Orders of less than $500 are mailed by the dealer and processed at
the offering price next calculated after acceptance by ACCESS.

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

9
<PAGE> 11

CLASS A SHARES

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

SALES CHARGE TABLE

<TABLE>
<CAPTION>
SIZE OF AS % OF NET AS % OF REALLOWED TO DEALERS
INVESTMENT AMOUNT INVESTED OFFERING PRICE (AS A % OF OFFERING PRICE)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000................ 6.10% 5.75% 5.00%
$50,000 but less than $100,000... 4.99% 4.75% 4.00%
$100,000 but less than
$250,000....................... 4.17% 4.00% 3.50%
$250,000 but less than
$500,000....................... 3.09% 3.00% 2.50%
$500,000 but less than
$1,000,000..................... 2.04% 2.00% 1.75%
$1,000,000 and over.............. (See herein) (See herein) (See herein)
- ---------------------------------------------------------------------------------------------------
</TABLE>

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

Effective March 15, 1994, for qualified 401(k) retirement plans administered
under American Capital Trust Company's (k) Advantage Program, or similar
recordkeeping programs made available through American Capital Trust Company, no
sales charge is payable at the time of purchase for plans with at least 50
eligible employees or investing at least $250,000 in American Capital funds,
which include Participating Funds as described herein under "Purchase of
Shares -- Class A Shares -- Volume Discounts," and American Capital Reserve
Fund, Inc. ("Reserve"). For such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. No such charge will be imposed unless and until appropriate
relief is granted by the SEC. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A commission will be paid to dealers who initiate and are responsible
for such purchases as follows: 1% on sales to $5 million, plus 0.50% on the next
$5 million, plus 0.25% on the excess over $10 million.

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

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

Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the shares
will not be resold except through redemption by the Fund, by (a) current or
retired directors of the Fund; current or retired employees of Travelers and any
of its subsidiaries; spouses, minor children and grandchildren of the above
persons; and parents of employees and parents of spouses of employees of
Travelers and any of its subsidiaries; (b) 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

10
<PAGE> 12

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

The Distributor may pay commissions of up to 1% for purchases described in
clause (d). The Distributor may pay Service Organizations through which
purchases are made as described in clause (f) above for transactions of $1
million or more an amount up to 0.50% of the amount invested, over a
twelve-month period following the pertinent transaction. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time. Contact the American Capital Service Department at (800)
421-5666 for further information and appropriate forms.

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

VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc., American Capital Equity Income Fund, Inc., American Capital Federal
Mortgage Trust ("Federal Mortgage"), American Capital Government Securities,
Inc., American Capital Government Target Series ("Government Target"), American
Capital Growth and Income Fund, Inc., American Capital Harbor Fund, Inc.,
American Capital High Yield Investments, Inc. ("High Yield"), American Capital
Municipal Bond Fund, Inc. ("Municipal Bond"), American Capital Pace Fund, Inc.,
American Capital 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. and American Capital World Portfolio Series, Inc. ("World Portfolio"). A
person eligible for a volume discount includes an individual; members of a
family unit comprising husband, wife and minor children; or a trustee or other
fiduciary purchasing for a single fiduciary account.

CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's dealer at the time an
order is placed for a purchase which would qualify for a reduced sales charge on
the basis of previous purchases and if sufficient information is furnished to
permit confirmation of such purchases.

LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the Participating Funds over a 13-month period based on the total
amount of intended purchases plus the value of all shares of the Participating
Funds previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charges applicable to the purchases made and the charges previously paid. The
initial purchase must be for an amount equal to at least five percent of the
minimum total purchased amount of the level selected. If trades not initially
made under a Letter of Intent subsequently qualify for a lower sales charge
through the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
adjustments in sales charge

11
<PAGE> 13

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 purchases
of shares, all payments during a month are aggregated and deemed to have been
made on the last day of the month.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- --------------------------------------------------------------------------------------------
<S> <C>
First...................................................... 5%
Second..................................................... 4%
Third...................................................... 3%
Fourth..................................................... 2.5%
Fifth...................................................... 1.5%
Sixth...................................................... None
</TABLE>

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

In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first, of any 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 four percent (the applicable rate in the second year after purchase).

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

CLASS C SHARES

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

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

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

12
<PAGE> 14

the second through tenth year after purchase. Additionally, the Distributor may,
from time to time, pay additional promotional incentives in the form of cash or
other compensation to Service Organizations that sell Class C shares of the
Fund.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE

The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.

- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------

Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Directors of the Fund, and the
shareholders of each class, have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan," and the "Class C Plan."
Each Distribution Plan is in compliance with the rules of fair practice of the
National Association of Securities Dealers, Inc. ("NASD Rules"), as amended July
7, 1993. 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. 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 service and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to 4% of
the purchase price of Class B shares purchased by the clients of broker-dealers
and other Service Organizations, and (ii) other distribution expenses as
described in the Statement of Additional Information. Under the Class C Plan,
the Distributor receives additional payments from the Fund in the form of a
distribution fee the annual rate of up to 0.75% of the net assets of the Class C
shares as reimbursements for (i) upfront commissions and transaction fees of up
to 0.75% of the purchase price of Class C shares purchased by the clients of
broker-dealers and other Service Organizations and ongoing commissions and
transaction fees of up to 0.65% of the average daily net assets of the Fund's
Class C shares and (ii) other distribution expenses as described in the
Statement of Additional Information.

In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Directors of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with respect
to distribution and service revenues and expenses is presented to the Directors
each year for their consideration in connection with their deliberations as to
the continuance of the Distribution Plans. In their review of the Distribution
Plans, the Directors are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.

Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.

The distribution fee attributable to Class B shares or Class C shares is
designed to permit an investor to purchase such shares without the assessment of
a front-end sales load and at the same time permit the 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.

13
<PAGE> 15

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.

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

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

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

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

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

PRE-AUTHORIZED CHECK PLAN. A pre-authorized check plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.

RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. American
Capital Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh
plans. Details regarding fees, as well as full plan administration for profit
sharing, pension and 401(k) plans, are available from the Distributor.

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

EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts"), other
than Government Target may be exchanged for shares

14
<PAGE> 16

of the same class of any other fund without sales charge, provided that shares
of Corporate Bond, Federal Mortgage, Government Trust, High Yield, Municipal
Bond, Tax-Exempt, Texas Municipal 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 shares of Reserve
or Class A shares of any other Participating 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 shares ("new shares") in an amount equal to
the aggregate net asset value of the original shares, without the payment of any
contingent deferred sales charge otherwise due upon redemption of the original
shares. For purposes of computing the contingent deferred sales charge payable
upon a disposition of the new shares, the holding period for the original shares
is added to the holding period of the new shares. Class B and Class C
shareholders may exchange their shares for shares of Reserve without incurring
the contingent deferred sales charge that otherwise would be due upon redemption
of such Class B or Class C shares. Class B or Class C shareholders would remain
subject to the contingent deferrred 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 without regard to the length of time such shares were held in
Reserve. Shares of Reserve acquired through an exchange of Class B or Class C
shares may be exchanged only for the same class of shares of a Participating
Fund without incurring a contingent deferred sales charge.

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

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. ACMR
and its subsidiaries, including ACCESS (collectively, "American Capital"), and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape 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
both "Purchase of Shares" and "Redemption of Shares." If the exchanging
shareholder does not have an account in the fund whose shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options (except fund to fund dividends) and dealer of record as
the account from which shares are exchanged, unless otherwise specified by the
shareholder. In order to establish a systematic withdrawal plan for the new
account or reinvest dividends from the new account into another fund, however,
an exchanging shareholder must file a specific written request. The Fund
reserves the right to reject any order to acquire its shares through exchange or
otherwise to modify, restrict or terminate the exchange privilege at any time on
60 days' notice to its shareholders of any termination or material amendment.

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

SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
above under "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 transmis-

15
<PAGE> 17

sion. 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 Class B 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 shareholders Initial Account Balance without incurring a
contingent deferred sales charge. Initial Account Balance means the amount of
the shareholders investment in the Fund on the date that the Plan is
established. See "Purchase of Shares -- Waiver of Contingent Deferred Sales
Charge" and the Statement of Additional Information.

Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with 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.

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

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

As described herein under "Purchase of Shares," redemptions of Class B or
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of one percent may be imposed on certain Class
A share redemptions made within one year of purchase for investments of $1
million or more. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses.
See "Purchase of Shares." A custodian of a retirement plan account may charge
fees based on the custodian's fee schedule.

The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a 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 IRA custodian, special IRA, 403(b)(7), or Keogh distribution forms
must be obtained from and be forwarded to American Capital Trust Company, P.O.
Box 944, Houston, Texas 77001-0944. Contact the custodian for information.

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<PAGE> 18

In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that 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 the redemption of shares.

The Fund may redeem any shareholder account with a net asset value of less
than $50, provided that there has been no purchase of shares for that account
during a continuous period of at least twelve months. Three months' advance
notice of any such involuntary redemption is required, and the shareholder is
given an opportunity to purchase the required value of additional shares at the
next determined net asset value without sales charge. Any involuntary redemption
may occur, if the shareholder account is less than $50 due to shareholder
redemptions. Any applicable contingent deferred sales charge will be deducted
from the proceeds of this redemption.

TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits shareholders and the dealer representative of
record to redeem shares by telephone and to have redemption proceeds sent to the
address of record for the account. 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 described herein. 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 the following
types of non-retirement accounts: individual accounts, joint accounts and
accounts of minors with custodians acting on their behalf. 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 paid by check, amounts of $25,000 or less may be redeemed by
telephone 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. This
privilege is not available if the address of record has been changed within 60
days prior to a telephone redemption request. Shareholders or the dealer
representative may also instruct ACCESS to have the proceeds of redemption wired
directly to their predesignated bank account(s). 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 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.

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

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

DIVIDENDS. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed annually as dividends to shareholders. Unless the
shareholder instructs otherwise, dividends and distributions are automatically
applied to purchase

17
<PAGE> 19

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
higher incremental transfer agency fees applicable to such classes of shares.

CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund distributes to shareholders at
least once a year the excess, if any, of its total profits on the sale of
securities during the year over its total losses on the sale of securities,
including capital losses carried forward from prior years under tax laws. As in
the case of income dividends, capital gains distributions are automatically
reinvested in additional shares of the Fund at net asset value. See "Shareholder
Services -- Reinvestment Plan."

TAXES. The Fund has qualified and intends to be taxed as a regulated
investment company under the Code. By qualifying as a regulated investment
company, the Fund is not subject to federal income taxes to the extent it
distributes its net investment income and net realized capital gains. Dividends
from net investment income and distributions from any net realized short-term
capital gains are taxable to shareholders as ordinary income. Long-term capital
gains distributions constitute long-term capital gains for federal income tax
purposes. All such dividends and distributions are taxable to the shareholder
whether or not reinvested in shares.

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

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

Dividends and distributions paid by the Fund have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution paid shortly after the purchase of shares
by an investor would represent, in substance, a return of capital to the
shareholder (to the extent it is paid on the shares so purchased) even though
subject to income taxes as discussed above.

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

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

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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 may invest up
to 25% of its assets in repurchase agreements but will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by the Fund, would exceed 10% of the
value of its net assets. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and loss including: (a) possible decline
in the value of the underlying security during the period while the Fund seeks
to enforce its rights thereto, (b) possible lack of access to income on the
underlying security during this period, and (c) expenses of enforcing its
rights.

For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the

18
<PAGE> 20

net revenue generated. The Adviser believes that the joint account produces
greater efficiencies and economies of scale that may contribute to reduced
transaction costs, higher returns, higher quality investments and greater
diversity of investments for the Fund than would be available to the Fund
investing separately. The manner in which the joint account is managed is
subject to conditions set forth in the SEC order obtained by the Fund
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that account.

SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 15% of the value of
its total assets in securities of foreign governments and companies. Such
investments may be subject to special risks, including changes in currency
exchange rates, future political and economic developments, the possible
imposition of additional withholding taxes on dividend or interest income
payable on the securities, or the seizure or nationalization of companies, or
establishment of exchange controls or adoption of other restrictions which might
adversely affect the investment.

USING OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund
expects to utilize futures contracts and options thereon in several different
ways, depending upon the status of the Fund's portfolio and the Adviser's
expectations concerning the securities markets.

In times of stable or rising stock prices, the Fund generally seeks to obtain
maximum exposure to the stock market, i.e., to be "fully invested."
Nevertheless, even when the Fund is fully invested, prudent management requires
that at least a small portion of assets be available as cash to honor redemption
requests and for other short term needs. The Fund may also have cash on hand
that has not yet been invested. The portion of the Fund's assets that is
invested in cash equivalents does not fluctuate with stock market prices, so
that, in times of rising market prices, the Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
stock index futures contracts, however, the Fund can "equitize" the cash portion
of its assets and obtain equivalent performance to investing 100% of its assets
in equity securities.

If the Adviser forecasts a market decline, the Fund may take a defensive
position, reducing its exposure to the stock market by increasing its cash
position. By selling stock index futures contracts instead of portfolio
securities, a similar result can be achieved to the extent that the performance
of the stock index futures contracts correlates to the performance of the Fund's
portfolio securities. Sale of futures contracts could frequently be accomplished
more rapidly and at less cost than the actual sale of securities. Once the
desired hedged position has been effected, the Fund could then liquidate
securities in a more deliberate manner, reducing its futures position
simultaneously to maintain the desired balance, or it could maintain the hedged
position.

As an alternative to selling stock index futures contracts, the Fund can
purchase stock index puts (or stock index futures puts) to hedge the portfolio's
risk in a declining market. Since the value of a put increases as the index
declines below a specified level, the portfolio's value is protected against a
market decline to the degree the performance of the index correlates with the
performance of the Fund's investment portfolio. If the market remains stable or
advances, the Fund can refrain from exercising the put and its portfolio will
participate in the advance, having incurred only the premium cost for the put.

In certain cases the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed with greater ease and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities.

POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities. While
utilization of options, futures contracts and similar instruments may be
advantageous to the Fund, if the Adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance will be
worse than if the Fund did not make such investments. In addition, the Fund
would pay commissions and other costs in connection with such investments, which
may increase the Fund's expenses and reduce its return. The Fund may write or
purchase options in privately negotiated transactions ("OTC Options") as well as
listed options. OTC Options can be closed out only by agreement with the other
party to the transaction. Any OTC Option purchased by the Fund is considered an
illiquid security. Any OTC Option written by the Fund is with a qualified dealer
pursuant to an agreement under which the Fund may repurchase the option at a
formula price. Such options 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 by the Fund, an amount of cash, cash
equivalents or liquid high grade debt securities equal to the market value of
the obligation under the futures contracts or options (less any related margin
deposits) will be maintained in a segregated account with the Custodian. The
Fund may not invest more than ten percent of its net assets in illiquid
securities and repurchase agreements which have a maturity of longer than seven
days. A more complete discussion of the potential risks

19
<PAGE> 21

involved in transactions in options or futures contracts and options on futures
contracts is contained in the Statement of Additional Information.

PORTFOLIO TURNOVER. The Fund purchases securities which are believed by the
Adviser to have above average potential for capital appreciation. Common stocks
are disposed of in situations where it is believed that potential for such
appreciation has lessened or that other common stocks have a greater potential.
Therefore, the Fund may purchase and sell securities without regard to the
length of time the security is to be, or has been held. The Fund's annual
portfolio turnover rate is shown in the table of "Financial Highlights." The
rate may exceed 100%, which is higher than that of many other investment
companies. A 100% turnover rate occurs, for example, if all the Fund's portfolio
securities are replaced during one year. High portfolio activity increases the
Fund's transaction costs, including brokerage commissions.

BROKERAGE PRACTICES. The Adviser is responsible for the placement of orders
for the purchase and sale of portfolio securities for the Fund and the
negotiation of brokerage commissions on such transactions. Brokerage firms are
selected on the basis of their professional capability for the type of
transaction and the value and quality of execution services on a continuing
basis. The Adviser is authorized to place portfolio transactions with brokerage
firms participating in the distribution of shares of the Fund and other American
Capital mutual funds if it reasonably believes that the quality of the execution
and the commission are comparable to that available from other qualified
brokerage firms. The Adviser is authorized to pay higher commissions to
brokerage firms that provide it with investment and research information than to
firms which do not provide such services if the Adviser determines that such
commissions are reasonable in relation to the overall services provided. The
information received may be used by the Adviser in managing the assets of other
advisory accounts as well as in the management of the assets of the Fund.

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 Shearson Inc. ("Smith Barney
Shearson") and Robinson Humphrey, Inc. When such transactions are made, in
accordance with Rule 17e-1 under 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."

INVESTMENT IN INVESTMENT COMPANIES. The Fund may invest in a separate
investment company, American Capital Small Capitalization Fund, Inc. ("Small Cap
Fund"), that invests in a broad selection of small capitalization securities.
The shares of the Small Cap Fund are available only to investment companies
advised by the Adviser. The Adviser believes that the use of the Small Cap Fund
provides the Fund with the most effective exposure to the performance of the
small capitalization sector of the stock market while at the same time
minimizing costs. The Adviser charges no advisory fee for managing the Small Cap
Fund, nor are there any sales load or other charges associated with distribution
of its shares. Other expenses incurred by the Small Cap Fund are borne by it,
and thus indirectly by the American Capital funds that invest in it. With
respect to such other expenses, the Adviser anticipates that the efficiencies
resulting from use of the Small Cap Fund will result in cost savings for the
Fund and other American Capital funds. In large part these savings will be
attributable to the fact that administrative actions that would have to be
performed multiple times if each American Capital fund held its own portfolio of
small capitalization stocks will need to be performed only once. The Adviser
expects that the Small Cap Fund will experience trading costs that will be
substantially less than the trading costs that would be incurred if small
capitalization stocks were purchased separately for the Fund and other American
Capital funds.

The securities of small and medium sized companies that the Small Cap Fund may
invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies.

The Fund will be deemed to own a pro rata portion of each investment of the
Small Cap Fund. For example, if the Fund's investment in the Small Cap Fund were
$10 million, and the Small Cap Fund had five percent of its assets invested in
the electronics industry, the Fund would be considered to have an investment of
$500,000 in the electronics industry.

INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the Fund's shareholders. One of
these restrictions provides that the Fund may not invest more than 25% of the
value of its assets in securities issued by companies in any one industry,
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata portion
of the securities and other assets owned by such company.

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<PAGE> 22

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

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

The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 5.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Since shares of the Fund were offered at a maximum sales charge of 8.50% prior
to June 12, 1989, actual Fund total return would have been somewhat less than
that computed on the basis of the current maximum sales charge. Total return is
based on historical earnings and asset value fluctuations and is not intended to
indicate future performance. No adjustments are made to reflect any income taxes
payable by shareholders on dividends and distributions paid by the Fund or to
reflect the fact no 12b-1 fees were incurred prior to October 1, 1989.

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

Total return is calculated separately for Class A, Class B and Class C shares.
Class A total return figures include the maximum sales charge of 5.75%; Class B
and Class C total return figures include any applicable contingent deferred
sales charge. Because of the differences in sales charges and distribution fees,
the total returns for each of the classes will differ.

In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds or with the Consumer Price Index, Dow Jones
Industrial Average, Standard & Poor's or NASDAQ, other appropriate indices of
investment securities, or with investment or savings vehicles. The performance
information may also include evaluations of the Fund published by nationally
recognized ranking services and by financial publications that are nationally
recognized, such as Business Week, Forbes, Fortune, Institutional Investor,
Investor's Business Daily, Kiplinger's Personal Finance Magazine, Money, Mutual
Fund Forecaster, Stanger's Investment Advisor, USA Today, U.S. News & World
Report, and The Wall Street Journal. Such comparative performance information
will be stated in the same terms in which the comparative data or indices are
stated. Any such advertisement would also include the standard performance
information required by the SEC as described above. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for Class A, Class B and
Class C shares of the Fund in any advertisement or information including
performance data of the Fund.

The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.

The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

ORGANIZATION OF THE FUND. The Fund was originally incorporated in the State of
Delaware on September 18, 1953 and was reincorporated into the State of Maryland
on January 12, 1979. The Fund may offer three classes of shares: Class A, Class
B and Class C. Each class of shares represents interests in the assets of the
Fund and has identical voting, dividend, liquidation and other rights on the
same terms and conditions, except that the distribution fees and/or service fees
related to each class of shares are borne solely by that class and each class of
shares has exclusive voting rights with respect to provisions of the Fund's
Class A Plan, Class B Plan and

21
<PAGE> 23

Class C Plan which pertain to that class. An order has been received from the
SEC permitting the issuance and sale of multiple classes of shares representing
interests in the Fund's existing portfolio. Shares issued are fully paid,
non-assessable and have no preemptive or conversion rights.

VOTING RIGHTS. The Bylaws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the 1940 Act. Such
event is likely to occur infrequently. In addition, a special meeting of the
shareholders will be called, if requested by the holders of ten percent of the
Fund's outstanding shares, for the purposes, and to act upon the matters,
specified in the request (which may include election or removal of directors).
When matters are submitted for a shareholder vote, each shareholder is entitled
to one vote for each share owned.

SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund at
2800 Post Oak Blvd., 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, 1201 Louisiana, Suite 2900,
Houston, Texas 77002 are the independent accountants for the Fund.

22
<PAGE> 24

- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------
December 31, 1993
COMMON STOCKS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
CONSUMER DISTRIBUTION
60,000 Cato Corp., Class A
118,500 CML Group, Inc.
*100,000 Consolidated Stores Corp.
160,000 Dollar General Corp.
225,000 Heilig-Meyers Co.
100,000 Lowe's Companies, Inc.
100,000 Penney (J.C.) Co., Inc.
150,000 Sears, Roebuck & Co.
*60,000 Stein Mart, Inc.
145,000 Sysco Corp.

CONSUMER DURABLES
100,000 Dana Corp.
125,000 Eastman Kodak Co.
125,000 Ford Motor Co.
350,000 General Motors Corp.
150,000 Leggett & Platt, Inc.
200,000 Singer Co.

CONSUMER NON-DURABLES
125,000 American Greeting Corp.,
Class A
37,500 Colgate Palmolive Co.
*525,000 Dr Pepper/Seven-Up
Companies, Inc.
200,000 Pioneer Hi-Bred
International, Inc.
250,000 Tyson Foods, Inc., Class A

CONSUMER SERVICES
125,000 Belo (A.H.) Corp.
*125,000 Brinker International,
Inc.
*115,000 Cablevision Systems
Development Co., Class A
200,000 Carnival Cruise Lines,
Inc., Class A
30,000 CBS, Inc.
300,000 Comcast Corp., Class A
125,000 Gaylord Entertainment Co.,
Class A
135,000 International Game
Technology
*125,000 King World Productions,
Inc.
300,000 Host Marriott Corp.
300,000 Marriott International,
Inc.
150,000 McDonald's Corp.
*150,000 Outback Steakhouse, Inc.
*150,000 Promus Companies, Inc.
*200,000 Tele-Communications, Inc.,
Class A
75,000 Tribune Co.
100,000 Walt Disney Co.

<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
ENERGY
200,000 Apache Corp.
*80,000 Arethusa Offshore, Ltd.
125,000 British Petroleum Co.,
PLC, ADR
125,000 Mobil Corp.
175,000 Repsol, S.A., ADR
80,000 Royal Dutch Petroleum Co.,
ADR
50,000 Sonat Offshore Drilling,
Inc.
250,000 Williams Companies, Inc.

FINANCE
75,000 Advanta Corp., Class A
125,000 Baybanks, Inc.
150,000 Federal National Mortgage
Association
200,000 First Interstate Bancorp
75,000 Green Tree Financial Corp.
*300,000 Midlantic Corp.
192,500 NWNL Companies, Inc.
175,000 Protective Life Corp.
525,000 West One Bancorp

HEALTH CARE
*200,000 Amgen, Inc.
100,000 Columbia Healthcare Corp.
*200,000 Genentech, Inc.
150,000 HBO & Co.
*350,000 Healthcare & Retirement
Corp.
*60,000 Healthsource, Inc.
*275,000 Healthtrust Inc.-The
Hospital Co.
*170,000 IDEXX Laboratories, Inc.
*360,000 Thermedics, Inc.
28,800 United Healthcare Corp.

PRODUCER MANUFACTURING
150,000 Allied-Signal, Inc.
100,000 Caterpillar, Inc.
75,000 Dover Corp.
125,000 General Electric Co.
115,000 Ingersoll Rand Co.
150,000 ITT Corp.
25,000 Johnson Controls, Inc.
50,000 Kennametal, Inc.
75,000 Parker-Hannifin Corp.
*160,000 Thermo Electron Corp.
*250,000 Thermo Fibertek, Inc.
*225,000 Thermo Instrument Systems,
Inc.
100,000 Trinity Industries, Inc.
85,000 Trinova Corp.
150,000 Tyco Laboratories, Inc.
*275,000 Varity Corp.
</TABLE>

23
<PAGE> 25

COMMON STOCKS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
RAW MATERIALS/PROCESSING INDUSTRIES
200,000 Allegheny Ludlum Corp.
300,000 Birmingham Steel Corp.
200,000 Ferro Corp.
100,000 Hercules, Inc.
200,000 Imperial Chemical
Industries,
PLC, ADR
100,000 International Paper Co.
125,000 Monsanto Co.
400,000 Praxair, Inc.
50,000 Rohm & Haas Co.
*131,500 Stone Container Corp.
50,000 Temple-Inland, Inc.
150,000 USX/US Steel Group

TECHNOLOGY
*100,000 Applied Materials, Inc.
*305,000 Cisco Systems, Inc.
100,000 Computer Associates
International, Inc.
*50,000 Electronic Arts, Inc.
40,000 Hewlett-Packard Co.
125,000 International Business
Machines Corp.
*75,000 Lam Research Corp.
180,000 Linear Technology Corp.
*45,000 Lotus Development Corp.
45,000 Motorola, Inc.
*75,000 Novellus System, Inc.
*100,000 Oracle Systems Corp.
*75,000 Parametric Technology
Corp.
300,000 Rockwell International
Corp.
*100,000 Wellfleet Communications
Inc.

<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
TRANSPORTATION
175,000 Burlington Northern, Inc.
75,000 CSX Corp.
*500,000 Southern Pacific Rail
Corp.
250,000 Southwest Airlines Co.

UTILITIES
*200,000 ALC Communications Corp.
300,000 Alltel Corp.
*125,000 IDB Communications Group,
Inc.
*50,000 LDDS Communications, Inc.
300,000 MCI Communications Corp.

CONVERTIBLE PREFERRED STOCKS
*200,000 Cellular Communications,
Inc.
125,000 Equitable Companies, Inc.

SHORT-TERM INVESTMENTS
PRINCIPAL
AMOUNT

COMMERCIAL PAPER
$ 6,040,000 General Electric Capital
Corp.,
3.20%, 1/3/94
UNITED STATES TREASURY BILLS
86,000,000 2.94% to 3.18%, 2/3/94 to
3/24/94

* Non-income producing security.
</TABLE>

See Notes to Financial Statements.

24
<PAGE> 26

PART B: STATEMENT OF ADDITIONAL INFORMATION

AMERICAN CAPITAL ENTERPRISE FUND, INC.

OCTOBER 17, 1994

This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated October 17,
1994. A Prospectus may be obtained without charge by calling or writing American
Capital Marketing, Inc. at 2800 Post Oak Blvd., Houston, Texas 77056 at (800)
421-5666.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
REPURCHASE AGREEMENTS................................................................. 2
FOREIGN SECURITIES.................................................................... 2
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS........................... 3
INVESTMENT RESTRICTIONS............................................................... 7
DIRECTORS AND EXECUTIVE OFFICERS...................................................... 9
INVESTMENT ADVISORY AGREEMENT......................................................... 11
DISTRIBUTOR........................................................................... 13
DISTRIBUTION PLANS.................................................................... 13
TRANSFER AGENT........................................................................ 14
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 15
DETERMINATION OF NET ASSET VALUE...................................................... 16
PURCHASE AND REDEMPTION OF SHARES..................................................... 17
EXCHANGE PRIVILEGE.................................................................... 20
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 21
PRIOR PERFORMANCE INFORMATION......................................................... 23
OTHER INFORMATION..................................................................... 23
FINANCIAL STATEMENTS.................................................................. 24
</TABLE>
<PAGE> 27

GENERAL INFORMATION

The Fund was incorporated in Delaware on September 18, 1953, and
reincorporated by merger into a Maryland corporation on January 12, 1979.

American Capital Asset Management, Inc. (the "Adviser"), American Capital
Marketing, Inc. (the "Distributor"), and Advantage Capital Corporation, a retail
broker-dealer affiliate of the Distributor, are wholly owned subsidiaries of
American Capital Management & Research, Inc. ("ACMR"). Eight-three percent of
the outstanding voting stock of ACMR is owned by Associated Madison Companies,
Inc. ("Associated Madison"), and 17% is owned by The Travelers Inc.
("Travelers"). Associated Madison is a wholly owned subsidiary of Travelers. See
"The Fund and Its Management" in the Prospectus.

As of July 27, 1994, Bean & Co. held of record approximately [ % of the
outstanding Class A shares of the Fund as nominee for First Pennsylvania Bank &
Trust Company. First Pennsylvania Bank & Trust Company, P.O. Box 874,
Conshohocken, Pennsylvania 19428-0874, serves as custodian for a unit investment
trust for the accumulation of Class A shares of the Fund, which trust is the
beneficial owner of these shares. Under the terms of the trust, the custodian
bank votes all shares of the Fund held by it for and against each proposal in
the same proportions as the shares for which it receives actual instructions
from the beneficial owners.]

As of July 27, 1994, [Smith Barney Inc. ("Smith Barney"), 388 Greenwich
Street -22nd Floor, New York, New York 10013-2375, held of record % of the
outstanding Class B shares of the Fund.]

As of July 27, 1994, [Smith Barney, 388 Greenwich Street -- 22nd Floor, New
York, New York 10013-2375, held of record % of the outstanding Class C shares
of the Fund; PaineWebber Inc., 1000 Harbor Blvd. 7th Floor, Weehawken, New
Jersey 07087-6727 held of record %; and Mary Jo Gantt and Margaret R. Ranet
Trustees for the Mary Jo and Jack S. Gantt Revocable Trust, 106 Thames Street,
Andalusia, Alabama 36420-4119, held beneficially and of record % of such
shares.]

In addition, American Capital Trust Company, 2800 Post Oak Blvd., Houston,
Texas 77056, acting as Custodian for certain employee benefit plans and
individual retirement accounts, held of record [ %, % and %, respectively
of the outstanding Class A, Class B and Class C shares of the Fund.]

REPURCHASE AGREEMENTS

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

FOREIGN SECURITIES

The Fund may invest up to 15% of the value of its total assets in
securities of foreign governments and companies. Such securities may be subject
to foreign government taxes which would reduce the income yield on such
securities. Foreign investments involve certain risks, such as political or
economic instability of the issuer or of the country of issue, changes in
currency exchange rates, difficulty of predicting international trade patterns
and the possibility of imposition of exchange controls. Such securities may also
be subject to greater

2
<PAGE> 28

fluctuations in price than securities of domestic corporations or of the United
States Government. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. There
is generally less government regulation of stock exchanges, brokers and listed
companies abroad than in the United States, and, with respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation, or
diplomatic developments which could affect investment in those countries.
Finally, in the event of a default on any such foreign debt obligations, it may
be more difficult for the Fund to obtain or to enforce a judgment against the
issuers of such securities.

OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

WRITING CALL AND PUT OPTIONS

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

Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security form the
writer at a specified price during a certain period. The Fund would write call
options only on a covered basis, which means that, at all times during the
option period, the Fund would own or have the right to acquire securities of the
type that it would be obligated to deliver if any outstanding option were
exercised.

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

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

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

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

Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security (whether or not
covered) that may be written by a single investor, whether

3
<PAGE> 29

acting alone or in concert with others, regardless of whether such options are
written on one or more accounts or through one or more brokers. An exchange may
order the liquidation of positions found to be in violation of those limits, and
it may impose other sanctions or restrictions. These position limits may
restrict the number of options the Fund may be able to write.

PURCHASING CALL AND PUT OPTIONS

The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital appreciation. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.

Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. Alternatively, put options could be purchased
for capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options.

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

OPTIONS ON STOCK INDEXES

Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.

Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges.

Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.

FUTURES CONTRACTS

The Fund may engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund is exempt from
registration as a "commodity pool."

A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified

4
<PAGE> 30

time and the price at which the futures contract is originally struck. No
physical delivery of the underlying stocks in the index is made.

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

Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.

For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.

At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.

Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.

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

Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.

There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities

5
<PAGE> 31

being hedged is greater than the historical volatility of the securities
underlying the futures contract. Conversely, the Fund could buy or sell futures
contracts in a lesser dollar amount than the dollar amount of securities being
hedged if the historical volatility of the securities being hedged is less than
the historical volatility of the securities underlying the futures contract. It
is also possible that the value of futures contracts held by the Fund could
decline at the same time as portfolio securities being hedged; if this occurred,
the Fund would lose money on the futures contract in addition to suffering a
decline in value in the portfolio securities being hedged.

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

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

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

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

OPTIONS ON FUTURES CONTRACTS

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

6
<PAGE> 32

on a futures contract is exercised, delivery of the futures position is
accompanied by cash representing the difference between the current market price
of the futures contract and the exercise price of the option. The Fund could
purchase put options on futures contracts in lieu of, and for the same purpose
as, it could sell a futures contract; at the same time, it could write put
options at a lower strike price (a "put bear spread") to offset part of the cost
of the strategy to the Fund. The purchase of call options on futures contracts
would be intended to serve the same purpose as the actual purchase of the
futures contracts.

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

ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS

Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.

Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in a futures contract and thus provide an offset to
losses on the futures contract.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of its outstanding shares. Such majority is defined by the the 1940 Act
as the lesser of (i) 67% or more of the voting securities present in person or
by proxy at the meeting, if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy; or (ii) more than 50% of
the outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. These restrictions provide that the Fund shall not:

1. Make loans except that the Fund may invest up to 25% of the Fund's
total assets in Repurchase Agreements;

2. Sell short or buy on margin, but the Fund may engage in transaction in
options, futures contracts and related options and make margin deposits
and payments in connection therewith;

7
<PAGE> 33

3. Primarily engage in the underwriting or distribution of securities;

4. Make any investment in real estate, commodities or commodities
contracts; however, the Fund is not prohibited from investing in
securities issued by a real estate investment trust, provided that such
trust is not permitted to invest in real estate or interests in real
estate other than mortgages or other security interests, and the Fund
is not prohibited from entering into transactions in futures contracts
and related options;

5. Make any investment in any security about which information is not
available with respect to history, management, assets, earnings, and
income of the issuer except to acquire shares of other open-end
investment companies to the extent permitted by rule or order of the
Securities and Exchange Commission ("SEC") exempting the Fund from the
limitations imposed by Section 12(d)(1) of the 1940 Act;

6. Make any investment which involves promotion or business management by
the Fund or which would subject the Fund to unlimited liability;

7. Invest more than five percent of the value of its assets in the
securities of any one issuer with the exception of U.S. Government
securities or purchase more than ten percent of the outstanding voting
securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies to the
extent permitted by rule or order of the SEC exempting the Fund from
the limitations imposed by Section 12(d)(1) of the 1940 Act;

8. Invest more than 25% of the value of its assets in securities issued by
companies in any one industry, provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Fund but includes the Fund's pro rata portion of the securities and
other assets owned by any such company;

9. Borrow more than ten percent of the value of its net assets valued at
the lower of cost or market at the time of borrowing; and then only
from banks and undertaken as a temporary measure for extraordinary or
emergency purposes; or pledge, transfer, assign or otherwise encumber
its assets except to secure such borrowing and in an amount not
exceeding the amount of the borrowing. Notwithstanding the foregoing,
the Fund may engage in transactions in options, futures contracts and
related options, segregate or deposit assets to cover or secure options
written, and make margin deposits or payments for futures contracts and
related options;

10. Invest in companies for the purpose of exercising control;

11. Acquire securities of any other domestic or foreign investment company
or investment fund except in connection with a plan of merger or
consolidation with or acquisition of substantially all the assets of
such other investment company or to acquire shares of other open-end
investment companies to the extent permitted by rule or order of the
SEC exempting the Fund from the limitations imposed by Section 12(d)(1)
of the 1940 Act; or

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

In addition to the foregoing, the Fund has adopted additional investment
restrictions which may be changed by the Board of Directors without a vote of
shareholders. These restrictions provide that the Fund may not:

1. Invest more than five percent of the value of its total assets in
securities of companies which (including predecessor companies or
operations) have been in business less than three years, provided,
however, that this limitation excludes shares of other open-end
investment companies

8
<PAGE> 34

owned by the Fund but includes the Fund's pro rata portion of the
securities and other assets owned by any such company;

2. Pledge, mortgage or hypothecate its portfolio securities to the extent
that at any time the percentage of pledged securities plus the sales
load will exceed ten percent of the offering price of the Fund's
shares. Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures contracts and related options,
segregate or deposit assets to cover or secure options written, and
make margin deposits or payments for futures contracts and related
options;

3. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed
to be an underwriter as that term is defined under the Securities Act
of 1933;

4. Acquire any private placement if it would cause more than two percent
of the net assets of the Fund, as determined at the time the Fund
agrees to any such acquisition, to be invested in private placements
and other assets not having readily available market quotations,
provided, however, that this limitation excludes shares of other
open-end investment companies owned by the Fund but includes the Fund's
pro rata portion of the securities and other assets owned by any such
company;

5. Purchase or retain securities of a company which has an officer or
director who is an officer or director of the Fund or its Adviser if,
to the knowledge of the Fund, one or more such persons own beneficially
more than one-half of one percent of the shares of the company, and all
such persons own more than five percent thereof;

6. Invest more than five percent of its net assets in warrants or rights
valued at the lower of cost or market, nor more than two percent of its
net assets in warrants or rights (valued on such basis) which are not
listed on the New York or American Stock Exchanges. Warrants or rights
acquired in units or attached to other securities are not subject to
the foregoing limitations;

7. Invest more than ten percent of its net assets (determined at the time
of investment) in illiquid securities and repurchase agreements that
have a maturity of longer than seven days; or

8. Invest in interests in oil, gas, or other mineral exploration or
developmental programs.

DIRECTORS AND EXECUTIVE OFFICERS

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

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

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

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

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

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<PAGE> 35

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

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

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

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

STEPHEN L. BOYD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President -- Portfolio Manager of the Adviser; also
serves as Vice President of American Capital Exchange Fund, American Capital
Pace Fund, Inc. and Common Sense Trust-Growth Fund and Growth II Fund. (4)

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

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

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

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

JEFF NEW, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056. Also
serves as Vice President of the American Capital Global Equity Fund of American
Capital World Portfolio Series, Inc.; formerly Associate Portfolio Manager of
the Adviser; formerly securities analyst with Texas Commerce Investment
Management Company. (4)

ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
the Adviser; Executive Vice President and Director of ACMR. (4)

J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel and Compliance
Review Officer of the Adviser. (4)

PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; Executive Vice President and
Director of ACMR; President, Chief Operating Officer, and Director of American
Capital Services, Inc.; Executive Vice President, Chief Operating Officer and
Director of American Capital Trust Company; Executive Vice President and
Director of American

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<PAGE> 36

Capital Companies Shareholder Services, Inc. ("ACCESS"); Vice President, Chief
Operating Officer and Director of the Distributor. (4)
- ---------------
* Director who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act by virtue of his affiliation with the Adviser
in the case of Mr. Powell and is an interested person by virtue of his
affiliation with Travelers in the case of Mr. Woodside.

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

(1) Also a director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Equity Income Fund, Inc., American Capital Federal
Mortgage Trust, American Capital Global Managed Assets Fund, Inc., American
Capital Government Securities, Inc., American Capital Government Target
Series, American Capital Growth and Income Fund, Inc., American Capital
Harbor Fund, Inc., American Capital High Yield Investments, Inc., American
Capital Life Investment Trust, American Capital Municipal Bond Fund, Inc.,
American Capital Pace Fund, Inc., American Capital Real Estate Securities
Fund, Inc., American Capital Reserve Fund, Inc., American Capital Small
Capitalization Fund, Inc., American Capital Tax-Exempt Trust, American
Capital Texas Municipal Securities, Inc., American Capital U.S. Government
Trust for Income, American Capital Utilities Income Fund, Inc. and American
Capital World Portfolio Series, Inc.

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

(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.

(4) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.

(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc., FPA Perennial
Fund, Inc., and TCW Convertible Securities Fund, Inc., investment companies
not advised by the Adviser.

The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto may act for the Board of Directors between Board meetings except where
board action is required by law.

The officers and directors of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the fiscal year ended December 31,
1993, the directors who were not affiliated with the Adviser or its parent
received as a group $20,344 in directors' fees from the Fund in addition to
certain out-of-pocket expenses. Such directors also received compensation for
serving as directors or trustees of other investment companies advised by the
Adviser as identified in the notes to the foregoing table. For legal services
rendered during the fiscal year ended December 31, 1993, the Fund paid legal
fees of $17,568 to the law firm of O'Melveny & Myers, of which Mr. Sheehan is Of
Counsel. The firm also serves as legal counsel to the American Capital funds
listed in Footnote 1 above.

INVESTMENT ADVISORY AGREEMENT

The Fund and the Adviser are parties to an investment advisory agreement,
dated [ , 1994] (the "Advisory Agreement"). Under the Advisory
Agreement, the Fund retains the Adviser to manage the investment of its assets
and to place orders for the purchase and sale of its portfolio securities. The
Adviser is responsible for obtaining and evaluating economic, statistical, and
financial data and for formulating and implementing investment programs in
furtherance of the Fund's investment objectives. The Adviser also furnishes at
no cost to the Fund (except as noted herein) the services of sufficient
executive and clerical personnel for the Fund as are necessary to prepare
registration statements, prospectuses, shareholder reports, and notices and
proxy solicitation materials. In addition, the Adviser furnishes at no cost to
the Fund the services of a President of the Fund, one or more Vice Presidents as
needed, and a Secretary.

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<PAGE> 37

Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser. A
portion of these amounts are paid to the Adviser or its parent in reimbursement
of personnel, office space, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost. The Fund also pays shareholder service agency fees,
distribution fees, service fees, custodian fees, legal and auditing fees, the
costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser.

Under the Advisory Agreement the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at an annual
rate of: 0.55% on the first $1 billion of average net assets; 0.50% on the next
$1 billion of net assets; 0.45% on the next $1 billion of average net assets;
0.40% on the next $1 billion of net assets; and 0.35% on the average net assets
in excess of $4 billion.

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

The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed one and one-half
percent of the first $30 million of the Fund's average net assets, plus one
percent of any excess over $30 million, the compensation due the Adviser will be
reduced by the amount of such excess and that, if a reduction in and refund of
the advisory fee is insufficient, the Adviser will pay the Fund monthly an
amount sufficient to make up the deficiency, subject to readjustment during the
year. Ordinary business expenses include the investment advisory fee and other
operating costs paid by the Fund except (1) interest and taxes, (2) brokerage
commissions, (3) certain litigation and indemnification expenses as described in
the Advisory Agreement and (4) payments made by the Fund pursuant to the
distribution plans (described herein). The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any actions or omissions if it
acted in good faith without willful misfeasance, negligence or misconduct.

The most restrictive applicable limitations will be 2.5% of the first $30
million, 2% of the next $70 million, and 1.5% of the remaining average net
assets.

The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Directors or (ii) by
vote of a majority of the Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of the Directors who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement provides that it shall
terminate automatically if assigned and that it may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days' written
notice.

During the fiscal years ended December 31, 1991, 1992 and 1993, the Adviser
received $3,128,951, $3,460,860 and $4,014,961, respectively, in advisory fees
from the Fund. For such periods the Fund paid $104,217, $111,196 and $163,818,
respectively, for the accounting services. A substantial portion of these

12
<PAGE> 38

amounts was paid to the Adviser in reimbursement of personnel, facilities and
equipment costs attributable to the provision of accounting services to the
Fund.

DISTRIBUTOR

The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, dated October 1, 1993 (the "Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of the
Fund through affiliated and unaffiliated dealers. The Distributor's obligation
is an agency or "best efforts" arrangement under which the Distributor is
required to take and pay for only such shares of the Fund as may be sold to the
public. The Distributor is not obligated to sell any stated number of shares.
The Distributor bears the cost of printing (but not typesetting) prospectuses
used in connection with this offering and the cost and expense of supplemental
sales literature, promotion and advertising. The Underwriting Agreement is
renewable from year to year if approved (a) by the Fund's Board of Directors or
by a vote of a majority of the Fund's outstanding voting securities and (b) by
the affirmative vote of a majority of Directors who are not parties to the
Underwriting Agreement or interested persons of any party, by votes cast in
person at a meeting called for such purpose. The Underwriting Agreement provides
that it will terminate if assigned, and that it may be terminated without
penalty by either party on 60 days' written notice. During the fiscal years
ended December 31, 1991, 1992, and 1993 total underwriting commissions on the
sale of shares of the Fund were $363,568, $830,887 and $1,150,951, respectively.
Of such totals, the amount retained by the Distributor was $47,525, $60,951 and
$154,112. The remainder was reallowed to dealers. Of such dealer reallowances
$66,259, $119,837 and $130,323, respectively, was received by Advantage Capital
Corporation, an affiliated dealer of the Distributor.

DISTRIBUTION PLANS

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

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

13
<PAGE> 39

the Fund's Class C shares, (2) out-of-pocket expenses of printing and
distributing prospectuses and annual and semi-annual shareholder reports to
other than existing shareholders, (3) out-of-pocket and overhead expenses for
preparing, printing and distributing advertising material and sales literature,
(4) expenses for promotional incentives to broker-dealers and financial and
industry professionals, and (5) advertising and promotion expenses, including
seminars, marketing support salaries and bonuses, and travel-related expenses.
Such reimbursements are subject to the maximum sales charge limits specified by
the National Association of Securities Dealers, Inc. for asset-based charges.

Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.

As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreements and selling group agreements were approved by the
Directors, including a majority of the Directors who are not interested persons
(as defined in the 1940 Act) of the Fund and who have no direct or indirect
financial interest in the operation of any of the Plans or in any agreements
related to each Plan ("Independent Directors"). In approving each Plan in
accordance with the requirements of Rule 12b-1, the Directors determined that
there is a reasonable likelihood that each Plan will benefit the Fund and its
shareholders.

Each Plan requires the Distributor to provide the Directors at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Directors, including a majority
of Independent Directors.

Each Plan may be terminated by vote of a majority of the Independent
Directors, or by vote of a majority of the outstanding voting shares of the
Fund. Any change in any of the Plans that would materially increase the
distribution or service expenses borne by the Fund requires shareholder
approval, voting separately by class, otherwise, it may be amended by a majority
of the Directors, including a majority of the Independent Directors, by vote
cast in person at a meeting called for the purpose of voting upon such
amendment. So long as the Plans are in effect, the selection or nomination of
the Independent Directors is committed to the discretion of the Independent
Directors.

For the fiscal year ended December 31, 1993, the Fund's aggregate expenses
under the Class A Plan were $1,274,952 or .17% of the Class A shares' average
daily net assets. Such expenses were paid to reimburse the Distributor for
payments to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. For the fiscal year ended December 31, 1993, the
Fund's aggregate expenses under the Class B Plan were $432,570 or .99% of the
Class B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $324,428 for commissions and transaction
fees paid to broker-dealers and other Service Organizations in respect of sales
of Class B shares of the Fund and $108,142 for fees paid to Service
Organizations for servicing Class B shareholders and administering the Class B
Plan. The offering of Class C shares commenced July 20, 1993. For the period
ended December 31, 1993, the Fund's aggregate expenses under the Class C Plan
were $3,599 or .46% of the Class C shares' average daily net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$2,699 for commissions and transaction fees paid to broker-dealers and other
service organizations in respect to sales of Class C shares of the Fund and $900
for fees paid to servicing Class C shareholders and administering the Class C
Plan.

TRANSFER AGENT

For the fiscal year ended December 31, 1993, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$1,827,904 for these services. These services are provided at cost plus a
profit.

14
<PAGE> 40

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions paid on such transactions. It is the policy of the Adviser to seek
the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting broker/dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser. Consistent with the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. and subject to seeking
best execution and such other policies as the Board of Directors may determine,
the Adviser may consider sales of shares of the Fund and of the other American
Capital mutual funds as a factor in the selection of firms to execute portfolio
transactions for the Fund.

Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).

Pursuant to provisions of the investment advisory agreement, the Fund's
Board of Directors has authorized the Adviser to cause the Fund to incur
brokerage commissions in an amount higher than the lowest available rate in
return for research services provided to the Adviser. The Adviser is of the
opinion that the continued receipt of supplemental investment research services
from dealers is essential to its provision of high quality portfolio management
services to the Fund. The Adviser undertakes that such higher commissions will
not be paid by the Fund unless (a) the Adviser determines in good faith that the
amount is reasonable in relation to the services in terms of the particular
transaction or in terms of the Adviser's overall responsibilities with respect
to the accounts as to which it exercises investment discretion, (b) such payment
is made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected benefits
to the Fund over the long term. The investment advisory fee paid by the Fund
under the investment advisory agreement is not reduced as a result of the
Adviser's receipt of research services.

The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.

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

15
<PAGE> 41

availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.

The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Directors who are not interested
persons (as defined in the 1940 Act) of the Adviser.

Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended December 31, 1991, 1992 and 1993 totalled $1,817,476,
$3,361,024 and $4,136,136, respectively. During the year ended December 31,
1993, the Fund paid $1,667,526 in brokerage commissions on transactions
totalling $890,745,130 to brokers selected primarily on the basis of research
services provided to the Adviser.

The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, Travelers.
Such affiliated persons currently are Smith Barney and Robinson Humphrey. In
addition, from December 15, 1988 through February 21, 1992, Dain Bosworth, Inc.
("Dain Bosworth") and Rauscher Pierce, Refsnes, Inc. ("Rauscher Pierce") were
affiliates of Travelers (then known as Primerica); from September 10, 1987 to
March 27, 1992, The Fox-Pitt, Kelton Group S.A. ("Fox-Pitt") was an affiliate of
Travelers (then known as Primerica); and from 1985 to September 30, 1992,
Jefferies & Company, Inc. ("Jefferies") was an affiliate of Travelers (then
known as Primerica). The negotiated commission paid to an affiliated broker on
any transaction would be comparable to that payable to a non-affiliated broker
in a similar transaction. The Fund paid the following commissions to these
brokers during the periods shown:

<TABLE>
<CAPTION>
ROBINSON SMITH DAIN RAUSCHER
HUMPHREY JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
--------- ---------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Commissions Paid:
Fiscal 1991................. -- $9,506 $ 69,343 $ 2,786 $1,750
Fiscal 1992.................. -- $9,562 $ 66,308 -- -- --
Fiscal 1993.................. $ 602 -- $167,083 -- -- --
Fiscal 1993 Percentages:
Commissions with affiliates
to total commissions....... .01% -- 4.04% -- -- --
Value of brokerage
transactions with affiliates
to total brokerage
transactions............... .01% -- 12.01% -- -- --
</TABLE>

The substantial difference between the percentage of total commissions paid
to Smith Barney Shearson and the percentage of aggregate dollar volume of
transactions attributable to Smith Barney Shearson is due to the fact that the
commission rate paid to the executing broker for the purchase and sale of
futures contracts is substantially lower than the commission rate paid on equity
transactions and Smith Barney Shearson performed a large percentage of the
transactions in futures and options.

DETERMINATION OF NET ASSET VALUE

The net asset value per share is determined as of the close of the New York
Stock Exchange (currently 4:00 p.m., New York time) on each business day on
which the New York Stock Exchange is open. The New York Stock Exchange is
currently closed on weekends and on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The net asset value of Fund shares is
computed by dividing the value of all securities plus other assets, less
liabilities, by the number of shares outstanding, and adjusting to the nearest
cents per share.

Such computation is made by using prices as of the close of trading on the
New York Stock Exchange and (i) valuing securities listed or traded on a
national securities exchange at the last reported sale price, or if there has
been no sale that day, at the mean between the last reported bid price and asked
price, (ii) valuing over-the-counter securities for which the last sale price is
available from the National Association of Securities Dealers Automated
Quotations ("NASDAQ") at that price, (iii) valuing all other over-the-

16
<PAGE> 42

counter securities for which market quotations are available at the mean between
the most recent bid and asked prices supplied by NASDAQ or broker-dealers, and
(iv) valuing any securities for which market quotations are not readily
available, and any other assets at fair value as determined in good faith by the
Board of Directors of the Fund. Short-term investments are valued in the manner
described in Note 2 to the Financial Statements included in this Statement of
Additional Information.

The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the SEC.

PURCHASE AND REDEMPTION OF SHARES

The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares".

PURCHASE OF SHARES

Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.

MULTIPLE PRICING SYSTEM

The Fund offers three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements, a
distribution fee, and any expenses (including higher transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distribution
fee is paid.

During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the Securities Act of 1933.

INVESTMENTS BY MAIL

A Shareholder Investment Account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of Fund shares next computed
following receipt of payment by ACCESS. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.

In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.

CUMULATIVE PURCHASE DISCOUNT

The reduced sales charges reflected in the sales charge table as shown in
the Prospectus under "Sales Charge Table" apply to purchases of Class A shares
of the Fund where the aggregate investment is $50,000 or more. For purposes of
determining eligibility for volume discounts, spouses and their minor children
are treated as a single purchaser, as is a trustee or other fiduciary purchasing
for a single fiduciary account. An

17
<PAGE> 43

aggregate investment includes all shares of the Fund and all shares of certain
other participating American Capital mutual funds described in the Prospectus
(the "Participating Funds"), which have been previously purchased and are still
owned, plus the shares being purchased. The current offering price is used to
determine the value of all such shares. If, for example, an investor has
previously purchased and still holds Class A shares of the Fund and shares of
another Participating Fund having a current offering price of $25,000 and that
person purchases $30,000 of additional Class A shares of the Fund, the charge
applicable to the $30,000 purchase would be 4.75% of the offering price. The
same reduction is applicable to purchases under a Letter of Intent as described
in the next paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN
ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE
BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN
SUCH AN ORDER IS PLACED BY MAIL. The reduced sales charge will not be applied if
such notification is not furnished at the time of the order. The reduced sales
charge will also not be applied should a review of the records of the
Distributor or the shareholder service agent fail to confirm the representations
concerning the investor's holdings.

LETTER OF INTENT

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

VOLUME DISCOUNTS

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

CONTINGENT DEFERRED SALES CHARGE -- CLASS A

For investments of $1,000,000 or more of Class A shares of the Fund
("Qualified Purchaser"), the front-end sales charge will be waived and a
contingent deferred sales charge ("CDSC -- Class A") of one percent is imposed
in the event of certain redemptions within one year of the purchase. If a
CDSC -- Class A is imposed upon redemption, the amount of the CDSC -- Class A
will be equal to the lesser of a specified percentage of the net asset value of
the shares at the time of purchase, or the same or lower percentage of the net
asset value of the shares at the time of redemption.

The CDSC -- Class A will only be imposed if a Qualified Purchaser redeems
an amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the period of two years prior to the redemption. The CDSC --

18
<PAGE> 44

Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., in retirement plans qualified under Section 401(a) of the Code
and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such payments include, but are not limited to death, disability,
retirement, or separation from service. No CDSC -- Class A will be imposed on
exchanges between funds. For purposes of the CDSC -- Class A, when shares of one
fund are exchanged for shares of another fund, the purchase date for the shares
of the fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.

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

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

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

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

(a) Redemption Upon Disability or Death

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

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

(b) Redemption in Connection with Certain Distributions from Retirement
Plans

The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of American Capital
Funds; in such event, as described below, the Fund will "tack" the period for
which the original shares were held onto the holding period of the shares
acquired in the transfer or rollover for purposes of determining what, if any,
CDSC -- Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge will be waived on any
redemption which results from the return of an excess contribution pursuant to
Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or disability
of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition,
the charge will be waived on any minimum distribution required to be distributed
in accordance with Code Section 401(a)(9).

19
<PAGE> 45

The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.

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

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

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

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

(e) Redemption by Adviser

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

REDEMPTION OF SHARES

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

EXCHANGE PRIVILEGE

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

By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. ACCESS' records of such instructions are
binding. 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

20
<PAGE> 46

and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed.

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

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

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

DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES

The Fund's policy is to distribute substantially all of its taxable net
investment income at least annually to shareholders of Class A, Class B and
Class C shares. The per share dividends on Class B and Class C shares will be
lower than the per share dividends on Class A shares as a result of the
distribution fees and higher transfer agency fees applicable to the Class B and
Class C shares. Any taxable net realized capital gains for each class are
distributed annually. Taxable net realized capital gains are the excess, if any,
of the Fund's total profits on the sale of securities during the year over its
total losses on the sale of securities, including capital losses carried forward
from prior years in accordance with the tax laws. Such capital gains, if any,
are distributed at least once a year. All income dividends and capital gains
distributions are reinvested in shares of the Fund at net asset value without
sales charge on the record date, except that any shareholder may otherwise
instruct ACCESS in writing and receive cash. Shareholders are informed as to the
sources of distributions at the time of payment.

The Fund expects to qualify as a regulated investment company ("RIC") under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders and meet certain diversification and other requirements. By
qualifying as a RIC, the Fund is not subject to federal income taxes to the
extent it distributes its taxable net investment income and taxable net realized
capital gains. If for any taxable year the Fund does not qualify for the special
tax treatment afforded RICs, all of its taxable income, including any net
realized capital gains, would be subject to tax at regular corporate rates
(without any deduction for distributions to shareholders).

The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable (net
investment) income for the twelve months ended December 31 plus 98% of its
capital gains net income for the twelve months ended October 31 of such calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax. The per share dividends on Class B and Class C shares will be
lower than the per share dividend on Class A shares as a result of the
distribution fee and higher transfer agency fees applicable to the Class B and
Class C shares

Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. To the extent
determined each year, a portion of dividends paid from net investment income
qualifies in the case of corporations, for the 70% dividends received deduction.
To quality for the dividends received deduction, a corporate shareholder must
hold the shares on which the dividend is paid for more than 45 days.

21
<PAGE> 47

Dividends and distributions declared payable to shareholders of record
after September 30 of any calendar year and paid before February 1 of the
following year, are considered taxable income to shareholders on the record date
even though paid in the next calendar year.

Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such distributions and distributions from short-term capital gains are
not eligible for the dividends received deduction referred to above. Any loss on
the sale of Fund shares held for less than six months is treated as a long-term
capital loss to the extent of any long-term capital gain distribution paid on
such shares, subject to an exception for losses incurred under certain
Systematic Withdrawal Plans. All dividends and distributions are taxable to the
shareholder whether or not reinvested in shares. Shareholders are notified
annually by the Fund as to the federal tax status of dividends and distributions
paid by the Fund unless such amount is less than ten dollars, in which case no
notice is provided.

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

Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.

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

Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.

BACK-UP WITHHOLDING

The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "Back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Code includes special rules applicable to certain listed options
(excluding equity options as defined in the Code), futures contracts and options
on futures contracts which the Fund may write, purchase or sell. Such options
and contracts are classified as Section 1256 contracts under the Code. The
character of gain or loss resulting from the sale, disposition, closing out,
expiration or other termination of Section 1256 contracts is generally treated
as long-term capital gain or loss to the extent of 60% thereof and short-term
capital gain or loss to the extent of 40% thereof ("60/40 gain or loss"). Such
contracts, when held by the Fund at the end of a fiscal year, generally are
required to be treated as sold at market value on the last day of such fiscal
year for Federal income tax purposes ("marked-to-market"). Over-the-counter
options are not classified as Section 1256 contracts and are not subject to the
marked-to-market rule or to 60/40 gain or loss treatment. Any gains or losses
recognized by the Fund from transactions in over-the-counter options generally
constitute

22
<PAGE> 48

short-term capital gains or losses. If over-the-counter call options written, or
over- the-counter put options purchased, by the Fund are exercised, the gain or
loss realized on the sale of the underlying securities may be either short-term
or long-term, depending on the holding period of the securities. In determining
the amount of gain or loss, the sales proceeds are reduced by the premium paid
for over-the-counter puts or increased by the premium received for
over-the-counter calls.

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

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

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

PRIOR PERFORMANCE INFORMATION

The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for the one-year, five-year, and
ten-year periods ended June 30, 1994, was %, % and %, respectively. The
average annual total return (computed in the manner described in the Prospectus)
for Class B shares of the Fund for the one-year and the two years and half month
periods (the initial offering of Class B shares) ended June 30, 1994, was %
and %, respectively. The aggregate total return (computed in the manner
described in the Prospectus) for Class C shares of the Fund from July 20, 1993
(the initial offering of Class C shares) to June 30, 1994 was %. These
results are based on historical earnings and asset value fluctuations and are
not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in the Fund's investment practices. Future results will be
affected by changes in the general level of prices of securities available for
purchase and sale by the Fund. The past one-year, five-year, and ten-year
periods have been ones of rising common stock prices, subject to interim
fluctuations.

Total return is computed separately for Class A, Class B and Class C
shares.

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

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.

OTHER INFORMATION

VOTING RIGHTS -- When matters are submitted for a shareholder vote, each
shareholder is entitled to one vote for each share owned. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election directors can elect 100% of the directors if
they choose to do so, and, in such 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 or persons to the Board of Directors.

23
<PAGE> 49

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

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

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

FINANCIAL STATEMENTS

The attached financial statements in the form in which they appear in the
Annual and Semiannual Reports to Shareholders, including the related report of
independent accountants on the December 31, 1993 financial statements, are
hereby included in the Statement of Additional Information.

The following information is not included in the Annual or Semiannual
Reports. This example assumes a purchase of Class A shares of the Fund
aggregating less than $50,000 subject to the schedule of sales charges set forth
in the Prospectus at a price based upon the net asset value of Class A shares of
the Fund on December 31, 1993.

<TABLE>
<CAPTION>
DECEMBER 31, 1993 JUNE 30, 1994
----------------- -------------
<S> <C> <C>
Net Asset Value Per Class A Share.......................... $12.23 $11.54
Class A Per Share Sales Charge -- 5.75% of offering price
(6.10% of net asset value per share)..................... $ .75 $ .70
------- ------
Class A Per Share Offering Price to the Public............. $12.98 $12.24
</TABLE>

24
<PAGE> 50
INVESTMENT PORTFOLIO

December 31, 1994

<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 92.8%

CONSUMER DISTRIBUTION 9.4%

140,000 American Stores Co. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,762,500
20,000 Dayton Hudson Corp. . . . . . . . . . . . . . . . . . . . . . . . . 1,415,000
90,000 Dillard Department Stores, Inc. . . . . . . . . . . . . . . . . . . 2,407,500
240,000 Dollar General Corp. . . . . . . . . . . . . . . . . . . . . . . . 7,200,000
*270,000 Eckerd Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,066,250
*210,000 Federated Department Stores, Inc. . . . . . . . . . . . . . . . . . 4,042,500
95,000 Gap, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,897,500
*180,000 Kroger Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,342,500
120,000 Limited, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,175,000
*105,000 Michael's Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . 3,648,750
*90,000 Nine West Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2,553,750
55,000 Nordstrom, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,310,000
*40,000 Officemax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,060,000
160,000 Premark International, Inc. . . . . . . . . . . . . . . . . . . . . 7,160,000
*85,000 Proffitts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,891,250
*210,000 Safeway, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,693,750
95,000 Talbots, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,968,750
100,000 Walgreen Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,375,000
520,000 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . 11,050,000
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . 80,020,000
------------
CONSUMER DURABLES 1.3%

100,000 Callaway Golf Co. . . . . . . . . . . . . . . . . . . . . . . . . . 3,312,500
140,000 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,920,000
150,000 Harley Davidson, Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,200,000
------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . . . 11,432,500
------------
CONSUMER NON-DURABLES 10.7%

100,000 Anheuser-Busch Companies, Inc. . . . . . . . . . . . . . . . . . . . 5,087,500
710,000 Archer Daniels Midland Co. . . . . . . . . . . . . . . . . . . . . 14,643,750
65,000 Campbell Soup Co. . . . . . . . . . . . . . . . . . . . . . . . . . 2,868,125
60,000 Clorox Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,532,500
85,000 Colgate-Palmolive Co. . . . . . . . . . . . . . . . . . . . . . . . 5,386,875
150,000 ConAgra, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,687,500
50,000 CPC International, Inc. . . . . . . . . . . . . . . . . . . . . . . 2,662,500
*325,000 Dr Pepper/Seven-Up Companies, Inc. . . . . . . . . . . . . . . . . 8,328,125
80,000 IBP, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,420,000
*100,000 Nautica Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . . 3,025,000
75,000 Pepsico, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,718,750
195,000 Philip Morris Companies, Inc. . . . . . . . . . . . . . . . . . . . 11,212,500
120,000 Procter & Gamble Co. . . . . . . . . . . . . . . . . . . . . . . . 7,440,000
*165,000 Ralcorp Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . 3,671,250
70,000 Reebok International, Ltd. . . . . . . . . . . . . . . . . . . . . 2,765,000
700,000 RJR Nabisco Holdings Corp. . . . . . . . . . . . . . . . . . . . . 3,850,000
105,000 Sara Lee Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,651,250
255,000 Whitman Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,398,750
------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . . . 91,349,375
------------
</TABLE>

F-1
<PAGE> 51
INVESTMENT PORTFOLIO, Continued

<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES 6.0%

30,000 Capital Cities ABC, Inc. . . . . . . . . . . . . . . . . . . . . . . $ 2,557,500
*175,000 Hospitality Franchise Systems, Inc. . . . . . . . . . . . . . . . . 4,637,500
*300,000 Host Marriott Corp. . . . . . . . . . . . . . . . . . . . . . . . . 2,887,500
200,000 Marriott International, Inc. . . . . . . . . . . . . . . . . . . . 5,625,000
220,000 Mirage Resorts, Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,510,000
180,000 Omnicom Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,315,000
500,000 Service Corp. International . . . . . . . . . . . . . . . . . . . . 13,875,000
100,000 Time Warner, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 3,512,500
95,000 Walt Disney Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,381,875
------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . 51,301,875
------------
ENERGY 5.5%

110,000 Amoco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,503,750
100,000 Apache Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000
80,000 Ashland Oil, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 2,760,000
60,000 Atlantic Richfield Co. . . . . . . . . . . . . . . . . . . . . . . 6,105,000
140,000 Baker Hughes, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 2,555,000
45,000 British Petroleum Co., PLC, ADR . . . . . . . . . . . . . . . . . . 3,594,375
140,000 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,505,000
100,000 Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,312,500
105,000 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,846,250
*175,000 Smith International, Inc. . . . . . . . . . . . . . . . . . . . . . 2,187,500
------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,869,375
------------
FINANCE 7.4%

100,000 American International Group, Inc. . . . . . . . . . . . . . . . . 9,800,000
55,000 BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 2,172,500
55,000 Baybanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,901,250
140,000 Citicorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,792,500
90,000 Crestar Financial Corp. . . . . . . . . . . . . . . . . . . . . . . 3,386,250
130,000 Federal Home Loan Mortgage Corp. . . . . . . . . . . . . . . . . . 6,565,000
95,000 Federal National Mortgage Association . . . . . . . . . . . . . . . 6,923,125
75,000 First Chicago Corp. . . . . . . . . . . . . . . . . . . . . . . . . 3,581,250
50,000 First Interstate Bancorp . . . . . . . . . . . . . . . . . . . . . . 3,381,250
30,000 Green Tree Financial Corp. . . . . . . . . . . . . . . . . . . . . 911,250
110,000 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,915,000
85,000 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . . . . . 3,803,750
30,000 Wells Fargo & Co. . . . . . . . . . . . . . . . . . . . . . . . . . 4,350,000
230,000 West One Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . 6,095,000
------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,578,125
------------
HEALTH CARE 14.8%

100,000 Abbott Laboratories . . . . . . . . . . . . . . . . . . . . . . . . 3,262,500
95,000 American Home Products Corp. . . . . . . . . . . . . . . . . . . . 5,961,250
*115,000 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,785,000
140,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . . 3,955,000
150,000 Columbia/HCA Healthcare Corp. . . . . . . . . . . . . . . . . . . . 5,475,000
*405,000 Community Health Systems, Inc. . . . . . . . . . . . . . . . . . . 11,036,250
*125,000 Elan Corp., PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . 4,453,125
*83,000 Genentech, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,766,125
115,000 Healthcare Compare Corp. . . . . . . . . . . . . . . . . . . . . . 3,924,375
*175,000 Healthcare & Retirement Corp. . . . . . . . . . . . . . . . . . . . 5,271,875
*200,000 Health Management Association, Inc., Class A . . . . . . . . . . . 5,000,000
</TABLE>

F-2
<PAGE> 52
INVESTMENT PORTFOLIO, Continued

<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE - Continued

*130,000 Horizon Healthcare Corp. . . . . . . . . . . . . . . . . . . . . . $ 3,640,000
124,000 Integrated Health Services, Inc. . . . . . . . . . . . . . . . . . 4,898,000
55,000 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . 3,011,250
145,000 Lilly (Eli) & Co. . . . . . . . . . . . . . . . . . . . . . . . . . 9,515,625
*220,000 Lincare Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . 6,380,000
170,000 Merck & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 6,481,250
280,000 Mylan Labs, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 7,560,000
*75,000 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,475,000
125,000 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . . 9,250,000
*240,000 Sun Healthcare Group . . . . . . . . . . . . . . . . . . . . . . . . 6,090,000
60,000 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . 4,620,000
*110,000 Watsons Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . 2,887,500
-------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . 125,699,125
-------------
PRODUCER MANUFACTURING 6.0%

120,000 Allied-Signal, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 4,080,000
275,000 Browning Ferris Industries, Inc. . . . . . . . . . . . . . . . . . 7,803,125
120,000 Caterpillar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 6,615,000
80,000 General Electric Corp. . . . . . . . . . . . . . . . . . . . . . . 4,080,000
130,000 Greenfield Industries, Inc. . . . . . . . . . . . . . . . . . . . . 3,120,000
100,000 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . . . . . 4,375,000
250,000 Philips N.V., ADR . . . . . . . . . . . . . . . . . . . . . . . . . 7,343,750
*125,000 Thermo Fibertek, Inc. . . . . . . . . . . . . . . . . . . . . . . . 1,984,375
*100,000 Varity Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,625,000
300,000 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . 7,875,000
-------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . 50,901,250
-------------
RAW MATERIALS/PROCESSING INDUSTRIES 6.6%

*135,000 AK Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,151,250
20,000 Aluminum Co. of America . . . . . . . . . . . . . . . . . . . . . . 1,732,500
265,000 American Barrick Resource Corp. . . . . . . . . . . . . . . . . . . 5,896,250
338,800 Battle Mountain Gold Co. . . . . . . . . . . . . . . . . . . . . . 3,726,800
75,000 Birmingham Steel Corp. . . . . . . . . . . . . . . . . . . . . . . 1,500,000
90,000 Bowater, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,396,250
55,000 DuPont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . . 3,093,750
25,000 Georgia Pacific Corp. . . . . . . . . . . . . . . . . . . . . . . . 1,787,500
25,000 Hercules, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,884,375
60,000 International Paper Co. . . . . . . . . . . . . . . . . . . . . . . 4,522,500
35,000 Lyondell Petrochemical Co. . . . . . . . . . . . . . . . . . . . . 905,625
35,000 Mead Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,701,875
23,700 Newmont Gold Co. . . . . . . . . . . . . . . . . . . . . . . . . . 844,313
270,000 Placer Dome, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 5,872,500
410,000 Praxair, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,405,000
65,000 Scott Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,493,125
40,000 Williamette Industries, Inc. . . . . . . . . . . . . . . . . . . . 1,900,000
-------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . 55,813,613
-------------
TECHNOLOGY 21.2%

35,000 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 1,041,250
140,000 Apple Computer, Inc. . . . . . . . . . . . . . . . . . . . . . . . 5,460,000
*135,000 Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . 5,703,750
</TABLE>

F-3
<PAGE> 53
INVESTMENT PORTFOLIO, Continued

<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY - Continued

*75,000 Atmel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,512,500
210,000 BMC Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 11,943,750
*80,000 Cabletron Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . 3,720,000
*165,000 Cadence Design Systems, Inc. . . . . . . . . . . . . . . . . . . . 3,403,125
*40,000 Chipcom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
*180,000 Cisco Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 6,322,500
*205,000 Compaq Computer Corp. . . . . . . . . . . . . . . . . . . . . . . . 8,097,500
110,000 Computer Association International, Inc. . . . . . . . . . . . . . . 5,335,000
*130,000 Compuware Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,680,000
*200,000 DSC Communications Corp. . . . . . . . . . . . . . . . . . . . . . 7,175,000
*200,000 Exabyte Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,275,000
*150,000 Filenet Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,050,000
*125,000 FTP Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 3,953,125
*320,000 General Instrument Corp. . . . . . . . . . . . . . . . . . . . . . 9,600,000
30,000 Hewlett Packard Co. . . . . . . . . . . . . . . . . . . . . . . . . 2,996,250
*200,000 Integrated Device Technology, Inc. . . . . . . . . . . . . . . . . . 5,900,000
65,000 Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,151,875
135,000 International Business Machines Corp. . . . . . . . . . . . . . . . 9,922,500
*50,000 KLA Instruments Corp. . . . . . . . . . . . . . . . . . . . . . . . 2,450,000
60,000 Linear Technology Corp. . . . . . . . . . . . . . . . . . . . . . . 2,970,000
*165,000 LSI Logic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,661,875
50,000 Micron Technology, Inc. . . . . . . . . . . . . . . . . . . . . . . 2,206,250
45,000 Motorola, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,604,375
40,000 Netmanage, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,620,000
80,000 Picturetel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 1,920,000
*200,000 Read-Rite Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,712,500
*130,000 Seagate Technology . . . . . . . . . . . . . . . . . . . . . . . . 3,120,000
*175,000 Sequent Computer Systems, Inc. . . . . . . . . . . . . . . . . . . 3,456,250
*105,000 Silicon Graphics, Inc. . . . . . . . . . . . . . . . . . . . . . . 3,241,875
*115,000 Stratus Computer, Inc. . . . . . . . . . . . . . . . . . . . . . . 4,370,000
*230,000 Sun Microsystems, Inc. . . . . . . . . . . . . . . . . . . . . . . 8,165,000
*200,000 Symantec Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000
*40,000 Tellabs, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,230,000
*130,000 Teradyne, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,403,750
45,000 Texas Instruments, Inc. . . . . . . . . . . . . . . . . . . . . . . 3,369,375
*55,000 Wall Data, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,186,250
40,000 Watkins Johnson Co. . . . . . . . . . . . . . . . . . . . . . . . . 1,190,000
*95,000 3Com Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,898,437
-------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . 180,519,062
-------------
TRANSPORTATION 0.8%

*40,000 Federal Express Corp. . . . . . . . . . . . . . . . . . . . . . . . 2,410,000
75,000 Illinois Central Corp. . . . . . . . . . . . . . . . . . . . . . . 2,306,250
90,000 Pittston Co. Services Group . . . . . . . . . . . . . . . . . . . . 2,385,000
-------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . . 7,101,250
-------------
UTILITIES 3.1%

*120,000 ALC Communications Corp. . . . . . . . . . . . . . . . . . . . . . 3,735,000
*25,000 Cellular Communications, Inc., Class A . . . . . . . . . . . . . . . 1,337,500
125,000 FPL Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,390,625
145,000 NIPSCO Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . 4,313,750
</TABLE>

F-4
<PAGE> 54
INVESTMENT PORTFOLIO, Continued

<TABLE>
<CAPTION>
Number Market
of Shares Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - Continued

180,000 Pacificorp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,262,500
*25,000 PT Indostat, ADS . . . . . . . . . . . . . . . . . . . . . . . . . . 893,750
175,000 Public Service Co. of Colorado . . . . . . . . . . . . . . . . . . . 5,140,625
*250,000 Public Service Co. of New Mexico . . . . . . . . . . . . . . . . . . 3,250,000
--------------

TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 26,323,750
--------------

TOTAL COMMON STOCK (COST $741,428,085) . . . . . . . . . . . . . . . 789,909,300
--------------

Convertible Preferred Stock 1.3%
*200,000 Cellular Communications, Inc. (Cost $6,587,298) . . . . . . . . . . . 10,700,000
--------------

Principal
Amount Short-Term Investments 8.4%
- ------------------
$ 8,000,000 Federal Home Loan Mortgage Corp., 5.88%, 1/31/95 . . . . . . . . . . 7,959,700
Federal National Mortgage Association
33,000,000 5.85%, 2/8/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,792,650
**15,000,000 5.93%, 1/5/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,987,688
5,520,000 Repurchase Agreement with Lehman Government Securities, Inc.
dated 12/30/94, 5.35%, due 1/3/95 (Collateralized
by U.S. Government obligations in a pooled cash
account) repurchase proceeds $5,523,281 . . . . . . . . . . . . . . 5,520,000
**10,000,000 United States Treasury Bill, 4.95%, 1/12/95 . . . . . . . . . . . . . 9,983,700
--------------

TOTAL SHORT-TERM INVESTMENTS (COST $71,243,738) . . . . . . . . . . 71,243,738

TOTAL INVESTMENTS (Cost $819,259,121) 102.5% . . . . . . . . . . . . 871,853,038
Other assets and liabilities, net (2.5%) . . . . . . . . . . . . . . (21,058,622)
--------------

NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . $ 850,794,416
==============
</TABLE>

* Non-income producing security.
** Securities with a market value of approximately $19.7 million were
maintained in a segregated account and placed as collateral for
futures contracts (Note 1B).

See Notes to Financial Statements.

F-5
<PAGE> 55
STATEMENT OF ASSETS AND LIABILITIES

December 31, 1994

<TABLE>
<S> <C>
ASSETS

Investments, at market value (Cost $819,259,121) . . . . . . . . . . . . . . . . . $ 871,853,038
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . 13,046,404
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . 2,091,929
Dividends and interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . 903,980
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,672
------------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 887,903,023
------------------

LIABILITIES

Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . 30,851,336
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,257,455
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . 1,608,637
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479,451
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,283
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . . . . . . 232,000
Due to broker-variation margin . . . . . . . . . . . . . . . . . . . . . . . . . . 185,125
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,320
------------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,108,607
------------------

NET ASSETS, equivalent to $11.43 per share for Class A shares,
$11.37 per share for Class B shares and $11.42 per share for
Class C shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 850,794,416
==================

NET ASSETS WERE COMPRISED OF:

Capital stock, at par; 65,606,367 Class A, 8,235,391 Class B and
649,445 Class C shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . $ 74,491,203
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717,308,313
Undistributed net realized gain on securities . . . . . . . . . . . . . . . . . . . 6,212,797
Net unrealized appreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,593,917
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,123
Accumulated net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . (86,937)
------------------
NET ASSETS at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 850,794,416
==================
</TABLE>

See Notes to Financial Statements.

F-6
<PAGE> 56
STATEMENT OF OPERATIONS

Year Ended December 31, 1994

<TABLE>
<S> <C>
INVESTMENT INCOME

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,533,221
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,354,394
-----------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,887,615
-----------------

EXPENSES

Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,227,519
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . . 2,423,997
Service fees-Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,366,149
Distribution and service fees-Class B . . . . . . . . . . . . . . . . . . . . . . . . 812,681
Distribution and service fees-Class C . . . . . . . . . . . . . . . . . . . . . . . . 58,590
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248,567
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,231
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,798
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,433
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,626
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,022
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,748
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,034
-----------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,593,395
-----------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,294,220
-----------------

REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES

Net realized gain (loss) on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,019,540
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (666,518)
Net unrealized appreciation (depreciation) of securities during the year
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,929,877)
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,155
-----------------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . . . (6,256,700)
-----------------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . . . $ (962,480)
=================
</TABLE>

See Notes to Financial Statements.

F-7
<PAGE> 57
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1994 1993
----------------- ------------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . $ 847,216,585 $ 757,859,810
----------------- ------------------

OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . 5,294,220 3,451,666
Net realized gain on securities . . . . . . . . . . . . . . 56,353,022 74,005,674
Net unrealized appreciation (depreciation)
of securities during the year . . . . . . . . . . . . . . . (62,609,722) 6,095,273
----------------- ------------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . . (962,480) 83,552,613
----------------- ------------------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . (5,421,487) (3,278,363)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . -- (12,497)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
----------------- ------------------
(5,421,487) (3,290,860)
----------------- ------------------

Net realized gain on securities
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . (42,823,112) (95,744,730)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . (5,142,630) (6,617,603)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . (417,302) (154,017)
----------------- ------------------
(48,383,044) (102,516,350)
----------------- ------------------

Total dividends and distributions . . . . . . . . . . . . . (53,804,531) (105,807,210)
----------------- ------------------

FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 1,071,449,681 642,316,525
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 87,294,376 75,563,479
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . 22,435,417 2,177,088
----------------- ------------------
1,181,179,474 720,057,092
----------------- ------------------

Proceeds from shares issued for dividends and
distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 42,222,983 87,642,926
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 4,813,913 6,227,140
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . 371,079 129,594
----------------- ------------------
47,407,975 93,999,660
----------------- ------------------

Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . (1,094,738,045) (667,670,800)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . (58,634,738) (34,633,064)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . (16,869,824) (141,516)
----------------- ------------------
(1,170,242,607) (702,445,380)
----------------- ------------------

Increase in net assets resulting from Fund
share transactions . . . . . . . . . . . . . . . . . . . . 58,344,842 111,611,372
----------------- ------------------

INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . 3,577,831 89,356,775
----------------- ------------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . $ 850,794,416 $ 847,216,585
================= ==================
</TABLE>

See Notes to Financial Statements.

F-8
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS

Note 1-Significant Accounting Policies

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

A. Investment Valuations

Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which
the last sale price is not available are valued at the mean between the
last reported bid and asked price.

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

B. Futures Contracts

Transactions in futures contracts are utilized in strategies to manage the
market risk of the Fund's investments by increasing or decreasing the
percentage of assets effectively invested. The purchase of a futures
contract increases the impact of changes in the market price of investments
on net asset value. There is a risk that the market movement of such
instruments may not be in the direction forecasted.

Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. A portion of these funds is held as collateral
in an account in the name of the broker. During the period the futures
contract is open, changes in the value of the contract ("variation margin")
are recognized by marking the contract to market on a daily basis. As
unrealized gains or losses are incurred, variation margin payments are
received from or made to the broker. Upon the closing or cash settlement of
a contract, gains or losses are realized. The cost of securities acquired
through delivery under a contract is adjusted by the unrealized gain or
loss on the contract.

C. Repurchase Agreements

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

D. Federal Income Taxes

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

F-9
<PAGE> 59
E. Investment Transactions and Related Investment Income

Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily.

F. Dividends and Distributions

Dividends and distributions to shareholders are recorded on the record
date. The Fund decreased capital surplus and accumulated net investment
loss and increased undistributed realized gain by $3,072,549, $241,023 and
$3,313,572, respectively, in order to reflect distributions of tax basis
earnings in accordance with the minimum distribution requirements of the
Internal Revenue Code. Such dividends or distributions may differ from
generally accepted accounting principles and may exceed financial statement
earnings. Net investment income, net realized gains, net assets and net
asset value per share were not affected by such reclassification.

Note 2-Management Fees and Other Transactions with Affiliates

The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.50% of the first $1 billion, .45% of the next $1 billion, .40% of the next $1
billion, and .35% of the amount in excess of $3 billion.

Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or subadvised by the Adviser.
For the year ended December 31, 1994, these charges included $16,492 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.

Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as shareholder service agent of the Fund. These services are
provided at cost plus a profit. For the year ended December 31, 1994, such fees
aggregated $2,104,575.

The Fund was advised that Van Kampen American Capital Distributors, Inc. (the
"Distributor"), and Advantage Capital Corporation (the "Retail Dealer"), both
affiliates of the Adviser, received $88,546 and $70,021, respectively, as their
portion of the commissions charged on sales of Fund shares during the year.

Under the Distribution Plans, each class of shares pays up to .25% per annum of
its average daily net assets to the Distributor for expenses and service fees
incurred. The Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average daily net assets to reimburse the Distributor
for its distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts
reimbursed to the Distributor by the Fund. At December 31, 1994, the
unreimbursed expenses incurred by the Distributor under the Class B and Class C
plans aggregated approximately $5.6 million and $87,000, respectively, and may
be carried forward and reimbursed through either the collection of the
contingent deferred sales charges from share redemptions or, subject to the
annual renewal of the plans, future Fund reimbursements of distribution fees.

During the year, the Fund paid brokerage commissions of $184,109 to companies
which are deemed affiliates of the Adviser's parent because it owns more than
5% of the companies' outstanding voting securities.

F-10
<PAGE> 60
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.

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

Note 3-Investment Activity

During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $1,394,508,056 and $1,358,862,138,
respectively.

For federal income tax purposes, the identified cost of investments owned at
December 31, 1994 was $820,316,403. Net unrealized appreciation of investments
aggregated $51,536,635, gross unrealized appreciation of investments aggregated
$71,451,509 and gross unrealized depreciation of investments aggregated
$19,914,874.

For federal income tax purposes, the net realized capital loss carryforward of
approximately $843,000 at December 31, 1994 may be utilized to offset current
or future capital gains until expiration in 1995.

At December 31, 1994, the Fund held 85 long Standard & Poor's 500 Index futures
contracts expiring in March 1995. The market value of such contracts was
$19,607,375, and the unrealized appreciation was $275,123.

Note 4-Director Compensation

Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $2,060 plus a fee of $50 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $770. During the year, such fees aggregated $23,846.

The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At December 31, 1994, the liability for the Plan aggregated
$86,937. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.

Note 5-Capital

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

F-11
<PAGE> 61
The Fund has 200 million of each class of shares of $1.00 par value capital
stock authorized. Transactions in shares of capital stock were as follows:

<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1994 1993
--------------- --------------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . 88,756,758 50,267,405
Class B . . . . . . . . . . . . . . . . . . . . . . . . . 7,241,495 5,927,750
Class C . . . . . . . . . . . . . . . . . . . . . . . . . 1,852,492 169,417
--------------- --------------
97,850,745 56,364,572
--------------- --------------

Shares issued for dividends and distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . 3,777,078 7,256,156
Class B . . . . . . . . . . . . . . . . . . . . . . . . . 432,428 519,744
Class C . . . . . . . . . . . . . . . . . . . . . . . . . 33,138 10,908
--------------- --------------
4,242,644 7,786,808
--------------- --------------

Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . (90,630,945) (52,081,586)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . (4,873,905) (2,707,611)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . (1,404,906) (11,604)
--------------- --------------
(96,909,756) (54,800,801)
--------------- --------------

Increase in shares outstanding . . . . . . . . . . . . . 5,183,633 9,350,579
=============== ==============
</TABLE>

F-12
<PAGE> 62
FINANCIAL HIGHLIGHTS

Selected data for a share of capital stock outstanding throughout each of the
periods indicated.

<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended December 31
------------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year . . . . . $12.23 $12.64 $13.83 $10.76 $11.52
------ ------ ------ ------ ------

INCOME FROM OPERATIONS
Investment income . . . . . . . . . . . . . . .21 .19 .27 .295 .35
Expenses . . . . . . . . . . . . . . . . . . (.13) (.13) (.135) (.125) (.11)
Net investment income . . . . . . . . . . . . .08 .06 .135 .17 .24
Net realized and unrealized gains
or losses on securities . . . . . . . . . . (.1225) 1.2525 .9325 3.9625 (.5475)
------ ------ ------ ------ ------
Total from investment operations . . . . . . (.0425) 1.3125 1.0675 4.1325 (.3075)
------ ------ ------ ------ ------

LESS DISTRIBUTIONS
Dividends from net investment income . . . . (.085) (.0575) (.145) (.1725) (.23)

Dividends from net realized gains
on securities . . . . . . . . . . . . . . . (.6725) (1.665) (2.1125) (.89) (.2225)
------ ------ ------ ------ ------
Total distributions . . . . . . . . . . . . . (.7575) (1.7225) (2.2575) (1.0625) (.4525)
------ ------ ------ ------ ------
Net asset value, end of year . . . . . . . . $11.43 $12.23 $12.64 $13.83 $10.76
====== ====== ====== ====== ======

TOTAL RETURN(1) . . . . . . . . . . . . . . . (.18%) 10.96% 8.39% 39.23% (2.87%)

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . . . $749.7 $778.9 $736.4 $713.1 $542.4
Average net assets (millions) . . . . . . . . $758.4 $759.0 $683.8 $625.8 $557.7

Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . . 1.05% .99% .99% .97% .94%
Net investment income . . . . . . . . . . . .71% .48% 1.00% 1.33% 2.13%

Portfolio turnover rate . . . . . . . . . . . 176% 196% 161% 103% 105%
</TABLE>

(1) Total return does not consider the effect of sales charges.

See Notes to Financial Statements.

F-13
<PAGE> 63
FINANCIAL HIGHLIGHTS, continued

Selected data for a share of capital stock outstanding throughout each of the
periods indicated.

<TABLE>
<CAPTION>
Class B(1) Class C(2)
--------------------------------- ------------------------------
Year July 20, 1993(3)
Year Ended December 31 Ended through
--------------------------------- December 31, December 31,
1994 1993 1992(2) 1994 1993
------ ------ ------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of year . . . . $12.19 $12.66 $13.82 $12.23 $12.66
------ ------ ------ ------ ------

INCOME FROM OPERATIONS
Investment income . . . . . . . . . . . . . .04 .16 .26 .06 .08
Expenses . . . . . . . . . . . . . . . . . (.04) (.20) (.245) (.06) (.11)
------ ------ ------ ------ ------

Net investment income (loss) . . . . . . . -- (.04) .015 -- (.03)
Net realized and unrealized gains or
losses on securities . . . . . . . . . . . (.1475) 1.24 .9675 (.1375) .765
------ ------ ------ ------ ------
Total from investment operations . . . . . (.1475) 1.20 .9825 (.1375) .735
------ ------ ------ ------ ------

LESS DISTRIBUTIONS
Dividends from net investment income . . . -- (.005) (.03) -- --
Dividends from net realized gains on
securities . . . . . . . . . . . . . . . . (.6725) (1.665) (2.1125) (.6725) (1.165)
------ ------ ------ ------ ------
Total distributions . . . . . . . . . . . . (.6725) (1.67) (2.1425) (.6725) (1.165)
------ ------ ------ ------ ------
Net asset value, end of year . . . . . . . $11.37 $12.19 $12.66 $11.42 $12.23
====== ====== ====== ====== ======

TOTAL RETURN(4) . . . . . . . . . . . . . . (1.07%) 10.00% 7.67% (.99%) 6.08%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . . $93.7 $66.2 $21.5 $7.4 $2.1
Average net assets (millions) . . . . . . . $81.3 $43.6 $8.3 $5.9 $0.8
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . 1.89% 1.81% 1.90% 1.90% 1.83%(5)
Net investment income (loss) . . . . . . . (.11%) (.37%) .12% (.12%) (.48%)(5)
Portfolio turnover rate . . . . . . . . . . 176% 196% 161% 176% 196%
</TABLE>

(1) Sales of Class B commenced December 20, 1991 at a net asset value of
$12.55 per share. At December 31, 1991, there were 763 Class B shares
outstanding with a per share net asset value of $13.82. The increase in
net asset value was due principally to unrealized appreciation. There were
no dividends or distributions to shareholders during the period. Other
financial highlights for the Class B shares for this short period are not
meaningful and therefore are not presented.

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

(3) Commencement of offering of sales.

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

(5) Annualized.

See Notes to Financial Statements.

F-14
<PAGE> 64
Report of Independent Accountants

To the Shareholders and Board of Directors of
American Capital Enterprise Fund, Inc.

In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
American Capital Enterprise Fund, Inc. at December 31, 1993, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the selected per share data and
ratios for each of the five years in the period then ended, in conformity with
generally accepted accounting principles. These financial statements and
selected per share data and ratios (thereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the fianncial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1993 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE

Houston, Texas
February 7, 1994

F-15