<PAGE> 1
SUPPLEMENT, DATED MAY 1, 1995 TO
PROSPECTUSES OF:
AMERICAN CAPITAL CORPORATE BOND FUND, INC.
AMERICAN CAPITAL EMERGING GROWTH FUND, INC.
AMERICAN CAPITAL GLOBAL EQUITY FUND
AMERICAN CAPITAL GLOBAL GOVERNMENT SECURITIES FUND
AMERICAN CAPITAL GROWTH AND INCOME FUND, INC.
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
AND
AMERICAN CAPITAL PACE FUND, INC.
1. Effective today, the Distributor has increased the ongoing payments to
broker-dealers and other Service Organizations with respect to Class C shares.
The Distributor will now pay broker-dealers and other Service Organizations
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares for the second through tenth year after
purchase for Class C shares sold on or after May 1, 1995. Broker-dealers and
other Service Organizations will still be paid ongoing commissions and
transaction fees for the second through tenth year after purchase of up to 0.65%
for Class C shares sold before May 1, 1995.
2. The first two paragraphs of "Shareholder Services -- Shareholder
Services Applicable to all Classes -- Exchange Privilege" are amended to read in
their entirety as follows:
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund
(listed herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts") other than Government Target, may be exchanged for shares of
the same class of any other fund without sales charge, provided that shares
of Corporate Bond, Federal Mortgage, Global Managed, Government Trust, High
Yield, Municipal Bond, Real Estate, Tax-Exempt, Texas Municipal, Utilities,
and the American Capital Global Government Securities Fund of World
Portfolio are subject to a 30-day holding period requirement. Shares of
Government Target may be exchanged for Class A shares of the Fund without
sales charge. Class A shares of Reserve that were not acquired in exchange
for Class B or Class C shares of a Participating Fund may be exchanged for
Class A shares of the Fund upon payment of the excess, if any, of the sales
charge rate applicable to the shares being acquired over the sales charge
rate previously paid. Shares of Reserve acquired through an exchange of
Class B or Class C shares may be exchanged only for the same class of
shares of a Participating Fund without incurring a contingent deferred
sales charge. Shares of any Participating Fund or Reserve may be exchanged
for shares of any other Participating Fund if shares of that Participating
Fund are available for sale; however, during periods of suspension of
sales, shares of a Participating Fund may be available for sale only to
existing shareholders of the Participating Fund. Additional Funds may be
added from time to time as a Participating Fund.
<PAGE> 2
Class B and Class C shareholders of the Fund have the ability to
exchange their shares ("original shares") for the same class of shares of
any other American Capital fund that offers such class of shares ("new
shares") in an amount equal to the aggregate net asset value of the
original shares, without the payment of any contingent deferred sales
charge otherwise due upon redemption of the original shares. For purposes
of computing the contingent deferred sales charge payable upon a
disposition of the new shares, the holding period for the original shares
is added to the holding period of the new shares. Class B and Class C
shareholders would remain subject to the contingent deferred sales charge
imposed by the original fund upon their redemption from the American
Capital complex of funds. The contingent deferred sales charge is based on
the holding period requirements of the original fund.
3. The following should be added under the section entitled "Purchase of
Shares -- General":
Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by registered
representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
<PAGE> 3
SUPPLEMENT, DATED JANUARY 16, 1995 TO
PROSPECTUSES OF:
AMERICAN CAPITAL COMSTOCK FUND, INC.
AMERICAN CAPITAL EMERGING GROWTH FUND, INC.
AMERICAN CAPITAL ENTERPRISE FUND, INC.
AMERICAN CAPITAL EQUITY INCOME FUND, INC.
AMERICAN CAPITAL GLOBAL EQUITY FUND
AMERICAN CAPITAL GROWTH AND INCOME FUND, INC.
AMERICAN CAPITAL HARBOR FUND, INC.
AND
AMERICAN CAPITAL PACE FUND, INC.
1. Effective January 16, 1995, for full service participant directed profit
sharing and money purchase plans administered by Van Kampen/American Capital
Trust Company, no sales charge is payable at the time of purchase for plans
with at least 50 eligible employees or investing at least $250,000 in American
Capital funds, which includes Participating Funds as described in the
Prospectus under "Purchase of Shares--Class A Shares--Volume Discounts," and
American Capital Reserve Fund, Inc. For such investments the Fund imposes a
contingent deferred sales charge of 1% in the event of certain redemptions
within one year of the purchase.
Effective January 16, 1995, the Fund will also begin imposing a
contingent deferred sales charge of 1% in the event of certain redemptions
within one year of the purchase with respect to those qualified 401(k)
retirement plans that are administered under Van Kampen/American Capital Trust
Company's (k) Advantage Program, or similar recordkeeping programs made
available through Van Kampen/American Capital Trust Company purchasing shares
of the Fund at net asset value.
2. Effective January 16, 1995, the Distributor will no longer pay any
commission on accounts opened for shareholders where the amounts invested
represent the redemption proceeds from investment companies distributed by an
entity other than the Distributor.
3. Effective January 16, 1995, the sales charge structure for Class A shares
has been modified as follows:
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED
TO DEALERS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 6.10% 5.75% 5.00%
$50,000 but less than $100,000 4.99% 4.75% 4.00%
$100,000 but less than $250,000 3.90% 3.75% 3.00%
$250,000 but less than $500,000 2.83% 2.75% 2.25%
$500,000 but less than $1,000,000 2.04% 2.00% 1.75%
$1,000,000 and over (see herein) (see herein) (see herein)
- --------------------------------------------------------------------------------
</TABLE>
No sales charge is payable at the time of purchase on investments of
$1 million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses.
A commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
4. Effective January 16, 1995, the Fund may sell Class A shares of the Fund at
net asset value to Service Organizations for the benefit of their clients who
are participating in such Service Organizations' "wrap accounts." Service
Organizations must execute supplemental agreements to their existing selling
agreement with the Distributor in order to qualify for the program.
999 STK-007
<PAGE> 4
SUPPLEMENT, DATED DECEMBER 20, 1994 TO
PROSPECTUSES OF:
AMERICAN CAPITAL COMSTOCK FUND, INC.
AMERICAN CAPITAL CORPORATE BOND FUND, INC.
AMERICAN CAPITAL EMERGING GROWTH FUND, INC.
AMERICAN CAPITAL EQUITY INCOME FUND, INC.
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
AMERICAN CAPITAL GOVERNMENT SECURITIES, INC.
AMERICAN CAPITAL GROWTH AND INCOME FUND, INC.
AMERICAN CAPITAL HARBOR FUND, INC.
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
AMERICAN CAPITAL PACE FUND, INC.
AMERICAN CAPITAL REAL ESTATE SECURITIES FUND, INC.
AMERICAN CAPITAL TAX-EXEMPT TRUST
AMERICAN CAPITAL TEXAS MUNICIPAL SECURITIES, INC.
AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
AND
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
1. On December 20, 1994, The Van Kampen Merritt Companies, Inc. (the "Buyer")
acquired from The Travelers Inc. ("Travelers") 100% ownership (the
"Acquisition") of American Capital Management & Research, Inc. (the "Company"),
the parent corporation of American Capital Asset Management, Inc. (the
"Adviser"), the Funds' investment adviser, and American Capital Marketing, Inc.
(the "Distributor"), the Funds' distributor. The Company was merged with and
into the Buyer after the Acquisition. The combined parent company was renamed
Van Kampen/American Capital, Inc. ("VKAC"). The Adviser and the Distributor are
wholly owned subsidiaries of VKAC, which is a wholly owned subsidiary of VK/AC
Holding, Inc. Prior to the Acquisition, the Company was an indirect wholly owned
subsidiary of Travelers.
The Adviser was renamed Van Kampen/American Capital Asset Management, Inc.
and will continue to provide investment advisory services to the Fund. The
Distributor was renamed Van Kampen/American Capital Marketing, Inc. and will
continue to provide distribution services to the Funds until approximately
December 31, 1994 when the Buyer anticipates merging the Distributor into Van
Kampen/American Capital Distributors, Inc. a registrered broker-dealer that
currently serves as distributor to the Van Kampen Merritt family of mutual
funds.
On December 16, 1994, in connection with the Acquisition, the
shareholders of each Fund approved a new investment advisory agreement with the
Adviser providing for the same terms and services as the investment advisory
agreement between each Fund and the Adviser that was in effect before the
Acquisition.
The Buyer is a wholly owned subsidiary of VK/AC Holding, Inc. which is
controlled by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership, ("C&D L.P."). C&D L.P. is managed by Clayton, Dubilier & Rice,
Inc., a private investment firm. It is anticipated that members of senior
management of the Buyer who were members of senior management of the Company
prior to the Acquisition will acquire minority interests (totaling less than 5%
in the aggregate) in VK/AC Holding, Inc. As part of the Acquisition, Travelers
also acquired a minority non-voting interest (representing less than 5%) in
VK/AC Holding, Inc. and was granted an option entitling Travelers, upon the
satisfaction of certain conditions, to purchase from VK/AC Holding, Inc.
additional non-voting shares representing up to 5% of outstanding VK/Holding,
Inc. common shares. The General Partner of C&D L.P. is Clayton & Dubilier
Associates IV Limited Partnership ("C&D Associates L.P."). The general partners
of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames, Alberto
Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a principal of
Clayton, Dubilier & Rice, Inc.
As of September 30, 1994, subsidiaries of VKAC on a pro forma basis would
have managed or supervised $51.8 billion of assets, including assets of 66
open-end investment companies and 38 closed-end investment companies having
aggregate total assets of $32.4 billion.
<PAGE> 5
2. Effective December 20, 1994, shares of each Fund will no longer be offered
at net asset value to accounts opened for shareholders by dealers where the
amounts invested represent the redemption proceeds from investment companies
distributed by either the Distributor or Van Kampen/American Capital
Distributors, Inc. This change does not affect any exchange or reinstatement
privilege described in each Fund's Prospectus.
3. Other agreements entered into in connection with the acquisition provide,
among other things and subject to certain conditions, for certain favorable
distribution arrangements for shares of the Fund(s) with subsidiaries of
Travelers.
4. For all Funds except American Capital Municipal Bond Fund, Inc., American
Capital Tax-Exempt Trust, and American Capital Texas Municipal Securities,
Inc.: The Distributor is sponsoring a sales incentive program for A.G. Edwards
& Sons, Inc. ("A.G. Edwards"). The Distributor will reallow its portion of the
Fund's sales concession to A.G Edwards on sales of Class A Shares of the Fund
relating to the "rollover" of any savings into an Individual Retirement Account
("IRA"), the transfer of assets into an IRA and contributions to an IRA,
commencing on January 1, 1995 and terminating on April 15, 1995.
5. The description in the Prospectus found at Purchase of Shares--Class A Shares
regarding the purchase of Class A shares at net asset value by directors of the
Fund and employees and officers of the Adviser and certain affiliates of the
Adviser and certain of their family members is replaced by the following:
Class A shares of the Fund may be purchased at net asset value, upon
written assurance that the purchase is made for investment purposes and
that the shares will not be resold except through redemption by the Fund,
by (a) current or retired Directors of the Fund; current or retired
employees of VK/AC Holding, Inc. or any of its subsidiaries; spouses, minor
children and grandchildren of the above persons; and parents of employees
and parents of spouses of employees of VK/AC Holding, Inc. and any of its
subsidiaries; trustees, directors and employees of Clayton, Dubilier &
Rice, Inc....
6. For all Funds except American Capital Comstock Fund, Inc., American Capital
Emerging Growth Fund, Inc., American Capital Equity Income Fund, Inc., American
Capital Growth and Income Fund, Inc., American Capital Harbor Fund, Inc., and
American Capital Pace Fund, Inc.: The Adviser may utilize at its own expense
credit analysis, research and trading support services provided by its
affiliate, Van Kampen/American Capital Investment Advisory Corp. (formerly Van
Kampen Merritt Investment Advisory Corp.).
7. The Distributor may from time to time implement programs under which a
broker, dealer or financial intermediary's sales force may be eligible to win
nominal awards for certain sales efforts or under which the Distributor will
reallow to any broker, dealer or financial intermediary that sponsors sales
contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on sales generated by
the broker or dealer during such programs. Also, the Distributor in its
discretion may from time to time, pursuant to objective criteria established by
it, pay fees to, and sponsor business seminars for, qualifying brokers, dealers
or financial intermediaries for certain services or activities which are
primarily intended to result in sales of shares of the Fund. Such fees paid for
such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis.
<PAGE> 6
SUPPLEMENT DATED NOVEMBER 1, 1994
TO PROSPECTUS OF
AMERICAN CAPITAL PACE FUND, INC.
On August 24, 1994, The Travelers Inc. ("Travelers") entered into a stock
purchase agreement with The Van Kampen Merritt Companies, Inc. (the "Buyer")
pursuant to which the Buyer may acquire 100% ownership of American Capital
Management & Research, Inc. (the "Company"), a wholly owned subsidiary of
Travelers and the parent corporation of American Capital Asset Management, Inc.
(the "Adviser"). Sale of the Company may be deemed to cause an assignment,
within the meaning of the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, of the investment advisory agreement between the Adviser
and American Capital Pace Fund, Inc. (the "Fund"). However, the sale of the
Company is contingent upon, among other things and subject to certain
exceptions, the approval of new investment advisory agreements with the Adviser
by both the boards of trustees or directors and the shareholders of investment
companies advised or subadvised by the Adviser, including the Fund, representing
a certain minimum amount of assets under management. The Fund anticipates that
the new advisory agreement with the Adviser proposed for the Fund will provide
for substantially the same terms and services as the current investment advisory
agreement between the Fund and the Adviser.
On October 7, 1994, the Board of Directors of the Fund approved the
proposed new investment advisory agreement between the Adviser and the Fund.
Shareholders of record as of October 26, 1994 will be entitled to vote on such
approval by proxy or at a shareholders' meeting to be held on or about December
16, 1994.
The Buyer is a wholly owned subsidiary of VKM Holding, Inc., which is
controlled by The Clayton & Dubilier Private Equity Fund IV Limited Partnership
("C&D L.P."). C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a private
investment firm. It is anticipated that senior members of management of the
Company and the Buyer will own a minority interest in VKM Holding, Inc. and that
Travelers will also own a minority non-voting interest in VKM Holding, Inc. The
general partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, Alberto Cribiore, Donald J. Gogel and
Hubbard C. Howe.
As of June 30, 1994, subsidiaries of the Buyer managed or supervised $35.9
billion of assets, including assets of 20 open-end investment companies and 34
closed-end investment companies having aggregate total assets of $16.0 billion,
representing over one million shareholder accounts.
014 STK-002
<PAGE> 7
- --------------------------------------------------------------------------------
AMERICAN CAPITAL PACE FUND, INC.
- --------------------------------------------------------------------------------
2800 Post Oak Blvd., Houston, Texas 77056, (800) 421-5666
November 1, 1994
American Capital Pace Fund, Inc. (the "Fund") is a mutual fund seeking growth
of capital by investing in a portfolio of securities consisting principally of
common stocks. Any income received on such securities is incidental to such
objective.
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 AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 8
- --------------------------------------------------------------------------------
AMERICAN CAPITAL PACE FUND, INC.
- --------------------------------------------------------------------------------
CUSTODIAN:
State Street Bank and
Trust Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER SERVICE AGENT:
American Capital Companies
Shareholder Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
INVESTMENT ADVISER:
American Capital
Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
DISTRIBUTOR:
American Capital
Marketing, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary................ 2
Expense Synopsis.................. 4
Financial Highlights.............. 5
Multiple Pricing System........... 6
Investment Objectives and
Policies........................ 8
Investment Practices and
Restrictions.................... 8
The Fund and Its Management....... 11
Purchase of Shares................ 12
Distribution Plans................ 16
Shareholder Services.............. 17
Redemption of Shares.............. 20
Dividends, Distributions and
Taxes........................... 21
Prior Performance Information..... 22
Additional Information............ 23
Investment Holdings............... 24
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or by the Distributor. This Prospectus
does not constitute an offering by the Distributor in any jurisdiction in
which such offering may not lawfully be made.
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
SHARES OFFERED. Capital Stock.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
TYPE OF COMPANY. Diversified, open-end management investment company.
INVESTMENT OBJECTIVE. Capital growth. There is, however, no assurance that the
Fund will be successful in achieving its objective.
INVESTMENT POLICY. The Fund invests principally in common stocks of companies
which, in the judgment of American Capital Asset Management, Inc. (the
"Adviser"), have above average potential for capital growth. The use of options,
futures contracts and related options and investments in foreign securities may
include additional risks. See "Investment Practices and Restrictions -- Using
Options, Futures Contracts and Related Options" and "Investment Practices and
Restrictions -- Securities of Foreign Issuers." Because prices of common stocks
and other securities fluctuate, the value of an investment in the Fund will vary
based upon the Fund's investment performance.
INVESTMENT RESULTS. The investment results of the Fund during the past ten
years are shown in the table of "Financial Highlights." See also "Prior
Performance Information."
INVESTMENT ADVISER. The Adviser has served as investment adviser to the Fund
since 1975. The Adviser serves as investment adviser to 45 investment company
portfolios. See "The Fund and Its Management."
2
<PAGE> 9
DISTRIBUTOR. American Capital Marketing, Inc. (the "Distributor").
MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Multiple Pricing
System -- Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."
CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 5.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."
CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 5% of redemption
proceeds during the first year, declining each year thereafter to 0% after the
fifth year. See "Redemption of Shares." The Fund pays a combined annual
distribution fee and service fee of up to 1% of its average daily net assets
attributable to such class of shares. See "Purchase of Shares -- Class B Shares"
and "Distribution Plans." Class B shares will convert automatically to Class A
shares six years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "Multiple Pricing System -- Conversion
Feature."
CLASS C SHARES. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of 1% on redemptions made within
one year of purchase. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution Plans." Class C shares will convert automatically to
Class A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income and capital
gains, if any, are distributed at least annually. All dividends and
distributions are automatically reinvested in shares of the Fund at net asset
value per share (without sales charge) unless payment in cash is requested. See
"Dividends, Distributions and Taxes."
3
<PAGE> 10
- --------------------------------------------------------------------------------
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(1)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price)..... 5.75%(a) None None
Sales charge imposed on dividend
reinvestments........................... None None None
Deferred sales charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None* 5% during the first 1.00 during the
year, 4% during the first year (b)
second year, 3% during
the third year, 2.5%
during the fourth year,
1.5% during the fifth year
and 0% after the fifth
year(b)
Exchange fee(c)........................... $5.00 $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES (as a
percentage of average net assets)
Management fees........................... .46% .46% .46%
Rule 12b-1 fees(d)........................ .20% .99%(f) 1.00%(f)
Other expenses(e)......................... .36% .34% .35%
Total fund operating expenses............. 1.02% 1.79% 1.81%
</TABLE>
- ------------
(a) Reduced for purchases of $50,000 and over. See "Purchase of Shares --
Class A Shares" -- page 13.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" --
page 16.
(c) Not charged in certain circumstances. See "Shareholder Services --
Shareholder Services Applicable to All Classes -- Systematic
Exchange" and "... -- Automatic Exchange" -- page 20.
(d) Up to .25% for Class A shares and 1.00% for Class B and Class C shares.
See "Distribution Plans" -- page 17.
(e) See "The Fund and Its Management" -- page 12.
(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.
(1) Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum $57.50
front-end sales charge and for Class B and Class C shares, a
contingent deferred sales charge assuming (1) an operating
expense ratio of 1.02% for Class A shares, 1.79% for Class B
shares and 1.81% for Class C shares, (2) a 5% annual return
throughout the period and (3) redemption at the end of the
period:
Class A.................................................... $ 67 $ 88 $111 $175
Class B.................................................... $ 70 $ 89 $115 $172**
Class C.................................................... $ 29 $ 57 $ 98 $213
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A.................................................... $ 67 $ 88 $111 $175
Class B.................................................... $ 18 $ 56 $ 97 $172**
Class C.................................................... $ 18 $ 57 $ 98 $213
- -------------------------------------------------------------------------------------------------------
</TABLE>
** Based on conversion to Class A shares after six years.
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. Expenses for Class C shares are based on estimated amounts for
the current fiscal year. See "Purchase of Shares," "The Fund and Its Management"
and "Redemption of Shares." The example is included to provide a means for the
investor to compare expense levels of funds with different fee structures over
varying investment periods. To facilitate such comparison, all funds are
required to utilize a five percent annual return assumption. This assumption is
unrelated to the Fund's prior performance and is not a projection of future
performance. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
4
<PAGE> 11
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(Selected data for a share of capital stock outstanding throughout each of the
periods indicated)
The following information for each of the five most recent fiscal years has
been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read in conjunction with the
related financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS A(1)
-----------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30
-----------------------------------------------------------------------------------------------
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....................... $12.95 $13.21 $12.37 $12.69 $12.72 $11.19 $14.47
------------ ----------- ------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS
Investment income............. .26 .305 .335 .40 .465 .40 .36
Expenses...................... (.13) (.14) (.14) (.125) (.12) (.085) (.075)
------------ ----------- ------------ ------------ ------------ ------------ ------------
Net investment income......... .13 .165 .195 .275 .345 .315 .285
Net realized and unrealized
gains or losses on
securities................... (.1475) 1.69 1.095 .1575 1.3188 1.55 (1.8787)
------------ ----------- ------------ ------------ ------------ ------------ ------------
Total from investment
operations................... (.0175) 1.855 1.29 .4325 1.6638 1.865 (1.5937)
------------ ----------- ------------ ------------ ------------ ------------ ------------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.135) (.145) (.2375) (.29) (.3675) (.2875) (.4263)
Distributions from net
realized gains
on securities................ (1.7475) (1.97) (.2125) (.4625) (1.3263) (.0475) (1.26)
------------ ----------- ------------ ------------ ------------ ------------ ------------
Total distributions........... (1.8825) (2.115) (.45) (.7525) (1.6938) (.335) (1.6863)
------------ ----------- ------------ ------------ ------------ ------------ ------------
Net asset value, end of
period....................... $11.05 $12.95 $13.21 $12.37 $12.69 $12.72 $11.19
============ =========== ============ ============ ============ ============ ============
TOTAL RETURN(4)............... (.64%) 15.20% 10.58% 4.31% 13.69% 17.32% (11.92%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)................... $2,152.5 $2,446.2 $2,350.2 $2,348.7 $2,456.8 $2,405.6 $2,487.5
Ratios to average net assets
Expenses..................... 1.02% 1.06% 1.00% 1.01% .88% .72% .66%
Net investment income........ .99% 1.22% 1.38% 2.22% 2.55% 2.58% 2.42%
Portfolio turnover rate....... 112% 113% 54% 40% 39% 45% 62%
<CAPTION>
CLASS B (3) CLASS C(3)
-------------------------------- ----------
JANUARY 10, AUGUST 27,
1992 (2) 1993 (2)
YEAR ENDED JUNE 30 THROUGH THROUGH
------------------- JUNE 30, JUNE 30,
1987 1986 1985 1994 1993 1992 1994
------------ ------------ ------------ --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period....................... $12.19 $10.45 $9.40 $12.86 $13.13 $13.87 $13.25
------------ ------------ ------------ --------- -------- ----------- ----------
INCOME FROM OPERATIONS
Investment income............. .365 .38 .495 .25 .29 .15 .17
Expenses...................... (.07) (.055) (.06) (.22) (.26) (.10) (.15)
------------ ------------ ------------ --------- -------- ----------- ----------
Net investment income......... .295 .325 .435 .03 .03 .05 .02
Net realized and unrealized
gains or losses on
securities................... 2.7275 2.0125 1.3775 (.1575) 1.705 (.79) (.4375)
------------ ------------ ------------ --------- -------- ----------- ----------
Total from investment
operations................... 3.0225 2.3375 1.8125 (.1275) 1.735 (.74) (.4175)
------------ ------------ ------------ --------- -------- ----------- ----------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.325) (.395) (.4375) (.025) (.035) -- (.095)
Distributions from net
realized gains
on securities................ (.4175) (.2025) (.325) (1.7475) (1.97) -- (1.7475)
------------ ------------ ------------ --------- -------- ----------- ----------
Total distributions........... (.7425) (.5975) (.7625) (1.7725) (2.005) -- (1.8425)
------------ ------------ ------------ --------- -------- ----------- ----------
Net asset value, end of
period....................... $14.47 $12.19 $10.45 $10.96 $12.86 $13.13 $10.99
============ ============ ============ ========= ======== =========== ==========
TOTAL RETURN(4)............... 26.53% 23.79% 20.43% (1.46%) 12.84% (5.34%) (3.70%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)................... $3,001.4 $2,229.6 $1,521.3 $35.8 $27.7 $11.7 $1.2
Ratios to average net assets
Expenses..................... .60% .58% .62% 1.79% 1.98% 1.82%(5) 1.81%(5)
Net investment income........ 2.51% 3.35% 4.48% .21% .25% .56%(5) .24%(5)
Portfolio turnover rate....... 36% 33% 40% 112% 113% 54% 112%
</TABLE>
- ------------
(1) Per share information for the years 1990 through 1985 has been adjusted to
reflect a 2 for 1 stock split effective June 8, 1990.
(2) Commencement of offering of sales.
(3) Based on average month-end shares outstanding.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(5) Annualized.
5
<PAGE> 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 5.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for a reduced initial sales charge. See
"Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of Shares --
Class B Shares." Class B shares will automatically convert to Class A shares six
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. See "Conversion Feature" below for discussion on
applicability of conversion feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% 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 Funds'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 convert automatically to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" below for discussion on applicability of
conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the month in which the shares were purchased and will no longer be subject to
the distribution fee. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge. The purpose of the conversion feature is to relieve the holders of the
Class B shares and Class C shares that have been outstanding for a period of
time sufficient for the Distributor to have been substantially compensated for
distribution expenses related to the Class B shares or Class C shares as the
case may be from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six years or ten years, respectively, after the end of the calendar month
in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares of 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
6
<PAGE> 13
each class of shares. In this regard, Class A shares may be more beneficial to
the investor who qualifies for reduced initial sales charges or purchases at net
asset value, as described herein under "Purchase of Shares -- Class A Shares."
For these reasons, the Distributor will reject any order of $250,000 or more for
Class B shares or any order of $1 million or more for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase, investors in
Class A shares do not have all their funds invested initially and, therefore,
initially own fewer shares. Other investors might determine that it is more
advantageous to purchase either Class B shares or Class C shares and have all
their funds invested initially, although remaining subject to ongoing
distribution fees and, for a five-year or one-year period, respectively, being
subject to a contingent deferred sales charge. Ongoing distribution fees on
Class B shares and Class C shares will be offset to the extent of the additional
funds originally invested and any return realized on those funds. However, there
can be no assurance as to the return, if any, which will be realized on such
additional funds. For investments held for ten years or more, the relative value
upon liquidation of the three classes tends to favor Class A or Class B shares,
rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. 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 Class A, Class B or Class C shares. INVESTORS SHOULD UNDERSTAND THAT THE
PURPOSE AND FUNCTION OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING
DISTRIBUTION FEE WITH RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE
SAME AS THOSE OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See
"Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
"Dividends, Distributions and Taxes." Shares of the Fund may be exchanged,
subject to certain limitations, for shares of the same class of other mutual
funds advised by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Directors of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 (the "1940 Act") and state laws, will seek to ensure that no
such conflict arises.
7
<PAGE> 14
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund seeks capital growth through investments in securities believed by
the Adviser to have above average potential for capital growth. Any income
received on such securities is incidental to such objective.
The Fund invests principally in common stocks. The Fund generally holds a
portion of its assets in investment grade short-term debt securities and
investment grade corporate or government bonds in order to provide liquidity.
From time to time the Fund may also invest up to 100% of its assets in high
quality debt securities for temporary defensive purposes. Short-term investments
may include repurchase agreements with domestic banks or broker-dealers. See
"Investment Practices and Restrictions -- Repurchase Agreements." The Fund may
also invest up to 15% of its total assets in securities of foreign issuers and
may invest in investment companies. See "Investment Practices and
Restrictions -- Securities of Foreign Issuers" and "Investment Practices and
Restrictions -- Investment in Investment Companies."
The Fund's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The Fund
may invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
The Fund attempts to reduce overall exposure to risk from declines in securities
prices by spreading its investments over many different companies in a variety
of industries. There is, however, no assurance that the Fund will be successful
in achieving its objective.
- --------------------------------------------------------------------------------
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. 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. The Fund may invest up to 25% of its
assets in repurchase agreements but will not invest in repurchase agreements
maturing in more than seven days if any such investment, together with any other
illiquid securities held by the Fund, would exceed ten percent of the value of
its net assets. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and loss including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto, (b) possible lack of access to income on the underlying security
during this period, and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 15% of the value of
its total assets in securities of foreign governments and companies. Such
investments may be subject to special risks, including changes in currency
exchange rates, future political and economic developments, the possible
imposition of additional withholding taxes on dividend or interest income
payable on the securities, or the seizure or nationalization of companies, or
establishment of exchange controls or adoption of other restrictions which might
adversely affect the investment.
The Fund may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a
8
<PAGE> 15
sponsored ADR. The Fund may invest in ADRs through both sponsored and
unsponsored arrangements. For further information on ADRs and EDRs, investors
should refer to the Statement of Additional Information.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund expects to
utilize futures contracts and options thereon in several different ways,
depending upon the status of the Fund's portfolio and the Adviser's expectations
concerning the securities markets.
In times of stable or rising stock prices, the Fund generally seeks to obtain
maximum exposure to the stock market, i.e., to be "fully invested."
Nevertheless, even when the Fund is fully invested, prudent management requires
that at least a small portion of assets be available as cash to honor redemption
requests and for other short-term needs. The Fund may also have cash on hand
that has not yet been invested. The portion of the Fund's assets that is
invested in cash equivalents does not fluctuate with stock market prices, so
that, in times of rising market prices, the Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
stock index futures contracts, however, the Fund can "equitize" the cash portion
of its assets and obtain equivalent performance to investing 100% of its assets
in equity securities.
If the Adviser forecasts a market decline, the Fund may take a defensive
position, reducing its exposure to the stock market by increasing its cash
position. By selling stock index futures contracts instead of portfolio
securities, a similar result can be achieved to the extent that the performance
of the stock index futures contracts correlates to the performance of the Fund's
portfolio securities. Sale of futures contracts could frequently be accomplished
more rapidly and at less cost than the actual sale of securities. Once the
desired hedged position has been effected, the Fund could then liquidate
securities in a more deliberate manner, reducing its futures position
simultaneously to maintain the desired balance, or it could maintain the hedged
position.
As an alternative to selling stock index futures contracts, the Fund can
purchase stock index puts (or stock index futures puts) to hedge the portfolio's
risk in a declining market. Since the value of a put increases as the index
declines below a specified level, the portfolio's value is protected against a
market decline to the degree the performance of the index correlates with the
performance of the Fund's investment portfolio. If the market remains stable or
advances, the Fund can refrain from exercising the put and its portfolio will
participate in the advance, having incurred only the premium cost for the put.
In certain cases the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed with greater ease and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments may be advantageous to the
Fund, if the Adviser is not successful in employing such instruments in managing
the Fund's investments, the Fund's performance will be worse than if the Fund
did not make such investments. In addition, the Fund would pay commissions and
other costs in connection with such investments, which may increase the Fund's
expenses and reduce its return.
The Fund may write or purchase options in privately negotiated transactions
("OTC Options") as well as listed options. OTC Options can be closed out only by
agreement with the other party to the transaction. Any OTC Option purchased by
the Fund is considered an illiquid security. Any OTC Option written by the Fund
is with a qualified dealer pursuant to an agreement under which the Fund may
repurchase the option at a formula price. Such options are considered illiquid
to the extent that the formula price exceeds the intrinsic value of the option.
The Fund may not purchase or sell futures contracts or related options for which
the aggregate initial margin and premiums exceed five percent of the fair market
value of the Fund's assets. In order to prevent leverage in connection with the
purchase of futures contracts or call options thereon by the Fund, an amount of
cash, cash equivalents or liquid high grade debt securities equal to the market
value of the obligation under the futures contracts or options (less any related
margin deposits) will be maintained in a segregated account with the Custodian.
The Fund may not invest more than ten percent of its net assets in illiquid
securities and repurchase agreements which have a maturity of longer than seven
days. A more complete discussion of the potential risks involved in transactions
in options or futures contracts and related options is contained in the
Statement of Additional Information.
PORTFOLIO TURNOVER. The Fund purchases securities which are believed by the
Adviser to have above average potential for capital growth. Common stocks are
disposed of in situations where it is believed that potential for such
appreciation has lessened or that other common stocks have a greater potential.
Therefore, the Fund may purchase and sell securities without regard to the
length of time the security is to be, or has been held. The Fund's annual
portfolio turnover rate is shown in the table of "Financial Highlights." The
rate may exceed 100%,
9
<PAGE> 16
which is higher than that of many other investment companies. A 100% turnover
rate occurs, for example, if all the Fund's portfolio securities are replaced
during one year. High portfolio activity increases the Fund's transaction costs,
including brokerage commissions. To the extent short-term trading results in
realization of gains on securities held for one year or less, shareholders are
subject to taxes at ordinary income rates.
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 and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuing basis. The Adviser is authorized to place portfolio transactions
with brokerage firms participating in the distribution of shares of the Fund and
other American Capital mutual funds if it reasonably believes that the quality
of the execution and the commission are comparable to that available from other
qualified brokerage firms. The Adviser is authorized to pay higher commissions
to brokerage firms that provide it with investment and research information than
to firms which do not provide such services if the Adviser determines that such
commissions are reasonable in relation to the overall services provided. The
information received may be used by the Adviser in managing the assets of other
advisory accounts as well as in the management of the assets of the Fund.
The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, The Travelers
Inc. ("Travelers"). Such affiliated persons include Smith Barney Inc. ("Smith
Barney"), a wholly owned subsidiary of Travelers, and Robinson Humphrey, Inc., a
wholly owned subsidiary of Smith Barney. When such transactions are made, in
accordance with Rule 17e-1 under the 1940 Act, commissions paid must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
INVESTMENT IN INVESTMENT COMPANIES. The Fund may invest in a separate
investment company, American Capital Small Capitalization Fund, Inc., ("Small
Cap Fund") that invests in a broad selection of small capitalization securities.
The shares of the Small Cap Fund are available only to investment companies
advised by the Adviser. The Adviser believes that the use of the Small Cap Fund
will provide the Fund with the most effective exposure to the performance of the
small capitalization sector of the stock market while at the same time
minimizing costs. The Adviser charges no advisory fee for managing the Small Cap
Fund, nor is there any sales load or other charges associated with distribution
of its shares. Other expenses incurred by the Small Cap Fund are borne by it,
and thus indirectly by the American Capital funds that invest in it. With
respect to such other expenses, the Adviser anticipates that the efficiencies
resulting from use of the Small Cap Fund will result in cost savings for the
Fund and other American Capital funds. In large part these savings will be
attributable to the fact that administrative actions that would have to be
performed multiple times if each American Capital fund held its own portfolio of
small capitalization stocks will need to be performed only once. The Adviser
expects that the Small Cap Fund will experience trading costs that will be
substantially less than the trading costs that would be incurred if small
capitalization stocks were purchased separately for the Fund and other American
Capital funds.
The securities of small and medium sized companies that the Small Cap Fund may
invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies.
The Fund will be deemed to own a pro rata portion of each investment of the
Small Cap Fund. For example, if the Fund's investment in the Small Cap Fund were
$10 million, and the Small Cap Fund had five percent of its assets invested in
the electronics industry, the Fund would be considered to have an investment of
$500,000 in the electronics industry.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the Fund's shareholders. These
restrictions provide, among other things, that the Fund may not:
1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except the United States
government) or purchase more than ten percent of the outstanding voting
securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-ended investment companies to the
extent permitted by rule or order of the SEC exempting the Fund from the
limitations imposed by Section 12(d)(1) of the 1940 Act;
2. Pledge any of its assets, except that the Fund may pledge assets having a
value of not more than ten percent of its total assets in order to secure
permitted borrowings from banks. Such borrowings may not
10
<PAGE> 17
exceed five percent of the value of the Fund's assets and can be made only
as a temporary measure for extraordinary or emergency purposes.
Notwithstanding the foregoing, the Fund may engage in transactions in
options, futures contracts or related options, segregate or deposit assets
to cover or secure options written and make margin deposits and payments
for futures contracts and related options;
3. Invest more than ten percent of its net assets (determined at the time of
investment) in illiquid securities, securities for which market quotations
are not readily available, and repurchase agreements which have a maturity
of longer than seven days; or
4. Invest in real estate (although the Fund may acquire securities of issuers
that invest in real estate), commodities or commodity contracts, except
that the Fund may enter into transactions in futures contracts or related
options.
In addition to the foregoing, the Fund has adopted additional investment
restrictions which may be changed by the Board of Directors without a vote of
shareholders. These restrictions provide that the Fund may not:
1. Invest more than five percent of its assets in the securities of any one
issuer other than the United States government except that it may acquire
shares of other open-end investment companies to the extent permitted by
rule or order of the SEC exempting the Fund from the limitations imposed
by Section 12(d)(1) of the 1940 Act;
2. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the value of the Fund's total assets would
be invested in such securities. Foreign investments may be subject to
special risks, including future political and economic developments, the
possible imposition of additional withholding taxes on dividend or
interest income payable on the securities, or the seizure or
nationalization of companies, or establishment of exchange controls or
adoption of other restrictions which might adversely affect the
investment; or
3. Invest more than five percent of its assets in companies having a record,
together with predecessors, of less than three years continuous operation
and in securities not having readily available market quotations provided,
however, that this limitation excludes shares of other open-end investment
companies owned by the Fund but includes the Fund's pro rata portion of
the securities and other assets owned by any such company.
- --------------------------------------------------------------------------------
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company,
incorporated in Delaware on December 2, 1968, and reincorporated by merger into
a Maryland corporation on December 30, 1982. A mutual fund provides, for those
who have similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
A board of eight directors has the responsibility for overseeing the affairs
of the Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056,
determines the investment of the Fund's assets, provides administrative services
and manages the Fund's business and affairs. The Adviser, together with its
predecessors, has been in the investment advisory business since 1926 and has
served as investment adviser to the Fund since 1975. As of September 30, 1994,
the Adviser provides investment advice to 45 investment company portfolios with
total net assets of approximately $16.4 billion.
The Adviser and the Distributor are wholly owned subsidiaries of American
Capital Management & Research, Inc. ("ACMR"), an indirect wholly owned
subsidiary of Travelers. Travelers is a financial services holding company
engaged, through its subsidiaries, principally in three business
segments -- investment services, consumer finance services, and insurance
services. Mr. Don G. Powell is President and Director of the Fund, President,
Chief Executive Officer and Director of the Adviser, and Executive Vice
President and Director of the Distributor. Most other officers of the Fund are
also officers and/or directors of the Adviser, and a number are also officers
and directors of the Distributor.
The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated July 2, 1990 (the "Advisory Agreement"), the
Fund pays the Adviser a monthly fee computed on average daily net assets of the
Fund at the annual rate of 0.50% on the first $1 billion of net assets; 0.45% on
the next $1 billion of net assets; 0.40% on the next $1 billion of net assets
and 0.35% on net assets in excess of $3 billion. Under the Advisory Agreement,
the Fund also reimburses the Adviser for the cost of the Fund's accounting
services, which include maintaining its financial books and records and
calculating its daily net asset value. Operating expenses paid by the Fund
include shareholder service agency fees, distribution fees, service fees,
custodian fees, legal and accounting fees, the costs of
11
<PAGE> 18
reports and proxies to shareholders, directors' fees, and all other business
expenses not specifically assumed by the Adviser. Advisory (management) fee and
total operating expense ratios are shown under the caption "Expense Synopsis"
herein.
Stephen Boyd is primarily responsible for the day-to-day management of the
Fund's investment portfolio and has been since July 11, 1994. Mr. Boyd is Vice
President of the Fund and Senior Investment Vice President -- Portfolio Manager
of the Adviser. Mr. Boyd was formerly Investment Vice President of the Adviser
from May 1989 to July 1990.
- --------------------------------------------------------------------------------
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 and Class C shares are sold
without an initial sales charge and are subject to a contingent deferred sales
charge upon certain redemptions. See "Multiple Pricing System" for a discussion
of factors to consider in selecting which class of shares to purchase. Contact
the American Capital Service Department at (800) 421-5666 for further
information and appropriate forms.
Shares are offered continuously for sale by the Distributor and are available
through authorized investment dealers. Initial investments must be at least $500
and subsequent investments must be at least $25. Both minimums may be waived by
the Distributor for plans involving periodic investments. Shares of the Fund may
be sold in foreign countries where 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, American Capital Companies Shareholder Services, Inc.
("ACCESS"). When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A, Class B or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time)
each day the Exchange is open. Net asset value per share for each class is
determined by dividing the value of the Fund's securities, cash and other assets
(including accrued interest) attributable to such class less all liabilities
(including accrued expenses) by the total number of shares of the class
outstanding. Securities listed or traded on a national securities exchange are
valued at the last sale price. Unlisted securities and listed securities for
which the last sale price is not available are valued at the most recent bid
price. Options are valued at the last sale price or if no sales are reported, at
the mean between the bid and asked prices. Securities for which market
quotations are not readily available and other assets are valued at fair value
as determined in good faith by the Board of Directors of the Fund. Short-term
securities are valued in the manner described in the Notes to the Financial
Statements included in the Statement of Additional Information.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another reflecting the daily expense accruals of the
distribution and 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.
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
12
<PAGE> 19
specific class, and (iii) Class B and Class C shares are subject to a conversion
feature. Each class has different exchange privileges and certain different
shareholder service options available. See "Distribution Plans" and "Shareholder
Services -- Exchange Privilege." The net income attributable to Class B and
Class C shares and the dividends payable on Class B and Class C shares will be
reduced by the amount of the distribution fee and incremental expenses
associated with such distribution fees. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling Class A, Class B or Class C shares.
CLASS A SHARES
The public offering price of Class A shares is the net asset value plus a
sales charge, as set forth below.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
SIZE OF AS % OF NET AS % OF REALLOWED TO DEALERS
INVESTMENT AMOUNT INVESTED OFFERING PRICE (AS A % OF OFFERING PRICE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000................ 6.10% 5.75% 5.00%
$50,000 but less than $100,000... 4.99% 4.75% 4.00%
$100,000 but less than
$250,000....................... 4.17% 4.00% 3.50%
$250,000 but less than
$500,000....................... 3.09% 3.00% 2.50%
$500,000 but less than
$1,000,000..................... 2.04% 2.00% 1.75%
$1,000,000 and over.............. (See herein) (See herein) (See herein)
- ------------------------------------------------------------------------------------------------------
</TABLE>
No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon redemption
is paid to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
For qualified 401(k) retirement plans administered under American Capital
Trust Company's (k) Advantage Program, or similar recordkeeping programs made
available through American Capital Trust Company, no sales charge is payable at
the time of purchase for plans with at least 50 eligible employees or investing
at least $250,000 in American Capital funds, which include Participating Funds
as described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," and American Capital Reserve Fund, Inc. ("Reserve"). For such
investments the Fund imposes a contingent deferred sales charge of 1% in the
event of certain redemptions within one year of the purchase. No such charge
will be imposed unless and until appropriate relief is granted by the SEC. The
contingent deferred sales charge incurred upon redemption is paid to the
Distributor in reimbursement for distribution-related expenses. A commission
will be paid to dealers who initiate and are responsible for such purchases as
follows: 1% on sales to $5 million, plus 0.50% on the next $5 million, plus
0.25% on the excess over $10 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. The Distributor may also
pay dealers through whom purchases are made at net asset value as described in
clause (e) herein an amount equal to 0.40% of the amount invested. Dealers which
are reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933 (the "1933 Act").
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 above. 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 interpretation of federal law
expressed herein and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the shares
will not be resold except through redemption by the Fund, by
13
<PAGE> 20
(a) current or retired directors of the Fund; current or retired employees of
ACMR and any of its affiliates; spouses, minor children and grandchildren of the
above persons; and parents of employees and parents of spouses of employees of
ACMR and any of its affiliates; (b) employees of an investment subadviser to any
fund in the same "group of investment companies" (as defined in Rule 11a-3 under
the 1940 Act) as the Fund or an affiliate of the Subadviser; employees and
registered representatives of Service Organizations with selling group
agreements with the Distributor; employees of financial institutions that have
arrangements with Service Organizations having selling group agreements with the
Distributor; and spouses and minor children of such persons; (c) any trust,
pension, profit sharing or other benefit plan for such persons and (d) trustees
or other fiduciaries purchasing shares for retirement plans of organizations
with retirement plan assets of $10 million or more. Shares are offered at net
asset value to such persons because of anticipated economies in sales efforts
and sales related expenses. Such shares are also offered at net asset value to
(e) accounts opened for shareholders by dealers where the amounts invested
represent the redemption proceeds from investment companies distributed by an
entity other than the Distributor if such redemption has occurred no more than
15 days prior to the purchase of shares of the Fund and the shareholder paid an
initial sales charge and was not subject to a deferred sales charge on the
redeemed account. Shares are also offered at net asset value to (f) registered
investment advisers, trust companies and bank trust departments exercising
discretionary investment authority with respect to the money to be invested in
the Fund, provided that the aggregate amount invested in the Fund alone, or in
any combination of shares of the Fund and shares of certain other participating
American Capital mutual funds as described herein under "Purchase of
Shares -- Class A Shares -- Volume Discounts," during the 13-month period
commencing with the first investment pursuant to this purchase at net asset
value, equals at least $1 million. Purchase orders made pursuant to clause (f)
may be placed either through authorized dealers as described above or directly
with ACCESS by the investment adviser, trust company or bank trust department,
provided that ACCESS receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer or financial institution may charge a transaction fee for
placing an order to purchase shares pursuant to this provision or for placing a
redemption order with respect to such shares. Service organizations will be paid
a service fee as described herein under "Distribution Plans" on purchases made
on behalf of registered investment advisers, trust companies and bank trust
departments described in clause (f) above, retirement plans described in clause
(d) above, and for registered representatives' accounts.
The Distributor may pay commissions of up to 1% for purchases described in
clause (d). The Distributor may pay Service Organizations through which
purchases are made as described in clause (f) above for transactions of $1
million or more an amount up to 0.50% of the amount invested, over a 12-month
period following the pertinent transaction. The Fund may terminate, or amend the
terms of, offering shares of the Fund at net asset value to such groups at any
time.
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of certain other
participating American Capital mutual funds (the "Participating Funds") although
other Participating Funds may have different sales charges. The Participating
Funds are American Capital Comstock Fund, Inc., American Capital Corporate Bond
Fund, Inc. ("Corporate Bond"), American Capital Emerging Growth Fund, Inc.,
American Capital Enterprise Fund, Inc., American Capital Equity Income Fund,
Inc., American Capital Federal Mortgage Trust ("Federal Mortgage"), American
Capital Global Managed Assets Fund, Inc. ("Global Managed"), American Capital
Government Securities, Inc., American Capital Government Target Series
("Government Target"), American Capital Growth and Income Fund, Inc., American
Capital Harbor Fund, Inc., American Capital High Yield Investments, Inc. ("High
Yield"), American Capital Municipal Bond Fund, Inc. ("Municipal Bond"), American
Capital Pace Fund, Inc., American Capital Real Estate Securities Fund, Inc.
("Real Estate"), American Capital Tax-Exempt Trust ("Tax-Exempt"), American
Capital Texas Municipal Securities, Inc. ("Texas Municipal"), American Capital
U.S. Government Trust for Income ("Government Trust"), American Capital
Utilities Income Fund, Inc. ("Utilities Income") and American Capital World
Portfolio Series, Inc. ("World Portfolio"). A person eligible for a volume
discount includes an individual; members of a family unit comprising husband,
wife and minor children; or a trustee or other fiduciary purchasing for a single
fiduciary account.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's dealer at the time an
order is placed for a purchase which would qualify for a reduced sales charge on
the basis of previous purchases and if sufficient information is furnished to
permit confirmation of such purchases.
14
<PAGE> 21
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
charge applicable to the purchases made and the charge previously paid. The
initial purchase must be for an amount equal to at least five percent of the
minimum total purchase amount of the level selected. If trades not initially
made under a Letter of Intent subsequently qualify for a lower sales charge
through the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
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 included in this Prospectus.
CLASS B SHARES
Class B shares are offered at net asset value. Class B shares which are
redeemed within five years of purchase are subject to a contingent deferred
sales charge at the rates set forth in the following table charged as a
percentage of the dollar amount subject thereto. The charge is assessed on an
amount equal to the lesser of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no charge is
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchases
of shares, all payments during a month are aggregated and deemed to have been
made on the last day of the month.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- --------------------------------------------------------------------------------------------
<S> <C>
First...................................................... 5%
Second..................................................... 4%
Third...................................................... 3%
Fourth..................................................... 2.5%
Fifth...................................................... 1.5%
Sixth...................................................... None
- --------------------------------------------------------------------------------------------
</TABLE>
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first, of any shares in the shareholder's Fund account that are not subject
to a contingent deferred sales charge, second, of shares held for over five
years or shares acquired pursuant to reinvestment of dividends or distributions
and third, of shares held longest during the five-year period. The charge is not
applied to dollar amounts representing an increase in the net asset value since
the time of purchase.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4% (the applicable rate in the second year after purchase).
A commission or transaction fee of 4% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
15
<PAGE> 22
CLASS C SHARES
Class C shares are offered at net asset value. Class C shares which are
redeemed within the first year of purchase are subject to a contingent deferred
sales charge of 1%. The charge is assessed on an amount equal to the lower of
the then current market value or the cost of the shares being redeemed.
Accordingly, no sales charge is imposed on increases in net asset value above
the initial purchase price. In addition, no charge is assessed on shares derived
from reinvestment of dividends or capital gains distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of 1% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.65% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge may be waived on redemptions of Class B
and Class C shares (i) following the death or disability (as defined in the
Code) of a shareholder, (ii) in connection with certain distributions from an
IRA or other retirement plan, (iii) pursuant to the Fund's systematic withdrawal
plan but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing of its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such rule, the Directors of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") applicable to
mutual fund sales charges. The NASD Rules limit the annual distribution charges
that a mutual fund may impose on a class of shares. The NASD Rules also limit
the aggregate amount which the Fund may pay for such distribution costs. Under
the Class A Plan, the Fund pays a service fee to the Distributor at an annual
rate of up to 0.25% of the Fund's aggregate average daily net assets
attributable to the Class A shares. Such payments to the Distributor under the
Class A Plan are based on an annual percentage of the value of Class A shares
held in shareholder accounts for which Service Organizations are responsible at
the rates of 0.15% annually with respect to Class A shares in such accounts on
September 29, 1989 and 0.25% annually with respect to Class A shares issued
after that date. Under the Class B Plan and the Class C Plan, the Fund pays a
service fee to the Distributor at an annual rate of up to 0.25% and a
distribution fee at an annual rate of up to 0.75% of the Fund's aggregate
average daily net assets attributable to the Class B shares or Class C shares to
reimburse the Distributor for service fees paid by it to Service Organizations
and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to 4% of
the purchase price of Class B shares purchased by the clients of broker-dealers
and other Service Organizations, and (ii) other distribution expenses as
described in the Statement of Additional Information. Under the Class C Plan,
the Distributor receives additional payments from the Fund in the form of a
distribution fee at the annual rate of up to 0.75% of the net assets of the
Class C shares as reimbursements for (i) upfront commissions and transaction
fees of up to 0.75% of the purchase price of Class C shares purchased by the
clients of broker-dealers and other Service Organizations and ongoing
commissions and transaction fees of up to 0.65% of the average daily
16
<PAGE> 23
net assets of the Fund's Class C shares, and (ii) other distribution expenses as
described in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Directors of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with respect
to distribution and service revenues and expenses is presented to the Directors
each year for their consideration in connection with their deliberations as to
the continuance of the Distribution Plans. In their review of the Distribution
Plans, the Directors are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B shares or Class C shares is
designed to permit an investor to purchase such shares without the assessment of
a front-end sales load and at the same time permit the Distributor to compensate
Service Organizations with respect to such shares. In this regard, the purpose
and function of the combined contingent deferred sales charge and distribution
fee are the same as those of the initial sales charge with respect to the Class
A shares of the Fund in that in both cases such charges provide for the
financing of the distribution of the Fund's shares.
Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward without
interest charges unless permitted under SEC regulations, and may be reimbursed
by the Fund or its shareholders from payments received through contingent
deferred sales charges in future years and from payments under the Class B Plan
and Class C Plan so long as such Plans are in effect. For example, if in a
fiscal year the Distributor incurred distribution expenses under the Class B
Plan of $1 million, of which $500,000 was recovered in the form of contingent
deferred sales charges paid by investors and $400,000 was reimbursed in the form
of payments made by the Fund to the Distributor under the Class B Plan, the
balance of $100,000, would be subject to recovery in future fiscal years from
such sources. For the plan year ended June 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B Plan and carried forward were
approximately $1.6 million or 5.02% of the Class B shares' net assets. The
unreimbursed expenses incurred by the Distributor under the Class C Plan from
August 27, 1993 (inception of Class C shares) through June 30, 1994, and carried
forward were approximately $20,000 or 2.96% of the Class C shares' net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investments in its shares at little or no extra cost to the investor. The
following is a description of such services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Stock certificates are not issued except upon
shareholder request. Most shareholders elect not to receive certificates in
order to facilitate redemptions and transfers. A shareholder may incur an
expense to replace a lost certificate. Except as described herein, after each
share transaction in an account, the shareholder receives a report showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds listed under "Purchase of Shares -- Class A Shares -- Volume
Discounts," or Reserve, may receive statements quarterly from ACCESS showing any
reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized investment dealers or by mailing a
check directly to ACCESS.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share
17
<PAGE> 24
(without sales charge) on the record date. Unless the shareholder instructs
otherwise, the reinvestment plan is automatic. The investor may, on the initial
application or prior to any declaration, instruct that dividends be paid in cash
and capital gains distributions be reinvested at net asset value, or that both
dividends and capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. American
Capital Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh
plans. Details regarding fees, as well as full plan administration for profit
sharing, pension and 401(k) plans, are available from the Distributor.
FUND TO FUND DIVIDENDS. A shareholder may, upon written request or by
completing the appropriate section of the application form in this Prospectus,
elect to have all dividends and other distributions paid on a Class A, Class B
or Class C account in the Fund invested into a pre-existing Class A, Class B or
Class C account in any of the Participating Funds listed under "Purchase of
Shares -- Class A Shares -- Volume Discounts," or Reserve.
Both accounts must be of the same class and of the same type, either
non-retirement or retirement. Any two non-retirement accounts can be used. If
the accounts are retirement accounts, they must both be for the same class and
of the same type of retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh), and
for the benefit of the same individual. If a qualified, pre-existing account
does not exist, the shareholder must establish a new account subject to minimum
investment and other requirements of the fund into which distributions would be
invested. Distributions are invested into the selected fund at its net asset
value as of the payable date of the distribution.
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. Shares of Reserve may be exchanged for Class A shares of any
Participating Fund upon payment of the excess, if any, of the sales charge rate
applicable to the shares being acquired over the sales charge rate previously
paid. Shares of any Participating Fund or Reserve may be exchanged for shares of
any other Participating Fund if shares of that Participating Fund are available
for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders.
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.
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.
Since the maximum sales charge rate applicable to purchases of Class A shares
of the Fund is at least one percentage point higher than the maximum sales
charge rate applicable to the purchase of Class A shares of American Capital
fixed income funds, the foregoing exchange privilege may be utilized to reduce
the sales charge paid to purchase Class A shares of the Fund, subject to the
exchange fee.
Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently five dollars 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
18
<PAGE> 25
on such shares is not included in the tax basis of the exchanged shares, but is
carried over and included in the tax basis of the shares acquired. See the
Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. ACMR
and its subsidiaries, including ACCESS (collectively, "American Capital"), and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither American Capital nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed. Exchanges
are effected at the net asset value per share next calculated after the request
is received in good order with adjustment for any additional sales charge. See
both "Purchase of Shares" and "Redemption of Shares." If the exchanging
shareholder does not have an account in the fund whose shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options (except fund to fund dividends) and dealer of record as
the account from which shares are exchanged, unless otherwise specified by the
shareholder. In order to establish a systematic withdrawal plan for the new
account or reinvest dividends from the new account into another fund, however,
an exchanging shareholder must file a specific written request. The Fund
reserves the right to reject any order to acquire its shares through exchange,
or otherwise to modify, restrict or terminate the exchange privilege at any time
on 60 days' notice to its shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for information regarding such fund.
SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
above under "Exchange Privilege" will be waived for such systematic exchanges.
Additional information on how to establish this option is available from the
Distributor.
AUTOMATIC EXCHANGE. The exchange fee described above under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the American
Capital Service Department at (800) 421-5666 for further information on how to
utilize this option.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any investor whose shares
in a single account total $5,000 or more may establish a withdrawal plan on a
quarterly, semiannual or annual basis. This plan provides for the orderly use of
the entire account, not only the income but also the capital, if necessary. Each
withdrawal constitutes a redemption of shares on which any capital gain or loss
will be recognized. The planholder may arrange for monthly, quarterly,
semiannual, or annual checks in any amount not less than $25. Such a systematic
withdrawal plan may also be maintained by an investor purchasing shares for a
retirement plan established on a form made available by the Fund. See
"Shareholder Services -- Retirement Plans."
Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
19
<PAGE> 26
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares of the Fund at
any time. To do so, a written request in proper form must be sent directly to
ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256. Shareholders may also
place redemption requests through an authorized dealer. Orders received from
dealers must be at least $500 unless transmitted via the FUNDSERV network. The
redemption price for such shares is the net asset value next calculated after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of dealers to transmit redemption requests received by them to
the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B or
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sale 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. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. See "Purchase of Shares." A custodian of a retirement plan account may
charge fees based on the custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where American Capital Trust Company
serves as IRA custodian, special IRA, 403(b)(7), or Keogh redemption forms must
be obtained from and be forwarded to American Capital Trust Company, P.O. Box
944, Houston, Texas 77001-0944. Contact the custodian for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until 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 $50, provided that there has been no purchase of shares for that account
during a continuous period of at least twelve months. Three months advance
notice of any such involuntary redemption is required and the shareholder is
given an opportunity to purchase the required value of additional shares at the
next determined net asset value without sales charge. Any involuntary redemption
may occur only if the shareholder account is less than $50 due to shareholder
redemptions. Any applicable contingent deferred sales charges will be deducted
from the proceeds of this redemption.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth, the Fund permits shareholders and the dealer
representative of record to redeem shares by telephone and to have redemption
proceeds sent to the address of record for the account or to the bank account of
record as described below. To establish such privilege, a shareholder must
complete the appropriate section of the application form in this Prospectus or
call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares
contact the telephone transaction line at (800) 421-5684. American Capital and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither American Capital nor the Fund will be liable
for following telephone instructions
20
<PAGE> 27
which it reasonably believes to be genuine. American Capital and the Fund may be
liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's regular redemption procedure previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If an account has multiple owners, ACCESS
may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed once in each 30-day period. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account or
wired directly to their predesignated bank account. This privilege is not
available if the address of record has been changed within 60 days prior to a
telephone redemption request. Proceeds from redemptions are expected to be wired
on the next business day following the date of redemption. The Fund reserves the
right at any time to terminate, limit or otherwise modify this redemption
privilege.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed at least annually as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value. See "Shareholder Services -- Reinvestment
Plan."
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
incremental transfer agency fees applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund at least annually distributes to
shareholders the excess, if any, of its total profits on the sale of securities
during the year over its total losses on the sale of securities, including
capital losses carried forward from prior years in accordance with tax laws. As
in the case of income dividends, capital gains distributions are automatically
reinvested in additional shares of the Fund at net asset value. See "Shareholder
Services -- Reinvestment Plan."
TAXES. The Fund has qualified and intends to be taxed as a regulated
investment company under the Code. By qualifying as a regulated investment
company, the Fund is not subject to federal income taxes to the extent it
distributes its net investment income and net realized capital gains. Dividends
from net investment income and distributions from any net realized short-term
capital gains are taxable to shareholders as ordinary income. Long-term capital
gains distributions are currently subject to federal income tax at ordinary
income rates. All such dividends and distributions are taxable to the
shareholder whether or not reinvested in shares. However, shareholders not
subject to tax on their income will not be required to pay tax on amounts
distributed to them.
Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Dividends and distributions paid by the Fund have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution paid shortly after the purchase of shares
21
<PAGE> 28
by an investor would represent, in substance, a return of capital to the
shareholder (to the extent it is paid on the shares so purchased) even though
subject to income taxes as discussed above.
Gains or losses on the Fund's transactions in listed options (except certain
equity options) on securities or indexes, futures and options on futures
generally are treated as 60% long-term and 40% short-term, and positions held by
the Fund at the end of its fiscal year generally are required to be marked to
market, with the result that unrealized gains and losses are treated as
realized. Gains and losses realized by the Fund from writing over-the-counter
options constitute short-term capital gains or losses unless the option is
exercised, in which case the character of the gain or loss is determined by the
holding period of the underlying security. The Code contains certain "straddle"
rules which require deferral of losses incurred in certain transactions
involving hedged positions to the extent the Fund has unrealized gains in
offsetting positions and generally terminate the holding period of the subject
position. Additional information is set forth in the Statement of Additional
Information.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisers for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or citizenship tax consequences of receipt of
dividends and distributions from the Fund.
- --------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one, five, and ten year periods. Other total return quotations,
aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 5.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Since shares of the Fund were offered at a maximum sales charge of 8.50% prior
to June 12, 1989, actual Fund total return would have been somewhat less than
that computed on the basis of the current maximum sales charge. Total return is
based on historical earnings and asset value fluctuations and is not intended to
indicate future performance. No adjustments are made to reflect any income taxes
payable by shareholders on dividends and distributions paid by the Fund or to
reflect the fact no 12b-1 fees were incurred prior to October 1, 1989.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
Total return is calculated separately for Class A, Class B and Class C shares.
Class A total return figures include the maximum sales charge of 5.75%; Class B
and Class C total return figures include any applicable contingent deferred
sales charge. Because of the differences in sales charges and distribution fees,
the total returns for each of the classes will differ.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds or with the Consumer Price Index, the Dow Jones
Industrial Average Index, Standard & Poor's, NASDAQ, other appropriate indices
of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Investor's Business Daily, Kiplinger's Personal Finance Magazine,
Money, Mutual Fund Forecaster, Stanger's Investment Advisor, USA Today, U.S.
News & World Report and The Wall Street Journal. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Any such advertisement would also include the standard
performance information required by the SEC as described above. For these
purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce Fund performance. The
22
<PAGE> 29
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 incorporated in Delaware on December 2,
1968, and reincorporated by merger into a Maryland corporation on December 30,
1982. The Fund may offer three classes of shares: Class A, Class B and Class C.
Each class of shares represents interests in the assets of the Fund and has
identical voting, dividend, liquidation and other rights on the same terms and
conditions except that the distribution fees and/or service fees related to each
class of shares are borne solely by that class, and each class of shares has
exclusive voting rights with respect to provisions of the Fund's Class A Plan,
Class B Plan and 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 interest in the Fund's existing portfolio. Shares issued are
fully paid, non-assessable and have no preemptive or conversion rights.
VOTING RIGHTS. The Bylaws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the 1940 Act. Such
event is likely to occur infrequently. In addition, a special meeting of the
shareholders will be called, if requested by the holders of ten percent of the
Fund's outstanding shares, for the purposes, and to act upon the matters,
specified in the request (which may include election or removal of directors).
When matters are submitted for a shareholder vote, each shareholder is entitled
to one vote for each share owned. The shares have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors if they choose to do so,
and in such an event, the holders of the remaining less than 50% of the shares
voting for the election of directors will not be able to elect any person to the
Board of Directors.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund at
2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256, serves as transfer agent, shareholder service agent and dividend
disbursing agent for the Fund. ACCESS, a wholly owned subsidiary of the
Adviser's parent, provides these services at cost plus a profit.
LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Fund.
23
<PAGE> 30
- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------
June 30, 1994
COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
CONSUMER DISTRIBUTION
*21,200 AutoZone, Inc.
*14,000 Best Buy, Inc.
49,000 Claire's Stores, Inc.
*63,000 CUC International, Inc.
185,000 Dayton Hudson Corp.
100,000 Dillard Department Stores,
Inc.
*13,000 Discount Auto Parts, Inc.
576,937 Dollar General Corp.
*20,800 Dress Barn, Inc.
*500,000 Federated Department
Stores, Inc.
40,800 Fingerhut Corp.
300,000 Gap, Inc.
18,000 Hannaford Brothers Co.
42,500 Heilig-Meyers Co.
*10,000 IHOP Corp.
*36,400 Kroger Co.
220,000 Lowes Companies, Inc.
675,000 May Department Stores Co.
11,000 McKesson Corp.
*33,000 Meyer (Fred), Inc.
*38,000 Michael's Stores, Inc.
4,000 Miller (Herman), Inc.
*120,000 Office Depot, Inc.
366,600 Penney (J.C.) Company,
Inc.
*10,000 Revco (D.S.), Inc.
*10,000 Safeway, Inc.
*87,200 Score Board, Inc.
350,000 Sears, Roebuck & Co.
*35,800 Stop & Shop Companies,
Inc.
28,800 Super Valu Stores, Inc.
*47,600 Tech Data Corp.
CONSUMER DURABLES
9,000 ARCTCO, Inc.
350,000 Brunswick Corp.
23,000 Callaway Golf Co.
29,100 Centex Corp.
*15,000 Clayton Homes, Inc.
347,000 Echlin, Inc.
3,000 Fleetwood Enterprises,
Inc.
9,000 Flexsteel Industries, Inc.
200,000 Ford Motor Co.
48,600 GenCorp. Inc.
315,000 General Motors Corp.
15,000 Harley Davidson, Inc.
24,800 Hayes Wheels
International, Inc.
50,000 Leggett & Platt, Inc.
38,250 Mattel, Inc.
31,000 Oakwood Homes Corp.
33,100 Pulte Corp.
*22,050 SLM International, Inc.
75,000 Snap-On, Inc.
140,000 Sunbeam-Oster Company,
Inc.
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
10,000 Toro Co.
*10,000 Winnebago Industries, Inc.
CONSUMER NON-DURABLES
480,000 American Greeting Corp.,
Class A
175,000 Anheuser-Busch Companies,
Inc.
55,000 Avon Products, Inc.
800,000 ConAgra, Inc.
*45,200 Cone Mills Corp.
7,000 Dean Foods Co.
*533,300 Dr Pepper/Seven-Up
Companies, Inc.
23,600 First Brands Corp.
6,000 Guilford Mills, Inc.
17,000 Hershey Foods Corp.
18,000 Hillenbrand Industries,
Inc.
9,000 Hormel (George A.) & Co.
35,800 IBP, Inc.
*23,200 Jones Apparel Group, Inc.
11,000 McCormick & Company, Inc.
190,000 PepsiCo, Inc.
170,000 Pet, Inc.
*46,600 Pillowtex Corp.
32,000 Pioneer Hi-Bred
International, Inc.
450,000 Procter & Gamble Co.
20,000 Reebok International, Ltd.
3,800,000 RJR Nabisco Holdings Corp.
160,000 Snapple Beverage Corp.
200,000 United States Shoe Corp.
*11,000 Warnaco Group, Inc.
56,800 Whitman Corp.
16,800 Wrigley (William, Jr.) Co.
CONSUMER SERVICES
*5,000 American Medical Response
33,000 Applebee's International,
Inc.
*1,000 Avid Technology, Inc.
8,000 Bowne & Co., Inc.
*262,500 Brinker International,
Inc.
177,000 Capital Cities ABC, Inc.
50,000 CBS, Inc.
32,800 Equifax, Inc.
*76,500 Hospitality Franchise
Systems, Inc.
800,000 Host Marriott Corp.
*15,000 King World Productions,
Inc.
*13,000 Liberty Media Corp., Class
A
507,500 Marriott International,
Inc.
900,000 McDonald's Corp.
7,000 Morrison Restaurants, Inc.
50,000 Ogden Corp.
17,000 Omnicom Group, Inc.
*352,500 Outback Steakhouse, Inc.
4,000 Reynolds & Reynolds Co.
*25,000 Robert Half International,
Inc.
3,000 Sbarro, Inc.
</TABLE>
24
<PAGE> 31
COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
43,000 Service Corp.
International
29,200 Spelling Entertainment
Group, Inc.
11,000 Tribune Co.
5,000 United Television, Inc.
120,000 Wendy's International,
Inc.
ENERGY
675,000 Amoco Corp.
750,000 Apache Corp.
35,000 Ashland Oil, Inc.
325,000 Atlantic Richfield Co.
380,000 Baker Hughes, Inc.
555,000 British Petroleum Co.,
PLC, ADR
92,600 Chevron Corp.
31,000 Eastern Enterprises
290,000 Enron Corp.
33,000 Equitable Resources, Inc.
242,000 Halliburton Co.
*3,000 Magma Power Co.
14,000 MAPCO, Inc.
300,000 Mobil Corp.
1,000 NACCO Industries, Inc.
22,500 National Fuel Gas Co.
33,000 NICOR, Inc.
*9,000 Offshore Pipelines, Inc.
14,400 Oneok, Inc.
26,600 Pacific Enterprises
30,300 Pittston Services Group
9,400 Quaker State Corp.
30,000 Repsol, S.A., ADR
160,000 Royal Dutch Petroleum Co.,
ADR
126,000 Schlumberger, Ltd.
*25,000 Smith International, Inc.
3,000 Southwestern Energy Co.
16,000 Sun, Inc.
7,000 Tidewater, Inc.
17,000 Tosco Corp.
*14,000 Tuboscope Vetco
International, Class C
10,000 Ultramar Corp.
*16,000 Weatherford International,
Inc.
*100,000 Western Atlas, Inc.
*85,000 Western Company of North
America
3,000 Wicor, Inc.
650,000 Williams Companies, Inc.
600,000 YPF Sociedad Anonima, ADS
FINANCE
164,300 Advanta Corp., Class A
150,000 Aetna Life & Casualty Co.
25,000 Alex Brown, Inc.
27,000 Ambac, Inc.
2,104,130 American Capital Small
Capitalization Fund, Inc.
250,000 American International
Group, Inc.
17,000 AmSouth Bancorporation
*41,000 Anchor Bancorp, Inc.
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
930,000 BankAmerica Corp.
17,000 Bankers Life Holding Corp.
23,000 Baybanks, Inc.
36,382 Bear, Stearns Companies,
Inc.
26,000 Boatmen's Bancshares, Inc.
6,000 Capitol American Financial
Corp.
5,000 CMAC Investment Corp.
26,000 Compass Bancshares, Inc.
1,000 Conseco, Inc.
176,200 Crestar Financial Corp.
*100,000 Dime Bancorp
775,000 Equitable Companies, Inc.
19,000 Fidelity National
Financial, Inc.
2,000 First American Financial
Corp.
425,000 First Bank System, Inc.
4,000 First Federal Corp.
300,000 First Interstate Bancorp
14,000 First of America Bank
Corp.
20,000 First USA, Inc.
10,000 Fleet Financial Group,
Inc.
5,000 Foothill Group, Inc.
3,000 Fremont General Corp.
146,000 General RE Corp.
14,000 GFC Financial Corp.
74,000 Green Tree Financial Corp.
6,000 Jefferson Pilot Corp.
38,000 Keycorp
11,000 Leucadia National Corp.
2,000 Life Partners Group, Inc.
7,500 Mercantile Bancorporation,
Inc.
35,333 Mercury Finance Co.
28,200 MGIC Investors Corp.
300,000 Midlantic Corp.
460,000 NationsBank Corp.
37,000 NWNL Companies, Inc.
5,000 Orion Capital Corp.
27,000 Paine Webber Group, Inc.
170,000 Protective Life Corp.
4,000 Provident Life &
Accidental Insurance Co.,
Class B
3,000 Raymond James Financial,
Inc.
22,000 Regions Financial Corp.
3,000 Reinsurance Group of
America, Inc.
12,000 Roosevelt Financial Group,
Inc.
287,000 Signet Banking Corp.
42,600 SouthTrust Corp.
7,000 Star Banc Corp.
13,000 Statesman Group, Inc.
150,000 St. Paul Companies, Inc.
29,000 SunAmerica, Inc.
2,000 TCF Financial Corp.
35,000 Transamerica Corp.
14,000 Union Planters Corp.
15,000 USLIFE Corp.
54,000 Washington Mutual Savings
Bank of Seattle
</TABLE>
25
<PAGE> 32
COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
4,000 Washington National Corp.
85,000 Wells Fargo & Co.
HEALTH CARE
940,000 Abbott Laboratories
226,500 American Cyanamid Co.
765,000 Baxter International, Inc.
9,000 Beckman Instruments, Inc.
10,000 Caremark International,
Inc.
*217,600 Carrington Laboratories,
Inc.
260,000 Columbia Healthcare Corp.
*8,000 Cordis Corp.
*4,900 Cor Therapeutics, Inc.
*17,000 Dentsply International,
Inc.
*8,160 FHP International Corp.
*7,800 Forest Labs, Inc.
*400,000 Genentech, Inc.
*38,000 Haemonetics Corp.
*12,000 HealthCare Compare Corp.
*220,000 Healthcare & Retirement
Corp.
*110,000 Healthtrust Inc.-The
Hospital Co.
*20,000 Humana, Inc.
*31,000 ICOS Corp.
650,000 Lilly (Eli) & Co.
*47,500 Mid-Atlantic Medical
Services, Inc.
*25,000 Nellcor, Inc.
*30,000 Oxford Health Plans, Inc.
*14,000 Pacificare Health Systems,
Inc., Class A
*34,000 Perrigo Co.
144,100 Pfizer, Inc.
*19,000 Quantum Health Resources,
Inc.
180,000 Schering-Plough Corp.
*17,000 Sofamor/Danek Group, Inc.
30,000 SpaceLabs Medical, Inc.
440,000 United Healthcare Corp.
15,000 U.S. Homecare Corp.
*25,200 Value Health, Inc.
*30,000 Vencor, Inc.
165,000 Warner-Lambert Co.
PRODUCER MANUFACTURING
640,000 Allied Signal, Inc.
16,600 Aptar Group, Inc.
560,000 Browning-Ferris
Industries, Inc.
135,000 Caterpillar, Inc.
*11,000 Coltec Industries, Inc.
20,000 Cummins Engine Company,
Inc.
470,000 General Electric Co.
*23,400 IDEX Corp.
24,000 Illinois Tool Works, Inc.
265,000 ITT Corp.
21,000 Johnson Controls, Inc.
34,000 Juno Lighting, Inc.
17,000 National Services
Industries, Inc.
5,750 Paccar, Inc.
580,000 Philips, N.V.
13,600 Pittway Corp., Class A
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
13,000 SPS Technologies, Inc.
26,600 Stewart & Stevenson
Services, Inc.
7,000 St. Joe Paper Co.
31,000 Teledyne, Inc.
10,000 Tenneco, Inc.
350,000 Textron, Inc.
*37,500 Thermo Electron Corp.
*14,000 Thermo Instrument Systems,
Inc.
46,500 Trinity Industries, Inc.
13,000 Tyco Laboratories, Inc.
*292,000 Varity Corp.
558,000 WMX Technologies, Inc.
RAW MATERIALS/PROCESSING INDUSTRIES
19,800 Albemarle Corp.
5,000 Amcast Industrial Corp.
*3,000 American Pacific Corp.
15,000 Asarco, Inc.
27,000 Avery Dennison Corp.
6,000 Bemis, Inc.
22,000 Betz Laboratories, Inc.
75,000 Birmingham Steel Corp.
13,000 Church & Dwight, Inc.
20,000 Crown Cork & Seal Co.,
Inc.
210,000 DuPont (E.I.) de Nemours &
Co., Inc.
35,000 Ecolab, Inc.
39,600 Ethyl Corp.
2,000 Excel Industries, Inc.
*225,000 Georgia Gulf Corp.
39,000 Handy & Harman
325,000 Hercules, Inc.
327,500 Imperial Chemical
Industries,
PLC, ADR
250,000 International Paper Co.
31,700 Justin Industries, Inc.
25,000 LAC Minerals, Ltd.
*25,000 LTV Corp.
12,000 Lukens, Inc.
39,400 Minerals Technologies,
Inc.
510,000 Monsanto Co.
14,400 Mycogen Corp.
26,000 Oregon Steel Mills, Inc.
*20,000 Owens-Corning Fiberglass
Corp.
*63,000 Owens-Illinois, Inc.
33,000 Pall Corp.
20,000 Pentair, Inc.
650,000 Praxair, Inc.
26,000 RPM, Inc.
325,000 Scott Paper Co.
*2,000 Sealed Air Corp.
18,000 Sigma-Aldrich Corp.
28,000 Sonoco Products Co.
8,000 Thiokol Corp.
9,333 Wausau Paper Mills Co.
59,000 Willamette Industries,
Inc.
20,000 Worthington Industries,
Inc.
</TABLE>
26
<PAGE> 33
COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
TECHNOLOGY
*41,600 Adaptec, Inc.
240,000 Adobe Systems, Inc.
*29,000 Analog Devices, Inc.
*13,500 Andrew Corp.
*330,000 Applied Materials, Inc.
17,000 Arrow Electronics, Inc.
*20,000 Aspect Telecommunications
Corp.
*110,000 Atmel Corp.
18,000 Avnet, Inc.
*25,000 Cadence Design Systems,
Inc.
*23,000 Ceridian Corp.
*54,750 Cheyenne Software, Inc.
*29,000 Chipcom Corp.
*18,000 Cirrus Logic, Inc.
*315,000 Compaq Computer Corp.
20,000 Computer Associates
International, Inc.
*67,400 Compuware Corp.
*17,000 Copytele, Inc.
*2,400 Cray Research, Inc.
*12,000 Digi International, Inc.
*8,000 Electronics for Imaging,
Inc.
*110,000 FileNet Corp.
*270,000 General Instrument Corp.
10,000 General Motors Corp.,
Class H
18,000 Harris Corp.
*44,600 Informix Corp.
*212,500 Integrated Device
Technology, Inc.
525,000 International Business
Machines Corp.
*50,000 Intuit, Inc.
*54,000 Komag, Inc.
*25,000 Lam Research Corp.
*7,000 Landmark Graphics Corp.
228,000 Linear Technology Corp.
90,000 Loral Corp.
*345,000 LSI Logic Corp.
*29,000 Marshall Industries
*215,000 Microsoft Corp.
*165,000 National Semiconductor
Corp.
*16,000 Network General Corp.
*375,000 Novell, Inc.
*85,000 Oracle Systems Corp.
*20,000 PeopleSoft, Inc.
5,000 Pioneer Standard
Electronics, Inc.
*8,000 Platinum Technology, Inc.
675,000 Rockwell International
Corp.
*193,000 Silicon Graphics, Inc.
*80,000 Solectron Corp.
*52,400 Standard Microsystems
Corp.
*6,000 Sterling Software, Inc.
*40,000 Symantec Corp.
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
*22,000 Synopsys, Inc.
*16,000 Syquest Technology, Inc.
*134,000 Tellabs, Inc.
*17,000 Teradyne Technologies,
Inc.
207,000 Texas Instruments, Inc.
*115,000 3Com Corp.
*6,800 U.S. Robotics, Inc.
7,000 Varian Associates, Inc.
*27,000 VLSI Technology, Inc.
*16,000 Wall Data, Inc.
*7,000 Xilinx, Inc.
TRANSPORTATION
11,000 Airborne Freight Corp.
210,000 Burlington Northern, Inc.
*42,000 Chicago and North Western
Transportation
20,000 Conrail, Inc.
219,000 Illinois Central Corp.
*36,000 Mesa Airlines, Inc.
11,000 Skywest, Inc.
215,000 Southwest Airlines Co.
UTILITIES
*60,000 ALC Communications Corp.
300,000 Alltel Corp.
275,000 Ameritech Corp.
300,000 Baltimore Gas & Electric
Co.
600,000 Bellsouth Corp.
9,000 Boston Edison Co.
1,000 Central Hudson Gas &
Electric Corp.
28,400 Century Telephone
Enterprises, Inc.
26,000 Cipsco, Inc.
4,000 Citizens Utilities Co.,
Class B
12,600 Comsat Corp.
*6,000 Contel Cellular, Inc.,
Class A
*30,000 Destec Energy, Inc.
10,000 DQE, Inc.
10,000 Eastern Utilities
Associates
23,000 Illinova Corp.
3,000 LG&E Energy Corp.
*10,000 Lin Broadcasting Corp.
37,000 Lincoln Telecommunications
Co.
300,000 MCI Communications Corp.
*9,000 Nextel Communications,
Inc.
33,800 Oklahoma Gas & Electric
Co.
64,000 Pinnacle West Capital
Corp.
61,000 Portland General Corp.
6,000 Public Service Co. of
Colorado
*77,000 Public Service Co. of New
Mexico
800,000 Sprint Corp.
</TABLE>
27
<PAGE> 34
CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ------------------------------------------
<S> <C>
27,200 FHP International Corp.,
Series A, $1.25
SHORT-TERM INVESTMENTS
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
COMMERCIAL PAPER
$47,020,000 General Electric Capital
Corp., 4.40%, 7/1/94
8,140,000 Prudential Funding Corp.,
4.30%, 7/1/94
10,000,000 State Bank of New South
Wales, 4.36%, 7/28/94
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------------
<S> <C>
REPURCHASE AGREEMENT
$ 10,675,000 Swiss Bank Corp.
Government Securities,
Inc., dated 6/30/94, 4.25%
due 7/1/94 (collateralized
by U.S. Government
obligations in a pooled
cash account) repurchase
proceeds $10,676,260
UNITED STATES AGENCY AND GOVERNMENT
OBLIGATIONS
10,000,000 Tennessee Valley
Authority, 4.29%, 8/11/94
#280,000,000 United States Treasury
Bills, 3.97% to 4.30%,
7/21/94 to 10/6/94
</TABLE>
* Non-income producing security.
# Securities with a market value of $242.6 million were placed as collateral for
futures contracts.
28
<PAGE> 35
BACKUP WITHHOLDING INFORMATION
STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with
the following guidelines:
Account Type Give Social Security Number or Tax
Identification Number of:
- --------------------------------------------------------------------------------
Individual Individual
- --------------------------------------------------------------------------------
Joint (or Joint Tenant) Owner who will be paying tax
- --------------------------------------------------------------------------------
Uniform Gifts to Minors Minor
- --------------------------------------------------------------------------------
Legal Guardian Ward, Minor or Incompetent
- --------------------------------------------------------------------------------
Sole Proprietor Owner of Business
- --------------------------------------------------------------------------------
Trust, Estate, Pension
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> 36
AMERICAN CAPITAL
PACE FUND, INC.
Prospectus
November 1, 1994
National Distributor
American Capital Marketing, Inc.
2800 Post Oak Blvd.
Houston, TX 77056
Investment Adviser
American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056
Disbursing, Redemption
and Shareholder Service Agent
American Capital Companies
Shareholder Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256
Independent Accountants
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Transfer Agent, American
Capital Companies Shareholder Services,
Inc. (ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor, American
Capital Marketing, Inc., P.O. Box 1411,
Houston, TX 77251-1411.
American Capital C/O ACCESS
Pace Fund, Inc. P.O. Box 418256
Kansas City, MO 64141-9256
For investors seeking growth of
capital through a portfolio of
common stocks.
[AMERICAN CAPITAL LOGO]
PRINTED MATTER
Printed in U.S.A./014 BRO-001
<PAGE> 37
PART B: STATEMENT OF ADDITIONAL INFORMATION
AMERICAN CAPITAL PACE FUND, INC.
NOVEMBER 1, 1994
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated November 1,
1994. A Prospectus may be obtained without charge by calling or writing American
Capital Marketing, Inc. at 2800 Post Oak Blvd., Houston, Texas 77056 at (800)
421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
REPURCHASE AGREEMENTS......................................................... 3
FOREIGN SECURITIES............................................................ 3
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS................................ 4
INVESTMENT RESTRICTIONS....................................................... 7
DIRECTORS AND EXECUTIVE OFFICERS.............................................. 10
INVESTMENT ADVISORY AGREEMENT................................................. 12
DISTRIBUTOR................................................................... 14
DISTRIBUTION PLANS............................................................ 14
TRANSFER AGENT................................................................ 16
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 16
DETERMINATION OF NET ASSET VALUE.............................................. 18
PURCHASE AND REDEMPTION OF SHARES............................................. 18
EXCHANGE PRIVILEGE............................................................ 22
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.................................... 22
PRIOR PERFORMANCE INFORMATION................................................. 24
OTHER INFORMATION............................................................. 25
FINANCIAL STATEMENTS.......................................................... 25
</TABLE>
<PAGE> 38
GENERAL INFORMATION
The Fund was incorporated in Delaware on December 2, 1968, and
reincorporated by merger into a Maryland corporation on December 30, 1982.
American Capital Asset Management, Inc. (the "Adviser"), American Capital
Marketing, Inc. (the "Distributor") and Advantage Capital Corporation, a retail
broker-dealer affiliate of the Distributor, are wholly owned subsidiaries of
American Capital Management & Research, Inc. ("ACMR"). Eighty-three percent of
the outstanding voting stock of ACMR is owned by Associated Madison Companies,
Inc. ("Associated Madison"), and 17% is owned by The Travelers Inc.
("Travelers"). Associated Madison is a wholly owned subsidiary of Travelers. See
"The Fund and Its Management" in the Prospectus.
As of October 4, 1994 no one person is known to own beneficially or to hold
of record five percent or more of the outstanding shares of any class of the
Fund except for those listed below:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NATURE OF NUMBER
RECORD HOLDER OWNERSHIP CLASS OF SHARES HELD PERCENT
---------------------------------------- --------- ----- -------------- -------
<S> <C> <C> <C> <C>
American Capital Trust Company of record A 94,282,069 49.90%
2800 Post Oak Blvd.
Houston, TX 77056
American Capital Trust Company of record B 1,134,964 35.68%
2800 Post Oak Blvd.
Houston, TX 77056
National Financial Services of record B 168,875 5.31%
200 Liberty One World Financial Center
New York, NY 10281-1003
Smith Barney Inc. of record B 353,251 11.11%
Pay Office
388 Greenwich St., 22nd Floor
New York, NY 10013-2375
American Capital Trust Company of record C 25,909 19.74%
2800 Post Oak Blvd.
Houston, TX 77056
American Capital Trust Company beneficially C 6,912 5.27%
IRA R/O Barbara J. Smith
Route 11, Box 500
Mountain Home, AR 72653-9624
Lena D. Lambert beneficially C 7,557 5.76%
Route 6, Box 33B
Andalusia, AL 36420-9110
Merrill Lynch Pierce Fenner of record C 13,816 10.53%
& Smith Inc.
Mutual Fund Operations
4800 Deer Lake Drive East,
3rd Floor
Jacksonville, FL 32246-6484.bp
PaineWebber Inc. of record C 12,781 9.74%
1 Ward Parkway, Suite 126
Kansas City, MO 64112-2117
</TABLE>
2
<PAGE> 39
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NATURE OF NUMBER
RECORD HOLDER OWNERSHIP CLASS OF SHARES HELD PERCENT
---------------------------------------- --------- ----- -------------- -------
<S> <C> <C> <C> <C>
PaineWebber for the benefit of beneficially C 8,626 6.57%
PaineWebber CDN FBO
Vincent J. Sokolaski
P.O. Box 3321
Weehawken, NJ 07087-8154
Smith Barney Inc. of record C 40,269 30.68%
Pay Office
388 Greenwich St., 22nd Floor
New York, NY 10013-2375
</TABLE>
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. As a matter of
operating policy, the Fund does not intend to invest more than five percent of
its assets in repurchase agreements. The Fund will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities owned by the Fund, exceeds ten percent of the
value of its net assets.
FOREIGN SECURITIES
The Fund may invest up to 15% of the value of its total assets in
securities of foreign governments and companies. Such securities may be subject
to foreign government taxes which would reduce the income yield on such
securities. Foreign investments involve certain risks, such as political or
economic instability of the issuer or of the country of issue, changes in
currency exchange rates, the difficulty of predicting international trade
patterns and the possibility of imposition of exchange controls. Such securities
may also be subject to greater fluctuations in price than securities of domestic
corporations or of the United States Government. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. There is generally less government regulation of stock
exchanges, brokers and listed companies abroad than in the United States, and,
with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, or diplomatic developments which could
affect investment in those countries. Finally, in the event of a default on any
such foreign debt obligations, it may be more difficult for the Fund to obtain
or to enforce a judgment against the issuers of such securities.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a
3
<PAGE> 40
similar ownership arrangement. Generally, ADRs in registered form, are designed
for use in United States securities markets and EDRs, in bearer form, are
designed for use in European securities markets.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option writing program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities is likely to result in a higher
portfolio turnover rate.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security form the
writer at a specified price during a certain period. The Fund would write call
options only on a covered basis, which means that, at all times during the
option period, the Fund would own or have the right to acquire securities of the
type that it would be obligated to deliver if any outstanding option were
exercised.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or U.S. Government securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
in to a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, which would not
close out its position as a writer, but would provide an asset of equal value to
its obligation under the option written. If the Fund is not able to enter into a
closing purchase transaction or to purchase an offsetting option with respect to
an option it has written, it will be required to maintain the securities subject
to the call or the collateral underlying the put until a closing purchase
transaction can be entered into (or the option is exercised or expires), even
though it might not be advantageous to do so.
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others, regardless of whether such options are written on one or
more accounts or through one or more brokers. An exchange may order the
liquidation of positions found to be in violation of those limits, and it may
impose other sanctions or restrictions. These position limits may restrict the
number of options the Fund may be able to write.
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<PAGE> 41
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital appreciation. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. Alternatively, put options could be purchased
for capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
OPTIONS ON STOCK INDEXES
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund is exempt from
registration as a "commodity pool."
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
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<PAGE> 42
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
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<PAGE> 43
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or 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 prevent leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option 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
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<PAGE> 44
Fund could purchase put options on futures contracts in lieu of, and for the
same purpose as, it could sell a futures contract; at the same time, it could
write put options at a lower strike price (a "put bear spread") to offset part
of the cost of the strategy to the Fund. The purchase of call options on futures
contracts would be intended to serve the same purpose as the actual purchase of
the futures contracts.
RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS
In addition to the risks described above which apply to all options
transactions, there are several special risks relating to options on futures.
The Adviser will not purchase options on futures on any exchange unless in the
Adviser's opinion, a liquid secondary exchange market for such options exists.
Compared to the use of futures, the purchase of options on futures involves less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances, such as when there is no movement in the level of the index or in
the price of the underlying security, when the use of an option on a future
would result in a loss to the Fund when the use of a future would not.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in a futures contract and thus provide an offset to
losses on the futures contract.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which may not be changed
without approval by the holders of a majority of its outstanding shares. Such
majority is defined by the 1940 Act as the lesser of (i) 67% or more of the
voting securities present at the meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. Make loans, except that the Fund may purchase bonds, debentures or
other debt securities of the type commonly offered privately to, and
purchased by, financial institutions in an amount not exceeding ten
percent of its total assets, and except that the Fund may invest in
repurchase agreements in an amount not exceeding 25% of its total
assets. The purchase of publicly distributed bonds and debentures shall
not constitute the making of loans;
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<PAGE> 45
2. Invest in securities of other investment companies in an amount in
excess of five percent of the value of the Fund's total assets except
to acquire shares of other open-end investment companies to the extent
permitted by rule or order of the Securities and Exchange Commission
("SEC") exempting the Fund from the limitations imposed by Section
12(d)(1) of the 1940 Act;
3. 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
who own more than one-half of one percent in the aggregate own more
than five percent of the outstanding securities of such company;
4. Invest in real estate, (although the Fund may acquire securities of
issuers that invest in real estate,) commodities or commodity contracts
except that the Fund may enter into transactions in futures contracts
or related options;
5. Invest in securities of a company for the purpose of exercising control
of management, although the Fund retains the right to vote securities
held by it;
6. Engage in the underwriting of securities of other issuers, except that
in connection with the disposal of an investment position the Fund may
be deemed to be an "underwriter" as that term is defined under the
Securities Act of 1933 (the "1933 Act");
7. Make any investment which would cause more than 25% of its assets to be
invested in securities issued by companies principally engaged in any
one industry, provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes
the Fund's pro rata portion of the securities and other assets owned by
any such company;
8. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except the United States
government) or purchase more than ten percent of the outstanding voting
securities of any one issuer. Neither limitation shall apply to the
acquisition of shares of other open-end investment companies to the
extent permitted by rule or order of the SEC exempting the Fund from
the limitations imposed by Section (d)(1) of the 1940 Act;
9. Pledge any of its assets, except that the Fund may pledge assets having
a value of not more than ten percent of its total assets in order to
secure permitted borrowings from banks. Such borrowings may not exceed
five percent of the value of the Fund's assets and can be made only as
a temporary measure for extraordinary or emergency purposes.
Notwithstanding the foregoing, the Fund may engage in transactions in
options, futures contracts or related options, segregate or deposit
assets to cover or secure options written and make margin deposits and
payments for futures contracts and related options;
10. Invest more than ten percent of its net assets (determined at the time
of investment) in illiquid securities, securities for which market
quotations are not readily available, and repurchase agreements which
have a maturity of longer than seven days; or
11. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of "cover."
The Fund is subject to the following policies, which may be amended by its Board
of Directors. In addition to such policies set forth in the Fund's Prospectus,
the Fund shall not:
1. Make short sales, unless at the time of the sale it owns an equal
amount of such securities;
2. Invest more than five percent of its net assets in warrants or rights
valued at the lower of cost or market, nor more than two percent of its
net assets in warrants or rights (valued on such basis) which
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<PAGE> 46
are not listed on the New York or American Stock Exchanges. Warrants or
rights acquired in units or attached to other securities are not
subject to the foregoing limitation;
3. Purchase securities on margin, but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities. Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures and related options, segregate or
deposit assets to cover or secure options written on long futures
positions and make margin deposits and payments for futures contracts
and related options;
4. Invest in the securities of other open-end investment companies, or
invest in the securities of closed-end investment companies except
through purchase in the open market in a transaction involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission) or is part of a merger, consolidation or
acquisition except to acquire shares of other open-end investment
companies to the extent permitted by rule or order of the SEC exempting
the Fund from the limitations imposed by Section 12 (d)(1) of the 1940
Act;
5. Invest in interests in oil, gas, mineral exploration or development
programs, although the Fund may acquire securities of companies that
engage in these businesses;
6. Invest more than five percent of its assets in the securities of any
one issuer other than the United States government except to acquire
shares of other open-end investment companies to the extent permitted
by rule or order of the SEC exempting the Fund from the limitations
imposed by Section 12 (d)(1) of the 1940 Act;
7. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the value of the Fund's total assets
would be invested in such securities. Foreign investments may be
subject to special risks, including future political and economic
developments, the possible imposition of additional withholding taxes
on dividend or interest income payable on the securities, or the
seizure or nationalization of companies, or establishment of exchange
controls or adoption of other restrictions which might adversely affect
the investment; or
8. Invest more than five percent of the market value of its total assets
in companies having a record, together with predecessors, of less than
three years continuous operation and in securities not having readily
available market quotations provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Fund but includes the Fund's pro rata portion of the securities and
other assets owned by any such company.
In addition to the above restrictions, the Fund has also undertaken to a
certain state that it will not invest more than ten percent of its net assets in
American Capital Small Capitalization Fund, Inc. until it complies with the
NASAA Guidelines for Registration of Master Fund/Feeder Fund.
DIRECTORS AND EXECUTIVE OFFICERS
The Fund's Directors and 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 07030-5991. George M. Bond
Professor and formerly Chairman, Department of Mechanical Engineering, Stevens
Institute of Technology; Director, Dynalysis of Princeton (engineering
research).(1)
J. MILES BRANAGAN, Director. 2300 205th Street, Torrance, California
90501-1452. Co-Founder, Chairman and President, MDT Corporation (medical
equipment).(1)
RICHARD E. CARUSO, Director. Two Radnor Station, Suite 314, 290 King of
Prussia Road, Radnor, Pennsylvania, 19087. Chairman and Chief Executive Officer,
Integra LifeSciences Corporation (biotechnology/life sciences); Trustee,
Susquehanna University; Trustee and First Vice President, The Baum School of
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<PAGE> 47
Art (community art school); Founder and Director, Uncommon Individual Foundation
(youth development); Director, International Board of Business Performance
Group, London School of Economics; formerly Director, First Sterling Bank;
formerly Director and Executive Vice President, LFC Financial Corporation (lease
financing).(1)
ROGER HILSMAN, Director. 251-1 Hamburg Cove, Lyme, Connecticut 06371.
Formerly Professor of Government and International Affairs, Columbia
University.(1)
*DON G. POWELL, President and Director. 2800 Post Oak Blvd., 45th Floor,
Houston, Texas 77056. Chairman, Chief Executive Officer and Director of ACMR;
President, Chief Executive Officer and Director of the Adviser; Executive Vice
President and Director of the Distributor.(1)(2)(4)
DAVID REES, Director. 1601 Country Club Drive, Glendale, California 91208.
Senior Editor, Los Angeles Business Journal.(1)(3)
**LAWRENCE J. SHEEHAN, Director. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner
(1969 -- 1994) of the law firm of O'Melveny & Myers, legal counsel to the
Fund.(1)(3)(5)
WILLIAM S. WOODSIDE, Director. 712 Fifth Avenue, 40th Floor, New York, New
York 10019. Chairman of the Board, Sky Chefs, Inc. (airline food catering);
formerly Director, Primerica Corporation (currently known as Travelers);
formerly Chairman of the Board and Chief Executive Officer, old Primerica
Corporation (American Can Company); Trustee and formerly President, Whitney
Museum of American Art; Chairman, Institute for Educational Leadership, Inc.,
Board of Visitors, Graduate School of The City University of New York, Academy
of Political Science; Committee for Economic Development; Director, Public
Education Fund Network, Fund for New York City Public Education; Trustee,
Barnard College; Member, Dean's Council, Harvard School of Public Health;
Member, Mental Health Task Force, Carter Center; formerly Director, James River
Corporation (paper products).(1)
STEPHEN L. BOYD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President -- Portfolio Manager of the Adviser; Vice President and
Portfolio Manager of American Capital Enterprise Fund, Inc., American Capital
Exchange Fund, the Common Sense Growth Fund and the Common Sense II Growth Fund
of Common Sense Trust; formerly Senior Vice President and Chief Investment
Officer of Wertheim Asset Management Services, Inc.(4)
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate Secretary
of the Adviser.(4)
PAUL A. HILSTAD, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Senior Vice President, General Counsel, Corporate Secretary and Director of
ACMR; Senior Vice President and General Counsel of the Adviser; Vice President
of the Distributor; formerly Vice President and Deputy General Counsel of IDS
Financial Services Inc.(4)
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/ Assistant Controller.(4)
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)
ALAN T. SACHTLEBEN, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Equity and Director of
the Adviser; Executive Vice President and Director of ACMR.(4)
J. DAVID WISE, Vice President and Assistant Secretary. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President, Associate General Counsel and Compliance
Review Officer of the Adviser.(4)
PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; Executive Vice President and
Director, ACMR; President, Chief Operating Officer
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<PAGE> 48
and Director of American Capital Services, Inc.; Executive Vice President, Chief
Operating Officer and Director of American Capital Trust Company; Executive Vice
President and Director of American Capital Companies Shareholder Services, Inc.
("ACCESS"); Executive Vice President, Chief Operating Officer and Director of
the Distributor.(4)
- ---------------
* Director who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act by virtue of his affiliation with the Adviser.
** Director who is an interested person of the Fund within the meaning of the
1940 Act by virtue of his affiliation with legal counsel of the Fund.
(1) Also a director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Enterprise Fund, Inc., American Capital Equity Income
Fund, Inc., American Capital Federal Mortgage Trust, American Capital Global
Managed Assets Fund, Inc., American Capital Government Securities, Inc.,
American Capital Government Target Series, American Capital Growth and
Income Fund, Inc., American Capital Harbor Fund, Inc., American Capital High
Yield Investments, Inc., American Capital Life Investment Trust, American
Capital Municipal Bond Fund, Inc., American Capital Real Estate Securities
Fund, Inc., American Capital Reserve Fund, Inc., American Capital Small
Capitalization Fund, Inc., American Capital Tax-Exempt Trust, American
Capital Texas Municipal Securities, Inc., American Capital U.S. Government
Trust for Income, American Capital Utilities Income Fund, Inc. and American
Capital World Portfolio Series, Inc.
(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser, and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as subadviser for eight of
the Portfolios.
(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.
(4) An officer and/or director/trustee of other investment companies advised or
subadvised by the Adviser.
(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc. and FPA Perennial
Fund, Inc., investment companies not advised by the Adviser, and TCW
Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.
The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto, may act for the Board of Directors between Board meetings except where
board action is required by law.
The directors and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the last fiscal year ended June
30, 1994, the directors who were not affiliated with the Adviser or its parent
received as a group $48,812 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, the Fund paid legal fees of $22,315 to the law
firm of O'Melveny & Myers, of which Mr. Sheehan is Of Counsel. The firm also
serves as legal counsel to the American Capital funds listed in Footnote 1
above.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement,
dated July 2, 1990 (the "Advisory Agreement"). Under the Advisory Agreement, the
Fund retains the Adviser to manage the investment of its assets and to place
orders for the purchase and sale of its portfolio securities. The Adviser is
responsible for obtaining and evaluating economic, statistical, and financial
data and for formulating and implementing investment programs in furtherance of
the Fund's investment objectives. The Adviser also furnishes at no cost to the
Fund (except as noted herein) the services of sufficient executive and clerical
personnel for the Fund as are necessary to prepare registration statements,
prospectuses, shareholder reports,
12
<PAGE> 49
and notices and proxy solicitation materials. In addition, the Adviser furnishes
at no cost to the Fund the services of a President of the Fund, one or more Vice
Presidents as needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser. A
portion of these amounts were paid to the Adviser or its parent in reimbursement
of personnel, office space, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost. The Fund also pays shareholder service agency fees,
distribution fees, custodian fees, legal and auditing fees, the costs of reports
to shareholders and all other ordinary expenses not specifically assumed by the
Adviser.
Under the Advisory Agreement dated July 2, 1990 the Fund pays the Adviser a
monthly fee computed on average daily net assets of the Fund at the annual rate
of 0.50% on the first $1 billion of net assets; 0.45% on the next $1 billion of
net assets; 0.40% on the next $1 billion of net assets and 0.35% on net assets
in excess of $3 billion. Under the Advisory Agreement the Fund also reimburses
the Adviser for the cost of the Fund's accounting services, which include
maintaining its financial books and records and calculating its daily net asset
value. Prior to July 2, 1990, the Fund paid an advisory fee computed at the
annual rate of 0.50% on the first $150 million of net assets; 0.45% on the next
$100 million of net assets; 0.40% on the next $100 million of net assets; and
0.35% on net assets over $350 million.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each business day during a given calendar month. Such fee is payable for
each calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any other
direct or indirect majority-owned subsidiary of ACMR, in connection with the
purchase and sale of portfolio investments of the Fund, less any direct expenses
incurred by such subsidiary of ACMR in connection with obtaining such payments.
Although Smith Barney Inc. ("Smith Barney") and Robinson Humphrey, Inc.
("Robinson Humphrey") are affiliates, they are not subsidiaries of ACMR and thus
are not subject to the foregoing sentence. The Adviser agrees to use its best
efforts to recapture tender solicitation fees and exchange offer fees for the
Fund's benefit, and to advise the Board of Directors of the Fund of any other
commissions, fees, brokerage or similar payments which may be possible under
applicable laws for the Adviser or any other direct or indirect majority owned
subsidiary of ACMR to receive in connection with the Fund's portfolio
transactions or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed one and one-half
percent of the first $30 million of the Fund's average net assets, plus one
percent of any excess over $30 million, the compensation due the Adviser will be
reduced by the amount of such excess and that, if a reduction in and refund of
the advisory fee is insufficient, the Adviser will pay the Fund monthly an
amount sufficient to make up the deficiency, subject to readjustment during the
year. Ordinary business expenses include the investment advisory fee and other
operating costs paid by the Fund except (1) interest and taxes, (2) brokerage
commissions, (3) certain litigation and indemnification expenses as described in
the Advisory Agreement and (4) payments made by the Fund pursuant to the
distribution plans (described below). The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any actions or omissions if it
acted in good faith without negligence or misconduct.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Directors or (ii) by
vote of a majority of the Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of the Directors who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement provides that it shall
terminate automatically if assigned and that it may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days' written
notice.
13
<PAGE> 50
During the fiscal years ended June 30, 1992, 1993 and 1994, the Adviser
received $11,332,026, $11,207,017 and $11,141,831, respectively, in advisory
fees from the Fund. For such periods, the Fund paid $253,536, $271,746 and
$306,171, respectively, for accounting services. A substantial portion of these
amounts was paid to the Adviser in reimbursement of personnel, facilities and
equipment costs attributable to the provision of accounting services to the
Fund.
DISTRIBUTOR
American Capital Marketing, Inc. (the "Distributor"), acts as the principal
underwriter of the Fund's shares pursuant to a written agreement, dated October
1, 1993 (the "Underwriting Agreement"). The Distributor has the exclusive right
to distribute shares of the Fund through affiliated and unaffiliated dealers.
The Distributor's obligation is an agency or "best efforts" arrangement under
which the Distributor is required to take and pay for only such shares of the
Fund as may be sold to the public. The Distributor is not obligated to sell any
stated number of shares. The Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost and
expense of supplemental sales literature, promotion and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Fund's Board of Directors or by a vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Directors who
are not parties to the Underwriting Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty be either party on 60 days' written notice.
During the fiscal years ended June 30, 1992, 1993 and 1994, total underwriting
commissions on the sale of shares of the Fund were $4,479,023, $3,279,270 and
$2,635,258, respectively. Of such totals, the amount retained by the Distributor
was $559,340, $396,873 and $348,004. The remainder was reallowed to dealers. Of
such dealer reallowances, $331,588, $213,318 and $181,219, respectively, was
received by Advantage Capital Corporation, an affiliated dealer of the
Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan", "Class B Plan" or "Class C
Plan", respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Directors have authorized payments by the Fund under the Plan to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and C Plans,
authorized payments by the Fund include payments at an annual rate of up to
0.25% 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
14
<PAGE> 51
commissions and transaction fees of up to 0.75% of the purchase price of Class C
shares purchased by the clients of broker-dealers and other Service
Organizations and ongoing commissions and transaction fees paid to
broker-dealers and other Service Organizations in an amount up to 0.65% of the
average daily net assets of the Fund's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professionals, and (5) advertising and promotion
expenses, including seminars, marketing support salaries and bonuses, and
travel-related expenses. Such reimbursements are subject to the maximum sales
charge limits specified by the National Association of Securities Dealers, Inc.
("NASD") for asset-based charges.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the form of
Servicing Agreement and Selling Group Agreements were approved by the Directors,
including a majority of the Directors who are not interested persons (as defined
in the 1940 Act) of the Fund and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
each Plan ("Independent Directors"). In approving each Plan in accordance with
the requirements of Rule 12b-1, the Directors determined that there is a
reasonable likelihood that each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Directors at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Directors, including a majority
of Independent Directors.
Each Plan may be terminated by vote of a majority of the Independent
Directors, or by vote of a majority of the outstanding voting securities of the
Fund. Any change in any of the Plans that would materially increase the
distribution expenses borne by the Fund requires shareholder approval; 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 June 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $4,867,516 or .20% of the Class A shares' average
net assets. Such expenses were paid to reimburse the Distributor for payments
made to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. The offering of Class B shares commenced on
January 10, 1992. For the fiscal year ended June 30, 1994, the Fund's aggregate
expenses under the Class B Plan were $310,935 or .99% of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $236,566 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 $74,369 for fees paid to Service Organizations for
servicing Class B shareholders and for administering the Class B Plan. The
offering of Class C shares commenced on August 27, 1993. For the fiscal year
ended June 30, 1994, the Fund's aggregate expenses under the Class C Plan were
$5,717 or .85% (not annualized) of the Class C shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$4,288 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
$1,429 for fees paid to Service Organizations for servicing Class C shareholders
and for administering the Class C Plan.
15
<PAGE> 52
TRANSFER AGENT
During the fiscal year ended June 30, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$6,531,269 for these services. These services are provided at cost plus a
profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions 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 NASD and subject to seeking best execution and such other policies as the
Board of Directors may determine, the Adviser may consider sales of shares of
the Fund and of the other American Capital mutual funds as a factor in the
selection of firms to execute portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the investment advisory agreement, the Fund's
Board of Directors has authorized the Adviser to cause the Fund to incur
brokerage commissions in an amount higher than the lowest available rate in
return for research services provided to the Adviser. The Adviser is of the
opinion that the continued receipt of supplemental investment research services
from dealers is essential to its provision of high quality portfolio management
services to the Fund. The Adviser undertakes that such higher commissions will
not be paid by the Fund unless (a) the Adviser determines in good faith that the
amount is reasonable in relation to the services in terms of the particular
transaction or in terms of the Adviser's overall responsibilities with respect
to the accounts as to which it exercises investment discretion, (b) such payment
is made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected benefits
to the Fund over the long term. The investment advisory fee paid by the Fund
under the investment advisory agreement is not reduced as a result of the
Adviser's receipt of research services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
16
<PAGE> 53
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.
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 June 30, 1992, 1993 and 1994 totalled $5,659,430, $6,994,275
and $6,854,082, respectively. During the year ended June 30, 1994 the Fund paid
$1,951,909 in brokerage commissions on transactions totalling $1,229,948,772 to
brokers selected primarily on the basis of research services provided to the
Adviser.
The Fund may, from time to time, place brokerage transactions with brokers
that may be considered affiliated persons of the Adviser's parent, Travelers.
Smith Barney, a wholly owned subsidiary of Travelers, is such an affiliated
person. Effective August 2, 1993, Robinson Humphrey, a wholly owned subsidiary
of Smith Barney, became an affiliate of Travelers (then known as Primerica). In
addition, from December 15, 1988 through February 21, 1992, Dain Bosworth, Inc.
("Dain Bosworth") and Rauscher Pierce, Refsnes, Inc. ("Rauscher Pierce") were
affiliates of Travelers (then known as Primerica). From September 10, 1987 to
March 27, 1992, The Fox-Pitt, Kelton Group S.A. ("Fox-Pitt") was an affiliate of
Travelers (then known as Primerica); and from 1985 to September 30, 1992,
Jefferies & Company, Inc. ("Jefferies") was deemed an affiliate of Travelers
(then known as Primerica). The negotiated commission paid to an affiliated
broker on any transaction would be comparable to that payable to a
non-affiliated broker in a similar transaction. The Fund paid the following
commissions to these brokers during the periods shown:
Commissions Paid:
<TABLE>
<CAPTION>
DAIN RAUSCHER ROBINSON
JEFFERIES SMITH BARNEY FOX-PITT BOSWORTH PIERCE HUMPHREY
--------- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year Ended
June 30, 1992 $ 30,397 $132,427 --(2) $1,050(1) --(1) --
Fiscal Year Ended
June 30, 1993 $ 2,450(3) $143,913 -- -- -- --
Fiscal Year Ended
June 30, 1994
Commissions Paid: -- $262,215 -- -- -- $8,652
Percentages:
Commissions with affiliates
to total commissions -- 3.83% -- -- -- .13%
Value of brokerage
transactions with
affiliates to total
brokerage transactions -- 9.85%(4) -- -- -- .08%
</TABLE>
- ---------------
(1) For period ending February 21, 1992
(2) For period ending March 27, 1992
(3) For period ending September 30, 1992
(4) Due to 20.80% of future trades
17
<PAGE> 54
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Such computation is made by using prices as of the close of trading on the
Exchange and (i) valuing securities listed or traded on a national securities
exchange at the last reported sale price, or if there has been no sale that day,
at the last reported bid price, (ii) valuing options at the last sale price, or
if there has been no sale that day, at the mean between the bid and asked
prices, (iii) valuing over-the-counter securities for which the last sale price
is available from the National Association of Securities Dealers Automated
Quotations ("NASDAQ") at that price, (iv) valuing all other over-the-counter
securities for which market quotations are available at the most recent bid
quotation supplied by NASDAQ or broker-dealers, and (v) valuing any securities
for which market quotations are not readily available, and any other assets as
fair value as determined in good faith by the Board of Directors of the Fund.
Short-term investments are valued in the manner described in Note 1 to the
Financial Statements included in this Statement of Additional Information.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the SEC.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.
MULTIPLE PRICING SYSTEM
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements,
distribution fees, and any expenses (including higher transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distribution
fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the 1933 Act.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in this 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.
18
<PAGE> 55
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to purchases of shares of the Fund shares where the
aggregate investment is $50,000 or more. For purposes of determining eligibility
for volume discounts, spouses and their minor children are treated as a single
purchaser, as is a 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 ($25,000), and that
person purchases $30,000 of additional Class A shares of the Fund, the charge
applicable to the $30,000 purchase would be 4.75% of the offering price. The
same reduction is applicable to purchases under a Letter of Intent as described
in the next paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN
ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE
BASIS OF PREVIOUS PURCHASES. Similar notification must be made in writing when
such an order is placed by mail. The reduced sales charge will not be applied if
such notification is not furnished at the time of the order. The reduced sales
charge will also not be applied should a review of the records of the
Distributor or the shareholder service agent fail to confirm the representations
concerning the investor's holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
the value of all shares of such funds previously purchased and still owned are
also included in determining the applicable quantity discount. A Letter of
Intent permits an investor to establish a total investment goal to be achieved
by any number of investments over a 13-month period. Each investment made during
the period will receive the reduced sales charge applicable to the amount
represented by the goal as if it were a single investment. Escrowed shares
totaling five percent of the dollar amount of the Letter of Intent are held by
ACCESS in the name of the shareholder. The effective date of a Letter of Intent
may be back-dated up to 90 days in order that any investments made during this
90-day period, valued at the investor's cost, can become subject to the Letter
of Intent. The Letter of Intent does not obligate the investor to purchase the
indicated amount. In the event the Letter of Intent goal is not achieved within
the 13-month period, the investor is required to pay the difference between
sales charges otherwise applicable to the purchases made during this period and
sales charges actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain such difference. If the goal is exceeded in an amount which
qualifies for a lower sales charge, a price adjustment is made by refunding to
the investor in shares of the Fund the amount of excess sales charges, if any,
paid during the 13-month period.
VOLUME DISCOUNTS
The schedule of volume discounts in the Prospectus applies to purchases of
Class A 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.
19
<PAGE> 56
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For investments of $1,000,000 or more of Class A shares of the Fund
("Qualified Purchaser"), the front-end sales charge will be waived and a
contingent deferred sales charge ("CDSC -- Class A") of one percent is imposed
in the event of certain redemptions within one year of the purchase. If a
CDSC -- Class A is imposed upon redemption, the amount of the CDSC -- Class A
will be equal to the lesser of 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 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 Qualified Purchasers
(e.g., in retirement plans qualified under Section 401(a) of the Code and
deferred compensation plans under Section 457 of the Code) required to obtain
funds to pay distributions to beneficiaries pursuant to the terms of the plans.
Such payments include, but are not limited to, death, disability, retirement, or
separation from service. No CDSC -- Class A will be imposed on exchanges between
funds. For purposes of the CDSC -- Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of American Capital Reserve Fund, Inc.
with shares of certain other participating American Capital mutual funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Purchase of Shares," redemption of
Class B and Class C shares is subject to a contingent deferred sales charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
The CDSC -- Class B and C may be waived on redemptions of Class B and Class
C shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may
20
<PAGE> 57
require, the Distributor will require satisfactory proof of death or disability
before it determines to waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of American Capital
Funds; in such event, as described below, the Fund will "tack" the period for
which the original shares were held onto the holding period of the shares
acquired in the transfer or rollover for purposes of determining what, if any,
CDSC -- Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or disability
of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition,
the charge will be waived on any minimum distribution required to be distributed
in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC -- Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC -- Class B and Class C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest, with
credit for any CDSC -- Class C paid on the redeemed shares, any portion or all
of his or her redemption proceeds (plus that amount necessary to acquire a
fractional share to round off his or her purchase to the nearest full share) in
shares of the Fund, provided that the reinvestment is effected within 120 days
after such redemption and the
21
<PAGE> 58
shareholder has not previously exercised this reinvestment privilege with
respect to Class C shares of the Fund. Shares acquired in this manner will be
deemed to have the original cost and purchase date of the redeemed shares for
purposes of applying the CDSC -- Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. ACMR and its subsidiaries, including ACCESS
(collectively, "American Capital"), and the Fund employ procedures considered by
them to be reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither
American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. American Capital and
the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sale charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the Fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new Fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any dealer
or the Distributor. An investor considering an exchange to one of such funds
should refer to the prospectus for additional information regarding such fund.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Fund's policy is to distribute substantially all of its taxable net
investment income at least annually to shareholders of Class A, Class B and
Class C shares. The per share dividends on Class B and Class C shares will be
lower than the per share dividends on Class A shares as a result of the
distribution fees and higher transfer agency fees applicable to the Class B and
Class C shares. The Fund intends to distribute to shareholders any taxable net
realized capital gains for each class. Taxable net realized capital gains are
the excess, if any, of the Fund's total profits on the sale of securities during
the year over its total losses on the sale of securities, including capital
losses carried forward from prior years in accordance with the tax laws. Such
capital gains, if any, are distributed at least once a year. All income
dividends and capital gains distributions are reinvested in shares of the Fund
at net asset value without sales charge on the record date, except that any
shareholder may otherwise instruct ACCESS in writing and receive cash.
Shareholders are informed as to the sources of distributions at the time of
payment.
22
<PAGE> 59
The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders and meet certain diversification and other requirements. By
qualifying as a regulated investment company, the Fund is not subject to federal
income taxes to the extent it distributes its taxable net investment income and
taxable net realized capital gains. If for any taxable year the Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a four percent excise tax to the extent it does not
distribute to its shareholders 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.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income qualify for the 70% dividends received
deduction for corporations. To qualify for the dividends received deduction, a
corporate shareholder must hold the shares on which the dividend is paid for
more than 45 days.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year,
are considered taxable income to shareholders on the record date even though
paid in the next year.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such distributions and distributions from short-term capital gains are
not eligible for the dividends received deduction referred to above. Any loss on
the sale of Fund shares held for less than six months is treated as a long-term
capital loss to the extent of any long-term capital gain distribution paid on
such shares, subject to an exception for losses incurred under certain
systematic withdrawal plans. All dividends and distributions are taxable to the
shareholder whether or not reinvested in shares. Shareholders are notified
annually by the Fund as to the federal tax status of dividends and distributions
paid by the Fund unless such amount is less than $10.00, in which case no notice
is provided.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer
23
<PAGE> 60
identification number, who fails to report fully dividend or interest income, or
who fails to certify to the Fund that he has provided a correct taxpayer
identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% back-up withholding tax is not an additional tax and may be credited against
a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Code includes special rules applicable to listed options (excluding
equity options as defined in the Code), futures contracts, and options on
futures contracts which the Fund may write, purchase or sell. Such options and
contracts are classified as Section 1256 contracts under the Code. The character
of gain or loss resulting from the sale, disposition, closing out, expiration or
other terminations of Section 1256 contracts is generally treated as long-term
capital gain or loss to the extent of 60% thereof and short-term capital gain or
loss to the extent of 40% thereof (" 60/40 gain or loss"). Such contracts, when
held by the Fund at the end of a fiscal year, generally are required to be
treated as sold at market value on the last day of such fiscal year for federal
income tax purposes ("marked-to-market"). Over-the-counter options are not
classified as Section 1256 contracts and are not subject to the mark-to-market
rule or to 60/40 gain or loss treatment. Any gains or losses recognized by the
Fund from transactions in over-the- counter options generally constitute
short-term capital gains or losses. If over-the-counter call options written, or
over-the-counter put options purchased, by the Fund are exercised, the gain or
loss realized on the sale of the underlying securities may be either short-term
or long-term, depending on the holding period of the securities. In determining
the amount of gain or loss, the sales proceeds are reduced by the premium paid
for over-the-counter puts or increased by the premium received for
over-the-counter calls.
Certain of the Fund's transactions in options, futures contracts, and
options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle in which at least one (but not
all) of the positions are Section 1256 contracts is a "mixed straddle" under the
Code if certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
PRIOR PERFORMANCE INFORMATION
The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for the one-year, five-year and
ten-year periods ended June 30, 1994, was -6.08%, 7.18%, and 10.68%,
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
the one year and six month periods (the initial offering of Class B shares)
ended June 30, 1994 was -5.50% and 1.64%, respectively. The aggregate total
return for Class C shares of the Fund from August 27, 1993 (the initial offering
of Class C shares) to June 30, 1994 was -5.36%. These results are based on
historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objectives and policies as well as the risks incurred in
the Fund's investment practices. Future results will be affected by changes in
the general level of prices of securities available for purchase and sale by the
Fund. The past one-year, five-year and ten-year periods have been ones of rising
common stock prices, subject to interim fluctuations.
Total return is computed separately for Class A, Class B and Class C
shares.
24
<PAGE> 61
From time to time the Fund will announce the results of its monthly polls
of U.S. investor intentions -- the American Capital Index of Investor Intentions
and the American Capital Mutual Fund Index -- which polls measure how Americans
plan to use their money.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
The Funds may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
and (3) in reports or other communications to shareholders or in advertising
material, illustrate the benefits of compounding at various assumed rates of
return. Such illustrations may be in the form of charts or graphs and will not
be based on historical returns experienced by the Funds.
OTHER INFORMATION
VOTING RIGHTS -- When matters are submitted for a shareholder vote, each
shareholder is entitled to one vote for each share owned. Shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election directors can elect 100% of the directors if
they choose to do so, and, in such event, the holders of the remaining less than
50% of the shares voting for the election of directors will not be able to elect
any person or persons to the Board of Directors.
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 annual audits of the
Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual Report to shareholders, including the related report of independent
accountants on the June 30, 1994 financial statements, are hereby included in
the Statement of Additional Information.
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
$50,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund on June 30,
1994.
<TABLE>
<S> <C>
Net Asset Value Per Class A Share $11.05
Class A Per Share Sales Charge -- 5.75%
of offering price (6.10% of net asset value per share) $ .67
------
Class A Per Share Offering Price to the Public $11.72
</TABLE>
25
<PAGE> 62
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 85.0%
CONSUMER DISTRIBUTION 6.5%
*21,200 AutoZone, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . $ 516,750
*14,000 Best Buy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 404,250
49,000 Claire's Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . 502,250
*63,000 CUC International, Inc. . . . . . . . . . . . . . . . . . . . . . 1,685,250
185,000 Dayton Hudson Corp. . . . . . . . . . . . . . . . . . . . . . . . 14,985,000
100,000 Dillard Department Stores, Inc. . . . . . . . . . . . . . . . . . 3,087,500
*13,000 Discount Auto Parts, Inc. . . . . . . . . . . . . . . . . . . . . 276,250
576,937 Dollar General Corp. . . . . . . . . . . . . . . . . . . . . . . 14,423,425
*20,800 Dress Barn, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 210,600
*500,000 Federated Department Stores, Inc. . . . . . . . . . . . . . . . . 10,000,000
40,800 Fingerhut Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 989,400
300,000 Gap, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,825,000
18,000 Hannaford Brothers Co. . . . . . . . . . . . . . . . . . . . . . 402,750
42,500 Heilig-Meyers Co. . . . . . . . . . . . . . . . . . . . . . . . . 1,152,812
*10,000 IHOP Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,250
*36,400 Kroger Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 846,300
220,000 Lowes Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . 7,535,000
675,000 May Department Stores Co. . . . . . . . . . . . . . . . . . . . . 26,493,750
11,000 McKesson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 793,375
*33,000 Meyer (Fred), Inc. . . . . . . . . . . . . . . . . . . . . . . . 1,200,375
*38,000 Michael's Stores, Inc. . . . . . . . . . . . . . . . . . . . . . 1,277,750
4,000 Miller (Herman), Inc. . . . . . . . . . . . . . . . . . . . . . . 104,500
*120,000 Office Depot, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2,400,000
366,600 Penney (J.C.) Company, Inc. . . . . . . . . . . . . . . . . . . . 19,888,050
*10,000 Revco (D.S.), Inc. . . . . . . . . . . . . . . . . . . . . . . . 160,000
*10,000 Safeway, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 238,750
*87,200 Score Board, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 654,000
350,000 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . 16,800,000
*35,800 Stop & Shop Companies, Inc. . . . . . . . . . . . . . . . . . . . 859,200
28,800 Super Valu Stores, Inc. . . . . . . . . . . . . . . . . . . . . . 871,200
*47,600 Tech Data Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 785,400
--------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . 142,655,137
--------------
CONSUMER DURABLES 2.8%
9,000 ARCTCO, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 236,250
350,000 Brunswick Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 7,700,000
23,000 Callaway Golf Co. . . . . . . . . . . . . . . . . . . . . . . . . 897,000
29,100 Centex Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 749,325
*15,000 Clayton Homes, Inc. . . . . . . . . . . . . . . . . . . . . . . . 264,375
347,000 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,453,375
3,000 Fleetwood Enterprises, Inc. . . . . . . . . . . . . . . . . . . . 57,375
9,000 Flexsteel Industries, Inc. . . . . . . . . . . . . . . . . . . . 123,750
200,000 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . 11,800,000
48,600 GenCorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 558,900
315,000 General Motors Corp. . . . . . . . . . . . . . . . . . . . . . . 15,828,750
15,000 Harley Davidson, Inc. . . . . . . . . . . . . . . . . . . . . . . 686,250
24,800 Hayes Wheels International, Inc. . . . . . . . . . . . . . . . . 688,200
50,000 Leggett & Platt, Inc. . . . . . . . . . . . . . . . . . . . . . . 1,875,000
</TABLE>
F-1
<PAGE> 63
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DURABLES-CONTINUED
38,250 Mattel, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 970,594
31,000 Oakwood Homes Corp. . . . . . . . . . . . . . . . . . . . . . . . 728,500
33,100 Pulte Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 761,300
*22,050 SLM International, Inc. . . . . . . . . . . . . . . . . . . . . . 242,550
75,000 Snap-On, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,793,750
140,000 Sunbeam-Oster Company, Inc. . . . . . . . . . . . . . . . . . . . 2,800,000
10,000 Toro Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,500
*10,000 Winnebago Industries, Inc. . . . . . . . . . . . . . . . . . . . 87,500
--------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . 60,540,244
--------------
CONSUMER NON-DURABLES 6.2%
480,000 American Greeting Corp., Class A . . . . . . . . . . . . . . . . 14,400,000
175,000 Anheuser-Busch Companies, Inc. . . . . . . . . . . . . . . . . . 8,881,250
55,000 Avon Products, Inc. . . . . . . . . . . . . . . . . . . . . . . . 3,238,125
800,000 ConAgra, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 24,400,000
*45,200 Cone Mills Corp. . . . . . . . . . . . . . . . . . . . . . . . . 581,950
7,000 Dean Foods Co. . . . . . . . . . . . . . . . . . . . . . . . . . 189,000
*533,300 Dr Pepper/Seven-Up Companies, Inc. . . . . . . . . . . . . . . . 12,265,900
23,600 First Brands Corp. . . . . . . . . . . . . . . . . . . . . . . . 864,350
6,000 Guilford Mills, Inc. . . . . . . . . . . . . . . . . . . . . . . 123,000
17,000 Hershey Foods Corp. . . . . . . . . . . . . . . . . . . . . . . . 737,375
18,000 Hillenbrand Industries, Inc. . . . . . . . . . . . . . . . . . . 492,750
9,000 Hormel (George A.) & Co. . . . . . . . . . . . . . . . . . . . . 187,875
35,800 IBP, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 953,175
*23,200 Jones Apparel Group, Inc. . . . . . . . . . . . . . . . . . . . . 655,400
11,000 McCormick & Company, Inc. . . . . . . . . . . . . . . . . . . . . 222,750
190,000 PepsiCo, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,818,750
170,000 Pet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,166,250
*46,600 Pillowtex Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 652,400
32,000 Pioneer Hi-Bred International, Inc. . . . . . . . . . . . . . . . 1,048,000
450,000 Procter & Gamble Co. . . . . . . . . . . . . . . . . . . . . . . 24,018,750
20,000 Reebok International, Ltd. . . . . . . . . . . . . . . . . . . . 597,500
3,800,000 RJR Nabisco Holdings Corp. . . . . . . . . . . . . . . . . . . . 23,275,000
160,000 Snapple Beverage Corp. . . . . . . . . . . . . . . . . . . . . . 3,240,000
200,000 United States Shoe Corp. . . . . . . . . . . . . . . . . . . . . 3,800,000
*11,000 Warnaco Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . 323,125
56,800 Whitman Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 880,400
16,800 Wrigley (William, Jr.) Co. . . . . . . . . . . . . . . . . . . . 798,000
--------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . 135,811,075
--------------
CONSUMER SERVICES 4.6%
*5,000 American Medical Response . . . . . . . . . . . . . . . . . . . . 128,750
33,000 Applebee's International, Inc. . . . . . . . . . . . . . . . . . 404,250
*1,000 Avid Technology, Inc. . . . . . . . . . . . . . . . . . . . . . . 27,250
8,000 Bowne & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . 167,000
*262,500 Brinker International, Inc. . . . . . . . . . . . . . . . . . . . 5,512,500
177,000 Capital Cities ABC, Inc. . . . . . . . . . . . . . . . . . . . . 12,589,125
50,000 CBS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,500,000
32,800 Equifax, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 926,600
*76,500 Hospitality Franchise Systems, Inc. . . . . . . . . . . . . . . . 1,874,250
</TABLE>
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CONSUMER SERVICES-CONTINUED
800,000 Host Marriott Corp. . . . . . . . . . . . . . . . . . . . . . . . $ 7,800,000
*15,000 King World Productions, Inc. . . . . . . . . . . . . . . . . . . 598,125
*13,000 Liberty Media Corp., Class A . . . . . . . . . . . . . . . . . . 256,750
507,500 Marriott International, Inc. . . . . . . . . . . . . . . . . . . 13,512,187
900,000 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . . . . 25,987,500
7,000 Morrison Restaurants, Inc. . . . . . . . . . . . . . . . . . . . 159,250
50,000 Ogden Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000
17,000 Omnicom Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . 820,250
*352,500 Outback Steakhouse, Inc. . . . . . . . . . . . . . . . . . . . . 8,504,062
4,000 Reynolds & Reynolds Co. . . . . . . . . . . . . . . . . . . . . . 92,500
*25,000 Robert Half International, Inc. . . . . . . . . . . . . . . . . . 1,009,375
3,000 Sbarro, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 111,750
43,000 Service Corp. International . . . . . . . . . . . . . . . . . . . 1,107,250
29,200 Spelling Entertainment Group, Inc. . . . . . . . . . . . . . . . 248,200
11,000 Tribune Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 585,750
5,000 United Television, Inc. . . . . . . . . . . . . . . . . . . . . . 237,500
120,000 Wendy's International, Inc. . . . . . . . . . . . . . . . . . . . 1,875,000
--------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . 101,135,174
--------------
ENERGY 11.8%
675,000 Amoco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,475,000
750,000 Apache Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 20,718,750
35,000 Ashland Oil, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 1,176,875
325,000 Atlantic Richfield Co. . . . . . . . . . . . . . . . . . . . . . 33,190,625
380,000 Baker Hughes, Inc. . . . . . . . . . . . . . . . . . . . . . . . 7,790,000
555,000 British Petroleum Co., PLC, ADR . . . . . . . . . . . . . . . . . 39,821,250
92,600 Chevron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,877,625
31,000 Eastern Enterprises . . . . . . . . . . . . . . . . . . . . . . . 709,125
290,000 Enron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,497,500
33,000 Equitable Resources, Inc. . . . . . . . . . . . . . . . . . . . . 1,134,375
242,000 Halliburton Co. . . . . . . . . . . . . . . . . . . . . . . . . . 8,167,500
*3,000 Magma Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . 87,750
14,000 MAPCO, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 826,000
300,000 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,487,500
1,000 NACCO Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 53,750
22,500 National Fuel Gas Co. . . . . . . . . . . . . . . . . . . . . . . 660,937
33,000 NICOR, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 870,375
*9,000 Offshore Pipelines, Inc. . . . . . . . . . . . . . . . . . . . . 176,625
14,400 Oneok, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,600
26,600 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . 528,675
30,300 Pittston Services Group . . . . . . . . . . . . . . . . . . . . . 810,525
9,400 Quaker State Corp. . . . . . . . . . . . . . . . . . . . . . . . 131,600
</TABLE>
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ENERGY-CONTINUED
30,000 Repsol, S.A., ADR . . . . . . . . . . . . . . . . . . . . . . . . $ 858,750
160,000 Royal Dutch Petroleum Co., ADR . . . . . . . . . . . . . . . . . 16,740,000
126,000 Schlumberger, Ltd. . . . . . . . . . . . . . . . . . . . . . . . 7,449,750
*25,000 Smith International, Inc. . . . . . . . . . . . . . . . . . . . . 381,250
3,000 Southwestern Energy Co. . . . . . . . . . . . . . . . . . . . . . 51,750
16,000 Sun, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,000
7,000 Tidewater, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 162,750
17,000 Tosco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,750
*14,000 Tuboscope Vetco International, Class C . . . . . . . . . . . . . 94,500
10,000 Ultramar Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 262,500
*16,000 Weatherford International, Inc. . . . . . . . . . . . . . . . . . 216,000
*100,000 Western Atlas, Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,762,500
*85,000 Western Company of North America . . . . . . . . . . . . . . . . 1,073,125
3,000 Wicor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,875
650,000 Williams Companies, Inc. . . . . . . . . . . . . . . . . . . . . 18,606,250
600,000 YPF Sociedad Anonima, ADS . . . . . . . . . . . . . . . . . . . . 14,325,000
--------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . 259,447,712
--------------
FINANCE 12.4%
164,300 Advanta Corp., Class A . . . . . . . . . . . . . . . . . . . . . 5,853,187
150,000 Aetna Life & Casualty Co. . . . . . . . . . . . . . . . . . . . . 8,381,250
25,000 Alex Brown, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 618,750
27,000 Ambac, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,059,750
2,104,130 American Capital Small Capitalization Fund, Inc. (See Note 2) . . 19,273,829
250,000 American International Group, Inc. . . . . . . . . . . . . . . . 21,656,250
17,000 AmSouth Bancorporation . . . . . . . . . . . . . . . . . . . . . 533,375
*41,000 Anchor Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . 635,500
930,000 BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . . . . 42,547,500
17,000 Bankers Life Holding Corp. . . . . . . . . . . . . . . . . . . . 342,125
23,000 Baybanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 1,385,750
36,382 Bear, Stearns Companies, Inc. . . . . . . . . . . . . . . . . . . 618,494
26,000 Boatmen's Bancshares, Inc. . . . . . . . . . . . . . . . . . . . 819,000
6,000 Capitol American Financial Corp. . . . . . . . . . . . . . . . . 141,000
5,000 CMAC Investment Corp. . . . . . . . . . . . . . . . . . . . . . . 126,250
26,000 Compass Bancshares, Inc. . . . . . . . . . . . . . . . . . . . . 643,500
1,000 Conseco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 46,625
176,200 Crestar Financial Corp. . . . . . . . . . . . . . . . . . . . . . 8,017,100
*100,000 Dime Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . 987,500
775,000 Equitable Companies, Inc. . . . . . . . . . . . . . . . . . . . . 13,756,250
19,000 Fidelity National Financial, Inc. . . . . . . . . . . . . . . . . 242,250
2,000 First American Financial Corp. . . . . . . . . . . . . . . . . . 46,250
</TABLE>
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<TABLE>
<CAPTION>
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OF SHARES VALUE
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FINANCE-CONTINUED
425,000 First Bank System, Inc. . . . . . . . . . . . . . . . . . . . . . $ 15,512,500
4,000 First Federal Corp. . . . . . . . . . . . . . . . . . . . . . . . 93,000
300,000 First Interstate Bancorp . . . . . . . . . . . . . . . . . . . . 23,100,000
14,000 First of America Bank Corp. . . . . . . . . . . . . . . . . . . . 498,750
20,000 First USA, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 767,500
10,000 Fleet Financial Group, Inc. . . . . . . . . . . . . . . . . . . . 377,500
5,000 Foothill Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 58,750
3,000 Fremont General Corp. . . . . . . . . . . . . . . . . . . . . . . 70,500
146,000 General RE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 15,914,000
14,000 GFC Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . 467,250
74,000 Green Tree Financial Corp. . . . . . . . . . . . . . . . . . . . 4,144,000
6,000 Jefferson Pilot Corp. . . . . . . . . . . . . . . . . . . . . . . 292,500
38,000 Keycorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,211,250
11,000 Leucadia National Corp. . . . . . . . . . . . . . . . . . . . . . 396,000
2,000 Life Partners Group, Inc. . . . . . . . . . . . . . . . . . . . . 35,000
7,500 Mercantile Bancorporation, Inc. . . . . . . . . . . . . . . . . . 263,437
35,333 Mercury Finance Co. . . . . . . . . . . . . . . . . . . . . . . . 582,994
28,200 MGIC Investors Corp. . . . . . . . . . . . . . . . . . . . . . . 747,300
300,000 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 8,775,000
460,000 NationsBank Corp. . . . . . . . . . . . . . . . . . . . . . . . . 23,632,500
37,000 NWNL Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . 1,230,250
5,000 Orion Capital Corp. . . . . . . . . . . . . . . . . . . . . . . . 170,625
27,000 Paine Webber Group, Inc. . . . . . . . . . . . . . . . . . . . . 421,875
170,000 Protective Life Corp. . . . . . . . . . . . . . . . . . . . . . . 6,842,500
4,000 Provident Life & Accident Insurance Co., Class B . . . . . . . . 102,000
3,000 Raymond James Financial, Inc. . . . . . . . . . . . . . . . . . . 43,500
22,000 Regions Financial Corp. . . . . . . . . . . . . . . . . . . . . . 767,250
3,000 Reinsurance Group of America, Inc. . . . . . . . . . . . . . . . 79,875
12,000 Roosevelt Financial Group, Inc. . . . . . . . . . . . . . . . . . 192,000
287,000 Signet Banking Corp. . . . . . . . . . . . . . . . . . . . . . . 11,587,625
42,600 SouthTrust Corp. . . . . . . . . . . . . . . . . . . . . . . . . 867,975
7,000 Star Banc Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 265,125
13,000 Statesman Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 191,750
150,000 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . . . . 6,018,750
29,000 SunAmerica, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 1,185,375
2,000 TCF Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . 67,750
35,000 Transamerica Corp. . . . . . . . . . . . . . . . . . . . . . . . 1,824,375
14,000 Union Planters Corp. . . . . . . . . . . . . . . . . . . . . . . 374,500
15,000 USLIFE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 532,500
54,000 Washington Mutual Savings Bank of Seattle . . . . . . . . . . . . 1,113,750
4,000 Washington National Corp. . . . . . . . . . . . . . . . . . . . . 85,000
85,000 Wells Fargo & Co. . . . . . . . . . . . . . . . . . . . . . . . . 12,781,875
--------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . 271,417,441
--------------
</TABLE>
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<TABLE>
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OF SHARES VALUE
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HEALTH CARE 9.1%
940,000 Abbott Laboratories . . . . . . . . . . . . . . . . . . . . . . . $ 27,260,000
226,500 American Cyanamid Co. . . . . . . . . . . . . . . . . . . . . . . 12,684,000
765,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . 20,081,250
9,000 Beckman Instruments, Inc. . . . . . . . . . . . . . . . . . . . . 227,250
10,000 Caremark International, Inc. . . . . . . . . . . . . . . . . . . 166,250
*217,600 Carrington Laboratories, Inc. . . . . . . . . . . . . . . . . . . 1,876,800
260,000 Columbia Healthcare Corp. . . . . . . . . . . . . . . . . . . . . 9,750,000
*8,000 Cordis Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 310,500
*4,900 Cor Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . 57,575
*17,000 Dentsply International, Inc. . . . . . . . . . . . . . . . . . . 595,000
*8,160 FHP International Corp. . . . . . . . . . . . . . . . . . . . . . 195,840
*7,800 Forest Labs, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 339,300
*400,000 Genentech, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 19,700,000
*38,000 Haemonetics Corp. . . . . . . . . . . . . . . . . . . . . . . . . 688,750
*12,000 HealthCare Compare Corp. . . . . . . . . . . . . . . . . . . . . 213,000
*220,000 Healthcare & Retirement Corp. . . . . . . . . . . . . . . . . . . 5,445,000
*110,000 Healthtrust Inc.-The Hospital Co. . . . . . . . . . . . . . . . . 3,052,500
*20,000 Humana, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 322,500
*31,000 ICOS Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,625
650,000 Lilly (Eli) & Co. . . . . . . . . . . . . . . . . . . . . . . . . 36,968,750
*47,500 Mid-Atlantic Medical Services, Inc. . . . . . . . . . . . . . . . 2,113,750
*25,000 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 668,750
*30,000 Oxford Health Plans, Inc. . . . . . . . . . . . . . . . . . . . . 1,335,000
*14,000 Pacificare Health Systems, Inc., Class A . . . . . . . . . . . . 700,000
*34,000 Perrigo Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 467,500
144,100 Pfizer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,096,313
*19,000 Quantum Health Resources, Inc. . . . . . . . . . . . . . . . . . 600,875
180,000 Schering-Plough Corp. . . . . . . . . . . . . . . . . . . . . . . 11,025,000
*17,000 Sofamor/Danek Group, Inc. . . . . . . . . . . . . . . . . . . . . 221,000
30,000 SpaceLabs Medical, Inc. . . . . . . . . . . . . . . . . . . . . . 637,500
440,000 United Healthcare Corp. . . . . . . . . . . . . . . . . . . . . . 20,185,000
15,000 U.S. Homecare Corp. . . . . . . . . . . . . . . . . . . . . . . . 48,750
*25,200 Value Health, Inc. . . . . . . . . . . . . . . . . . . . . . . . 963,900
*30,000 Vencor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,035,000
165,000 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . 10,890,000
--------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . 200,058,228
--------------
</TABLE>
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INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
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PRODUCER MANUFACTURING 7.8%
640,000 Allied Signal, Inc. . . . . . . . . . . . . . . . . . . . . . . . $ 22,160,000
16,600 Aptar Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 377,650
560,000 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . . 17,010,000
135,000 Caterpillar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 13,500,000
*11,000 Coltec Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 204,875
20,000 Cummins Engine Company, Inc. . . . . . . . . . . . . . . . . . . 865,000
470,000 General Electric Co. . . . . . . . . . . . . . . . . . . . . . . 21,913,750
*23,400 IDEX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 924,300
24,000 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . . . . 936,000
265,000 ITT Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,630,625
21,000 Johnson Controls, Inc. . . . . . . . . . . . . . . . . . . . . . 1,015,875
34,000 Juno Lighting, Inc. . . . . . . . . . . . . . . . . . . . . . . . 646,000
17,000 National Services Industries, Inc. . . . . . . . . . . . . . . . 442,000
5,750 Paccar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 265,938
580,000 Philips, N.V. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,675,000
13,600 Pittway Corp., Class A . . . . . . . . . . . . . . . . . . . . . 472,600
13,000 SPS Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . 331,500
26,600 Stewart & Stevenson Services, Inc. . . . . . . . . . . . . . . . . 1,103,900
7,000 St. Joe Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . 348,250
31,000 Teledyne, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 496,000
10,000 Tenneco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 463,750
350,000 Textron, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 18,331,250
*37,500 Thermo Electron Corp. . . . . . . . . . . . . . . . . . . . . . . 1,396,875
*14,000 Thermo Instrument Systems, Inc. . . . . . . . . . . . . . . . . . 399,000
46,500 Trinity Industries, Inc. . . . . . . . . . . . . . . . . . . . . 1,633,313
13,000 Tyco Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . 594,750
*292,000 Varity Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,621,500
558,000 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . 14,787,000
--------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . 169,546,701
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 7.9%
19,800 Albemarle Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 324,225
5,000 Amcast Industrial Corp. . . . . . . . . . . . . . . . . . . . . . 109,375
*3,000 American Pacific Corp. . . . . . . . . . . . . . . . . . . . . . 44,063
15,000 Asarco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 421,875
27,000 Avery Dennison Corp. . . . . . . . . . . . . . . . . . . . . . . 783,000
6,000 Bemis, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,500
22,000 Betz Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . 932,250
75,000 Birmingham Steel Corp. . . . . . . . . . . . . . . . . . . . . . 2,025,000
</TABLE>
F-7
<PAGE> 69
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES-CONTINUED
13,000 Church & Dwight, Inc. . . . . . . . . . . . . . . . . . . . . . . $ 295,750
20,000 Crown Cork & Seal Co., Inc. . . . . . . . . . . . . . . . . . . . 745,000
210,000 DuPont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . 12,258,750
35,000 Ecolab, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 770,000
39,600 Ethyl Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,150
2,000 Excel Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 31,000
*225,000 Georgia Gulf Corp. . . . . . . . . . . . . . . . . . . . . . . . 7,706,250
39,000 Handy & Harman . . . . . . . . . . . . . . . . . . . . . . . . . 546,000
325,000 Hercules, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 34,775,000
327,500 Imperial Chemical Industries, PLC, ADR . . . . . . . . . . . . . 15,556,250
250,000 International Paper Co. . . . . . . . . . . . . . . . . . . . . . 16,562,500
31,700 Justin Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 380,400
25,000 LAC Minerals, Ltd. . . . . . . . . . . . . . . . . . . . . . . . 212,500
*25,000 LTV Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384,375
12,000 Lukens, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 393,000
39,400 Minerals Technologies, Inc. . . . . . . . . . . . . . . . . . . . 1,142,600
510,000 Monsanto Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 38,568,750
14,400 Mycogen Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 154,800
26,000 Oregon Steel Mills, Inc. . . . . . . . . . . . . . . . . . . . . 497,250
*20,000 Owens-Corning Fiberglass Corp. . . . . . . . . . . . . . . . . . 622,500
*63,000 Owens-Illinois, Inc. . . . . . . . . . . . . . . . . . . . . . . 693,000
33,000 Pall Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
20,000 Pentair, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 715,000
650,000 Praxair, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,675,000
26,000 RPM, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442,000
325,000 Scott Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . . 16,981,250
*2,000 Sealed Air Corp. . . . . . . . . . . . . . . . . . . . . . . . . 55,500
18,000 Sigma-Aldrich Corp. . . . . . . . . . . . . . . . . . . . . . . . 720,000
28,000 Sonoco Products Co. . . . . . . . . . . . . . . . . . . . . . . . 574,000
8,000 Thiokol Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 193,000
9,333 Wausau Paper Mills Co. . . . . . . . . . . . . . . . . . . . . . 219,326
59,000 Willamette Industries, Inc. . . . . . . . . . . . . . . . . . . . 2,522,250
20,000 Worthington Industries, Inc. . . . . . . . . . . . . . . . . . . 370,000
--------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . 173,511,439
--------------
TECHNOLOGY 9.7%
*41,600 Adaptec, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 728,000
240,000 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . 6,540,000
*29,000 Analog Devices, Inc. . . . . . . . . . . . . . . . . . . . . . . 833,750
</TABLE>
F-8
<PAGE> 70
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY--CONTINUED
*13,500 Andrew Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 496,125
*330,000 Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . 14,107,500
17,000 Arrow Electronics, Inc. . . . . . . . . . . . . . . . . . . . . . 633,250
*20,000 Aspect Telecommunications Corp. . . . . . . . . . . . . . . . . . 557,500
*110,000 Atmel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,612,500
18,000 Avnet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 567,000
*25,000 Cadence Design Systems, Inc. . . . . . . . . . . . . . . . . . . 418,750
*23,000 Ceridian Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 566,375
*54,750 Cheyenne Software, Inc. . . . . . . . . . . . . . . . . . . . . . 465,375
*29,000 Chipcom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,138,250
*18,000 Cirrus Logic, Inc. . . . . . . . . . . . . . . . . . . . . . . . 558,000
*315,000 Compaq Computer Corp. . . . . . . . . . . . . . . . . . . . . . . 10,158,750
20,000 Computer Associates International, Inc. . . . . . . . . . . . . . 800,000
*67,400 Compuware Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 2,788,675
*17,000 Copytele, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 161,500
*2,400 Cray Research, Inc. . . . . . . . . . . . . . . . . . . . . . . . 54,300
*12,000 Digi International, Inc. . . . . . . . . . . . . . . . . . . . . 180,000
*8,000 Electronics for Imaging, Inc. . . . . . . . . . . . . . . . . . . 128,000
*110,000 FileNet Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,897,500
*270,000 General Instrument Corp. . . . . . . . . . . . . . . . . . . . . 15,390,000
10,000 General Motors Corp., Class H . . . . . . . . . . . . . . . . . . 358,750
18,000 Harris Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 794,250
*44,600 Informix Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 691,300
*212,500 Integrated Device Technology, Inc. . . . . . . . . . . . . . . . 5,259,375
525,000 International Business Machines Corp. . . . . . . . . . . . . . . 30,843,750
*50,000 Intuit, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,675,000
*54,000 Komag, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 999,000
*25,000 Lam Research Corp. . . . . . . . . . . . . . . . . . . . . . . . 700,000
*7,000 Landmark Graphics Corp. . . . . . . . . . . . . . . . . . . . . . 215,250
228,000 Linear Technology Corp. . . . . . . . . . . . . . . . . . . . . . 10,032,000
90,000 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,150,000
*345,000 LSI Logic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 8,625,000
*29,000 Marshall Industries . . . . . . . . . . . . . . . . . . . . . . . 638,000
*215,000 Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 11,072,500
*165,000 National Semiconductor Corp. . . . . . . . . . . . . . . . . . . 2,846,250
*16,000 Network General Corp. . . . . . . . . . . . . . . . . . . . . . . 254,000
*375,000 Novell, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,281,250
*85,000 Oracle Systems Corp. . . . . . . . . . . . . . . . . . . . . . . 3,187,500
*20,000 PeopleSoft, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 700,000
5,000 Pioneer Standard Electronics, Inc. . . . . . . . . . . . . . . . 125,000
*8,000 Platinum Technology, Inc. . . . . . . . . . . . . . . . . . . . . 104,000
</TABLE>
F-9
<PAGE> 71
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY-CONTINUED
675,000 Rockwell International Corp. . . . . . . . . . . . . . . . . . . $ 25,228,125
*193,000 Silicon Graphics, Inc. . . . . . . . . . . . . . . . . . . . . . 4,270,125
*80,000 Solectron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 2,030,000
*52,400 Standard Microsystems Corp. . . . . . . . . . . . . . . . . . . . 746,700
*6,000 Sterling Software, Inc. . . . . . . . . . . . . . . . . . . . . . 180,000
*40,000 Symantec Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 430,000
*22,000 Synopsys, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 825,000
*16,000 Syquest Technology, Inc. . . . . . . . . . . . . . . . . . . . . 150,000
*134,000 Tellabs, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,154,000
*17,000 Teradyne Technologies, Inc. . . . . . . . . . . . . . . . . . . . 450,500
207,000 Texas Instruments, Inc. . . . . . . . . . . . . . . . . . . . . . 16,456,500
*115,000 3Com Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,908,125
*6,800 U.S. Robotics, Inc. . . . . . . . . . . . . . . . . . . . . . . . 183,600
7,000 Varian Associates, Inc. . . . . . . . . . . . . . . . . . . . . . 248,500
*27,000 VLSI Technology, Inc. . . . . . . . . . . . . . . . . . . . . . . 369,563
*16,000 Wall Data, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 628,000
*7,000 Xilinx, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 238,875
--------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . 212,830,888
--------------
TRANSPORTATION 1.3%
11,000 Airborne Freight Corp. . . . . . . . . . . . . . . . . . . . . . 382,250
210,000 Burlington Northern, Inc. . . . . . . . . . . . . . . . . . . . . 11,208,750
*42,000 Chicago and North Western Transportation . . . . . . . . . . . . 971,250
20,000 Conrail, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,095,000
219,000 Illinois Central Corp. . . . . . . . . . . . . . . . . . . . . . 7,254,375
*36,000 Mesa Airlines, Inc. . . . . . . . . . . . . . . . . . . . . . . . 355,500
11,000 Skywest, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 280,500
215,000 Southwest Airlines Co. . . . . . . . . . . . . . . . . . . . . . 5,616,875
--------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . 27,164,500
--------------
UTILITIES 4.9%
*60,000 ALC Communications Corp. . . . . . . . . . . . . . . . . . . . . 1,845,000
300,000 Alltel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,537,500
275,000 Ameritech Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 10,518,750
300,000 Baltimore Gas & Electric Co. . . . . . . . . . . . . . . . . . . 6,375,000
600,000 Bellsouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 37,050,000
9,000 Boston Edison Co. . . . . . . . . . . . . . . . . . . . . . . . . 236,250
1,000 Central Hudson Gas & Electric Corp. . . . . . . . . . . . . . . . 26,250
28,400 Century Telephone Enterprises, Inc. . . . . . . . . . . . . . . . 734,850
26,000 Cipsco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 663,000
4,000 Citizens Utilities Co., Class B . . . . . . . . . . . . . . . . . 55,000
</TABLE>
F-10
<PAGE> 72
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES-CONTINUED
12,600 Comsat Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 292,950
*6,000 Contel Cellular, Inc., Class A . . . . . . . . . . . . . . . . . 99,375
*30,000 Destec Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . 300,000
10,000 DQE, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,250
10,000 Eastern Utilities Associates . . . . . . . . . . . . . . . . . . 231,250
23,000 Illinova Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 431,250
3,000 LG&E Energy Corp. . . . . . . . . . . . . . . . . . . . . . . . . 109,500
*10,000 Lin Broadcasting Corp. . . . . . . . . . . . . . . . . . . . . . 1,197,500
37,000 Lincoln Telecommunications Co. . . . . . . . . . . . . . . . . . 564,250
300,000 MCI Communications Corp. . . . . . . . . . . . . . . . . . . . . 6,637,500
*9,000 Nextel Communications, Inc. . . . . . . . . . . . . . . . . . . . 272,250
33,800 Oklahoma Gas & Electric Co. . . . . . . . . . . . . . . . . . . . 1,026,675
64,000 Pinnacle West Capital Corp. . . . . . . . . . . . . . . . . . . . 1,048,000
61,000 Portland General Corp. . . . . . . . . . . . . . . . . . . . . . 1,037,000
6,000 Public Service Co. of Colorado . . . . . . . . . . . . . . . . . 156,750
*77,000 Public Service Co. of New Mexico . . . . . . . . . . . . . . . . 885,500
800,000 Sprint Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 27,900,000
--------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . 107,527,600
--------------
TOTAL COMMON STOCK (Cost $1,746,906,742) . . . . . . . . . . . . 1,861,646,139
--------------
CONVERTIBLE PREFERRED STOCK 0.0%
27,200 FHP International Corp., Series A, $1.25 (Cost $472,500) . . . . . 642,600
--------------
PRINCIPAL
AMOUNT SHORT-TERM INVESTMENTS 16.7%
------------
COMMERCIAL PAPER 3.0%
$ 47,020,000 General Electric Capital Corp., 4.40%, 7/1/94 . . . . . . . . . . 47,014,253
8,140,000 Prudential Funding Corp., 4.30%, 7/1/94 . . . . . . . . . . . . . 8,139,028
10,000,000 State Bank of New South Wales, 4.36%, 7/28/94 . . . . . . . . . . 9,966,244
--------------
TOTAL COMMERCIAL PAPER . . . . . . . . . . . . . . . . . . . . . 65,119,525
--------------
REPURCHASE AGREEMENT 0.5%
10,675,000 Swiss Bank Corp. Government Securities, Inc., dated 6/30/94,
4.25% due 7/1/94 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase proceeds
$10,676,260 . . . . . . . . . . . . . . . . . . . . . . . . . . 10,675,000
--------------
UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS 13.2%
10,000,000 Tennessee Valley Authority, 4.29%, 8/11/94 . . . . . . . . . . . 9,950,183
#280,000,000 United States Treasury Bills, 3.97% to 4.30%, 7/21/94 to
10/6/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278,424,084
--------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT
OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 288,374,267
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $364,125,861) . . . . . . . . 364,168,792
--------------
TOTAL INVESTMENTS (Cost $2,111,505,103) 101.7% . . . . . . . . . 2,226,457,531
Other assets and liabilities, net (1.7%) . . . . . . . . . . . . . (36,942,617)
--------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . $2,189,514,914
==============
</TABLE>
* NON-INCOME PRODUCING SECURITY.
# SECURITIES WITH A MARKET VALUE OF $242.6 MILLION WERE PLACED AS COLLATERAL
FOR FUTURES CONTRACTS (SEE NOTE 1B).
SEE NOTES TO FINANCIAL STATEMENTS.
F-11
<PAGE> 73
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $2,111,505,103) . . . . . . . . . . . . . . . . . $2,226,457,531
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,535
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . 43,264,149
Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,665,604
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . 644,345
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,190
--------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,273,323,354
--------------
LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . 74,194,246
Payables for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . 4,621,875
Due to broker-variation margin . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,043,700
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,240,028
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876,397
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . . . . . . . 585,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,194
--------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,808,440
--------------
NET ASSETS, equivalent to $11.05 per share for Class A shares, $10.96 per share
for Class B shares and $10.99 per share for Class C shares . . . . . . . . . . . . $2,189,514,914
==============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 194,877,296 Class A, 3,263,488 Class B and
109,057 Class C shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . $ 99,124,920
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,878,588
Undistributed net realized gain on securities . . . . . . . . . . . . . . . . . . . . 170,037,178
Net unrealized appreciation (depreciation) of:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,952,428
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,789,075)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 11,310,875
--------------
NET ASSETS at June 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,189,514,914
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-12
<PAGE> 74
STATEMENT OF OPERATIONS
Year Ended June 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,415,194
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,849,484
--------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,264,678
--------------
EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,141,831
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . . 7,398,120
Service fees--Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,867,516
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389,771
Distribution and service fees--Class B. . . . . . . . . . . . . . . . . . . . . . . . 310,935
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,171
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,420
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,177
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,728
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,972
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,315
Distribution and service fees--Class C. . . . . . . . . . . . . . . . . . . . . . . . 5,717
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,107
--------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,769,780
--------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,494,898
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . 232,990,620
Net realized gain on futures contracts . . . . . . . . . . . . . . . . . . . . . . . 2,371,236
Net unrealized depreciation of investments during the year . . . . . . . . . . . . . (257,578,223)
Net unrealized depreciation of futures contracts during the year . . . . . . . . . . (7,984,700)
--------------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . . (30,201,067)
--------------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . . $ (6,706,169)
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-13
<PAGE> 75
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . $2,473,920,030 $2,361,937,893
-------------- --------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . 23,494,898 29,524,152
Net realized gain on securities . . . . . . . . . . . . . . 235,361,856 412,713,039
Net unrealized depreciation of securities
during the period . . . . . . . . . . . . . . . . . . . . (265,562,923) (98,985,107)
-------------- --------------
Increase (decrease) in net assets resulting from operations (6,706,169) 343,252,084
-------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . (24,273,814) (24,845,830)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . (50,746) (44,521)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . (2,996) --
-------------- --------------
(24,327,556) (24,890,351)
-------------- --------------
From net realized gain on securities
Class A . . . . . . . . . . . . . . . . . . . . . . . . . (314,435,443) (337,588,107)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . (3,566,766) (2,505,912)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . (55,106) --
-------------- --------------
(318,057,315) (340,094,019)
-------------- --------------
Total dividends and distributions . . . . . . . . . . . . (342,384,871) (364,984,370)
-------------- --------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . 575,629,932 201,502,483
Class B . . . . . . . . . . . . . . . . . . . . . . . . . 136,091,283 105,940,440
Class C . . . . . . . . . . . . . . . . . . . . . . . . . 4,759,679 --
-------------- --------------
716,480,894 307,442,923
-------------- --------------
Proceeds from shares issued for dividends and
distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . 309,712,281 330,277,945
Class B . . . . . . . . . . . . . . . . . . . . . . . . . 3,364,645 2,382,287
Class C . . . . . . . . . . . . . . . . . . . . . . . . . 51,108 --
-------------- --------------
313,128,034 332,660,232
-------------- --------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . (834,638,575) (414,472,958)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . (126,789,572) (91,915,774)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . (3,494,857) --
-------------- --------------
(964,923,004) (506,388,732)
-------------- --------------
Increase in net assets resulting from Fund share
transactions . . . . . . . . . . . . . . . . . . . . . 64,685,924 133,714,423
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . (284,405,116) 111,982,137
-------------- --------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . $2,189,514,914 $2,473,920,030
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-14
<PAGE> 76
NOTES TO FINANCIAL STATEMENTS
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
American Capital Pace Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. INVESTMENT VALUATIONS
Securities, including options, listed or traded on a national securities
exchange or NASDAQ, are valued at the last sale price. Unlisted securities
and listed securities for which the last sale price is not available are
valued at the most recent bid price. Options are valued at the last sale
price or, if no sales are reported, at the mean between the bid and asked
prices.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are valued
based on market quotations until the remaining days to maturity becomes
less than 61 days. From such time, until maturity, the investments are
valued at amortized cost.
B. OPTIONS AND FUTURES CONTRACTS
Transactions in options and futures contracts are utilized in strategies to
manage the market risk of the Fund's investments by increasing or
decreasing the percentage of assets effectively invested. The purchase of a
futures contract or call option (or the writing of a put option) increases
the impact of changes in the market price of investments on net asset
value. There is also a risk that the market movement of such instruments
may not be in the direction forecasted.
Call and Put Options--The Fund may write covered call options and
collateralized put options. Options written on futures contracts require
initial margin deposits. Options purchased are recorded as investments;
options written (sold) are accounted for as liabilities. When an option
expires, the premium (original option value) is realized as a gain if the
option was written or realized as a loss if the option was purchased. When
the exercise of an option results in a cash settlement, the difference
between the premium and the settlement proceeds is realized as a gain or
loss. When securities are acquired or delivered upon exercise of an option,
the acquisition cost or sale proceeds are adjusted by the amount of the
premium. When an option is closed, the difference between the premium and
the cost to close the position is realized as a gain or loss.
Futures Contracts--Upon entering into futures contracts, the Fund
maintains, in a segregated account with its custodian, securities with a
value equal to its obligation under the futures contracts. A portion of
these funds are held as collateral in an account in the name of the broker,
the Fund's agent in acquiring the futures position. During the period the
futures contract is open, changes in the value of the contract ("variation
margin") are recognized by marking the contracts to market on a daily
basis. As unrealized gains or losses are incurred, variation margin
payments are received from or made to the broker. Upon the closing or cash
settlement of a contract, gains or losses are realized. The cost of
securities acquired through delivery under a contract is adjusted by the
unrealized gain or loss on the contract.
C. REPURCHASE AGREEMENTS
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Fund may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised or sub-advised by American Capital Asset Management, Inc. (the
"Adviser"), the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are collateralized by
F-15
<PAGE> 77
the underlying debt security. The Fund will make payment for such
securities only upon physical delivery or evidence of book entry transfer
to the account of the custodian bank. The seller is required to maintain
the value of the underlying security at not less than the repurchase
proceeds due the Fund.
D. FEDERAL INCOME TAXES
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all of its taxable net investment income and taxable net
realized gains on investments to its shareholders.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily.
F. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which may
result in dividends or distributions in excess of financial statement
earnings.
Effective July 1, 1993, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result of this statement, the Fund changed the classification of
distributions to shareholders to better disclose the differences between
financial statement amounts and distributions determined in accordance with
income tax regulations. The cumulative effect caused by adopting this
statement was to decrease undistributed net investment income and to
increase capital surplus by $709,500. Current year net investment income,
net realized gains, net assets and net asset value per share were not
affected by this reclassification.
NOTE 2-MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.50% of the first $1 billion, .45% of the next $1 billion, .40% of the next $1
billion, and .35% of the amount in excess of $3 billion.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the year ended June 30, 1994, these charges included $35,490 as the Fund's
share of the employee costs attributable to the Fund's accounting officers. A
portion of the accounting services expense was paid to the Adviser in
reimbursement of personnel, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended June 30, 1994, the fees for
such services were $6,531,269.
American Capital Marketing, Inc. (the "Distributor") and Advantage Capital
Corporation (the "Retail Dealer"), both affiliates of the Adviser, received
$348,004 and $181,219, respectively, as their portion of the commissions
charged on sales of Fund shares during the year.
F-16
<PAGE> 78
During the year, the Fund paid brokerage commissions of $270,867 to companies
which are deemed affiliates of the Adviser's parent because it owns more than
5% of the companies' outstanding voting securities.
Under the Distribution Plans, the Fund pays up to .25% per annum of its average
net assets to the Distributor for expenses and service fees incurred. Class B
shares and Class C shares pay an additional fee of up to .75% per annum of
their average net assets to reimburse the Distributor for its distribution
expenses. Actual distribution expenses incurred by the Distributor for Class B
shares and Class C shares may exceed the amounts reimbursed to the Distributor
by the Fund. At June 30, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B and Class C plans aggregated approximately $1.6
million and $20,000, respectively, and may be carried forward and reimbursed
through either the collection of the contingent deferred sales charges from
share repurchases or, subject to the annual renewal of the plans, future Fund
reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
At June 30, 1994, the Fund owned 100% of the American Capital Small
Capitalization Fund, Inc. ("Small Cap"), an investment company managed by the
Adviser. At June 30, 1994, Small Cap's portfolio consisted of the following
securities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
NUMBER MARKET
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK
CONSUMER DISTRIBUTION
2,000 Best Buy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,250
2,000 Big B, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,250
6,000 Burlington Coat Factory Corp. . . . . . . . . . . . . . . . . . . 105,000
6,000 Caldor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 169,500
14,000 Claire's Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . 141,750
5,000 Dress Barn, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 50,000
1,000 Fingerhut Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
30,000 Food Lion, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
8,000 Gymboree Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 320,000
3,000 Haggar Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
1,000 Home Shopping Network, Inc. . . . . . . . . . . . . . . . . . . . 12,000
10,000 Merisel, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000
5,000 Meyer (Fred), Inc. . . . . . . . . . . . . . . . . . . . . . . . 183,750
4,000 Michael's Stores, Inc. . . . . . . . . . . . . . . . . . . . . . 134,500
2,000 New England Business Service, Inc. . . . . . . . . . . . . . . . 38,500
4,000 Nine West Group, Inc. . . . . . . . . . . . . . . . . . . . . . . 109,500
33,000 Proffitts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 614,625
32,000 Revco (D.S.), Inc. . . . . . . . . . . . . . . . . . . . . . . . 508,000
5,000 Rykoff-Sexton, Inc. . . . . . . . . . . . . . . . . . . . . . . . 95,000
5,000 Shoe Carnival, Inc. . . . . . . . . . . . . . . . . . . . . . . . 51,250
11,000 Value City Department Stores, Inc. . . . . . . . . . . . . . . . 145,750
16,000 Viking Office Products, Inc. . . . . . . . . . . . . . . . . . . 400,000
------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . 3,538,625
------------
CONSUMER DURABLES
13,000 GenCorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 152,750
3,000 Harman International Industries, Inc. . . . . . . . . . . . . . . 76,875
3,000 Smith (A.O.) Corp. . . . . . . . . . . . . . . . . . . . . . . . 75,750
4,000 Sunbeam-Oster Company, Inc. . . . . . . . . . . . . . . . . . . . 84,000
1,000 Toro Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,875
5,000 Winnebago Industries, Inc. . . . . . . . . . . . . . . . . . . . 42,500
------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . 455,750
------------
CONSUMER SERVICES
17,000 Players International, Inc. . . . . . . . . . . . . . . . . . . . $ 252,875
------------
ENERGY
1,000 Tosco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
------------
FINANCE
4,000 Alex Brown, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 97,000
1,000 Ban Ponce Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 31,750
15,000 Citizens First Bancorp . . . . . . . . . . . . . . . . . . . . . 133,125
2,000 Duff & Phelps Corp. . . . . . . . . . . . . . . . . . . . . . . . 39,250
1,000 Fourth Financial Corp. . . . . . . . . . . . . . . . . . . . . . 29,500
1,000 Kimco Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . 35,875
4,000 Old Kent Financial Corp. . . . . . . . . . . . . . . . . . . . . 139,000
7,000 ONBANCorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 210,000
43,500 PaineWebber Group, Inc. . . . . . . . . . . . . . . . . . . . . . 685,125
3,000 Peoples Heritage Financial Group, Inc. . . . . . . . . . . . . . 39,750
4,000 Premier Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . 69,500
10,000 SouthTrust Corp. . . . . . . . . . . . . . . . . . . . . . . . . 205,000
2,000 Standard Federal Bank . . . . . . . . . . . . . . . . . . . . . . 49,750
1,000 TCF Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . 33,875
1,000 Zions Bancorporation . . . . . . . . . . . . . . . . . . . . . . 40,000
------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . 1,838,500
------------
HEALTH CARE
3,000 Biogen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 85,875
10,000 Caremark International, Inc. . . . . . . . . . . . . . . . . . . 167,500
4,000 Dentsply International, Inc. . . . . . . . . . . . . . . . . . . 139,000
480 FHP International Corp. . . . . . . . . . . . . . . . . . . . . . 11,385
1,600 FHP International Corp.,
Series A, Preferred, $1.25 . . . . . . . . . . . . . . . . . . 37,600
1,000 Haemonetics Corp. . . . . . . . . . . . . . . . . . . . . . . . . 18,000
------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . 459,360
------------
</TABLE>
F-17
<PAGE> 79
<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/
PROCESSING INDUSTRIES
4,000 Ecolab, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,500
5,000 Elcor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,875
18,000 Ferro Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 414,000
6,000 First Mississippi Corp. . . . . . . . . . . . . . . . . . . . . . 93,750
1,000 Handy & Harman . . . . . . . . . . . . . . . . . . . . . . . . . 14,250
10,500 Hanna (M.A.) Co. . . . . . . . . . . . . . . . . . . . . . . . . 262,500
8,000 Hecla Mining Co. . . . . . . . . . . . . . . . . . . . . . . . . 85,000
13,000 Inland Steel Industries, Inc. . . . . . . . . . . . . . . . . . . 451,750
6,000 International Specialty Products, Inc. . . . . . . . . . . . . . 40,500
6,000 Kaiser Aluminum Corp. . . . . . . . . . . . . . . . . . . . . . . 57,750
6,000 Lawter International, Inc. . . . . . . . . . . . . . . . . . . . 66,000
7,000 Longview Fibre Co. . . . . . . . . . . . . . . . . . . . . . . . 127,750
3,000 Medusa Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
19,000 Minerals Technologies, Inc. . . . . . . . . . . . . . . . . . . . 551,000
4,000 NCH Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
18,000 Owens-Illinois, Inc. . . . . . . . . . . . . . . . . . . . . . . 193,500
2,000 Pentair, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 73,500
4,000 Riverwood International Corp. . . . . . . . . . . . . . . . . . . 66,000
7,000 RPM,Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,875
1,000 Sequa Corp., Class A . . . . . . . . . . . . . . . . . . . . . . 29,750
15,000 Terra Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 118,125
1,333 Wausau Paper Mills Co. . . . . . . . . . . . . . . . . . . . . . 31,992
------------
TOTAL RAW MATERIALS/
PROCESSING INDUSTRIES . . . . . . . . . . . . . . . . . . . . . 3,319,367
------------
TECHNOLOGY
19,500 Cheyenne Software, Inc. . . . . . . . . . . . . . . . . . . . . . 165,750
6,000 Chipcom Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 234,000
9,000 Harris Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 400,500
27,000 Informix Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 432,000
12,000 National Semiconductor Corp. . . . . . . . . . . . . . . . . . . . 210,000
2,000 Pioneer Standard Electronics, Inc. . . . . . . . . . . . . . . . 51,500
3,000 Smart & Final, Inc. . . . . . . . . . . . . . . . . . . . . . . . 42,750
10,000 Sybase, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
*9,000 Synopsys, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 346,500
3,000 3Com Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,750
1,000 VLSI Technology, Inc. . . . . . . . . . . . . . . . . . . . . . . 14,000
------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . 2,545,750
------------
TRANSPORTATION
11,000 Airborne Freight Corp. . . . . . . . . . . . . . . . . . . . . . 380,875
15,000 Arkansas Best Corp. . . . . . . . . . . . . . . . . . . . . . . . 189,375
2,000 Arnold Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 39,500
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF SHARES/
PRINCIPAL MARKET
(000) VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
1,000 Harper Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . $ 14,188
4,000 Kansas City Southern Industries, Inc . . . . . . . . . . . . . . 165,500
18,000 Mesa Airlines, Inc. . . . . . . . . . . . . . . . . . . . . . . . 182,250
9,000 Skywest, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 231,750
3,000 Werner Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . 83,250
------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . 1,286,688
------------
UTILITIES
3,000 American Water Works Co., Inc. . . . . . . . . . . . . . . . . . 81,375
15,000 Atlantic Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . 255,000
3,000 Black Hills Corp. . . . . . . . . . . . . . . . . . . . . . . . . 55,500
16,000 Boston Edison Co. . . . . . . . . . . . . . . . . . . . . . . . . 420,000
2,000 Central Hudson Gas & Electric Corp. . . . . . . . . . . . . . . . 53,000
5,000 Central Louisiana Electric, Inc. . . . . . . . . . . . . . . . . 116,875
1,000 Central Vermont Public Service Corp. . . . . . . . . . . . . . . 14,500
2,000 Cilcorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 58,500
4,000 Cipsco, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 102,500
6,000 Citizens Utilities Co., Class B . . . . . . . . . . . . . . . . . 81,750
20,000 Delmarva Power & Light Co. . . . . . . . . . . . . . . . . . . . . 360,000
10,000 DQE, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296,250
8,000 Eastern Utilities Associates . . . . . . . . . . . . . . . . . . 186,000
5,000 IES Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . 128,125
4,000 Ipalco Enterprises, Inc. . . . . . . . . . . . . . . . . . . . . 114,500
9,000 Kansas City Power & Light Co. . . . . . . . . . . . . . . . . . . 175,500
5,000 Nevada Power Co. . . . . . . . . . . . . . . . . . . . . . . . . 95,625
8,000 Oklahoma Gas & Electric Co. . . . . . . . . . . . . . . . . . . . 242,000
3,000 Orange & Rockland Utilities, Inc. . . . . . . . . . . . . . . . . 91,875
1,000 Philadelphia Suburban Corp. . . . . . . . . . . . . . . . . . . . 18,125
24,000 Portland General Corp. . . . . . . . . . . . . . . . . . . . . . 405,000
6,000 Rochester Gas & Electric Corp. . . . . . . . . . . . . . . . . . 129,750
4,000 Sierra Pacific Resources . . . . . . . . . . . . . . . . . . . . 74,500
1,000 Southern California Water Co. . . . . . . . . . . . . . . . . . . 19,125
7,000 Western Resources, Inc. . . . . . . . . . . . . . . . . . . . . . 187,250
------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . 3,762,625
------------
TOTAL COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . 17,489,540
------------
REPURCHASE AGREEMENT
$1,710 Swiss Bank Corp. Government Securities, 4.25%, 7/1/94 . . . . . . 1,710,000
------------
TOTAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . 19,199,540
Other assets and liabilities, net . . . . . . . . . . . . . . . . 74,289
------------
NET ASSETS at June 30, 1994 . . . . . . . . . . . . . . . . . . . $ 19,273,829
============
</TABLE>
NOTE 3-INVESTMENT ACTIVITY
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $2,293,699,112 and $2,623,435,921,
respectively.
At June 30, 1994, the Fund held 1,090 long Standard & Poor's 500-Index futures
contracts expiring in September, 1994. The market value of such contracts was
$242,552,250 and the unrealized depreciation was $6,789,075.
For federal income tax purposes, the identified cost of investments owned at
June 30, 1994, was $2,113,956,570, net unrealized appreciation of investments
aggregated $112,500,961, gross unrealized appreciation of investments
aggregated $180,427,457 and gross unrealized depreciation of investments
aggregated $67,926,496.
F-18
<PAGE> 80
NOTE 4-DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $4,430 plus a fee of $110 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $1,660. During the year, such fees aggregated
$48,812.
The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At June 30, 1994, the liability for the Plan aggregated
$139,461. Each director covered under the Plan elects to be credited with an
earnings component or amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
NOTE 5-CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income, and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions. The offering of Class C
shares commenced August 27, 1993.
The Fund has 600 million Class A and 300 million each of Class B and Class C
shares of $.50 par value capital stock authorized. Transactions in shares of
capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1994 1993
----------- -----------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 48,584,035 15,685,865
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 11,172,261 8,208,994
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . 405,848 --
----------- -----------
60,162,144 23,894,859
----------- -----------
Shares issued for dividends and distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 27,048,575 27,336,611
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 294,834 196,959
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . 4,467 --
----------- -----------
27,347,876 27,533,570
----------- -----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . (69,697,790) (32,037,764)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . (10,358,193) (7,143,709)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . (301,258) --
----------- -----------
(80,357,241) (39,181,473)
----------- -----------
Increase in shares outstanding . . . . . . . . . . . . . . 7,152,779 12,246,956
=========== ===========
</TABLE>
F-19
<PAGE> 81
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
CLASS A(1)
--------------------------------------------------------------------
YEAR ENDED JUNE 30
--------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . $12.95 $13.21 $12.37 $12.69 $12.72
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS
Investment income . . . . . . . . . . . . .26 .305 .335 .40 .465
Expenses . . . . . . . . . . . . . . . . (.13) (.14) (.14) (.125) (.12)
-------- -------- -------- -------- --------
Net investment income . . . . . . . . . . .13 .165 .195 .275 .345
-------- -------- -------- -------- --------
Net realized and unrealized gains or
losses on securities . . . . . . . . . . (.1475) 1.69 1.095 .1575 1.3188
-------- -------- -------- -------- --------
Total from investment operations . . . . (.0175) 1.855 1.29 .4325 1.6638
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income . . (.135) (.145) (.2375) (.29) (.3675)
Distributions from net realized gains
on securities . . . . . . . . . . . . . (1.7475) (1.97) (.2125) (.4625) (1.3263)
-------- -------- -------- -------- --------
Total distributions . . . . . . . . . . . (1.8825) (2.115) (.45) (.7525) (1.6938)
-------- -------- -------- -------- --------
Net asset value, end of period . . . . . $11.05 $12.95 $13.21 $12.37 $12.69
======== ======== ======== ======== ========
TOTAL RETURN(2) . . . . . . . . . . . . . (.64%) 15.20% 10.58% 4.31% 13.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . $2,152.5 $2,446.2 $2,350.2 $2,348.7 $2,456.8
Average net assets (millions) . . . . . . $2,378.3 $2,409.9 $2,456.5 $2,275.2 $2,441.2
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . 1.02% 1.06% 1.00% 1.01% 0.88%
Net investment income . . . . . . . . . .99% 1.22% 1.38% 2.22% 2.55%
Portfolio turnover rate . . . . . . . . . 112% 113% 54% 40% 39%
</TABLE>
(1) PER SHARE INFORMATION FOR THE YEAR 1990 HAS BEEN ADJUSTED TO REFLECT A 2
FOR 1 STOCK SPLIT EFFECTIVE JUNE 8, 1990.
(2) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
SEE NOTES TO FINANCIAL STATEMENTS.
F-20
<PAGE> 82
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------- --------
JANUARY 10, AUGUST 27,
1992(1) 1993(1)
YEAR ENDED JUNE 30 THROUGH THROUGH
---------------------- JUNE 30, JUNE 30,
1994 1993 1992 1994
------- ------ ------ -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(2)
Net asset value, beginning of period . . $12.86 $13.13 $13.87 $13.25
------- ------ ------ -------
INCOME FROM OPERATIONS
Investment income . . . . . . . . . . . . .25 .29 .15 .17
Expenses . . . . . . . . . . . . . . . . (.22) (.26) (.10) (.15)
------- ------ ------ -------
Net investment income . . . . . . . . . . .03 .03 .05 .02
Net realized and unrealized gains or losses
on securities . . . . . . . . . . . . . (.1575) 1.705 (.79) (.4375)
------- ------ ------ -------
Total from investment operations . . . . (.1275) 1.735 (.74) (.4175)
------- ------ ------ -------
LESS DISTRIBUTIONS
Dividends from net investment income . . (.025) (.035) -- (.095)
Distributions from net realized gains
on securities . . . . . . . . . . . . . (1.7475) (1.97) -- (1.7475)
------- ------ ------ -------
Total distributions . . . . . . . . . . . (1.7725) (2.005) -- (1.8425)
------- ------ ------ -------
Net asset value, end of period . . . . . $10.96 $12.86 $13.13 $10.99
======= ====== ====== =======
TOTAL RETURN(3) . . . . . . . . . . . . . (1.46%) 12.84% (5.34%) (3.70%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . $35.8 $27.7 $11.7 $1.2
Average net assets (millions) . . . . . . $31.5 $16.8 $ 3.9 $0.7
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . 1.79% 1.98% 1.82%(4) 1.81%(4)
Net investment income . . . . . . . . . .21% 0.25% 0.56%(4) .24%(4)
Portfolio turnover rate . . . . . . . . . 112% 113% 54% 112%
</TABLE>
(1) COMMENCEMENT OF OFFERING OF SALES
(2) BASED ON AVERAGE MONTH-END SHARES OUTSTANDING
(3) TOTAL RETURN FOR PERIODS OF LESS THAN ONE FULL YEAR ARE NOT ANNUALIZED.
TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
(4) ANNUALIZED
SEE NOTES TO FINANCIAL STATEMENTS.
F-21
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL PACE FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Pace Fund, Inc.,
at June 30, 1994, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the selected per share data and ratios for each of the five years in the period
then ended, in conformity with generally accepted accounting principles.
These financial statements and selected per share data and ratios (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1994 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
August 5, 1994
F-22
