<PAGE> 1
REGISTRATION NO. 2-90482
811-4003
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 (X)
POST-EFFECTIVE AMENDMENT NO. 19 (X)
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 (X)
AMENDMENT NO. 20 (X)
</TABLE>
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
2800 POST OAK BLVD., HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 993-0500
NORI L. GABERT
VICE PRESIDENT AND ASSOCIATE GENERAL COUNSEL
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
Approximate Date of Proposed Public Offering: As soon as practicable following
effectiveness of this Registration Statement.
---------------------
It is proposed that this filing will become effective:
/ / immediately upon filing pursuant to paragraph (b).
/X/ on April 30, 1995 pursuant to paragraph (b).
/ / 60 days after filing pursuant to paragraph (a)(i).
/ / on (date) pursuant to paragraph (a)(i).
/ / 75 days after filing pursuant to paragraph (a)(ii).
/ / on (date) pursuant to paragraph (a)(ii) of Rule 285.
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Exhibit Index required by Rule 483(a) under the Securities Act of 1933 is
located at page of the manually copy Registration Statement.
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE SECURITIES
ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940 AND,
PURSUANT TO PARAGRAPH (B)(2), REGISTRANT DID NOT FILE A RULE 24F-2 NOTICE FOR
ITS LAST FISCAL YEAR BECAUSE IT DID NOT SELL ANY SECURITIES PURSUANT TO SUCH
DECLARATION DURING SUCH FISCAL YEAR.
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<PAGE> 2
[CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT AGGREGATE
TITLE OF SECURITY BEING AMOUNT PRICE OFFERING OF REGISTRATION
BEING REGISTERED REGISTERED PER UNIT(1) PRICE(2) FEE
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Stock $.001 par
value...................... 129,512,856 $10.58 $289,998 $100
- - -------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the offering price of $10.58 per share on April 18, 1995.
(2) This calculation is made pursuant to Rule 24e-2 under the Investment Company
Act of 1940. During the fiscal year ended December 31, 1994, 129,485,446
shares were redeemed or repurchased. No shares have been utilized for
reductions prior to this time and all of such shares are being used for
reduction at this time.
<PAGE> 3
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM
PART A PROSPECTUS CAPTION
- - ------------- ------------------
<S> <C> <C>
1. Cover Page................................. Cover Page
2. Synopsis................................... Prospectus Summary; Expense Synopsis
3. Condensed Financial Information............ Financial Highlights
4. General Description of Registrant.......... Investment Objective and Policies;
Investment Practices and Restrictions; The
Fund and Its Management
5. Management of the Fund..................... The Fund and Its Management
6. Capital Stock and Other Securities......... Multiple Pricing System; The Fund and Its
Management; Dividends, Redemption of
Shares; Distributions and Taxes;
Additional Information
7. Purchase of Securities Being Offered....... Multiple Pricing System; Purchase of Shares
8. Redemption or Repurchase................... Redemption of Shares
9. Pending Legal Proceedings.................. Inapplicable
</TABLE>
<TABLE>
<CAPTION>
PART B STATEMENT OF ADDITIONAL INFORMATION
- - ------ -----------------------------------
<S> <C> <C>
10. Cover Page................................. Cover Page
11. Table of Contents.......................... Table of Contents
12. General Information and History............ General Information
13. Investment Objective and Policies.......... Investment Objective and Policies; Option,
Futures Contracts and Related Options;
Investment Restrictions
14. Management of the Registrant............... General Information; Directors and
Executive Officers; Investment Advisory
Agreement
15. Control Persons and Principal Holders of
Securities............................... Directors and Executive Officers;
Investment Advisory Agreement
16. Investment Advisory and Other Services..... Investment Advisory Agreement; Distributor;
Transfer Agent; Portfolio Transactions
and Brokerage; Other Information
17. Brokerage Allocation and Other Practices... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities......... Purchase and Redemption of Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Determination of Net Asset Value; Purchase
and Redemption of Shares; Multiple Pricing
System
20. Tax Status................................. Dividends, Distributions and Federal Taxes
21. Underwriters............................... Distributor
22. Calculation of Performance Data............ Prior Performance Information
23. Financial Statements....................... Financial Statements
PART C
- - ------
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item in Part C of this registration statement.
<PAGE> 4
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AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
- - ------------------------------------------------------------------------------
2800 Post Oak Boulevard Houston, Texas 77056 (800) 421-5666
May 1, 1995
American Capital Government Securities, Inc. (the "Fund") is a mutual fund
whose investment objective is to seek to provide investors with a high current
return consistent with preservation of capital. The Fund invests primarily in
debt securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. In order to hedge against changes in interest rates, the Fund
may also purchase or sell options and engage in transactions involving interest
rate futures contracts and options on such contracts. The Fund does not engage
in an option writing program for the purpose of enhancing or supporting its
monthly distribution.
There is no assurance that the Fund will achieve its investment objective.
This Prospectus tells investors briefly the information they should know
before investing in the Fund. Investors should read and retain this Prospectus
for future reference.
A Statement of Additional Information dated the same date as this
Prospectus has been filed with the Securities and Exchange Commission ("SEC")
and contains further information about the Fund. A copy of the Statement of
Additional Information may be obtained without charge by calling or writing the
Fund at the telephone number and address printed above. The Statement of
Additional Information is incorporated by reference into this Prospectus.
THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THE SHARES OF THIS FUND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
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AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
- - ------------------------------------------------------------------------------
CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICE AGENT:
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
INVESTMENT ADVISER:
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
DISTRIBUTOR:
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
- - ------------------------------------------------------------------------------
TABLE OF CONTENTS
- - ------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary........ 3
Expense Synopsis.......... 5
Financial Highlights...... 7
Multiple Pricing System... 9
Investment Objective and
Policies................ 12
Investment Practices and
Restrictions............ 17
The Fund and Its
Management.............. 21
Purchase of Shares........ 22
Distribution Plans........ 30
Shareholder Services...... 32
Redemption of Shares...... 36
Dividends, Distributions
and Taxes............... 39
Prior Performance
Information............. 41
Additional Information.... 42
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or by the Distributor. This Prospectus does
not constitute an offering by the Distributor in any jurisdiction in which
such offering may not lawfully be made.
2
<PAGE> 6
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PROSPECTUS SUMMARY
- - ------------------------------------------------------------------------------
SHARES OFFERED. Common Stock.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
TYPE OF COMPANY. Diversified, open-end management investment company.
INVESTMENT OBJECTIVE. The Fund seeks to provide high current return
consistent with preservation of capital.
INVESTMENT POLICY. Invests primarily in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The Fund
may sell (write) and purchase call and put options, and may purchase and sell
interest rate futures contracts and options on such contracts since such
transactions are entered into for bona fide hedging purposes. The Fund may
purchase or sell U.S. Government securities on a forward commitment basis and
enter into interest rate swaps and may purchase or sell interest rate caps,
floors and collars.
INVESTMENT RESULTS. The investment results of the Fund since its inception
are shown in the table of "Financial Highlights."
RISK FACTORS. The market prices of debt securities, including U.S.
Government securities, generally fluctuate with changes in interest rates so
that the Fund's net asset value can be expected to decrease as interest rates
rise. As interest rates fall, increases in the Fund's net asset value may be
limited by investments in mortgage-related securities and by the sale of
options. Varying economic and market conditions may affect the value of, and
yields on, debt securities owned by the Fund. The Fund may also purchase or sell
U.S. Government securities on a forward commitment basis, purchase or sell
options and engage in transactions involving interest rate futures contracts and
options on such contracts, and may lend its portfolio securities. The Fund may
enter into interest rate swaps and may purchase or sell interest rate caps,
floors and collars. Each of such activities may subject the Fund to additional
risks. See "Investment Objective and Policies -- General, U.S. Government
Securities and Other Government Related Securities," "Investment Practices and
Restrictions -- Forward Commitments, Lending of Securities, Options, Futures
Contracts and Related Options and Interest Rate Transactions." No assurance can
be given as to the actual maturity of a mortgage-related security because the
mortgage loans underlying the security may be prepaid by the obligor. Depending
on market conditions, the Fund may be able to reinvest prepayments passed
through to it only at a lower yielding investment rate. See "Investment
Objective and Policies -- U.S. Government Securities." Shares of the Fund are
not insured or guaranteed by the U.S. Government, its agencies or
instrumentalities or by any other person or entity.
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") serves as investment adviser to the Fund. The Adviser provides
3
<PAGE> 7
investment advice to 50 investment company portfolios. See "The Fund and Its
Management."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").
MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Multiple Pricing
System -- Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."
CLASS A SHARES. These shares are offered at net asset value per share plus
a maximum initial sales charge of 4.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."
CLASS B SHARES. These shares are offered at net asset value per share and
are subject to a maximum contingent deferred sales charge of four percent of
redemption proceeds during the first and second year, declining each year
thereafter to zero percent after the fifth year. See "Redemption of Shares." The
Fund pays a combined annual distribution fee and service fee of up to one
percent of its average daily net assets attributable to such class of shares.
See "Purchase of Shares -- Class B Shares" and "Distribution Plans." Class B
shares will convert automatically to Class A shares six years after the end of
the calendar month in which the shareholder's order to purchase was accepted.
See "Multiple Pricing System -- Conversion Feature."
CLASS C SHARES. These shares are offered at net asset value per share and
are subject to a contingent deferred sales charge of one percent on redemptions
made within one year of purchase. See "Redemption of Shares." The Fund pays a
combined annual distribution fee and service fee of up to one percent of its
average daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class C Shares" and "Distribution Plans." Class C shares will convert
automatically to Class A shares ten years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."
DIVIDENDS AND DISTRIBUTIONS. Income dividends are paid monthly; any net
short-term or long-term capital gains are distributed at least annually. The
Fund does not engage in an option writing program for the purpose of enhancing
or supporting its monthly distribution. 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. A portion of the
dividends and distributions paid may constitute a return of capital for federal
income tax purposes. See "Dividends, Distributions and Taxes."
4
<PAGE> 8
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EXPENSE SYNOPSIS
- - ------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------------
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum sales
charge
imposed on
purchases
(as a
percentage of
offering
price)....... 4.75%(a) None None
Sales charge
imposed on
dividend
reinvestments... None None None
Deferred sales
charge (as a
percentage of
original
purchase
price or
redemption
proceeds,
whichever is
lower)....... None* 4% during the first and 1% during
second year, the(e)
3% during the third year, first year(b)
2.5% during the fourth year,
1.5% during the fifth year
and 0% after the fifth
year(b)
Exchange
fee(c)....... $5.00(a) $5.00(f) $5.00(f)
ANNUAL FUND OPERATING EXPENSES (as a
percentage of average net assets)
Management
fees......... .51%(a) .51%(f) .51%(f)
Rule 12b-1
fees(d)...... .25%(a) 1.00%(f) 1.00%(f)
Other
expenses(e)... .26%(a) .27%(f) .27%(f)
Total fund
operating
expenses..... 1.02%(a) 1.78%(f) 1.78%(f)
</TABLE>
- - ------------
(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares" -- pages 25.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- pages
28 and 29.
(c) Not charged in certain circumstances. See "Shareholder
Services -- Systematic Exchange" and "-- Automatic Exchange" -- page 35.
(d) Up to .25% for Class A Shares, and one percent for Class B and C Shares. See
"Distribution Plans" -- page 30.
(e) See "The Fund and Its Management" -- page 21.
(f) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
* Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of 1% may be imposed
on certain redemptions made within one year of the purchase.
5
<PAGE> 9
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
<S> <C> <C> <C> <C>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - ------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment
including, for Class A shares, the
maximum $47.50 front-end sales charge
and for Class B and Class C shares, a
contingent deferred sales charge
assuming (1) an operating expense ratio
of 1.02% for Class A shares, 1.78% for
Class B shares and 1.78% for Class C
shares, (2) a 5% annual return
throughout the period and (3) redemption
at the end of the period:
Class A............................... $ 57 $ 78 $101 $166
Class B............................... $ 59 $ 89 $114 $171**
Class C............................... $ 28 $ 56 $ 96 $209
An investor would pay the following
expenses on the same $1,000 investment
assuming no redemption at the end of the
period:
Class A............................... $ 57 $ 78 $101 $166
Class B............................... $ 18 $ 56 $ 96 $171**
Class C............................... $ 18 $ 56 $ 96 $209
</TABLE>
- - ------------------------------------------------------------------------------
** Based on conversion to Class A shares after six years.
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. See "Purchase of Shares," "The Fund and Its Management" and
"Redemption of Shares." The example is included to provide a means for the
investor to compare expense levels of funds with different fee structures over
varying investment periods. To facilitate such comparison, all funds are
required to utilize a five percent annual return assumption. This assumption is
unrelated to the Fund's prior performance and is not a projection of future
performance. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
6
<PAGE> 10
- - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
(Selected data for a share of Capital Stock outstanding throughout 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. This information should be read in conjunction with the
financial statements and notes thereto included in the Fund's Annual Report to
shareholders for the fiscal year ended December 31, 1994, which are incorporated
by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
------------- ------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period..... $ 10.80 $ 10.75 $ 10.95 $ 10.27 $ 10.37 $ 9.98 $ 10.31
--------- -------- -------- ------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................ .76 .90587 1.00 1.00 1.04 1.09 1.08
Expenses................................. (.01) (.10212) (.10) (.10) (.09) (.09) (.08)
--------- -------- -------- ------- -------- -------- --------
Net investment income.................... .66 .80375 .90 .90 .95 1.00 1.00
Net realized and unrealized gain or loss
on securities........................... (1.1145) .05 (.2225) .68 (.12) .41 (.31)
--------- -------- -------- ------- -------- -------- --------
Total from investment operations......... (.4545) .85375 .6775 1.58 .83 1.41 .69
--------- -------- -------- ------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income..... (.6755) (.80375) (.8775) (.90) (.93) (1.02) (1.02)
Distributions from net realized gain on
securities.............................. -- .-- .-- .-- .-- .-- .--
--------- -------- -------- ------- -------- -------- --------
Total dividends and distributions........ (.6755) (.80375) (.8775) (.90) (.93) (1.02) (1.02)
--------- -------- -------- ------- -------- -------- --------
Net asset value, end of period........... $ 9.67 $ 10.80 $ 10.75 $ 10.95 $ 10.27 $ 10.37 $ 9.98
========= ======== ======== ======= ======== ======== ========
TOTAL RETURN**(5)........................ (4.26%) 8.15% 6.56% 16.28% 8.71% 14.91% 6.94%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..... $ 2,578.7 $3,418.8 $3,635.3 $3,871.5 $3,887.1 $4,661.5 $5,231.6
Ratios to average net assets
Expenses................................ 1.02% .98% .97% .96% .93% .90% .82%
Net investment income................... 6.96% 7.73% 8.42% 8.65% 9.56% 9.88% 9.74%
Portfolio turnover rate.................. 306% 239% 239% 131% 177% 9% 34%
<CAPTION>
JULY 16,
EIGHT MONTHS YEAR ENDED 1984(1)
ENDED APRIL 30 THROUGH
DECEMBER 31, ------------------------ APRIL 30,
1987 1987 1986 1985(2)
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period..... $ 10.97 $ 11.94 $ 11.65 $ 11.66
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................ .65 .91 1.22 .91
Expenses................................. (.05) (.07) (.08) (.10)
-------- -------- -------- --------
Net investment income.................... .60 .84 1.14 .81
Net realized and unrealized gain or loss
on securities........................... (.525) (.4025) .86 .29
-------- -------- -------- --------
Total from investment operations......... .075 .4375 2.00 1.10
-------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income..... (.5675) (.8175) (1.16) (.80)
Distributions from net realized gain on
securities.............................. (.1675) (.59) (.55) (.31)
-------- -------- -------- --------
Total dividends and distributions........ (.735) (1.4075) (1.71) (1.11)
-------- -------- -------- --------
Net asset value, end of period........... $ 10.31 $ 10.97 $ 11.94 $ 11.65
======== ======== ======== ========
TOTAL RETURN**(5)........................ .82% 3.65% 18.31% 9.99%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..... $6,844.2 $9,049.6 $6,607.2 $1,681.8
Ratios to average net assets
Expenses................................ .69%(4) 60% .67% 1.08%(4)
Net investment income................... 8.54%(4) 7.14% 9.06% 9.75%(4)
Portfolio turnover rate.................. 52% 277% 411% 208%
</TABLE>
7
<PAGE> 11
<TABLE>
<CAPTION>
CLASS B(3) CLASS C
----------------------- ------------ MARCH 10,
YEAR ENDED YEAR 1993(1)
DECEMBER 31 ENDED THROUGH
----------------------- DECEMBER 31, DECEMBER 31,
1994 1993 1992(2) 1994 1993(2)
-------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period..................... $ 10.80 $10.75 $10.95 $ 10.79 $ 10.94
------- ------ ------ -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................ .77 .92 .94 .77 .85
Expenses................................................. (.17) (.18) (.18) (.17) (.16)
------- ------ ------ -------- --------
Net investment income.................................... .60 .74 .76 .60 .69
Net realized and unrealized gain or loss on securities... (1.1275) .03 (.165) (1.1375) (.3055)
------- ------ ------ -------- --------
Total from investment operations......................... (.5275) .77 .595 (.5375)
------- ------ ------ -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income..................... (.5925) (.72) (.795) (.5925) (.5345)
Distributions from net realized gain on securities....... .-- .-- .-- .-- .--
------- ------ ------ -------- --------
Total dividends and distributions........................ (.5925) (.72) (.795) (.5925) (.5345)
------- ------ ------ -------- --------
Net asset value, end of period........................... $ 9.68 $10.80 $10.75 $ 9.66 $ 10.79
======= ====== ====== ======== ========
TOTAL RETURN**(5)........................................ (4.95%) 7.31% 5.74% (5.05%) 3.58%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)..................... $ 278.7 $368.4 $236.6 $ 32.0 $ 39.0
Ratios to average net assets
Expenses................................................ 1.78% 1.74% 1.74% 1.78% 1.72%(4)
Net investment income................................... 6.20% 7.21% 7.20% 6.24% 7.54%(4)
Portfolio turnover rate.................................. 306% 239% 239% 306% 239%
</TABLE>
(1) Commencement of offering of sales.
(2) Based on average month-end shares outstanding.
(3) Class B shares commenced sales on December 20, 1991 at a net asset value of
$10.86 per share. At December 31, 1991, there were 16,980 shares outstanding
with a per share net asset value of $10.95. The increase in net asset value
was due principally to unrealized appreciation; there were no dividends or
distributions paid during the period.
(4) Annualized.
(5) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of the sales charges.
8
<PAGE> 12
- - ------------------------------------------------------------------------------
MULTIPLE PRICING SYSTEM
- - ------------------------------------------------------------------------------
The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject
to a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate daily net assets attributable to the Class B shares. Class B
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
B shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
B Shares." Class B shares will automatically convert to Class A shares six years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject
to a deferred sales charge if redeemed within one year of purchase. Class C
shares are subject to an ongoing service fee at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class C shares
and an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will automatically convert to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding for
a period of time sufficient for the Distributor to have been
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<PAGE> 13
substantially compensated for distribution expenses related to the Class B
shares or Class C shares as the case may be, from the burden of the ongoing
distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six years or ten years, respectively, after the end of the calendar month
in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share on Class A
shares. To assist investors in making this determination, the table under the
caption "Expense Synopsis" sets forth examples of the charges applicable to each
class of shares. In this regard, Class A shares may be more beneficial to the
investor who qualifies for reduced initial sales charges or purchases shares at
net asset value, as described herein under "Purchase of Shares -- Class A
Shares." For these reasons, the Distributor will reject any order of $250,000 or
more for Class B shares or any order of $1 million or more for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors in
Class A shares do not have all their funds invested initially and, therefore,
initially own fewer shares. Other investors might determine that it is more
advantageous to purchase either Class B shares or Class C shares and have all
their funds invested initially, although remaining subject to ongoing
distribution fees and, for a five-year or one-year period, respectively, being
subject to a contingent deferred sales charge. Ongoing distribution fees on
Class B shares and Class C shares will be offset to the extent of the additional
funds originally invested and any return realized on those funds. However, there
can be no assurance as to the return, if
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<PAGE> 14
any, which will be realized on such additional funds. For investments held for
ten years or more, the relative value upon liquidation of the three classes
tends to favor Class A or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (see "Shareholder Services -- Shareholder Services Applicable to Class A
Shareholders Only -- Check Writing Privilege"). Class B shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, and/or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish to
avoid a front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
Under most circumstances, for investments aggregating less than $100,000 at
the time of purchase, investments originally made in Class C shares will tend to
have a slightly higher value upon liquidation than investments originally made
in either Class A or Class B shares if liquidated within approximately the first
six years after the date of the original investment and investments originally
made in Class B shares will tend to have a slightly higher value upon
liquidation than investments originally made in either Class A or Class C shares
for investments held longer. Under most circumstances, for investments
aggregating $100,000 or more at the time of purchase, investments originally
made in Class C shares will tend to have a slightly higher value upon
liquidation than either investments originally made in Class A or Class B shares
if liquidated within approximately the first two to the first six years after
the date of the original investment, but investments originally made in Class A
and Class B shares will tend to have a slightly higher value upon liquidation
for investments held longer. The foregoing will not, however, be true in all
cases. Particularly, if the Fund experiences a consistently negative or widely
fluctuating total return, results may differ.
The distribution expenses incurred by the Distributor in connection with
the sale of the shares will be reimbursed, in the case of Class A shares, from
the proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and
Class C shares will be calculated in the same manner at the same time on the
same day, except that the distribution fees and any incremental transfer agency
costs relating to Class B or
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<PAGE> 15
Class C shares will be borne by the respective class. See "Dividends,
Distributions and Taxes." Shares of the Fund may be exchanged, subject to
certain limitations, for shares of the same class of other mutual funds advised
by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Directors of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 (the "1940 Act") and state laws, will seek to ensure that no
such conflict arises.
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INVESTMENT OBJECTIVE AND POLICIES
- - ------------------------------------------------------------------------------
GENERAL. The investment objective of the Fund is to seek to provide
investors with a high current return consistent with preservation of capital.
The Fund invests primarily in debt securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Under normal circumstances, at
least 80% of the total assets of the Fund are invested in such securities. The
Fund may invest up to 20% of its assets in other government-related securities
and in repurchase agreements fully collateralized by U.S. Government securities.
The other government related securities include mortgage-related and
mortgage-backed securities and certificates issued by financial institutions or
broker-dealers representing "stripped" U.S. Government securities. See "Other
Government Related Securities" below. In order to hedge against changes in
interest rates, the Fund may purchase or sell options and engage in transactions
involving interest rate futures contracts and options on such contracts. See
"Investment Practices and Restrictions -- Options, Futures Contracts and Related
Options" and the Statement of Additional Information for discussion of options,
futures contracts and related options. The Fund may also purchase or sell U.S.
Government securities on a forward commitment basis and enter into interest rate
swaps and may purchase or sell interest rate caps, floors and collars. See
"Investment Practices and Restrictions -- Forward Commitments and Interest Rate
Transactions." The Fund is not designed for investors seeking capital
appreciation. Shares of the Fund are not insured or guaranteed by the U.S.
Government, its agencies or instrumentalities or by any other person or entity.
There is no assurance that the Fund's objective will be achieved.
In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of three to eight
years. Duration is a measure of the expected life of a debt security that was
developed as a more precise alternative to the concept of "term to maturity."
Duration incorporates a debt security's yield, coupon interest payments, final
maturity and call features into one measure.
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<PAGE> 16
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower of the yield-to-maturity of a debt security, the longer
its duration; conversely, the higher the coupon rate of interest, the shorter
the maturity or the higher the yield-to-maturity of a debt security, the shorter
its duration.
Duration allows an investment manager to make certain predictions regarding
how the value of a portfolio will generally respond to changes in interest
rates. For example, a portfolio consisting entirely of treasury notes with a
remaining maturity of five years would have a duration of 4.5 years. A 1% change
in the interest rate earned on such securities would cause a change of
approximately 4.5% in the net asset value of the portfolio. A portfolio
consisting entirely of treasury notes with a remaining maturity of ten years
would have a duration of about 7.5 years and a 1% change in the interest rate
earned on such securities would cause a change of between 7% and 8% in the net
asset value of the portfolio. This example is intended for demonstration
purposes only, however, and is not intended to approximate how the Fund's
portfolio will respond to changes in interest rates. The Fund's investment
portfolio may include securities with differing maturities and quality levels,
and interest rates on those instruments may not all change by the same amount at
the same time as rates rise or fall generally in the marketplace. Also, the
treasury securities described in the example cannot be retired prior to
maturity, while some of the securities in the Fund's portfolio can. These
factors among others can cause the Fund's investment portfolio to respond
somewhat differently to changes in interest rates than shown in the example.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At December 31, 1994, the average
maturity of the debt securities owned by the Fund, as adjusted for investments
in options, futures contracts and related options, was approximately 7.20 years
and the duration of the portfolio was approximately 5.12 years. The duration is
likely to vary from time to time as the Adviser pursues its strategy of striving
to maintain an active
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<PAGE> 17
balance between seeking to maximize income and endeavoring to maintain the value
of the Fund's capital. Thus, the objective of providing high current return
consistent with preservation of capital to shareholders is tempered by seeking
to avoid undue market risk and thus provide reasonable total return as well as
high distributed return. There is, of course, no assurance that the Adviser will
be successful in achieving such results for the Fund.
The Fund generally purchases debt securities at a premium over the
principal or face value in order to obtain higher current income. The amount of
any premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Fund's net asset value. Any such decline is realized for accounting purposes
as a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.
The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Fund reduces its potential
for capital appreciation on debt securities if interest rates decline. Thus if
market prices of debt securities increase, the Fund receives less total return
from its optioned positions than it would have received if the options had not
been sold. The purpose of selling options is intended to improve the Fund's
total return and not to support or "enhance" monthly distributions. During
periods when the Fund has capital loss carry forwards any capital gains
generated from such transactions will be retained in the Fund. See "Investment
Practices and Restrictions -- Options, Futures Contracts and Related Options"
and "Dividends, Distributions and Taxes" and the Statement of Additional
Information for discussion of options, futures contracts and related options.
The purchase and sale of options may result in a high portfolio turnover
rate. The Fund's turnover rate is shown in the Financial Highlights table. See
"Investment Practices and Restrictions -- Portfolio Turnover."
The investment objective of the Fund cannot be changed without shareholder
approval; however, the investment policies set forth in this section of the
Prospectus may be changed by the Board of Directors of the Fund without
shareholder approval.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities include: (1) U.S. Treasury
obligations, which differ in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, including government guaranteed
mortgage-related securities, some of which are backed by the full faith and
credit of the U.S. Treasury, some of which are supported by the right of the
issuer to borrow from the U.S. Government and some of which are backed only by
the credit of the issuer itself.
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Mortgage loans made by banks, savings and loan institutions, and other
lenders are often assembled into pools, which are issued or guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this Prospectus calls
"mortgage-related securities."
Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly-owned corporate instrumentality
of the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and
privately-owned corporation, and FHLMC, a federal corporation, are
instrumentalities of the United States. The securities and guarantees of FNMA
and FHLMC are not backed, directly or indirectly, by the full faith and credit
of the United States. Although the Secretary of the Treasury of the United
States has discretionary authority to lend FNMA up to $2.25 billion outstanding
at any time, neither the United States nor any agency thereof is obligated to
finance FNMA's or FHLMC's operations or to assist FNMA or FHLMC in any other
manner. Securities of FNMA and FHLMC include those issued in principal only or
interest only components.
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. Thus, the securityholders frequently receive prepayments of principal,
in addition to the principal which is part of the regular monthly payment. A
borrower is more likely to prepay a mortgage which bears a relatively high rate
of interest. This means that in times of declining interest rates, some of the
Fund's higher yielding securities might be converted to cash, and the Fund will
be forced to accept lower interest rates when that cash is used to purchase
additional securities. The increased likelihood of prepayment when interest
rates decline also limits market price appreciation of mortgage-related
securities. If the Fund buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a loss to the Fund of up to
the amount of the premium paid since only timely payment of principal and
interest is guaranteed.
OTHER GOVERNMENT RELATED SECURITIES. The Fund may invest up to 20% of its
assets in other government related securities and in repurchase agreements fully
collateralized by U.S. Government securities. Principal types of government
related securities in which the Fund may invest are mortgage-backed securities
including collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs").
CMOs are debt securities issued by U.S. Government agencies or by financial
institutions and other mortgage lenders and collateralized by a pool of
mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are
15
<PAGE> 19
repaid. Prepayment may shorten the stated maturity of the obligation and can
result in a loss of premium, if any has been paid. Certain of these securities
may have variable or floating interest rates and others may be stripped
(securities which provide only the principal or interest feature of the
underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986 (the "Tax
Reform Act"), are private entities formed for the purpose of holding a fixed
pool of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. The Fund will invest in such
privately issued securities only if they are 100% collateralized at the time of
issuance by securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. The Fund intends to invest in privately issued CMOs and
REMICs only if they are rated at the time of purchase in the two highest grades
by a nationally-recognized rating agency.
STRIPPED SECURITIES. Stripped mortgage-related securities (hereinafter
referred to as "Stripped Mortgage Securities") are derivative multiclass
mortgage securities. Stripped Mortgage Securities may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing.
Stripped Mortgage Securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of Stripped Mortgage Securities will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the securities'
yield to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is rated AAA or Aaa.
Holders of PO securities are not entitled to any periodic payments of interest
prior to maturity. Accordingly, such securities usually trade at a deep discount
from their face or par value and are subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. Current federal tax law
requires that a holder (such as the Fund) of such securities accrue a portion of
the discount at which the security was purchased as income each year even though
the holder receives no interest payment in cash on the certificate during the
year. Such securities may involve greater risk than securities issued directly
by the U.S. Government, its agencies or instrumentalities.
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<PAGE> 20
Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may not
be readily marketable and will be considered illiquid for purposes of the Fund's
limitation on investments in illiquid securities. The Directors of the Fund will
establish guidelines and standards for determining whether a particular
government-issued IO or PO backed by fixed-rate mortgages is liquid. Generally,
such a security may be deemed liquid if it can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of the net asset value per share. Stripped Mortgage Securities,
other than government-issued IO and PO securities backed by fixed-rate
mortgages, are presently considered by the staff of the SEC to be illiquid
securities and thus subject to the Fund's limitation on investment in illiquid
securities.
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INVESTMENT PRACTICES AND RESTRICTIONS
- - ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of a default by the other party. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by the Fund,
exceeds ten percent of the value of its net assets. In the event of the
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights. See the Statement of Additional Information.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
FORWARD COMMITMENTS. The Fund may purchase or sell U.S. Government
securities on a "when-issued" or "delayed delivery" basis ("Forward
Commitments"). These transactions occur when securities are purchased or sold by
the Fund with payment and delivery taking place in the future, frequently a
month or more after such transaction. The price is fixed on the date of the
commitment, and the seller continues to
17
<PAGE> 21
accrue interest on the securities covered by the Forward Commitment until
delivery and payment takes place. At the time of settlement, the market value of
the securities may be more or less than the purchase or sale price.
The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or before
the settlement date in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction; should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure. Forward Commitments are not traded on
an exchange and thus may be less liquid than exchange traded contracts.
The Fund maintains a segregated account (which is marked-to-market daily)
of cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase or sell continues.
LENDING OF SECURITIES. The Fund may lend its portfolio securities to
broker-dealers and other financial institutions in an amount up to ten percent
of the total assets, provided that such loans are callable at any time by the
Fund, and are at all times secured by cash collateral that is at least equal to
the market value, determined daily, of the loaned securities. During the period
of the loan, the Fund receives the income on both the loaned securities and the
collateral and thereby increases its yield after payment of lending fees.
Lending portfolio securities involves risks of delay in recovery of the loaned
securities or in some cases loss of rights in the collateral should the borrower
fail financially. Accordingly, loans of portfolio securities will only be made
to borrowers considered by the Adviser to be creditworthy.
INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and
may purchase or sell interest rate caps, floors and collars. The Fund expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Fund may also enter into
these transactions to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date. The Fund does not intend to use
these transactions as speculative investments and will not enter into interest
rate swaps or sell interest rate caps or floors where it does not own or have
the right to acquire the underlying securities or other instruments providing
the income stream the Fund may be obligated to pay. Interest rate swaps involve
the exchange by the Fund with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for
fixed-rate payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling the interest rate
floor. An interest rate collar
18
<PAGE> 22
combines the elements of purchasing a cap and selling a floor. The collar
protects against an interest rate rise above the maximum amount but foregoes the
benefit of an interest rate decline below the minimum amount. Interest rate
swaps, caps, floors and collars will be treated as illiquid securities and will,
therefore, be subject to the Fund's investment restriction limiting investment
in illiquid securities. See the Statement of Additional Information for further
discussion on such interest rate transactions.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid debt securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the Fund enters
into an interest rate swap on other than a net basis, the Fund would maintain a
segregated account in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap.
PORTFOLIO TURNOVER. The Fund generally experiences a high rate of portfolio
turnover, which may vary from year to year. The rate of portfolio turnover is
not a limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, futures contracts and
related options. A 100% turnover rate would occur, for example, if all the
securities held by the Fund were replaced in a period of one year. Higher
portfolio turnover involves correspondingly greater brokerage commissions and
other transaction costs, which are borne directly by the Fund. A high portfolio
turnover rate may also result in the realization of substantial net short-term
capital gains. See "Dividends, Distributions and Taxes -- Taxes."
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies of
the Fund permit the Fund to invest in or write options, futures contracts and
related options.
The Fund presently expects to utilize options, futures contracts and
options thereon in several different ways, depending upon the status of the
Fund's portfolio and the Adviser's expectations concerning the securities
markets. See the Statement of Additional Information for discussion of options,
futures contracts and related options.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments may be advantageous to the
Fund, if the Adviser is not successful in employing such instruments in managing
the Fund's investments, the Fund's performance will be worse than if the Fund
did not make such investments. In addition, the Fund would pay commissions and
other costs in connection with such investments, which may increase the Fund's
expenses and reduce its return. The Fund may sell or purchase options in
privately negotiated transactions ("OTC Options") as well as listed options. OTC
Options can be closed out only by agreement with the other party to the
transaction. Any OTC Option purchased by the Fund will be considered an illiquid
security. Any OTC Option written by the Fund will be with a qualified dealer
pursuant to an agreement under which the Fund may repurchase the option at a
formula price. Such options will be considered illiquid to the extent that the
formula price exceeds the intrinsic value of the option. The Fund may not
purchase or sell futures
19
<PAGE> 23
contracts or related options for which the aggregate initial margin and premiums
exceed five percent of the fair market value of the Fund's assets. In order to
prevent leverage in connection with the purchase of futures contracts by the
Fund, an amount of cash, cash equivalents or liquid high grade debt securities
equal to the market value of the obligation under the futures contracts (less
any related margin deposits) will be maintained in a segregated account with the
Custodian. The Fund may not invest more than ten percent of its net assets in
illiquid securities and repurchase agreements which have a maturity of longer
than seven days. See "Investment Objective and Policies -- Other
Government-Related Securities."
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Fund. U.S. Government securities in which the Fund invests are traded in
the over-the-counter market. Such securities are generally traded on a net basis
with dealers acting as principal for their own accounts without a stated
commission, although the prices of the securities usually include a profit to
the dealers. It is the policy of the Fund to seek to obtain the best net results
taking into account such factors as price (including the applicable dealer
spread), the size, type and difficulty of the transaction involved, the firm's
general execution and operational facilities, the firm's risk in positioning the
securities involved, and the provision of supplemental investment research by
the firm. While the Fund seeks reasonably competitive dealer spreads, the Fund
will not necessarily be paying the lowest spread available. Brokerage
commissions are paid on transactions in listed options, futures contracts and
options thereon. The Adviser is authorized to place portfolio transactions with
broker-dealers participating in the distribution of shares of the Fund and other
American Capital Funds if it reasonably believes that the quality of the
execution and any commissions are comparable to that available from other
qualified firms. The Adviser is authorized to pay higher commissions to
brokerage firms that provide it with investment and research information than to
firms which do not provide such service if the Adviser determines that such
commissions are reasonable in relation to the overall services provided. The
information received may be used by the Adviser in managing the assets of other
advisory accounts as well as in the management of the assets of the Fund.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment
restrictions which, like the investment objective, may not be changed without
approval by a majority (as defined in the 1940 Act) vote of the Fund's
shareholders. These restrictions provide, among other things, that the Fund may
not:
1. Invest more than five percent of its assets in the securities of any one
issuer (except the U.S. Government, its agencies and instrumentalities) or
purchase more than ten percent of the outstanding voting securities of any one
issuer.
2. Borrow in excess of five percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five percent of
the market or other fair value of its total assets. Any such borrowings shall be
from banks and shall be undertaken only as a temporary measure for extraordinary
or emergency purposes. Margin deposits or payments in connection with the
writing of covered call or secured
20
<PAGE> 24
put options, or in connection with the purchase or sale of futures contracts and
related options, are not deemed to be a pledge or other encumbrance.
3. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than five percent
of the Fund's assets would be invested in such securities. Restricted securities
are securities which must be registered under the Securities Act of 1933 before
they may be offered or sold to the public.
4. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (a) write covered or fully collateralized call options, write
secured put options, and enter into closing or offsetting purchase transactions
with respect to such options, (b) purchase and sell options to the extent that
the premiums paid for all such options owned at any time do not exceed ten
percent of its total assets and (c) engage in transactions in interest rate
futures contracts and related options provided that such transactions are
entered into for bona fide hedging purposes (or that the underlying commodity
value of the Fund's long positions do not exceed the sum of certain identified
liquid investments as specified in CFTC regulations), provided further that the
aggregate initial margin and premiums do not exceed five percent of the fair
market value of the Fund's total assets, and provided further that the Fund may
not purchase futures contracts or related options if more than 30% of the Fund's
total assets would be so invested.
- - ------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- - ------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company
incorporated in Maryland on March 5, 1984. 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, 2800 Post Oak Boulevard, Houston, Texas 77056,
determines the investment of the Fund's assets, provides administrative services
and manages the Fund's business and affairs. The Adviser, together with its
predecessors, has been in the investment advisory business since 1926. As of
March 31, 1995, the Adviser provides investment advice to 47 investment company
portfolios with total net assets of approximately $16.4 billion.
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 I. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald I. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and
21
<PAGE> 25
employees of VKAC own, in the aggregate, not more than 6% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 10% of the common stock of VK/AC Holding, Inc.
Mr. Don G. Powell is President and Director of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chairman, Chief Executive
Officer and Director of the Distributor. Most other officers of the Fund are
also officers and/or directors of the Adviser.
The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated December 20, 1994 (the "Advisory
Agreement"), the Fund pays the Adviser a monthly fee computed on average daily
net assets of the Fund at the annual rate of 0.540% of the first $1 billion of
average daily net assets; 0.515% of the next $1 billion of average daily net
assets; 0.490% of the next $1 billion of average daily net assets; 0.440% of the
next $1 billion of average daily net assets; 0.390% of the next $1 billion of
average daily net assets; 0.340% of the next $1 billion of average daily net
assets; 0.290% of the next $1 billion of average daily net assets; and 0.240% of
the average daily net assets over $7 billion. Under the Advisory Agreement, the
Fund also reimburses the Adviser for the costs of the Fund's accounting
services, which include maintaining its financial books and records and
calculating its daily net asset value. Operating expenses paid by the Fund
include shareholder service agency fees, distribution fees, service fees,
custodian fees, legal and accounting fees, the costs of reports and proxies to
shareholders, directors' fees, and all other business expenses not specifically
assumed by the Adviser. Advisory (management) fee, and total operating expense,
ratios are shown under the caption "Expense Synopsis" herein.
John R. Reynoldson is primarily responsible for the day-to-day management
of the Fund's investment portfolio. Mr. Reynoldson is Vice President of the Fund
and has been Senior Investment Vice President of the Adviser since July, 1991.
He was previously an investment vice president with the Adviser. Mr. Reynoldson
has been primarily responsible for managing the Fund's investment portfolio
since June, 1988.
- - ------------------------------------------------------------------------------
PURCHASE OF SHARES
- - ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public. Class A
shares are sold with an initial sales charge; Class B shares and Class C shares
are sold without an initial sales charge and are subject to a contingent
deferred sales charge upon certain redemptions. See "Multiple Pricing System"
for a discussion of factors to consider in selecting which class of shares to
purchase. Contact the Service Department at (800) 421-5666 for further
information and appropriate forms.
Shares of the Fund are offered continuously for sale by the Distributor and
are available through authorized investment dealers. Initial investments must be
at least $500 and subsequent investments must be at least $25. Both minimums may
be waived by the Distributor for plans involving periodic investments. Shares of
the Fund may be sold in
22
<PAGE> 26
foreign countries where permissible. The Fund and the Distributor reserve the
right to refuse any order for the purchase of shares. The Fund also reserves the
right to suspend the sale of the Fund's shares in response to conditions in the
securities markets or for other reasons.
Shares may be purchased on any business day through authorized dealers.
Shares may also be purchased by completing the application included in this
Prospectus and forwarding the application through the designated dealer, to the
shareholder service agent, ACCESS Investor Services, Inc. ("ACCESS"). When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class B or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time)
each day the Exchange is open. Net asset value per share for each class is
determined by dividing the value of the Fund's securities, cash and other assets
(including accrued interest) attributable to such class, less all liabilities
(including accrued expenses) attributable to such class, by the total number of
shares of the class outstanding.
U.S. Government securities and related forward commitments are valued at
the last reported bid price. Listed options are valued at the last reported sale
price on the exchange on which such option is traded, or, if no sales are
reported, at the mean between the last reported bid and asked prices. Options
and forward commitments for which market quotations are not readily available
are valued at a fair value under a method approved by the Board of Directors of
the Fund.
Short-term investments with a maturity of 60 days or less when purchased
are valued at cost plus interest earned (amortized cost), which approximates
market value. Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days to
maturity become less than 61 days. See Notes to Financial Statements in the
Statement of Additional Information.
Generally, the net asset values per share of the Class A, Class B and Class
C shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the next
calculation of net asset value (plus applicable Class A sales charges) after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. Orders
received by dealers after the close of the Exchange are priced based on the next
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
orders received by them to the Distributor so they will be received prior to
such time. Orders of less than $500 are mailed by the dealer and processed at
the offering price next calculated after acceptance by ACCESS.
23
<PAGE> 27
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges and certain different shareholder service options available. See
"Distribution Plans" and "Shareholder Services -- Exchange Privilege." The net
income attributable to Class B and Class C shares and the dividends payable on
Class B and Class C shares will be reduced by the amount of the distribution fee
and incremental expenses associated with such distribution fee. Sales personnel
of broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a
broker, dealer or financial intermediary's sales force may be eligible to win
nominal awards for certain sales efforts or under which the Distributor will
reallow to any broker, dealer or financial intermediary that sponsors sales
contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on sales generated by
the broker or dealer during such programs. Also, the Distributor in its
discretion may from time to time, pursuant to objective criteria established by
it, pay fees to, and sponsor business seminars for, qualifying brokers, dealers
or financial intermediaries for certain services or activities which are
primarily intended to result in sales of shares of the Fund. Such fees paid for
such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature.
24
<PAGE> 28
CLASS A SHARES
The public offering price of Class A shares is the next determined net
asset value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO
DEALERS (AS
AS % OF AS % OF A %
SIZE OF NET AMOUNT OFFERING OF OFFERING
INVESTMENT INVESTED PRICE PRICE)
<S> <C> <C> <C>
- - ------------------------------------------------------------------------------
Less than $100,000.................... 4.99% 4.75% 4.25%
$100,000 but less than $250,000....... 3.90% 3.75% 3.25%
$250,000 but less than $500,000....... 2.83% 2.75% 2.25%
$500,000 but less than $1,000,000..... 2.04% 2.00% 1.75%
$1,000,000 and over................... (See herein) (See herein) (See herein)
- - ------------------------------------------------------------------------------
</TABLE>
No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of one percent in the event of certain redemptions within
one year of the purchase. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A commission will be paid to dealers who initiate and are responsible
for purchases of $1 million or more as follows: one percent on sales to $2
million, plus 0.80% on the next million, plus 0.20% on the next $2 million and
0.08% on the excess over $5 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Dealers which are
reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions (which may include
banks) and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
25
<PAGE> 29
Class A shares of a Portfolio may be purchased at net asset value, upon
written assurance that the purchase is made for investment purposes and that the
shares will not be resold except through redemption by such Portfolio, by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser,
Van Kampen American Capital Investment Advisory Corp. or John Govett &
Co. Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any such fund or an affiliate
of such subadviser; and such persons' families and their beneficial
accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and minor children when purchasing for
any accounts they beneficially own, or, in the case of any such
financial institution, when purchasing for retirement plans for such
institution's employees.
(4) Registered investment advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in the Fund alone, or in
any combination of shares of the Fund and shares of certain other
participating American Capital funds as described herein under
"Purchase of Shares -- Class A Shares -- Volume Discounts", during the
13 month period commencing with the first investment pursuant hereto
which equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made of an amount up to 0.50%
of the amount invested, over a twelve month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
of organizations with retirement plan assets of $10 million or more.
The Distributor may pay commissions of up to 1% for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account
management fee ("wrap accounts"), provided the bank or broker-dealer
has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to
such purchase.
(8) Full service participant directed profit sharing and money purchase
plans, full service 401(k) plans, or similar full service recordkeeping
programs made available through Van Kampen American Capital Trust
Company with at least 50 eligible employees or investing at least
$250,000 in Participating Funds (as hereinafter defined) or American
Capital Reserve Fund, Inc. ("Reserve"). For such investments the Fund
imposes a contingent deferred sales charge of one percent in the event
of redemptions within one year of the purchase other
26
<PAGE> 30
than redemptions required to make payments to participants under the
terms of the plan. The contingent deferred sales charge incurred upon
certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1% on sales
to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the
excess over $10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described herein.
VOLUME DISCOUNTS. The size of investment shown in the preceding table
applies to the total dollar amount being invested by any person in shares of the
Fund alone, or in any combination of shares of the Fund and shares of certain
other participating American Capital mutual funds (the "Participating Funds"),
although other Participating Funds may have different sales charges. The
Participating Funds are American Capital Comstock Fund, Inc., American Capital
Corporate Bond Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth
Fund, Inc. ("Emerging Growth"), American Capital Enterprise Fund, Inc.
("Enterprise"), American Capital Equity Income Fund, Inc. ("Equity Income"),
American Capital Federal Mortgage Trust ("Federal Mortgage"), American Capital
Global Managed Asset Fund, Inc. ("Global Managed"), American Capital Government
Securities, Inc. ("Government Securities"), American Capital Government Target
Series ("Government Target"), American Capital Growth and Income Fund, Inc.
("Growth and Income"), 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. ("Pace"), American
Capital Real Estate Securities Fund, Inc. ("Real Estate"), American Capital
Tax-Exempt Trust ("Tax-Exempt"), American Capital Texas Municipal Securities,
Inc. ("Texas Municipal"), American Capital U.S. Government Trust for Income
("Government Trust"), American Capital Utilities Income Fund, Inc. ("Utilities
Income") and American Capital World Portfolio Series, Inc. ("World Portfolio").
A person eligible for a volume discount includes an individual; members of a
family unit comprising husband, wife and minor children; or a trustee or other
fiduciary purchasing for a single fiduciary account.
27
<PAGE> 31
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's dealer at the time an
order is placed for a purchase which would qualify for a reduced sales charge on
the basis of previous purchases and if sufficient information is furnished to
permit confirmation of such purchases.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating the investments over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table also includes
purchases of shares of the Participating Funds over a 13-month period based on
the total amount of intended purchases plus the value of all shares of the
Participating Funds previously purchased and still owned. An investor may elect
to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
If the goal is not achieved within the period, the investor must pay the
difference between the charges applicable to the purchases made and the charges
previously paid. The initial purchase must be for an amount equal to at least
five percent of the minimum total purchased amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustments in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form included in this Prospectus.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
28
<PAGE> 32
The amount of the contingent deferred sales charge, if any, varies
depending on the number of years from the time of payment for the purchase of
Class B shares until the time of redemption of such shares. Solely for purposes
of determining the number of years from the time of any payment for the
purchases of shares, all payments during a month are aggregated and deemed to
have been made on the last day of the month.
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
- - -------------------------------------------------------------------------
First................................... 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.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of four percent (the applicable rate in the second year after purchase).
A commission or transaction fee of four percent of the purchase amount will
be paid to broker-dealers and other Service Organizations at the time of
purchase. Additionally, the Distributor may, from time to time, pay additional
promotional incentives in the form of cash or other compensation, to Service
Organizations that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of one percent. The charge is assessed on an
amount equal to the lesser of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price.
29
<PAGE> 33
In addition, no charge is assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of one percent of the purchase amount will
be paid to broker-dealers and other Service Organizations at the time of
purchase. Broker-dealers and other Service Organizations will also be paid
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares for the second through tenth year after
purchase. Additionally, the Distributor may, from time to time, pay additional
promotional incentives, in the form of cash or other compensation, to Service
Organizations that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B
and Class C shares (i) following the death or disability (as defined in the
Code) of a shareholder, (ii) in connection with certain distributions from an
IRA or other retirement plan, (iii) pursuant to the Fund's systematic withdrawal
plan but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
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DISTRIBUTION PLANS
- - ------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment
company to directly or indirectly pay expenses associated with the distribution
of its shares ("distribution expenses") and servicing its shareholders in
accordance with a plan adopted by the investment company's board of directors
and approved by its shareholders. Pursuant to such Rule, the Directors of the
Fund, and the shareholders of each class have adopted three Distribution Plans
hereinafter referred to as the "Class A Plan," the "Class B Plan" and the "Class
C Plan." Each Distribution Plan is in compliance with the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. ("NASD Rules")
applicable to mutual fund sales charges. The NASD Rules limit the annual
distribution charges that a mutual fund may impose on a class of shares. The
NASD Rules also limit the aggregate amount which the Fund may pay for such
distribution costs. Under the Class A Plan, the Fund pays a service fee to the
Distributor at an annual rate of up to 0.25% of the Fund's aggregate average
daily net assets attributable to the Class A shares. Under the Class B Plan and
the Class C Plan, the Fund pays a service fee to the
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<PAGE> 34
Distributor at an annual rate of up to 0.25% and a distribution fee at an annual
rate of up to 0.75% of the Fund's aggregate average daily net assets
attributable to the Class B or Class C shares to reimburse the Distributor for
service fees paid by it to Service Organizations and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to four
percent of the purchase price of Class B shares purchased by the clients of
broker-dealers and other Service Organizations and (ii) other distribution
expenses as described in the Statement of Additional Information. Under the
Class C Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class C shares as reimbursement for (i) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares and (ii) other distribution expenses as
described in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Directors of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with respect
to distribution and service revenues and expenses is presented to the Directors
each year for their consideration in connection with their deliberations as to
the continuance of the Distribution Plans. In their review of the Distribution
Plans, the Directors are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be
paid from the Class A service fees received from the Fund in subsequent fiscal
years. Thus, if the Class A Plan were terminated or not continued, no amounts
(other than current amounts accrued but not yet paid) would be owed by the Fund
to the Distributor.
The distribution fee attributable to Class B or Class C shares is designed
to permit an investor to purchase such shares without the assessment of a
front-end sales load and at the same time permit the Distributor to compensate
Service Organizations with respect to such shares. In this regard, the purpose
and function of the combined contingent deferred sales charge and distribution
fee are the same as those of the initial sales charge with respect to the Class
A shares of the Fund in that in both cases such charges provide for the
financing of the distribution of the Fund's shares.
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 applicable SEC
regulations, and may be reimbursed by the Fund or its
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<PAGE> 35
shareholders from payments received through contingent deferred sales charges in
future years and from payments under the Class B Plan and Class C Plan so long
as such Plans are in effect. For example, if in a fiscal year the Distributor
incurred distribution expenses under the Class B Plan of $1 million, of which
$500,000 was recovered in the form of contingent deferred sales charges paid by
investors and $400,000 was reimbursed in the form of payments made by the Fund
to the Distributor under the Class B Plan, the balance of $100,000 would be
subject to recovery in future fiscal years from such sources. For the plan year
ended June 30, 1994, the unreimbursed expenses incurred by the Distributor and
carried forward were approximately $15.9 million or 4.99% of average daily net
assets of the Class under the Class B Plan and $770,000 or 1.95% of average
daily net assets of the Class under the Class C Plan.
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.
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SHAREHOLDER SERVICES
- - ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of 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 requests. Most shareholders elect not to receive certificates in
order to facilitate redemptions and transfers. A shareholder may incur an
expense to replace a lost certificate. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds listed under "Purchase of Shares -- Class A Shares -- Volume
Discounts," or American Capital Reserve Fund, Inc. ("Reserve"), may receive
statements quarterly from ACCESS showing any reinvestments of dividends and
capital gains distributions and any other activity in the account since the
preceding statement. Such shareholders also will receive separate confirmations
for each purchase or sale transaction other than reinvestment of dividends and
capital gains distributions and systematic purchases or redemptions. Additions
to an investment account may be made at any time by purchasing shares through
authorized investment dealers or by mailing a check directly to ACCESS.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. The investor may, on the initial application or prior to any
declaration, instruct that dividends
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<PAGE> 36
be paid in cash and capital gains distributions be reinvested at net asset
value, or that both dividends and capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP, and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans are available from the Distributor.
FUND TO FUND DIVIDENDS. A shareholder may, upon written request or by
completing the appropriate section of the application form in this Prospectus,
elect to have all dividends and other distributions paid on a Class A, Class B
or Class C account in the Fund invested into a pre-existing Class A, Class B or
Class C account in any of the Participating Funds listed under "Purchase of
Shares -- Class A Shares -- Volume Discounts" or Reserve.
Both accounts must be of the same class and of the same type, either non-
retirement or retirement. Any two non-retirement accounts can be used. If the
accounts are retirement accounts, they must both be for the same class and of
the same type of retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual. If a qualified, pre-existing account does
not exist, the shareholder must establish a new account subject to minimum
investment and other requirements of the fund into which distributions would be
invested. Distributions are invested into the selected fund at its net asset
value as of the payable date of the distribution only if shares of such selected
fund have been registered for sale in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts") other
than Government Target, may be exchanged for shares of the same class of any
other fund without sales charge, provided that shares of Corporate Bond, Federal
Mortgage, Global Managed, Government Trust, High Yield, Municipal Bond, Real
Estate, Tax-Exempt, Texas Municipal, Utilities Income and the American Capital
Global Government Securities Fund of World Portfolio are subject to a 30-day
holding period requirement. Shares of Government Target may be exchanged for
shares of Reserve or Class A shares of any other Participating Fund without
sales charge. Class A shares of Reserve that were not acquired in exchange for
Class B or Class C shares of a Participating Fund may be exchanged for Class A
shares of the Fund upon payment of the excess, if any, of the sales charge rate
applicable to the shares being acquired over the sales charge rate previously
paid. Shares of Reserve acquired through an exchange of Class B or Class C
shares may be exchanged only for the same class of shares of a Participating
Fund without incurring a contingent deferred sales charge. Shares of any
Participating Fund or Reserve may be
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<PAGE> 37
exchanged for shares of any other Participating Fund if shares of that
Participating Fund are available for sale; however, during periods of suspension
of sales, shares of a Participating Fund may be available for sale only to
existing shareholders of the Participating Fund. Additional funds may be added
from time to time as a Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other
American Capital fund that offers such shares ("new shares") in an amount equal
to the aggregate net asset value of the original shares, without the payment of
any contingent deferred sales charge otherwise due upon redemption of the
original shares. For purposes of computing the contingent deferred sales charge
payable upon a disposition of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B and
Class C shareholders may exchange their shares for shares of Reserve without
incurring the contingent deferred sales charge that otherwise would be due upon
redemption of such Class B or Class C shares. Class B or Class C shareholders
would remain subject to the contingent deferred sales charge imposed by the
original fund upon their redemption from the American Capital complex of funds.
The contingent deferred sales charge is based on the holding period requirements
of the original fund.
Shares of the Fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described herein under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held for
less than 91 days, the sales charge paid on such shares is not included in the
tax basis of the exchanged shares, but is carried over and included in the tax
basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. VKAC
and its subsidiaries, including ACCESS (collectively, "Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. Exchanges are effected at the net asset value per
share next calculated after the request is received in good order with
adjustment for any additional sales charge. See "Purchase of Shares" and
"Redemption of Shares." If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options (except fund to
fund dividends) and dealer of record as the account from which shares are
exchanged,
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<PAGE> 38
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or reinvest dividends from the
new account into another fund, however, an exchanging shareholder must file a
specific written request. The Fund reserves the right to reject any order to
acquire its shares through exchange, or otherwise to modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any
Participating Fund by systematically exchanging from the Fund into such other
fund account ($25 minimum for existing account, $100 minimum for establishing
new account). Both accounts must be of the same type and class. The exchange fee
as described above under "Shareholder Services -- Exchange Privilege" will be
waived for such systematic exchanges. Additional information on how to establish
this option is available from the Distributor.
AUTOMATIC EXCHANGE. The exchange fee described above under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the Service
Department at (800) 421-5666 for further information on how to utilize this
option.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any investor whose shares
in a single account total $5,000 or more may establish a withdrawal plan on a
quarterly, semiannual or annual basis. This plan provides for the orderly use of
the entire account, not only the income but also the capital, if necessary. Each
withdrawal constitutes a redemption of shares on which any capital gain or loss
will be recognized. The planholder may arrange for monthly, quarterly,
semiannual, or annual checks in any amount not less than $25. Such a systematic
withdrawal plan may also be maintained by an investor purchasing shares for a
retirement plan established on a form made available by the Fund. See
"Shareholder Services -- Retirement Plans."
Class B and Class C shareholders who establish a withdrawal plan may redeem
up to 12% annually of the shareholder's Initial Account Balance without
incurring a contingent deferred sales charge. Initial account balance means the
amount of the shareholder's investment in the Fund at the time the election to
participate in the Plan is made. See "Purchase of Shares -- Waiver of Contingent
Deferred Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the 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
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<PAGE> 39
ultimately exhausted. Withdrawals made concurrently with the purchase of
additional shares ordinarily will be disadvantageous to the shareholder because
of the duplication of sales charges. Any taxable gain or loss will be recognized
by the shareholder upon redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund
for which certificates have not been issued and which are in a non-escrow status
may appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY
CHECK form and the appropriate section of the application and returning the form
and the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the shareholder's Class A account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of Class A shares. Any
gain or loss realized on the sale of shares is a taxable event. See "Redemption
of Shares."
Checks will not be honored for redemption of Class A shares held less than
15 calendar days, unless such Class A shares have been paid for by bank wire.
Any Class A shares for which there are outstanding certificates may not be
redeemed by check. If the amount of the check is greater than the proceeds of
all uncertificated shares held in the shareholder's Class A account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or State Street Bank. Retirement Plans and accounts that are subject to
backup withholding are not eligible for the privilege. A "stop payment" system
is not available on these checks. See the Statement of Additional Information
for further information regarding the establishment of the privilege.
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REDEMPTION OF SHARES
- - ------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized investment
dealer. Orders received from dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by a dealer provided such order
is transmitted to the Distributor prior to the Distributor's close of business
on such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
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<PAGE> 40
As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of one percent may be imposed on certain
redemptions of Class A shares made within one year of purchase for investments
of $1 million or more and for certain qualified 401(k) retirement plans. The
contingent deferred sales charge incurred upon redemption is paid to the
Distributor in reimbursement for distribution-related expenses. See "Purchase of
Shares." A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of 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 Van Kampen American Capital Trust
Company serves as IRA custodian, special IRA, 403(b)(7), or Keogh distribution
forms must be obtained from and be forwarded to Van Kampen American Capital
Trust Company, P.O. Box 944, Houston, Texas 77001-0944. Contact the custodian
for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any taxable gain or loss will be recognized by the
shareholder upon redemption of shares.
The Fund may redeem any shareholder account with a net asset value of less
than $500. The Fund would redeem a shareholder's account falling below the
minimum initial investment only if this results from shareholder withdrawals and
not from market decline. Three months advance notice of any such involuntary
redemption is required,
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<PAGE> 41
and the shareholder is given an opportunity to purchase the required value of
additional shares at the next determined net asset value without sales charge.
Any applicable contingent deferred sales charges will be deducted from the
proceeds of this redemption.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits shareholders and the dealer representative of
record to redeem shares by telephone and to have redemption proceeds sent to the
address of record for the account. To establish such privilege, a shareholder
must complete the appropriate section of the application form in this Prospectus
or call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares,
contact the telephone transaction line at (800) 421-5684. 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 previously described. Requests
received by ACCESS prior to 4:00 p.m., New York time, on a regular business day
will be processed at the net asset value per share determined that day. These
privileges are available for the following types of non-retirement accounts:
individual accounts, joint accounts and accounts of minors with custodians
acting on their behalf. The telephone redemption privilege is not available for
shares represented by certificates. If an account has multiple owners, ACCESS
may rely on the instructions of any one owner.
For redemptions paid by check, amounts of $25,000 or less may be redeemed
by telephone once in each 30-day period. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account. This
privilege is not available if the address of record has been changed within 60
days prior to a telephone redemption request. Shareholders or the dealer
representative may also instruct ACCESS to have the proceeds of redemption wired
directly to their predesignated bank account(s). Proceeds from redemptions are
expected to be wired on the next business day following the date of redemption.
The Fund reserves the right at any time to terminate, limit or otherwise modify
this redemption privilege.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services --
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<PAGE> 42
Exchange Privilege") next determined after the order is received, which must be
within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by Van
Kampen American Capital Trust Company for repayment of principal (and interest)
on their borrowings on such plans.
- - ------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- - ------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Dividends from estimated net investment income
are declared and paid monthly. Any taxable net realized short-term or long-term
capital gains will be distributed to shareholders at least annually.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the distribution fees
and higher incremental transfer agency fees applicable to such classes of
shares. Since the capital loss carry forward plus net unrealized depreciation of
securities totalled about $4.24 per share at December 31, 1994, no capital gain
distributions are presently anticipated.
Unless the shareholder instructs otherwise, dividends and capital gains
distributions are automatically applied to purchase additional shares of the
Fund at net asset value. See "Shareholder Services -- Reinvestment Plan."
In computing interest income, the Fund does not amortize premiums paid on
the purchase of debt securities. Thus in the case of U.S. Government securities
purchased at a premium, interest income is greater than it would be if the
premiums were amortized.
Dividends and distributions paid by the Fund have the effect of reducing
the net asset value per share on the record date by the amount of the dividend
or distribution. Therefore, a dividend or distribution paid shortly after a
purchase of shares by an investor would represent, in substance, a return of
capital to the shareholder (to the extent it is paid on the shares so
purchased), even though it would be subject to income taxes, as discussed below.
TAXES. The Fund has qualified and intends to continue to qualify under
Subchapter M of the Code. Because the Fund intends to distribute substantially
all of its net investment income and net realized capital gains to shareholders,
it is not expected that the Fund will be required to pay any federal income tax.
However, shareholders normally are subject to federal income taxes, and any
applicable state or local income taxes, on the dividends and distributions
received from the Fund.
There are differences between federal income tax regulations and the
generally accepted accounting principles adopted by the Fund. For example,
year-end marking-to-market on certain options and futures contracts generally
are recognized as realized gains or losses for tax purposes but not for
accounting purposes and certain adjustments are made for tax purposes for
repayments on mortgage-related securities. Since dividends and distributions
may, from time to time, be paid by the Fund based on earnings recognized for
accounting purposes, a portion of such dividends and distributions may
constitute a return of capital for federal income tax purposes. If the amount of
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<PAGE> 43
distributions paid by the Fund for any fiscal year exceeds its investment
company taxable income plus net realized capital gains for the year, the excess
is treated as a return of capital. Each distribution paid for that year would be
treated, in the same proportion, in part as a distribution of taxable income and
in part as a return of capital. Shareholders are not subject to current federal
income tax on the part which is treated as a return of capital, but their basis
in Fund shares would be reduced by that amount. This reduction of basis would
operate to increase capital gain (or decrease capital loss) upon subsequent sale
or redemption of shares.
Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures generally are treated as 60% long-term and 40%
short-term, and positions held by the Fund at the end of its fiscal year
generally are required to be marked-to-market, with the result that unrealized
gains and losses are treated as realized. Gains and losses realized by the Fund
from writing over-the-counter options constitute short-term capital gains or
losses unless the option is exercised, in which case the character of the gain
or loss is determined by the holding period of the underlying security. The Code
contains certain "straddle" rules which require deferral of losses incurred in
certain transactions involving hedged positions to the extent the Fund has
unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.
Current federal tax law requires that a holder, such as the Fund, of a
stripped security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest payment
in cash on the security during the year. As an investment company, the Fund must
pay out substantially all of its net investment income each year. Accordingly,
the Fund may be required to pay out as an income distribution each year an
amount which is greater than the total amount of cash interest the Fund actually
received. Such distributions will be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the Adviser will select
which securities to sell. The Fund may realize a gain or loss from such sales.
In the event the Fund realizes net capital gains from such transactions, its
shareholders may receive a larger capital gain distribution, if any, than they
would in the absence of such transactions.
Shareholders are notified annually of the federal tax status of dividends
and capital gains distributions. Long-term capital gains distributions
constitute long-term capital gains for federal income tax purposes.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
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.
40
<PAGE> 44
- - ------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- - ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five years and for the life of the Fund. Other
total return quotations, aggregate or average, over other time periods may also
be included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes a maximum sales charge of 4.75% for Class A
shares); that all income dividends or capital gains distributions during the
period are reinvested in Fund shares at net asset value; and that any applicable
contingent deferred sales charge has been paid. The Fund's total return will
vary depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and unrealized net capital gains or
losses during the period. Total return is based on historical earnings and asset
value fluctuations and is not intended to indicate future performance. No
adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will
41
<PAGE> 45
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%; Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the ratings or rankings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds, with the Consumer Price Index, the Dow
Jones Industrial Average Index, Standard & Poor's, NASDAQ, other appropriate
indicies 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. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Any such advertisement would also include the standard
performance information required by the SEC as described above. For these
purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce Fund performance. The Fund will include performance data for Class
A, Class B and Class C shares of the Fund in any advertisement or information
including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A
copy of the Annual Report may be obtained without charge by calling or writing
the Fund at the telephone number and address printed on the cover page of this
Prospectus.
- - ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- - ------------------------------------------------------------------------------
ORGANIZATION OF THE FUND. The Fund was organized on March 5, 1984, under
the laws of the State of Maryland. The Fund may offer three classes of shares:
Class A, Class B and Class C shares. Each class of shares represents interests
in the assets of the Fund and has identical voting, dividend, liquidation and
other rights on the same terms and conditions, except that the distribution fees
and/or service fees related to each class of shares are borne solely by that
class, and each class of shares has exclusive voting rights with respect to
provisions of the Fund's Class A Plan, Class B Plan and Class C Plan which
pertain to that class. An order has been received from the SEC permitting the
issuance and sale of multiple classes of shares representing interests in the
Fund's
42
<PAGE> 46
existing portfolio. Shares issued are fully paid, non-assessable and have no
pre-emptive or conversion rights.
VOTING RIGHTS. The Bylaws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the 1940 Act. Such
event is likely to occur infrequently. In addition, a special meeting of the
shareholders will be called, if requested by the holders of ten percent of the
Fund's outstanding shares, for the purposes, and to act upon the matters,
specified in the request (which may include election or removal of directors).
When matters are submitted for a shareholder vote, each shareholder is entitled
to one vote for each share owned. The shares have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so,
and in such an event, the holders of the remaining less than 50% of the shares
voting for the election of directors will not be able to elect any person to the
Board of Directors.
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 pre-clearance and other procedures designed to prevent conflicts of interest.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund
at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256, a subsidiary of ACMR, serves as transfer agent, shareholder service
agent and dividend disbursing agent to the Fund. ACCESS, a wholly owned
subsidiary of the Adviser's parent, provides these services at cost plus a
profit.
LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Fund.
43
<PAGE> 47
BACKUP WITHHOLDING INFORMATION
STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with
the following guidelines:
<TABLE>
<S> <C>
- - --------------------------------------------------------------------------------
Account Type Give Social Security Number or Tax
Identification Number of:
- - --------------------------------------------------------------------------------
Individual Individual
- - --------------------------------------------------------------------------------
Joint (or Joint Tenant) Owner who will be paying tax
- - --------------------------------------------------------------------------------
Uniform Gifts to Minors Minor
- - --------------------------------------------------------------------------------
Legal Guardian Ward, Minor or Incompetent
- - --------------------------------------------------------------------------------
Sole Proprietor Owner of Business
- - --------------------------------------------------------------------------------
Trust, Estate, Pension
Plan Trust Trust, Estate, Pension Plan Trust (NOT
personal TIN of fiduciary)
- - --------------------------------------------------------------------------------
Corporation, Partnership,
Other Organization Corporation, Partnership, Other
Organization
- - --------------------------------------------------------------------------------
Broker/Nominee Broker/Nominee
- - --------------------------------------------------------------------------------
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> 48
AMERICAN CAPITAL
GOVERNMENT SECURITIES, INC.
Prospectus
May 1, 1995
National Distributor
Van Kampen American Capital 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
Disbursing, Redemption
and Shareholder Service Agent
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256
Independent Accountants
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent,
ACCESS Investor Services, Inc.
(ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor,
Van Kampen American Capital Distributors, Inc.,
One Parkview Plaza
Oakbrook Terrace, IL 60181
American Capital C/O ACCESS
Government P.O. Box 418256
Securities, Inc. Kansas City, MO 64141-9256
For investors seeking high current
return through investments in U.S.
Government Securities.
[AMERICAN CAPITAL LOGO]
PRINTED MATTER
Printed in U.S.A./008-2-2204/029 PRO-001
<PAGE> 49
PART B: STATEMENT OF ADDITIONAL INFORMATION
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
MAY 1, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated May 1, 1995.
A Prospectus may be obtained without charge by calling or writing Van Kampen
American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook Terrace, IL
60181 at (800) 421-5666.
TABLE OF CONTENTS
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
INVESTMENT OBJECTIVE AND POLICIES..................................................... 2
INVESTMENT RESTRICTIONS............................................................... 12
DIRECTORS AND EXECUTIVE OFFICERS...................................................... 13
INVESTMENT ADVISORY AGREEMENT......................................................... 16
DISTRIBUTOR........................................................................... 17
DISTRIBUTION PLANS.................................................................... 18
TRANSFER AGENT........................................................................ 19
PORTFOLIO TURNOVER.................................................................... 19
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 20
DETERMINATION OF NET ASSET VALUE...................................................... 21
PURCHASE AND REDEMPTION OF SHARES..................................................... 22
EXCHANGE PRIVILEGE.................................................................... 25
CHECK WRITING PRIVILEGE............................................................... 26
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 26
PRIOR PERFORMANCE INFORMATION......................................................... 29
OTHER INFORMATION..................................................................... 30
FINANCIAL STATEMENTS.................................................................. 30
</TABLE>
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<PAGE> 50
GENERAL INFORMATION
The Fund was incorporated in Maryland on March 5, 1984.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associated 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 exercise
of options, approximately an additional 10% of the common stock of VK/AC
Holding, Inc. Advantage Capital Corporation, a retail broker-dealer affiliate of
the Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.
As of April 20, 1995, no person was known by the Fund to own beneficially
or of record as much as five percent of the Class A, Class B or Class C shares
of the Fund except as follows: 6.05% of the outstanding Class A shares of the
Fund and 13.54% of the outstanding Class C Shares were owned of record by
Merrill Lynch Pierce Fenner & Smith, 4800 Deer Lake Dr., 3rd Fl., Jacksonville,
FL 32246-6484; 8.34%% of the outstanding Class B shares of the Fund were owned
of record by National Financial Services, 200 Liberty, One World Financial
Center, New York, New York 10281-1003; 8.12% of the outstanding Class B shares
of the Fund and 30.20% of the outstanding Class C shares of the Fund were owned
of record by Smith Barney, Inc., 388 Greenwich Street, 11th Floor, New York, New
York 10013-2375; 20.08% of the outstanding Class A shares of the Fund; 16.11% of
the outstanding Class B shares of the Fund and 5.19% of the outstanding Class C
shares of the Fund were owned 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 individual retirement accounts; 5.92%% of the
outstanding Class B shares were owned of record by Donaldson Lufkin, 1 Pershing
Plaza, 5th Floor, Jersey City, New Jersey 07399-0001 and 5.00% of the
outstanding Class B shares were owned of record by First Union Brokerage
Services, Inc., 301 South College Street, 5th Floor, Charlotte, North Carolina
28202-6000.
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
The Fund seeks to provide investors with a high current return consistent
with preservation of capital. The Fund invests primarily in debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
related options, futures contracts and options on futures contracts. The Fund
may invest in other government-related securities and in repurchase agreements
fully collateralized by U.S. Government securities. The other government-related
securities include mortgage-related and mortgage-backed securities and
certificates issued by financial institutions or broker-dealers representing
"stripped" U.S. Government securities. Repurchase agreements will be entered
into with domestic banks or broker-dealers deemed creditworthy by the Fund's
Adviser solely for purposes of investing the Fund's cash reserves or when the
Fund is in a temporary defensive posture.
One type of mortgage-related securities in which the Fund invests are those
which are issued or guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. One such type
of mortgage-related security is a Government National Mortgage Association
("GNMA") Certificate. GNMA Certificates are backed as to principal and interest
by the full faith and credit of the U.S. Government. Another type is a Federal
National Mortgage Association
2
<PAGE> 51
("FNMA") Certificate. Principal and interest payments of FNMA Certificates are
guaranteed only by FNMA itself, not by the full faith and credit of the U.S.
Government. A third type of mortgage-related security in which the Fund may
invest is a Federal Home Loan Mortgage Association ("FHLMC") Participation
Certificate. This type of security is backed by FHLMC as to payment of principal
and interest but, like a FNMA security, it is not backed by the full faith and
credit of the U.S. Government.
The Fund seeks to obtain a high return from the following sources:
- interest paid on the Fund's portfolio securities;
- premiums earned upon the expiration of options written;
- net profits from closing transactions; and
- net gains from the sale of portfolio securities on the exercise of
options or otherwise.
The Fund is not designed for investors seeking long-term capital
appreciation. Moreover, varying economic and market conditions may affect the
value of and yields on debt securities and opportunities for gains from an
option writing program. Accordingly, there is no assurance that the Fund's
investment objective will be achieved.
GNMA CERTIFICATES
Government National Mortgage Association. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Fund purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owned on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Fund will be
reinvested in additional GNMA Certificates or in other permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers
Home Administration or guaranteed by the Veterans Administration ("VA"). The
GNMA guarantee is backed by the full faith and credit of the United States. GNMA
is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA are normally used as
an indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities (the type of mortgages backing the vast majority of GNMA
Certificates) is approximately twelve years. For this reason, it is customary
for pricing purposes to consider GNMA Certificates as 30-year mortgage-backed
securities which prepay fully in the twelfth year.
3
<PAGE> 52
Yield Characteristics of GNMA Certificates. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate.
If mortgagors prepay their mortgages, the principal returned to
Certificate holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent more than U.S.
Government and U.S. Government agency bonds. As the life of individual pools may
vary widely, however, the actual yield earned on any issue of GNMA Certificates
may differ significantly from the yield estimated on the assumption of a
twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA SECURITIES
The Federal National Mortgage Association ("FNMA") was established in 1938
to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.
FHLMC SECURITIES
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional residential
mortgages. The FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"): mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMC's also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semiannually and return principal once a year in guaranteed minimum
payments. The expected average life of these securities is approximately ten
years. The FHLMC guarantee is not backed by the full faith and credit of the
United States.
4
<PAGE> 53
COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations are debt obligations issued generally
by finance subsidiaries or trusts which are secured by mortgage-backed
certificates, including GNMA Certificates, FHLMC Certificates and FNMA
Certificates, together with certain funds and other collateral. Scheduled
distributions on the mortgage-backed certificates pledged to secure the
collateralized mortgage obligations, together with certain funds and other
collateral and reinvestment income thereon at an assumed reinvestment rate, will
be sufficient to make timely payments of interest on the obligations and to
retire the obligations not later than their stated maturity. Since the rate of
payment of principal of any collateralized mortgage obligation will depend on
the rate of payment (including prepayments) of the principal of the mortgage
loans underlying the mortgage-backed certificates, the actual maturity of the
obligation could occur significantly earlier than its stated maturity.
Collateralized mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage obligations
may be either fixed or floating. In addition, certain collateralized mortgage
obligations do not bear interest and are sold at a substantial discount (i.e., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-backed certificates since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium of
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of their issuers and are not insured or guaranteed
by GNMA, FHLMC, FNMA or any other governmental agency or instrumentality, or by
any other person or entity. The issuers of collateralized mortgage obligations
typically have no significant assets other than those pledged as collateral for
the obligations.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to broker-dealers and other financial institutions provided
that such loans are callable at any time by the Fund, and are at all times
secured by cash collateral that is at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the interest on the loaned securities, while at
the same time earning interest on the collateral which will be invested in
short-term obligations. The Fund pays lending fees and custodial fees in
connection with loans of its securities. There is no assurance as to the extent
to which securities loans can be effected.
A loan may be terminated by the borrower on one business day's notice, or
by the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the consideration which can be
earned from such loans is believed to justify the attendant risks. The Fund
would not lend any portfolio securities to brokers affiliated with the Adviser.
On termination of the loan, the borrower is required to return the securities to
the Fund; any gain or loss in the market price during the loan would inure to
the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, whole or in part
as may be appropriate, to permit the exercise of such
5
<PAGE> 54
rights if the matters involved would have a material effect on the Fund's
investment in the securities which are the subject of the loan.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities marked-to-market daily at not less than the repurchase
price. The underlying securities (securities of the U.S. Government, or its
agencies and instrumentalities) may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. See "Investment
Practices and Restrictions -- Repurchase Agreements" in the Prospectus for
further information.
FORWARD COMMITMENTS
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked-to-market daily) of cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase continues. Since the
market value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked-to-market daily) either the
security covered by the Forward Commitment or cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's Custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to sell continues. By entering into
a Forward Commitment sale transaction, the Fund foregoes or reduces the
potential for both gain and loss in the security which is being hedged by the
Forward Commitment sale.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or high-quality liquid debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's Custodian. If
the Fund enters into an interest rate swap on other than a net basis, the Fund
would maintain a segregated account in the full amount accrued on a daily basis
of the Fund's obligations with respect to the swap. Interest rate transactions
do not constitute senior securities under the 1940 Act when the Fund segregates
assets to cover the obligations under the transactions. The Fund will enter into
interest rate swap, cap or floor transactions only with counterparties approved
by the Board of Directors. The Adviser will monitor the creditworthiness of
counterparties to its interest rate swap, cap, floor and collar transactions on
an ongoing basis. If there is a default by the other party to such a
transaction, the Fund will
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have contractual remedies pursuant to the agreements related to the transaction.
To the extent the Fund sells (i.e., writes) caps, floors and collars, it will
maintain in a segregated account cash or high-quality liquid debt securities
having an aggregate net asset value at least equal to the full amount, accrued
on a daily basis, of the Fund's net obligations with respect to the caps, floors
or collars. The use of interest rate swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the Adviser is incorrect in
its forecasts of the market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not used. The use of
interest rate swaps, caps, collars and floors may also have the effect of
shifting the recognition of income between current and future periods.
These transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
Call and Put Options
Call and put options on various U.S. Treasury notes and U.S. Treasury bonds
are listed and traded on Exchanges, and are written in over-the-counter
transactions. Call and put options on mortgage-related securities are currently
written or purchased only in over-the-counter transactions.
Selling Call and Put Options
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater return than would be realized on the underlying
securities alone.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
seller at a specified price during a certain period. The Fund sells call options
either on a covered basis, or for cross-hedging purposes. A call option is
covered if the Fund owns or has the right to acquire the underlying securities
subject to the call option at all times during the option period. Thus, the Fund
may sell options on forward commitments or on mortgage-related or other U.S.
Government securities. An option is for cross-hedging purposes if it is not
covered, but is designed to provide a hedge against a security which the Fund
owns or has the right to acquire. In such circumstances, the Fund collateralizes
the option by maintaining in a segregated account with the Fund's Custodian,
cash or U.S. Government securities in an amount not less than the market value
of the underlying security, marked-to-market daily, while the option is
outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would sell put options only on
a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or high grade debt securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a seller of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously sold by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as a seller of an option only
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if a liquid secondary market exists for options of that series, but there is no
assurance that such a market will exist, particularly in the case of
over-the-counter options, since they can be closed out only with the other party
to the transaction. Alternatively, the Fund could purchase an offsetting option,
which would not close out its position as a seller, but would provide an asset
of equal value to its obligation under the option sold. If the Fund is not able
to enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the option until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
Risks of Writing Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market prices.
Purchasing Call and Put Options
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. The Fund will not purchase call or put
options on securities if as a result, more than ten percent of its net assets
would be invested in premiums on such options.
The Fund may purchase either listed or over-the-counter options.
RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES
Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the Exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian so that it will be
treated as being covered.
Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Fund as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery
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obligation in the event of exercise may find that the mortgage-related
securities it holds no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will purchase additional
mortgage-related securities from the same pool (if obtainable) or replacement
mortgage-related securities in the cash market in order to maintain its cover. A
mortgage-related security held by the Fund to cover an option position in any
but the nearest expiration month may cease to represent cover for the option in
the event of a decline in the coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. If this should occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace such mortgage-related security with a
mortgage-related security which represents cover. When the Fund closes its
position or replaces such mortgage-related security, it may realize an
unanticipated loss and incur transaction costs.
Interest Rate Futures Contracts
The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool."
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds, U.S. Treasury notes, U.S. Treasury bills and GNMA Certificates)
at a specified future time and at a specified price. Interest rate futures
contracts also include cash settlement contracts based upon a specified interest
rate such as the London interbank offering rate for dollar deposits or LIBOR.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund will be required to deposit with its Custodian in
an account in the brokers' name an amount of cash, cash equivalents or liquid
high grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, will be made on a daily basis as the price of the underlying
securities fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as marking-to-market.
For example, when the Fund has purchased a futures contract and the price
of the underlying security has risen, that position will have increased in
value, and the Fund will receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the value of the underlying security has declined, the
position would be less valuable, and the Fund would be required to make a
variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract would serve
as a temporary substitute for the purchase of individual securities, which may
be purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security, the sale of futures contracts would
substantially reduce the risk to the Fund of a market decline and, by so doing,
provide an alternative to the liquidation of securities positions in the Fund.
Ordinarily
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commissions on futures transactions are lower than transaction costs incurred in
the purchase and sale of mortgage-related and U.S. Government securities.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contracts. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depository requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities underlying the
futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
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CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC Regulations) and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed five percent of the fair market value of the Fund's assets. In
order to minimize leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the Custodian.
Options on Futures Contracts
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as it could sell, a futures contract. The purchase of call
options on futures contracts would be intended to serve the same purpose as the
actual purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the price of the underlying security, when the use of an
option on a future would result in a loss to the Fund when the use of a future
would not.
ADDITIONAL RISKS RELATING TO OPTIONS AND FUTURES TRANSACTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges, or are held or written
on one or more accounts, or through one or more brokers). Option positions of
all investment companies advised by the Adviser are combined for purposes of
these limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described in the Prospectus,
there is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.
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INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which may not be changed
without the approval of the holders of a majority of its outstanding shares.
Such majority is defined as the lesser of (i) 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of Securities. These restrictions provide that the Fund shall not:
1. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition.
2. Make any investment in real estate, commodities or commodities
contracts, except that the Fund may purchase or sell securities which
are secured by real estate, and engage in transactions in interest rate
futures contracts and related options as described under Investment
Restriction Number 4 in the Prospectus.
3. Make any investment which would cause more than 25% of the market or
other fair value of its total assets to be invested in the securities
of issuers, all of which conduct their principal business activities in
the same industry. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
4. Make loans of money or securities, except that the Fund may invest (a)
by investment in repurchase agreements in accordance with applicable
requirements set forth in the Fund's Prospectus or (b) by lending its
portfolio securities in amounts not to exceed ten percent of the Fund's
total assets, provided that such loans are secured by cash collateral
that is at least equal to the market value. The Fund will not invest in
repurchase agreements maturing in more than seven days (unless subject
to a demand feature) if any such investment, together with any illiquid
securities (including securities which are subject to legal or
contractual restrictions on resale and which are not readily
marketable) held by the Fund, exceeds ten percent of the market or
other fair value of its total net assets. See "Investment Practices and
Restrictions -- Repurchase Agreements."
5. Make short sales of securities, unless at the time of the sale the Fund
owns an equal amount of such securities. Notwithstanding the foregoing,
the Fund may make short sales by entering into forward commitments for
hedging or cross-hedging purposes and engage in transactions in
options, futures contracts and related options.
6. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Fund of initial
or maintenance margin in connection with options, interest rate futures
contracts or related options transactions is not considered the
purchase of a security on margin.
7. Invest in warrants or rights except where acquired in units or attached
to other securities. This restriction does not apply to options,
futures contracts or related options.
8. Invest in securities of any company if any officer or director of the
Fund or of the Adviser owns more than one-half of one percent of the
outstanding securities of such company, and such officers and directors
own in the aggregate more than five percent of the outstanding
securities of such issuer.
9. Invest in interests in oil, gas, or other mineral exploration or
development programs.
10. Invest more than five percent of its assets in the securities of any
one issuer (except the U.S. Government, its agencies and
instrumentalities) or purchase more than ten percent of the outstanding
voting securities of any one issuer.
11. Borrow in excess of five percent of the market or other fair value of
its total assets; or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Margin
deposits or payments in connection with the writing of
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covered call or secured put options, or in connection with the purchase or sale
of futures contracts and related options, are not deemed to be a pledge or other
encumbrance.
12. Purchase a restricted security or a security for which market
quotations are not readily available if as a result of such purchase
more than five percent of the Fund's assets would be invested in such
securities. Restricted securities are securities which must be
registered under the Securities Act of 1933 before they may be offered
or sold to the public.
13. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or
offsetting purchase transactions with respect to such options, (b)
purchase and sell options to the extent that the premiums paid for all
such options owned at any time do not exceed ten percent of its total
assets and (c) engage in transactions in interest rate futures
contracts and related options provided that such transactions are
entered into for bona fide hedging purposes (or that the underlying
commodity value of the Fund's long positions do not exceed the sum of
certain identified liquid investments as specified in CFTC
regulations), provided further that the aggregate initial margin and
premiums do not exceed five percent of the fair market value of the
Fund's total assets, and provided further that the Fund may not
purchase futures contracts or related options if more than 30% of the
Fund's total assets would be so invested.
14. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts, forward commitments and other investment strategies and
instruments that would be considered "senior securities" but for the
maintenance by the Fund of a segregated account with its custodian or
some other form of "cover."
15. Underwrite securities of other companies, except insofar as the Fund
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 in the resale of any securities owned by the Fund.
DIRECTORS AND EXECUTIVE OFFICERS
The Fund's directors and executive officers and their principal occupations
for the past five years are listed below. All persons named as Directors also
serve in similar capacities for other funds advised by the Adviser as indicated
below.
FERNANDO SISTO, Chairman of the Board and Director. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030. Dean of Graduate
School, George M. Bond Professor and formerly Dean of Graduate School and
Chairman, Department of Mechanical Engineering, Stevens Institute of Technology;
Director, Dynalysis of Princeton (engineering research).(1)
J. MILES BRANAGAN, Director. 2300 205th Street, Torrance, California
90501-1452. Co-founder, Chairman and President, MDT Corporation (medical
equipment).(1)
RICHARD E. CARUSO, Director. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania 19087. Chairman and Chief Executive Officer,
Integra LifeSciences Corporation (biotechnology/life sciences); Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of Art
(community art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business Performance
Group, London School of Economics; formerly Director, First Sterling Bank;
formerly Director and Executive Vice President, LFC Financial Corporation
(leasing financing).(1)
ROGER HILSMAN, Director. 420 West 118th Street, New York, New York 10027.
Formerly, Professor of Government and International Affairs, Columbia
University.(1)
13
<PAGE> 62
*DON G. POWELL, President and Director. 2800 Post Oak Blvd., 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, Los Angeles,
California 90067. 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., Suite 4710, 9 West 57th Street, New York,
New York 10019. Chairman of the Board, Sky Chefs, Inc. (airline food catering);
formerly Director, Primerica Corporation (currently known as The Travelers
Inc.); formerly Chairman of the Board and Chief Executive Officer, old Primerica
Corporation (American Can Company); formerly Director, James River Corporation
(paper products); Trustee and formerly President, Whitney Museum of American
Art; Chairman, Institute for Educational Leadership, Inc., Board of Visitors,
Graduate School of The City University of New York, Academy of Political
Science; Committee for Economic Development; Director, Public Education Fund
Network, Fund for New York City Public Education; Trustee, Barnard College;
Member, Dean's Council, Harvard School of Public Health; Member, Mental Health
Task Force, Carter Center.(1)
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 VKAC., President, Chief Operating
Officer and Director of Van Kampen American Capital Investment Advisory Corp.;
and Director of McCarthy, Crisanti & Maffei, Inc.(4)
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)
RONALD A. NYBERG, Vice President. One Parkview Plaza, Oakbrook Terrace, IL
60181. Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc., Vice President of ACCESS Investor Services, Inc. and Van Kampen American
Services Inc., Vice President, General Counsel and Assistant Secretary of Van
Kampen American Capital Advisors, Inc., Senior Vice President and General
Counsel of the Adviser, Executive Vice President and General Counsel and
Director of the Distributor.(4)
ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income Department
and Director of the Adviser; Executive Vice President and Director, VKAC.(4)
JOHN R. REYNOLDSON, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Investment Vice President of the Adviser; Mr. Reynoldson also
serves as Vice President of American Capital Federal Mortgage Trust, Portfolio
'97 of American Capital Government Target Series, American Capital U.S.
Government Trust for Income, American Capital World Portfolio Series,
Inc. -- Global Government Securities Fund, and Common Sense Trust -- Government
Fund.(4)
J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel and Compliance
Review Officer of the Adviser.(4)
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; President, Chief Operating Officer
and Director of Van Kampen American Capital
14
<PAGE> 63
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 the Adviser.
(1) 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 Managed Assets Fund, Inc., American Capital Municipal Bond Fund,
Inc., American Capital Pace Fund, Inc., American Capital Reserve Fund, Inc.,
American Capital Small Capitalization Fund, Inc., American Capital
Tax-Exempt Trust, American Capital Texas Municipal Securities, Inc.,
American Capital U.S. Government Trust for Income, American Capital
Utilities Income Fund, Inc. and American Capital World Portfolio Series,
Inc.
(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital Income
Trust, American Capital Exchange Fund, 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 December 31,
1994, the directors who were not affiliated with the Adviser or its parent
received as a group $69,111 in directors' fees from the Fund in addition to
certain out-of-pocket expenses. Such directors also received compensation for
serving as directors or trustees of other investment companies advised by the
Adviser as identified in the notes to the foregoing table. For legal services
rendered during the fiscal year ended December 31, 1994, the Fund paid legal
fees of $18,790 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.
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<PAGE> 64
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Directors serve as directors or trustees
noted in Footnote 1 above is set forth below. The compensation shown for the
Fund and the total compensation shown for the Fund and other related mutual
funds for the year ended December 31, 1994, are set forth below. 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
AGGREGATE RETIREMENT FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED AND FUND
FROM AS PART OF FUND COMPLEX PAID TO
NAME OF PERSONS REGISTRANT EXPENSES DIRECTORS(1)(5)
--------------- ------------ ---------------- ---------------
<S> <C> <C> <C>
J. Miles Branagan.............................. $ 9,665 -0- $64,000
Dr. Richard E. Caruso(2)(3).................... 9,675 -0- 64,000
Dr. Roger Hilsman.............................. 9,980 -0- 66,000
David Rees(3).................................. 9,665 -0- 64,000
Lawrence J. Sheehan............................ 10,130 -0- 67,000
Dr. Fernando Sisto(2)(3)....................... 12,440 -0- 82,000
William S. Woodside(4)......................... 8,240 -0- 54,000
</TABLE>
- - ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $9,375 for Dr. Caruso and $6,520
for Dr. Sisto.
(3) The cumulative deferred compensation paid by the Fund is as follows: Dr.
Caruso, $30,046; Mr. Rees, $81,518; and Dr. Sisto, $38,464.
(4) 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,
$2,400 and $17,000, respectively, were paid by the registrant, or the
registrant and the fund complex, as the case may be.
(5) Includes the following amounts for which the various funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in footnote 4 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,
including the placing of orders for the purchase and sale of portfolio
securities. The Adviser obtains and evaluates economic, statistical, and
financial information to formulate and implement the Fund's investment programs.
The Adviser also furnishes the services of the Fund's President and such
other executive and clerical personnel as are necessary to prepare the various
reports and statements and conduct the Fund's day-to-day operations. The Fund,
however, bears the cost of its accounting services, which include maintaining
its financial books and records and calculating its net asset value. The costs
of such accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser.
The services provided by the Adviser are at cost. The Fund also pays shareholder
service agency fees, distribution fees, service fees, custodian fees, legal and
auditing fees, the costs of reports to shareholders, and all other ordinary
business expenses not specifically assumed by the Adviser. The Advisory
Agreement also provides that the Adviser shall not be liable to the Fund for any
actions or omissions if it acted without willful misfeasance, bad faith,
negligence or reckless disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the
16
<PAGE> 65
Fund at an annual rate of: 0.540% on the first $1 billion of average daily net
assets; 0.515% on the next $1 billion of average daily net assets; 0.490% on the
next $1 billion of average daily net assets; 0.440% on the next $1 billion of
average daily net assets; 0.390% on the next $1 billion of average daily net
assets; 0.340% on the next $1 billion of average daily net assets; 0.290% on the
next $1 billion of average daily net assets; and 0.240% on the average daily net
assets over $7 billion.
The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser is reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority-owned subsidiary of VK/AC
Holding, Inc., in connection with the purchase and sale of portfolio investments
of the Fund, less any direct expenses incurred by such subsidiary of VK/AC
Holding, Inc., in connection with obtaining such payments. The Adviser agrees to
use its best efforts to recapture tender solicitation fees and exchange offer
fees for the Fund's benefit and to advise the Board of Directors of the Fund of
any other commissions, fees, brokerage or similar payments which may be possible
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 the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, the Adviser's monthly compensation will be reduced by the
amount of such excess and that, if the amount of such excess exceeds the
Adviser's monthly compensation, the Adviser will pay the Fund an amount
sufficient to make up the deficiency, subject to readjustment during the Fund's
fiscal year. Ordinary business expenses include the investment advisory fee and
other operating costs paid by the Fund except (1) interest and taxes, (2)
brokerage commissions, (3) certain litigation and indemnification expenses as
described in the Advisory Agreement and (4) payments made by the Fund pursuant
to the distribution plans (described herein). The Advisory Agreement also
provides that the Adviser shall not be liable to the Fund for any actions or
omissions if it acted in good faith without negligence or misconduct.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Directors or (ii) by
vote of a majority of the Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of the Directors who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement provides that it shall
terminate automatically if assigned and that it may be terminated without
penalty by either party on 60 days' written notice.
During the fiscal years ended December 31, 1992, 1993, and 1994, the
Adviser received $17,449,142, $18,727,007, and $16,668,177, respectively, in
advisory fees from the Fund. For such periods, the Fund paid $364,242, $499,920,
and $365,416, respectively, for accounting services. A portion of 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.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, dated December 20, 1994 (the "Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of the
Fund through affiliated and unaffiliated dealers. The Distributor's obligation
is an agency or "best efforts" arrangement under which the Distributor is
required to take and pay for only such shares of the Fund as may be sold to the
public. The Distributor is not obligated to sell any stated number of shares.
The Distributor bears the cost of printing (but not typesetting) prospectuses
used in connection with this offering and the cost and expense of supplemental
sales literature, promotion and advertising. The Underwriting Agreement is
renewable from year to year if approved (a) by the Fund's Board of Directors or
by a vote of a majority of the Fund's outstanding voting securities and (b) by
the affirmative vote of a majority
17
<PAGE> 66
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. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods is shown in the chart below. Advantage Capital
Corporation is an affiliated dealer of the Distributor.
<TABLE>
<CAPTION>
DEALER REALLOWANCES
RECEIVED BY
TOTAL UNDERWRITING AMOUNT RETAINED ADVANTAGE CAPITAL
COMMISSIONS BY DISTRIBUTOR CORPORATION
------------------ --------------- -------------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1992 $5,854,589 $ 657,307 $ 787,394
Fiscal Year Ended December 31, 1993 $3,911,330 $ 594,806 $ 477,118
Fiscal Year Ended December 31, 1994 $1,772,494 $ 227,845 $ 163,977
</TABLE>
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan," "Class B Plan" and "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
the Class C Plan the distribution of its shares (the Class A Plan, the Class B
Plan and the Class C Plan are sometimes referred to herein collectively as
"Plans" and individually as a "Plan").
The Directors have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to four percent of the purchase price of Class B
shares purchased by the clients of broker-dealers and other Service
Organizations, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, and (5) advertising and promotion expenses, including conducting
and organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses. With respect to the Class C Plan, authorized payments
by the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class C shares to reimburse the Distributor for (1) upfront
commissions and transaction fees of up to 0.75% of the purchase price of Class C
shares purchased by the clients of broker-dealers and other Service
Organizations and ongoing commissions and transaction fees paid to
broker-dealers and other Service Organizations in an amount up to 0.75% of the
average daily net assets of the Fund's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professionals, and (5) advertising and promotion
expenses, including conducting and organizing sales seminars, marketing support
salaries and bonuses, and travel-related expenses. Such reimbursements are
subject to the maximum sales charge limits specified by the National Association
of Securities Dealers, Inc.
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
18
<PAGE> 67
described services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a bank would result in any material adverse consequences to the Fund. In
addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreements were approved by the Board of Directors, including a
majority of the Directors who are not affiliated persons (as defined in the 1940
Act) of the Fund and who have no direct or indirect financial interest in the
operation of any of the Plans or in any agreements related to each Plan
("Independent Directors"). In approving each Plan in accordance with the
requirements of Rule 12b-1, the Directors determined that there is a reasonable
likelihood that each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Fund's Board of Directors
at least quarterly with a written report of the amounts expended pursuant to
each Plan and the purposes for which such expenditures were made. Unless sooner
terminated in accordance with its terms, the Plans will continue in effect so
long as such continuance is specifically approved at least annually by the Board
of 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 or service expenses borne by the Fund requires shareholder
approval, voting separately by class; otherwise, it may be amended by a majority
of the Directors, including a majority of the Independent Directors, by vote
cast in person at a meeting called for the purpose of voting upon such
amendment. So long as the Plans are in effect, the selection or nomination of
the Independent Directors is committed to the discretion of the Independent
Directors.
For the fiscal year ended December 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $7,223,715 or .25% of the Class A shares' average
daily net assets. Such expenses were paid to reimburse the Distributor for
payments to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. For the fiscal year ended December 31, 1994, the
Fund's aggregate expenses under the Class B Plan were $3,206,280 or 1.00% of the
Class B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $2,404,710 for commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class B shares of the Fund and $801,570 for fees paid to
Service Organizations for servicing Class B shareholders and administering the
Class B Plan. For the fiscal year ended December 31, 1994, the Fund's aggregate
expenses under the Class C Plan were $386,025 or 1.00% of the Class C shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $289,519 for commissions and transaction fees paid to
broker-dealers and other Service Organizations in respect of sales of Class C
shares of the Fund and $96,506 for fees paid to Service Organizations for
servicing Class C shareholders and administering the Class C Plan. For the
fiscal year ended December 31, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B Plan and Class C Plan and carried forward were
approximately $14.3 million and $697,000 respectively.
TRANSFER AGENT
During the fiscal year ended December 31, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$6,179,933, for these services. These services are provided at cost plus a
profit.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate for prior
years is shown under "Financial Highlights" in the Prospectus. The turnover rate
will fluctuate over time
19
<PAGE> 68
depending upon the Adviser's investment strategy and the higher volatility of
the market for government securities. In 1994, as a result of declining interest
rates and because of the previously described factors, the portfolio turnover
rate rose to a higher level than 1993.
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, paid on such transactions. It is the policy of the Adviser
to seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services, as described below,
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser. Consistent with the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. and subject to seeking
best execution and such other policies as the Board of Directors may determine,
the Adviser may consider sales of shares of the Fund as a factor in the
selection of firms to execute portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the investment advisory agreement, the Fund's
Board of Directors has authorized the Adviser to cause the Fund to incur
brokerage commissions in an amount higher than the lowest available rate in
return for research services provided to the Adviser. The Adviser is of the
opinion that the continued receipt of supplemental investment research services
from dealers is essential to its provision of high quality portfolio management
services to the Fund. The Adviser undertakes that such higher commissions will
not be paid by the Fund unless (a) the Adviser determines in good faith that the
amount is reasonable in relation to the services in terms of the particular
transaction or in terms of the Adviser's overall responsibilities with respect
to the accounts as to which it exercises investment discretion, (b) such payment
is made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected benefits
to the Fund over the long term. The investment advisory fee paid by the Fund
under the investment advisory agreement is not reduced as a result of the
Adviser's receipt of research services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts, including the Fund,
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
20
<PAGE> 69
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
Prior to December 20, 1994, Smith Barney, Inc. was an affiliated person of
the Adviser. The Fund paid Smith Barney, Inc. commissions of $259,023, $287,232
and $142,220 for the years ended December 13, 1992, 1993 and 1994, respectively.
The commission payments to Smith Barney, Inc. constituted 18.80% of total
commissions and the transactions with Smith Barney, Inc. constituted 19.33% of
total transactions.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Directors who are not affiliated
persons (as defined in the 1940 Act) of the Adviser.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended December 31, 1992, 1993, and 1994 totalled $1,808,702,
$1,413,803, and $756,679, respectively. No commissions were paid for research
services during the last fiscal year and no commissions were paid to affiliated
brokers during the last three years.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
U.S. Government and Agency obligations and related forward commitments are
valued at the last reported bid price. Listed options are valued at the last
reported sale price on the exchange on which such option is traded or if no
sales are reported, at the mean between the last reported bid and asked prices.
Options and forward commitments for which market quotations are not readily
available are valued at a fair value under a method approved by the Board of
Directors of the Fund.
Securities (as well as over-the-counter options) and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund. Such valuations and procedures are reviewed periodically by the Board
of Directors.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.
MULTIPLE PRICING SYSTEM
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same
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rights and are identical in all respects, except that Class B and Class C shares
bear the expenses of the deferred sales arrangements, distribution fees, and any
expenses (including higher transfer agency costs) resulting from such sales
arrangements, and have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the distribution fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the Securities Act of 1933.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of Fund shares next computed
following receipt of payment by ACCESS. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus under "Purchase of Shares -- Sales Charge Table" apply to
purchases of Class A shares of the Fund where the aggregate investment is
$100,000 or more. For purposes of determining eligibility for volume discounts,
spouses and their minor children are treated as a single purchaser, as is a
director or other fiduciary purchasing for a single fiduciary account. An
aggregate investment includes all shares of the Fund and all shares of certain
other participating American Capital mutual funds described in the Prospectus
(the "Participating Funds"), which have been previously purchased and are still
owned, plus the shares being purchased. The current offering price is used to
determine the value of all such shares. If, for example, an investor has
previously purchased and still holds Class A shares of the Fund and shares of
other Participating Funds having a current offering price of $40,000, and that
person purchases $65,000 of additional Class A shares of the Fund, the charge
applicable to the $65,000 purchase would be four percent of the offering price.
The same reduction is applicable to purchases under a Letter of Intent as
described in the next paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE
TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED
CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION MUST BE MADE IN
WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. The reduced sales charge will not
be applied if such notification is not furnished at the time of the order. The
reduced sales charge will also not be applied should a review of the records of
the Distributor or ACCESS fail to confirm the investor's representations
concerning his holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount", made pursuant to the Letter of Intent and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can
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<PAGE> 71
become subject to the Letter of Intent. The Letter of Intent does not obligate
the investor to purchase the indicated amount. In the event the Letter of Intent
goal is not achieved within the 13-month period, the investor is required to pay
the difference between sales charges otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the investor in shares of the Fund, the amount of excess sales
charges, if any, paid during the 13-month period.
VOLUME DISCOUNTS
The schedule of volume discounts in the Prospectus applies to purchases of
shares made at one time by any purchaser, which term includes (1) an
individual -- or an individual, his or her spouse and children under the age of
21 -- purchasing securities for his or her or their own account; (2) a trustee
or other fiduciary of a single trust estate or a single fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code (the
"Code")), although more than one beneficiary is involved; and (3) tax-exempt
organizations enumerated in Section 501(c)(3) or (13) of the Code.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC -- Class A") of one percent is imposed in the event of
certain redemptions within one year of the purchase. If a CDSC -- Class A is
imposed upon redemption, the amount of the CDSC -- Class A will be equal to the
lesser of one percent of the net asset value of the shares at the time of
purchase, or one percent of the net asset value of the shares at the time of
redemption.
The CDSC -- Class A will only be imposed if a Qualified Purchaser redeems
an amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The CDSC --
Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., retirement plans qualified under Section 401(a) of the Code
and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such payments include, but are not limited to, death, disability,
retirement, or separation from service. No CDSC -- Class A will be imposed on
exchanges between funds. For purposes of the CDSC -- Class A, when shares of one
fund are exchanged for shares of another fund, the purchase date for the shares
of the fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent will apply to the net
asset value privilege. Also, in order to establish an amount of $1,000,000 or
more, a Qualified Purchaser may aggregate shares of American Capital Reserve
Fund, Inc. with shares of certain other participating American Capital mutual
funds described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
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<PAGE> 72
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
The CDSC -- Class B and C is waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of American Capital
funds; in such event, as described below, the Fund will "tack" the period for
which the original shares were held on to the holding period of the shares
acquired in the transfer or rollover for purposes of determining what, if any,
CDSC -- Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or disability
of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition,
the charge will be waived on any minimum distribution required to be distributed
in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan (the
"Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC -- Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
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<PAGE> 73
(d) Involuntary Redemptions of Shares in Accounts That Do Not Have the
Required
Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC -- Class B and
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 at net
asset value, with credit for any CDSC -- Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C shares of the Fund, provided that the reinvestment is
effected within 120 days after such redemption and the shareholder has not
previously exercised this reinvestment privilege with respect to Class C shares
of the Fund. Shares acquired in this manner will be deemed to have the original
cost and purchase date of the redeemed shares for purposes of applying the
CDSC -- Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
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 Securities and Exchange Commission, by order, so permits.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
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<PAGE> 74
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signatures are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes monthly substantially all of its net investment income
to shareholders of Class A, Class B and Class C shares. The per share dividends
on Class B and Class C shares will be lower than the per share dividends on
Class A shares as a result of the distribution fees and higher transfer agency
fees applicable to the Class B and Class C shares. Net investment income for
dividend purposes consists of interest earned less expenses of the Fund accrued
for that dividend period. The Fund may distribute monthly, quarterly, or on such
other basis as the Board of Directors may determine from time to time, its net
realized short-term capital gains, if any, including such gains realized from
net premiums received from expired options, from closing purchase transactions
and from securities sold upon the exercise of options or otherwise, less any net
realized long-term capital loss. Such gains may be distributed less frequently
in the discretion of the Board of Directors. Dividends and distributions are
automatically reinvested in shares of the Fund at the next determined net asset
value without sales charge except that any shareholder may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as discussed below whether they are
reinvested in shares of the Fund or received in cash.
As described below under "Tax Treatment of Option and Futures
Transactions," 60% of any gain or loss realized by the Fund from transactions in
listed options, futures, and options on futures generally constitutes long-term
capital gains or losses and the balance constitutes short-term capital gains or
losses. The Fund has received from the Securities and Exchange Commission an
exemption order permitting it to designate any portion of a monthly or quarterly
distribution as paid from long-term capital gains attributable to such 60%
portion.
Dividends and distributions declared to shareholders of record after
September 30th of any year and paid before February 1st of the following year,
are considered taxable income to shareholders on the record date even though
paid in the next year.
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<PAGE> 75
TAX STATUS OF THE FUND
Through payment of all or substantially all of its taxable net investment
income and net realized capital gains to shareholders and by meeting certain
diversification of assets and other requirements of the Code, the Fund believes
that it has qualified and expects to continue to qualify as a regulated
investment company, under Subchapter M of the Code. This enables the Fund to be
relieved from payment of income taxes on that portion of its taxable net
investment income and net realized capital gains distributed to shareholders.
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).
Dividends paid by the Fund from its net investment income, and
distributions of the Fund's net realized short-term capital gains, are taxable
to shareholders as ordinary income. Any distributions designated as being made
from the Fund's net realized long-term capital gains are taxable to shareholders
as long-term capital gains, regardless of the length of the period that a
shareholder has held his shares. Not later than 60 days after the end of each
fiscal year, the Fund will send to its shareholders a written notice required by
the Code designating the amount of any distributions made during such year which
are long-term capital gains distributions. Such notice may be included in the
annual report to shareholders. A dividend or capital gains distribution received
after the purchase of the Fund's shares reduces the net asset value of the
shares by the amount of the dividend or distribution and will be subject to
income taxes. A loss on the sale of shares held for less than six months
attributable to a long-term capital gains distribution is treated as a long-term
capital loss for federal income tax purposes.
If for any fiscal year of the Fund, the amount of distributions paid or
deemed paid for such year exceeds its net investment income plus net realized
capital gains for such year, the amount of such excess is expected to be treated
as a return of capital to all those shareholders who held shares of the Fund
during the year. In such case, each distribution paid or deemed paid for that
year would be treated, in the same proportion, in part as a distribution of
taxable income and in part as a return of capital. Shareholders would incur no
current federal income tax on the portion of such distributions which are
treated as a return of capital, but each shareholder's basis in the Fund's
shares would be reduced by that amount. This reduction of basis would operate to
increase the shareholder's capital gain (or decrease its capital loss) upon
redemption of Fund shares.
One of the requirements for qualification as a regulated investment company
is that less than 30% of the Fund's gross income be derived from gains from the
sale or other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in utilizing certain option and futures
trading strategies, including the extent to which it may write options on
securities which have been held less than three months, write options which
expire in less than three months, effect closing purchase transactions with
respect to options which have been written less than three months prior to such
transactions and effect closing transactions in futures contracts which have
been open for less than three months. Another requirement for qualification is
that at least 90% of the Fund's gross income in each fiscal year be derived from
dividends, interest and gains from the sale or other disposition of securities.
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable (net
investment) income for the twelve months ended December 31, plus 98% of its
capital gain net income for the twelve months ended October 31 of such calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized on
the basis of the subsequent shares.
Since none of the Fund's net investment income arises from dividends on
common or preferred stock, none of its distributions are eligible for the 70%
dividends received deduction for corporations.
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<PAGE> 76
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.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
TAX TREATMENT OF OPTION AND FUTURES TRANSACTIONS
The Code includes special rules applicable to listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other termination of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, when held by the Fund at the end of a
fiscal year, generally are required to be treated as sold at market value on the
last day of such fiscal year for federal income tax purposes
("marked-to-market"). Over-the-counter options are not classified as Section
1256 contracts and are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses recognized by the Fund from transactions
in over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by the Fund are exercised, the gain or loss realized on the
sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.
A substantial portion of the Fund's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle in which at
least one (but not all) of the positions are Section 1256 contracts is a "mixed
straddle" under the Code if certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
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<PAGE> 77
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
PRIOR PERFORMANCE INFORMATION
The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for the one year, five year, and
ten year periods ended December 31, 1994, was -8.82%, 5.84% and 7.62%,
respectively. The Fund's average annual total return (computed in the manner
described in the Prospectus) for Class B shares of the Fund for the one year and
three year and 11 days periods (period since the date of inception) ended
December 31, 1994, was -8.53% and 2.11%, respectively. The aggregate total
return for Class C shares of the Fund for the one year and the nineteen month
and twenty-one day (period since the date of inception) ended December 31, 1994
was -5.94% and -0.92%. These results are based on historical earnings and asset
value fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objective and
policies as well as the risks incurred in the Fund's investment practices.
The Fund's annualized current yield for Class A shares, Class B shares and
Class C shares of the Fund for the 30-day period ending December 31, 1994, was
6.20%, 5.70%, and 5.68%, respectively. The yield for any class of shares is not
fixed and will fluctuate in response to prevailing interest rates and the market
value of portfolio securities, and as a function of the type of securities owned
by the Fund, portfolio maturity and the Fund's expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time VKAC will announce the results of its monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
Intentions and the Van Kampen American Capital Mutual Fund Index -- which polls
measure how Americans plan to use their money.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by American Capital in 1994.
The Funds may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return. Such illustrations may be in the
form of charts or graphs and will not be based on historical returns experienced
by the Funds.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders,
and annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston,
Texas 77002, the independent accountants for the Fund, perform an annual audit
of the Fund's financial statements.
29
<PAGE> 78
FINANCIAL STATEMENTS
Financial statements including Investment Portfolio, Statement of Assets
and Liabilities, Statement of Operations, Statement of Changes in Net Assets,
Notes to Financial Statements, Financial Highlights and Report of Independent
Accountants of such financial statements, are hereby incorporated by reference
to the Fund's Annual Report to Shareholders for the year ended December 31,
1994, previously filed with the SEC on or about March 10, 1995. The Fund will
furnish, without charge, a copy of such Annual Report on request by calling or
writing the Fund at 2800 Post Oak Boulevard, Houston, Texas 77056, (800)
421-5666.
The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------
<S> <C>
Net Asset Value per Class A Share $ 9.67
Class A Per Share Sales Charge -- 4.75% of offering price
(4.99% of net asset value per share) $ .48
Class A Per Share Offering Price to the Public $10.15
</TABLE>
30
<PAGE> 79
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
<TABLE>
<CAPTION>
INCLUDED
IN PART B
---------
<S> <C>
Investment Portfolio
December 31, 1994 X
Statement of Assets and Liabilities
December 31, 1994 X
Statement of Operations
Year Ended December 31, 1994 X
Statement of Changes in Net Assets
Year Ended December 31, 1993 X
Year Ended December 31, 1994 X
Notes to Financial Statements X
Financial Highlights X
Report of Independent Accountants X
</TABLE>
The Statement of Sources of Net Assets and Schedules II and III are omitted
because the required information is included in the financial statements filed
herewith, or because the conditions requiring their filing do not exist.
(b) Exhibits
<TABLE>
<S> <C>
1.1 -- Articles of Incorporation incorporated herein by reference (Exhibit 1 to
Form N-1 of Registrant, Registration No. 2-90482, Pre-Effective Amendment
No. 1, filed on June 12, 1984).
1.2 -- Articles of Amendment dated February 8, 1985 incorporated herein by
reference (Exhibit 1.1 to Form N-1A of Registrant, Registration No.
2-90482, Post Effective Amendment No. 2, filed on August 23, 1985).
1.3 -- Articles of Amendment dated August 28, 1985 incorporated herein by
reference (Exhibit 1.2 to Form N-1A of Registrant, Registration No.
2-90482, Post Effective Amendment No. 2, filed on August 23, 1985).
1.4 -- Articles of Amendment dated January 7, 1992 incorporated herein by
reference (Exhibit 1.4 to Form N-1A of Registrant, Registration No.
2-90482, Post Effective Amendment No. 14, filed on February 25, 1992).
1.5 -- Articles Supplementary dated March 8, 1993 incorporated herein by
reference (Exhibit 1.4 to Form N-1A of Registrant, Registration No.
2-90482, Post-Effective Amendment No. 18 filed on February 24, 1994).
2. -- Bylaws as amended March 3, 1995.
3. -- Inapplicable.
4.1 -- Specimen Stock Certificate (Class A shares).
4.2 -- Specimen Stock Certificate (Class B shares).
4.3 -- Specimen Stock Certificate (Class C shares).
5. -- Investment Advisory Agreement dated December 20, 1994.
6. -- Underwriting Agreement dated December 20, 1994.
</TABLE>
C-1
<PAGE> 80
<TABLE>
<S> <C>
6.3 -- Form of Selling Group Agreement incorporated herein by reference (Exhibit
6.2 to Form N-1A of Registrant, Registration No. 2-90482, Post Effective
Amendment No. 14, filed on February 25, 1992).
6.4 -- Form of Selling Agreement for banks and bank affiliated broker/dealers
incorporated herein by reference (Exhibit 6.3 to Form N-1A of Registrant,
Registration No. 2-90482, Post Effective Amendment No. 14, filed on
February 25, 1992).
7. -- Inapplicable.
8.1 -- Custodian Contract dated December 2, 1993 incorporated herein by reference
(Exhibit 8 to Form N-1A of American Capital Global Managed Assets Fund
Inc., Registration No. 33-74024, Post-Effective Amendment No. 2, filed on
May 6, 1994).
8.2 -- Transfer Agency and Service Agreement dated January 1, 1995 incorporated
herein by reference (Exhibit 8.2 to Form N-1A of American Capital
Tax-Exempt Trust, Registration No. 2-96030, Post-Effective Amendment No.
15, filed March 29, 1995).
9. -- Form of Data Access Services Agreement dated December 2, 1993 incorporated
herein by reference (Exhibit 9.2 to Form N-1A of American Capital
Utilities Income Fund, Inc., Registration No. 33-68452, Post-Effective
Amendment No. 1, filed on May 19, 1994).
10. -- Opinion of Counsel.
11. -- Consent of Independent Accountants.
12. -- Inapplicable.
13. -- Investment Letter incorporated herein by reference (Exhibit 13 to Form N-1
of Registrant, Registration No. 2-90482, Pre-Effective Amendment No. 2,
filed on June 21, 1984).
14.1 -- Individual Retirement Account Brochure with Application incorporated
herein by reference (Exhibit 14.2 to Form N-1A of American Capital Reserve
Fund, Inc., Registration No. 2-50870, Post Effective Amendment No. 31,
filed on September 24, 1993).
14.2 -- 403(b)(7) Custodial Account incorporated herein by reference (Exhibit 14.2
to Form N-1A of American Capital Reserve Fund, Inc., Registration No.
2-50870, Post Effective Amendment No. 30, filed on September 24, 1992).
14.3 -- ORP 403(b)(7) Custodial Account incorporated herein by reference (Exhibit
14.3 to Form N-1A of American Capital Reserve Fund, Inc., Registration No.
2-50870, Post Effective Amendment No. 30, filed on September 24, 1992).
14.4 -- Retirement Plans for the Small Business -- Forms Package and Plan
Documents incorporated herein by reference (Exhibit 14.4 to Form N-1A of
Registrant, Registration No. 2-90482, Post Effective Amendment No. 18,
filed on February 25, 1994).
14.5 -- Prototype Profit Sharing/Money Purchase Plan and Trust incorporated herein
by reference (Exhibit 14.5 to Form N-1A of American Capital Growth and
Income Fund, Inc., Registration No. 2-21657, Post Effective Amendment No.
61, filed on March 26, 1991).
14.6 -- Prototype 401(k) Plan and Trust incorporated herein by reference (Exhibit
14.6 to Form N-1A of American Capital Growth and Income Fund, Inc.,
Registration No. 2-21657, Post Effective Amendment No. 61, filed on March
26, 1991).
14.7 -- Salary Reduction Simplified Employee Pension Plan incorporated herein by
reference (Exhibit 14.7 to Form N-1A of American Capital World Portfolio
Series, Inc., Registration No. 33-37879, Post Effective Amendment No. 9,
filed on September 24, 1993).
</TABLE>
C-2
<PAGE> 81
<TABLE>
<S> <C>
15.1 -- Class A Distribution Plan as amended October 7, 1994.
15.2 -- Class B Distribution Plan as amended October 7, 1994.
15.3 -- Class C Distribution Plan as amended October 7, 1994.
15.4 -- Form of Servicing Agreement incorporated herein by reference (Exhibit 15.3
to Form N-1A of Registrant, Registration No. 2-90482, Post Effective
Amendment No. 14, filed on February 25, 1992).
15.5 -- Form of Servicing Agreement for banks and bank affiliated broker/dealers
incorporated herein by reference (Exhibit 15.4 to Form N-1A of Registrant,
Registration No. 2-90482, Post Effective Amendment No. 14, filed on
February 25, 1992).
16. -- Computation Measure for Performance Information.
18 -- Multiple Class Plan dated April 7, 1995 incorporated herein by reference
(Exhibit 18 to Form N-1A of American Capital Federal Mortgage Trust,
Registration No. 33-1705, filed April 21, 1995).
19.1 -- Powers-of-Attorney for J. Miles Branagan and William S. Woodside
incorporated herein by reference (Exhibit 17.1 to Form N-1A of Registrant,
Registration No. 2-90482, Post Effective Amendment No. 12, filed on April
29, 1991).
19.2 -- Powers-of-Attorney for Roger Hilsman, Don G. Powell, David Rees, and
Fernando Sisto incorporated herein by reference (Exhibit 17.3 to Form N-1A
of Registrant, Registration No. 2-90482, Post Effective Amendment No. 11,
filed on April 25, 1990).
19.3 -- Powers-of-Attorney for Richard E. Caruso and Lawrence J. Sheehan
incorporated herein by reference (Exhibit 17.3 to Form N-1A of Registrant,
Registration No. 2-90482, Post Effective Amendment No. 13, filed on
October 21, 1991).
27. -- Financial Data Schedules.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
(1) (2)
NUMBER OF RECORD
TITLE OF CLASS HOLDERS
-------------- ----------------
<S> <C>
Common stock, $.001 par value 166,200 (Class A)
16,203 (Class B)
2,531 (Class C)
</TABLE>
ITEM 27. INDEMNIFICATION.
Item 4 of Part II is incorporated herein by reference to Form N-1 of
Registrant's Registration No. 2-90482, filed on April 10, 1984.
C-3
<PAGE> 82
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
During the last two fiscal years, the investment adviser has not engaged in
any business of a substantial nature except as investment adviser to the
American Capital Funds Group (listed below) and to the Emerging Growth Portfolio
of the Smith Barney Shearson Series Fund, and Common Sense Trust, and as
subadviser to Western Reserve Life-Emerging Growth Portfolio and Smith
Barney/Travelers Series Fund Inc. -- American Capital Enterprise Portfolio, all
registered open-end investment companies. The American Capital Funds Group and
Common Sense Trust are all located at 2800 Post Oak Blvd., Houston, Texas 77056.
The Emerging Growth Portfolio of the Smith Barney Shearson Series Fund and the
American Capital Enterprise Portfolio of the Smith Barney Travelers Series Fund
Inc. are located at Two World Trade Center, New York, New York 10048. Western
Reserve Life-Emerging Growth Portfolio is located at 201 Highland Avenue, Largo,
Florida 34640.
The American Capital Funds Group of registered investment companies for
which Van Kampen American Capital Asset Management, Inc. (formerly American
Capital Asset Management, Inc.) currently serves as investment adviser are
listed below:
American Capital Bond Fund, Inc.
American Capital Comstock Fund, Inc.
American Capital Convertible Securities, 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 Exchange Fund
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 Income Trust
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Small Capitalization Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
Mosher, Inc.
C-4
<PAGE> 83
During the last two fiscal years, no officer or director of the investment
adviser has engaged in any other business, profession, vocation or employment of
a substantial nature except as follows:
William N. Brown; Senior Vice President
Vice President and Director;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
Vice President;
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.
Huey P. Falgout, Jr.; Vice President and Assistant Secretary
Vice President and Assistant Corporate Secretary;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Alabama, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Massachusetts, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.
Advantage Capital Insurance Agency of Texas, Inc.
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
ACCESS Investor Services, Inc.
Van Kampen American Capital Trust Company
Nori L. Gabert; Vice President, Associate General Counsel and Secretary
Vice President, Corporate Secretary and Counsel;
American Capital Contractual Services, Inc.
Vice President and Corporate Secretary;
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Vice President and Assistant Corporate Secretary;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
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<PAGE> 84
Wayne D. Godlin; Vice President -- Portfolio Manager
Vice President;
Van Kampen American Capital Advisors, Inc.
Ronald A. Nyberg; Senior Vice President and General Counsel
Executive Vice President, General Counsel and Corporate Secretary;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.
Executive Vice President, General Counsel and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Vice President, General Counsel and Assistant Corporate Secretary;
American Capital Shareholders Corporation
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Vice President and Assistant Corporate Secretary;
American Capital Contractual Services, Inc.
Vice President;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
General Counsel and Assistant Secretary;
McCarthy, Crisanti & Maffei, Inc.
McCarthy, Crisanti & Maffei Acquisition Corporation
Robert C. Peck, Jr.; Senior Vice President, Chief Investment
Officer -- Fixed-Income Department and Director
Senior Vice President, Chief Investment Officer -- Fixed-Income Department
and Director;
Van Kampen American Capital Advisors, Inc.
Don G. Powell; President, Chief Executive Officer and Director
President, Chief Executive Officer and Director;
Van Kampen American Capital, Inc.
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Holding, Inc.
VK/AC Holding, Inc.
Chairman, Chief Executive Officer and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Executive Vice President and Director;
ACCESS Investor Services, Inc.
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.
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<PAGE> 85
American Capital Shareholders Corporation
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
Director;
McCarthy, Crisanti & Maffei, Inc.
McCarthy, Crisanti & Maffei Acquisition Corporation
William R. Rybak; Senior Vice President, Chief Financial Officer and Treasurer
Executive Vice President, Chief Financial Officer and Director;
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Executive Vice President and Chief Financial Officer;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.
Vice President, Chief Financial Officer and Treasurer;
ACCESS Investor Services, Inc.
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Exchange Corp.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company
Vice President and Chief Financial Officer;
Advantage Capital Corporation
American Capital Contractual Services, Inc.
Vice President and Treasurer;
Advantage Capital Credit Services, Inc.
Treasurer;
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Alabama, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Massachusetts, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.
Alan T. Sachtleben; Senior Vice President, Chief Investment Officer -- Equity
Department and Director
Executive Vice President;
Van Kampen American Capital, Inc.
VK/AC Holding, Inc.
Senior Vice President, Chief Investment Officer -- Equity Department and
Director;
Van Kampen American Capital Advisors, Inc.
J. David Wise; Vice President, Associate General Counsel, Compliance Review
Officer and Assistant Secretary
Vice President, General Counsel and Corporate Secretary;
Van Kampen American Capital Trust Company
Vice President and Assistant Corporate Secretary;
Van Kampen American Capital Services, Inc.
C-7
<PAGE> 86
Vice President;
ACCESS Investor Services, Inc.
Paul R. Wolkenberg; Senior Vice President
President, Chief Operating Officer and Director;
Van Kampen American Capital Services, Inc.
Executive Vice President, Chief Operating Officer and Director;
Van Kampen American Capital Trust Company
Executive Vice President and Director;
ACCESS Investor Services, Inc.
Executive Vice President;
American Capital Shareholders Corporation
Director;
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc.
Lea S. Zeitman; Assistant Secretary
Vice President, General Counsel and Corporate Secretary;
Advantage Capital Corporation
Advantage Capital Credit Services, Inc.
Advantage Capital Insurance Agency, Inc.
Advantage Capital Insurance Agency of Hawaii, Inc.
Advantage Capital Insurance Agency of Ohio, Inc.
Advantage Capital Insurance Agency of Oklahoma, Inc.
Vice President, General Counsel and Assistant Corporate Secretary;
Van Kampen American Capital Sales, Inc.
Vice President and Assistant Corporate Secretary;
Van Kampen American Capital T.A., Inc.
Vice President;
Van Kampen American Capital Trust Company
American Capital Contractual Services, Inc.
Assistant Corporate Secretary;
Van Kampen American Capital Advisors, Inc.
Clerk;
Advantage Capital Insurance Agency of Massachusetts, Inc.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Van Kampen American Capital Distributors, Inc. acts as principal
underwriter for the following registered investment companies:
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.
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<PAGE> 87
American Capital Government Securities, Inc.
American Capital Government Target Series
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
*Van Kampen Merritt California Tax Free Income Fund
Van Kampen Merritt Equity Trust
*Van Kampen Merritt Michigan Tax Free Income Fund
*Van Kampen Merritt Missouri Tax Free Income Fund
Van Kampen Merritt Money Market Trust
*Van Kampen Merritt Ohio Tax Free Income Fund
Van Kampen Merritt Pennsylvania Tax Free Income Fund
Van Kampen Merritt Prime Rate Income Trust
Van Kampen Merritt Series Trust
Van Kampen Merritt Tax Free Fund
Van Kampen Merritt Tax Free Money Fund
Van Kampen Merritt Trust
Van Kampen Merritt U.S. Government Trust
Van Kampen Merritt Insured Tax Free Income Fund
Van Kampen Merritt Tax Free High Income Fund
Van Kampen Merritt California Insured Tax Free Fund
Van Kampen Merritt Municipal Income Fund
Van Kampen Merritt Limited Term Municipal Income Fund
Van Kampen Merritt Florida Insured Tax Free Income Fund
Van Kampen Merritt New Jersey Tax Free Income Fund
Van Kampen Merritt New York Tax Free Income Fund
Van Kampen Merritt High Yield Fund
Van Kampen Merritt Short-Term Global Income Fund
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Van Kampen Merritt Strategic Income Fund
Van Kampen Merritt Emerging Markets Income Fund
Van Kampen Merritt Growth Fund
Van Kampen Merritt Growth and Income Fund
Van Kampen Merritt Utility Fund
Van Kampen Merritt Balanced Fund
Van Kampen Merritt Total Return Fund
Van Kampen Merritt Pennsylvania Tax Free Income Fund
Van Kampen Merritt Money Market Fund
Van Kampen Merritt Tax Free Money Fund
Van Kampen Merritt Prime Rate Income Trust
<TABLE>
<S> <C>
Emerging Markets Municipal Income Trust Series 1
Insured Municipals Income Trust Series 1 through 342
Insured Municipals Income Trust (Discount) Series 5 through 13
Insured Municipals Income Trust (Short Intermediate Term) Series 1 through 96
</TABLE>
C-9
<PAGE> 88
<TABLE>
<S> <C>
Insured Municipals Income Trust (Intermediate Term) Series 5 through 81
Insured Municipals Income Trust (Limited Term) Series 9 through 78
Insured Municipals Income Trust (Premium Bond Series) Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered
Maturity) Series 1 and 2
Insured Tax Free Bond Trust Series 1 through 6
Insured Tax Free Bond Trust (Limited Term) Series 1
Investors' Quality Tax-Exempt Trust Series 1 through 88
Investors' Quality Tax-Exempt Trust-Intermediate Series 1
Investors' Corporate Income Trust Series 1 through 12
Investors' Governmental Securities Income Trust Series 1 through 7
Van Kampen Merritt International Bond Income Trust Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust Series 1
Alabama Insured Municipals Income Trust Series 1 through 8
Arizona Investors' Quality Tax-Exempt Trust Series 1 through 16
Arizona Insured Municipals Income Trust Series 1 through 12
Arkansas Insured Municipals Income Trust Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust Series 1
California Insured Municipals Income Trust Series 1 through 136
California Insured Municipals Income Trust (Premium Bond
Series) Series 1
California Insured Municipals Income Trust (1st Intermediate
Series) Series 1 through 3
California Investors' Quality Tax-Exempt Trust Series 1 through 20
California Insured Municipals Income Trust (Intermediate
Laddered) Series 1 through 16
Colorado Insured Municipals Income Trust Series 1 through 73
Colorado Investors' Quality Tax-Exempt Trust Series 1 through 18
Connecticut Insured Municipals Income Trust Series 1 through 26
Connecticut Investors' Quality Tax-Exempt Trust Series 1
Delaware Investor's Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipal Income Trust -- Intermediate Series 1 and 2
Florida Insured Municipals Income Trust Series 1 through 88
Florida Investors' Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipals Income Trust (Intermediate
Laddered) Series 1 through 14
Georgia Insured Municipals Income Trust Series 1 through 73
Georgia Investors' Quality Tax-Exempt Trust Series 1 through 16
Hawaii Investors' Quality Tax-Exempt Trust Series 1
Investors' Quality Municipals Trust (AMT) Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust Series 1 through 53
Louisiana Insured Municipals Income Trust Series 1 through 13
Maine Investor's Quality Tax-Exempt Trust Series 1
Maryland Investors' Quality Tax-Exempt Trust Series 1 through 69
Massachusetts Insured Municipals Income Trust Series 1 through 30
Massachusetts Insured Municipals Income Trust
(Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust Series 1 through 124
Michigan Insured Municipals Income Trust (Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust (1st Intermediate
Series) Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust Series 1 through 30
Minnesota Insured Municipals Income Trust Series 1 through 54
Minnesota Investors' Quality Tax-Exempt Trust Series 1 through 21
Missouri Insured Municipals Income Trust Series 1 through 88
Missouri Insured Municipals Income Trust (Premium Bond Series) Series 1
Missouri Investors' Quality Tax-Exempt Trust Series 1 through 15
</TABLE>
C-10
<PAGE> 89
<TABLE>
<S> <C>
Missouri Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1
Nebraska Investors' Quality Tax-Exempt Trust Series 1 through 9
New Mexico Insured Municipals Income Trust Series 1 through 16
New Jersey Insured Municipals Income Trust Series 1 through 98
New Jersey Investors' Quality Tax-Exempt Trust Series 1 through 22
New Jersey Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1 and 4
New York Insured Municipals Income Trust -- Intermediate Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) Series 1
New York Insured Municipals Income Trust Series 1 through 123
New York Insured Tax-Free Bond Trust Series 1
New York Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1 through 14
New York Investors' Quality Tax-Exempt Trust Series 1
North Carolina Investors' Quality Tax-Exempt Trust Series 1 through 80
Ohio Insured Municipals Income Trust Series 1 through 94
Ohio Insured Municipals Income Trust (Premium Bond Series) Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) Series 1
Ohio Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust Series 1 through 16
Oklahoma Insured Municipal Income Trust Series 1 through 14
Oregon Investors' Quality Tax-Exempt Trust Series 1 through 53
Pennsylvania Insured Municipals Income Trust -- Intermediate Series 1 through 6
Pennsylvania Insured Municipals Income Trust Series 1 through 196
Pennsylvania Insured Municipals Income Trust (Premium Bond
Series) Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust Series 1 through 78
Tennessee Insured Municipals Income Trust Series 1-3 and 5-30
Texas Insured Municipals Income Trust Series 1 through 39
Texas Insured Municipals Income Trust (Intermediate Ladder) Series 1
Virginia Investors' Quality Tax-Exempt Trust Series 1 through 63
Van Kampen Merritt Utility Income Trust Series 1 through 6
Van Kampen Merritt Insured Income Trust Series 1 through 36
Van Kampen Merritt Insured Income Trust (Intermediate Term) Series 1 through 33
Van Kampen Merritt Select Equity Trust Series 1
Van Kampen Merritt Select Equity and Treasury Trust Series 1
Washington Insured Municipals Income Trust Series 1
West Virginia Insured Municipals Income Trust Series 1 through 5
</TABLE>
- - ---------------
*Has not yet commenced investment operations.
Van Kampen American Capital Distributors, Inc. also acts as principal
underwriter or depositor for American Capital Monthly Accumulation Plans, a
registered unit investment trust.
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<PAGE> 90
(b) The following information is furnished with respect to each officer and
director of Van Kampen American Capital Distributors, Inc.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS PRINCIPAL UNDERWRITER WITH REGISTRANT
- - --------------------------- ------------------------------- ----------------------
<S> <C> <C>
Don G. Powell(1) Chairman and Chief Executive President and Director
Officer
William R. Molinari(2) President and Chief Operating --
Officer
Ronald A. Nyberg(2) Executive Vice President and --
General Counsel
William R. Rybak(2) Executive Vice President and --
Chief Financial Officer
Robert A. Broman(2) Sr. Vice President --
Gary R. DeMoss(2) Sr. Vice President --
Robert J. Froehlich(2) Sr. Vice President --
Keith K. Furlong(2) Sr. Vice President --
Robert S. West(2) Sr. Vice President --
John H. Zimmermann, III(2) Sr. Vice President --
Timothy K. Brown(2) 1st Vice President --
James S. Fosdick(2) 1st Vice President --
Edward F. Lynch(2) 1st Vice President --
Scott E. Martin(2) 1st Vice President, Deputy --
General Counsel and Secretary
Mark R. McClure(2) 1st Vice President --
Mark T. McGannon(2) 1st Vice President --
Charles G. Millington(2) 1st Vice President, Controller --
and Treasurer
Michael L. Stallard(2) 1st Vice President --
David M. Swanson(2) 1st Vice President --
Patricia A. Bettlach(2) Vice President --
Carol S. Biegel(2) Vice President --
Linda Mae Brown(2) Vice President --
William F. Burke, Jr.(2) Vice President --
Thomas M. Byron(2) Vice President --
Glenn M. Cackovic(2) Vice President --
Joseph N. Caggiano(2) Vice President --
Richard J. Charlino(2) Vice President --
Eleanor M. Cloud(2) Vice President --
Dominick Cogliandro(2) Vice President and Assistant --
Treasurer
David B. Dibo(2) Vice President --
Howard A. Doss(2) Vice President --
Charles Edward Fisher(2) Vice President --
William J. Fow(2) Vice President --
Erich P. Gerth(2) Vice President --
John A. Hanhauser(2) Vice President --
Eric J. Hargens(2) Vice President --
J. Christopher Jackson(2) Vice President, Associate --
General Counsel and Assistant
Secretary
Dana R. Klein(2) Vice President --
Ann Marie Klingenhagen(2) Vice President --
</TABLE>
C-12
<PAGE> 91
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS PRINCIPAL UNDERWRITER WITH REGISTRANT
- - --------------------------- ------------------------------- ----------------------
<S> <C> <C>
David R. Kowalski(2) Vice President and Director of --
Compliance
S. William Lehew III(2) Vice President --
Walter Lynn(2) Vice President --
Deborah A. Lysacek(2) Vice President --
Michele L. Manley(2) Vice President --
Kevin S. Marsh(2) Vice President --
Ruth L. McKeel(2) Vice President --
Ronald E. Pratt(2) Vice President --
Craig S. Prichard(2) Vice President --
Michael W. Rohr(2) Vice President --
James B. Ross(2) Vice President --
James J. Ryan(2) Vice President --
Heather R. Sabo(2) Vice President --
Lisa A. Schomer(2) Vice President --
Ronald J. Schuster(2) Vice President --
Diane H. Snowden(2) Vice President --
Darren D. Stabler(2) Vice President --
Christopher J. Vice President --
Staniforth(2)
William C. Strafford(2) Vice President --
James C. Taylor(2) Vice President --
John F. Tierney(2) Vice President --
Curtis L. Ulvestad(2) Vice President --
Jeffrey A. Urbina(2) Vice President --
Sandra A. Waterworth(2) Vice President and Assistant --
Secretary
Steven T. West(2) Vice President --
Weston B. Wetherell(2) Vice President, Associate --
General Counsel and Assistant
Secretary
James R. Yount(2) Vice President --
Richard P. Zgonina(2) Vice President --
</TABLE>
- - ---------------
(1) 2800 Post Oak Blvd., Houston, Texas 77056
(2) One Parkview Plaza, Oakbrook Terrace, IL 60181
(c) Commissions and other compensation received by each principal
underwriter who is not an affiliated person of the Registrant or an affiliated
person of such an affiliated person, directly or indirectly, from the Registrant
during the Registrant's last fiscal year:
Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Unless otherwise stated below, the books or other documents required to be
maintained by Section 3l(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are in the physical possession of:
Fund Treasurer
Mutual Fund Accounting
2800 Post Oak Blvd.
Houston, TX 77056
C-13
<PAGE> 92
<TABLE>
<CAPTION>
RULE LOCATION OF REQUIRED RECORDS
- - ---- ----------------------------
<S> <C> <C>
31a-1 (b)(2)(iii) Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
(b)(2)(iv) ACCESS Investor, Services, Inc.
7501 Tiffany Springs Parkway
Kansas City, Missouri 64153
(b)(4)-(6) Van Kampen American Capital Asset Management, Inc.
(b)(9)-(11) Van Kampen American Capital Asset Management, Inc.
</TABLE>
ITEM 31. MANAGEMENT SERVICES.
There are no management related services contracts not discussed in Part A.
ITEM 32. UNDERTAKINGS.
Registrant hereby undertakes, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a
director or directors and to assist in communications with other shareholders as
required by Section 16(c) of the Investment Company Act of 1940.
Registrant hereby undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-14
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, and State of Texas, on the 25th day of
April, 1995.
AMERICAN CAPITAL GOVERNMENT
SECURITIES, INC.
By /s/ DON G. POWELL
---------------------------------------
Don G. Powell, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on April 25, 1995:
<TABLE>
<S> <C>
Principal Executive Officer and Director:
/s/ DON G. POWELL Director and President
---------------------------------------------
(Don G. Powell)
Principal Financial Officer and Accounting
Officer:
/s/ CURTIS W. MORELL Vice President and Treasurer
---------------------------------------------
(Curtis W. Morell)
Directors:
*J. MILES BRANAGAN Director
---------------------------------------------
(J. Miles Branagan)
*RICHARD E. CARUSO Director
---------------------------------------------
(Richard E. Caruso)
*ROGER HILSMAN Director
---------------------------------------------
(Roger Hilsman)
*DAVID REES Director
---------------------------------------------
(David Rees)
*LAWRENCE J. SHEEHAN Director
---------------------------------------------
(Lawrence J. Sheehan)
*FERNANDO SISTO Director
---------------------------------------------
(Fernando Sisto)
*WILLIAM S. WOODSIDE Director
---------------------------------------------
(William S. Woodside)
</TABLE>
- - ---------------
* Signed by the undersigned pursuant to a Power-of-Attorney previously filed
with the Commission.
/s/ NORI L. GABERT
------------------------------------------
Nori L. Gabert
Attorney-in-Fact
<PAGE> 94
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
INDEX TO EXHIBITS TO FORM N-1A
REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- - ------- ----------------------
<C> <S>
2 -- Bylaws as amended March 3, 1995.
4.1 -- Specimen Stock Certificate (Class A shares).
4.2 -- Specimen Stock Certificate (Class B shares).
4.3 -- Specimen Stock Certificate (Class C shares).
5. -- Investment Advisory Agreement dated December 20, 1994.
6. -- Underwriting Agreement dated December 20, 1994.
10. -- Opinion of Counsel.
11. -- Consent of Independent Accountants.
15.1 -- Class A Distribution Plan as amended October 7, 1994.
15.2 -- Class B Distribution Plan as amended October 7, 1994.
15.3 -- Class C Distribution Plan as amended October 7, 1994.
16. -- Computation Measure for Performance Information.
27. -- Financial Data Schedules.
</TABLE>
<PAGE> 1
EXHIBIT 2
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
BY-LAWS
(As amended March 3, 1995)
ARTICLE I.
STOCKHOLDERS
SECTION 1.01. Annual Meeting. So long as the Corporation is
registered as an investment company under the Investment Company Act of 1940,
the Corporation shall not be required to hold an annual meeting in any year in
which the election of directors is not required to be acted upon under the
Investment Company Act of 1940. In the event that the Corporation is required
to hold an annual meeting of its stockholders by the Investment Company Act of
1940, such meeting shall be held: (a) at a date and time set by the Board of
Directors in accordance with the Investment Company Act of 1940 ("40 Act") if
the purpose of the meeting is to elect Directors or to approve an investment
advisory agreement or distribution agreement; and (b) on a date fixed by the
Board of Directors (i) in the fiscal year immediately following the fiscal year
in which independent accountants were appointed if the purpose of the meeting
is to ratify the selection of such independent accountants or (ii) in any
fiscal year if an annual meeting is to be held for any reason other than as
specified in the foregoing. Any stockholders' meeting held in accordance with
the preceding sentence shall for all purposes constitute the annual meeting of
stockholders for the fiscal year of the Corporation in which the meeting is
held. At any such meeting, the stockholders shall elect Directors to hold the
offices of any Directors who have held office for more than one year or who
have been elected by the Board of Directors to fill vacancies which result from
any cause. Except as the Charter or statute provides otherwise, any business
may be considered at an annual meeting without the purpose of the meeting
having been specified in the notice. Failure to hold an annual meeting does
not invalidate the Corporation's existence or affect any otherwise valid
corporate acts.
SECTION 1.02. Special Meeting. At any time in the interval
between stockholders' meetings, a special meeting of the stockholders may be
called by the Chairman of the Board or the President or by a majority of the
Board of Directors by vote at a meeting or in writing (addressed to the
Secretary of the Corporation) with or without a meeting. Special meetings of
stockholders shall also be called by the Secretary upon the written request of
the holders of not less than ten percent (10%) of all the shares entitled to
vote at such meeting. Such request shall state the purpose or purposes of such
meeting and the matters proposed to be acted on thereat. No special meeting
need be called upon the request of the holders of less than a majority of all
the shares entitled to vote at such meeting to consider any matter which is
1
<PAGE> 2
substantially the same as a matter voted upon at any special meeting of
stockholders held during the preceding twelve months.
SECTION 1.03. Place of Meetings. Meetings of stockholders
shall be held at such place in the United States as is set from time to time by
the Board of Directors.
SECTION 1.04. Notice of Meetings; Waiver of Notice. Not less
than ten nor more than 90 days before each stockholder's meeting, the Secretary
shall give written notice of the meeting to each stockholder entitled to vote
at the meeting and each other stockholder entitled to notice of the meeting.
The notice shall state the time and place of the meeting and, if the meeting is
a special meeting or notice of the purpose is required by statute, the purpose
of the meeting. Notice is given to a stockholder when it is personally
delivered to him, left at his residence or usual place of business, or mailed
to him at his address as it appears on the records of the Corporation.
Notwithstanding the foregoing provisions, each person who is entitled to notice
waives notice if he before or after the meeting signs a waiver of notice which
is filed with the records of stockholders' meetings, or is present at the
meeting in person or by proxy.
SECTION 1.05. Quorum; Voting. Unless statute or the Charter
provides otherwise, at a meeting of stockholders the presence in person or by
proxy of stockholders entitled to cast a majority of all the votes entitled to
be cast at the meeting constitutes a quorum, and a majority of all the votes
cast at a meeting at which a quorum is present is sufficient to approve any
matter which properly comes before the meeting, except that a plurality of all
the votes cast at a meeting at which a quorum is present is sufficient to elect
a director.
SECTION 1.06. Adjournments. Whether or not a quorum is
present, a meeting of stockholders convened on the date for which it was called
may be adjourned from time to time by the stockholders present in person or by
proxy by a majority vote.
Any business which might have been transacted at the meeting as
originally notified may be deferred and transacted at any such adjourned
meeting at which a quorum shall be present. No further notice of an adjourned
meeting other than by announcement shall be necessary if held on a date not
more than 120 days after the original record date.
SECTION 1.07. General Right to Vote; Proxies. Unless the Charter
provides for a greater or lesser number of votes per share or limits or denies
voting rights, each outstanding share of stock, regardless of class, is
entitled to one vote on each matter submitted to a vote at a meeting of
stockholders. In all elections for directors, each share of stock may be voted
for as many individuals as there are directors to be elected and for whose
election the share is entitled to be voted. A stockholder may vote the stock
the stockholder owns of record either in person or by proxy. A stockholder may
sign a writing authorizing another person to act as proxy. Signing may be
accomplished by the stockholder or the stockholder's authorized agent signing
the writing or causing the stockholder's signature to be affixed to the writing
by any reasonable
2
<PAGE> 3
means, including facsimile signature. A stockholder may authorize another
person to act as proxy by transmitting, or authorizing the transmission of, a
telegram, cablegram, datagram, or other means of electronic transmission to the
person authorized to act as proxy or to a proxy solicitation firm, proxy
support service organization, or other person authorized by the person who will
act as proxy to receive the transmission. Unless a proxy provides otherwise,
it is not valid more than 11 months after its date. A proxy is revocable by a
stockholder at any time without condition or qualification unless the proxy
states that it is irrevocable and the proxy is coupled with an interest. A
proxy may be made irrevocable for so long as it is coupled with an interest.
The interest with which a proxy may be coupled includes an interest in the
stock to be voted under the proxy or another general interest in the
Corporation or its assets or liabilities.
SECTION 1.08. List of Stockholders. At each meeting of
stockholders, a full, true and complete list of all stockholders entitled to
vote at such meeting, showing the number and class of shares held by each and
certified by the transfer agent for such class or by the Secretary, shall be
furnished by the Secretary.
SECTION 1.09. Conduct of Voting. At all meetings of
stockholders, unless the voting is conducted by inspectors, the proxies and
ballots shall be received, and all questions touching the qualification of
voters and the validity of proxies and the acceptance or rejection of votes
shall be decided, by the chairman of the meeting. If demanded by stockholders,
present in person or by proxy, entitled to cast 10% in number of votes entitled
to be cast, or if ordered by the chairman, the vote upon any election or
question shall be taken by ballot, and upon like demand or order, the voting
shall be conducted by two inspectors, in which event the proxies and ballots
shall be received, and all questions touching the qualification of voters and
the validity of proxies and the acceptance or rejection of votes shall be
decided, by such inspectors. Unless so demanded or ordered, no vote need be by
ballot and voting need not be conducted by inspectors. The stockholders at any
meeting may choose an inspector or inspectors to act at such meeting, and in
default of such election the chairman of the meeting may appoint an inspector
or inspectors. No candidate for election as a director at a meeting shall
serve as an inspector thereat.
SECTION 1.10. Informal Action by Stockholders. Any action
required or permitted to be taken at a meeting of stockholders may be taken
without a meeting if there is filed with the records of stockholders' meetings
a unanimous written consent which sets forth the action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right to
dissent signed by each stockholder entitled to notice of the meeting but not
entitled to vote at it.
3
<PAGE> 4
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.01. Function of Directors. The business and
affairs of the Corporation shall be managed under the direction of its Board of
Directors. All powers of the Corporation may be exercised by or under
authority of the Board of Directors, except as conferred on or reserved to the
stockholders by statute or by the Charter or By-Laws.
SECTION 2.02. Number of Directors. The business and property
of the Corporation shall be conducted and managed by a Board of Directors
consisting of not less than five (5) nor more than seventeen (17) Directors,
which number may be increased or decreased as herein provided. By vote of a
majority of the entire Board of Directors, the number of Directors fixed by
these Bylaws may be increased or decreased from time to time, but the tenure of
office of a Director shall not be affected by any decrease in the number of
Directors to hold office until the next annual meeting and until their
successors are elected and qualify. Directors need not be stockholders.
SECTION 2.03. Election and Tenure of Directors. At each
annual meeting, the stockholders shall elect directors to hold office until the
next annual meeting and until their successors are elected and qualify;
provided, however, that through June 30, 1996 the term of office of each
director shall end at the time such director reaches the age of 76 1/2 or
74 1/2 for persons first elected on or after January 1, 1986 as a director of
any open end investment company managed by Van Kampen American Capital Asset
Management, Inc. and that on and after July 1, 1996 the term of office of each
director shall end at the time such director reaches the age of 76 1/2 or
72 1/2 for persons first elected on or after January 1, 1986 as a director of
any open end investment company managed by Van Kampen American Capital Asset
Management, Inc.
SECTION 2.04. Removal of Director. Unless statute or the
Charter provides otherwise, the stockholders may remove any director, with or
without cause, by the affirmative vote of a majority of the outstanding voting
securities as defined in Section 2(a)(42) of the 40 Act. Such action may be
taken at a special meeting of stockholders called for such purpose upon the
request of the holders of not less than 10% of the shares entitled to vote
pursuant to Section 1.02 hereof.
Whenever ten or more stockholders of record who have been such
for at least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at
least 1 per centum of the outstanding shares, whichever is less, shall apply to
the Board of Directors in writing, stating that they wish to communicate with
other stockholders with a view to obtaining signatures to a request for a
special meeting to remove any director and accompanied by a form of
communication and request which they wish
4
<PAGE> 5
to transmit, the Board shall within five business days after receipt of such
application either:
(a) afford to such applicants access to a list of the names and
addresses of all stockholders as recorded on the books of the Corporation; or
(b) inform such applicants as to the approximate number of
stockholders of record, and the approximate cost of mailing to them the
proposed communication and form of request.
If the Board elects to follow the course specified in
paragraph (b), the Board, upon the written request of such applicants,
accompanied by a tender of the material to be mailed and of the reasonable
expenses of mailing, shall, with reasonable promptness, mail such material to
all stockholders of record at their addresses as recorded on the books, unless
within five business days after such tender the Board shall mail to such
applicants and file with the Securities and Exchange Commission (the
"Commission") together with a copy of the material to be mailed, a written
statement signed by at least a majority of the directors to the effect that in
their opinion either such material contains untrue statements of fact or omits
to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the
basis of such opinion.
If the Commission shall enter an order refusing to sustain any
of such objections, or if, after the entry of an order sustaining one or more
of such objections, the Commission shall find, after notice and opportunity for
hearing, that all objections so sustained have been met, and shall enter an
order so declaring, the Board shall mail copies of such material to all
stockholders with reasonable promptness after the entry of such order and the
renewal of such tender.
SECTION 2.05. Vacancy on Board. The stockholders may elect a
successor to fill a vacancy on the Board of Directors which results from the
removal of a director. A director elected by the stockholders to fill a
vacancy which results from the removal of a director serves for the balance of
the term of the removed director. A majority of the remaining directors,
whether or not sufficient to constitute a quorum, may fill a vacancy on the
Board of Directors which results from any cause except an increase in the
number of directors and a majority of the entire Board of Directors may fill a
vacancy which results from an increase in the number of directors. A director
elected by the Board of Directors to fill a vacancy serves until the next
annual meeting of stockholders and until his successor is elected and
qualifies. The Board of Directors may not fill more than two directorships
resulting from an increase in the number of directors during the period between
any two successive annual meetings of stockholders.
SECTION 2.06. Regular Meetings. Any regular meeting of the
Board of Directors shall be held on such date and at any place as may be
designated from time to time by the Board of Directors.
5
<PAGE> 6
SECTION 2.07. Special Meetings. Special meetings of the
Board of Directors may be called at any time by the Chairman of the Board or
the President or by a majority of the Board of Directors by vote at a meeting,
or in writing with or without a meeting. A special meeting of the Board of
Directors shall be held on such date and at any place as may be designated from
time to time by the Board of Directors. In the absence of designation such
meeting shall be held at such place as may be designated in the call.
SECTION 2.08. Notice of Meeting. Except as provided in
Section 2.06, the Secretary shall give notice to each director of each regular
and special meeting of the Board of Directors. The notice shall state the time
and place of the meeting. Notice is given to a director when it is delivered
personally to him, left at his residence or usual place of business, or sent by
telegraph or telephone, at least 24 hours before the time of the meeting or, in
the alternative, by mail to his address as it shall appear on the records of
the Corporation, at least 72 hours before the time of the meeting. Unless the
By-Laws or a resolution of the Board of Directors provides otherwise, the
notice need not state the business to be transacted at or the purposes of any
regular or special meeting of the Board of Directors. No notice of any meeting
of the Board of Directors need be given to any director who attends (except
where a director attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
convened), or to any director who, in writing executed and filed with the
records of the meeting either before or after the holding thereof, waives such
notice. Any meeting of the Board of Directors, regular or special, may adjourn
from time to time to reconvene at the same or some other place, and no notice
need be given of any such adjourned meeting other than by announcement.
SECTION 2.09. Action by Directors. Unless statute or the
Charter or By-Laws requires a greater proportion, the action of a majority of
the directors present at a meeting at which a quorum is present is action of
the Board of Directors. A majority of the entire Board of Directors shall
constitute a quorum for the transaction of business. In the absence of a
quorum, the directors present by majority vote and without notice other than by
announcement may adjourn the meeting from time to time until a quorum shall
attend. At any such adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting as
originally notified. Any action required or permitted to be taken at a meeting
of the Board of Directors may be taken without a meeting, if a unanimous
written consent which sets forth the action is signed by each member of the
Board and filed with the minutes of proceedings of the Board.
SECTION 2.10. Meeting by Conference Telephone. Members of
the Board of Directors may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Participation in a meeting
by these means constitutes presence in person at a meeting.
SECTION 2.11. Compensation. By resolution of the Board of
Directors a fixed
6
<PAGE> 7
sum and expenses, if any, for attendance at each regular or special meeting of
the Board of Directors or of committees thereof, and other compensation for
their services as such or on committees of the Board of Directors, may be paid
to directors. A director who serves the Corporation in any other capacity also
may receive compensation for such other services, pursuant to a resolution of
the directors.
ARTICLE III.
COMMITTEES
SECTION 3.01. Committees. The Board of Directors may appoint
from among its members an Executive Committee and other committees composed of
two or more directors and delegate to these committees any of the powers of the
Board of Directors, except the power to declare dividends or other
distributions on stock, elect directors, issue stock other than as provided in
the next sentence, recommend to the stockholders any action which requires
stockholder approval, amend the Articles of Incorporation or By-Laws, approve
any merger or share exchange which does not require stockholder approval, elect
or remove officers or members of any such committee, fix the compensation or
any member of such committee, or any other power prohibited by law. If the
Board of Directors has given general authorization for the issuance of stock, a
committee of the Board, in accordance with a general formula or method
specified by the Board by resolution or by adoption of a stock option or other
plan, may fix the terms of stock subject to classification or reclassification
and the terms on which any stock may be issued, including all terms and
conditions required or permitted to be established or authorized by the Board
of Directors.
SECTION 3.02. Committee Procedure. Each committee may fix
rules of procedure for its business. A majority of the members of a committee
shall constitute a quorum for the transaction of business and the act of a
majority of those present at a meeting at which a quorum is present shall be
the act of the committee. The members of a committee present at any meeting,
whether or not they constitute a quorum, may appoint a director to act in the
place of an absent member. Any action required or permitted to be taken at a
meeting of a committee may be taken without a meeting, if a unanimous written
consent which sets forth the action is signed by each member of the committee
and filed with minutes of the committee. The members of a committee may
conduct any meeting thereof by conference telephone in accordance with the
provisions of Section 2.10.
SECTION 3.03. Emergency. In the event of a state of disaster
of sufficient severity to prevent the conduct and management of the affairs and
business of the Corporation by its directors and officers as contemplated by
the Charter and the By-Laws, any two or more available members of the then
incumbent Executive Committee shall constitute a quorum of that Committee for
the full conduct and management of the affairs and business of the Corporation
7
<PAGE> 8
in accordance with the provisions of Section 3.01. In the event of the
unavailability, at such time, of a minimum of two members of the then incumbent
Executive Committee, the available directors shall elect an Executive Committee
consisting of any two members of the Board of Directors, whether or not they be
officers of the Corporation, which two members shall constitute the Executive
Committee for the full conduct and management of the affairs of the Corporation
in accordance with the aforegoing provisions of this Section. This Section
shall be subject to implementation by resolution of the Board of Directors
passed from time to time for that purpose, and any provisions of the By-Laws
(other than this Section) and any resolutions which are contrary to the
provisions of this Section or to the provisions of any such implementary
resolutions shall be suspended until it shall be determined by any interim
Executive Committee acting under this Section that it shall be to the advantage
of the Corporation to resume the conduct and management of its affairs and
business under all the other provisions of the By-Laws.
ARTICLE IV.
OFFICERS
SECTION 4.01. Executive and Other Officers. The Corporation
shall have a President, a Secretary, and a Treasurer who shall be the executive
officers of the Corporation. The Board of Directors may designate an officer
to serve as Chief Executive Officer, having general supervision of the business
and affairs of the Corporation, or as Chief Operating Officer, having
supervision of the operations of the Corporation; in the absence of designation
the President shall serve as Chief Executive Officer and Chief Operating
Officer. The Corporation may also have one or more Vice Presidents, assistant
officers, and subordinate officers as may be established by the Board of
Directors. A person may hold more than one office in the Corporation but may
not serve concurrently as both President and Vice President or as President and
Secretary of the Corporation. Officers may also be directors.
SECTION 4.02. Chairman of the Board. The Chairman of the
Board, if one be elected, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present; and, in
general, he shall perform all such duties as are from time to time assigned to
him by the Board of Directors. The Chairman of the Board shall be a director.
The Chairman of the Board, if one be elected, shall not be an officer of the
corporation unless expressly designated as an officer by the Board of
Directors; the Chairman shall be an executive officer if also expressly
designated as the Chief Executive Officer of the Corporation.
SECTION 4.03. President. The President, in the absence of
the Chairman of the Board, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present; he may sign and
execute, in the name of the Corporation, all authorized deeds, mortgages,
bonds, contracts or other instruments, except in cases in which the signing and
8
<PAGE> 9
execution thereof shall have been expressly delegated to some other officer or
agent of the Corporation; and, in general, he shall perform all duties usually
performed by a president of a corporation and such other duties as are from
time to time assigned to him by the Board of Directors or the Chief Executive
Officer of the Corporation.
SECTION 4.04. Vice Presidents. The Vice President or Vice
Presidents, at the request of the Chief Executive Officer or the President, or
in the President's absence or during his inability to act, shall perform the
duties and exercise the functions of the President, and when so acting shall
have the powers of the President. If there be more than one Vice President,
the Board of Directors may determine which one or more of the Vice Presidents
shall perform any of such duties or exercise any of such functions, of if such
determination is not made by the Board of Directors, the Chief Executive
Officer, or the President may make such determination; otherwise any of the
Vice Presidents may perform any of such duties or exercise any of such
functions. The Vice President or Vice Presidents shall have such other powers
and perform such other duties, and have such additional descriptive
designations in their titles (if any), as are from time to time assigned to
them by the Board of Directors, the Chief Executive Officer, or the President.
SECTION 4.05. Secretary. The Secretary shall keep the
minutes of the meetings of the stockholders, of the Board of Directors and of
any committees (unless a committee has elected a different person as
secretary), in books provided for the purpose; he shall see that all notices
are duly given in accordance with the provisions of the By-Laws or as required
by law; he shall be custodian of the records of the Corporation; he may witness
any document on behalf of the Corporation, the execution of which is duly
authorized, see that the corporate seal is affixed where such document is
required or desired to be under its seal, and when so affixed, may attest the
same; and, in general, he shall perform all duties incident to the office of a
secretary of a corporation, and such other duties as are from time to time
assigned to him by the Board of Directors, the Chief Executive Officer, or the
President.
SECTION 4.06. Treasurer. The Treasurer shall have charge of
and be responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust
companies or other depositories as shall, from time to time, be selected by the
Board of Directors; he shall render to the President and to the Board of
Directors, whenever requested an account of the financial condition of the
Corporation; and, in general, he shall perform all the duties incident to the
office of a treasurer of a corporation, and such other duties as are from time
to time assigned to him by the Board of Directors, the Chief Executive Officer,
or the President.
SECTION 4.07. Assistant and Subordinate Officers. The
assistant and subordinate officers of the Corporation are all officers below
the office of Vice President, Secretary, or Treasurer. The assistant or
subordinate officers shall have such duties as are from time to time
9
<PAGE> 10
assigned to them by the Board of Directors, the Chief Executive Officer, or the
President.
SECTION 4.08. Election, Tenure and Removal of Officers. The
Board of Directors shall elect the officers. The Board of Directors may from
time to time authorize any committee or officer to appoint assistant and
subordinate officers. The President serves for one year. All other officers
shall be appointed to hold their offices, respectively, during the pleasure of
the Board. The Board of Directors (or, as to any assistant or subordinate
officer, any committee or officer authorized by the Board) may remove an
officer at any time. The removal of an officer does not prejudice any of his
contract rights. The Board of Directors (or, as to any assistant or
subordinate officer, any committee or officer authorized by the Board) may fill
a vacancy which occurs in any office for the unexpired portion of the term.
SECTION 4.09. Compensation. The Board of Directors shall
have power to fix the salaries and other compensation and remuneration, of
whatever kind, of all officers of the Corporation. It may authorize any
committee or officer, upon whom the power of appointing assistant and
subordinate officers may have been conferred, to fix the salaries, compensation
and remuneration of such assistant and subordinate officers.
ARTICLE V.
STOCK
SECTION 5.01. Certificates for Stock. Upon written request
therefor in accordance with such procedures as may be established by the Board
of Directors from time to time, each stockholder is entitled to certificates
which represent and certify the shares of stock he holds in the Corporation.
Each stock certificate shall include on its face the name of the corporation
that issues it, the name of the stockholder or other person to whom it is
issued, and the class of stock and number of shares it represents. It shall be
in such form, not inconsistent with law or with the Charter, as shall be
approved by the Board of Directors or any officer or officers designated for
such purpose by resolution of the Board of Directors. Each stock certificate
shall be signed by the Chairman of the Board, the President, or a Vice
President, and countersigned by the Secretary, an Assistant Secretary, the
Treasurer, or an Assistant Treasurer. Each certificate may be sealed with the
actual corporate seal or a facsimile of it or in any other form and the
signatures may be either manual or facsimile signatures. A certificate is
valid and may be issued whether or not an officer who signed it is still an
officer when it is issued.
SECTION 5.02. Transfers. The Board of Directors shall have
power and authority to make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of certificates of stock; and
may appoint transfer agents and registrars thereof. The duties of transfer
agent and registrar may be combined.
10
<PAGE> 11
SECTION 5.03. Record Date and Closing of Transfer Books. The
Board of Directors may set a record date or direct that the stock transfer
books be closed for a stated period for the purpose of making any proper
determination with respect to stockholders, including which stockholders are
entitled to notice of a meeting, vote at a meeting, receive a dividend, or be
allotted other rights. The record date may not be more than 90 days before the
date on which the action requiring the determination will be taken; the
transfer books may not be closed for a period longer than 20 days; and, in the
case of a meeting of stockholders, the record date or the closing of the
transfer books shall be at least ten days before the date of the meeting.
SECTION 5.04. Stock Ledger. The Corporation shall maintain a
stock ledger which contains the name and address of each stockholder and the
number of shares of stock of each class which the stockholder holds. The stock
ledger may be in written form or in any other form which can be converted
within a reasonable time into written form for visual inspection. The original
or a duplicate of the stock ledger shall be kept at the offices of a transfer
agent for the particular class of stock, or, if none, at the principal office
in the State of Texas or the principal executive offices of the Corporation.
SECTION 5.05. Certification of Beneficial Owners. The Board
of Directors may adopt by resolution a procedure by which a stockholder of the
Corporation may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth
the class of stockholders who may certify; the purpose for which the
certification may be made; the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books, within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board considers necessary or desirable. On receipt of a certification
which complies with the procedure adopted by the Board in accordance with this
Section, the person specified in the certification is, for the purpose set
forth in the certification, the holder of record of the specified stock in
place of the stockholder who makes the certification.
SECTION 5.06. Lost Stock Certificates. The Board of
Directors of the Corporation may determine the conditions for issuing a new
stock certificate in place of one which is alleged to have been lost, stolen,
or destroyed, or the Board of Directors may delegate such power to any officer
or officers of the Corporation. In their discretion, the Board of Directors or
such officer or officers may refuse to issue such new certificate save upon the
order of some court having jurisdiction in the premises.
11
<PAGE> 12
ARTICLE VI.
FINANCE
SECTION 6.01. Checks, Drafts, Etc. All checks, drafts and
orders for the payment of money, notes and other evidences of indebtedness,
issued in the name of the Corporation, shall, unless otherwise provided by
resolution of the Board of Directors, be signed by the President, a Vice
President or an Assistant Vice President and countersigned by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary.
SECTION 6.02. Annual Statement of Affairs. The President
shall prepare annually a full and correct statement of the affairs of the
Corporation, to include a balance sheet and a financial statement of operations
for the preceding fiscal year. The statement of affairs shall be submitted at
the annual meeting of the stockholders and, within 20 days after the meeting,
placed on file at the Corporation's principal office.
SECTION 6.03. Fiscal Year. The fiscal year of the
Corporation shall be fixed by resolution of the Board of Directors.
SECTION 6.04. Dividends. If declared by the Board of
Directors at any meeting thereof, the Corporation may pay dividends on its
shares in cash, property, or in shares of the capital stock of the Corporation,
unless such dividend is contrary to law or to a restriction contained in the
Charter.
ARTICLE VII.
SUNDRY PROVISIONS
SECTION 7.01. Books and Records. The Corporation shall keep
correct and complete books and records of its accounts and transactions and
minutes of the proceedings of its stockholders and Board of Directors and of
any executive or other committee when exercising any of the powers of the Board
of Directors. The books and records of a Corporation may be in written form or
in any other form which can be converted within a reasonable time into written
form for visual inspection. Minutes shall be recorded in written form but may
be maintained in the form of a reproduction. The original or a certified copy
of the By-Laws shall be kept at the principal office of the Corporation.
SECTION 7.02. Corporate Seal. The Board of Directors shall
provide a suitable seal, bearing the name of the Corporation, which shall be in
the charge of the Secretary. The Board of Directors may authorize one or more
duplicate seals and provide for the custody thereof. If the Corporation is
required to place its corporate seal to a document, it is sufficient to meet
12
<PAGE> 13
the requirement of any law, rule, or regulation relating to a corporate seal to
place the word "Seal" adjacent to the signature of the person authorized to
sign the document on behalf of the Corporation.
SECTION 7.03. Bonds. The Board of Directors may require any
officer, agent or employee of the Corporation to give a bond to the
Corporation, conditioned upon the faithful discharge of his duties, with one or
more sureties and in such amount as may be satisfactory to the Board of
Directors.
SECTION 7.04. Voting Upon Shares in Other Corporations.
Stock of other corporations or associations, registered in the name of the
Corporation, may be voted by the President, a Vice President, or a proxy
appointed by either of them. The Board of Directors, however, may by
resolution appoint some other person to vote such shares, in which case such
person shall be entitled to vote such shares upon the production of a certified
copy of such resolution.
SECTION 7.05. Mail. Any notice or other document which is
required by these By-Laws to be mailed shall be deposited in the United States
mails, postage prepaid.
SECTION 7.06. Execution of Documents. A person who holds
more than one office in the Corporation may not act in more than one capacity
to execute, acknowledge, or verify an instrument required by law to be
executed, acknowledged, or verified by more than one officer.
SECTION 7.07. Amendments. Subject to the special provisions
of Section 2.02, (a) any and all provisions of these By-Laws may be altered or
repealed and new by-laws may be adopted at any annual meeting of the
stockholders, or at any special meeting called for that purpose, and (b) the
Board of Directors shall have the power, at any regular or special meeting
thereof, to make and adopt new by-laws, or to amend, alter or repeal any of the
By-Laws of the Corporation.
ARTICLE VIII.
CUSTODIAN
SECTION 8.01. Employment of Custodian. All assets of the
Corporation shall be held by one or more custodian banks or trust companies
meeting the requirements of the Investment Company Act of 1940, as amended (the
"1940 Act"), and having capital, surplus and undivided profits of at least
$2,000,000 and may be registered in the name of the Corporation, including the
designation of the particular class or series to which such assets belong, or
any such custodian, or the nominee of either of them. The terms of any such
custodian agreement shall
13
<PAGE> 14
be determined by the Board of Directors, which terms shall be in accordance
with the provisions of the 1940 Act. If so directed by vote of the holders of
a majority of the outstanding shares of a particular class or series or by vote
of the Board of Directors, the custodian of the assets belonging to such class
or series shall deliver and pay over such assets as specified in such vote.
Subject to such rules, regulations and orders as the
Securities and Exchange Commission (the "Commission") may adopt, the
Corporation may direct a custodian to deposit all or any part of the securities
owned by the Corporation in a system for the central handling of securities
established by the Federal Reserve system or by a national securities exchange
or a national securities association registered with the Commission, or
otherwise in accordance with the 1940 Act, pursuant to which system, all
securities of a particular class or issuer deposited within the system are
treated as fungible and may be transferred or pledged by bookkeeping entry
without the physical delivery of such securities, provided that all such
deposits shall be subject to withdrawal only upon the order of the Corporation
or a custodian.
ARTICLE IX.
INDEMNIFICATION
SECTION 9.01. Indemnification of Directors and Officers.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than a proceeding by or in the right of the Corporation in which such
person shall have been adjudged to be liable to the Corporation), by reason of
being or having been a director or officer of the Corporation, or serving or
having served at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another entity in which the Corporation
has an interest as a shareholder, creditor or otherwise (a "Covered Person"),
against all liabilities, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and
reasonable expenses (including attorney's fees) actually incurred by the
Covered Person in connection with such action, suit or proceeding, except (a)
liability in connection with any proceeding in which it is determined that (i)
the act or omission of the Covered Person was material to the matter giving
rise to the proceeding, and was committed in bad faith or was the result of
active and deliberate dishonesty, or (ii) the Covered Person actually received
an improper personal benefit in money, property or services, or (iii) in the
case of any criminal proceeding, the Covered Person had reasonable cause to
believe that the act or omission was unlawful and (b) liability to the
Corporation or its security holders to which the Covered Person would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office (any or
all of the conduct referred to in clauses (a) and (b) being hereinafter
referred to as "Disabling Conduct").
14
<PAGE> 15
SECTION 9.02. Procedure for Indemnification. Any
indemnification under this By-Law shall (unless ordered by a court) be made by
the Corporation only as authorized for a specific proceeding by (a) a final
decision on the merits by a court or other body before whom the proceeding was
brought that the Covered Person to be indemnified was not liable by reason of
Disabling Conduct, (b) dismissal of the proceeding against the Covered Person
for insufficiency of evidence of any Disabling Conduct, or (c) a reasonable
determination, based upon a review of the facts, by a majority of a quorum of
the directors who are neither "interested persons" of the Corporation as
defined in the 40 Act nor parties to the proceeding ("disinterested, non-party
directors"), or an independent legal counsel in a written opinion, that the
Covered Person was not liable by reason of Disabling Conduct. The termination
of any proceeding by judgment, order or settlement shall not create a
presumption that the Covered Person did not meet the required standard of
conduct; the termination of any proceeding by conviction, or a plea of nolo
contendere or its equivalent, or an entry of an order of probation prior to
judgment, shall create a rebuttable presumption that the Covered Person did not
meet the required standard of conduct. Any determination pursuant to this
Section IX shall not prevent recovery from any Covered Person of any amount
paid to him in accordance with this By-Law as indemnification if such Covered
Person is subsequently adjudicated by a court of competent jurisdiction to be
liable by reason of Disabling Conduct.
SECTION 9.03. Advance Payment of Expenses. Reasonable
expenses (including attorney's fees) incurred by a Covered Person may be paid
or reimbursed by the Corporation in advance of the final disposition of an
action, suit or proceeding upon receipt by the Corporation of (a) a written
affirmation by the Covered Person of his good faith belief that the standard of
conduct necessary for indemnification under this By-Law has been met and (b) a
written undertaking by or on behalf of the Covered Person to repay the amount
if it is ultimately determined that such standard of conduct has not been met,
so long as either (i) the Covered Person has provided a security for his
undertaking, (ii) the Corporation is insured against losses arising by reason
of any lawful advances, or (iii) a majority of a quorum of the disinterested,
non-party directors, or an independent legal counsel in a written opinion, has
determined, based on a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the Covered Person
ultimately will be found entitled to indemnification.
SECTION 9.04. Exclusivity, Etc. The indemnification and
advance of expenses provided by this By-Law shall not be deemed exclusive of
any other rights to which a Covered Person seeking indemnification or advance
of expenses may be entitled under any law (common or statutory), or any
agreement, vote of stockholders or disinterested directors, or other provision
that is consistent with law, both as to action in an official capacity and as
to action in another capacity while holding office or while employed by or
acting as agent for the Corporation, shall continue in respect of all events
occurring while the Covered Person was a director or officer after such Covered
Person has ceased to be a director or officer, and shall inure to the benefit
of the estate, heirs, executors and administrators of such Covered person. All
rights to
15
<PAGE> 16
indemnification and advance of expenses under the Charter and hereunder shall
be deemed to be a contract between the Corporation and each director or officer
of the Corporation who serves or served in such capacity at any time while this
By-Law is in effect. Nothing herein shall prevent the amendment of this
By-Law, provided that no such amendment shall diminish the rights of any
Covered Person hereunder with respect to events occurring or claims made before
its adoption or as to claims made after its adoption in respect of events
occurring before its adoption. Any repeal or modification of this By-Law shall
not in any way diminish any rights to indemnification or advance of expenses of
a Covered Person or the obligations of the Corporation arising hereunder with
respect to events occurring, or claims made, while this By-Law or any provision
hereof is in force.
SECTION 9.05. Insurance. The Corporation may purchase and
maintain insurance on behalf of any Covered Person against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such; provided, however, that the Corporation shall not
purchase insurance to indemnify any Covered Person against liability for
Disabling Conduct.
SECTION 9.06. Severability: Definitions. The invalidity or
unenforceability of any provision of this Article IX shall not affect the
validity or enforceability of any other provision hereof. The phrase "this
By-Law" in this Article IX means this Article IX in its entirety.
16
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
VOID
__________ __________
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
CLASS A
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 025001 10 8
_________________
fully paid and nonassessable shares of the common stock of the par value of one
tenth of one cent per share of American Capital Government Securities, Inc.
transferable on the books of the Corporation by the holder thereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[AMERICAN CAPITAL
GOVERNMENT SECURITIES, INC.
CORPORATE SEAL]
NORI L. GABERT DON G. POWELL
SECRETARY PRESIDENT
KC 440558
- - --------------------------------------------------------------------------------
COUNTERSIGNED by AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By WILLIAM N. BROWN
----------------------------------------------------
AUTHORIZED OFFICER
- - --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
NUMBER CLASS A SHARES
KC
ACCOUNT. NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
<PAGE> 2
- - --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURES(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- - --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- - --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifs to
TEN ENT - as tenants by Minor Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorships and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- - --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4.3
NUMBER SHARES
__________ __________
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
CLASS B
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 025001 20 7
_________________
fully paid and nonassessable shares of the common stock of the par value of one
tenth of one cent per share of American Capital Government Securities, Inc.
transferable on the books of the Corporation by the holder thereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is, however, subject (i) to a contingent deferred
sales charge on amounts redeemed within five years of purchase and (ii) to a
conversion feature to CLASS A shares of the Corporation six years after the end
of the calendar month from the date of purchase. This certificate is not valid
unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[AMERICAN CAPITAL
GOVERNMENT SECURITIES, INC.
CORPORATE SEAL]
NORI L. GABERT DON G. POWELL
SECRETARY PRESIDENT
KC 2805
- - --------------------------------------------------------------------------------
COUNTERSIGNED by AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- - --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
NUMBER CLASS A SHARES
KC
ACCOUNT. NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
<PAGE> 2
- - --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURES(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- - --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- - --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifs to
TEN ENT - as tenants by Minor Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorships and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- - --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4.2
NUMBER SHARES
__________ __________
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
CLASS C
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 025001 30 6
_________________
fully paid and nonassessable shares of the common stock of the par value of one
tenth of one cent per share of American Capital Government Securities, Inc.
transferable on the books of the Corporation by the holder thereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is, however, subject (i) to a contingent deferred
sales charge on amounts redeemed within one year of purchase and (ii) to a
conversion feature to CLASS A shares of the Corporation ten years after the
end of the calencar month from the date of purchase. This certificate is not
valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[AMERICAN CAPITAL
GOVERNMENT SECURITIES, INC.
CORPORATE SEAL]
NORI L. GABERT DON G. POWELL
SECRETARY PRESIDENT
KC 2105
- - --------------------------------------------------------------------------------
COUNTERSIGNED by AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- - --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
NUMBER CLASS C SHARES
KC
ACCOUNT. NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
<PAGE> 2
- - --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURES(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- - --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- - --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifs to
TEN ENT - as tenants by Minor Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorships and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- - --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 5
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this 20th day of December, 1994, by and
between AMERICAN CAPITAL GOVERNMENT SECURITIES, INC., a Maryland corporation
(hereinafter referred to as the "FUND"), and AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation (hereinafter referred to as the "ADVISER").
The FUND and the ADVISER agree as follows:
(1) Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the FUND's
Directors and in conformity with applicable laws, the FUND's Articles of
Incorporation ("Articles of Incorporation"), By-laws, registration statements,
prospectus and stated investment objectives, policies and restrictions, shall:
a. manage the investment and reinvestment of the FUND's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the FUND's portfolio, and formulation and implementation of
investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the FUND's account with brokers or dealers selected
by the ADVISER;
c. conduct and manage the day-to-day operations of the FUND including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing
of routine legal services except for services provided by outside counsel to
the FUND selected by the Directors, and the supervision of the FUND's Treasurer
and the personnel working under his direction; and
d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each FUND director and FUND officer who is an
affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the FUND the most favorable price and
execution available and shall maintain records adequate to demonstrate
compliance with this requirement. Subject to prior authorization by the FUND's
Directors of appropriate policies and procedures, the ADVISER may, to the
extent authorized by law, cause the FUND to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of
<PAGE> 2
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction. In the event of such authorization and to the extent
authorized by law, the ADVISER shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of such action.
Except as otherwise agreed, or as otherwise provided herein, the FUND shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
FUND shall include (i) interest and taxes; (ii) brokerage commissions and other
costs in connection with the purchase and sale of portfolio investments; (iii)
compensation of its directors and officers other than those who are affiliated
persons of the ADVISER; (iv) compensation of its Treasurer, compensation of
personnel working under the Treasurer's direction, and expenses of office
space, facilities, and equipment used by the Treasurer and such personnel in
the performance of their normal duties for the FUND which consist of
maintenance of the accounts, books and other documents which constitute the
record forming the basis for the FUND's financial statements, preparation of
such financial statements and other FUND documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the FUND's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the FUND selected by the Directors; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the FUND and its shares for distribution under state and federal
securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and proxy solicitation materials of
the FUND; (xi) all other expenses incidental to holding meetings of the FUND's
shareholders including proxy solicitations therefor; (xii) expenses for
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the FUND's membership in
trade associations approved by the Directors; and (xv) such nonrecurring
expenses as may arise, including those associated with actions, suits or
proceedings to which the FUND is a party and the legal obligation which the
FUND may have to indemnify its officers and directors with respect thereto. To
the extent that any of the foregoing expenses are allocated between the FUND
and any other party, such allocations shall be pursuant to methods approved by
the Directors.
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<PAGE> 3
(2) Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the FUND are not impaired.
Except as otherwise required by the Investment Company Act of 1940 (the "1940
Act"), any of the shareholders, directors, officers and employees of the FUND
may be a shareholder, trustee, director, officer or employee of, or be
otherwise interested in, the ADVISER, and in any person controlled by or under
common control with the ADVISER, and the ADVISER, and any person controlled by
or under common control with the ADVISER, may have an interest in the FUND.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties hereunder on the part
of the ADVISER, the ADVISER shall not be subject to liability to the FUND, or
to any shareholder of the FUND, for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
(3) Compensation Payable to ADVISER
The FUND shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, a monthly fee computed
at the following annual rates:
.540% on the first $1 billion of the FUND's average daily net assets; .515% on
the next $1 billion of the FUND's average daily net assets; .490% on the next
$1 billion of the FUND's average daily net assets; .440% on the next $1 billion
of the FUND's average daily net assets; .390% on the next $1 billion of the
FUND's average daily net assets; .340% on the next $1 billion of the FUND's
average daily net assets; .290% on the next $1 billion of the FUND's average
daily net assets; and .240% of any excess over $7 billion.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month calculated in the
manner provided in the FUND's Articles of Incorporation. Such fee shall be
payable for each calendar month as soon as practicable after the end of that
month.
The fees payable to the ADVISER by the FUND pursuant to this Section 3 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 American Capital Management & Research, Inc., or
its successor, in connection with the purchase and sale of portfolio
investments of the FUND, less any direct expenses incurred by such person, in
3
<PAGE> 4
connection with obtaining such commissions, fees, brokerage or similar
payments. The ADVISER shall use its best efforts to recapture all available
tender offer solicitation fees and exchange offer fees in connection with the
FUND's portfolio transactions and shall advise the Directors 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 American
Capital Management & Research, Inc., or its successor, to receive in connection
with the FUND's portfolio transactions or other arrangements which may benefit
the FUND.
In the event that the ordinary business expenses of the FUND for any fiscal
year should exceed the most restrictive expense limitation applicable in the
states where the FUND's shares are qualified for sale, the compensation due the
ADVISER for such fiscal year shall be reduced by the amount of such excess. The
ADVISER's compensation shall be so reduced by a reduction or a refund thereof,
at the time such compensation is payable after the end of each calendar month
during such fiscal year of the FUND, and if such amount should exceed such
monthly compensation, the ADVISER shall pay the FUND an amount sufficient to
make up the deficiency, subject to readjustment during the FUND's fiscal year.
For purposes of this paragraph, all ordinary business expenses of the FUND
shall include the investment advisory fee and other operating expenses paid by
the FUND except (i) for interest and taxes; (ii) brokerage commissions; (iii)
as a result of litigation in connection with a suit involving a claim for
recovery by the FUND; (iv) as a result of litigation involving a defense
against a liability asserted against the FUND, provided that, if the ADVISER
made the decision or took the actions which resulted in such claim, it acted in
good faith without negligence or misconduct; (v) any indemnification paid by
the FUND to its officers and directors and the ADVISER in accordance with
applicable state and federal laws as a result of such litigation; and (vi)
amounts paid to American Capital Marketing, Inc., the distributor of the FUND's
shares, in connection with a distribution plan adopted by the FUND's Directors
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
(4) Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the FUND are the
property of the FUND and further agrees to surrender promptly to the FUND any
of such records upon the FUND's request. The ADVISER further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the Act.
4
<PAGE> 5
(5) Duration of Agreement
This Agreement shall have an initial term of 2 years from the date hereof, and
shall continue in force from year to year thereafter, but only so long as such
continuance is approved at least annually by the vote of a majority of the
FUND's Directors who are not parties to this Agreement or interested persons of
any such parties, cast in person at a meeting called for the purpose of voting
on such approval, and by a vote of a majority of the FUND's Directors or a
majority of the FUND's outstanding voting securities.
This Agreement shall terminate automatically in the event of its assignment.
The Agreement may be terminated at any time by the FUND's Directors, by vote of
a majority of the FUND's outstanding voting securities, or by the ADVISER, on
60 days' written notice, or upon such shorter notice as may be mutually agreed
upon. Such termination shall be without payment of any penalty.
(6) Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the 1940 Act and
the Rules and Regulations thereunder, subject, however, to such exemptions as
may be granted to either the ADVISER or the FUND by the Securities and Exchange
Commission (the "Commission"), or such interpretive positions as may be taken
by the Commission or its staff, under the 1940 Act, and the term "brokerage and
research services" shall have the meaning given in the Securities Exchange Act
of 1934 and the Rules and Regulations thereunder.
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
By: /s/ CURTIS W. MORELL
-------------------------------------
Name: Curtis W. Morell
-------------------------------------
Its: Vice President
-------------------------------------
AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By: /s/ NORI L. GABERT
-------------------------------------
Name: Nori L. Gabert
-------------------------------------
Its: Vice President
-------------------------------------
5
<PAGE> 1
EXHIBIT 6
UNDERWRITING AGREEMENT
between
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
and
AMERICAN CAPITAL MARKETING, INC.
THIS AGREEMENT made this 20th day of December 1994, by and between AMERICAN
CAPITAL GOVERNMENT SECURITIES, INC., a Maryland corporation, hereinafter
referred to as the "Fund" and AMERICAN CAPITAL MARKETING, INC., a Texas
corporation, hereinafter referred to as the "Underwriter".
WHEREAS, the Fund proposes to issue its shares in three classes: Class A,
Class B and Class C, all as described in the Fund's current prospectus at the
time of sale;
W I T N E S S E T H:
In consideration of the mutual covenants herein contained and other good and
valuable consideration, the receipt whereof is hereby acknowledged, the parties
hereto agree as follows:
FIRST: The Fund hereby appoints the Underwriter as its exclusive agent for the
sale of shares of the Fund to the public through investment dealers in the
United States and throughout the world.
SECOND: The Fund shall not sell any of its shares except through the
Underwriter and under the terms and conditions set forth in paragraph FOURTH
below. Notwithstanding the provisions of the foregoing sentence, however,
(A) the Fund may issue its shares to any other investment company or personal
holding company, or to the shareholders thereof, in exchange for all or a
majority of the shares or assets of any such company;
(B) the Fund may issue its shares at net asset value to any shareholder of the
Fund purchasing such shares with dividends or other cash distributions received
from the Fund pursuant to an offer made to all shareholders; and
(C) the Fund may issue its shares at net asset value to its Directors.
THIRD: The Underwriter hereby accepts appointment as exclusive agent for the
sale of all classes of shares of the Fund and agrees that it will use its best
efforts to sell such shares; provided, however, that:
(A) the Underwriter may, and when requested by the Fund shall, suspend its
efforts to effectuate sales for any or all classes of
1
<PAGE> 2
shares of the Fund or limit such sales efforts to existing shareholders of the
Fund at any time when, in the opinion of the Underwriter, after consultation
with the investment adviser to the Fund, or in the opinion of the Fund, sales
efforts should be limited or suspended because of market or other economic
considerations (including a determination by the Fund's investment adviser that
it would be in the best interests of existing shareholders of the Fund to
suspend sales of shares of the Fund or limit such sales to existing
shareholders of the Fund) or abnormal circumstances of any kind;
(B) upon the limiting or suspension of sales efforts by the Underwriter
pursuant to clause (A) above, the Fund may in its discretion suspend the sale
of shares through the Underwriter or limit such sales to existing shareholders
of the Fund; and
(C) the Fund may withdraw the offering of its shares (i) at any time with the
consent of the Underwriter, or (ii) without such consent when so required by
the provisions of any statute or of any order, rule or regulation of any
governmental body having jurisdiction. It is mutually understood and agreed
that the Underwriter does not undertake to sell any specific amount of shares
of the Fund. The Fund shall have the right to specify minimum amounts for
initial and subsequent orders for the purchase of shares.
FOURTH: The offering price of shares of the Fund (the "offering price") shall
be the net asset value per share plus, in the case of Class A shares, any
applicable initial sales charge. Net asset value per share shall be determined
in the manner provided in the then current prospectus of the Fund. The sales
charge for shares shall be established by the Underwriter. The Underwriter may
designate a scale of reducing sales charges on the basis of the value of shares
purchased or owned in accordance with Rule 22d-1 under the Investment Company
Act of 1940 (the "Act"). Included in the scale of reducing sales charges may
be a level at which no sales charges are added to the net asset value in
computing the public offering price. The Underwriter may also designate
eliminations of sales charges to particular classes of investors or
transactions in accordance with Rule 22d-1, provided such eliminations are
approved by the Fund and described in the prospectus. The Fund shall allow,
directly to investment dealers through whom shares of the Fund are sold, such
portion of the sales charge as may be payable to them and specified by the
Underwriter up to, but not exceeding, the amount of the total sales charge.
The difference between any portion of the sales charge so payable to investment
dealers and the total sales charges included in the offering price shall be
paid to the Underwriter.
The offering price of Class B and Class C shares of the Fund shall be the net
asset value per share without an initial sales charge. However, the Fund
agrees that the Underwriter shall impose certain
2
<PAGE> 3
contingent deferred sales charges in connection with the redemption of Class B
and Class C shares of the Fund, not to exceed a specified percentage of the
original purchase price of the shares as from time to time set forth in the
prospectus of the Fund. The Underwriter may retain (or receive from the Fund,
as the case may be) all of such contingent deferred sales charges. Net asset
value per share shall be determined in the manner provided in the then current
prospectus of the Fund. The Underwriter may designate eliminations of
contingent deferred sales charges to particular classes of investors or
transactions in accordance with Rule 22d-1 provided such eliminations are
approved by the Fund and described in the prospectus. The Underwriter proposes
to pay to investment dealers through whom Class B and Class C shares of the
Fund are sold a dealer commission of a specified percentage of the purchase
price of Class B and Class C shares purchased through them and as from time to
time set forth in the prospectus of the Fund.
The Underwriter shall act as agent of the Fund in connection with the sale and
repurchase of shares of the Fund. Except with respect to such sales and
repurchases, the Underwriter shall act as principal in all matters relating to
the promotion of the sale of shares of the Fund and shall enter into all of its
own engagements, agreements and contracts as principal on its own account. The
Underwriter shall enter into selling group agreements with investment dealers
selected by the Underwriter, authorizing such investment dealers to offer and
sell shares of the Fund to the public upon the terms and conditions set forth
therein, which shall not be inconsistent with the provisions of this Agreement.
Each selling group agreement shall provide that the investment dealer shall act
as a principal, and not as an agent of the Fund.
FIFTH: The Underwriter shall bear
(A) the expenses of printing from the final proof and distributing
registration statements and prospectuses relating to public offerings made by
the Underwriter pursuant to this Agreement and annual and semi-annual
shareowner reports used as sales literature (not, however, including
typesetting costs), as well as all printing and distribution costs of any other
sales literature used by the Underwriter or furnished by the Underwriter to
dealers in connection with such public offerings except as otherwise agreed by
the Board of Directors;
(B) expenses of advertising in connection with such public offerings except as
otherwise agreed by the Board of Directors; and
(C) all legal expenses in connection with the foregoing.
SIXTH: The Underwriter will accept orders for shares of the Fund only to the
extent of purchase orders actually received and not in excess of such orders,
and it will not avail itself of any opportunity of making a profit by
expediting or withholding orders.
3
<PAGE> 4
SEVENTH:
(A) The Fund and the Underwriter shall each comply with all applicable
provisions of the Act, the Securities Act of 1933 (the "Securities Act") and of
all other federal and state laws, rules and regulations governing the issuance
and sale of shares of the Fund.
(B) The Fund agrees to indemnify the Underwriter against any and all claims,
demands, liabilities and expenses which the Underwriter may incur under the
Securities Act, or common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in any registration
statement or prospectus of the Fund, or any omission to state a material fact
therein, the omission of which makes any statement contained therein
misleading, unless such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund in connection therewith by
or on behalf of the Underwriter.
(C) The Underwriter agrees to indemnify the Fund against any and all claims,
demands, liabilities and expenses which the Fund may incur arising out of or
based upon any act or deed of the Underwriter or its sales representatives
which has not been authorized by the Fund in its prospectus or in this
Agreement. The Underwriter agrees to indemnify the Fund against any and all
claims, demands, liabilities and expenses which the Fund may incur under the
Securities Act, or common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in any registration
statement or prospectus of the Fund, or any omission to state a material fact
therein if such statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund in connection therewith by
or on behalf of the Underwriter.
(D) The Underwriter agrees to indemnify the Fund against any and all claims,
demands, liabilities and expenses which the Fund may incur under the Securities
Act, or common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in any prospectus of the Fund
prepared for use under Rule 482 of the Securities Act, or any omission to state
a material fact therein.
EIGHTH: Nothing herein contained shall require the Fund to take any action
contrary to any provision of its Articles of Incorporation or to any applicable
statute or regulation.
NINTH: This Agreement shall become effective on the date hereof, shall have an
initial term of two years from the date hereof, and shall continue in force and
effect from year to year thereafter, provided, that such continuance is
specifically approved at least annually (a)(i) by the Board of Directors of the
Fund, or (ii) by
4
<PAGE> 5
vote of a majority of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the Act); and (b) by vote of a majority of the Fund's Board
of Directors who are not parties to this Agreement or interested persons (as
defined in Section 2(a)(19) of the Act) of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval.
TENTH:
(A) This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Board of Directors of the Fund or by vote of a majority
of the outstanding voting securities of the Fund, or by the Underwriter, on
sixty days written notice to the other party.
(B) This Agreement shall automatically terminate in the event of its
assignment (as defined in Section 2(a)(4) of the Act).
ELEVENTH: Any notice under this Agreement shall be in writing, addressed and
delivered, or mailed, postage paid, to the other party at such address as such
other party may designate for the receipt of such notices. Until further
notice to the other party, it is agreed that the address of both the Fund and
the Underwriter shall be 2800 Post Oak Boulevard, Houston, Texas 77056.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in
duplicate on the day and year first above written.
AMERICAN CAPITAL MARKETING, INC.
By: /s/ FRED SHEPHERD
---------------------------------------------
Name: Fred Shepherd
---------------------------------------------
Its: Vice President
---------------------------------------------
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
By: /s/ J. DAVID WISE
---------------------------------------------
Name: J. David Wise
---------------------------------------------
Its: Vice President and Assistant Secretary
---------------------------------------------
5
<PAGE> 1
EXHIBIT 10
O ' M E L V E N Y & M Y E R S
4 0 0 S O U T H H O P E S T R E E T
L O S A N G E L E S , C A L I F O R N I A 9 0 0 7 1 - 2 8 9 9
TELEPHONE (213) 669-6000
FACSIMILE (213) 669-6407
April 20, 1995
WRITER'S DIRECT DIAL NUMBER OUR FILE NUMBER
(213) 669-6690 019,612-999
LA1-663284.V1
American Capital Government Securities, Inc.
2800 Post Oak Boulevard
Houston, TX 77056
Ladies and Gentlemen:
At your request, we have examined the form of Post-Effective
Amendment No. 19 to Registration Statement No. 2-90482 to be filed by you with
the Securities and Exchange Commission on form N-1A in connection with the
registration under the Securities Act of 1933 of 129,512,856 shares of your
Capital Stock, $.001 par value (the "Shares"). We are familiar with the
proceedings taken and proposed to be taken by you in connection with the
authorization, issuance and sale of the Shares.
Based upon our examination and upon our knowledge of your
corporate activities, it is our opinion that the Shares will, when issued and
sold in the manner described in the Registration Statement at a price in excess
of par value, be validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Respectfully submitted,
/s/ O'MELVENY & MYERS
0'MELVENY & MYERS
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 19, Amendment No. 20 to the Registration Statement on Form N-1A
(the "Registration Statement") of our report dated February 16, 1995, relating
to the financial statements and financial highlights appearing in the December
31, 1994 Annual Report to Shareholders of American Capital Government
Securities, Inc., which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings "Financial
Highlights" and "Independent Accountants" in the Prospectus and under the
heading "Independent Accountants" in the Statement of Additional Information.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
April 25, 1995
<PAGE> 1
EXHIBIT 15.1
CLASS A
DISTRIBUTION PLAN
OF
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
Section 1. American Capital Government Securities, Inc. (the "Fund") may act
as a distributor of securities of which it is the issuer, pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act"), according to the
terms of this Distribution Plan (the "Plan").
Section 2. The Fund may incur as a distributor of securities of which it is
the issuer expenses of up to twenty-five one-hundredths of one percent (0.25%)
per annum of the Fund's average daily net assets.
Section 3. Amounts set forth in Section 2 may be expended when and if
authorized in advance by the Fund's Board of Directors. Such amounts may be
used to finance any activity which is primarily intended to result in the sale
of the Fund's shares, including, but not limited to, expenses of organizing and
conducting sales seminars, printing of prospectuses and reports for other than
existing shareholders, preparation and distribution of advertising material and
sales literature, supplemental payments to dealers under a dealer incentive
program to be established by American Capital Marketing, Inc. ("Marketing") as
the Fund's Distributor in accordance with Section4, and the costs of
administering such a program. All amounts expended pursuant to the Plan shall
be paid to Marketing. Marketing shall be required to use such amounts
exclusively to finance those activities set forth in Sections3 and 4 of the
Plan.
Section 4. (a) Amounts expended by the Fund under the Plan shall be used
primarily for the implementation by Marketing of a dealer incentive program
with respect to those shareholder accounts which have been opened for at least
one year.
(b) Pursuant to this program Marketing may enter into agreements ("Servicing
Agreements") with such broker/dealers ("Dealers") as may be selected from time
to time by Marketing for the provision of distribution assistance in connection
with the sale of shares of common stock of the Fund ("Shares") to the Dealers'
clients and customers ("Customers") and for the provision of administrative
support services to Customers who may from time to time directly or
beneficially own Shares. The distribution assistance and administrative
support services to be rendered by Dealers under the Servicing Agreements may
include, but shall not be limited to, the following: distributing sales
literature; answering routine Customer inquiries concerning the Fund; assisting
Customers in changing dividend options, account designations and addresses, and
<PAGE> 2
in enrolling into the pre-authorized check plan, systematic withdrawal plan or
any of several tax sheltered retirement plans offered in connection with the
purchase of Shares; assisting in the establishment and maintenance of Customer
accounts and records and in the processing of purchase and redemption
transactions; investing dividends and capital gains distributions automatically
in Shares and providing such other information and services as the Fund or the
Customer may reasonably request.
Section 5. This Plan shall not take effect until it has been approved by a
vote of at least a majority (as defined in the Act) of the outstanding voting
securities of the Fund.
Section 6. This Plan shall not take effect until it has been approved,
together with any related agreements, by votes of the majority of both (a) the
Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund (as defined in the Act) and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Disinterested Directors"), cast in person at a meeting
called for the purpose of voting on this Plan or such agreements.
Section 7. Unless sooner terminated pursuant to Section9, this Plan shall
continue in effect for a period of one year from the date it takes effect and
thereafter shall continue in effect so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
Section6.
Section 8. Marketing shall provide to the Fund's Board and the Board shall
review, at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made.
Section 9. This Plan may be terminated at any time by vote of a majority of
the Disinterested Directors, or by vote of a majority of the Fund's outstanding
voting securities.
Section 10. Any agreement related to this Plan shall be in writing, and shall
provide:
(a) That such agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Disinterested Directors or by a vote of
the Fund's outstanding voting securities, on not more than sixty days' written
notice to any other party to the agreement; and
(b) That such agreement shall terminate automatically in the event of its
assignment.
Section 11. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in Section 2 hereof unless such amendment is
approved in the manner provided in
2
<PAGE> 3
Section 5 hereof, and no material amendment to the Plan shall be made unless
approved in the manner provided for in Section 6 hereof.
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
By: /s/ NORI L. GABERT
-------------------------------
Name: Nori L. Gabert
Its: Vice President
Plan effective as of: December 15, 1988
as amended October 7, 1994
3
<PAGE> 1
EXHIBIT 15.2
CLASS B
DISTRIBUTION PLAN
OF
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
WHEREAS, American Capital Government Securities, Inc. (the "Fund"), engages in
business as an open-end management investment company and is registered as such
under the Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Fund proposes to commence an offering of Class B shares at net
asset value without initial sales charge but with a contingent deferred sales
charge ("CDSC");
WHEREAS, the Fund proposes to engage in activities which are primarily intended
to result in the distribution and sale of its Class B shares, to make payments
in connection with the distribution of its Class B shares and to engage
American Capital Marketing, Inc. ("Marketing") to act as principal underwriter
(as defined in the Act) of its Class B shares, and desires to adopt a Class B
Shares Distribution Plan pursuant to Rule 12b-1 under the Act;
WHEREAS, Marketing proposes to compensate broker-dealers or other persons for
providing distribution assistance in the offering of Class B shares and to
compensate financial and other industry professionals that provide services to
facilitate transactions in Class B shares for their clients (such
broker-dealers, other persons, financial institutions and other industry
professionals being collectively referred to as "Service Organizations");
WHEREAS, such compensation includes commissions to dealers and transaction fees
to other Service Organizations (such commissions and transaction fees being
collectively referred to as "Transactional Compensation"), plus supplemental
payments to Service Organizations ("Service Fees") pursuant to Servicing
Agreements proposed to be offered by Marketing to such Service Organizations;
WHEREAS, Marketing may provide additional promotional incentives to certain or
all Service Organizations and proposes to incur substantial additional expenses
in rendering distribution services for Class B shares, including but not
limited to, printing prospectuses and reports for other than existing
shareholders, preparation and distribution of advertising material and sales
literature, expenses of organizing and conducting sales seminars, and other
operating expenses;
WHEREAS, the Directors of the Fund have determined that there is a reasonable
likelihood that adoption of this Class B Distribution
<PAGE> 2
Plan will benefit the Fund and its Class B shareholders;
NOW, THEREFORE, the Fund hereby adopts this Class B Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the Act and containing the
following terms and conditions:
1. Subject to the supervision of the Board of Directors of the Fund, Marketing
will provide the Fund with such distribution services and facilities as the
Fund may from time to time consider necessary to enhance the sale of its Class
B shares.
2. In consideration of the Transactional Compensation and Service Fees paid
and the other distribution services for Class B shares rendered by Marketing,
the Fund shall pay Marketing out of the assets attributable to the Class B
shares an annual distribution fee ("Distribution Fee") calculated daily and
payable weekly. The Distribution Fee shall equal on an annual basis up to
1.00% of the average daily net assets of the Funds' Class B shares. Only
distribution expenditures of a type and amount authorized in advance by the
Fund's Board of Directors and properly attributable to the sale of Class B
shares will be used to justify any fee paid pursuant to this Plan.
3. This Plan shall not take effect until it has been approved by a vote of at
least a majority (as defined in the Act) of the outstanding Class B shares of
the Fund.
4. This Plan shall not take effect until it has been approved, together with
any related agreements, by votes of the majority of both (a) the Board of
Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund (as defined in the Act) and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Disinterested Directors"), cast in person at a meeting
called for the purpose of voting on this Plan or such agreements.
5. So long as the Plan remains in effect, the selection and nomination of
persons to serve as trustees of the Fund who are not "interested persons" of
the Fund shall be committed to the discretion of the Directors then in office
who are not "interested persons" of the Fund.
6. Unless sooner terminated pursuant to Section 8, this Plan shall continue in
effect for a period of one year from the date it takes effect (which shall be
the date of the commencement of the public offering of Class B shares, provided
that the conditions of Sections 3 and 4 above have been met).
7. Marketing shall provide to the Fund's Board and the Board shall review, at
least quarterly, a written report of the expenses incurred hereunder and the
purposes for which such expenditures were made.
2
<PAGE> 3
8. The Plan may be terminated, without payment of any penalty, at any time by
vote of a majority of the Disinterested Directors, or by vote of a majority of
the outstanding voting securities of the Fund.
9. Any agreement related to this Plan shall be in writing, and shall provide:
(a) That such agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Disinterested Directors or by a vote of
the outstanding voting securities of the Fund, on not more than sixty days'
written notice to any other party to this agreement; and
(b) That such agreement shall terminate automatically in the event of its
assignment.
10. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in Section 2 hereof unless such amendment is
approved in the manner provided in Section 3 hereof, and no material amendment
to the Plan shall be made unless approved in the manner provided for in Section
4 hereof.
11. The Fund will preserve copies of the Plan, any agreement relating to the
Plan and any report made pursuant to Section 7 above, for a period of not less
than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
American Capital Government Securities, Inc.
By: /s/ NORI L. GABERT
--------------------------
Name: Nori L. Gabert
Its: Vice President
Plan effective as of: December 20, 1991
as amended October 7, 1994
3
<PAGE> 1
EXHIBIT 15.3
CLASS C
DISTRIBUTION PLAN
OF
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
WHEREAS, American Capital Government Securities, Inc. (the "Fund"), engages in
business as an open-end management investment company and is registered as such
under the Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Fund proposes to commence an offering of Class C shares at net
asset value without initial sales charge but with a contingent deferred sales
charge ("CDSC");
WHEREAS, the Fund proposes to engage in activities which are primarily intended
to result in the distribution and sale of its Class C shares, to make payments
in connection with the distribution of its Class C shares and to engage
American Capital Marketing, Inc. ("Marketing") to act as principal underwriter
(as defined in the Act) of its Class C shares, and desires to adopt a Class C
Shares Distribution Plan pursuant to Rule 12b-1 under the Act;
WHEREAS, Marketing proposes to compensate broker-dealers or other persons for
providing distribution assistance in the offering of Class C shares and to
compensate financial and other industry professionals that provide services to
facilitate transactions in Class C shares for their clients (such
broker-dealers, other persons, financial institutions and other industry
professionals being collectively referred to as "Service Organizations");
WHEREAS, such compensation includes commissions to dealers and transaction fees
to other Service Organizations (such commissions and transaction fees being
collectively referred to as "Transactional Compensation"), plus supplemental
payments to Service Organizations ("Service Fees") pursuant to Servicing
Agreements proposed to be offered by Marketing to such Service Organizations;
WHEREAS, Marketing may provide additional promotional incentives to certain or
all Service Organizations and proposes to incur substantial additional expenses
in rendering distribution services for Class C shares, including but not
limited to, printing prospectuses and reports for other than existing
shareholders, preparation and distribution of advertising material and sales
literature, expenses of organizing and conducting sales seminars, and other
operating expenses;
WHEREAS, the Directors of the Fund have determined that there is a reasonable
likelihood that adoption of this Class C Distribution
<PAGE> 2
Plan will benefit the Fund and its Class C shareholders;
NOW, THEREFORE, the Fund hereby adopts this Class C Distribution Plan (the
"Plan") in accordance with Rule 12b-1 under the Act and containing the
following terms and conditions:
1. Subject to the supervision of the Board of Directors of the Fund, Marketing
will provide the Fund with such distribution services and facilities as the
Fund may from time to time consider necessary to enhance the sale of its Class
C shares.
2. In consideration of the Transactional Compensation and Service Fees paid
and the other distribution services for Class C shares rendered by Marketing,
the Fund shall pay Marketing out of the assets attributable to the Class C
shares an annual distribution fee ("Distribution Fee") calculated daily and
payable weekly. The Distribution Fee shall equal on an annual basis up to
1.00% of the average daily net assets of the Fund's Class C shares. Only
distribution expenditures of a type and amount authorized in advance by the
Fund's Board of Directors and properly attributable to the sale of Class C
shares will be used to justify any fee paid pursuant to this Plan.
3. This Plan shall not take effect until it has been approved by a vote of at
least a majority (as defined in the Act) of the outstanding Class C shares of
the Fund.
4. This Plan shall not take effect until it has been approved, together with
any related agreements, by votes of the majority of both (a) the Board of
Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund (as defined in the Act) and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Disinterested Directors"), cast in person at a meeting
called for the purpose of voting on this Plan or such agreements.
5. So long as the Plan remains in effect, the selection and nomination of
persons to serve as directors of the Fund who are not "interested persons" of
the Fund shall be committed to the discretion of the Directors then in office
who are not "interested persons" of the Fund.
6. Unless sooner terminated pursuant to Section 8, this Plan shall continue in
effect for a period of one year from the date it takes effect (which shall be
the date of the commencement of the public offering of Class C shares, provided
that the conditions of Sections 3 and 4 above have been met).
7. Marketing shall provide to the Fund's Board and the Board shall review, at
least quarterly, a written report of the expenses incurred hereunder and the
purposes for which such expenditures were made.
2
<PAGE> 3
8. The Plan may be terminated, without payment of any penalty, at any time by
vote of a majority of the Disinterested Directors, or by vote of a majority of
the outstanding voting securities of the Fund.
9. Any agreement related to this Plan shall be in writing, and shall provide:
(a) That such agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of the Disinterested Directors or by a vote of
the outstanding voting securities of the Fund, on not more than sixty days'
written notice to any other party to this agreement; and
(b) That such agreement shall terminate automatically in the event of its
assignment.
10. This Plan may not be amended to increase materially the amount of
distribution expenses provided for in Section 2 hereof unless such amendment is
approved in the manner provided in Section 3 hereof, and no material amendment
to the Plan shall be made unless approved in the manner provided for in Section
4 hereof.
11. The Fund will preserve copies of the Plan, any agreement relating to the
Plan and any report made pursuant to Section 7 above, for a period of not less
than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
By: /s/ NORI L. GABERT
---------------------------------------
Name: Nori L. Gabert
Its: Vice President
Plan effective as of: March 9, 1993
as amended October 7, 1994
3
<PAGE> 1
EXHIBIT 16
COMPUTATION MEASURE FOR PERFORMANCE INFORMATION
CALCULATION OF TOTAL RETURN -- CLASS A SHARES
The Fund calculates its average annual total return quotations for the 1, 5
and 10 year periods ended December 31, 1994, the date of the most recent balance
sheet included in the registration statement, by finding the average annual
compounded rates of return over the 1, 5 and 10 year periods that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods, at the end of the 1, 5 and 10 year
periods, or fractional portion thereof
</TABLE>
These calculations incorporate the following assumptions:
1. The maximum sales load, or other charges deducted from payments, is
deducted from the initial $1,000 payment.
2. All dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during the period,
i.e., any sales load charged upon reinvestment of dividends would be
reflected.
3. All recurring fees, if any, charged to all shareholder accounts are
included.
4. The ending redeemable value assumes a complete redemption at the
end of 1, 5 and 10 year periods and the deduction of all nonrecurring
charges, if any, deducted at the end of each period.
<PAGE> 2
CALCULATION OF TOTAL RETURN -- CLASS B SHARES
The Fund calculates its average annual total return quotations for Class B
shares for the period ending December 31, 1994, the date of the most recent
balance sheet included in the registration statement, by finding the average
annual compounded rates of return over the designated period or periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period, at the end of the period, or fractional portion
thereof
</TABLE>
These calculations incorporate the following assumptions:
1. Assumes an initial $1,000 payment with the applicable contingent
deferred sale charge imposed upon redemption.
2. All dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during the period.
3. All recurring fees, if any, charged to all shareholder accounts are
included.
4. The ending redeemable value assumes a complete redemption at the
end of the designated period or periods and the deduction of all
nonrecurring charges, if any, deducted at the end of such period or
periods.
<PAGE> 3
CALCULATION OF TOTAL RETURN -- CLASS C SHARES
The Fund calculates its average annual total return quotations for Class C
shares for the period ending December 31, 1994, the date of the most recent
balance sheet included in the registration statement, by finding the average
annual compounded rates of return over the designated period or periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n=ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000 payment made at the beginning
of the period, at the end of the period, or fractional portion thereof
</TABLE>
These calculations incorporate the following assumptions:
1. Assumes an initial $1,000 payment with a 1% contingent deferred
sale charge imposed if redeemed during the first year.
2. All dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during the period.
3. All recurring fees, if any, charged to all shareholder accounts are
included.
4. The ending redeemable value assumes a complete redemption at the
end of the designated period or periods and the deduction of all
nonrecurring charges, if any, deducted at the end of such period or
periods.
<PAGE> 4
CALCULATION OF YIELD
The Fund calculates its yield quotations based on a 30-day period ended on
December 31, 1994, the date of the most recent balance sheet included in the
registration statement, by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
<TABLE>
<S> <C> <C>
a-b
YIELD (y) = 2[ + 1)6 - 1]
cd
</TABLE>
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
- - ---------------- --------------- --------------
<S> <C> <C>
a = $ 16,155,153 a = $ 1,742,932 a = $ 200,899
b = $ 2,214,191 b = $ 423,802 b = $ 49,052
c = 269,168,494 c = 29,027,780 c = 3,361,967
d = $ 10.15 d = $ 9.68 d = $ 9.66
y = 6.20% y = 5.70% y = 5.68%
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000744376
<NAME> AC GOVT SECURITIES - A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 3158790
<INVESTMENTS-AT-VALUE> 3066529
<RECEIVABLES> 35353
<ASSETS-OTHER> 1119
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3103001
<PAYABLE-FOR-SECURITIES> 197703
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15864
<TOTAL-LIABILITIES> 213567
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4163604
<SHARES-COMMON-STOCK> 266772
<SHARES-COMMON-PRIOR> 316600
<ACCUMULATED-NII-CURRENT> 4202
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1187296)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (91375)
<NET-ASSETS> 2889434
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 261777
<OTHER-INCOME> 0
<EXPENSES-NET> 36305
<NET-INVESTMENT-INCOME> 225472
<REALIZED-GAINS-CURRENT> (339948)
<APPREC-INCREASE-CURRENT> (44521)
<NET-CHANGE-FROM-OPS> (158997)
<EQUALIZATION> (3508)
<DISTRIBUTIONS-OF-INCOME> 196818
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 54144
<NUMBER-OF-SHARES-REDEEMED> 114112
<SHARES-REINVESTED> 10139
<NET-CHANGE-IN-ASSETS> (936827)
<ACCUMULATED-NII-PRIOR> (1749)
<ACCUMULATED-GAINS-PRIOR> (854167)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 16668
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 36305
<AVERAGE-NET-ASSETS> 2919000
<PER-SHARE-NAV-BEGIN> 10.80
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> (1.115)
<PER-SHARE-DIVIDEND> 0.678
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000744376
<NAME> AC GOVT SECURITIES - B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 28790
<SHARES-COMMON-PRIOR> 34103
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18939
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6087
<NUMBER-OF-SHARES-REDEEMED> 12509
<SHARES-REINVESTED> 1109
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 320700
<PER-SHARE-NAV-BEGIN> 10.80
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> (1.128)
<PER-SHARE-DIVIDEND> 0.593
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.68
<EXPENSE-RATIO> 1.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000744376
<NAME> AC GOVT SECURITIES - C
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 3316
<SHARES-COMMON-PRIOR> 3615
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2254
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2434
<NUMBER-OF-SHARES-REDEEMED> 2865
<SHARES-REINVESTED> 131
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 38600
<PER-SHARE-NAV-BEGIN> 10.79
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> (1.128)
<PER-SHARE-DIVIDEND> .593
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 1.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
