AMERICAN CAPITAL WORLD PORTFOLIO SERIES INC, 497, 1995-05-04

AMERICAN CAPITAL WORLD PORTFOLIO SERIES INC
497, 1995-05-04

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<PAGE> 1

SUPPLEMENT, DATED MAY 1, 1995 TO
PROSPECTUSES OF:

AMERICAN CAPITAL CORPORATE BOND FUND, INC.
AMERICAN CAPITAL EMERGING GROWTH FUND, INC.
AMERICAN CAPITAL GLOBAL EQUITY FUND
AMERICAN CAPITAL GLOBAL GOVERNMENT SECURITIES FUND
AMERICAN CAPITAL GROWTH AND INCOME FUND, INC.
AMERICAN CAPITAL HIGH YIELD INVESTMENTS, INC.
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
AND
AMERICAN CAPITAL PACE FUND, INC.

1. Effective today, the Distributor has increased the ongoing payments to
broker-dealers and other Service Organizations with respect to Class C shares.
The Distributor will now pay broker-dealers and other Service Organizations
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares for the second through tenth year after
purchase for Class C shares sold on or after May 1, 1995. Broker-dealers and
other Service Organizations will still be paid ongoing commissions and
transaction fees for the second through tenth year after purchase of up to 0.65%
for Class C shares sold before May 1, 1995.

2. The first two paragraphs of "Shareholder Services -- Shareholder
Services Applicable to all Classes -- Exchange Privilege" are amended to read in
their entirety as follows:

EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund
(listed herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts") other than Government Target, may be exchanged for shares of
the same class of any other fund without sales charge, provided that shares
of Corporate Bond, Federal Mortgage, Global Managed, Government Trust, High
Yield, Municipal Bond, Real Estate, Tax-Exempt, Texas Municipal, Utilities,
and the American Capital Global Government Securities Fund of World
Portfolio are subject to a 30-day holding period requirement. Shares of
Government Target may be exchanged for Class A shares of the Fund without
sales charge. Class A shares of Reserve that were not acquired in exchange
for Class B or Class C shares of a Participating Fund may be exchanged for
Class A shares of the Fund upon payment of the excess, if any, of the sales
charge rate applicable to the shares being acquired over the sales charge
rate previously paid. Shares of Reserve acquired through an exchange of
Class B or Class C shares may be exchanged only for the same class of
shares of a Participating Fund without incurring a contingent deferred
sales charge. Shares of any Participating Fund or Reserve may be exchanged
for shares of 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
PROSPECTUS OF:

AMERICAN CAPITAL GLOBAL EQUTY FUND

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 Fund's investment adviser, and American Capital Marketing, Inc.
(the "Distributor"), the Fund's 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 Fund until approximately
December 31, 1994 when the Buyer anticipates merging the Distributor into Van
Kampen/American Capital Distributors, Inc., a registered broker-dealer that
currently serves as distributor to the Van Kampen Merritt family of mutual
funds.

On December 16, 1994, in connection with the Acquisition, the shareholders of
the Fund approved a new investment advisory agreement with the Adviser
providing for the same terms and services as the investment advisory agreement
between the 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/AC
Holding, Inc. common shares. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc.

As of September 30, 1994, subsidiaries of VKAC on a pro forma basis would
have managed or supervised $51.8 billion of assets, including assets of 66
open-end investment companies and 38 closed-end investment companies having
aggregate total assets of $32.4 billion.

2. On December 16, 1994, the shareholders of the Fund approved a new investment
subadvisory agreement between the Adviser and John Govett & Co. Limited ("John
Govett") which will take effect on December 21, 1994. John Govett is a United
Kingdom based investment management company whose investment activities
originated in the 1920s. John Govett is primarily responsible for recommending
the allocation of investments among various international markets and
currencies; recommendation and selection of particular securities in
the international markets; and trading in foreign markets. The investment
subadvisory fee as reflected in the Prospectus remains the same with John
Govett.

<PAGE> 5

3. The following replaces the last paragraph under the section entitled "The
Fund and Its Management":

Jeff New is primarily responsible for the day-to-day management of the Fund's
investment portfolio with respect to investments in the United States. Mr. New
is Vice President of the Fund. He has been an associate portfolio manager with
the Adviser since April 1990. Prior to that he was a securities analyst with
Texas Commerce Investment Management Company. Mr. New has been primarily
responsible for managing the Fund's investment portfolio with respect to
investments in the United States since May 13, 1994. John Govett (the
"Subadviser") has employed Peter Kysel since September 1994 as Director and
Fund Manager. He is primarily responsible for allocating the Fund's investments
between United States and non-United States equity securities and the
day-to-day management of the Fund's investments in countries other than the
United States. Mr. Kysel will begin managing the Fund's investment portfolio
effective December 21, 1994. Mr. Kysel was previously a managing director of
the investment banking division of Komercni Bank.

4. Effective December 20, 1994, shares of the 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 the Fund's Prospectus.

5. 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 with subsidiaries of
Travelers.

6. 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.

7. 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:

8. 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

- --------------------------------------------------------------------------------
AMERICAN CAPITAL GLOBAL EQUITY FUND
- --------------------------------------------------------------------------------

2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
September 29, 1994

American Capital Global Equity Fund (the "Fund") is a professionally managed
mutual fund organized as a diversified open-end series of American Capital World
Portfolio Series, Inc. (the "Company"). The Fund seeks long-term growth of
capital through investments in an internationally diversified portfolio of
equity securities of companies of any nation including the United States.

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

This Prospectus tells investors briefly the information they should know
before investing. 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 Company. A copy of the Statement of Additional
Information may be obtained without charge by calling or writing the Company 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> 7

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

INVESTMENT SUBADVISER:
Lombard Odier International
Portfolio Management Limited
Norfolk House
13 Southampton Place
London WC1A 2AJ
England

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

- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Prospectus Summary................ 3
Expense Synopsis.................. 4
Financial Highlights.............. 5
Multiple Pricing System........... 5
Investment Objective and
Policies........................ 7
Investment Practices and
Restrictions.................... 9
The Company and Its Management.... 12
Purchase of Shares................ 13
Distribution Plans................ 17
Shareholder Services.............. 18
Redemption of Shares.............. 21
Dividends, Distributions and
Federal Taxes................... 22
Prior Performance Information..... 23
Additional Information............ 24
Investment Holdings............... 25
</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 Company or by the Distributor. This Prospectus
does not constitute an offering by the Distributor in any jurisdiction in which
such offering may not lawfully be made.

2
<PAGE> 8

- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------

SHARES OFFERED. Common Stock.

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

TYPE OF COMPANY. Diversified, open-end management investment company. The Fund
is a diversified portfolio of the Company and is one of two series of shares
which the Company is currently authorized to issue.

INVESTMENT OBJECTIVE. The Fund seeks long-term growth of capital.

INVESTMENT POLICY. Invests in an internationally diversified portfolio of
equity securities of companies of any nation including the United States. See
"Investment Objective and Policies." Use of options, futures contracts and
related options may include additional risks. See "Investment Practices and
Restrictions -- Using Options, Futures Contracts and Related Options."

INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the "Financial Highlights" table.

RISK FACTORS. Investing in common stocks of foreign issuers may subject the
Fund to risks of foreign political, economic and legal conditions and
developments. See "Investment Objective and Policies -- Risk Factors."

INVESTMENT ADVISER. American Capital Asset Management, Inc. (the "Adviser")
serves as investment adviser to the Fund. The Adviser provides investment advice
to 45 investment company portfolios. Lombard Odier International Portfolio
Management Limited (the "Subadviser") provides advisory services to the Adviser
of the Fund with respect to the Fund's investments in foreign securities. See
"The Company and Its Management."

DISTRIBUTOR. American Capital Marketing, Inc. (the "Distributor").

MULTIPLE PRICING SYSTEM. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Multiple Pricing
System -- Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."

CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 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 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 Federal Taxes."

3
<PAGE> 9

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

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

CLASS A SHARES CLASS B SHARES CLASS C SHARES(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on 5.75%(a) None None
purchases (as a percentage of
offering price)....................
Sales charge imposed on dividend None None None
reinvestments......................
Deferred sales charge (as a None* 5% during the first year, 1.0% during the first
percentage of original purchase 4% during the second year, year(b)
price or redemption proceeds, 3% during the third year,
whichever is lower)................ 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...................... 1.00% 1.00% 1.00%
Rule 12b-1 fees(d)................... .25% 1.00%(g) 1.00%(g)
Other expenses(e).................... 1.21% 1.21% 1.21%(f)
Total fund operating expenses........ 2.46% 3.21% 3.21%

- ---------------------------------------------------------------------------------------------------------
</TABLE>

(a) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares" -- page 14.
(b) See "Purchase of Shares -- Class B Shares" and "-- Class C Shares" -- pages
16 and 17.
(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% for Class B and C shares. See
"Distribution Plans" -- page 17.
(e) See "The Company and Its Management" -- page 12.
(f) "Other expenses" is based on estimated amounts for the current fiscal year.
(g) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
(1) Annualized.
* Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of 1% may be
imposed on certain redemptions made within one year of the purchase.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
1 3 5 10
EXAMPLE: YEAR YEARS YEARS 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 2.46% for
Class A shares, 3.21% for Class B shares and 3.21% for Class C
shares, (2) a 5% annual return throughout the period and (3)
redemption at the end of the period:
Class A......................................................... $81 $130 $181 $321
Class B......................................................... $83 $131 $184 $318**
Class C......................................................... $43 $ 99 $168 $351
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A......................................................... $81 $130 $181 $321
Class B......................................................... $32 $ 99 $168 $318**
Class C......................................................... $32 $ 99 $168 $351
</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 Fund's current fiscal year. See "Purchase of Shares," "The Company 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> 10

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

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

The following information for the fiscal years ended May 31, 1994 and May 31,
1993, and the period ended May 31, 1992, 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.

CLASS A CLASS B
------------------------------------ ------------------------------------ CLASS C
YEAR YEAR ----------
ENDED AUG. 5, ENDED NOV. 15, JUNE 21,
MAY 31 1991(1) TO MAY 31 1991(1) TO 1993(1) TO
----------------------- MAY 31, ----------------------- MAY 31, MAY 31,
1994 1993(4) 1992(4) 1994 1993(4) 1992(4) 1994(4)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period............................... $10.76 $10.44 $9.33 $10.67 $10.46 $9.78 $10.29
---------- ---------- ---------- ---------- ---------- ---------- ----------

INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .26 .235 .21 .22 .235 .16 .24
Expenses.............................. (.32) (.325) (.185) (.35) (.435) (.165) (.37)
Expense reimbursement................. -- .035 -- -- .065 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net investment income (loss).......... (.06) (.055) .025 (.13) (.135) (.005) (.13)
Net realized and unrealized gain on
securities........................... 1.0125 .7775 1.145 .9825 .7475 .745 1.4725
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations...... .9525 .7225 1.17 .8525 .6125 .74 1.3425
---------- ---------- ---------- ---------- ---------- ---------- ----------

DISTRIBUTIONS FROM NET REALIZED GAINS
ON SECURITIES........................ (.0425) (.4025) (.06) (.0425) (.4025) (.06) (.0425)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period........ $11.67 $10.76 $10.44 $11.48 $10.67 $10.46 $11.59
========= ========= ========= ========= ========= ========= =========

TOTAL RETURN(2)....................... 9.17% 7.13% 12.56% 8.21% 6.15% 7.58% 13.06%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)........................... $41.8 $12.7 $8.4 $48.8 $6.9 $1.2 $5.1
Average net assets (millions)......... $25.8 $9.2 $6.2 $26.4 $2.8 $0.5 $2.4

Ratios to average net assets
Expenses........................... 2.46% 2.93% 2.07%(3) 3.21% 3.88% 3.11%(3) 3.21%(3)
Expenses, without expense
reimbursement.................... -- 3.28% -- -- 4.50% -- --
Net investment income.............. (.46%) (.57%) .29%(3) (1.19%) (1.41%) (.12%)(3) (1.15%)(3)
Net investment income, without
expense reimbursement............ -- (.92%) -- -- (2.02%) -- --

Portfolio turnover rate............... 116% 120% 135% 116% 120% 135% 116%
</TABLE>

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

(1) Commencement of offering of sales.
(2) Total return for periods of less than one year have not been annualized.
Total return does not consider the effect of sales charges.
(3) Annualized.
(4) Based on average month-end share outstanding.

- --------------------------------------------------------------------------------
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 reduced initial sales charges. See
"Purchase of Shares -- Class A Shares."

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

5
<PAGE> 11

after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class B shares.

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

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

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

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

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

6
<PAGE> 12

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 Federal Taxes." Shares of the Fund may be
exchanged, subject to certain limitations, for shares of the same class of other
mutual funds advised by the Adviser. See "Shareholder Services -- Exchange
Privilege."

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

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

The investment objective of the Fund is to provide long-term growth of capital
through investments in an internationally diversified portfolio of equity
securities of companies of any nation including the United States. The Fund
intends to be invested in equity securities of companies of at least three
countries including the United States. Under normal market conditions, at least
65% of the Fund's total assets are so invested. Equity securities include common
stocks, preferred stocks and warrants or options to acquire such securities. In
selecting portfolio securities, the Fund attempts to take advantage of the
differences between economic trends and the anticipated performance of
securities markets in various countries.

Normally, the Fund invests in securities of issuers traded on markets of at
least three of the world's six largest countries by market capitalization
(United States, Japan, United Kingdom, Germany, France and Canada), but
securities of issuers traded on quoted markets of other countries are also
considered for investment. The next six largest countries, in terms of market
capitalization, are Switzerland, Italy, Netherlands, Australia, Sweden and
Spain.

The Adviser, subject to the direction of the Company's Directors, provides the
Fund with an overall investment program consistent with the Fund's objective and
policies. The Adviser is solely responsible for advising the Fund with respect
to investments in the United States. The Subadviser, subject to overall review
by the Adviser and the Company's Directors and other authorized officers, is
responsible for recommending an optimal geographic equity allocation and is
responsible for providing advice with respect to the Fund's investments in
countries other than the United States. Investments may be shifted among the
world's various capital markets and among different types of securities in
accordance with ongoing analysis provided by the Adviser and the Subadviser of
trends and developments affecting such markets and securities. The Adviser and
the Subadviser are sometimes referred to as the Advisers.

7
<PAGE> 13

While the investment policy of the Fund is to be broadly diversified as to
both countries and individual issuers, the Advisers select individual countries
and securities on the basis of several factors. Investments are allocated among
issuers in countries selected based on a comparison of values between the equity
markets in those countries. This comparison is based upon criteria such as
return on equity, book value, earnings, dividends, and interest rates in each
market. After evaluating these factors and others for each country and comparing
opportunities among countries, the Advisers select those countries which, in
their opinion, have the most attractive equity markets. This evaluation is
influential in deciding the amount of investment in each equity market.
Individual equity securities are selected within each market. The Advisers seek
the most attractive individual equity securities based on factors such as book
value, earnings per share and other financial data. The Advisers' approach to
both country and individual security selection is characterized as a
quantitative method utilizing specific financial criteria to identify both value
and opportunity in the equity markets. The Advisers also endeavor to identify
industry, political, and geographical trends which may affect equity values
within individual countries or among a group of countries. The Advisers use
these financial criteria and analysis of industry, political, and geographical
trends to evaluate and compare equity investment opportunities among various
countries and among securities within each country with the objective of
identifying and investing in those securities which can best meet the Fund's
investment objective. Of course, there is no assurance that the Advisers will be
successful in this endeavor or that the investment objective will be realized.

The Fund may 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 obligations 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. 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.

The Fund may invest cash temporarily in short-term debt instruments. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment. See "Temporary Short-Term Investments" herein.

The investment objective and policies, the percentage limitations and the
kinds of securities in which the Fund may invest may be changed by the Board of
Directors unless expressly governed by those limitations as described under
"Investment Practices and Restrictions -- Investment Restrictions" which can be
changed only by action of the shareholders. If there is a change in investment
objective, shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial position and needs.

RISK FACTORS. An investment in the Fund involves risks similar to those of
investing in foreign common stocks generally. Investment in common stocks of
foreign issuers may subject the Fund to risks of foreign political, economic and
legal conditions and developments. Such conditions or developments might include
favorable or unfavorable changes in currency exchange rates, exchange control
regulations (including currency blockage), expropriation of assets of companies,
imposition of withholding taxes on dividend or interest payments, and possible
difficulty in obtaining and enforcing judgments against a foreign issuer. Also,
foreign common stocks may not be as liquid and may be more volatile than
comparable domestic common stocks.

Furthermore, issuers of foreign common stocks are subject to different, often
less comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. The Fund, in connection with its purchases and sales of
foreign securities, other than securities purchased or sold in United States
dollars, will incur transaction costs in converting currencies. Also, brokerage
costs incurred in purchasing and selling securities in foreign securities
markets generally are higher than such costs in comparable transactions in
domestic securities markets, and foreign custodial costs relating to the Fund's
portfolio securities are higher than domestic custodial costs. See also
"Investment Practices and Restrictions" for a discussion of certain additional
risks related to investment practices that may be utilized by the Fund,
including use of options, futures contracts and related options.

FOREIGN CURRENCY TRANSACTIONS. The value of the Fund's portfolio securities
that are traded in foreign markets may be affected by changes in currency
exchange rates and exchange control regulations. In addition, the Fund will
incur costs in connection with conversions between various currencies. The
Fund's foreign currency exchange transactions generally will be conducted on a
spot basis (that is, cash basis) at the spot rate for purchasing or selling
currency prevailing in the foreign currency exchange market. The Fund purchases
and sells foreign currency on a spot basis in connection with the settlement of
transactions in securities traded in such foreign currency. The Fund does not
purchase and sell foreign currencies as an investment.

8
<PAGE> 14

The Fund also may enter into contracts with banks or other foreign currency
brokers or dealers to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.

The Fund may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency futures contract for
such amount. Such hedging strategies may be employed before the Fund purchases a
foreign security traded in the hedged currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received. Hedging against a change in
the value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions reduce
or preclude the opportunity for gain if the value of the hedged currency should
move in the direction opposite to the hedged position. The Fund will not
speculate in foreign currency forward or futures contracts or through the
purchase and sale of foreign currencies.

TEMPORARY SHORT-TERM INVESTMENTS. It is the Fund's policy to be fully invested
in common stocks and securities convertible into common stocks. However, the
Fund may hold a portion of its assets in cash to meet redemptions and other
day-to-day operating expenses. The Fund may invest cash held for such purposes
in obligations of the United States and of foreign governments, including their
political subdivisions, commercial paper, bankers' acceptances, certificates of
deposit, repurchase agreements collateralized by these securities, and other
short-term evidences of indebtedness. The Fund will only purchase commercial
paper if it is rated Prime-1 or Prime-2 by Moody's Investors Services, Inc. or
A-1 or A-2 by Standard & Poor's Corporation. The Fund also may invest cash held
for such purposes in short-term, high grade foreign debt securities. High grade
foreign debt securities are those debt securities of foreign issuers which the
Advisers determine to have creditworthiness substantially equivalent to that of
domestic issuers of debt securities rated investment grade.

- --------------------------------------------------------------------------------
INVESTMENT PRACTICES AND RESTRICTIONS
- --------------------------------------------------------------------------------

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic or foreign banks or broker-dealers in order to earn a return on
temporarily available cash. A repurchase agreement is a short-term investment in
which the purchaser (i.e., the Fund) acquires ownership of a debt security and
the seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the holding period. Repurchase agreements
involve certain risks in the event of a default by the other party. The Fund
will not invest in repurchase agreements maturing in more than seven days if any
such investment, together with any other illiquid securities held by the Fund,
exceeds ten percent of the value of the Fund's net assets. In the event of the
bankruptcy or other default of the seller of a repurchase agreement, the Fund
could experience delays in liquidating the underlying securities including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto, (b) possible lack of access to
income on the underlying security during this period, and (c) expenses of
enforcing its rights. See the Statement of Additional Information.

For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.

PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Advisers are 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 of services on a
continuing basis. The Advisers are authorized to place portfolio transactions
with broker and dealer firms participating in the distribution of shares of the
Fund and other American Capital mutual funds if it reasonably believes that the
quality of the execution and the commission are comparable to that available
from other qualified firms. The Advisers are authorized to pay higher
commissions to brokerage firms that provide investment and research information

9
<PAGE> 15

than to firms which do not provide such services if the Advisers determine that
such commissions are reasonable in relation to the overall services provided.
The information received may be used by the Advisers 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. Similarly, the Fund may from time to
time, place brokerage transactions with brokers that may be considered
affiliated persons of the Subadviser, including the Subadviser's parent company,
Lombard, Odier & Cie ("LOC"). When such transactions are made, in accordance
with Rule 17e-1 of 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."

PORTFOLIO TURNOVER. A change in securities held by the Fund is known as
"portfolio turnover" and may involve the payment by the Fund of brokerage
commissions or dealer mark-up and other transaction costs on the sale of
securities as well as on the investment of the proceeds in other securities. The
portfolio turnover rate for a fiscal year is the ratio of the lesser of
purchases or sales of portfolio securities to the average value of portfolio
securities, excluding debt securities whose maturities at acquisition were one
year or less. The rate may exceed 100% in any given year, which is higher than
that of many other investment companies. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.

LOANS OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
unaffiliated brokers, dealers and financial institutions provided that (a)
immediately after any such loan, the value of the securities loaned does not
exceed 15% of the total value of the Fund's assets, and (b) any securities loan
is collateralized in accordance with applicable regulatory requirements. The
Advisers believe the risk of loss on such transactions is slight, because, if a
borrower were to default for any reason, the collateral should satisfy the
obligation. See the Statement of Additional Information.

RESTRICTED SECURITIES. The Fund may invest up to ten percent of its net assets
in restricted securities and other illiquid assets. As used herein, restricted
securities are those that have been sold in the United States without
registration under the Securities Act of 1933 ("1933 Act") and are thus subject
to restrictions on resale. Excluded from the limitation, however, are any
restricted securities which are eligible for resale pursuant to Rule 144A under
the 1933 Act and which have been determined to be liquid by the Board of
Directors or by the Adviser pursuant to Board-approved guidelines. The
determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. Since it is not possible to
predict with assurance how the markets for restricted securities sold and
offered under Rule 144A will develop, the Directors will carefully monitor the
Fund's investment in these securities focusing on such factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. These difficulties and delays could
result in the Fund's inability to realize a favorable price upon disposition of
restricted securities, and in some cases might make disposition of such
securities at the time desired by the Fund impossible. Since market quotations
are not readily available for restricted securities, such securities will be
valued by a method that the Fund's Board of Directors believes accurately
reflects fair value.

SHORT SALES AGAINST THE BOX. The Fund may from time to time make short sales
of securities it owns or has the right to acquire through conversion or exchange
of other securities it owns. A short sale is "against the box" to the extent
that the Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short. In a short sale, the Fund does not
immediately deliver the securities sold and does not receive the proceeds from
the sale. The Fund is said to have a short position in the securities sold until
it delivers the securities sold, at which time it receives the proceeds of the
sale. The Fund may not make short sales or maintain a short position if to do so
would cause more than 25% of its total assets, taken at market value, to be held
as collateral for such sales.

To secure its obligation to deliver the securities sold short, the Fund will
deposit in escrow in a separate account with its Custodian an equal amount of
the securities sold short or securities convertible into or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short. However, the Fund
will not purchase and deliver new securities to satisfy its short order if such
purchase and sale would cause such Fund to derive more than 30% of its gross
income from the sale of securities held for less than three months.

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

10
<PAGE> 16

In times of stable or rising security prices, the Fund generally seeks to
obtain maximum exposure to the securities markets, 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 security 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
futures contracts, however, the Fund can compensate for the cash portion of its
assets and obtain equivalent performance to investing 100% of its assets in
equity securities.

If the Advisers forecast a market decline, the Fund may take a defensive
position, reducing its exposure to the securities markets by increasing its cash
position. By selling 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. See the Statement of Additional
Information for further discussion of options, futures contracts and related
options, and risks related thereto.

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 Advisers are 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. Under current policy, any OTC Option written by the Fund will
be with a qualified dealer pursuant to an agreement under which the Fund may
repurchase the option at a formula price. Any such OTC Option is presently
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 by the Fund, an
amount of cash, cash equivalents or liquid high grade debt securities equal to
the market value of the obligation under the futures contracts (less any related
margin deposits) will be maintained in a segregated account with the Custodian.
The Fund may not invest more than ten percent of its net assets in illiquid
securities including OTC Options and repurchase agreements which have a maturity
of longer than seven days.

INVESTMENT RESTRICTIONS. The Fund has adopted a number of investment
restrictions which may not be changed without the approval of the holders of a
majority of the Fund's shares. See the Statement of Additional Information. The
percentage limitations need only be met at the time the investment is made or
other relevant action taken. These restrictions provide, among other things,
that the Fund may not:

1. Purchase any security (other than obligations of the United States
Government, its agencies, or instrumentalities) if more than 25% of its
total assets (taken at current value) would then be invested in a single
industry.

2. Invest more than five percent of its total assets (taken at current
value) in securities of a single issuer other than the United States
Government, its agencies or instrumentalities, or hold more than ten
percent of the outstanding voting securities of an issuer.

3. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than ten percent of its net assets in
connection with permissible borrowings or purchase additional securities
when money bor-

11
<PAGE> 17

rowed exceeds five percent of its net assets. Margin deposits or
payments in connection with the writing of options or in connection with
the purchase or sale of forward contracts, futures, foreign currency
futures and related options, are not deemed to be a pledge or other
encumbrance.

4. Lend money except through the purchase of (i) United States and foreign
government securities, commercial paper, bankers' acceptances,
certificates of deposit and similar evidences of indebtedness, both
foreign and domestic, and (ii) repurchase agreements; or lend securities
in an amount exceeding 15% of the total assets of the Fund. The purchase
of a portion of an issue of securities described under (i) above
distributed publicly, whether or not the purchase is made on the
original issuance, is not considered the making of a loan.

- --------------------------------------------------------------------------------
THE COMPANY AND ITS MANAGEMENT
- --------------------------------------------------------------------------------

The Company is an open-end, management investment company, commonly referred
to as a "mutual fund," incorporated in Maryland on May 25, 1990. A mutual fund
provides, for those who have similar investment goals, a practical and
convenient way to invest in a more diversified portfolio of securities than such
investors could assemble independently by combining their resources in an effort
to achieve such goals. The Fund is a diversified portfolio of the Company and is
one of two series of shares of common stock which the Company is currently
authorized to issue. The other series is American Capital Global Government
Securities Fund ("Global Government"). From time to time, the Company may
establish other funds, each corresponding to a distinct investment portfolio and
a distinct series of the Company's common stock. Each series of the Company is a
separate and distinct entity, and a shareholder of one series has no interest in
or entitlement to the assets of any other series.

A board of eight directors has the responsibility for overseeing the affairs
of the Company. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056 and
the Subadviser, Norfolk House, 13 Southampton Place, London WC1A 2AJ, England,
are responsible for the provision of advisory services in relation to the Fund's
assets. The Adviser also provides administrative services and manages the Fund's
business and affairs. The Adviser, together with its predecessors, has been in
the investment advisory business since 1926. As of August 31, 1994, the Adviser
provides investment advice to 45 investment company portfolios with total net
assets of approximately $16.8 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 Company, President,
Chief Executive Officer and Director of the Adviser, and Executive Vice
President and Director of the Distributor. Most other officers of the Company
are also officers and/or directors of the Adviser, and a number are also
officers and directors of the Distributor. The Subadviser provides investment
advisory services to the Adviser of the Fund with respect to the Fund's
investments in foreign securities, including recommending optimal geographic and
equity allocation. The Subadviser is wholly owned by LOC, one of the largest and
oldest private banks in Switzerland, established in 1798. Mr. Pierre Keller, a
Managing Partner of LOC, is Chairman and Mr. Robert van Maasdijk is Managing
Director of the Subadviser. The Subadviser presently serves as investment
subadviser to two open-end investment company portfolios and one closed-end
investment company portfolio other than the Company.

The Company 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
has entered into a sub-advisory agreement dated July 17, 1991, as supplemented,
(the "Sub-advisory Agreement") with the Subadviser to assist it in performing
its investment advisory functions. The Subadviser will be primarily responsible
for recommending the allocation of investments among various international
markets and currencies; recommendation and selection of particular securities in
the international markets; and placement of portfolio transactions in the
foreign equity markets. Under an investment advisory agreement dated July 17,
1991, as supplemented, (the "Advisory Agreement"), the Company pays the Adviser
a monthly fee computed on average daily net assets of the Fund at the annual
rate of 1.00% of the Fund's average daily net assets. This fee is higher than
that charged by most other mutual funds but the Fund believes it is justified by
the special international nature of the Fund and is not necessarily higher than
the fees charged by certain mutual funds with investment objective and policies
similar to those of the Fund. Under the Advisory Agreement, the Company 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 charges, custodial fees, legal and accounting fees,
the costs of reports and proxies to shareholders, directors' fees, and all other
business expenses not specifically assumed by the Adviser. Advisory (management)
fee, and total operating expense, ratios are shown under the caption "Expense
Synopsis" herein. Pursuant to the

12
<PAGE> 18

Sub-advisory Agreement, the Subadviser receives on an annual basis 50% of the
compensation received by the Adviser. The Adviser and the Subadviser may, from
time to time, agree to waive their respective investment advisory fees or any
portion thereof or elect to reimburse the Fund for ordinary business expenses in
excess of an agreed upon amount.

Jeff New is primarily responsible for the day-to-day management of the Fund's
investment portfolio with respect to investments in the United States. Mr. New
is Vice President of the Fund. He has been an associate portfolio manager with
the Adviser since April 1990. Prior to that he was a securities analyst with
Texas Commerce Investment Management Company. Mr. New has been primarily
responsible for managing the Fund's investment portfolio with respect to
investments in the United States since May 13, 1994. The Subadviser employs
Ronald Armist as Director and Senior Investment Manager, who is primarily
responsible for the day-to-day management of the Fund's investments in countries
other than the United States. Mr. Armist has provided such services since the
Fund's inception.

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

GENERAL

The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B shares and Class C shares are
sold without an initial sales charge and are subject to a contingent deferred
sales charge upon certain redemptions. See "Multiple Pricing System" for a
discussion of factors to consider in selecting which class of shares to
purchase. Contact the 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 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 ("Exchange") (currently 4:00 p.m. New York time) each
day the Exchange is open. Net asset value per share for each class is determined
by dividing the value of the Fund's securities, cash and other assets (including
accrued interest) attributable to such class, less all liabilities (including
accrued expenses) attributable to such class, by the total number of shares of
the class outstanding. With respect to foreign securities, income is accrued by
the Fund on the ex date or when data becomes available, whichever is later.
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 and
futures contracts 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 and other
securities are valued in the manner described in the Statement of Additional
Information.

Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and 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.

13
<PAGE> 19

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

CLASS A SHARES

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

SALES CHARGE TABLE

<TABLE>
<CAPTION>
REALLOWED TO
DEALERS (AS A
AS % OF AS % OF % 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 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 "Volume Discounts," and American Capital Reserve Fund,
Inc. ("Reserve"). For such investments the Fund imposes a contingent deferred
sales charge of 1% in the event of certain redemptions within one year of the
purchase. No such charge will be imposed unless and until appropriate relief is
granted by the SEC. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A commission will be paid to dealers who initiate and are responsible
for such purchases as follows: 1% on sales to $5 million, plus 0.50% on the next
$5 million, plus 0.25% on the excess over $10 million.

In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. The Distributor may pay
dealers through whom purchases are made at net asset value as described in
clause (e) herein an amount equal to 0.40% of the amount invested. Dealers which
are reallowed all or substantially all of the sales commissions may be deemed to
be underwriters for purposes of 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 herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of

14
<PAGE> 20

a relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.

Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the shares
will not be resold except through redemption by the Fund, by (a) current or
retired directors of the Fund; current or retired employees of 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 hereto at net asset value, equals
at least $1 million. Purchase orders made pursuant to clause (f) may be placed
either through authorized dealers as described above or directly with ACCESS by
the investment adviser, trust company or bank trust department, provided that
ACCESS receives federal funds for the purchase by the close of business on the
next business day following acceptance of the order. An authorized dealer or
financial institution may charge a transaction fee for placing an order to
purchase shares pursuant to this provision or for placing a redemption order
with respect to such shares. Service Organizations will be paid a service fee as
described herein under "Distribution Plans" on purchases made on behalf of
registered investment advisers, trust companies and bank trust departments
described in clause (f) above, retirement plans described in clause (d) above,
and for registered representatives' accounts.

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

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

VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund,
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., 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. 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.

15
<PAGE> 21

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

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

CLASS B SHARES

Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.

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
DOLLAR AMOUNT
YEAR SINCE PURCHASE 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).

16
<PAGE> 22

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

CLASS C SHARES

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

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

A commission or transaction fee of 1% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.65% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class C shares of the Fund.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE

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

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

Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Directors of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the rules of fair practice of the
National Association of Securities Dealers, Inc. ("NASD Rules") as amended July
7, 1993. The NASD Rules limit the annual distribution charges that a mutual fund
may impose on a class of shares. The NASD Rules also limit the aggregate amount
which the Fund may pay for such distribution costs. Under the Class A Plan, the
Fund pays a service fee to the Distributor at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class A
shares. Under the Class B Plan and the Class C Plan, the Fund pays a service fee
to the 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 and 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 reimbursement for (i) upfront commissions and transaction fees
of up to 0.75% of the purchase price of Class C shares purchased by the clients
of broker-dealers and other Service Organizations and ongoing commissions and
transaction

17
<PAGE> 23

fees of up to 0.65% of the average daily net assets of the Fund's Class C
shares, and (ii) other distribution expenses as described in the Statement of
Additional Information.

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

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

The distribution fee attributable to Class B shares or Class C shares is
designed to permit an investor to purchase such shares without the assessment of
a front-end sales load and at the same time permit the Distributor to compensate
Service Organizations with respect to such shares. In this regard, the purpose
and function of the combined contingent deferred sales charge and distribution
fee are the same as those of the initial sales charge with respect to the Class
A shares of the Fund in that in both cases such charges provide for the
financing of the distribution of the Fund's shares.

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 $1.5 million or 2.85% of the Class B shares' net assets. The
unreimbursed expenses incurred by the Distributor under the Class C Plan from
June 21, 1993 (inception of Class C shares) through May 31, 1994, and carried
forward were approximately $90,000 or 1.48% of the Class C shares' net assets.

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

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

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

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

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

18
<PAGE> 24

out sales charge) on the record date. Unless the shareholder instructs
otherwise, the reinvestment plan is automatic. The investor may, on the initial
application or prior to any declaration, instruct that dividends be paid in cash
and capital gains distributions be reinvested at net asset value, or that both
dividends and capital gains distributions be paid in cash.

AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized dealers.

RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); Keogh and corporate 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 and charges an annual fee. Details regarding other fees, as well as
full plan administration for profit sharing, pension and 401(k) plans are
available from the Distributor.

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

EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
herein under "Purchase of Shares -- 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
Government, Government Trust, High Yield, Municipal Bond, Real Estate,
Tax-Exempt, Texas Municipal and Utilities Income 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 described below.

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

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<PAGE> 25

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 gains options (except fund to fund
dividends) and dealer of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or reinvest dividends from the
new account into another fund, however, an exchanging shareholder must file a
specific written request. The Fund reserves the right to reject any order to
acquire its shares through exchange, or otherwise to modify, restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.

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

SYSTEMATIC EXCHANGE. A shareholder may invest regularly into any Participating
Fund by systematically exchanging from the Fund into such other fund account
($25 minimum for existing account, $100 minimum for establishing new account).
Both accounts must be of the same type and class. The exchange fee as described
above under "Shareholder Services -- Exchange Privilege" will be waived for such
systematic exchanges. Additional information on how to establish this option is
available from the Distributor.

AUTOMATIC EXCHANGE. The exchange fee described above under "Shareholder
Services -- Exchange Privilege" will be waived for any exchange transmitted
through ACCESS Plus, FUNDSERV or via computer transmission. Contact the American
Capital Service Department at (800) 421-5666 for further information on how to
utilize this option.

SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly withdrawal plan. Any investor whose shares
in a single account total $5,000 or more may establish a withdrawal plan on a
quarterly, semiannual or annual basis. This plan provides for the orderly use of
the entire account, not only the income but also the capital, if necessary. Each
withdrawal constitutes a redemption of shares on which any capital gain or loss
will be recognized. The planholder may arrange for monthly, quarterly,
semiannual, or annual checks in any amount not less than $25. Such a systematic
withdrawal plan may also be maintained by an investor purchasing shares for a
retirement plan established on a form made available by the Fund. See
"Shareholder Services -- Retirement Plans."

Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.

Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under this plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.

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<PAGE> 26

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

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

As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of 1% may be imposed on certain redemptions of
Class A shares made within one year of purchase for 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 the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.

Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where American Capital Trust Company
serves as IRA custodian, special IRA, 403(b)(7), or Keogh distribution forms
must be obtained from and be forwarded to American Capital Trust Company, P.O.
Box 944, Houston, Texas 77001-0944. Contact the custodian for information.

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. 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 the purchase check has cleared, usually a period of 15 days. Any taxable
gain or loss will be recognized by the shareholder upon redemption of shares.

The Fund may redeem any shareholder account if such account has for a period
of more than six months had a net asset value of less than $500. The Fund would
redeem a shareholder's account falling below $500 only if this results from
shareholder withdrawals and not from market decline. Sixty days prior written
notice of any such involuntary redemption is required, and the shareholder is
given an opportunity to purchase the required value of additional shares at the
next determined net asset value without sales charge. Any applicable contingent
deferred sales charge will be deducted from the proceeds of this redemption.

TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth, the Fund permits shareholders and the dealer
representative of record to redeem shares by telephone and to have redemption
proceeds sent to the address of record for the account or to the bank account of
record as described below. To establish such privilege, a shareholder must
complete the appropriate section of the application form in this Prospectus or
call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares,
contact the telephone transaction line at (800) 421-5684. American Capital and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither American Capital nor the Fund will be liable
for

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<PAGE> 27

following telephone instructions which it reasonably believes to be genuine.
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's regular redemption
procedure previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If an account has multiple
owners, ACCESS may rely on the instructions of any one owner.

For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed once in each 30-day period. The proceeds must be payable to the
shareholder(s) of record and sent to the address of record for the account or
wired directly to their predesignated bank account. This privilege is not
available if the address of record has been changed within 60 days prior to a
telephone redemption request. Proceeds from redemptions are expected to be wired
on the next business day following the date of redemption. The Fund reserves the
right at any time to terminate, limit or otherwise modify this redemption
privilege.

REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.

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

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

DIVIDENDS. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed annually as dividends to shareholders. Unless the
shareholder instructs otherwise, dividends 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 higher distribution
charges 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 distributes to shareholders at
least once a year the excess, if any, of its total profits on the sale of
securities during the year over its total losses on the sale of securities,
including capital losses carried forward from prior years under tax laws. As in
the case of income dividends, capital gains distributions are automatically
reinvested in additional shares of the Fund at net asset value. See "Shareholder
Services -- Reinvestment Plan."

Transactions in stock index futures traded on domestic exchanges or boards of
trade will generally give rise to a combination of short-term and long-term
capital gains and losses.

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 constitute long-term capital gains for federal income tax purposes. All
such dividends and distributions are taxable to the shareholder whether or not
reinvested in shares. However, shareholders not subject to tax on their income
will not be required to pay tax on amounts distributed to them.

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

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

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<PAGE> 28

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

Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Investors
may be entitled to claim United States foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. If
more than 50% in value of the Fund's total assets at the close of its fiscal
year consists of securities of foreign issuers, the Fund will be eligible, and
may file elections with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their respective pro rata
portions of such taxes in their United States income tax returns as gross
income, treat such respective pro rata portions as taxes paid by them, and
deduct such respective pro rata portions in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their United States
income taxes. The Fund will report annually to its shareholders the amount per
share of such withholding.

Under Code Section 988, foreign currency gains or losses from certain forward
contracts not traded in the interbank market generally are treated as ordinary
income or loss. Such Code Section 988 gains or losses will increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. Additionally, if Code
Section 988 losses exceed other investment company taxable income during a
taxable year, the Fund would not be able to make any ordinary dividend
distributions, and any distributions made before the losses were realized but in
the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing each shareholder's basis in his or her Fund
shares.

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 advisors 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 year and for the life of the Fund. Other total return
quotations, aggregate or average, over other time periods may also be included.

The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 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.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund.

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

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

In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds or with the Dow Jones Industrial Average Index or
Standard & Poor's, or with other global indexes, such as the Morgan Stanley
Capital International World Index, other appropriate indices of investment
securities, or with investment or savings vehicles. The performance information
may also include evalu-

23
<PAGE> 29

ations of the Fund published by nationally recognized ranking services and by
financial publications that are nationally recognized, such as Business Week,
Forbes, Fortune, Institutional Investor, Investor's Business Daily, Kiplinger's
Personal Finance Magazine, Money, Mutual Fund Forecaster, Stanger's Investment
Advisor, USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement would also
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Fund, as well as the
performance of other mutual funds or indices, do not reflect sales charges, the
inclusion of which would reduce Fund performance. The Fund will include
performance data for Class A, Class B and Class C shares of the Fund in any
advertisement or information including performance data of the Fund. The Fund
may also refer to results of top performing world equity markets as compiled by
Morgan Stanley Capital International or other independent statistical services
or to products or services produced or provided by domestic or foreign
companies.

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 Company was organized on May 25, 1990, under the
laws of the State of Maryland, and presently is authorized to sell two series.
These series are American Capital Global Government Securities Fund and the
Fund. Each of these series offers three classes of shares: Class A, Class B and
Class C shares. Each class of shares represents interests in the assets of the
Fund and has identical voting, dividend, liquidation and other rights on the
same terms and conditions except that the distribution fees and/or service fees
related to each class of shares are borne solely by that class, and each class
of shares has exclusive voting rights with respect to provisions of the Fund's
Class A Plan, Class B Plan and Class C Plan which pertain to that class. An
order has been received from the SEC permitting the issuance and sale of
multiple classes of shares representing interests in the Fund's existing
portfolio. Shares issued are fully paid, non-assessable and have no preemptive
or conversion rights.

VOTING RIGHTS. The Bylaws of the Company 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 of the Fund 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. Shares of the Fund will be voted
by the Fund's shareholders individually when the matter affects the specific
interest of the Fund only, such as a change in a fundamental investment policy.
The shares of all the Company's series will be voted in the aggregate on other
matters, such as the election of the Company's directors. 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 Company
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 Company.

INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1201 Louisiana, Suite 2900,
Houston, Texas 77002, are the independent accountants for the Company.

CUSTODIAN. The Company's securities and cash in the United States will be held
under a custodian agreement with State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. The Custodian may employ
sub-custodians outside the United States approved by the Directors of the
Company in accordance with regulations of the SEC.

24
<PAGE> 30

- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------

May 31, 1994
Common Stock
<TABLE>
<CAPTION>

Number of
Shares
<S> <C>
AUSTRALIA
17,000 Broken Hill Property
150,000 TNT

AUSTRIA
10,000 Flughafen Wien

BELGIUM
2,700 Ackermans
9,100 GIB
1,370 Kredietbank

CANADA
*32,000 Advanced Information
Technology
13,200 Alcan Aluminium
*106,000 Current Technology Corp.
*25,000 DY 4 Systems, Inc.
*174,000 Global Election Systems,
Inc.
*12,000 Home Oil, Ltd.
*13,800 Hummingbird
Communications, Ltd.
*21,500 ID Biomedical Corp.
69,000 Laidlaw, Inc., Class B
*113,000 Markborough Properties
*24,400 Northern Reef
Explorations,
Ltd.
*182,000 Ondaatje Corp.
12,200 Seagram Co., Ltd.
*26,700 Speedy Muffler King, Inc.

DENMARK
7,100 Tele Danmark, AS, Class B

FRANCE
3,800 Alcatel Alst (CGE)
4,000 Alcatel Cable
2,900 BIC
4,450 Castorama Dubois
21,600 CSF (Thomson)
6,550 Guilbert, SA
230 LeGrand
9,700 Michelin, Class B
3,600 Primagaz (Cie Gaz)
6,000 Roussel UCLAF
7,300 TV Francaise (TF1)
10,750 Total, Class B

GERMANY
2,060 Bayer Hypo/Wech Bank
400 Bayerische Motoren Werke
*400 Bayerische Motoren Werke,
Rights (expiring 6/94)
820 Daimler Benz
750 Deutsche Bank AG
*1,000 Duer
1,640 Felten & Guilleaume
900 Leifheit
2,000 Man
695 Siemens AG
1,500 Veba

HONG KONG
28,800 China Light & Power
126,000 Dairy Farm International
600,000 Goldlion Holdings, Ltd.
*34,000 Guoco Group
*128,000 Hong Kong Telecomm,
Warrants (expiring
2/95)
550,000 S. Megga International
155,000 Varitronix International
600,000 Wai Kee Holdings
400,000 World Houseware

ITALY
41,500 Burgo (Cartiere) SPA
90,000 Danieli & Co.
*100,000 Fiat SPA, Warrants
(expiring 12/94)
55,900 Rinascente (La)
144,000 SIP
33,000 Sirti SPA

JAPAN
34,000 Ajinomoto Co., Inc.
10,000 Asatsu, Inc.
60,000 Citizen Watch Co.
7 DDI Corp.
95,000 Dowa Mining Co.
115 East Japan Railway
*450 Ebara Corp., Warrants
(expiring 3/98)
60,000 Hitachi
95,000 Hitachi Zosen Corp.
20,000 Honda Motor Corp.
120,000 Ishikawajima Har
120,000 Isuzu Motors
80,000 Japan Air Lines Co.
70,000 Japan Wool Textile
40,000 Kitano Construction Co.
240,000 Kobe Steel
20,000 Kokusai Electric
60,000 Komatsu
43,000 Komatsu Seiren Co.
35,000 Makino Milling
80,000 Marubeni Corp.
28,000 Marui Co.
24,000 Matsushita Electric
Industries
40,000 Matsushita Electric Works
100,000 Mazda Motor Corp.
110,000 Minolta Camera Co.
45,000 Mitsubishi Construction
90,000 Mitsubishi Electric Corp.
</TABLE>

25
<PAGE> 31

Common Stock
<TABLE>
<CAPTION>
Number of
Shares
<S> <C>
120,000 Mitsubishi Ka Sei
50,000 NEC Corp.
50,000 New Oji Paper Co.
*10,700 Nikkei, Warrants
(expiring 12/95)
*10,400 Nikkei, Warrants
(expiring 6/96)
110,000 Nippon Diesel Motor
75,000 Nippon Sanso Corp.
65 Nippon Telephone &
Telegraph Corp.
65,000 NTN Corp.
45,000 Onward Kashiyama
10,000 Rohm Co.
20,000 Shimachu
300 Sony Music Entertainment
60,000 Toray Industries, Inc.
140,000 Ube Industries
90,000 Yokohama Rubber Co.
20,000 Yurtec Industries, Inc.

MALAYSIA
17,000 Edaran Otomobil
20,000 Resorts World BHD
*16,000 United Engineers Malaysia
BHD, Convertible

NETHERLANDS
*5,300 ABN Amro Holdings NV,
Rights
4,000 Aegon NV
3,100 Akzo NV
4,555 International Nederlanden
Group
15,000 KNP BT (KON) NV
5,550 Royal Dutch Petroleum
16,000 Stork NV
1,300 Unilever NV

SINGAPORE
25,000 Cycle & Carriage
22,000 Fraser & Neave
45,000 Sembawang Maritime
18,000 Singapore Airlines
10,000 Singapore Press Holdings

SPAIN
6,900 Banco Santander
7,500 Empresa Nac Elec
4,000 Gas Natural SDG, SA
67,200 Iberdrola, SA
37,700 Uralita

SWEDEN
22,500 Astra, AB, Series B
13,800 Celsius Industriar, AB,
Series B
*31,600 Hoganas, AB, Series B
*14,400 Skanska, AB, Series B
13,400 Svedala Industrial
12,200 Svenska Cellulosa,
Series B

SWITZERLAND
240 Baloise Holdings
*350 Brown, Bov and Cie, AG,
Series A
375 Ciba Geigy, AG
1,000 CS Holdings
*325 Grands Mgs Jelmoli
*1,625 Grands Mgs Jelmoli,
Warrants (expiring
5/96)
500 Nestle, SA
400 Publicitas Holdings
800 Sandoz, AG
210 Schindler Holdings, AG

THAILAND
4,000 Advanced Information
Services
17,000 Ban Pu Coal
17,000 Hana Microelectronic
55,000 NTS Steel Groups
12,500 Siam City Cement
11,000 Sino Thai Eng, PLC
14,000 Thai Glass Industries,
PLC

UNITED KINGDOM
60,000 BAA
94,200 Bank of Ireland
50,000 Barclay's
103,000 British Petroleum Co.,
PLC
126,000 British Steel, PLC, ADS
148,000 BTR
110,750 Cable & Wireless, PLC,
ADS
53,457 Claremont Garments
114,000 Cowie Group, PLC
76,000 Croda International
48,000 Eurotherm
44,000 Fairey Group
93,500 Granada Group
105,000 Hanson, PLC, ADR
110,000 Hartstone Group
23,500 La Porte
175,000 MAI
145,000 Next, PLC
*140,000 Northern Ireland
Electricity
*120,000 Pelican Group
*66,666 Pelican Group, Rights
(expiring 6/94)
37,500 Reed International
63,000 Reuters Holdings, PLC,
ADR
106,000 Royal Insurance
49,000 Scottish Power
45,000 Shell Transportation &
Trading
14,300 Siebe
117,000 Standard Chartered
73,000 Trinity Holdings
75,000 Willis Corroon Group

UNITED STATES
8,000 Abbott Laboratories
6,000 Adobe Systems, Inc.
2,800 Allied-Signal, Inc.
8,000 Alltel Corp.
6,500 American Greetings Corp.,
Class A
3,100 American International
Group, Inc.
</TABLE>

26
<PAGE> 32

Common Stock
<TABLE>
<CAPTION>
Number of
Shares
- --------------------------------------
<S> <C>
5,000 American Telephone &
Telegraph Co.
*2,000 Amgen, Inc.
3,500 Amoco Corp.
4,600 Anheuser Busch Companies,
Inc.
3,300 Apache Corp.
*3,700 Applied Materials, Inc.
2,000 Atlantic Richfield Co.
6,200 Bankamerica Corp.
8,000 Baxter International,
Inc.
4,000 Baybanks, Inc.
4,400 Bellsouth Corp.
2,000 Belo (A.H.) Corp.
5,800 Birmingham Steel Corp.
*2,200 BMC Software, Inc.
6,000 British Petroleum Co.,
PLC, ADR
3,500 Browning-Ferris
Industries, Inc.
2,200 Callaway Golf Co.
100 Capital Cities-ABC, Inc.
2,000 Caterpillar, Inc.
4,000 Chrysler Corp.
5,000 Citicorp
2,100 Clorox Co.
1,400 Coca-Cola Co.
1,800 Columbia/HCA Healthcare
*6,000 Community Health Systems,
Inc.
1,500 Compania de Telefonos,
Chili, ADR
2,000 Crestar Financial
1,500 CSX Corp.
3,500 Dayton Hudson Corp.
5,500 Dollar General Corp.
2,200 Dow Chemical Co.
*5,000 Dr Pepper/Seven Up
Companies, Inc.
1,200 DuPont (E.I.) de Nemours
& Co., Inc.
2,000 Duracell International,
Inc.
1,400 Eaton Corp.
4,600 Enron Corp.
5,000 Enron Oil & Gas Co.
2,000 Federal National Mortgage
Association
*3,600 Filenet Corp.
2,600 First Bank Systems, Inc.
7,200 First Chicago Corp.
2,500 First Interstate Bancorp.
3,600 First USA, Inc.
2,000 Fluor Corp.
2,600 Ford Motor Co.
*1,500 Fore Systems
5,000 Gap, Inc.
4,500 Gaylord Entertainment
Co., Class A
*2,500 General Instrument Corp.
2,200 General Motors Corp.
*3,100 Georgia Gulf Corp.
3,400 Gillette Co.
107,000 Glaxo Holdings, PLC, ADR
2,500 Grainger (W.W.) Financial
Corp.
1,700 Green Tree Financial
Corp.
4,100 Harley Davidson, Inc.
*10,000 Healthcare & Retirement
Corp.
*2,600 Healthsource, Inc.
3,500 Healthtrust Inc.-The
Hospital Company
3,500 Heilig Meyers Co.
1,700 Hercules, Inc.
900 Hewlett-Packard Co.
*3,700 Hospitality Franchise
Systems
12,000 Host Marriott Corp.
4,565 IDB Communications Group,
Inc.
5,700 Illinois Central Corp.
2,700 Illinois Tool Works, Inc.
*3,500 Integrated Device
Technology
5,300 International Business
Machines Corp.
2,000 International Paper Co.
900 ITT Corp.
3,400 Kimberly Clark Corp.
*4,600 Kohls Corp.
1,400 Leggett & Platt, Inc.
*11,800 Lincare Holdings, Inc.
6,500 Loral Corp.
*4,500 LSI Logic Corp.
4,400 Marriott International,
Inc.
3,200 May Department Stores Co.
3,900 McDonald's Corp.
*2,500 Michaels Stores, Inc.
1,600 Micron Technology, Inc.
*3,000 Microsoft Corp.
5,500 Midlantic Corp.
5,000 Mobil Corp.
2,700 Monsanto Co.
2,300 Motorola, Inc.
4,000 NationsBank Corp.
*8,000 Nellcor, Inc.
8,000 NIPSCO Industries, Inc.
1,800 Nordstrom, Inc.
*4,000 Office Depot, Inc.
6,200 Omnicom Group, Inc.
*3,000 Outback Steakhouse, Inc.
6,000 Penney (J.C.), Inc.
13,000 Pet, Inc.
1,000 Pfizer, Inc.
2,000 Philip Morris Companies,
Inc.
2,500 Philippine Long Distance
Telephone, ADR
2,800 Pioneer HiBred
International, Inc.
3,000 PPG Industries, Inc.
11,000 Praxair, Inc.
2,500 Procter & Gamble Company
4,600 Rockwell International
Corp.
3,000 Schering-Plough Corp.
5,500 Service Corp.
International
4,000 Southwestern Bell Corp.
7,500 Sprint Corp.
</TABLE>

27
<PAGE> 33

Common Stock

<TABLE>

Number of
Shares
- -------------------------------------------
<S> <C>

*2,500 Sterling Software, Inc.
3,500 SunAmerica, Inc.
9,300 Telefonos de Mexico, SA,
ADR
3,200 Tenneco, Inc.
1,500 Texas Instruments, Inc.
*1,000 3Com Corp.
3,300 Tribune Co.
5,000 United States Shoe Corp.
4,000 United Technologies Corp.
*2,300 Varity Corp.
700 Wells Fargo & Company
*2,200 Western Atlas, Inc.
6,400 West One Bancorp
4,000 Weyerhaeuser Co.
2,000 Williamette Industries,
Inc.
3,400 Williams Companies, Inc.
8,000 WMX Technologies, Inc.
14,800 YPF Sociedad Anonima, ADR

Short-Term Investments

Principal
Amount
- -------------------------------------------
REPURCHASE AGREEMENT
<S> <C>
$7,685,000 Kidder, Peabody & Company,
Inc., dated 5/31/94,
4.27%, due 6/1/94
(collateralized by U.S.
Government obligations
in a pooled cash
account) repurchase
proceeds $7,685,911

U.S. GOVERNMENT OBLIGATIONS
120,000 U.S. Treasury Bills, 4.01%
to 4.02%, due 7/28/94 to
8/4/94
</TABLE>

* Non-income producing security.

28
<PAGE> 34

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> 35

AMERICAN CAPITAL
GLOBAL EQUITY FUND

PROSPECTUS
September 29, 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

INVESTMENT SUBADVISER
Lombard Odier International
Portfolio Management Limited
Norfolk House
13 Southampton Place
London WC1A 2AJ
England

TRANSFER, DISBURSING, REDEMPTION
AND SHAREHOLDER SERVICE AGENT
American Capital Companies
Shareholder Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256

INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002

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

Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent
American Capital Companies Shareholder
Services, Inc. (ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor, American
Capital Marketing, Inc., P.O. Box 1411,
Houston, TX 77251-1411.

American Capital C/O ACCESS
Global Equity Fund P.O. Box 418256
A Fund of Kansas City, MO 64141-9256
American Capital
World Portfolio
Series, Inc.

A Fund of American Capital
World Portfolio Series, Inc.

[AMERICAN CAPITAL LOGO]

PRINTED MATTER
Printed in U.S.A./###-##-####/075 PRO-001 (W/S)

<PAGE> 36

PART B: STATEMENT OF ADDITIONAL INFORMATION

AMERICAN CAPITAL WORLD PORTFOLIO SERIES, INC.
AMERICAN CAPITAL GLOBAL EQUITY FUND
SEPTEMBER 29, 1994

American Capital Global Equity Fund (the "Fund") is a diversified series of
American Capital World Portfolio Series, Inc. (the "Company") an open-end
investment company which presently is authorized to sell shares of two series.

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

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 September
29, 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
INVESTMENT OBJECTIVE AND POLICIES..................................................... 3
OPTIONS, FUTURES AND RELATED OPTIONS.................................................. 3
REPURCHASE AGREEMENTS................................................................. 9
LOANS OF PORTFOLIO SECURITIES......................................................... 9
INVESTMENT RESTRICTIONS............................................................... 9
DIRECTORS AND EXECUTIVE OFFICERS...................................................... 11
INVESTMENT ADVISORY AGREEMENT......................................................... 13
DISTRIBUTOR........................................................................... 15
DISTRIBUTION PLANS.................................................................... 15
TRANSFER AGENT........................................................................ 17
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 17
DETERMINATION OF NET ASSET VALUE...................................................... 19
PURCHASE AND REDEMPTION OF SHARES..................................................... 19
EXCHANGE PRIVILEGE.................................................................... 23
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 24
PRIOR PERFORMANCE INFORMATION......................................................... 26
OTHER INFORMATION..................................................................... 27
FINANCIAL STATEMENTS.................................................................. 27
</TABLE>

<PAGE> 37

GENERAL INFORMATION

The Company was incorporated in Maryland on May 25, 1990.

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 Company and Its Management" in the Prospectus.

Lombard Odier International Portfolio Management Limited (the "Subadviser")
is a wholly owned subsidiary of Lombard Odier & Cie ("LOC"), one of the oldest
and largest private banks in Switzerland, established in 1798.

As of August 12, 1994, no one person was 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>
NATURE NUMBER
OF OF SHARES
NAME AND ADDRESS OF HOLDER OWNERSHIP CLASS HELD PERCENT
- ------------------------------------------------------ ---------- ----- --------- -------
<S> <C> <C> <C> <C>
American Capital Trust Company of record.... A 1,511,680 39.05%
2800 Post Oak Blvd.
Houston, TX 77056

Smith Barney Inc. of record.... A 209,984 5.42%
388 Greenwich Street, 22nd Floor
New York, NY 10013-2375

American Capital Trust Company of record.... B 1,009,986 21.17%
2800 Post Oak Blvd.
Houston, TX 77056

Smith Barney Inc. of record.... B 669,565 14.03%
388 Greenwich Street, 22nd Floor
New York, NY 10013-2375

American Capital Trust Company of record.... C 35,264 7.38%
2800 Post Oak Blvd.
Houston, TX 77056

Merrill Lynch Pierce Fenner & Smith Inc. of record.... C 32,009 6.70%
Mutual Fund Operations
4800 Deer Lake Drive East,
3rd Floor
Jacksonville, FL 32246-6484

PaineWebber Inc. of record.... C 63,598 13.31%
1000 Harbor Blvd., 7th Floor
Weehawken, NJ 07087-6727

Smith Barney Inc. of record.... C 135,073 28.27%
388 Greenwich Street, 22nd Floor
New York, NY 10013-2375
</TABLE>

2
<PAGE> 38

INVESTMENT OBJECTIVE AND POLICIES

The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete
explanation of the matters disclosed. Readers must also refer to this caption in
the Prospectus for a complete presentation of the matters disclosed below.

The investment objective of the Fund is to provide long-term growth of
capital.

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 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.

The Fund may write and invest in options, futures contracts and related
options thereon. For further discussion of options, futures and related options
see "Investment Practices and Restrictions" in the Prospectus and "Options,
Futures and Related Options" herein.

OPTIONS, FUTURES 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 or total return than would be
realized on the underlying securities alone. Such returns 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. Actively writing options on portfolio securities is likely to
result in a substantially higher portfolio turnover rate than that of most other
investment companies.

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 from 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 segregated account with its Custodian cash, cash
equivalents or U.S. Government securities in any 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.

The Fund intends to limit its ability to write options such that the
aggregate value of the securities underlying the calls or the obligations
underlying the puts determined as of the date the options are sold shall not
exceed 25% of its net assets.

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

The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as a writer of an option only

3
<PAGE> 39

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 and limits it ability to achieve long-term growth of
capital for such period; by writing a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.

Each of the United States 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.

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 which 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

4
<PAGE> 40

in the index. Options are currently traded on The Chicago Board Options
Exchange, the American Stock Exchange and other exchanges. The Fund may write or
purchase options which are listed on an exchange as well as options which are
traded over-the-counter.

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.

FOREIGN CURRENCY OPTIONS

The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than five percent of the Fund's net assets at
any given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the Fund from time to
time and over-the-counter options may also be purchased, but only when the
Advisers believe that a liquid secondary market exists for such options,
although there can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Option on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investment generally. See "Investment Practices and Restrictions -- Using
Options, Futures Contracts and Related Options" in the Prospectus.

The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.

There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.

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 would be 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.

Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of

5
<PAGE> 41

Trade. Differences in the stocks included in the indexes may result in
differences in correlation of the futures contracts with movements in the value
of the securities being hedged.

Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto Stock
Exchange. Futures and futures options on the Nikkei Index are traded on the CME
and United States commodity exchanges may develop futures and futures options on
other indices of foreign securities. Futures and options on United States
devised index of foreign stocks are also being developed.

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 or a futures
contract. Initially, the Fund will be 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, will be 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 has purchased a futures contract and the price
of the underlying security or index has risen, that position will have increased
in value, and the Fund will receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the value of the underlying security or index has declined,
the position would be less valuable, and the Fund would be required to make a
variation margin payment to the broker.

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

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

6
<PAGE> 42

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, currency or index 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 (lesser) dollar amount than the dollar amount of
securities being hedged if the historical volatility of the securities being
hedged is greater (lesser) than the historical volatility of the securities,
currency or index 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, currencies 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, currencies 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 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 the
movements in the futures contracts and movements in the securities or currencies
underlying them, a correct forecast of general market trends by the Advisers 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 on 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 Advisers' 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.

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
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

7
<PAGE> 43

completely offset losses on the futures contract. However, as described in the
Prospectus, there is no guarantee that the price of the securities being hedged
will, in fact, correlate with the price movements in a futures contract and thus
provide an offset to losses on the futures contract.

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

OPTIONS ON FUTURES CONTRACTS

The Fund could also purchase and write options on futures contracts.
Options on futures contracts to be written or purchased by the Fund will be
traded on Untied States or foreign exchanges or over-the-counter. An option on a
futures contract gives the purchasers the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), at a specified exercise price
at any time during the option period. As a writer of an option on a futures
contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as it could sell, a futures contract; 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 such Fund. The purchase of call options on
futures contracts would be intended to serve the same purpose as the actual
purchase of the futures contract.

RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS

In addition to the risks described above which apply to all options
transactions, there are several special risks relating to options on futures.
The Advisers will not purchase options on futures on any exchange unless in the
Advisers' 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 OF OPTIONS AND FUTURES TRANSACTIONS

Each of the United States exchanges and boards of trade 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 Advisers
are combined for purposes of these limits. An exchange or board of trade 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.

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<PAGE> 44

REPURCHASE AGREEMENTS

In order to earn interest on funds available for very short-term
investment, the Fund may enter into repurchase agreements with domestic or
foreign banks or broker-dealers deemed to be creditworthy by the Adviser under
guidelines approved by the Board of Directors. 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 fully collateralized by the underlying debt securities
and are considered to be loans under the Investment Company Act of 1940, as
amended ("1940 Act"). The Fund pays 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 (normally 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 securities unless the seller defaults under its
repurchase obligation. See "Investment Practices and Restrictions -- Repurchase
Agreements" in the Prospectus for further information.

LOANS OF PORTFOLIO SECURITIES

The Fund may lend portfolio securities to unaffiliated brokers, dealers and
financial institutions provided that cash or U.S. Government securities equal in
value to 100% of the market value of the securities loaned is deposited by the
borrower with the Fund and is marked to market daily. While such securities are
on loan, the borrower is required to pay the Fund any income accruing thereon.
Furthermore, the Fund may invest the cash collateral in portfolio securities
thereby increasing the return to the Fund as well as increasing the market risk
to the Fund. The Fund will not lend its portfolio securities if such loans are
not permitted by the laws or regulations of any state in which its shares are
qualified for sale. However, should the Fund believe that lending securities is
in the best interests of its shareholders, it would consider withdrawing it
shares from sale in any such state.

Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. The Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions which cannot be changed
without approval by the holders of a majority of its outstanding shares. Such
majority is defined as the lesser of (i) 67% or more of the voting securities
present at the meeting, if the holders of more than 50% of the outstanding
voting securities of the Fund are present or represented by proxy; or (ii) more
than 50% of the Fund's outstanding voting securities. 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. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed
to be an underwriter under the federal securities laws.

2. Purchase any security (other than obligations of the United States
Government, its agencies, or instrumentalities) if more than 25% of its
total assets (taken at current value) would then be invested in a
single industry.

9
<PAGE> 45

3. Invest more than five percent of its total assets (taken at current
value) in securities of a single issuer other than the United States
Government, its agencies or instrumentalities, or hold more than ten
percent of the outstanding voting securities of an issuer.

4. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than ten percent of its net assets in
connection with permissible borrowings or purchase additional
securities when money borrowed exceeds five percent of its net assets.
Margin deposits or payments in connection with the writing of options
or in connection with the purchase or sale of forward contracts,
futures, foreign currency futures and related options are not deemed
to be a pledge or other encumbrance.

5. Lend money except through the purchase of (i) United States and foreign
government securities, commercial paper, bankers' acceptances,
certificates of deposit and similar evidences of indebtedness, both
foreign and domestic, and (ii) repurchase agreements; or lend
securities in an amount exceeding 15% of the total assets of the Fund.
The purchase of a portion of an issue of securities described under
(i) above distributed publicly, whether or not the purchase is made
on the original issuance, is not considered the making of a loan.

6. Make short sales of securities, unless at the time of the sale it owns
or has the right to acquire an equal amount of such securities;
provided that this prohibition does not apply to the writing of
options or the sale of forward contracts, futures, foreign currency
futures or related options.

7. Purchase securities on margin but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities. The deposit or payment by the Fund of initial or
maintenance margin in connection with forward contracts, futures,
foreign currency futures or related options is not considered the
purchase of a security on margin.

8. Buy or sell real estate or interests in real estate including real
estate limited partnerships, provided that the foregoing prohibition
does not apply to a purchase and sale of publicly traded (i) securities
which are secured by real estate, (ii) securities representing
interests in real estate, and (iii) securities of companies
principally engaged in investing or dealing in real estate.

9. Make investments for the purpose of exercising control or management
although the Fund retains the right to vote securities held by it.

10. Invest in commodities or commodity contracts, except that the Fund may
enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related
options and forward contracts.

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, forward contracts, forward commitments and other investment
strategies and instruments that would be considered "senior securities"
but for the maintenance by the Fund of a segregated account with its
custodian or some other form of "cover".

In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Fund is subject to the following policies
which may be amended by the Company's Board of Directors and which apply at the
time of purchase of portfolio securities.

1. The Fund may not 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 as part of a merger,
consolidation or other acquisition.

2. The Fund may not 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

10
<PAGE> 46

such basis) which are not listed on the New York or American Stock
Exchanges. Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitation.

3. The Fund may not invest in securities of any company if any officer or
director of the Company 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 own
in the aggregate more than five percent of the outstanding securities
of such issuer.

4. The Fund may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Fund may acquire securities of public companies
which themselves are engaged in such activities.

5. The Fund may not invest more than five percent of its total assets in
securities of unseasoned issuers which have been in operation directly
or through predecessors for less than three years.

6. The Fund may not purchase or otherwise acquire any security if, as a
result, more than ten percent of its net assets (taken at current
value) would be invested in securities that are illiquid by virtue of
the absence of a readily available market. This policy includes
repurchase agreements maturing in more than seven days and
over-the-counter options held by the Fund and that portion of assets
used to cover such options. This policy does not apply to restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 (the "1933 Act") which the Board of Directors
or the Adviser under Board approved guidelines, may determine are
liquid nor does it apply to other securities, for which,
notwithstanding legal or contractual restrictions on resale, a liquid
market exists.

The Fund has made an undertaking with one state that it will continue to
comply with the disclosure relating to writing options and engaging in future
and related options transactions as described herein. The Fund has made an
undertaking with one state to provide written notification to shareholders of
any change in its investment objective at least 30 days prior to implementing
such change and will waive any fee or charge which may result if the shareholder
decides to redeem his or her account as a result of such change in the
investment objectives.

DIRECTORS AND EXECUTIVE OFFICERS

The Company directors and executive officers and their principal
occupations during the past 5 years are listed below. All persons named as
Director also serve in similar capacities for other funds advised by the Adviser
as indicated below.

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

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

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

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

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<PAGE> 47

*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 Dr., 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); Director, James River Corporation (paper
products); Trustee and formerly President, Whitney Museum of American Art;
Chairman, Institute for Educational Leadership, Inc., Board of Visitors,
Graduate School of The City University of New York, Academy of Political
Science; Committee for Economic Development; Director, Public Education Fund
Network, Fund for New York City Public Education; Trustee, Barnard College;
Member, Dean's Council, Harvard School of Public Health; Member, Mental Health
Task Force, Carter Center.(1)

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

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, IDS
Financial Services Inc.(4)

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

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

JEFF NEW, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056. Mr.
New also serves as Vice President of American Capital Enterprise Fund, Inc. and
American Capital Global Managed Assets Fund, Inc.; formerly Associate Portfolio
Manager of the Adviser; formerly securities analyst with Texas Commerce
Investment Management Company.(4)

ROBERT C. PECK, JR., Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President -- Chief Investment Officer/Fixed Income and
Director of the Adviser; Executive Vice President and Director of ACMR.(4)

JOHN R. REYNOLDSON, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Senior Investment Vice President of the Adviser. Mr. Reynoldson also
serves as Vice President of American Capital Global Managed Assets Fund, Inc.,
American Capital Government Securities, Inc., Portfolio '97 of American Capital
Government Target Series, Government Portfolio of American Capital Life
Investment Trust, and Common Sense Trust -- Common Sense Government Fund and
Common Sense II Government Fund.(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, 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)

12
<PAGE> 48

PAUL R. WOLKENBERG, Vice President. 2800 Post Oak Blvd., Houston, Texas
77056. Executive Vice President and Director of ACMR; Senior Vice President of
the Adviser; President, Chief Operating Officer and Director of American Capital
Services, Inc.; Executive Vice President, Chief Operating Officer and Director
of American Capital Trust Company; Executive Vice President and Director of
American 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
in the case of Mr. Powell and is an interested person by virtue of his
affiliation with Travelers in the case of Mr. Woodside.

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

(1) Also a director or trustee of American Capital Comstock Fund, Inc.,
American Capital Corporate Bond Fund, Inc., American Capital Emerging
Growth Fund, Inc., American Capital Enterprise Fund, Inc., American
Capital Equity Income Fund, Inc., American Capital Federal Mortgage
Trust, American Capital Global Managed Assets Fund, Inc., American
Capital Government Securities, Inc., American Capital Government Target
Series, American Capital Growth and Income Fund, Inc., American Capital
Harbor Fund, Inc., American Capital High Yield Investments, Inc., American
Capital Life Investment Trust, American Capital Municipal Bond Fund, Inc.,
American Capital Pace Fund, Inc., American Capital 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 and American Capital Utilities Income Fund, 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.

(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 by
the Adviser.

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

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

The directors and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the fiscal year ended May 31,
1994, the directors who were not affiliated with the Adviser or its parent
received as a group $7,789 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 last fiscal year, the Fund paid legal fees of $13,576 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 Company and the Adviser are parties to an investment advisory
agreement, dated July 17, 1991 (the "Advisory Agreement"), as supplemented.
Under the Advisory Agreement, the Company retains the Adviser to manage the
investment of the Fund's assets, including the placing of orders for the
purchase and sale of portfolio securities. The Adviser obtains and evaluates
economic, statistical and financial information to formulate and implement the
Fund's investment programs.

13
<PAGE> 49

The Adviser has entered into a subadvisory agreement dated July 17, 1991,
as supplemented, with the Subadviser to assist it in performing its investment
advisory functions (the "Sub-advisory Agreement"). The Subadviser will be
primarily responsible for recommending the allocation of investments among
various international markets and currencies; recommendation and selection of
particular securities in the international markets; and placement of portfolio
transactions in the foreign equity markets. For its services, the Subadviser
receives from the Adviser a fee at the annual rate of 50% of the compensation
received by the Adviser. The Adviser and Subadviser are hereinafter sometimes
referred to as the "Advisers."

The Adviser also furnishes the services of the Company's President and such
other executive and clerical personnel as are necessary to prepare the various
reports and statements and conduct the Company's day-to-day operations. The
Company, however, bears the cost of its accounting services, which include
maintaining its financial books and records. The costs of such accounting
services include the salaries and overhead expenses of the Company's Treasurer
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,
facilities and equipment costs attributable to the provision of accounting
services to the Company. The services provided by the Adviser are at cost. The
Company also pays shareholder service agency fees, distribution fees, custodian
fees, legal and auditing fees, the costs of reports to shareholders, and all
other ordinary business expenses not specifically assumed by the Adviser. The
Advisory Agreement also provides that the Adviser shall not be liable to the
Company for any actions or omissions if it acted without willful misfeasance,
bad faith, negligence or reckless disregard of its obligations.

Under the Advisory Agreement, the Company pays to the Adviser, as
compensation for the services rendered, facilities furnished, and expenses paid
by it, a fee payable monthly, computed at the annual rate of 1.00% of average
daily net assets of the Fund.

The Fund's average net assets are determined by taking the average of all
determinations of the net assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser will be reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of ACMR in
connection with the purchase and sale of portfolio investments less any direct
expenses incurred by such subsidiary of ACMR, in connection with obtaining such
commissions, fees, brokerage or similar 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 Company's benefit and
to advise the Directors of the Company of any other commissions, fees, brokerage
or similar payments which may be possible for the Adviser or any other direct or
indirect majority owned subsidiary of 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 Company, calculated separately for each series, for any
fiscal year should exceed the most restrictive expense limitation applicable in
the states where the Company's shares are qualified for sale, the compensation
due the Adviser will be reduced by the amount of such excess and that, if the
amount of such excess exceeds the Adviser's monthly compensation, the Adviser
will pay the Company an amount sufficient to make up the deficiency, subject to
readjustment during the Company's fiscal year. Ordinary business expenses do not
include (1) interest and taxes, (2) brokerage commissions, (3) certain
litigation and indemnification expenses as described in the Advisory Agreement,
and (4) payments made by the Fund pursuant to the distribution plans (described
below).

The most restrictive applicable limitation is 2 1/2% of the first $30
million, 2% of the next $70 million, and 1 1/2% of the remaining average net
assets.The Advisory Agreement also limits the extent to which the Adviser shall
be liable to the Company for acts or omissions.

The Advisory Agreement has an initial term of two years and thereafter may
be continued from year to year if specifically approved at least annually (a)(i)
by the Directors, or (ii) by vote of a majority of the

14
<PAGE> 50

Fund's outstanding voting securities; and (b) by the vote of a majority of the
Directors who are not parties to the agreement or interested persons of any such
party by votes cast in person at a meeting called for such purpose. The Advisory
Agreement provides that it shall terminate automatically if assigned and that it
may be terminated without penalty by either party on 60 days' written notice.

During the period ended May 31, 1992, the Adviser received $46,462 in
advisory fees from the Fund. For such period no payment was made to the Adviser
for accounting services rendered because accounting services were obtained by
the Company from the Custodian Bank. For the fiscal years ended May 31, 1993 and
1994, the Adviser received $70,621 (net of contractual expense reduction of
$49,813) and $544,485, respectively, in advisory fees from the Fund. For such
periods the Fund paid $8,546 and $27,600, respectively, for accounting services.

Pursuant to the Advisory Agreement and the Sub-advisory Agreement, the
Company has agreed to indemnify the Adviser and the Adviser has agreed to
indemnify the Subadviser, respectively, against any taxes imposed by the United
Kingdom on the Company for its investment related activities as contemplated in
each Agreement. Neither the Adviser nor the Subadviser may be indemnified,
however, with respect to any liabilities incurred by such party's willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
Agreements or to the Company.

DISTRIBUTOR

American Capital Marketing, Inc. (the "Distributor"), acts as the principal
underwriter of the Company'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 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 Funds 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 certain
other costs, including the cost of sales literature and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
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 the Directors who
are not parties to the Underwriting Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
During the period ended May 31, 1992, and the fiscal years ended May 31, 1993
and 1994, total underwriting commissions on the sale of shares of the Fund were
$41,681, $37,359, and $567,966, respectively. Of such total, the amount retained
by the Distributor was $3,095, $3,758, and $37,912, respectively. The remainder
was reallowed to dealers. Of such dealer reallowance, $15,103, $11,793, and
$87,300, respectively was received by Advantage Capital Corporation, an
affiliated dealer of the Distributor.

DISTRIBUTION PLANS

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

The Directors have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the

15
<PAGE> 51

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 4% of the purchase price of Class
B shares purchased by the clients of broker-dealers and other Service
Organizations, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, and (5) advertising and promotion expenses, including conducting
and organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses. With respect to the Class C Plan, authorized payments
by the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class C shares to reimburse the Distributor for (1) upfront
commissions and transaction fees of up to 0.75% of the purchase price of Class C
shares purchased by the clients of broker-dealers and other Service
Organizations and ongoing commissions and transaction fees paid to
broker-dealers and other Service Organizations in an amount up to 0.65% of the
average daily net assets of the Fund's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and semi-annual
shareholder reports to other than existing shareholders, (3) out-of-pocket and
overhead expenses for preparing, printing and distributing advertising material
and sales literature, (4) expenses for promotional incentives to broker-dealers
and financial and industry professionals, and (5) advertising and promotion
expenses, including conducting and organizing sales seminars, marketing support
salaries and bonuses, and travel-related expenses. Such reimbursements are
subject to the maximum sales charge limits specified by the National Association
of Securities Dealers, Inc. for asset-based charges.

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

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

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

Each Plan may be terminated by vote of a majority of the Independent
Directors, or by vote of a majority of the outstanding voting securities of the
Fund. Any change in any of the Plans that would materially increase the
distribution expenses borne by the Fund requires shareholder approval, 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 May 31, 1994, the Fund's aggregate expenses under
the Class A Plan were $64,422 or .25% of the Class A shares' average net assets.
Such expense were paid to reimburse the

16
<PAGE> 52

Distributor for payments made to Service Organizations for servicing Fund
shareholders and for administering the Class A Plan. For the fiscal year ended
May 31, 1994, the Fund's aggregate expenses under the Class B Plan were $263,556
or 1.00% of the Class B shares' average net assets. Such expenses were paid to
reimburse the Distributor for the following payments: $197,667 for commissions
and transaction fees paid to broker-dealer and other service organizations in
respect of sales of Class B shares of the Fund and $65,889 for fees paid to
Service Organizations for servicing Class B shareholders and for administering
the Class B Plan. For the fiscal year ended May 31, 1994, the Fund's aggregate
expenses under the Class C Plan were $23,237 or .95% (not annualized) of the
Class C shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $17,428 for commissions and transaction
fees paid to broker-dealer and other service organizations in respect of sales
of Class C shares of the Fund and $5,809 for fees paid to Service Organizations
for servicing Class C shareholders and for administering the Class C Plan.

TRANSFER AGENT

During the fiscal year ended May 31, 1994, ACCESS, shareholder service
agent and dividend distributing agent for the Fund, received fees aggregating
$183,170 for these services. These services are provided at cost plus a profit.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Advisers are 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 Advisers 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 Advisers
seek the best security price at the most favorable commission rate. In selecting
broker/dealers and in negotiating commissions, the Advisers consider 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 Advisers. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to seeking best execution
and such other policies as the Board of Directors may determine, the Advisers
may consider sales of shares of the Funds and of the other American Capital
mutual funds as a factor in the selection of firms to execute portfolio
transactions for the Funds.

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 who supplies brokerage and research services, a commission for
effecting a securities transaction in excess of the amount of commission another
broker 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 Advisory Agreement and the Sub-advisory
Agreement, the Company's Board of Directors has authorized the Advisers 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 Advisers. The
Advisers are of the opinion that the continued receipt of supplemental
investment research services from brokers is essential to its provision of high
quality portfolio management services to the Fund. The Advisers undertake that
such higher commissions will not be paid by the Fund unless (a) the Advisers
determine in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Advisers'
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 Advisers, the total commissions paid by the Fund are

17
<PAGE> 53

reasonable in relation to the expected benefits to the Fund over the long term.
The investment advisory fee paid by the Fund under the Advisory Agreement is not
reduced as a result of the Advisers' receipt of research services.

The Advisers place 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
Advisers in servicing all of their accounts; not all of such services may be
used by the Advisers in connection with the Fund. In the opinion of the
Advisers, the benefits from research services to each of the accounts (including
the Fund) managed by the Advisers 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 Advisers, such costs to the Fund will not be disproportionate to the
benefits received by the Fund on a continuing basis.

The Advisers seek 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 Advisers 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 Advisers' brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Company Directors who are not interested
persons (as defined in the 1940 Act) of the Advisers. Brokerage commissions paid
by the Fund on portfolio transactions for the fiscal years ended May 31, 1992,
1993 and 1994 totalled $77,585, $113,537 and $587,199, respectively.

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 through September 30, 1992,
Jefferies & Company, Inc. ("Jefferies") was deemed an affiliate of Travelers
(then known as Primerica). Similarly, the Fund may, from time to time, place
brokerage transactions with brokers that may be considered affiliated persons of
the Subadviser, including its parent company, LOC. Until February 28, 1992,
Marshall & Co. was wholly owned by LOC, and therefore, was also affiliated with
the Subadviser. 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:

Commissions Paid:

<TABLE>
<CAPTION>
SMITH DAIN RAUSCHER
JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE
-------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Period Ended May 31, 1992..................... $ 2 $638 $-0- $-0- $245

Fiscal Year Ended May 31, 1993................ $-0- $556 $-0- $-0- $-0-
Fiscal Year Ended May 31, 1994................
</TABLE>

18
<PAGE> 54

Commissions Paid:

<TABLE>
<CAPTION>
SMITH DAIN RAUSCHER ROBINSON
JEFFERIES BARNEY FOX-PITT BOSWORTH PIERCE HUMPHREY
-------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Percentages:....................... $-- $8,315 $-- $-- $-- $1,330

Commissions with affiliates to
total commissions................ -- 1.42% -- -- -- .23%

Value of brokerage transactions
with affiliates to total
brokerage transactions........... -- 2.11% -- -- -- .40%
</TABLE>

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.

Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place on all business days in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Fund's net asset value is not
calculated and on which the Fund does not effect sales, redemptions and
repurchases of its shares. There may be significant variations in the net asset
value of Fund shares on days when net asset value is not calculated and on which
shareholders cannot redeem on account of changes in prices of stocks traded in
foreign stock markets.

The Fund calculates net asset value per share, and therefore effects sales,
redemptions and repurchases of its shares, as of the close of the Exchange once
on each day on which the Exchange is open. Such calculation does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when the Fund's net asset value is calculated, such
securities will be valued at fair value as determined in good faith by the Board
of Directors.

The net asset value of the Fund is computed by (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,
using prices as of the close of trading on the Exchange, (ii) valuing unlisted
securities for which over-the-counter market quotations are readily available at
the most recent bid price as supplied by the National Association of Securities
Dealers Automated Quotations ("NASDAQ") or by broker/dealers, and (iii) valuing
any securities for which market quotations are not readily available and any
other assets at fair value as determined in good faith by the Board of Directors
of the Company. Options on stocks, options on stock indexes, and stock index
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sale or settlement price as of the close of such exchanges, or, if
no sales are reported, at the mean between the last reported bid and asked
prices. Debt securities with a remaining maturity of 60 days or less are valued
on an amortized cost basis which approximates market value.

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

PURCHASE AND REDEMPTION OF SHARES

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

19
<PAGE> 55

PURCHASE OF SHARES

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

MULTIPLE PRICING SYSTEM

The Fund offers three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements,
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 the Prospectus and forwarding the application, through
the designated dealer, to the shareholder service agent, ACCESS, at P.O. Box
419319, Kansas City, Missouri 64141-6319. The account is opened only upon
acceptance of the application by ACCESS. The minimum initial investment of $500
or more, in the form of a check payable to the Fund, must accompany the
application. This minimum may be waived by the Distributor for plans involving
continuing investments. Subsequent investments of $25 or more may be mailed
directly to ACCESS. All such investments are made at the public offering price
of Fund shares next computed following receipt of payment by ACCESS.
Confirmations of the opening of an account and of all subsequent transactions in
the account are forwarded by ACCESS to the investor's dealer of record, unless
another dealer is designated.

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

CUMULATIVE PURCHASE DISCOUNT

The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to purchases of Class A shares of the Fund where the
aggregate investment is $50,000 or more. For purposes of determining eligibility
for volume discounts, spouses and their minor children are treated as a single
purchaser, as is a director or other fiduciary purchasing for a single fiduciary
account. An aggregate investment includes all shares of the Fund and all shares
of certain other participating American Capital mutual funds described in the
Prospectus (the "Participating Funds"), which have been previously purchased and
are still owned, plus the shares being purchased. The current offering price is
used to determine the value of all such shares. If, for example, an investor has
previously purchased and still holds Class A shares of the Fund and shares of
other Participating Funds having a current offering price of $25,000, and that
person purchases $30,000 of additional Class A Shares of the Fund, the sales
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 ACCESS fail to confirm the representations concerning the
investor's holdings.

20
<PAGE> 56

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 receives the reduced sales charge applicable to the amount
represented by the goal as if it were a single investment. Escrowed shares
totalling five percent of the dollar amount of the Letter of Intent are held by
ACCESS in the name of the shareholder. The effective date of a Letter of Intent
may be back-dated up to 90 days in order that any investments made during this
90-day period, valued at the investor's cost, can become subject to the Letter
of Intent. The Letter of Intent does not obligate the investor to purchase the
indicated amount. In the event the Letter of Intent goal is not achieved within
the 13-month period, the investor is required to pay the difference between
sales charges otherwise applicable to the purchases made during this period and
sales charges actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrow
shares to obtain such difference. If the goal is exceeded in an amount which
qualifies for a lower sales charge, a price adjustment is made by refunding to
the investor in shares of the Fund, the amount of excess sales charges, if any,
paid during the 13-month period.

VOLUME DISCOUNTS

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

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

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

21
<PAGE> 57

will be imposed on exchanges between funds. For purposes of the CDSC -- Class A,
when shares of one fund are exchanged for shares of another fund, the purchase
date for the shares of the fund exchanged into will be assumed to be the date on
which shares were purchased in the fund from which the exchange was made. If the
exchanged shares themselves are acquired through an exchange, the purchase date
is assumed to carry over from the date of the original election to purchase
shares subject to a CDSC -- Class A rather than a front-end load sales charge.
In determining whether a CDSC -- Class A is payable, it is assumed that shares
held the longest are the first to be redeemed.

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

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

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

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

(a) Redemption Upon Disability or Death

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

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

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

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

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

22
<PAGE> 58

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. The Fund will waive the CDSC -- Class B and C
upon such involuntary redemption.

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

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

(f) Redemption by Adviser

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

EXCHANGE PRIVILEGE

The following supplements the discussion of "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

23
<PAGE> 59
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 exchange security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.

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

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

DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES

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

The Fund expects to qualify as a regulated investment company ("RIC") under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders of Class A, Class B and Class C shares 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 RIC's, 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).

To the extent the Fund should not distribute to its shareholders during any
calendar year at least 98% of its ordinary taxable (net investment) income for
the twelve months ended December 31, plus 98% of its capital gains net income
for the twelve months ended October 31 of such calendar year the Fund would be
required to pay a four percent excise tax. 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. 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.

24
<PAGE> 60

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 any exception that may be provided by IRS
regulations 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 each 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.

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

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

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.

The Fund may qualify for and may make the election permitted under Section
853 of the Code so that shareholders will be able to claim a credit or deduction
on their income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid by
the Fund to foreign countries (which taxes relate primarily to investment
income). The shareholders of the Fund may claim a foreign tax credit by reason
of the Fund's election under Section 853 of the Code subject to the certain
limitations imposed by Section 904 of the Code. Also under Section 63 of the
Code, no deduction for foreign taxes may be claimed by shareholders who do not
itemize deductions on their federal income tax returns, although any such
shareholder may claim a credit for foreign taxes and in any event will be
treated as having taxable income in respect to the shareholder's pro rata share
of foreign taxes paid by the Fund. It should also be noted that a tax-exempt
shareholder, like other shareholders, will be required to treat as part of the
amounts distributed to it a pro rata portion of the income taxes paid by the
Fund to foreign countries. However, that income will generally be exempt from
United States taxation by virtue of such shareholder's tax-exempt status and
such a shareholder will not be entitled to either a tax credit or a deduction
with respect to such income.

BACK-UP WITHHOLDING

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

25
<PAGE> 61
TAX TREATMENT OF OPTION AND FUTURES TRANSACTIONS

The Code includes special rules applicable to listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other terminations of Section 1256
contracts is generally treated as long-term capital gain or loss to the
extent of 60 percent thereof and short-term captial gain or loss to the extent
of 40 percent 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 and the two
years and ten month periods ended May 31, 1994, was 3.03% and 8.07%,
respectively. The Fund's average annual total return (computed in the manner
described in this Prospectus) for Class B shares of the Fund for the one year
and the two years and six and one-half month periods ended May 31, 1994, was
3.41% and 6.90%, respectively. The aggregate total return for Class C shares of
the Fund from June 21, 1993 (the initial offering of Class C shares) to May 31,
1994 was 12.06%. 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.

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

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

26
<PAGE> 62
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

CUSTODY OF ASSETS -- State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as Custodian for the Company. The custodian
has entered into agreements with foreign sub-custodians approved by the
Directors pursuant to Rule 17f-5 under the 1940 Act. The Custodian and sub-
custodians generally domestically, and frequently abroad, do not actually hold
certificates for the securities in their custody, but instead have book records
with domestic and foreign securities depositories, which in turn have book
records with the transfer agents of the issuers of the securities.

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 Company, perform annual examinations
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 May 31, 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.

<TABLE>
<CAPTION>
MAY 31,
1994
-------
<S> <C>
Net Asset Value Per Class A Share $11.67
Class A Per Share Sales Charge -- 5.75% of offering price (6.10% of net
asset value per share) $ .71
-------
Class A Per Share Offering Price to the Public $12.38
</TABLE>

27
<PAGE> 63
INVESTMENT PORTFOLIO
MAY 31, 1994

<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock and Equivalents 93.2%
AUSTRALIA 0.5%
17,000 Broken Hill Property . . . . . . . . . . . . . . . . . . . . . . . $ 229,546
150,000 TNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,838
----------
484,384
----------
AUSTRIA 0.4%
10,000 Flughafen Wien . . . . . . . . . . . . . . . . . . . . . . . . . . 393,514
----------

BELGIUM 1.1%
2,700 Ackermans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,072
9,100 GIB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409,849
1,370 Kredietbank . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,133
----------
1,031,054
----------

CANADA 3.9%
*32,000 Advanced Information Technology . . . . . . . . . . . . . . . . . 285,941
13,200 Alcan Aluminium . . . . . . . . . . . . . . . . . . . . . . . . . 305,004
*106,000 Current Technology Corp. . . . . . . . . . . . . . . . . . . . . 130,118
*25,000 DY 4 Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 198,570
*174,000 Global Election Systems, Inc. . . . . . . . . . . . . . . . . . . 282,692
*12,000 Home Oil, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 164,633
*13,800 Hummingbird Communications, Ltd. . . . . . . . . . . . . . . . . . 225,449
*21,500 ID Biomedical Corp. . . . . . . . . . . . . . . . . . . . . . . . 214,095
69,000 Laidlaw, Inc., Class B . . . . . . . . . . . . . . . . . . . . . . 467,091
*113,000 Markborough Properties . . . . . . . . . . . . . . . . . . . . . . 191,747
*24,400 Northern Reef Explorations, Ltd. . . . . . . . . . . . . . . . . . 125,533
*182,000 Ondaatje Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 374,540
12,200 Seagram Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 362,282
*26,700 Speedy Muffler King, Inc. . . . . . . . . . . . . . . . . . . . . 438,606
----------
3,766,301
----------

DENMARK 0.4%
7,100 Tele Danmark, AS, Class B . . . . . . . . . . . . . . . . . . . . 351,202
----------

FRANCE 6.7%
3,800 Alcatel Alst (CGE) . . . . . . . . . . . . . . . . . . . . . . . . 413,058
4,000 Alcatel Cable . . . . . . . . . . . . . . . . . . . . . . . . . . 429,105
2,900 BIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634,585
4,450 Castorama Dubois . . . . . . . . . . . . . . . . . . . . . . . . . 570,005
21,600 CSF (Thomson) . . . . . . . . . . . . . . . . . . . . . . . . . . 651,343
6,550 Guilbert, SA . . . . . . . . . . . . . . . . . . . . . . . . . . . 617,595
230 LeGrand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,737
9,700 Michelin, Class B . . . . . . . . . . . . . . . . . . . . . . . . 379,303
3,600 Primagaz (Cie Gaz) . . . . . . . . . . . . . . . . . . . . . . . . 595,624
6,000 Roussel UCLAF . . . . . . . . . . . . . . . . . . . . . . . . . . 646,860
7,300 TV Francaise (TF1) . . . . . . . . . . . . . . . . . . . . . . . . 579,221
10,750 Total, Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 594,205
----------
6,366,641
----------

GERMANY 4.0%
2,060 Bayer Hypo/Wech Bank . . . . . . . . . . . . . . . . . . . . . . . 454,841
400 Bayerische Motoren Werke . . . . . . . . . . . . . . . . . . . . . 199,453
*400 Bayerische Motoren Werke, Rights (expiring 6/94) . . . . . . . . . 5,108
820 Daimler Benz . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,645
750 Deutsche Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . 336,120
*1,000 Duer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418,364
1,640 Felten & Guilleaume . . . . . . . . . . . . . . . . . . . . . . . 340,067
</TABLE>

F-1
<PAGE> 64
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY--CONTINUED
900 Leifheit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 415,932
2,000 Man . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505,321
695 Siemens AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,567
1,500 Veba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456,066
----------
3,828,484
----------

HONG KONG 1.7%
28,800 China Light & Power . . . . . . . . . . . . . . . . . . . . . . . 160,290
126,000 Dairy Farm International . . . . . . . . . . . . . . . . . . . . . 184,287
600,000 Goldlion Holdings, Ltd. . . . . . . . . . . . . . . . . . . . . . 186,383
*34,000 Guoco Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,226
*128,000 Hong Kong Telecomm, Warrants (expiring 2/95) . . . . . . . . . . . 168,988
550,000 S. Megga International . . . . . . . . . . . . . . . . . . . . . . 149,495
155,000 Varitronix International . . . . . . . . . . . . . . . . . . . . . 218,677
600,000 Wai Kee Holdings . . . . . . . . . . . . . . . . . . . . . . . . . 182,500
400,000 World Houseware . . . . . . . . . . . . . . . . . . . . . . . . . 195,444
----------
1,602,290
----------

ITALY 1.9%
41,500 Burgo (Cartiere) SPA . . . . . . . . . . . . . . . . . . . . . . . 281,400
90,000 Danieli & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 341,861
*100,000 Fiat SPA, Warrants (expiring 12/94) . . . . . . . . . . . . . . . 181,447
55,900 Rinascente (La) . . . . . . . . . . . . . . . . . . . . . . . . . 375,533
144,000 SIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388,762
33,000 Sirti SPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248,627
----------
1,817,630
----------

JAPAN 23.6%
34,000 Ajinomoto Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . 415,485
10,000 Asatsu, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 458,256
60,000 Citizen Watch Co. . . . . . . . . . . . . . . . . . . . . . . . . 526,994
7 DDI Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578,006
95,000 Dowa Mining Co. . . . . . . . . . . . . . . . . . . . . . . . . . 545,993
115 East Japan Railway . . . . . . . . . . . . . . . . . . . . . . . . 554,442
*450 Ebara Corp., Warrants (expiring 3/98) . . . . . . . . . . . . . . 52,812
60,000 Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618,645
95,000 Hitachi Zosen Corp. . . . . . . . . . . . . . . . . . . . . . . . 526,039
20,000 Honda Motor Corp. . . . . . . . . . . . . . . . . . . . . . . . . 358,967
120,000 Ishikawajima Har . . . . . . . . . . . . . . . . . . . . . . . . . 579,693
120,000 Isuzu Motors . . . . . . . . . . . . . . . . . . . . . . . . . . . 569,383
80,000 Japan Air Lines Co. . . . . . . . . . . . . . . . . . . . . . . . 568,237
70,000 Japan Wool Textile . . . . . . . . . . . . . . . . . . . . . . . . 821,996
40,000 Kitano Construction Co. . . . . . . . . . . . . . . . . . . . . . 374,242
240,000 Kobe Steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 708,005
20,000 Kokusai Electric . . . . . . . . . . . . . . . . . . . . . . . . . 397,155
60,000 Komatsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553,344
43,000 Komatsu Seiren Co. . . . . . . . . . . . . . . . . . . . . . . . . 599,360
35,000 Makino Milling . . . . . . . . . . . . . . . . . . . . . . . . . . 258,962
80,000 Marubeni Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 433,815
28,000 Marui Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467,803
24,000 Matsushita Electric Industries . . . . . . . . . . . . . . . . . . 419,304
40,000 Matsushita Electric Works . . . . . . . . . . . . . . . . . . . . 442,981
100,000 Mazda Motor Corp. . . . . . . . . . . . . . . . . . . . . . . . . 547,043
110,000 Minolta Camera Co. . . . . . . . . . . . . . . . . . . . . . . . . 597,546
45,000 Mitsubishi Construction . . . . . . . . . . . . . . . . . . . . . 485,465
</TABLE>

F-2
<PAGE> 65
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN--CONTINUED
90,000 Mitsubishi Electric Corp. . . . . . . . . . . . . . . . . . . . . $ 591,150
120,000 Mitsubishi Ka Sei . . . . . . . . . . . . . . . . . . . . . . . . 608,334
50,000 NEC Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,046
50,000 New Oji Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . 496,444
*10,700 Nikkei, Warrants (expiring 12/95) . . . . . . . . . . . . . . . . 442,980
*10,400 Nikkei, Warrants (expiring 6/96) . . . . . . . . . . . . . . . . . 504,400
110,000 Nippon Diesel Motor . . . . . . . . . . . . . . . . . . . . . . . 613,299
75,000 Nippon Sanso Corp. . . . . . . . . . . . . . . . . . . . . . . . . 430,331
65 Nippon Telephone & Telegraph Corp. . . . . . . . . . . . . . . . . 536,780
65,000 NTN Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425,080
45,000 Onward Kashiyama . . . . . . . . . . . . . . . . . . . . . . . . . 579,980
10,000 Rohm Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408,611
20,000 Shimachu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 849,685
300 Sony Music Entertainment . . . . . . . . . . . . . . . . . . . . . 16,927
60,000 Toray Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . 418,158
140,000 Ube Industries . . . . . . . . . . . . . . . . . . . . . . . . . . 519,929
90,000 Yokohama Rubber Co. . . . . . . . . . . . . . . . . . . . . . . . 600,601
20,000 Yurtec Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 511,718
----------
22,582,426
----------

MALAYSIA 0.2%
17,000 Edaran Otomobil . . . . . . . . . . . . . . . . . . . . . . . . . 110,047
20,000 Resorts World BHD . . . . . . . . . . . . . . . . . . . . . . . . 108,536
*16,000 United Engineers Malaysia BHD, Convertible . . . . . . . . . . . . 6,202
----------
224,785
----------

NETHERLANDS 2.6%
*5,300 ABN Amro Holdings NV, Rights . . . . . . . . . . . . . . . . . . . 173,544
4,000 Aegon NV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,826
3,100 Akzo NV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,561
4,555 International Nederlanden Group . . . . . . . . . . . . . . . . . 187,425
15,000 KNP BT (KON) NV . . . . . . . . . . . . . . . . . . . . . . . . . 389,515
5,550 Royal Dutch Petroleum . . . . . . . . . . . . . . . . . . . . . . 586,111
16,000 Stork NV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417,218
1,300 Unilever NV . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,019
----------
2,448,219
----------

SINGAPORE 1.0%
25,000 Cycle & Carriage . . . . . . . . . . . . . . . . . . . . . . . . . 179,328
22,000 Fraser & Neave . . . . . . . . . . . . . . . . . . . . . . . . . . 263,971
45,000 Sembawang Maritime . . . . . . . . . . . . . . . . . . . . . . . . 199,544
18,000 Singapore Airlines . . . . . . . . . . . . . . . . . . . . . . . . 156,113
10,000 Singapore Press Holdings . . . . . . . . . . . . . . . . . . . . . 176,068
----------
975,024
----------

SPAIN 2.0%
6,900 Banco Santander . . . . . . . . . . . . . . . . . . . . . . . . . 302,145
7,500 Empresa Nac Elec . . . . . . . . . . . . . . . . . . . . . . . . . 362,145
4,000 Gas Natural SDG, SA . . . . . . . . . . . . . . . . . . . . . . . 335,569
67,200 Iberdrola, SA . . . . . . . . . . . . . . . . . . . . . . . . . . 493,906
37,700 Uralita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444,674
----------
1,938,439
----------

SWEDEN 2.2%
22,500 Astra, AB, Series B . . . . . . . . . . . . . . . . . . . . . . . 467,505
13,800 Celsius Industriar, AB, Series B . . . . . . . . . . . . . . . . . 352,226
</TABLE>

F-3
<PAGE> 66
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
SWEDEN--CONTINUED
*31,600 Hoganas, AB, Series B . . . . . . . . . . . . . . . . . . . . . . $ 425,565
*14,400 Skanska, AB, Series B . . . . . . . . . . . . . . . . . . . . . . 345,377
13,400 Svedala Industrial . . . . . . . . . . . . . . . . . . . . . . . . 293,894
12,200 Svenska Cellulosa, Series B . . . . . . . . . . . . . . . . . . . 183,077
----------
2,067,644
----------

SWITZERLAND 3.2%
240 Baloise Holdings . . . . . . . . . . . . . . . . . . . . . . . . . 423,529
*350 Brown, Bov and Cie, AG, Series A . . . . . . . . . . . . . . . . . 314,439
375 Ciba Geigy, AG . . . . . . . . . . . . . . . . . . . . . . . . . . 227,273
1,000 CS Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . 442,068
*325 Grands Mgs Jelmoli . . . . . . . . . . . . . . . . . . . . . . . . 196,043
*1,625 Grands Mgs Jelmoli, Warrants (expiring 5/96) . . . . . . . . . . . 3,418
500 Nestle, SA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408,913
400 Publicitas Holdings . . . . . . . . . . . . . . . . . . . . . . . 399,287
800 Sandoz, AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393,012
210 Schindler Holdings, AG . . . . . . . . . . . . . . . . . . . . . . 267,273
----------
3,075,255
----------

THAILAND 1.4%
4,000 Advanced Information Services . . . . . . . . . . . . . . . . . . 158,730
17,000 Ban Pu Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,349
17,000 Hana Microelectronic . . . . . . . . . . . . . . . . . . . . . . . 144,365
55,000 NTS Steel Groups . . . . . . . . . . . . . . . . . . . . . . . . . 162,599
12,500 Siam City Cement . . . . . . . . . . . . . . . . . . . . . . . . . 233,135
11,000 Sino Thai Eng, PLC . . . . . . . . . . . . . . . . . . . . . . . . 172,857
14,000 Thai Glass Industries, PLC . . . . . . . . . . . . . . . . . . . . 172,222
----------
1,300,257
----------

UNITED KINGDOM 12.9%
60,000 BAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836,408
94,200 Bank of Ireland . . . . . . . . . . . . . . . . . . . . . . . . . 367,457
50,000 Barclay's . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383,278
103,000 British Petroleum Co., PLC . . . . . . . . . . . . . . . . . . . . 600,340
126,000 British Steel, PLC, ADS . . . . . . . . . . . . . . . . . . . . . 258,134
148,000 BTR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834,654
110,750 Cable & Wireless, PLC, ADS . . . . . . . . . . . . . . . . . . . . 729,235
53,457 Claremont Garments . . . . . . . . . . . . . . . . . . . . . . . . 274,802
114,000 Cowie Group, PLC . . . . . . . . . . . . . . . . . . . . . . . . . 501,572
76,000 Croda International . . . . . . . . . . . . . . . . . . . . . . . 396,432
48,000 Eurotherm . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,665
44,000 Fairey Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 492,289
93,500 Granada Group . . . . . . . . . . . . . . . . . . . . . . . . . . 694,111
105,000 Hanson, PLC, ADR . . . . . . . . . . . . . . . . . . . . . . . . . 403,235
110,000 Hartstone Group . . . . . . . . . . . . . . . . . . . . . . . . . 74,841
23,500 La Porte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268,168
175,000 MAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 666,767
145,000 Next, PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519,580
*140,000 Northern Ireland Electricity . . . . . . . . . . . . . . . . . . . 503,780
*120,000 Pelican Group . . . . . . . . . . . . . . . . . . . . . . . . . . 160,568
*66,666 Pelican Group, Rights (expiring 6/94) . . . . . . . . . . . . . . 10,079
37,500 Reed International . . . . . . . . . . . . . . . . . . . . . . . . 465,490
63,000 Reuters Holdings, PLC, ADR . . . . . . . . . . . . . . . . . . . . 437,209
106,000 Royal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 384,639
49,000 Scottish Power . . . . . . . . . . . . . . . . . . . . . . . . . . 259,298
</TABLE>

F-4
<PAGE> 67
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM--CONTINUED
45,000 Shell Transportation & Trading . . . . . . . . . . . . . . . . . . $ 479,664
14,300 Siebe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,428
117,000 Standard Chartered . . . . . . . . . . . . . . . . . . . . . . . . 421,016
73,000 Trinity Holdings . . . . . . . . . . . . . . . . . . . . . . . . . 327,805
75,000 Willis Corroon Group . . . . . . . . . . . . . . . . . . . . . . . 185,969
----------
12,343,913
----------

UNITED STATES 23.5%
8,000 Abbott Laboratories . . . . . . . . . . . . . . . . . . . . . . . 239,000
6,000 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . 172,500
2,800 Allied-Signal, Inc. . . . . . . . . . . . . . . . . . . . . . . . 98,350
8,000 Alltel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,000
6,500 American Greetings Corp., Class A . . . . . . . . . . . . . . . . 182,813
3,100 American International Group, Inc. . . . . . . . . . . . . . . . . 289,463
5,000 American Telephone & Telegraph Co. . . . . . . . . . . . . . . . . 272,500
*2,000 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,125
3,500 Amoco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,063
4,600 Anheuser Busch Companies, Inc. . . . . . . . . . . . . . . . . . . 250,125
3,300 Apache Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,513
*3,700 Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . 161,412
2,000 Atlantic Richfield Co. . . . . . . . . . . . . . . . . . . . . . . 201,750
6,200 Bankamerica Corp. . . . . . . . . . . . . . . . . . . . . . . . . 300,700
8,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . . 206,000
4,000 Baybanks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 252,250
4,400 Bellsouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 261,800
2,000 Belo (A.H.) Corp. . . . . . . . . . . . . . . . . . . . . . . . . 99,750
5,800 Birmingham Steel Corp. . . . . . . . . . . . . . . . . . . . . . . 181,250
*2,200 BMC Software, Inc. . . . . . . . . . . . . . . . . . . . . . . . 123,200
6,000 British Petroleum Co., PLC, ADR . . . . . . . . . . . . . . . . . 421,500
3,500 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . . . 101,500
2,200 Callaway Golf Co. . . . . . . . . . . . . . . . . . . . . . . . . 94,325
100 Capital Cities-ABC, Inc. . . . . . . . . . . . . . . . . . . . . . 73,975
2,000 Caterpillar, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 213,750
4,000 Chrysler Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 198,500
5,000 Citicorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,500
2,100 Clorox Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,887
1,400 Coca-Cola Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 56,525
1,800 Columbia/HCA Healthcare . . . . . . . . . . . . . . . . . . . . . 71,550
*6,000 Community Health Systems, Inc. . . . . . . . . . . . . . . . . . . 142,875
1,500 Compania de Telefonos, Chili, ADR . . . . . . . . . . . . . . . . 136,500
2,000 Crestar Financial . . . . . . . . . . . . . . . . . . . . . . . . 96,100
1,500 CSX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,750
3,500 Dayton Hudson Corp. . . . . . . . . . . . . . . . . . . . . . . . 275,188
5,500 Dollar General Corp. . . . . . . . . . . . . . . . . . . . . . . . 144,375
2,200 Dow Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . 150,150
*5,000 Dr Pepper/Seven Up Companies, Inc. . . . . . . . . . . . . . . . . 122,500
1,200 DuPont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . . 74,400
2,000 Duracell International, Inc. . . . . . . . . . . . . . . . . . . . 84,250
1,400 Eaton Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,000
4,600 Enron Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,300
5,000 Enron Oil & Gas Co. . . . . . . . . . . . . . . . . . . . . . . . 220,000
2,000 Federal National Mortgage Association . . . . . . . . . . . . . . 167,000
*3,600 Filenet Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 95,400
2,600 First Bank Systems, Inc. . . . . . . . . . . . . . . . . . . . . . 98,800
</TABLE>

F-5
<PAGE> 68
INVESTMENT PORTFOLIO, CONTINUED

<TABLE>
<CAPTION>
NUMBER MARKET
OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES--CONTINUED
7,200 First Chicago Corp. . . . . . . . . . . . . . . . . . . . . . . . $ 380,700
2,500 First Interstate Bancorp. . . . . . . . . . . . . . . . . . . . . 200,000
3,600 First USA, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 159,750
2,000 Fluor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,000
2,600 Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 150,150
*1,500 Fore Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,187
5,000 Gap, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,875
4,500 Gaylord Entertainment Co., Class A . . . . . . . . . . . . . . . . 103,500
*2,500 General Instrument Corp. . . . . . . . . . . . . . . . . . . . . . 153,438
2,200 General Motors Corp. . . . . . . . . . . . . . . . . . . . . . . . 118,250
*3,100 Georgia Gulf Corp. . . . . . . . . . . . . . . . . . . . . . . . . 98,038
3,400 Gillette Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,150
107,000 Glaxo Holdings, PLC, ADR . . . . . . . . . . . . . . . . . . . . . 867,130
2,500 Grainger (W.W.) Financial Corp. . . . . . . . . . . . . . . . . . 162,812
1,700 Green Tree Financial Corp. . . . . . . . . . . . . . . . . . . . . 100,087
4,100 Harley Davidson, Inc. . . . . . . . . . . . . . . . . . . . . . . 196,287
*10,000 Healthcare & Retirement Corp. . . . . . . . . . . . . . . . . . . 260,000
*2,600 Healthsource, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 82,550
3,500 Healthtrust Inc.-The Hospital Company . . . . . . . . . . . . . . 102,987
3,500 Heilig Meyers Co. . . . . . . . . . . . . . . . . . . . . . . . . 99,750
1,700 Hercules, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 179,137
900 Hewlett-Packard Co. . . . . . . . . . . . . . . . . . . . . . . . 70,650
*3,700 Hospitality Franchise Systems . . . . . . . . . . . . . . . . . . 100,363
12,000 Host Marriott Corp. . . . . . . . . . . . . . . . . . . . . . . . 123,000
4,565 IDB Communications Group, Inc. . . . . . . . . . . . . . . . . . . 66,193
5,700 Illinois Central Corp. . . . . . . . . . . . . . . . . . . . . . . 198,075
2,700 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . . . . 110,025
*3,500 Integrated Device Technology . . . . . . . . . . . . . . . . . . . 101,063
5,300 International Business Machines Corp. . . . . . . . . . . . . . . 335,225
2,000 International Paper Co. . . . . . . . . . . . . . . . . . . . . . 138,500
900 ITT Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,150
3,400 Kimberly Clark Corp. . . . . . . . . . . . . . . . . . . . . . . . 192,100
*4,600 Kohls Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,500
1,400 Leggett & Platt, Inc. . . . . . . . . . . . . . . . . . . . . . . 52,500
*11,800 Lincare Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . 271,400
6,500 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,375
*4,500 LSI Logic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 108,000
4,400 Marriott International, Inc. . . . . . . . . . . . . . . . . . . . 124,300
3,200 May Department Stores Co. . . . . . . . . . . . . . . . . . . . . 124,000
3,900 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 241,800
*2,500 Michaels Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . 101,250
1,600 Micron Technology, Inc. . . . . . . . . . . . . . . . . . . . . . 53,800
*3,000 Microsoft Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 161,250
5,500 Midlantic Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 170,500
5,000 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 405,000
2,700 Monsanto Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,725
2,300 Motorola, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 107,525
4,000 NationsBank Corp. . . . . . . . . . . . . . . . . . . . . . . . . 221,500
*8,000 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 219,500
8,000 NIPSCO Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 246,000
1,800 Nordstrom, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 79,425
*4,000 Office Depot, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 149,500
6,200 Omnicom Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . 291,400
*3,000 Outback Steakhouse, Inc. . . . . . . . . . . . . . . . . . . . . . 78,750
</TABLE>

F-6
<PAGE> 69
INVESTMENT PORTFOLIO, CONTINUED

Principal
Amount Short-Term Investments 8.1%
--------- REPURCHASE AGREEMENT 8.0%
$7,685,000 Kidder, Peabody & Company, Inc., dated 5/31/94, 4.27%, due 6/1/94
(collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $7,685,911 . . . . . . . . . . . 7,685,000
U.S. GOVERNMENT OBLIGATIONS 0.1%
120,000 U.S. Treasury Bills, 4.01% to 4.02%, due 7/28/94 to 8/4/94 . . . . 119,214
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $7,804,214) . . . . . . . . . 7,804,214
-----------
TOTAL INVESTMENTS (Cost $93,675,028) 101.3% . . . . . . . . . . . 96,989,298
Other assets and liabilities, net (1.3%) . . . . . . . . . . . . . (1,271,954)
-----------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . $95,717,344
===========
</TABLE>

* Non-income producing security.

SEE NOTES TO FINANCIAL STATEMENTS.

F-7
<PAGE> 70
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994

<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments, at market value (Cost $93,675,028)............................ $ 96,989,298
Foreign currency, at market value (Cost $713,620).......................... 716,570
Receivable for investments sold............................................ 3,013,668
Receivable for Fund shares sold............................................ 637,788
Dividend and interest receivable........................................... 305,637
Other assets............................................................... 33,636
------------
TOTAL ASSETS........................................................... 101,696,597
------------

LIABILITIES
Payable for investments purchased.......................................... 5,358,535
Accrued expenses........................................................... 149,767
Due to Adviser............................................................. 119,875
Payable for Fund shares redeemed........................................... 104,490
Unrealized depreciation of forward currency exchange contracts............. 92,698
Organization expenses payable.............................................. 75,000
Due to Distributor......................................................... 75,938
Due to broker-variation margin............................................. 2,950
------------
TOTAL LIABILITIES...................................................... 5,979,253
------------
NET ASSETS, equivalent to $11.67 per share for Class A shares, $11.48 per
share for Class B shares and $11.59 per share for Class C shares......... $ 95,717,344
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 3,585,828 Class A, 4,249,746 Class B and
438,215 Class C shares outstanding....................................... $ 8,274
Capital surplus............................................................ 90,951,283
Undistributed net realized gain on securities.............................. 2,509,611
Unrealized appreciation (depreciation) of:
Investments.............................................................. 3,314,270
Foreign currency......................................................... 2,950
Forward currency exchange contracts...................................... (92,698)
Other foreign denominated assets and liabilities......................... 1,475
Accumulated net investment loss............................................ (977,821)
------------
NET ASSETS at May 31, 1994................................................. $ 95,717,344
============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-8
<PAGE> 71
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1994

INVESTMENT INCOME
Dividends (net of $105,752 of foreign taxes withheld at source).............. $ 909,675
Interest..................................................................... 186,982
-----------
Investment income........................................................... 1,096,657
-----------

EXPENSES
Management fees ............................................................. 544,485
Distribution and service fees--Class B....................................... 263,556
Shareholder service agent's fees and expenses................................ 223,792
Custodian fees............................................................... 156,282
Registration and filing fees................................................. 138,308
Service fees--Class A........................................................ 64,422
Audit fees................................................................... 39,265
Reports to shareholders...................................................... 32,623
Accounting services.......................................................... 27,600
Distribution and service fees--Class C....................................... 23,237
Organization expenses........................................................ 14,998
Legal fees................................................................... 14,553
Directors' fees and expenses................................................. 9,023
Miscellaneous................................................................ 1,034
-----------
Total expenses.............................................................. 1,553,178
-----------
Net investment loss......................................................... (456,521)
-----------

REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on:
Investments ............................................................... 2,613,217
Foreign currency and forward currency exchange contracts................... (465,182)
Futures contracts.......................................................... (16,200)
Net unrealized appreciation (depreciation) during the year of:
Investments................................................................ 1,541,881
Foreign currency........................................................... (906)
Forward currency exchange contracts........................................ (42,268)
Futures contracts.......................................................... (713)
Other foreign denominated assets and liabilities........................... 5,549
-----------
Net realized and unrealized gain on securities.............................. 3,635,378
-----------
Increase in net assets resulting from operations............................ $ 3,178,857
===========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-9

<PAGE> 72
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED MAY 31
--------------------------------
1994 1993
------------ -----------
<S> <C> <C>
NET ASSETS, beginning of year.................................. $ 19,645,729 $ 9,599,476
------------ -----------
OPERATIONS
Net investment loss........................................... (456,521) (92,152)
Net realized gain on securities................................ 2,131,835 173,598
Net unrealized appreciation of securities
during the year............................................... 1,503,543 1,304,985
----------- -----------

Increase in net assets resulting from operations............... 3,178,857 1,386,431

DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED
GAIN ON SECURITIES
Class A................................................... (92,844) (352,559)
Class B................................................... (104,235) (103,642)
Class C................................................... (8,409) --
----------- -----------
Total distributions............................................ (205,488) (456,201)
----------- -----------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A................................................... 41,722,355 6,037,504
Class B................................................... 47,632,240 5,403,551
Class C................................................... 5,489,462 --
------------ ------------
94,844,057 11,441,055
------------ ------------
Proceeds from shares issued for distributions reinvested
Class A................................................... 84,865 346,604
Class B................................................... 98,060 100,531
Class C................................................... 7,850 --
------------ -----------
190,775 447,135
------------ -----------
Cost of shares redeemed
Class A................................................... (14,329,235) (2,539,093)
Class B................................................... (7,126,354) (233,074)
Class C................................................... (480,997) --
------------ ------------
(21,936,586) (2,772,167)
------------ ------------
Increase in net assets resulting from Fund share transactions 73,098,246 9,116,023
------------ ------------
INCREASE IN NET ASSETS......................................... 76,071,615 10,046,253
------------ ------------
NET ASSETS, end of year........................................ $ 95,717,344 $ 19,645,729
============ ============

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-10
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS

Note 1--Significant Accounting Policies

American Capital Global Equity Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The investment objective of the Fund is to
provide long-term growth of capital through investments in an internationally
diversified portfolio of equity securities. Investments in foreign securities
involve certain risks not ordinarily associated with investments in securities
of domestic issuers, including fluctuations in foreign exchange rates, future
political and economical developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.

A. Investment Valuations

Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which
the last sale price is not available are valued at the most recent bid
price. Options and futures contracts 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 are valued
at fair value under a method approved by the Board of Directors.

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. Foreign Currency Translation

The market values of foreign securities, forward currency exchange
contracts and other assets and liabilities stated in foreign currency are
translated into U.S. dollars based on quoted exchange rates as of 3:30 p.m.
Eastern Standard Time. The cost of securities is determined using
historical exchange rates. Income and expenses are translated at prevailing
exchange rates when accrued or incurred. Gains and losses on the sale of
securities are not segregated for financial reporting purposes between
amounts arising from changes in exchange rates and amounts arising from
changes in the market prices of securities.

C. Forward Currency Exchange Contracts

The Fund enters into forward currency exchange contracts in order to hedge
its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings. A forward currency exchange contract is a commitment to
buy or sell a foreign security at a set price on a future date. Changes in
the value of the contract are recognized by marking the contract to market
on a daily basis to reflect current currency translation rates. The Fund
realizes gains or losses at the time the forward currency exchange contract
is closed. Risks may arise as a result of the potential inability of the
counterparties to meet the terms of their contracts, and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.

D. 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-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

F-11
<PAGE> 74
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 is
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 contract to market on a daily basis. As
unrealized gains or losses are incurred, variation margin payments are
received from or made to the broker. Upon the closing or cash settlement
of a contract, gains or losses are realized. The cost of securities
acquired through delivery under a contract is adjusted by the unrealized
gain or loss on the contract.

E. Repurchase Agreements

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

F. 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.

G. 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.

Under the applicable foreign tax laws, a withholding tax may be imposed on
interest, dividends and realized gains generated from foreign investments.
Such withholding taxes are reflected on the Statement of Operations as a
reduction of the related income or gains.

H. 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 June 1, 1993, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
As a result of this statement, the Fund changed the classification of
distributions to shareholders to better disclose the differences between
financial statement amounts and distributions determined in accordance with
income tax regulations. The cumulative effect caused by adopting this
statement was to increase

F-12
<PAGE> 75
undistributed net realized gain and accumulated net investment loss by $93
and $143,910, respectively, and to decrease capital surplus by $143,817.
Current year net investment income, net realized gains, net assets and net
asset value per share were not affected by this reclassification.

I. Organization Costs

Organization expenses of approximately $75,000 were deferred and are being
amortized over a five year period ending September, 1996.

Note 2-Management Fees and Other Transactions with Affiliates

The Adviser serves as investment manager to the Fund. The Adviser has entered
into a subadvisory agreement with Lombard Odier International Portfolio
Management Limited (the "Subadviser"), who provides advisory services to the
Fund and the Adviser with respect to the Fund's investments in foreign
securities. Management fees are calculated monthly, based on the average daily
net assets of the Fund at the annual rate of 1.00%. The Adviser pays 50% of its
management fee to the Subadviser.

Under the terms of the advisory agreement, if the total ordinary business
expenses of the Fund, exclusive of taxes, interest and distribution plans,
exceed the most restrictive expense limitation applicable in the states where
the Fund's shares are qualified for sale, the Adviser will reimburse the Fund
for the excess. Such reimbursement shall be made monthly. The most restrictive
expense limitation in effect was California's which aggregated 2 1/2% of the
first $30 million of average daily net assets, 2% of the next $70 million of
average daily net assets and 1 1/2% of the average daily net assets in excess of
$100 million. No reimbursement was made during the current year.

American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended May 31, 1994, such fees
aggregated $183,170.

American Capital Marketing, Inc. (the "Distributor") and Advantage Capital
Corporation (the "Retail Dealer"), both affiliates of the Adviser, received
$37,912 and $87,300, respectively, as their portion of the commissions charged
on sales of Fund shares during the year.

Under the Distribution Plans, each class of shares pays up to .25% per annum of
its average net assets to the Distributor for expenses and services fees
incurred. Class B shares and Class C shares pay an additional fee of up to .75%
per annum of their average daily net assets to reimburse the Distributor for
its distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts
reimbursed to the Distributor by the Fund. At May 31, 1994, the unreimbursed
expenses incurred by the Distributor under the Class B and Class C plans
aggregated approximately $1.4 million and $90,000, respectively, and may be
carried forward and reimbursed through either the collection of the contingent
deferred sales charges from share redemptions or, subject to the annual renewal
of the plans, future Fund reimbursements of distribution fees.

During the year, the Fund paid brokerage commissions of $9,645 to companies
which are deemed affiliates of the Adviser's parent because it owns more than
5% of the companies' outstanding voting securities.

Legal fees of $13,576 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.

F-13
<PAGE> 76
Note 3--Investment Activity

During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $125,679,168 and $57,787,652,
respectively.

For federal income tax purposes, the identified cost of portfolio securities
and foreign currency was $94,487,342. Net unrealized appreciation aggregated
$3,218,526, gross unrealized appreciation aggregated $5,804,148 and gross
unrealized depreciation aggregated $2,585,622. Approximately $500,000 of
financial statement losses are deferred for tax purposes to the following
fiscal year.

At May 31, 1994, the Fund held the following open forward currency exchange
contracts, settling 7/11/94.

<TABLE>
<CAPTION>
U.S. DOLLAR
VALUE AT UNREALIZED
CURRENCY MAY 31, 1994 DEPRECIATION
--------------------------------------- ------------ ------------
<S> <C> <C>
Belgian Franc (receivable)
3,546,000 . . . . . . . . . . . . $ 104,715 $ 4,715
Deutsche Mark (receivable)
2,234,310 . . . . . . . . . . . . 1,357,507 57,507
French Franc (receivable)
441,698 . . . . . . . . . . . . . 78,478 3,478
Netherlands Guilder (receivable)
770,320 . . . . . . . . . . . . . 417,290 17,290
Swiss Franc (receivable)
434,310 . . . . . . . . . . . . . 309,708 9,708
---------- -------
$2,267,698 $92,698
========== =======
</TABLE>

Note 4--Director Compensation

Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $930 plus a fee of $20 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at an annual rate of $350. During the year, such fees aggregated $7,789.

The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At May 31, 1994, the liability for the Plan aggregated $4,491.
Each director covered by the Plan elects to be credited with an earning
component on amounts deferred equal to the income earned by the Fund on its
short-term investments or equal to the total return of the Fund.

Note 5--Capital

The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B and Class C shares bear the cost of
distribution fees and certain other class specific expenses. 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. Realized and
unrealized gains or losses, net 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. The offering of Class
C shares commenced June 21, 1993.

F-14
<PAGE> 77
The Fund has 200 million of each class of shares of $.001 par value capital
stock authorized. Transactions in shares of capital stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED MAY 31
----------------------------
1994 1993
----------- ---------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . 3,663,156 601,318
Class B . . . . . . . . . . . . . . . 4,223,622 540,804
Class C . . . . . . . . . . . . . . . 479,149 --
----------- ---------
8,365,927 1,142,122
----------- ---------
Shares issued for distributions reinvested
Class A . . . . . . . . . . . . . . . 7,564 36,523
Class B . . . . . . . . . . . . . . . 8,850 10,638
Class C . . . . . . . . . . . . . . . 701 --
----------- ---------
17,115 47,161
----------- ---------
Shares redeemed
Class A . . . . . . . . . . . . . . . (1,268,856) (253,881)
Class B . . . . . . . . . . . . . . . (629,979) (23,612)
Class C . . . . . . . . . . . . . . . (41,635) --
----------- ---------
(1,940,470) (277,493)
----------- ---------
Increase in shares outstanding . . . . 6,442,572 911,790
=========== =========
</TABLE>

F-15
<PAGE> 78
FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------------ ----------------------------------- ----------
Year Year
Ended Aug. 5, Ended Nov. 15, June 21,
May 31 1991(1) to May 31 1991(1) to 1993(1) to
PER SHARE OPERATING -------------------- May 31, --------------------- May 31, May 31,
PERFORMANCE 1994 1993(5) 1992(5) 1994 1993(5) 1992(5) 1994(5)
------ ------- ---------- ------ ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period . . . . . . . . . . . . . $10.76 $10.44 $ 9.33 $10.67 $10.46 $ 9.78 $10.29
------ ------ ------ ------ ------ ------ ------
Income from investment operations
Investment income . . . . . . . . . . .26 .235 .21 .22 .235 .16 .24
Expenses . . . . . . . . . . . . . . (.32) (.325) (.185) (.35) (.435) (.165) (.37)
Expense reimbursement(2) . . . . . . -- .035 -- -- .065 --
------ ------ ------ ------ ------ ------ ------
Net investment income (loss) . . . . (.06) (.055) .025 (.13) (.135) (.005) (.13)
Net realized and unrealized gain
on securities . . . . . . . . . . . 1.0125 .7775 1.145 .9825 .7475 .745 1.4725
------ ------ ------ ------ ------ ------ ------
Total from investment operations . . .9525 .7225 1.17 .8525 .6125 .74 1.3425
------ ------ ------ ------ ------ ------ ------
Distributions from net realized
gains on securities . . . . . . . . (.0425) (.4025) (.06) (.0425) (.4025) (.06) (.0425)
------ ------ ------ ------ ------ ------ ------
Net asset value, end of period . . . $11.67 $10.76 $10.44 $11.48 $10.67 $10.46 $11.59
====== ====== ====== ====== ====== ====== ======
Total return (3) . . . . . . . . . . 9.17% 7.13% 12.56% 8.21% 6.15% 7.58% 13.06%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions). $41.8 $12.7 $8.4 $48.8 $6.9 $1.2 $5.1
Average net assets (millions) . . . . $25.8 $9.2 $6.2 $26.4 $2.8 $0.5 $2.4

Ratios to average net assets(2)
Expenses . . . . . . . . . . . . . . 2.46% 2.93% 2.07%(4) 3.21% 3.88% 3.11%(4) 3.21%(4)
Expenses, without expense
reimbursement . . . . . . . . . . . -- 3.28% -- -- 4.50% -- --
Net investment income . . . . . . . . (.46%) (.57%) .29%(4) (1.19%) (1.41%) (.12%)(4) 1.15%(4)
Net investment income, without
expense reimbursement . . . . . . . -- (.92%) -- -- (2.02%) -- --

Portfolio turnover rate . . . . . . . 116% 120% 135% 116% 120% 135% 116%
</TABLE>

(1) COMMENCEMENT OF OFFERING OF SALES
(2) SEE NOTE 2.
(3) TOTAL RETURN FOR PERIODS OF LESS THAN ONE YEAR HAVE NOT BEEN ANNUALIZED.
TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
(4) ANNUALIZED
(5) BASED ON AVERAGE MONTH-END SHARES OUTSTANDING

SEE NOTES TO FINANCIAL STATEMENTS.

F-16
<PAGE> 79
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF AMERICAN CAPITAL GLOBAL EQUITY FUND,
A SERIES OF AMERICAN CAPITAL WORLD PORTFOLIO SERIES, 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 Global Equity
Fund, a series of American Capital World Portfolio Series, Inc., at May 31,
1994, the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

PRICE WATERHOUSE
Houston, Texas
July 29, 1994

F-17