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AMERICAN CAPITAL RESERVE FUND, INC.
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2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
April 18, 1995
(as supplemented May 22, 1995)
American Capital Reserve Fund, Inc. (the "Fund") is a mutual fund seeking
protection of capital and high current income through investments in U.S. dollar
denominated money market securities.
INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. ALTHOUGH THE FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
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.
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AMERICAN CAPITAL RESERVE FUND, INC.
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CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICING AGENT:
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
INVESTMENT ADVISER:
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
DISTRIBUTOR:
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus Summary....... 3
Expense Synopsis......... 5
Financial Highlights..... 7
Multiple Pricing
System................. 8
Investment Objective and
Policies............... 10
Investment Practices and
Restrictions........... 13
The Fund and Its
Management............. 13
Determination of Net
Asset Value............ 14
Purchase of Shares....... 15
Distribution Plans....... 19
Shareholder Services..... 21
Redemption of Shares..... 25
Dividends and Taxes...... 28
Yield Information........ 30
Additional Information... 31
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or by the Distributor. This Prospectus does
not constitute an offering by the Distributor in any jurisdiction in which
such offering may not lawfully be made.
2
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PROSPECTUS SUMMARY
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SHARES OFFERED. Capital Stock.
MINIMUM PURCHASE. $500 minimum initial investment and $50 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
TYPE OF COMPANY. Diversified, open-end management investment company.
INVESTMENT OBJECTIVE. Protection of capital and high current income. There
is, however, no assurance that the Fund will be successful in achieving its
objective.
INVESTMENT POLICY. The Fund seeks to maintain a constant net asset value of
$1.00 per share by investing in a diversified portfolio of money market
instruments. It seeks high current income from these short-term investments to
the extent consistent with protection of capital.
RISK FACTORS. Investments in the Fund are neither insured nor guaranteed by
the U.S. Government. Although the Fund seeks to maintain a stable net asset
value of $1.00 per share there is no assurance that the Fund will be able to do
so.
INVESTMENT RESULTS. The investment results of the Fund during the past ten
years are shown in the table of "Financial Highlights." See also "Prior
Performance Information."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") has served as investment advisor to the Fund since 1974. The Adviser
serves as investment adviser to 47 investment company portfolios. See "The Fund
and Its Management."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").
MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Unless investors intend to exchange their Fund
shares for Class B shares or Class C shares of other American Capital funds,
they should purchase the Fund's Class A shares because there is no distribution
fee. Even investors who do intend to exchange their Fund shares for Class B or
Class C shares of other American Capital Funds may prefer to purchase Class A
shares of the Fund and then redeem those shares and use the proceeds to purchase
Class B or Class C shares of other American Capital funds. See "Multiple Pricing
System -- Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."
3
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CLASS A SHARES. These shares are offered at net asset value per share. The
Fund pays an annual service fee of up to 0.15% of its average daily net assets
attributable to such class of shares. See "Purchase of Shares -- Class A Shares"
and "Distribution Plans."
CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first 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 .90% 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 .90% 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 declared and paid daily. 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 and
Taxes."
4
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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>
<S> <C> <C> <C>
CLASS A SHARES CLASS B SHARES(F) CLASS C SHARES(F)
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SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales charge
imposed on purchases (as
a percentage of offering
price)................... None None None
Sales charge imposed on
dividend reinvestments... None None None
Deferred sales charge (as
a percentage of original
purchase price or
redemption proceeds,
whichever is lower)...... None 4% during the first 1% during the first
year, 4% during the year(a)
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(a)
Exchange fee(b)........ $5.00 $5.00 $5.00
ANNUAL FUND OPERATING
EXPENSES (as a percentage
of average net assets)
Management fees.......... .46% .46% .46%
Rule 12b-1 fees(c)....... .13% .90%(e) .90%(e)
Other expenses(d)........ .44% .44% .44%
Total fund operating
expenses............... 1.03% 1.80% 1.80%
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</TABLE>
(a) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- pages
17 and 18.
(b) Not charged in certain circumstances. See "Shareholder
Services -- Shareholder Services Applicable to All Classes -- Systematic
Exchange" -- page 24.
(c) Up to .15% for Class A shares and .90% for Class B and Class C shares. See
"Distribution Plans" -- page 19.
(d) See "The Fund and Its Management" -- page 13.
(e) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges otherwise permitted by NASD Rules.
(f) The operating expense information has been estimated based on the actual
operating results of the current class of shares for the most recent fiscal
year.
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<TABLE>
<CAPTION>
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CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
EXAMPLE: YEAR YEARS YEARS YEARS
1 3 5 10
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<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including, for Class B and Class C
shares, a contingent deferred
sales charge assuming (1) an
operating expense ratio of 1.03%
for Class A shares, 1.80% for
Class B shares and 1.80% for Class
C shares, (2) a 5% annual return
throughout the period and (3)
redemption at the end of the
period:
Class A......................... $11 $33 $ 57 $126
Class B......................... $61 $93 $120 $173**
Class C......................... $30 $60 $103 $212
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A......................... $11 $33 $ 57 $126
Class B......................... $19 $60 $103 $173**
Class C......................... $19 $60 $103 $212
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</TABLE>
** Based on conversion to Class A shares after six years.
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. Expenses for Class B and Class C shares are based on estimated
amounts for the current fiscal year. 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.
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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 LLP, independent accountants, whose report
thereon was unqualified. The information presented below for the six months
ended November 30, 1994 is unaudited. This information should be read in
conjunction with the related financial statements and notes thereto included in
the Statement of Additional Information. Selected per share data and ratios are
not present for Class B or Class C shares since no Class B or Class C shares
were outstanding during the periods presented below.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED MAY 31
NOVEMBER 30, -----------------------------------------------------------------------
1994 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period..... $1.00 $ 1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- ------- ------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................ .0234 .0329 .0353 .052 .0757 .0893 .0891 .0729
Expenses................................. (.0046) (.0100) (.0109) (.0105) (.0094) (.0092) (.0076) (.0078)
------- ------- ------- ------- ------- ------- --------- ---------
Net investment income.................... .0188 .0229 .0244 .0415 .0663 .0801 .0815 .0651
------- ------- ------- ------- ------- ------- --------- ---------
Net realized and unrealized gain on
securities............................. -- -- -- -- .0001 -- .000007 .000015
------- ------- ------- ------- ------- ------- --------- ---------
Total from investment operations......... .0188 .0229 .0244 .0415 .0664 .0801 .081507 .065115
------- ------- ------- ------- ------- ------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income..... (.0188) (.0229) (.0244) (.0415) (.0664) (.0801) (.0815) (.0651)
Distributions from net realized gain on
securities............................. -- -- -- -- -- -- (.000007) (.000015)
------- ------- ------- ------- ------- ------- --------- ---------
Total dividends and distributions........ (.0188) (.0229) (.0244) (.0415) (.0664) (.0801) (.081507) (.065115)
------- ------- ------- ------- ------- ------- --------- ---------
Net asset value, end of period........... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======= ======= ======= ======= ======= ======= ========= =========
TOTAL RETURN............................. 1.89% 2.32% 2.44% 4.20% 6.80% 8.33% 8.49% 6.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..... $518.3 $463.8 $279.3 $329.2 $402.3 $426.1 $474.2 $500.7
Ratios to average net assets
Expenses............................... .93%* 1.03% 1.09% 1.05% .94% .91% .76% .78%
Net investment income.................. 3.75%* 2.36% 2.44% 4.19% 6.68% 7.99% 8.19% 6.56%
<CAPTION>
1987 1986 1985
--------- ------- -------
<S> <<C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period..... $1.00 $1.00 $1.00
--------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................ .0647 .0802 .1005
Expenses................................. (.0092) (.0093) (.0087)
--------- ------- -------
Net investment income.................... .0555 .0709 .0918
--------- ------- -------
Net realized and unrealized gain on
securities............................. .000102 .0002 .0001
--------- ------- -------
Total from investment operations......... .055602 .0711 .0919
--------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income..... (.0556) (.0709) (.0919)
Distributions from net realized gain on
securities............................. (.000002) (.0002) (.0001)
--------- ------- -------
Total dividends and distributions........ (.055602) (.0711) (.0920)
--------- ------- -------
Net asset value, end of period........... $1.00 $1.00 $1.00
========= ======= =======
TOTAL RETURN............................. 5.71% 7.37% 9.64%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..... $377.8 $227.9 $228.0
Ratios to average net assets
Expenses............................... .92% .93% .88%
Net investment income.................. 5.60% 7.16% 9.30%
</TABLE>
---------------
* Annualized.
7
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MULTIPLE PRICING SYSTEM
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The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.15% of the Fund's
aggregate average daily net assets attributable to the Class A shares. 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
0.15% 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.
The ongoing distribution fee paid by Class B shares will cause such shares to
have a higher expense ratio and to pay lower dividends than those related to
Class A shares. See "Purchase of Shares -- Class B Shares." Class B shares will
automatically convert to Class A shares six years after the end of the calendar
month in which the shareholder's order to purchase was accepted. See "Conversion
Feature" below for discussion on applicability of 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 0.15% 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. The
ongoing distribution fee paid by Class C shares will cause such shares to have a
higher expense ratio and to pay lower dividends than those related to Class A
shares. See "Purchase of Shares -- Class C Shares." Class C shares will convert
automatically to Class A shares ten years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Conversion Feature"
below for discussion on applicability of 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 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
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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 or a private
letter ruling from the Internal Revenue Service 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 an opinion or ruling is no
longer available at the time such conversion is to occur that such conversion
does not constitute a taxable event. 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. Class B and Class C shares of the Fund are made
available primarily to allow investors to directly purchase Class B and Class C
shares and later exchange such shares directly into Class B and Class C shares
of the other Participating Funds listed in "Shareholder Services -- Shareholder
Services Applicable to All Classes -- Exchange Privilege." Investors purchasing
shares of the Fund without regard to the availability of exchanges should
purchase Class A shares because there is no distribution fee and, therefore,
Class A shares will have a higher yield than Class B and Class C shares.
Investors who wish to have the ability to exchange their shares for Class B or
Class C shares of other Participating Funds should consider purchasing the class
they ultimately intend to hold in that Participating Fund. Such investors should
also consider purchasing Class A shares of the Fund and then redeeming those
shares when they wish to invest in Class B shares or Class C shares of other
Participating Funds. Since Class A shares are not subject to an ongoing
distribution fee, purchasing Class A shares and then redeeming them to purchase
Class B or Class C shares of another Participating Fund is likely to result in a
higher return to the investor than purchasing Class B or Class C shares of the
Fund and then exchanging them for Class B or Class C shares of another
Participating Fund.
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GENERAL. The distribution expenses incurred by the Distributor in connection
with the sale of Class B and Class C shares will be reimbursed 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. Distribution expenses by the Distributor in connection with the sale
of Class A shares are not reimbursed by the Fund. 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 B and Class C shares. Sales personnel are not entitled to
receive compensation for selling Class A shares.
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
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
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The Fund seeks protection of capital and high current income through
investments in U.S. dollar denominated money market securities. These securities
may include obligations of the U.S. Government and its agencies, bank
obligations, commercial paper and repurchase agreements secured by such
obligations. Such securities are described below.
The Fund seeks to maintain a constant net asset value of $1.00 per share by
investing in a diversified portfolio of money market instruments with remaining
maturities of 13 months or less with a dollar-weighted average maturity of 90
days or less as defined in the rules of the SEC. It seeks high current income
from these short-term investments to the extent consistent with protection of
capital. Of course, there can be no guarantee that the Fund will achieve its
objective or be able at all times to maintain its net asset value per share at
$1.00. In addition, the daily dividend rate paid by the Fund may be expected to
fluctuate. The Fund uses the amortized cost method for valuing portfolio
securities purchased at a discount. See "Determination of Net Asset Value."
OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS AGENCIES. The Fund may invest in
obligations issued or guaranteed as to principal and interest by the U.S.
Government,
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its agencies and instrumentalities which are supported by any of the following:
(a) the full faith and credit of the U.S. Government, (b) the right of the
issuer to borrow an amount limited to a specific line of credit from the U.S.
Government, (c) discretionary authority of the U.S. Government agency or
instrumentality, or (d) the credit of the instrumentality. Such agencies or
instrumentalities include, but are not limited to, the Federal National Mortgage
Association, the Government National Mortgage Association, Federal Land Banks,
and the Farmer's Home Administration.
BANK OBLIGATIONS. The Fund may invest in certificates of deposit, time
deposits and bankers' acceptances issued by domestic banks, foreign branches or
subsidiaries of domestic banks, and domestic or foreign branches of foreign
banks which at the time of investment are rated in the two highest categories by
Standard & Poor's Corporation ("S&P") (A-1 and A-2) or by Moody's Investors
Service ("Moody's") (Prime-1 and Prime-2). The ratings of Moody's and S&P
represent their opinions of the quality of the bank obligations they undertake
to rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. The Fund's current policy is to limit investments
in bank obligations to obligations rated A-1 or Prime-1.
Certificates of deposit are certificates representing the obligation of a bank
to repay funds deposited with it for a specified period of time. Time deposits
are non-negotiable deposits maintained in a bank for a specified period of time
(in no event longer than seven days) at a stated interest rate. Time deposits
which may be held by the Fund will not benefit from insurance from the Federal
Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation. Bankers' acceptances are credit instruments evidencing the
obligation of a bank to pay a draft drawn on it by a customer. These instruments
reflect the obligation both of the bank and of the drawer to pay the face amount
of the instrument upon maturity.
The purchase of obligations of foreign banks may subject the Fund to
additional investment risks that are different in some respect from those
incurred in investing in obligations of domestic banks. Foreign banks and
foreign branches or subsidiaries of domestic banks are not necessarily subject
to the same or similar regulatory requirements that apply to domestic banks,
such as mandatory reserve requirements, loan limitations and accounting, audit
and financial record keeping requirements. In addition, less information may be
publicly available about a foreign bank or about a foreign branch of a domestic
bank. Because evidences of ownership of obligations of foreign branches or
subsidiaries of foreign banks usually are held outside the United States, the
Fund will be subject to additional risks which include possible adverse
political and economic developments, possible seizure or nationalization of
foreign deposits and possible adopting of governmental restrictions which might
adversely affect the payment of principal and interest on the foreign
obligations or might restrict the payment of principal and interest to investors
located outside the country of the issuer, whether from currency blockage or
otherwise. Income earned or received by
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the Fund from sources within foreign countries may be reduced by withholding and
other taxes imposed by such countries.
COMMERCIAL PAPER. The Fund may invest in short-term obligations of companies
which at the time of investment are (a) rated in the two highest categories by
S&P (A-1 and A-2) or by Moody's (Prime-1 and Prime-2), or (b) if not rated,
issued by a company which at the date of investment has any outstanding
long-term debt securities rated at least A by S&P or by Moody's.
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. (See Appendix in the Statement of Additional Information for an
explanation of these ratings.) The Fund's current policy is to limit investments
in commercial paper to obligations rated A-1 or Prime-1.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks (or a foreign branch or subsidiary thereof) which have a
short-term debt rating of high quality (in one of the two highest categories) by
either Moody's or S&P and with primary government securities dealers reporting
to the Federal Reserve Bank of New York. 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. No repurchase
agreement may exceed one year, and the Fund may not invest in repurchase
agreements maturing in more than seven days if such investment, together with
any other illiquid securities held by the Fund, exceeds 10% of the value of the
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, American Capital Asset
Management, Inc. (the "Adviser") may aggregate the cash that substantially all
of the funds advised or subadvised by the Adviser would otherwise invest
separately into a joint account. The cash in the joint account is then invested
and the funds that contributed to the joint account share pro rata in the net
revenue generated. The Adviser believes that the joint account produces greater
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Fund that 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.
12
<PAGE> 13
------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RESTRICTIONS
------------------------------------------------------------------------------
BROKERAGE PRACTICES. The Adviser is responsible for the placement of orders
for the purchase and sale of portfolio securities for the Fund. Most
transactions made by the Fund are principal transactions at net prices which
incur little or no brokerage costs. Dealers are selected on the basis of their
professional capability for the type of transaction and the value and quality of
execution services rendered on a continuing basis. The Adviser is authorized to
place portfolio transactions with brokerage firms participating in the
distribution of shares of the Fund and other American Capital mutual funds if it
reasonably believes that the quality of the execution and the commission are
comparable to that available from other qualified firms.
No commissions were paid by the Fund during the past three fiscal years.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without the approval of
a majority (as defined in the 1940 Act) vote of the Fund's shareholders. The
Fund may not borrow money, except from banks for temporary or emergency
purposes, such as to accommodate heavy redemption requests, and then in amounts
not exceeding 10% of the value of the Fund's total net assets. The Fund may not
mortgage, pledge, or hypothecate any assets except in connection with any such
borrowing and in amounts not exceeding the lesser of the dollar amount borrowed
or five percent of the value of the Fund's assets at the time of such borrowing.
The Fund may not lend money, except through the purchase or holding of the types
of debt securities in which the Fund may invest. Other investment restrictions
are described in the Statement of Additional Information. Except to the extent
governed by such restrictions, the investment policies described under
"Investment Objective and Policies" can be changed by the Board of Directors.
------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company,
incorporated in Maryland on March 28, 1974. A mutual fund provides, for those
who have similar investment goals, a practical and convenient way to invest in a
diversified list of securities by combining their resources in an effort to
achieve such goals.
A board of eight directors has the responsibility for overseeing the affairs
of the Fund. The Adviser 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. As of March 31, 1995, the Adviser provides investment
advice to 47 investment company portfolios with total net assets of
approximately $16.4 billion.
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<PAGE> 14
The Adviser and the Distributor are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.
Mr. Don G. Powell is President and Director of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chief Executive Officer and
Chairman of the Distributor. Most other officers of the Fund are also officers
and/or directors of the Adviser.
The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated December 20, 1994 (the "Advisory
Agreement"), the Fund pays the Adviser a monthly fee computed on average daily
net assets of the Fund at the annual rate of 0.50% of the first $150 million of
net assets; 0.45% on the next $100 million of net assets; 0.40% on the next $100
million of net assets; and 0.35% on net assets over $350 million. Under the
Advisory Agreement, the Fund also reimburses the Adviser for the cost of the
Fund's accounting services, which include maintaining its financial books and
records and calculating its daily net asset value. Operating expenses paid by
the Fund include shareholder service agency fees, service fees, distribution
fees, custodial fees, legal and accounting fees, the costs of reports and
proxies to shareholders, directors' fees, and all other business expenses not
specifically assumed by the Adviser. Advisory (management) fees and total
operating expense ratios are shown under the caption "Expense Synopsis" herein.
The Adviser may utilize at its own expense credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp. (formerly Van Kampen Merritt Investment Advisory
Corp.).
------------------------------------------------------------------------------
DETERMINATION OF NET ASSET VALUE
------------------------------------------------------------------------------
Purchases of shares are priced at the next determined net asset value after a
purchase order becomes effective which is upon receipt by the Fund of federal
funds. Net asset value per share for each class is determined once daily as of
the close of
14
<PAGE> 15
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.,
New York time) each day the Exchange is open. Net asset value per share for each
class is determined by adding the total market value of all portfolio securities
owned by the Fund, cash and other assets, including accrued interest and
dividends attributable to such class. All liabilities attributable to such
class, including accrued expenses, are subtracted. The resulting amount is
divided by the total number of shares of the class outstanding to arrive at the
net asset value of each share of the class. The Fund's assets are valued on the
basis of amortized cost, which involves valuing a portfolio security at its cost
and, thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the security. While this method provides for certainty in valuation it
may result in periods in which value as determined by amortized cost is higher
or lower than the price the Fund would receive if it sold the security.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares.
------------------------------------------------------------------------------
PURCHASE OF SHARES
------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public. Class A shares
are sold at net asset value, without sales charge; Class B and Class C shares
are sold at net asset value, without sales charge, and are subject to a
contingent deferred sales charge upon certain redemptions. See "Multiple Pricing
System" for a discussion of factors to consider in selecting which class of
shares to purchase. Contact the Service Department at (800) 421-5666 for further
information and appropriate forms.
Shares of the Fund are sold in a continuous offering and may be purchased on
any business day through the shareholder service agent, ACCESS Investor
Services, Inc. ("ACCESS"). When purchasing shares of this Fund, investors must
specify whether the purchase is Class A, Class B or Class C. All orders and
drafts become effective when the wire or check payment is converted into federal
funds. A check order or draft is normally converted into federal funds on the
second business day following receipt of payment by ACCESS. These payments
should be sent to ACCESS, P.O. Box 419319, Kansas City, Missouri 64141-6319.
When payment is by wire transfer of federal funds, such order becomes effective
upon receipt provided that prior notice has been given as described below; other
bank wire payments are normally converted
15
<PAGE> 16
into federal funds on the day following receipt. The Fund and the Distributor
reserve the right to refuse any order for the purchase of shares.
Initial investments must be at least $500, however, this minimum may be waived
by the Distributor for plans involving periodic investments. Subsequent
investments must be at least $50.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges and certain different shareholder service options available. See
"Distribution Plans" and "Shareholder Services -- Exchange Privilege." The net
income attributable to Class B and Class C shares and the dividends payable on
Class B and Class C shares will be reduced by the amount of the distribution fee
and incremental expenses associated with such distribution fees. Sales personnel
of broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A, Class B or Class C shares.
INITIAL INVESTMENT BY BANK WIRE. To open an account by wire an investor should
telephone ACCESS at (800) 421-6714 (Alaska and Hawaii residents should call
collect at (816) 283-3979), and provide the account registration, the address,
tax identification number, the amount being wired and the name of the wiring
bank. ACCESS furnishes the investor with an account number. The investor's bank
should wire the specified amount along with the account number and registration
to State Street Bank and Trust Company ("State Street Bank"), 225 Franklin
Street, Boston, Massachusetts 02102, attention ACCESS/AC Reserve Account No.
9900-446-7. The investor should then immediately mail a properly completed
application form included in this Prospectus to ACCESS. To receive immediate
credit to an account, the investor must call ACCESS, at the telephone number
listed above, by 11:00 a.m. Kansas City time with the intent to wire funds and
State Street Bank must then receive such funds by 4:00 p.m. Boston time.
INITIAL INVESTMENT BY MAIL. To open an account by mail an investor should send
a check payable to American Capital Reserve Fund, Inc. along with a completed
application form to ACCESS.
SUBSEQUENT INVESTMENTS BY BANK WIRE. The investor's bank should wire the
specified amount along with the account number and registration to State Street
Bank. To receive immediate credit to an account, the investor must call ACCESS
at (800)
16
<PAGE> 17
421-6714 (Alaska and Hawaii residents should call collect at (816) 283-3979), by
11:00 a.m. Kansas City time with the intent to wire funds and State Street Bank
must then receive such funds by 4:00 p.m. Boston time.
SUBSEQUENT INVESTMENTS BY MAIL. Subsequent investments in the amount of $50 or
more may be sent to ACCESS, indicating the account registration and account
number.
AUTOMATIC INVESTMENT PLAN. Investors desiring a monthly investment are given
the option to utilize an automatic investment plan whereby the Distributor is
empowered to draft the shareholder's account monthly (minimum $50) with the
proceeds of the draft to be invested in Fund shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers, Inc.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by registered representatives and
members of their families to locations within or outside of the United States
for meetings or seminars of a business nature.
CLASS A SHARES
Class A shares are offered at net asset value without sales charge.
CLASS B SHARES
Class B shares are offered at 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 Distributor will reject any order of $250,000 or more for
Class B shares.
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.
17
<PAGE> 18
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE OF
DOLLAR AMOUNT SUBJECT
YEAR SINCE PURCHASE TO CHARGE
------------------------------------------------------------------------------
<S> <C>
First.................................... 4%
Second................................... 4%
Third.................................... 3%
Fourth................................... 2.5%
Fifth.................................... 1.5%
Sixth.................................... None
</TABLE>
------------------------------------------------------------------------------
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first, of any shares in the shareholder's Fund account that are not subject
to a contingent deferred sales charge, second, of shares held for over five
years or shares acquired pursuant to reinvestment of dividends or distributions
and third, of shares held longest during the five-year period. The charge is not
applied to dollar amounts representing an increase in the net asset value since
the time of purchase.
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 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. The Distributor
will reject any order of $1 million or more for Class C shares.
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-
18
<PAGE> 19
dealers and other Service Organizations will also be paid ongoing commissions
and transaction fees of up to 0.75% of the average daily net assets of the
Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge may be waived on redemptions of Class B
and Class C shares (i) following the death or disability (as defined in the
Code) of a shareholder, (ii) in connection with certain distributions from an
IRA or other retirement plan, (iii) pursuant to the Fund's systematic withdrawal
plan but limited to 12% annually of the initial value of the account. The
contingent deferred sales charge is also waived on redemptions of Class C shares
as it relates to the reinvestment of redemption proceeds in shares of the same
class of the Fund within 120 days after redemption. See the Statement of
Additional Information for further discussion of waiver provisions.
------------------------------------------------------------------------------
DISTRIBUTION PLANS
------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing of its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such rule, the Directors of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") applicable to
mutual fund sales charges. The NASD Rules limit the annual distribution charges
that a mutual fund may impose on a class of shares. The NASD Rules also limit
the aggregate amount which the Fund may pay for such distribution costs. Under
the Class A Plan, the Fund pays a service fee to the Distributor at an annual
rate of up to 0.15% 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 0.15%
and a distribution fee at an annual rate of up to 0.75% of the Fund's aggregate
average daily net assets attributable to the Class B shares or Class C shares to
reimburse the Distributor for service fees paid by it to certain financial
institutions (which may include banks), securities dealers and other industry
professionals (collectively, "Service Organizations") and for its distribution
costs.
19
<PAGE> 20
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to 4% of
the purchase price of Class B shares purchased by the clients of broker-dealers
and other Service Organizations, and (ii) other distribution expenses as
described in the Statement of Additional Information. Under the Class C Plan,
the Distributor receives additional payments from the Fund in the form of a
distribution fee at the annual rate of up to 0.75% of the net assets of the
Class C shares as 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 0.75% of the average daily net assets
of the Fund's Class C shares, and (ii) other distribution expenses as described
in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Directors of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with respect
to distribution and service revenues and expenses is presented to the Directors
each year for their consideration in connection with their deliberations as to
the continuance of the Distribution Plans. In their review of the Distribution
Plans, the Directors are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
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
20
<PAGE> 21
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.
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 light of the
Glass-Steagall Act, the Distributor engages banks as Service Organizations only
to perform administrative and shareholder servicing functions. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretation of federal law expressed herein and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
------------------------------------------------------------------------------
SHAREHOLDER SERVICES
------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate the
investment in its shares at little or no extra cost to the investor. Below is a
description of such services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Stock certificates are not issued except upon
shareholder request. Most shareholders elect not to receive certificates in
order to facilitate redemptions and transfers. A shareholder may incur an
expense to replace a lost certificate. Except as described below, 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 "Shareholder Services -- Exchange Privilege",
may receive statements quarterly from ACCESS showing any reinvestment 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.
21
<PAGE> 22
AUTOMATIC EXCHANGE. The exchange fee described herein under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the Service
Department at (800) 421-5666 for further information on how to utilize this
option.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the next determined net asset value 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 $50.
A Class B or Class C shareholder or a Class A shareholder who acquired his
shares in the Fund in exchange for Class B or Class C shares of another American
Capital mutual fund may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment in the Fund at
the time the election to participate in the plan is made. For more detail
regarding waiver of contingent deferred sales charges, please refer to the
prospectus of the original fund.
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.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP, and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of certain other participating American Capital mutual funds (the
"Participating Funds"), upon payment of the excess, if any, of the sales charge
rate applicable to the shares being acquired over the sales charge rate, if any,
previously paid. The Participating Funds are American Capital Comstock Fund,
Inc., American Capital
22
<PAGE> 23
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc., American Capital Enterprise Fund, Inc., American Capital Equity
Income Fund, Inc., American Capital Federal Mortgage Trust ("Federal Mortgage"),
American Capital Global Managed Assets Fund, Inc. ("Global Managed"), American
Capital Government Securities, Inc., American Capital Growth and Income Fund,
Inc., American Capital Harbor Fund, Inc., American Capital High Yield
Investments, Inc. ("High Yield"), American Capital Municipal Bond Fund, Inc.
("Municipal Bond"), American Capital Pace Fund, Inc., American Capital Real
Estate Securities Fund, Inc. ("Real Estate"), American Capital Tax-Exempt Trust
("Tax-Exempt"), American Capital Texas Municipal Securities, Inc. ("Texas
Municipal"), American Capital U.S. Government Trust for Income ("Government
Trust"), American Capital Utilities Income Fund, Inc. ("Utilities Income") and
American Capital World Portfolio Series, Inc. ("World Portfolio"). Shares of any
Participating Fund and the Fund may be exchanged for shares of any other
Participating Fund if shares of that Participating Fund are available for sale;
however, shares of a Participating Fund may not be available to potential
investors who are not already shareholders of the Participating Fund. Additional
funds may be added from time to time as Participating Funds.
Shares of the Participating Funds may be exchanged without sales charge for
shares of the same class of the Fund, except that a 30-day holding period
applies to exchanges from shares of Corporate Bond, Federal Mortgage, Global
Managed, Government Trust, High Yield, Municipal Bond, Real Estate, Tax-Exempt,
Texas Municipal, Utilities Income and the American Capital Global Government
Securities Fund of World Portfolio. Shares of American Capital Government Target
Series may be exchanged for Class A shares of the Fund without sales charge.
Class B and Class C shareholders of the Fund have the ability to exchange their
shares ("original shares") for the same class of shares of any other American
Capital fund that offers such shares ("new shares") in an amount equal to the
aggregate net asset value of the original shares, without the payment of any
contingent deferred sales charge otherwise due upon redemption of the original
shares. Such shares remain subject to the contingent deferred sales charge
imposed by the fund initially purchased by the the shareholder upon their
redemption from the American Capital complex of Funds. Class A shareholders who
acquired their shares in exchange for Class B or Class C shares of a
Participating Fund may exchange their Class A shares for the same class of
shares of a Participating Fund (also, "new shares") as the class of shares they
disposed of in acquiring their current shares (also, "original shares") without
incurring a contingent deferred sales charge. 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.
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. Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes.
23
<PAGE> 24
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
designated otherwise in the application form included in this Prospectus. VKAC
and its subsidiaries, including ACCESS (collectively, "Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Exchanges are effected at the net asset value next
calculated after the request is received in good order with adjustment for any
additional sales charge. See "Purchase of Shares" and "Redemption of Shares." If
the exchanging shareholder does not have an account in the fund whose shares are
being acquired, a new account will be established with the same registration,
dividend and capital gain options (except Fund to Fund Dividends) and dealer of
record as the account from which shares are exchanged, unless otherwise
specified by the shareholder. In order to establish a systematic withdrawal plan
for the new account or reinvest dividends from the new account into another
fund, however, an exchanging shareholder must file a specific written request.
Each American Capital 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 information regarding such fund.
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 of the same class. The exchange fee
as described under "Shareholder Services -- Exchange Privilege" will be waived
for such systematic exchanges. Additional information on how to establish this
option is available from the Distributor.
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
24
<PAGE> 25
in any of the Participating Funds listed under "Exchange Privilege." 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), Keogh, 401(k)) 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.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A shareholder holding Class A shares of the Fund (a)
for which certificates have not been issued, (b) which are in a non-escrow
status and (c) which were not acquired in exchange for Class B or Class C shares
of another American Capital mutual fund may appoint ACCESS as agent by
completing the AUTHORIZATION FOR REDEMPTION BY CHECK form and the appropriate
section of the application and returning the form and application to ACCESS.
Once the form is properly completed, signed and returned to ACCESS, a supply of
checks drawn on State Street Bank will be sent to the shareholder. These checks
may be made payable by the shareholder to the order of any person in any amount
of $100 or more. When a check is presented to State Street Bank for payment,
full and fractional Class A shares required to cover the amount of the check are
redeemed from the shareholder's Class A account by ACCESS at the next determined
net asset value. Checks will not be honored for redemption of Class A shares
held less than 15 calendar days, unless such Class A shares have been paid for
by bank wire. Any Class A shares for which there are outstanding certificates
may not be redeemed by check. If the amount of the check is greater than the
proceeds of all uncertificated Class A shares held in the shareholder's account,
the check is returned and the shareholder may be subject to additional charges.
A Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or State Street Bank. A "stop payment" system is not available on these
checks. Retirement Plans and accounts that are subject to backup withholding are
not eligible for the privilege. See the Statement of Additional Information for
further information regarding the establishment of the privilege.
------------------------------------------------------------------------------
REDEMPTION OF SHARES
------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Although the Fund imposes no charge for redemptions, a custodian of a retirement
25
<PAGE> 26
plan account may charge fees based on the custodian's fee schedule, and if a
shareholder acquired Fund shares in an exchange for shares of another American
Capital Fund that subjected the shareholder to a contingent deferred sales
charge, that shareholder would remain subject to a deferred sales charge imposed
by the original fund upon their redemption. Shareholders may also place
redemption requests through an authorized dealer. Orders received from dealers
must be at least $500 unless transmitted via the FUNDSERV network.
As described herein under "Purchase of Shares," redemptions of Class B or
Class C shares are subject to a contingent deferred sales charge. 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, and the names must be exactly the same as the names which
were signed when the shares were purchased. If the proceeds of the redemption
exceed $50,000, if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 60
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker/dealer; a credit union; a savings and loan association; a
member firm of a national securities exchange, registered securities association
or clearing agency; or 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 does so if a special request has been made
to ACCESS. In the case of shareholders holding certificates, the certificates
for the shares being redeemed must accompany the redemption request. In the
event the redemption is requested by a corporation, partnership, trust,
fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where American Capital Trust Company
serves as custodian, special IRA, 403(b)(7), or Keogh distribution forms must be
obtained from and must be forwarded to American Capital Trust Company, P.O. Box
944, Houston, Texas 77001-0944. Contact the custodian for information.
In all cases, the redemption price is the net asset value per share next
determined after the request for redemption is received in proper form by
ACCESS. Payment for shares redeemed is 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
26
<PAGE> 27
rules of the SEC. If the shares to be redeemed have been recently purchased by
check, ACCESS may delay mailing a redemption check until the purchase check has
cleared, usually a period of up to 15 days. Such delay can be avoided if such
payment of shares is made by bank wire. Any taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
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 of the account or to the bank account of record as described
below. To establish such privilege a shareholder must complete the appropriate
section of the application form in this Prospectus or call the Fund at (800)
421-5666 to request that a copy of the Telephone Redemption Authorization form
be sent to them for completion. To redeem shares contact the telephone
transaction line at (800) 421-5684. Van Kampen American Capital and the Fund
employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen American Capital nor the Fund will
be liable for following telephone instructions which it reasonably believes to
be genuine. Van Kampen American Capital and the Fund may be liable for any
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed. Telephone redemptions may not be available 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 above. Requests received by ACCESS
prior to 4:00 p.m., New York time, on a regular business day will be processed
at the net asset value per share determined that day. These privileges are
available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed once in each 30-day period. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account or
wired directly to their predesignated bank account. This privilege is not
available if the address of record has been changed within 60 days prior to a
telephone redemption request. Proceeds from redemptions are expected to be wired
on the next business day following the date of redemption. The Fund reserves the
right at any time to terminate, limit or otherwise modify this redemption
privilege.
EXPEDITED REDEMPTIONS. Shareholders of the Fund who have completed the
appropriate section of the application may request expedited redemption payment
of
27
<PAGE> 28
shares having a value of $1,000 or more, by calling (800) 421-5671 (Alaska and
Hawaii residents should call collect at (816) 283-3114). Redemption proceeds in
the form of federal funds will be wired to the bank designated in the
application. Expedited redemption requests received in good order prior to 10:00
a.m. Kansas City time are processed on the date of receipt. Redemption requests
received by ACCESS after such hour are priced at the net asset value next
determined and the proceeds are wired on the next banking day following receipt
of such request. ACCESS reserves the right to deduct the wiring costs from the
proceeds of the redemption. A shareholder may change the bank account previously
designated at any time by written notice to ACCESS with the signature of the
shareholder guaranteed. The Fund reserves the right at any time to terminate,
limit or otherwise modify this expedited 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 Van
Kampen American Capital Trust Company for repayment of principal (and interest)
on their borrowings on such plans.
------------------------------------------------------------------------------
DIVIDENDS AND TAXES
------------------------------------------------------------------------------
The Fund's net income is declared as a dividend on a daily basis. Dividends
are paid to shareholders of record immediately prior to the determination of net
asset value for that day. Since shares are issued and redeemed at the time net
asset value is determined, dividends commence on the day following the date
shares are issued and are paid for the day shares are redeemed. All dividends
are automatically invested in additional full and fractional shares of the Fund
at net asset value. Shareholders may elect to receive monthly payment of
dividends in cash by written instruction to ACCESS. Shares purchased by daily
reinvestments are liquidated at the net asset value on the last business day of
the month and the proceeds of such redemption mailed to the shareholder electing
cash payment. A redeeming shareholder receives all dividends accrued through the
date of redemption.
28
<PAGE> 29
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
incremental transfer agency fees applicable to such classes of shares.
The Fund's net income for dividend purposes is calculated daily and consists
of interest accrued or discount earned, plus or minus any net realized gains or
losses on portfolio securities, less any amortization of premium and the
expenses of the Fund.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code. By
qualifying as a regulated investment company, the Fund is not subject to federal
income taxes to the extent it distributes its net investment income and net
realized capital gains. Dividends from net investment income and distributions
from any net realized short-term capital gains are taxable to shareholders as
ordinary income. However, shareholders not subject to tax on their income will
not be required to pay tax on amounts distributed to them.
Information as to the federal tax status of dividends and distributions is
provided by the Fund to shareholders annually if such amounts are $10.00 or
more.
To avoid being subject to a 31% federal back-up withholding tax on dividends,
distributions and redemption payments, a shareholder must furnish the Fund with
a certification of their correct taxpayer identification number.
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.
29
<PAGE> 30
------------------------------------------------------------------------------
YIELD INFORMATION
------------------------------------------------------------------------------
From time to time the Fund advertises its "yield" and "effective yield." Both
yield figures are based on historical earnings and are not intended to indicate
future performance. The "yield" of the Fund refers to the income generated by an
investment in the Fund over a seven-day period (which period will be stated in
the advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the Fund is assumed to be reinvested. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. The current and effective yields for the
seven-day period ending November 30, 1994, and a description of the method by
which the yield was calculated is contained in the Statement of Additional
Information.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is
generally a function of the kind and quality of the instrument held in a
portfolio, portfolio maturity, operating expenses and market conditions.
Yield is calculated separately for Class A, Class B and Class C shares.
Because of the differences in distribution fees, the yields for each of the
classes will differ with Class B and Class C shares having a lower yield than
Class A shares.
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.,
Donoghue's Money Market Report or similar independent services which monitor the
performance of mutual funds, with other appropriate indexes 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, U.S. News & World Report, USA Today
and The Wall Street Journal. 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.
30
<PAGE> 31
------------------------------------------------------------------------------
ADDITIONAL INFORMATION
------------------------------------------------------------------------------
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 10% 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 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.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, officers and employees to
buy and sell securities for their personal accounts subject to certain
restrictions. Persons with access to certain sensitive information are subject
to preclearance and other procedures designed to prevent conflicts of interest.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund at
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Fund.
31
<PAGE> 32
BACKUP WITHHOLDING INFORMATION
STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with
the following guidelines:
Account Type Give Social Security Number or Tax
Identification Number of:
--------------------------------------------------------------------------------
Individual Individual
--------------------------------------------------------------------------------
Joint (or Joint Tenant) Owner who will be paying tax
--------------------------------------------------------------------------------
Uniform Gifts to Minors Minor
--------------------------------------------------------------------------------
Legal Guardian Ward, Minor or Incompetent
--------------------------------------------------------------------------------
Sole Proprietor Owner of Business
-------------------------------------------------------------------------------
Trust, Estate, Pension Trust, Estate, Pension Plan Trust (not
Plan Trust personal TIN of fiduciary)
--------------------------------------------------------------------------------
Corporation, Partnership, Corporation, Partnership, Other
Other Organization Organization
--------------------------------------------------------------------------------
Broker/Nominee Broker/Nominee
--------------------------------------------------------------------------------
STEP 2. If you do not have a TIN or you do not know your TIN, you must obtain
Form SS-5 (Application for Social Security Number) or Form SS-4 (Application
for Employer Identification Number) from your local Social Security or IRS
office and apply for one. Write "Applied For" in the space on the application.
STEP 3. If you are one of the entities listed below, you are exempt from
backup withholding and should not check the box on the Application in Section
2, Taxpayer Identification.
* A corporation
* Financial institution
* Section 501 (a) exempt organization (IRA, Corporate Retirement Plan,
403(b), Keogh)
* United States or any agency or instrumentality thereof
* A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof
* International organization or any agency or instrumentality thereof
* Registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
* Real estate investment trust
* Common trust fund operated by a bank under section 584 (a)
* An exempt charitable remainder trust, or a non-exempt trust described in
section 4947 (a) (1)
If you are in doubt as to whether you are exempt, please contact the Internal
Revenue Service.
STEP 4. IRS PENALTIES -- If you do not supply us with your TIN, you will be
subject to an IRS $50 penalty unless your failure is due to reasonable cause
and not willful neglect. If you fail to report interest, dividend or
patronage dividend income on your federal income tax return, you will be
treated as negligent and subject to an IRS 5% penalty tax on any resulting
underpayment of tax unless there is clear and convincing evidence to the
contrary. If you falsify information on this form or make any other false
statement resulting in no backup withholding on an account which should be
subject to backup withholding, you may be subject to an IRS $500 penalty and
certain criminal penalties including fines and imprisonment.
<PAGE> 33
AMERICAN CAPITAL
RESERVE FUND, INC.
PROSPECTUS
April 18, 1995
National Distributor As Supplemented
Van Kampen American Capital May 22, 1995
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Advisor
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056
Transfer, Disbursing, Redemption
and Shareholder Service Agent
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256
Independent Accountants
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002
Custodian
State Steet Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent,
ACCESS Investor Services, Inc.
(ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor, Van Kampen
American Capital Distributors, Inc.,
One Parkview Plaza
Oakbrook Terrace, IL 60181
American Capital C/O ACCESS
Reserve Fund Inc. P.O. Box 418256
Kansas City, MO 64141-9256
For investors seeking protection
of capital and current income
through investments in money
market instruments.
PRINTED MATTER
Printed in U.S.A./023 PRO-001
<PAGE> 34
PART B: STATEMENT OF ADDITIONAL INFORMATION
AMERICAN CAPITAL RESERVE FUND, INC.
APRIL 18, 1995 (AS SUPPLEMENTED MAY 22, 1995)
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated April 18,
1995 (as supplemented May 22, 1995). A Prospectus may be obtained without charge
by calling or writing Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
INVESTMENT POLICIES........................................................... 2
INVESTMENT RESTRICTIONS....................................................... 3
REPURCHASE AGREEMENTS......................................................... 4
LOANS OF PORTFOLIO SECURITIES................................................. 4
DIRECTORS AND EXECUTIVE OFFICERS.............................................. 4
INVESTMENT ADVISORY AGREEMENT................................................. 7
DISTRIBUTOR................................................................... 8
DISTRIBUTION PLANS............................................................ 9
TRANSFER AGENT................................................................ 10
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 10
DETERMINATION OF NET ASSET VALUE.............................................. 10
PURCHASE OF SHARES............................................................ 11
EXCHANGE PRIVILEGE............................................................ 13
REDEMPTION OF SHARES.......................................................... 14
CHECK WRITING PRIVILEGE....................................................... 14
DIVIDENDS AND TAXES........................................................... 14
YIELD INFORMATION............................................................. 15
OTHER INFORMATION............................................................. 16
FINANCIAL STATEMENTS.......................................................... 16
APPENDIX...................................................................... 17
</TABLE>
<PAGE> 35
GENERAL INFORMATION
The Fund was incorporated in Maryland on March 28, 1974.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), ACCESS Investor
Services, Inc. ("ACCESS") and Advantage Capital Corporation, a retail
broker-dealer affiliate of the Distributor, are wholly owned subsidiaries of Van
Kampen/American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of
VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of
a substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.
As of December 30, 1994, no one person was known to own beneficially or
hold of record five percent or more of the outstanding shares of the Fund,
except that 30.17% of the outstanding shares of the Fund were held of record by
Van Kampen American Capital Trust Company, 2800 Post Oak Boulevard, Houston,
Texas 77056, acting as custodian for certain employee benefit plans and
retirement accounts.
INVESTMENT POLICIES
The Fund seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Fund uses the amortized cost method of
valuing the Fund's securities pursuant to Rule 2a-7 under the Investment Company
Act of 1940 (the "1940 Act"), certain requirements of which are summarized
below.
In accordance with Rule 2a-7, the Fund is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 13 months or less and invest only in
U.S. dollar denominated securities determined in accordance with procedures
established by the Board of Directors to present minimal credit risks and which
are rated in one of the two highest rating categories for debt obligations by at
least two nationally recognized statistical rating organizations (or one rating
organization if the instrument was rated by only one such organization) or, if
unrated, are of comparable quality as determined in accordance with procedures
established by the Board of Directors. The nationally recognized statistical
rating organizations currently rating instruments of the type the Fund may
purchase are Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S & P"), Fitch Investors Services, Inc., Duff and Phelps, Inc. and
IBCA Limited and IBCA Inc. See Appendix hereto.
In addition, the Fund will not invest more than five percent of its total
assets in the securities (including the securities collateralizing a repurchase
agreement) of, or subject to puts issued by, a single issuer, except that (i)
the Fund may invest more than five percent of its total assets in a single
issuer for a period of up to three business days in certain limited
circumstances, (ii) the Fund may invest in obligations issued or guaranteed by
the U.S. Government without any such limitation, and (iii) the limitation with
respect to puts does not apply to unconditional puts if no more than ten percent
of the Fund's total assets is invested in securities issued or guaranteed by the
issuer of the unconditional put. Investments in rated securities not rated in
the highest category by at least two rating organizations (or one rating
organization if the instrument was rated by only one such organization), and
unrated securities not determined by the Board of Directors to be comparable to
those rated in the highest category, will be limited to five percent of the
Fund's total assets, with the investment in any one such issuer being limited to
no more than the greater of one percent of the Fund's total assets or
$1,000,000. As to each security, these percentages are measured at the time the
Fund purchases the security. There can be no assurance that the Fund will be
able to maintain a stable net asset value of $1.00 per share.
2
<PAGE> 36
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which may be less
restrictive than the investment policies stated in the Prospectus and may not be
changed without approval by the holders of a majority of its outstanding shares.
Such majority is defined by the 1940 Act as the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy;
or (ii) more than 50% of the Fund's outstanding voting securities. In addition
to the fundamental investment limitations set forth in the Fund's prospectus,
the Fund may not:
1. Purchase any security which matures more than two years from the date
of purchase. As set forth under "Investment Objective and Policies" in
the Prospectus, the Fund's operating policy is not to purchase any
security having a remaining maturity of more than 13 months;
2. Purchase any security other than (a) obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities; (b) bank
time deposits, certificates of deposit and bankers' acceptances which
are obligations of a domestic bank (or a foreign branch or subsidiary
thereof), or of a foreign bank, rated at the time of investment A-1 and
A-2 by Moody's or Prime-1 and Prime-2 by S & P; (c) instruments secured
by a bank obligation described in item 2(b); (d) commercial paper if
rated A by S & P's or Prime by Moody's, or if not rated, issued by a
company having an outstanding debt issue rated at least A by S & P's or
Moody's (see Appendix for an explanation of these ratings); and (e)
repurchase agreements collateralized by the debt securities described
above;
3. Issue any senior security, although the Fund may borrow as set forth
under item 14 below;
4. Purchase or sell real estate; although the Fund may purchase securities
issued by companies, including real estate investment trusts, which
invest in real estate or interest therein;
5. Purchase securities on margin, make short sales of securities or
maintain a short position;
6. Purchase or sell commodities or commodity contracts, or invest in oil,
gas or mineral exploration or development programs;
7. Acquire voting securities of any issuer or any securities of other
investment companies;
8. Make investments for the purpose of exercising control or management;
9. Lend its portfolio securities in excess of 10% of its total assets,
both taken at market value provided that any loans shall be in
accordance with the guidelines established for such loans by the Board
of Directors of the Fund as described under "Loans of Portfolio
Securities," including the maintenance of collateral from the borrower
equal at all times to the current market value of the securities
loaned;
10. Invest in securities, except repurchase agreements, for which there are
legal or contractual restrictions on resale;
11. Underwrite securities of other issuers except that the Fund may sell an
investment position even though it may be deemed an underwriter as that
term is defined under the Securities Act of 1933;
12. Invest in warrants, or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof;
13. Purchase or retain securities of any issuer if those officers and
directors of the Fund or its investment adviser who own beneficially
more than one-half of one percent of the securities of such issuer,
together own more than five percent of the securities of such issuer;
14. Borrow money, except from banks for temporary or emergency purposes and
then in amounts not exceeding ten percent of the value of the Fund's
total net assets; or mortgage, pledge, or hypothecate any assets except
in connection with any such borrowing and in amounts not exceeding the
lesser of the dollar amount borrowed or five percent of the value of
the Fund's assets at the time of such borrowing (the Fund will not
borrow for leveraging or investment but only to meet redemption
requests which might otherwise require undue dispositions of portfolio
securities);
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<PAGE> 37
15. Lend money, except through the purchase or holding of the types of debt
securities in which the Fund may invest;
16. With respect to 75% of its assets, purchase securities if the purchase
would cause the Fund, at that time, to have more than five percent of
the value of its total assets invested in the securities of any one
issuer (except obligations of the U.S. government, its agencies or
instrumentalities and repurchase agreements fully collateralized
thereby);
17. Invest in the securities of any issuer, if immediately thereafter, the
Fund would own more than ten percent of the total value of all
outstanding securities of such issuer;
18. Invest more than five percent of its assets in companies having a
record together with predecessors, of less than three years continuous
operation; and
19. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the U.S.
Government and of domestic branches of U.S. banks).
The Fund has committed to one state that so long as its shares are
registered for sale in that state it will apply the restriction contained in No.
17 above to any class of the outstanding securities of any issuer. Consistent
with its investment objectives, the Fund may make additional commitments more
restrictive than its fundamental policies. Should the Fund determine in the
future that a commitment is no longer in the best interests of the Fund and its
shareholders, it will revoke the commitment by withdrawing its shares from sale
in the state to which the commitment was made.
REPURCHASE AGREEMENTS
Repurchase agreements are collateralized by the underlying debt securities
and may be considered to be loans under the 1940 Act. The Fund makes payment for
such securities only upon physical delivery or evidence of book entry transfer
to the account of a custodian or bank acting as agent. The seller under a
repurchase agreement is required to maintain the value of the underlying
securities marked-to-market daily at not less than the repurchase price. The
underlying securities must be of a type in which the Fund may invest (normally
securities of the U.S. Government, or its agencies and instrumentalities),
except that the underlying securities may have maturity dates exceeding one
year.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities to brokers, dealers and financial
institutions provided that cash equal to 100% of the market value of the
securities loaned is deposited by the borrower with the Fund and is maintained
each business day. While such securities are on loan, the borrower is required
to pay the Fund any income accruing thereon. Furthermore, the Fund may invest
the cash collateral in portfolio securities thereby increasing the return to the
Fund as well as increasing the market risk to the Fund. The Fund does not
presently intend to lend its portfolio securities in excess of five percent of
its total assets.
Any loans would be made for short-term purposes and would be subject to
termination by the Fund in the normal settlement time, currently five business
days after notice, or by the borrower on one day's notice. Borrowed securities
must be returned when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term of the loan inures
to the Fund and its shareholders, but any gain can be realized only if the
borrower does not default. The Fund may pay reasonable finders', administrative
and custodial fees in connection with a loan.
DIRECTORS AND EXECUTIVE OFFICERS
The Fund's directors and executive officers and their principal occupations
during the past 5 years are listed below. All persons named as Director also
serve in similar capacities for other funds advised by the Adviser as indicated
below.
FERNANDO SISTO, Chairman of the Board and Director. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991. George M. Bond
Professor and formerly Dean of Graduate
4
<PAGE> 38
School and Chairman, Department of Mechanical Engineering, Stevens Institute of
Technology; Director, Dynalysis of Princeton (engineering research).(1)
J. MILES BRANAGAN, Director. 2300 205th Street, Torrance, California
90501-1452. Co-Founder, Chairman and President, MDT Corporation (medical
equipment).(1)
RICHARD E. CARUSO, Director. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive Officer,
Integra LifeSciences Corporation (biotechnology/life sciences); Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of Art
(community art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business Performance
Group, London School of Economics; formerly Director, First Sterling Bank;
formerly Director and Executive Vice President, LFC Financial Corporation (lease
financing)(1)
ROGER HILSMAN, Director. 251-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly Professor of Government and International Affairs, Columbia
University.(1)
*DON G. POWELL, President and Director. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. President, Chief Executive Officer and Director of VK/AC
Holding, Inc., VKAC and the Adviser; Chairman, Chief Executive Officer and
Director of the Distributor.(1)(2)(4)
DAVID REES, Director. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(3)
**LAWRENCE J. SHEEHAN, Director. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner (1969-1994)
of the law firm of O'Melveny & Myers, legal counsel to the Fund.(1)(3)(5)
WILLIAM S. WOODSIDE, Director. Sky Chefs, Inc., 712 Fifth Avenue, 40th
Floor, New York, New York 10019. Vice Chairman of the Board, Sky Chefs, Inc.
(airline food catering); formerly Director, Primerica Corporation (currently
known as The Travelers Inc.); formerly Chairman of the Board and Chief Executive
Officer, old Primerica Corporation (American Can Company); formerly Director,
James River Corporation (paper products); Trustee and formerly President,
Whitney Museum of American Art; Chairman, Institute for Educational Leadership,
Inc., Board of Visitors, Graduate School of The City University of New York,
Academy of Political Science; Committee for Economic Development; Director,
Public Education Fund Network, Fund for New York City Public Education; Trustee,
Barnard College; Member, Dean's Council, Harvard School of Public Health;
Member, Mental Health Task Force, Carter Center; formerly Director, James River
Corporation (paper products).(1)
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate Secretary
of the Adviser.(4)
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/Assistant Controller.(4)
DENNIS J. MCDONNELL, Vice President. One Parkview Plaza, Oakbrook Terrace,
IL 60181. Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.,
President, Chief Operating Officer and Director of Van Kampen American Capital
Investment Advisory Corp.; and Director of McCarthy, Crisanti & Maffei, Inc.
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)
RONALD A. NYBERG, Vice President. One Parkview Plaza, Oakbrook Terrace, IL
60181. Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc., Vice President of ACCESS Investor Services, Inc. and Van Kampen American
Capital Services, Inc., Vice President, General Counsel and Assistant Secretary
of Van Kampen American Capital Investment Advisory Corp., Senior Vice President
5
<PAGE> 39
and General Counsel of the Adviser, Executive Vice President and General Counsel
and Director of VKAC Distributors, Inc.
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd. Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income and
Director of the Adviser; Executive Vice President and Director of VKAC.(4)
DAVID R. TROTH, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Investment Vice President of the Adviser; Vice President of American
Capital Bond Fund, Inc., American Capital Corporate Bond Fund, Inc., the Money
Market Portfolio of American Capital Life Investment Trust, and the Money Market
Fund of Common Sense Trust.(4)
J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel, Compliance
Review Officer and Assistant Corporate Secretary of the Adviser.(4)
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; President, Chief Operating Officer
and Director of Van Kampen American Capital Services, Inc.; Executive Vice
President, Chief Operating Officer and Director of Van Kampen American Capital
Trust Company, Executive Vice President and Director of ACCESS.(4)
---------------
* Director who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act, by virtue of his affiliation with the Adviser.
** Director who is an interested person of the Fund and may be an interested
person of the Adviser within the meaning of the 1940 Act by virtue of his
affiliation with legal counsel of the Fund.
(1) Also a director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Enterprise Fund, Inc., American Capital Equity Income
Fund, Inc., American Capital Federal Mortgage Trust, American Capital Global
Managed Assets Fund, Inc., American Capital Government Securities, Inc.,
American Capital Government Target Series, American Capital Growth and
Income Fund, Inc., American Capital Harbor Fund, Inc., American Capital High
Yield Investments, Inc., American Capital Life Investment Trust, American
Capital Municipal Bond Fund, Inc., American Capital Pace Fund, Inc.,
American Capital RealEstate Securities Fund, Inc., American Capital
Tax-Exempt Trust, American Capital Texas Municipal Securities, Inc.,
American Capital U.S. Government Trust for Income, American Capital
Utilities Income Fund, Inc. and American Capital World Portfolio Series,
Inc.
(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser, and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as adviser for nine of the
portfolios.
(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.
(4) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.
(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc. and FPA Perennial
Fund, Inc. investment companies not advised by the Adviser, and TCW
Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.
The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto may act for the Board of Directors between Board meetings except where
board action is required by law.
The directors and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the fiscal year ended May 31,
1994, the Directors who were not affiliated with the Adviser or its parent
received as a group $13,400 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
6
<PAGE> 40
during the last fiscal year, the Fund paid legal fees of $9,218 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.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Directors serve as directors or trustees
noted in Footnote 1 above is set forth below. The compensation shown for the
Fund is for the fiscal year ended May 31, 1994 and the total compensation shown
for the Fund and other related mutual Funds is for the calendar year ended
December 31, 1994. Mr. Powell is not compensated for his service as Director,
because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED AND FUND
COMPENSATION AS PART OF FUND COMPLEX PAID TO
NAME OF PERSON FROM REGISTRANT EXPENSES DIRECTORS(1)(5)
----------------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
J. Miles Branagan........................ $ 1,940 -0- $64,000
Dr. Richard E. Caruso(4)................. $ 1,910(2) -0- $64,000
Dr. Roger Hilsman........................ $ 2,040 -0- $66,000
David Rees(4)............................ $ 1,910 -0- $64,000
Lawrence J. Sheehan...................... $ 2,040 -0- $67,000
Dr. Fernando Sisto(4).................... $ 2,560(2) -0- $82,000
William S. Woodside(3)................... $ 1,520 -0- $54,000
</TABLE>
---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Mr. Caruso deferred his entire compensation from the Fund for the most
recent fiscal year.
(3) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, of the amounts reflected in second and fourth
columns, $1,520 and $17,000, respectively, were paid by the registrant or
the registrant and the fund complex, as the case may be.
(4) The cumulative deferred compensation accrued by the Fund as of May 31, 1994
is as follows: Caruso, $4,791; Rees, $29,858; Sisto, $5,612.
(5) Includes the following amounts for which the various Portfolios were
reimbursed by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman,
$1,000; Rees, $2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000.
(Mr. Woodside was paid $36,000 directly by the Advisor as discussed in
footnote 3 above.)
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement,
dated December 20, 1994 (the "Advisory Agreement"). Under the Advisory
Agreement, the Fund retains the Adviser to manage the investment of its assets
and to place orders for the purchase and sale of its portfolio securities. The
Adviser is responsible for obtaining and evaluating economic, statistical, and
financial data and for formulating and implementing investment programs in
furtherance of the Fund's investment 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.
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.
During the fiscal years ended May 31, 1992, 1993 and 1994, the Adviser received
$1,696,366, $1,426,894 and $1,494,701, respectively in advisory fees from the
Fund. For such periods the Fund paid $71,600, $90,648 and $106,905,
respectively, for accounting services. A portion of
7
<PAGE> 41
these amounts was paid to the Adviser or its parent in reimbursement of
personnel, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services provided by the Adviser are at
cost. The Fund also pays transfer agency 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 the annual
rate of: 0.50% on the first $150 million net assets; 0.45% on the next $100
million of net assets; 0.40% on the next $100 million of net assets; and 0.35%
on the net assets over $350 million.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each 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 fees payable to the adviser by the Fund shall be reduced by any
commissions, tender solicitation and other fees, brokerage or similar payments
received by the Adviser, or any other direct or indirect majority owned
subsidiary of VK/AC Holding, Inc. in connection with the purchase and sale of
portfolio investments of the Fund, less any direct expenses incurred by such
subsidiary of VK/AC Holding, Inc. in connection with obtaining such commissions,
fees, brokerage or similar payments. The Adviser agrees to use its best efforts
to recapture tender solicitation fees and exchange offer fees for the Fund's
benefit and to advise the Board of Directors of the Fund of any other
commissions, fees, brokerage or similar payments which may be possible for the
Adviser or any other direct or indirect majority owned subsidiary of VK/AC
Holding, Inc., to receive in connection with the Fund's portfolio transactions
or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed one percent of the
Fund's average net assets, the compensation due the Adviser will be reduced by
the amount of such excess and that, if a reduction in and refund of the advisory
fee is insufficient, the Adviser will pay the Fund monthly an amount sufficient
to make up the deficiency, subject to readjustment during the year. Ordinary
business expenses do not include (1) interest and taxes; (2) brokerage
commissions; (3) certain litigation and indemnification expenses as described in
the Advisory Agreement and (4) payments made by the Fund pursuant to the
Distribution Plans. The Advisory Agreement also provides that the Adviser shall
not be liable to the Fund for any actions or omissions if it acted in good faith
without negligence or misconduct.
The Advisory Agreement has an initial term of two years and 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 60 days'
written notice.
DISTRIBUTOR
The Distributor, acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, dated December 20, 1994 (the "Underwriting
Agreement"). The Distributor is owned by the Adviser's parent company. 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 Underwriting Agreement is renewable from year to
year if approved (a) (i) by the Fund's Board of Directors or (ii) 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. 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 Fund pays all expenses attributable to the registrations of
its shares under federal and state laws, including registration and
8
<PAGE> 42
filing fees, the cost of preparation of the prospectuses, related legal and
auditing expenses, and the cost of printing prospectuses for current
shareholders.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan", "Class B Plan" or "Class C
Plan", respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Directors have authorized payments by the Fund under the Plan 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 C Plans,
authorized payments by the Fund include payments at an annual rate of up to
0.15% of the net assets of the shares of the respective class to reimburse the
Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to four percent of the purchase price of Class B
shares purchased by the clients of broker-dealers and other Service
Organizations, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, and (5) advertising and promotion expenses, including conducting
and organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses. With respect to the Class C Plan, authorized payments
by the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class C shares to reimburse the Distributor for (1) upfront
commissions and transaction fees of up to 0.75% of the purchase price of Class C
shares purchased by the clients of broker-dealers and other Service
Organizations and ongoing commissions and transaction fees paid to
broker-dealers and other Service Organizations in an amount up to 0.75% of the
average daily net assets of the Fund's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professionals, and (5) advertising and promotion
expenses, including seminars, marketing support salaries and bonuses, and
travel-related expenses. Such reimbursements are subject to the maximum sales
charge limits specified by the National Association of Securities Dealers, Inc.
("NASD") 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 affiliated persons
(as defined in the 1940 Act) of the Fund and who have no direct or indirect
financial interest in the operation of any of the Plans or in any agreements
related to each Plan ("Independent Directors"). In
9
<PAGE> 43
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, each Plan 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 securities of the
Fund. Any change in any of the Plans that would materially increase the
distribution expenses borne by the Fund requires shareholder approval;
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 amendments. So long as each Plan is
in effect, the selection or nomination of the Independent Directors is committed
to the discretion of the Independent Directors.
During the fiscal year ended May 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $418,816 or .13%, respectively of the Fund's average
net assets. Such expenses were paid to reimburse the Distributor for payments
made to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. The offering of Class B and Class C shares
commenced after the end of the fiscal year ended May 31, 1994.
TRANSFER AGENT
During the fiscal years ending May 31, 1992, 1993 and 1994, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $1,131,424, $986,681 and $898,801, respectively, for these
services. These services are provided at cost plus a profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions, if any, on such transactions. As most transactions made by the Fund
are principal transactions at net prices, the Fund incurs little or no brokerage
cost. During the past three years the Fund paid no commissions to brokers on the
purchase or sale of portfolio securities. Portfolio securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include the spread between the bid and
asked price. The Adviser places portfolio transactions in a manner deemed fair
and reasonable to the Fund and not according to any formula. The primary
consideration in all portfolio transactions is prompt execution of orders in an
effective manner at a favorable price.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies, and 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, the main factors considered
by the Adviser are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
Purchases of shares will be priced at the net asset value next determined
after a purchase order becomes effective which is upon receipt by the Fund of
federal funds. The net asset value per share is determined once daily as of the
close of trading on the New York Stock Exchange (the "Exchange") (currently 4:00
p.m., New York time) each day the Exchange is open. The Exchange is currently
closed on weekends and on the
10
<PAGE> 44
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 is computed by dividing the value of the Fund's securities plus all cash
and other assets (including accrued interest) less all liabilities (including
accrued expenses) by the number of shares outstanding.
The valuation of the Fund's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at its
cost and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price that the Fund would receive if
it sold the instrument.
The Fund's use of the amortized cost method of valuing its portfolio
securities is permitted by a rule adopted by the Securities and Exchange
Commission ("SEC"). Under this rule, the Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of thirteen months or less and invest only in securities
determined by the Adviser to be of eligible quality with minimal credit risks.
The Fund's Board of Directors has established procedures reasonably
designed, taking into account current market conditions and the Fund's
investment objective, to stabilize the net asset value per share for purposes of
sales and redemptions at $1.00. These procedures include review by the Board, at
such intervals as it deems appropriate, to determine the extent, if any, to
which the net asset value per share calculated by using available market
quotations deviates from $1.00 per share based on amortized cost. In the event
such deviation should exceed four tenths of one percent, the Board is required
to promptly consider what action, if any, should be initiated. If the Board
believes that the extent of any deviation from a $1.00 amortized cost price per
share may result in material dilution or other unfair results to new or existing
shareholders, it will take such steps as it considers appropriate to eliminate
or reduce these consequences to the extent reasonably practicable. Such steps
may include selling portfolio securities prior to maturity; shortening the
average maturity of the portfolio; withholding or reducing dividends; or
utilizing a net asset value per share determined by using available market
quotations.
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 OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
at net asset value, without sales charge, on any business day through ACCESS.
All orders become effective when the wire or check payment is converted into
federal funds. A check order will normally be converted into federal funds on
the second business day following receipt of payment by ACCESS. When payment is
by wire transfer of federal funds, such order becomes effective upon receipt
provided that prior notice has been given as described below; other bank wire
payments will normally be converted into federal funds on the day following
receipt.
After each initial and subsequent investment, the shareholder receives a
statement of the number of shares owned. Certificates for shares purchased will
not normally be issued but shares will be held on deposit by ACCESS. However,
the shareholder may request a certificate by writing ACCESS for shares at any
time. It is preferred that such request for a certificate be for at least 1,000
shares in order to minimize shareholder service agent costs.
MULTIPLE PRICING SYSTEM
The Fund issues three classes of shares: Class A shares are sold at net
asset value without a 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,
11
<PAGE> 45
have the same rights and are identical in all respects, except that Class B and
Class C shares bear the expenses of the deferred sales arrangements,
distribution fees, and any expenses (including higher transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distribution
fee is paid.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
The CDSC -- Class B and C may be waived on redemptions of Class B and Class
C shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of American Capital
Funds; in such event, as described below, the Fund will "tack" the period for
which the original shares were held 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 also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or disability
of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition,
the charge will be waived on any minimum distribution required to be distributed
in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Withdrawal Plan") with respect to the shareholder's investment in the Fund.
Under the Withdrawl 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 Withdrawal Plan. The
CDSC -- Class B and C will be waived on redemptions made under the Withdrawal
Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Withdrawal 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
12
<PAGE> 46
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
Withdrawal Plan and the ability to offer the Withdrawal Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC -- Class B and Class C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest, 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
shares of the Fund, provided that the reinvestment is effected within 120 days
after such redemption and the shareholder has not previously exercised this
reinvestment privilege with respect to Class C shares of the Fund. Shares
acquired in this manner will be deemed to have the original cost and purchase
date of the redeemed shares for purposes of applying the CDSC -- Class C to
subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Exchange Privilege" in the
Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
Shareholders in the American Capital Family of Funds have an exchange
privilege whereby they may exchange all or part of their shares for the same
class of shares of other funds in the American Capital Family of Funds as
described in the Prospectus. For purposes of determining the sales charge rate
previously paid on Class A shares, all sales charges paid on the exchanged
security and on any security previously exchanged for such security or for any
of its predecessors shall be included. If the exchanged security was acquired
through reinvestment, that security is deemed to have been sold with a sales
charge rate equal to the rate previously paid on the security on which the
dividend or distribution was paid. If a shareholder exchanges less than all of
his securities, the security upon which the highest sales charge rate was
previously paid is deemed exchanged first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on
13
<PAGE> 47
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 above.
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.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CHECK WRITING PRIVILEGE
To establish the check writing privilege, a shareholder must complete the
appropriate section of the application and the Authorization for Redemption form
and return both documents to ACCESS before checks will be issued. All signatures
on the authorization card must be guaranteed if any of the signators are persons
not referenced in the account registration or if more than 30 days have elapsed
since ACCESS established the account on its records. Moreover, if the
shareholder is a corporation, partnership, trust, fiduciary, executor or
administrator, the appropriate documents appointing authorized signers
(corporate resolutions, partnerships or trust agreements) must accompany the
authorization card. The documents must be certified in original form, and the
certificates must be dated within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
DIVIDENDS AND TAXES
The Fund's net income is declared as dividends on a daily basis. Dividends
are paid to shareholders of record immediately prior to the determination of net
asset value for that day. Since shares are issued and redeemed at the time net
asset value is determined, dividends commence on the day following the date
shares are issued and are received for the day shares are redeemed. 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. All dividends
are automatically invested in additional full and fractional shares of the Fund
at net asset value. Shareholders may elect to receive monthly payment of
dividends in cash by written instruction to ACCESS. Shares purchased by daily
reinvestments are liquidated at the net asset value on the last business day of
the month and the proceeds of such redemption less any applicable CDSC mailed to
the shareholder electing cash payment. A redeeming shareholder receives all
dividends accrued through the date of redemption.
The Fund's net income for dividend purposes is calculated daily and
consists of interest accrued or discount earned, plus or minus any net realized
gains or losses on portfolio securities, less any amortization of premium and
the expenses of the Fund.
Should the Fund incur or anticipate any unusual expense, or loss or
depreciation which would adversely affect its net asset value per share or
income for a particular period, the Board of Directors would at that time
consider whether to adhere to the present dividend policy described above or to
revise it in the light of the then prevailing circumstances. For example, if the
Fund's net asset value per share was reduced below $1.00, the Board may suspend
further dividend payments until net asset value returned to $1.00. Thus, such
expenses or losses or depreciation may result in an investor receiving no
dividends for the period during which he held his shares and in his receiving
upon redemption a price per share lower than that which he paid.
14
<PAGE> 48
By meeting certain diversification of assets and other requirements of the
Internal Revenue Code (the "Code"), the Fund intends to continue to qualify as a
regulated investment company and thereby be relieved from payment of federal
income taxes on that portion of its net investment income and net realized
capital gains which is distributed to shareholders. Dividends from net
investment income and distributions from any net realized short-term capital
gains are taxable to shareholders as ordinary income. Dividends do not qualify
for the dividends received deduction for corporations. All dividends and any
distributions are taxable to the shareholder whether or not reinvested in
shares. Information as to the federal tax status of dividends and distributions
is provided by the Fund to shareholders annually if such amounts are $10.00 or
more.
If for any taxable year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income,
including any net realized capital gains, would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders).
The Fund is subject to a four percent excise tax to the extent it does not
distribute to its shareholders during any calendar year at least 98% of its
ordinary taxable (net investment) income for the twelve months ended December
31, plus 98% of its capital gain net income for the twelve months ended October
31 of such year. The Fund intends to distribute sufficient amounts to avoid
liability for the excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year
are considered taxable income to shareholders on the record date even though
paid in the next year.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate up to 30% under existing provisions of
the Code applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Non-resident shareholders are urged to consult their own tax 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 any 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.
YIELD INFORMATION
The Fund's annualized current yield for the seven day period ending
November 30, 1994 was 4.33%. Its compound effective yield for the same period
was 4.43%.
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<PAGE> 49
The yield of the Fund is its net income expressed in annualized terms. The
SEC requires by rule that a yield quotation set forth in an advertisement for a
"money market" fund be computed by a standardized method based on a historical
seven calendar day period. The standardized yield is computed by determining the
net change (exclusive of realized gains and losses and unrealized appreciation
and depreciation) in the value of an hypothetical pre-existing account having a
balance of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by
(365/7). The determination of net change in account value reflects the value of
additional shares purchased with dividends from the original share, dividends
declared on both the original share and such additional shares, and all fees
that are charged to all shareholder accounts, in proportion to the length of the
base period and the Fund's average account size. The Fund may also calculate its
annualized yield by compounding the unannualized base period return (calculated
as described above) by adding 1 to the base period return, raising the sum to a
power equal to 365 divided by 7, and subtracting one.
The yield quoted at any time represents the amount being earned on a
current basis for the indicated period and is a function of the types of
instruments in the Fund's portfolio, their quality and length of maturity, and
the Fund's operating expenses. At May 31, 1994, 22% of the Fund's portfolio was
invested in obligations of U.S. Government Agencies', 35% was invested in
commercial paper of which 100% was rated A-1 or Prime-1, 2% was invested in U.S.
Treasury obligations and the remaining 41% was invested in repurchase
agreements. See "Investment Policies -- Commercial Paper," and the Appendix
hereto. The length of maturity for the portfolio is the average dollar weighted
maturity of the portfolio. This means that the portfolio has an average maturity
of a stated number of days for all of its issues. The calculation is weighted by
the relative value of the investment. At May 31, 1994 the average dollar
weighted maturity of the portfolio was 17 days.
The yield fluctuates daily as the income earned on the investments of the
Fund fluctuates. Accordingly, there is no assurance that the yield quoted on any
given occasion will remain in effect for any period of time. It should also be
emphasized that the Fund is an open-end investment company and that there is no
guarantee that the net asset value will remain constant. A shareholder's
investment in the Fund is not insured. Investors comparing results of the Fund
with investment results and yields from other sources such as banks or savings
and loan associations should understand this distinction. The yield quotation
may be of limited use for comparative purposes because it does not reflect
charges imposed at the Account level which, if included, would decrease the
yield.
Other funds of the money market type as well as banks and savings and loan
associations may calculate their yield on a different basis, and the yield
quoted by the Fund could vary upwards or downwards if another method of
calculation or base period were used.
Yield is calculated separately for Class A, Class B and Class C shares.
Because of the differences in distribution fees, the yield for each of the
classes will differ.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs annual audits of the
Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form of the Annual and Semi-Annual
Reports to Shareholders including the related report of Independent Accountants
on such financial statements are hereby included in the Statement of Additional
Information.
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<PAGE> 50
APPENDIX
Description of the highest commercial paper, bond and other short-term and
long-term rating categories assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Service ("Moody's"), Fitch Investors Service, Inc. ("Fitch"),
Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc. ("IBCA").
COMMERCIAL PAPER AND SHORT-TERM RATINGS
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations and ordinarily well established industries,
high rates of return of funds employed, conservative well established
industries, high rates of return of funds employed, conservative capitalization
structures with moderate reliance on debt and ample asset protection, broad
margins in earnings coverage of fixed financial charges and high internal cash
generation, and well established access to a range of financial markets and
assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a strong
capacity for repayment of short-term promissory obligations. This ordinarily
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
The rating Fitch-1 (Highest Grade) is the highest commercial paper rating
assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest
degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is
the second highest commercial paper rating assigned by Fitch which reflects an
assurance of timely payment only slightly less in degree than the strongest
issues.
The rating Duff-1 is the highest commercial paper rating assigned by Duff,
Paper rated Duff-1 is regarded as having very high certainty of timely payment
with excellent liquidity factors which are supported by ample asset protection.
Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty
of timely payment, good access to capital markets and sound liquidity factors
and company fundamentals. Risk factors small.
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. The designation A2 by
IBCA indicates that the obligation is supported by a strong capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
BOND AND LONG-TERM RATINGS
Bonds rated AAA are considered by S&P to be the highest grade obligations
and possess an extremely strong capacity to pay principal and interest. Bonds
rated AA by S&P are judged by S&P to have a very strong capacity to pay
principal and interest and, in the majority of instances, differ only in small
degrees from issues rated AAA.
Bonds which are rated Aaa by Moody's are judged to be of the best quality.
Bonds are rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large or fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2
and 3 in the Aa rating category. The modifier 1 indicates a ranking for the
security in
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<PAGE> 51
the higher end of this rating category, the modifier 2 indicates a mid-range
ranking, and the modifier 3 indicates a ranking in the lower end of the rating
category.
Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions and liable to but slight market fluctuation other than through
changes in the money rate. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements, with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be
of safety virtually beyond question and are readily salable, whose merits are
not unlike those of the AAA class, but whose margin of safety is less strikingly
broad. The issue may be the obligation of a small company, strongly secured but
influenced as to rating by the lesser financial power of the enterprise and more
local type of market.
Bonds rated Duff-1 are judged by Duff to be of the highest credit quality
with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds
rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions.
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations rated AA have a
very low expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very significantly.
IBCA also assigns a rating to certain international and U.S. banks. An IBCA
bank rating represents IBCA's current assessment of the strength of the bank and
whether such bank would receive support should it experience difficulties. In
its assessment of a bank, IBCA uses a dual rating system comprised of Legal
Rating and Individual Ratings. In addition, IBCA assigns banks Long- and
Short-Term Ratings as used in the corporate ratings discussed above. Legal
Ratings, which range in gradation from 1 through 5, address the question of
whether the bank would receive support by central banks or shareholders if it
experienced difficulties, and such ratings are considered by IBCA to be a prime
factor in its assessment of credit risk. Individual Ratings, which range in
gradations from A through E, represent IBCA's assessment of a bank's economic
merits and address the question of how the bank would be viewed if it were
entirely independent and could not rely on support from state authorities or its
owners.
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<PAGE> 52
Reserve Fund
Investment Portfolio
November 30, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount Value
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
United States Agency and Government Obligations 46.8%
Federal Home Loan Mortgage Corp.,
$ 25,000,000 5.32%, 1/19/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,817,708
1,926,000 5.33%, 1/4/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,916,113
16,000,000 5.38%, 1/24/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,870,200
62,000,000 5.70%, 2/2/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,379,449
22,000,000 5.78%, 2/16/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,728,300
Federal National Mortgage Association
5,000,000 4.70%, 12/16/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,989,733
25,000,000 5.32%, 1/20/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,811,938
53,000,000 5.78%, 2/17/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,337,058
10,000,000 5.79%, 2/22/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,866,767
15,000,000 5.80%, 2/21/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,802,183
10,000,000 5.81%, 1/4/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,943,806
Total United States Agency and Government Obligations
($242,463,255) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,463,255
Commercial Paper 11.5%
26,000,000 General Electric Capital Corp., 5.89%, 2/16/95 . . . . . . . . . . . . . . . . 25,673,267
10,000,000 MetLife Funding, Inc., 5.04%, 12/16/94 . . . . . . . . . . . . . . . . . . . . 9,977,778
24,000,000 Prudential Funding Corp., 5.47%, 1/3/95 . . . . . . . . . . . . . . . . . . . 23,877,147
Total Commercial Paper (Cost $59,528,192) . . . . . . . . . . . . . . . . . . 59,528,192
Repurchase Agreements 33.4%
113,790,000 Salomon Brothers, Inc., dated 11/30/94, 5.70%, due 12/1/94
(collateralized by U.S. Government obligations in a pooled
cash account) repurchase proceeds $113,808,017 . . . . . . . . . . . . . . . 113,790,000
59,740,000 State Street Bank & Trust Co., dated 11/30/94, 5.40%,
due 12/1/94 (collateralized by U.S. Government securities
in a pooled cash account) repurchase proceeds $59,748,961 . . . . . . . . . . 59,740,000
Total Repurchase Agreements (Cost $173,530,000) . . . . . . . . . . . . . . . 173,530,000
TOTAL INVESTMENTS (Cost $475,521,447) 91.7% . . . . . . . . . . . . . . . . . 475,521,447
Other assets and liabilities, net 8.3% . . . . . . . . . . . . . . . . . . . . 42,776,624
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 518,298,071
</TABLE>
See Notes to Financial Statements.
F-1
<PAGE> 53
Statement of Assets and Liabilities
November 30, 1994 (Unaudited)
<TABLE>
<S> <C>
ASSETS
Investments, at amortized cost . . . . . . . . . . . . . . . . . . . $ 475,521,447
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,717
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . 46,964,935
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,853
522,618,952
LIABILITIES
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . 3,842,421
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 186,223
Due to Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,087
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . 111,150
4,320,881
Net Assets, equivalent to $1.00 per share . . . . . . . . . . . . . . $ 518,298,071
Net Assets were comprised of:
Shares of capital stock, par value $.01 per share;
1 billion shares authorized; 518,305,008 shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,183,050
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . 513,055,484
Undistributed net investment income . . . . . . . . . . . . . . . . . 59,537
NET ASSETS at November 30, 1994 . . . . . . . . . . . . . . . . . . . $ 518,298,071
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE> 54
Statement of Operations
Six Months Ended November 30, 1994 (Unaudited)
<TABLE>
<S> <C>
Investment Income
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,152,968
Expenses
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,019,909
Shareholder service agent's fees and expenses . . . . . . . . . . . . 706,799
Service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339,159
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . 48,218
Registration and filing fees . . . . . . . . . . . . . . . . . . . . 38,250
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . 13,580
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . 10,859
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,349
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,125
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,069
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,186
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,210,503
Net investment income . . . . . . . . . . . . . . . . . . . . . . . 8,942,465
Increase in net assets resulting from operations . . . . . . . . . . $ 8,942,465
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 55
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1994 May 31, 1994
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . $ 463,827,313 $ 279,344,078
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 8,942,465 7,722,464
Increase in net assets resulting from operations . . . . . . . . . . 8,942,465 7,722,464
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME . . . . . . . . (8,961,180) (7,713,417)
FUND SHARE TRANSACTIONS
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . . 1,651,205,413 2,733,962,738
Proceeds from shares issued for dividends reinvested . . . . . . . . 8,945,975 7,713,418
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . (1,605,661,915) (2,557,201,968)
Increase in net assets resulting from Fund share transactions . . . . 54,489,473 184,474,188
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . 54,470,758 184,483,235
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . $ 518,298,071 $ 463,827,313
FUND SHARE TRANSACTIONS
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,651,205,413 2,733,962,738
Shares issued for dividends reinvested . . . . . . . . . . . . . . . 8,945,975 7,713,418
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,605,661,915) (2,557,202,100)
Increase in Fund shares outstanding . . . . . . . . . . . . . . . . 54,489,473 184,474,056
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 56
Notes to Financial Statements
(Unaudited)
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
American Capital Reserve 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
Investments are valued at amortized cost, which approximates market
value. The cost of investments for federal income tax purposes is
substantially the same as for financial reporting purposes.
B. REPURCHASE AGREEMENTS
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Fund may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised or sub-advised by 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.
C. FEDERAL INCOME TAXES
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized gains to its shareholders.
D. 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 amortized
cost. Interest income is accrued daily.
E. DIVIDENDS
The Fund records daily dividends from net investment income. These
dividends are automatically reinvested in additional shares of the Fund
at net asset value. Shares purchased by daily reinvestments are
liquidated at net asset value on the last business day of the month and
the proceeds of such redemptions paid to the shareholders electing to
receive dividends in cash. The Fund distributes tax basis earnings in
accordance with the minimum distribution requirements of the Internal
Revenue Code, which may differ from generally accepted accounting
principles. Such distributions may result in dividends in excess of
financial statement net investment income.
F. DEBT DISCOUNT AND PREMIUM
For financial and tax reporting purposes, all discounts and premiums are
amortized over the life of the security.
NOTE 2-MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are
calculated monthly, based on the average daily net assets of the Fund at an
annual rate of .50% of the first $150 million; .45% of the next $100 million;
.40% of the next $100 million; and .35% of the amount in excess of $350
million.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the period ended November 30, 1994, these charges included $4,678 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 the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the period ended November 30, 1994, fees
for these services aggregated $582,718.
F-5
<PAGE> 57
Under a Distribution Plan, the Fund pays up to .15% per annum of its average
daily net assets to Van Kampen American Capital Distributors, Inc. (the
"Distributor"), for expenses and service fees incurred.
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 and the shareholder service agent.
NOTE 3-DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,450 plus a fee of $35 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $540. During the period, such fees aggregated
$9,428.
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 November 30, 1994, the liability for the Plan aggregated
$62,805. Each director covered by 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.
Financial Highlights
Selected data for a share of capital stock outstanding throughout each of the
periods indicated. (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended May 31
November 30,
1994 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Income from operations
Investment income . . . . . . . . . . . . .0234 .0329 .0353 .052 .0758 .0893
Expenses . . . . . . . . . . . . . . . . (.0046) (.0100) (.0109) (.0105) (.0094) (.0092)
Net investment income . . . . . . . . . . .0188 .0229 .0244 .0415 .0664 .0801
Dividends from net
investment income . . . . . . . . . . . . (.0188) (.0229) (.0244) (.0415) (.0664) (.0801)
Net asset value, end of period . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
TOTAL RETURN . . . . . . . . . . . . . . 1.89% 2.32% 2.44% 4.20% 6.80% 8.33%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) . . . $518.3 $463.8 $279.3 $329.2 $402.3 $426.1
Average net assets (millions) . . . . . . $475.7 $326.8 $306.7 $377.5 $482.6 $479.4
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . .93%* 1.03% 1.09% 1.05% .94% .91%
Net investment income . . . . . . . . . . 3.75%* 2.36% 2.44% 4.19% 6.68% 7.99%
</TABLE>
*Annualized.
See Notes to Financial Statements.
F-6
<PAGE> 58
Investment Portfolio
May 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
--------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER 35.4%
$22,000,000 Chevron Oil Finance Co., 4.26%, 6/15/94 . . . . . . . . . . $ 21,961,042
24,000,000 General Electric Capital Corp., 4.30%, 6/17/94 . . . . . . 23,951,493
22,000,000 General Electric Co., 4.25%, 6/20/94 . . . . . . . . . . . 21,948,300
9,387,000 MetLife Funding, Inc., 4.24%, 6/23/94 . . . . . . . . . . . 9,361,632
21,000,000 Raytheon Co., 4.24%, 6/24/94 . . . . . . . . . . . . . . . 20,940,920
20,000,000 State Bank of New South Wales, 4.27%, 6/27/94 . . . . . . . 19,936,250
22,000,000 Toronto Dominion Holdings, 4.25%, 6/20/94 . . . . . . . . . 21,948,300
24,000,000 Wal-Mart Stores, Inc., 4.26%, 6/2/94 . . . . . . . . . . . 23,994,333
TOTAL COMMERCIAL PAPER (Cost $164,042,270) . . . . . . . . 164,042,270
UNITED STATES AGENCY AND GOVERNMENT
OBLIGATIONS 25.1%
31,810,000 Federal Home Loan Banks, 4.11% to 4.20%, 6/2/94 to 6/23/94 31,741,525
65,000,000 Federal Home Loan Mortgage Corp., 4.21%, 6/27/94 . . . . . 64,795,888
10,000,000 Federal National Mortgage Association, 4.20%, 7/1/94 . . . 9,964,006
10,000,000 United States Treasury Bills, 3.47%, 1/12/95 . . . . . . . 9,789,380
Total United States Agency and Government Obligations
(Cost $116,290,799) . . . . . . . . . . . . . . . . . . . . 116,290,799
--------------------------------------------------------------------------------------------
Repurchase Agreements 42.4%
98,380,000 Kidder, Peabody & Co., Inc., dated 5/31/94, 4.27%, due 6/1/94
(collateralized by U.S. Government obligations in a pooled
cash account) repurchase proceeds $98,391,669 . . . . . . . 98,380,000
98,382,000 Swiss Bank Corp. Government Securities, Inc., dated 5/31/94,
4.30%, due 6/1/94 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase proceeds
$98,393,751 . . . . . . . . . . . . . . . . . . . . . . . . 98,382,000
Total Repurchase Agreements (Cost $196,762,000) . . . . . . 196,762,000
TOTAL INVESTMENTS (Cost $477,095,069)102.9% . . . . . . . . 477,095,069
Other assets and liabilities, net(2.9%) . . . . . . . . . . (13,267,756)
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . $ 463,827,313
--------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE> 59
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
May 31, 1994
<S> <C>
ASSETS
Investments, at amortized cost . . . . . . . . . . . . . . . . . . . . . $ 477,095,069
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,868
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . 480,220
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,853
477,712,010
LIABILITIES
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . 13,399,235
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,378
Due to Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,067
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,017
13,884,697
NET ASSETS, equivalent to $1.00 per share . . . . . . . . . . . . . . . . $ 463,827,313
NET ASSETS WERE COMPRISED OF:
Shares of capital stock, par value $.01 per share; 1 billion shares authorized;
463,815,535 shares outstanding . . . . . . . . . . . . . . . . . . . . . $ 4,638,155
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459,110,906
Undistributed net investment income . . . . . . . . . . . . . . . . . . . 78,252
NET ASSETS at May 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . $ 463,827,313
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-8
<PAGE> 60
Statement of Operations
<TABLE>
<CAPTION>
Year Ended May 31, 1994
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,095,566
Expenses
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,494,701
Shareholder service agent fees and expenses . . . . . . . . . . . . . . . . 1,181,648
Service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418,816
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,905
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . 75,472
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 27,222
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,884
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,617
Director's fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 15,346
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,218
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,273
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,373,102
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,722,464
Increase in net assets resulting from operations . . . . . . . . . . . . . $ 7,722,464
</TABLE>
See Notes to Financial Statements.
F-9
<PAGE> 61
Statement of Changes in Net Assets
May 31, 1993
<TABLE>
<CAPTION>
Year Ended May 31
1994 1993
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . $ 279,344,078 $ 329,174,695
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . 7,722,464 7,481,877
Increase in net assets resulting from operations . . . . . . 7,722,464 7,481,877
Dividends to shareholders from net investment income . . . . (7,713,417) (7,491,278)
FUND SHARE TRANSACTIONS
Proceeds from shares sold . . . . . . . . . . . . . . . . . . 2,733,962,738 881,962,949
Proceeds from shares issued for dividends reinvested . . . . 7,713,418 7,491,277
Cost of shares redeemed . . . . . . . . . . . . . . . . . . (2,557,201,968) (939,275,442)
Increase (decrease) in net assets resulting from Fund share
transactions . . . . . . . . . . . . . . . . . . . . . . . . 184,474,188 (49,821,216)
Increase (decrease) in net assets . . . . . . . . . . . . . . 184,483,235 (49,830,617)
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . $ 463,827,313 $ 279,344,078
FUND SHARE TRANSACTIONS
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . 2,733,962,738 881,962,949
Shares issued for dividends reinvested . . . . . . . . . . . 7,713,418 7,491,277
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . (2,557,202,100) (939,275,439)
Increase (decrease) in Fund shares outstanding . . . . . . . 184,474,056 (49,821,213)
</TABLE>
See Notes to Financial Statements.
F-10
<PAGE> 62
Notes to Financial Statements
May 31, 1993
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
American Capital Reserve 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
Investments are valued at amortized cost, which approximates market
value. The cost of investments for federal income tax purposes is
substantially the same as for financial reporting purposes.
B. REPURCHASE AGREEMENTS
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund
may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised or sub-advised by American Capital Asset
Management, Inc. (the "Adviser"), the daily aggregate of which is
invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Fund will make
payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not
less than the repurchase proceeds due the Fund.
C. FEDERAL INCOME TAXES
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized gains to its shareholders.
D. 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
amortized cost. Interest income is accrued daily.
E. DIVIDENDS
The Fund records daily dividends from net investment income. These
dividends are automatically reinvested in additional shares of the
Fund at net asset value. Shares purchased by daily reinvestments are
liquidated at net asset value on the last business day of the month
and the proceeds of such redemptions paid to the shareholders electing
to receive dividends in cash. The Fund distributes tax basis earnings
in accordance with the minimum distribution requirements of the
Internal Revenue Code, which may result in dividends in excess of
financial statement net investment income.
Effective June 1, 1993, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies. As a result of this statement, the Fund changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions
determined in accordance with income tax regulations. The cumulative
effect caused by adopting this statement was to increase undistributed
net investment income and decrease capital surplus by $66,653. Current
year net investment income, net assets and net asset value per share
were not affected by this reclassification.
F. DEBT DISCOUNT AND PREMIUM
For financial and tax reporting purposes, all discounts and premiums
are amortized over the life of the security.
NOTE 2-MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are
calculated monthly, based on the average daily net assets of the Fund at an
annual rate of .50% of the first $150 million; .45% of the next $100 million;
.40% of the next $100 million; and .35% of the amount in excess of $350
million.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the year ended May 31, 1994, these charges included $10,454 as the Fund's
share of the employee costs attributable to the Fund's accounting officers. A
portion of the accounting services expense was paid to the Adviser in
reimbursement of personnel, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended May 31, 1994, the fees for
these services aggregated $898,801.
Under a Distribution Plan, the Fund pays up to .15% per annum of its average
daily net assets to American Capital Marketing, Inc. (the "Distributor"), for
expenses and service fees incurred.
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 and the shareholder service agent.
F-11
<PAGE> 63
NOTE 3-DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,590 plus a fee of $40 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $590. During the year, such fees aggregated
$13,400.
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 May 31, 1994, the liability for the Plan aggregated
$60,398. Each director covered by 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.
Financial Highlights
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Year Ended May 31
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . $1.00 $1.00 $1.00 $1.00 $1.00
Income from operations
INVESTMENT INCOME . . . . . . . . . . . . .0329 .0353 .052 .0758 .0893
Expenses . . . . . . . . . . . . . . . . (.0100) (.0109) (.0105) (.0094) (.0092)
Net investment income . . . . . . . . . . .0229 .0244 .0415 .0664 .0801
Dividends from net investment income . . (.0229) (.0244) (.0415) (.0664) (.0801)
Net asset value, end of period . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
TOTAL RETURN . . . . . . . . . . . . . . 2.32% 2.44% 4.20% 6.80% 8.33%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . $463.8 $279.3 $329.2 $402.3 $426.1
Average net assets (millions) . . . . . . $326.8 $306.7 $377.5 $482.6 $479.4
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . 1.03% 1.09% 1.05% .94% .91%
Net investment income . . . . . . . . . . 2.36% 2.44% 4.19% 6.68% 7.99%
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE> 64
Report of Independent Accountants
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL RESERVE FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Reserve Fund,
Inc. at May 31, 1994, 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
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at May 31, 1994 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Houston, Texas
July 5, 1994
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