AMERICAN CAPITAL UTILITIES INCOME FUND INC, 497, 1995-02-03

AMERICAN CAPITAL UTILITIES INCOME FUND INC
497, 1995-02-03

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<PAGE>

2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
January 31, 1995

American Capital Utilities Income Fund, Inc. (the "Fund") is a mutual fund
seeking as its primary objective current income. Capital appreciation is a
secondary objective which is sought only when consistent with the primary
objective. The Fund will seek to achieve these investment objectives by
investing in a diversified portfolio of common stocks and income securities
issued by companies engaged in the utilities industry ("Utility Securities").
Companies engaged in the utilities industry include those involved in the
production, generation, transmission, or distribution of electric energy, gas,
telecommunications services or the provision of other utility or utility
related goods or services. Under normal market conditions, at least 65% of the
Fund's total assets will be invested in Utility Securities. The Fund may
invest up to 35% of its total assets in securities issued by foreign issuers,
some or all of which may also be Utility Securities. There can be no assurance
that the Fund will achieve its investment objectives.

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

A Statement of Additional Information dated the same date as this Prospectus
has been filed with the Securities and Exchange Commission ("SEC") and
contains further information about the Fund. A copy of the Statement of
Additional Information may be obtained without charge by calling or writing
the Fund at the telephone number and address printed above. The Statement of
Additional Information is incorporated by reference into this Prospectus.

THE SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.

THE SHARES OF THIS FUND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>

CUSTODIAN: INVESTMENT ADVISER:
State Street Bank and Van Kampen American Capital
Trust Company Asset Management, Inc.
225 Franklin Street 2800 Post Oak Boulevard
Boston, Massachusetts 02110 Houston, Texas 77056

SHAREHOLDER SERVICE AGENT: DISTRIBUTOR:
Van Kampen/American Capital Van Kampen American Capital
Shareholder Services, Inc. Distributors, Inc.
P.O. Box 418256 One Parkview Plaza
Kansas City, Missouri 64141-9256 Oakbrook Terrace, Illinois 60181

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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary......... 2
Expense Synopsis........... 4
Financial Highlights....... 5
Multiple Pricing System.... 5
Investment Objectives and
Policies................. 7
Investment Practices and
Restrictions............. 12
The Fund and Its Manage-
ment..................... 15
Purchase of Shares......... 16
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Distribution Plans.................................................... 21
Shareholder Services.................................................. 22
Redemption of Shares.................................................. 25
Dividends, Distributions and Taxes.................................... 26
Prior Performance Information......................................... 28
Additional Information................................................ 29
Investment Holdings................................................... 30
</TABLE>

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

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PROSPECTUS SUMMARY
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SHARES OFFERED. Capital Stock.

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

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

INVESTMENT OBJECTIVE. The Fund's primary investment objective is to seek
current income. Capital appreciation is a secondary objective which is sought
only when consistent with the Fund's primary objective. There is, however, no
assurance that the Fund will be successful in achieving its objectives.

INVESTMENT POLICY AND RISKS. The Fund will seek to achieve its investment
objectives by investing in a diversified portfolio of common stocks and income
securities issued by companies engaged in the utilities industry. Companies
engaged in the utilities industry include those involved in the production,
transmission, or distribution of electric energy, gas, telecommunications
services or the provision of other utility or utility related goods or
services. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in Utility Securities. Utility Securities may include
securities issued by foreign or domestic issuers and the Fund must concentrate
over 25% of its total assets in such securities. Under normal market
conditions, the Fund may invest up to 35% of its total assets in other than
Utility Securities, including common stocks and income securities of issuers
not engaged in the utilities industry, U.S. Government securities (securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities), cash and money market

2
<PAGE>

instruments. The Fund's investments in income securities will be rated, at the
time of investment, at least BBB by Standard & Poor's Corporation ("S&P"), Baa
by Moody's Investors Service ("Moody's"), a comparable rating by any other
nationally recognized statistical rating organization or if unrated,
considered by the Fund's investment adviser to be of comparable quality.

Because of the Fund's policy of concentrating its investments in Utility
Securities, the Fund may be more susceptible than an investment company
without such a policy to any single economic, political or regulatory
occurrence affecting the public utilities industry. In addition, the Fund will
be affected by general changes in interest rates which will result in
increases or decreases in the market value of the debt securities (and, to a
lesser degree, equity securities) held by the Fund; the market value of such
securities tends to have an inverse relationship to the movement of interest
rates. For additional information regarding the risk connected with investment
in Utility Securities, see "Investment Objective and Policies--Portfolio
Securities."

The Fund may invest up to 35% of its total assets in securities issued by
foreign issuers, some or all of which may also be Utility 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 economic
developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. See "Investment Objectives and
Policies--Portfolio Securities--Foreign Securities."

The Fund may sell (write) and purchase call and put options. The Fund may
purchase and sell futures contracts and options on such contracts since such
transactions are entered into for hedging purposes. The Fund may purchase or
sell debt securities on a forward commitment basis and may lend portfolio
securities. The use of options, futures contracts and options on futures
contracts may include additional risks. See "Using Options, Futures Contracts
and Options on Futures Contracts." The Fund's net asset value per share will
fluctuate depending on market conditions and other factors. See "Investment
Objectives and Policies."

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

INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") has served as investment adviser to the Fund since its inception.
The Adviser serves as investment adviser to 45 investment company portfolios.
See "The Fund and Its Management."

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").

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

CLASS A SHARES. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares--Class A Shares" and
"Distribution Plans."

CLASS B SHARES. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first and second years, 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 are
declared daily and paid monthly; net capital gains, if any, are distributed at
least annually. All dividends and distributions are automatically reinvested
in shares of the Fund at net asset value per share (without sales charge)
unless payment in cash is requested. See "Dividends, Distributions and Taxes."

3
<PAGE>

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EXPENSE SYNOPSIS
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The following tables are intended to assist investors in understanding the
expenses applicable to each class of shares:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES(G) CLASS B SHARES(G) CLASS C SHARES(G)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales charge im-
posed on purchases (as
a
percentage of offering
price)................ 4.75%(a) None None
Sales charge imposed on
dividend reinvestment. None None None
Deferred sales charge None* 4% during the first year, 1% during
(as a percentage of 4% during the second year, the first year(b)
original 3% during the third year,
purchase price or re- 2.5% during the fourth year,
demption proceeds, 1.5% during the fifth year and
whichever is lower)... 0% after the fifth year(b)
Exchange fee............ $5.00(c) $5.00(c) $5.00(c)
ANNUAL FUND OPERATING
EXPENSES (as a per-
centage of average net
assets)
Management fees (after
reimbursement)...... .00%(h) .00%(h) .00%(h)
Rule 12b-1 fees(d).... .18% 1.00%(f) 1.00%(f)
Other expenses (after
reimbursement)(e)... .88%(i) .82%(i) .79%(i)
Total fund operating
expenses.............. 1.06%(j) 1.82%(j) 1.79%(j)
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares--Class
A Shares"--page 17.
(b) See "Purchase of Shares--Class B Shares" and "--Class C Shares"--pages 19
and 20.
(c) Not charged in certain circumstances. See "Shareholder Services--
Systematic Exchange" and "--Automatic Exchange"--page 24.
(d) Up to .25% for Class A shares and 1.00% for Class B and C shares. See
"Distribution Plans"--page 21.
(e) See "The Fund and Its Management"--page 15. "Other expenses" is based on
estimated amounts for the current fiscal year on an annualized basis.
(f) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
(g) For the period November 23, 1993 through September 30, 1994 on an
annualized basis.
(h) After a voluntary expense reimbursement. In the absence of such a
reimbursement, management fees for all classes would be .65%.
(i) After expense reimbursement. In the absence of expense reimbursement,
other expenses would be 1.60% for Class A shares, 1.54% for Class B shares
and 1.51% for Class shares, respectively.
(j) After expense reimbursement. In the absence of expense reimbursement,
total fund operating expenses would be 2.43% for Class A shares, 3.19% for
Class B shares and 3.16% for Class C shares.
* 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:
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including, for Class A
shares, the maximum $47.50 front-end sales
charge and for Class B and Class C shares, a
contingent deferred sales charge, assuming
(1) an operating expense ratio of 1.06% for
Class A shares, 1.82% for Class B shares and
1.79% for Class C shares, (2) a 5% annual re-
turn throughout the period and (3) redemption
at the end of the period:
Class A..................................... $58 $80 $103 $171
Class B..................................... $60 $90 $116 $175**
Class C..................................... $29 $57 $_99 $214
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A..................................... $58 $80 $103 $171
Class B..................................... $18 $57 $_99 $175**
Class C..................................... $18 $57 $_99 $214
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</TABLE>
**Based on conversion to Class A shares after six years.

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

4
<PAGE>

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

The following financial highlights have been audited by the Fund's
independent accountants, Price Waterhouse LLP, whose report thereon was
unqualified. This summary should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.

<TABLE>
<CAPTION>
November 23, 1993(1)
through
September 30, 1994
------------------------
Class A Class B Class C
------- -------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
Net asset value, beginning of period................... $9.44 $9.44 $9.44
------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................................... .53 .52 .53
Expenses............................................... (.09) (.14) (.15)
------- -------- -------
Net investment income.................................. .44 .38 .38
Net realized and unrealized losses on securities....... (1.10) (1.096) (1.106)
------- -------- -------
Total from investment operations....................... (.66) (.716) (.726)
------- -------- -------
DIVIDENDS FROM NET INVESTMENT INCOME................... (.39) (.334) (.334)
------- -------- -------
Net asset value, end of period......................... $8.39 $8.39 $8.38
======= ======== =======
TOTAL RETURN(3)...................................... (7.24%) (7.72%) (7.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................... $7.5 $10.7 $1.8
Ratios to average net assets(2)
Expenses.............................................. 1.06% 1.82% 1.79%
Expenses, without expense reduction................... 2.43% 3.19% 3.16%
Net investment income................................. 5.48% 4.66% 4.65%
Net investment income, without expense reduction...... 4.11% 3.29% 3.28%
Portfolio turnover rate................................ 72% 72% 72%
</TABLE>

(1) Commencement of offering of sales.
(2) Annualized
(3) Totalreturn not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.

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

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

CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Class A shares are
subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class A shares.
Certain purchases of Class A shares qualify for reduced initial sales charges.
See "Purchase of Shares--Class A Shares."

CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up
to 0.25% of the Fund's aggregate average daily net assets attributable to the
Class B shares and an ongoing distribution fee at an annual rate of up to
0.75% of the Fund's aggregate average daily net assets attributable to

5
<PAGE>

the Class B shares. Class B shares enjoy the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
distribution fee paid by Class B shares will cause such shares to have a
higher expense ratio and to pay lower dividends than those related to Class A
shares. See "Purchase of Shares--Class B Shares." Class B shares will
automatically convert to Class A shares six years after the end of the
calendar month in which the shareholder's order to purchase was accepted. See
"Conversion Feature" herein for discussion on applicability of the conversion
feature to Class B shares.

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

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

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

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

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

6
<PAGE>

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. In addition, the check writing privilege is only available for Class
A shares (see "Shareholder Services--Shareholder Services Applicable to Class
A Shareholders Only--Check Writing Privilege"). Class B shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, and/or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish
to avoid a front-end sales charge, put 100% of their investment dollars to
work immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.

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

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

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

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

- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------------------

The Fund's primary investment objective is to provide its shareholders with
current income. Capital appreciation is a secondary objective which is sought
only when consistent with the primary objective. The Fund will seek to achieve
its investment objectives by investing in a diversified portfolio of common
stock and income securities issued by companies engaged in the utilities
industry. Companies engaged in the utilities

7
<PAGE>

industry include those engaged in the production, generation, transmission, or
distribution of electric energy and telecommunications services, the
distribution of gas or the provision of other utility or utility related goods
or services. Utility Securities may be issued by either foreign or domestic
issuers. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in Utility Securities. As a fundamental policy, which
cannot be changed without shareholder approval, the Fund must concentrate over
25% of its assets in Utility Securities. The Fund will not purchase more than
5% of the outstanding voting securities of more than one public utility
company. Under normal market conditions, the Fund may invest up to 35% of its
total assets in other than Utility Securities, including common stock and
income securities of issuers not engaged in the utilities industry, U.S.
Government securities, cash and money market instruments. Income securities
include preferred stock and debt securities of various maturities. The Fund's
investments in income securities will be rated, at the time of investment, at
least BBB by S&P, Baa by Moody's, a comparable rating by any other nationally
recognized statistical rating organization or if unrated, determined by the
Adviser to be of comparable quality. Ratings at the time of purchase determine
which securities may be acquired, and a subsequent reduction in ratings does
not require the Fund to dispose of a security. Securities rated BBB by S&P or
Baa by Moody's are considered to be medium grade obligations which possess
speculative characteristics so that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher rated securities. The ratings
of the ratings agencies represent their opinions of the quality of the debt
securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, income securities with the
same maturity, coupon and rating may have different yields while income
securities of the same maturity and coupon with different rates may have the
same yield. The Fund may invest up to 35% of its assets in securities issued
by foreign issuers.

The investment objectives and policies, the percentage limitations, and the
kinds of securities in which the Fund may invest are generally not fundamental
policies and may be changed by the Directors, unless expressly governed by
certain 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 the objectives of the Fund,
shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial position and needs.

In evaluating particular issuers of Utility Securities, the Adviser will
consider a number of factors, including rates of return on capital, financial
condition and resources, historical growth rates, geographic location and
service area, management skills and such utilities industry factors as
regulatory environment, energy sources, the costs of alternative fuels and, in
the case of electric energy utilities, the extent and nature of their
involvement with nuclear power. The Adviser believes that Utility Securities
provide above-average dividend returns and below-average price/earnings ratios
which in the view of the Adviser are factors that not only provide current
income but also generally tend to moderate risk. The Adviser will buy and sell
securities for the Fund's portfolio with a view toward seeking capital
appreciation together with current income and will select securities which the
Adviser believes entail reasonable credit risk considered in relation to the
investment policies of the Fund. As a result, the Fund will not necessarily
invest in the highest yielding Utility Securities permitted by the investment
policies if the Adviser determines that market risks associated with such
investments would subject the Fund's portfolio to excessive risk. Other than
for tax purposes, frequency of portfolio turnover generally will not be a
limiting factor if the Fund considers it advantageous to purchase or sell
securities. The Fund may have annual portfolio turnover rates in excess of
100%. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses or dealer costs than a lower rate, which
expenses and costs must be borne by the Fund and its shareholders. See
"Investment Practices and Restrictions--Portfolio Turnover."

The Fund may enter into repurchase agreements with domestic banks and broker-
dealers which involves certain risks or may lend portfolio securities on a
fully collateralized basis. See "Investment Practices and Restrictions--
Repurchase Agreements" and "Investment Practices and Restrictions--Lending of
Securities." When deemed appropriate for temporary defensive purposes, up to
100% of the Fund's assets may be invested in U.S. Government securities and
investment grade corporate debt securities.

The Fund may dispose of a security whenever, in the opinion of the Adviser,
factors indicate it is desirable to do so. Such factors include a change in
economic or market factors in general or with respect to a particular
industry, a change in the market trend of or other factors affecting an
individual security, changes in the relative market performance or
appreciation possibilities offered by individual securities and other
circumstances bearing on the desirability of a given investment.

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<PAGE>

PORTFOLIO SECURITIES

GENERAL. Utility Securities are common stocks and income securities of
companies engaged in the utilities industry. Such companies may be either
foreign or domestic. Companies engaged in the utilities industry include a
variety of entities involved in (i) production , generation, transmission or
distribution of electric energy, (ii) the provision of natural gas, (iii) the
provision of telephone, mobile communication, satellite, microwave and other
telecommunications services or (iv) the provision of other utility or utility
related goods or services, including entities engaged in cogeneration, waste
disposal system provision, solid waste electric generation and independent
power producers.

The rate of return of issuers of Utility Securities generally are subject to
review and limitation by state public utilities commissions and tend to
fluctuate with marginal financing costs. Rate changes generally lag changes in
financing costs, and thus can favorably or unfavorably affect the earnings or
dividend payments on Utility Securities depending upon whether such rates and
costs are declining or rising.

Companies engaged in the public utilities industry historically have been
subject to a variety of risks depending, in part, on such factors as the type
of utility company involved and its geographic location. Such risks include
increases in fuel and other operating costs, high interest expenses for
capital construction programs, costs associated with compliance with
environmental and nuclear safety regulations, service interruption due to
environmental, operational or other mishaps, the effects of economic
slowdowns, surplus capacity, competition and changes in the overall regulatory
climate. In particular, regulatory changes with respect to nuclear and
conventionally fueled generating facilities could increase costs or impair the
ability of utility companies to operate such facilities, thus reducing utility
companies' earnings or resulting in losses. There can be no assurance that
regulatory policies or accounting standard changes will not negatively affect
utility companies' earnings or dividends. Companies engaged in the public
utilities industry are subject to regulation by various authorities and may be
affected by the imposition of special tariffs and changes in tax laws. To the
extent that rates are established or reviewed by governmental authorities,
companies engaged in the public utilities industry are subject to the risk
that such authority will not authorize increased rates. In addition, because
of the Fund's policy of concentrating its investments in Utility Securities,
the Fund may be more susceptible than an investment company without such a
policy to any single economic, political or regulatory occurrence affecting
the public utilities industry. Under market conditions that are unfavorable to
the utilities industry, the Adviser may significantly reduce the Fund's
investment in that industry.

GAS AND TELECOMMUNICATIONS UTILITIES. Gas transmission companies, gas
distribution companies and telecommunications companies are undergoing
significant changes. Gas utilities have been adversely affected by declines in
the prices of alternative fuels, oversupply conditions and competition.
However, the better managed companies have utilized their cash flows to
diversify into non-regulated businesses that have helped to offset slow growth
in the utility. Telephone utilities are still experiencing the effects of
increased competition and rapidly developing technologies. Potential sources
of competition and new products are cable television systems, shared tenant
services and other noncarrier systems which are capable of bypassing
traditional telephone services providers' local plant, either completely or
partially, through substitutions of special access for switched access or
through concentration of telecommunications traffic on fewer of the
traditional telephone services providers' lines. Although there can be no
assurance that increased competition and other structural changes will not
adversely affect the profitability of such utilities, or that other negative
factors will not develop in the future, in the Adviser's opinion, competition
and technological advances may over time result in better-positioned utility
companies with opportunities for enhanced profitability.

ELECTRIC UTILITIES. Electric utility companies in general have been favorably
affected by lower fuel costs, the full or near completion of major
construction programs and lower financing costs. Some electric utilities have
also taken advantage of the right to sell power outside of their historical
territories. Certain electric utilities with uncompleted nuclear power
facilities may have problems completing and licensing such facilities, and
there is increasing public, regulatory and governmental concern with the cost
and safety of nuclear power facilities in general. At this time, there are
certain institutional impediments to the wide-scale deregulation of electric
utilities including among other things, limitations on the redistribution of
power.

Electric utilities are also facing significant change as the industry moves
from a regulated monopoly to full competition. While this process will take
several years to complete, the companies today must enhance efficiency of
operation in order to survive. In some instances, this may require asset
writedowns of uneconomic

9
<PAGE>

plants which could place a burden on those companies with weaker balance
sheets. In the opinion of the Adviser, those companies preparing today for
competition in the future will be strong survivors with opportunities for
increased profitability and dividend growth.

OTHER UTILITIES. Other issuers of Utility Securities are emerging as new
technologies develop and as old technologies are refined. Such issuers include
entities engaged in cogeneration, waste disposal system provision, solid waste
electric generation and independent power producers.

INCOME SECURITIES. The Fund may invest its assets in income securities, which
include preferred stocks and debt securities of various maturities. The Fund
will make these investments in securities which, at the time of investment,
are rated at least BBB by S&P, Baa by Moody's, a comparable rating by any
other nationally recognized statistical rating organization or if unrated, of
comparable quality as determined by the Adviser. For a description of such
ratings, see the Appendix included with the Statement of Additional
Information.

While the Fund has no policy limiting the maturities of the debt securities
in which it may invest, the Adviser seeks to limit market risk by generally
maintaining a portfolio duration within a range of five to ten years. Duration
is a measure of the expected life of a debt security that was developed as a
more precise alternative to the concept of "term to maturity." Duration
incorporates a debt security's yield, coupon interest payments, final maturity
and call features into one measure.

The Fund may invest in securities convertible into, or ultimately
exchangeable for, Utility Securities. Convertible securities rank senior to
common stocks in a corporation's capital structure. They are consequently of
higher quality and entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure
upon the degree to which the convertible security sells above its value as a
fixed-income security.

The net asset value of the Fund will change with changes in the value of its
portfolio securities. The values of income securities may change as interest
rate levels fluctuate. To the extent that the Fund invests in income
securities, the net asset value of the Fund can be expected to change as
general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in income securities generally can be expected
to rise. Conversely, when interest rates rise, the value of a portfolio
invested in income securities generally can be expected to decline. Volatility
may be greater during periods of general economic uncertainty.

The foregoing policies with respect to credit quality of portfolio
investments will apply only at the time of purchase of a security, and the
Fund will not be required to dispose of a security in the event that S&P or
Moody's (or any other nationally recognized statistical rating organization)
or, in the case of unrated income securities, the Adviser, downgrades its
assessment of the credit characteristics of a particular issuer. In
determining whether the Fund will retain or sell such a security, in addition
to the factors described above, the Adviser may consider such factors as the
Adviser's assessment of the credit quality of the issuer of such security, the
price at which such security could be sold and the rating, if any, assigned to
such security by other nationally recognized statistical rating organizations.

COMMON STOCK. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders,
after making required payments to holders of such entity's preferred stock and
other senior equity. Common stock usually carries with it the right to vote
and frequently an exclusive right to do so. In selecting common stocks for
investment, the Fund will focus both on the security's potential for
appreciation and on its dividend paying capacity.

FOREIGN SECURITIES. The Fund may invest up to 35% of its assets in securities
issued by foreign issuers of similar quality as the securities described above
as determined by the Adviser. Some of such securities may also be Utility
Securities. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the accrued income and unrealized
appreciation or depreciation of investments. Changes in foreign currency
exchange rates relative to the U.S. dollar will affect the U.S. dollar value
of the Fund's assets denominated in that currency and the Fund's yield on such
assets.

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<PAGE>

The Fund may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or
other securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of
the depositary's transaction fees, whereas under an unsponsored arrangement,
the foreign issuer assumes no obligation and the depositary's transaction fees
are paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR and the
financial information about a company may not be as reliable for an
unsponsored ADR as it is for a 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.

With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social
instability or diplomatic developments which could affect investment in those
countries. There may be less publicly available information about a foreign
security than about a United States security, and foreign entities may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition,
certain foreign investments made by the Fund may be subject to foreign
withholding taxes, which would reduce the Fund's total return on such
investments and the amounts available for distributions by the Fund to its
shareholders. See "Dividends, Distributions and Taxes." Foreign financial
markets, while growing in volume, have, for the most part, substantially less
volume than United States markets, and securities of many foreign companies
are less liquid and their prices more volatile than securities of comparable
domestic companies. The foreign markets also have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are not
invested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Fund due to subsequent declines in value of the portfolio security or, if the
Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage
commissions, are generally higher than with transactions in United States
securities. In addition, the Fund will incur costs in connection with
conversions between various currencies. There is generally less government
supervision and regulation of exchanges, financial institutions and issuers in
foreign countries than there is in the United States.

The Adviser believes that many foreign issuers of Utility Securities have yet
to experience the growth that certain issuers of Utility Securities located in
the United States have experienced and that as such foreign issuers develop
their domestic markets, they may become attractive investments. In addition,
the Adviser believes that certain foreign governments may engage in programs
of privatization of issuers of Utility Securities and that the Utility
Securities issued by privatized companies may offer attractive investment
opportunities with the potential for long-term growth. However, it is not
possible to predict the terms of offerings by privatized companies or the
effect of privatization in the domestic securities market of such privatized
companies. There can be no assurance that securities of privatized companies
will be offered to the public or to foreign companies such as the Fund.

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.

The Fund also may enter into contracts with banks or other foreign currency
brokers and 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

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<PAGE>

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 price 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.

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INVESTMENT PRACTICES AND RESTRICTIONS
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REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser, (i.e., the Fund) acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the holding period. It is the current
policy of the Fund not to invest at the time of purchase more than 25% of its
total assets in securities subject to repurchase agreements, nor more than 15%
of its net assets in securities subject to repurchase agreements that do not
mature within seven days and in any other illiquid securities. In the event of
the bankruptcy of the seller of a repurchase agreement, the Fund could
experience delays in liquidating the underlying securities, and the Fund could
incur a loss including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its rights thereto,
(b) possible lack of access to income on the underlying security during this
period, and (c) expenses of enforcing its rights. See the Statement of
Additional Information.

For the purpose of investing in repurchase agreements, the Adviser aggregates
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
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that
account.

USING OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund
expects to utilize options, futures contracts and options on futures contracts
in several different ways, depending upon the status of the Fund's portfolio
and the Adviser's expectations concerning the securities markets. See the
Statement of Additional Information for a discussion of options, futures
contracts and options on futures contracts.

POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. The purchase and sale of options and futures contracts involve
risks different from those involved with direct investments in securities.
While utilization of options, futures contracts and similar instruments may be
advantageous to the Fund, if the Adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance will be
worse than if the Fund did not make such investments. In addition, the Fund
would pay commissions and other costs in connection with such investments,
which may increase the Fund's expenses and reduce its return. The Fund may
write or purchase options in privately negotiated transactions ("OTC Options")
as well as listed options. OTC Options can be closed out only by agreement
with the other party to the transaction. Any OTC Option purchased by the Fund
is considered an illiquid security. Any OTC Option written by the Fund is with
a qualified dealer pursuant to an agreement under which the Fund may
repurchase the option at a formula price. Such options are considered illiquid
to the extent that the formula

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<PAGE>

price exceeds the intrinsic value of the option. The Fund may not purchase or
sell futures contracts or related options for which the aggregate initial
margin and premiums exceed five percent of the fair market value of the Fund's
assets. In order to prevent leverage in connection with the purchase of
futures contracts or call options thereon by the Fund, an amount of cash, cash
equivalents or liquid high-grade debt securities equal to the market value of
the obligation under the futures contract or option (less any related margin
deposits) will be maintained in a segregated account with the Custodian. The
Fund may not invest more than 15% of its net assets in illiquid securities and
repurchase agreements which have a maturity of longer than seven days. A more
complete discussion of the potential risks involved in transactions involving
options or futures contracts and related options, is contained in the
Statement of Additional Information.

FORWARD COMMITMENTS. The Fund may purchase or sell debt securities on a
"when-issued" or "delayed delivery" basis ("Forward Commitments"). These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future, frequently a month or more
after such transaction. This price is fixed on the date of the commitment, and
the seller continues to accrue interest on the securities covered by the
Forward Commitment until delivery and payment take place. At the time of
settlement, the market value of the securities may be more or less than the
purchase or sale price.

The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or
before the settlement date in which event the Fund may reinvest the proceeds
in another Forward Commitment. The Fund's use of Forward Commitments may
increase its overall investment exposure and thus its potential for gain or
loss. When engaging in Forward Commitments, the Fund relies on the other party
to complete the transaction, should the other party fail to do so, the fund
might lose a purchase of sale opportunity that could be more advantageous than
alternative opportunities at the time of the failure.

The Fund maintains a segregated account (which is marked to market daily) of
cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the
amount of its commitment as long as the obligation to purchase or sell
continues.

LENDING OF SECURITIES. In order to generate additional income, the Fund may
lend its portfolio securities in an amount up to 33 1/3% of total assets to
broker-dealers, major banks or other recognized domestic institutional
borrowers of securities not affiliated with the Adviser. The borrower at all
times during the loan must maintain cash equal to at least 100% of the value
of the securities loaned. During the time portfolio securities are on loan,
the borrower pays the Fund any dividends or interest paid on such securities,
and the Fund may invest the cash collateral in short-term instruments and earn
additional income. There are risks of delay in recovery and in some cases even
loss of rights in the collateral should the borrower of the securities fail
financially.

RESTRICTED SECURITIES. The Fund may invest up to 15% of its net assets in
restricted securities and other illiquid assets (but see below for information
regarding state restrictions). As used herein, restricted securities are those
that have been sold in the United States without registration under the
Securities Act of 1933 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 Securities Act of 1933 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. The Directors will carefully monitor the Fund's
investment in 144A 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.

Notwithstanding the foregoing, due to various state regulations, the Fund
will not invest more than 10% of its net assets in restricted securities;
restricted securities eligible for resale pursuant to Rule 144A are not
included within this limitation. In the event that the Fund's shares cease to
be qualified under the laws of such states or if such regulations are amended
or otherwise cease to be operative, the Fund would not be subject to this 10%
restriction.

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<PAGE>

PORTFOLIO TURNOVER. The Fund may experience a high rate of portfolio turnover
which may vary from year to year. The rate of portfolio turnover is not a
limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, future contracts and
related options. A 100% turnover rate would occur, for example, if all the
securities held by the Fund were replaced in a period of one year. Higher
portfolio turnover involves correspondingly greater brokerage commissions and
other transaction costs, which are borne directly by the Fund, and may result
in realization of short-term capital gains if securities are held for one year
or less which may be subject to applicable income taxes. See "Dividends,
Distributions and Taxes." Although no assurance can be given with respect to
future portfolio turnover rates, it is anticipated that the Fund's rate of
portfolio turnover will not generally exceed 400%.

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

INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies
cannot be changed without the approval of holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. See the Statement
of Additional Information for further information. These restrictions provide,
among other things that the Fund may not:

1. Borrow in excess of five percent of the market or other fair value of its
total assets; or pledge its assets to an extent greater than five percent
of the market or other fair value of its total assets. Any such borrowings
shall be from banks and shall be undertaken only as a temporary measure
for extraordinary or emergency purposes. Margin deposits or payments in
connection with the writing of options, or in connection with the purchase
or sale of forward contracts, futures contracts and foreign currency
futures and options thereon, are not deemed to be a pledge or other
encumbrance.

2. Invest more than five percent of its assets in the securities of any one
issuer (except the U.S. Government, its agencies and instrumentalities) or
purchase more than ten percent of the outstanding voting securities of any
one issuer.

3. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (a) write covered or fully collateralized call options, write
secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (b) purchase options to the
extent that the premiums paid for all such options owned at any time do
not exceed ten percent of its total assets, and enter into closing or
offsetting transactions with respect to such options, and (c) engage in
transactions in interest rate futures contracts and related options
provided that such transactions are entered into for bona fide hedging
purposes (or that the underlying commodity value of the Fund's long
positions do not exceed the sum of certain identified liquid investments
as specified in CFTC regulations), provided further that the aggregate
initial margin and premiums do not exceed five percent of the fair market
value of the Fund's total assets, and provided further that the Fund may
not purchase futures contracts or related options if more than 30% of the
Fund's total assets would be so invested.

4. Make loans of money or securities, except (a) by investment in repurchase
agreements in accordance with applicable requirements set forth in the
Fund's Prospectus or (b) by lending its portfolio securities in amounts
not to exceed 33 1/3% of the Fund's total assets, provided that such loans
are secured by cash collateral that is at least equal to the market value.
See "Investment Practices and Restrictions" herein.

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<PAGE>

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

The Fund is an open-end, diversified management investment company,
incorporated as a Maryland corporation on August 31, 1993. A mutual fund
provides, for those who have similar investment goals, a practical and
convenient way to invest in a diversified portfolio of securities by combining
their resources in an effort to achieve such goals.

A board of eight directors has the responsibility for overseeing the affairs
of the Fund. The Adviser, determines the investment of the Fund's assets,
provides administrative services and manages the Fund's business and affairs.
The Adviser, together with its predecessors, has been in the investment
advisory business since 1926 and has served as investment adviser to the Fund
since its inception. As of November 30, 1994, the Adviser provides investment
advice to 45 investment company portfolios with total net assets of
approximately $16.1 billion. The Adviser may utilize at its own expense credit
analysis, research and trading support services provided by its affiliate, Van
Kampen American Capital Investment Advisory Corp.

The Adviser and the Distributor are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The
general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of VKAC own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.

Mr. Don G. Powell is President and Director of the Fund, President, Chief
Executive Officer and Director of the Adviser, and Chairman, Chief Executive
Officer and Director of the Distributor. Most other officers of the Fund are
also officers and/or directors of the Adviser.

The Fund retains the Adviser to manage the investment of its assets and to
place orders for the purchase and sale of its portfolio securities. Under an
investment advisory agreement dated December 20, 1994 (the "Advisory
Agreement"), the Fund pays the Adviser a monthly fee computed on average daily
net assets of the Fund at the annual rate of 0.65% of the Fund's average daily
net assets. Under the Advisory Agreement, the Fund also reimburses the Adviser
for the cost of the Fund's accounting services, which include maintaining its
financial books and records and calculating its daily net asset value.
Operating expenses paid by the Fund include shareholder service agency fees,
service fees, distribution fees, custodial fees, legal and accounting fees,
the costs of reports and proxies to shareholders, directors' fees, and all
other business expenses not specifically assumed by the Adviser. Advisory
(management) fee and total operating expense ratios are shown under the
caption "Expense Synopsis" herein.

Mary Jayne Byrne is primarily responsible for the day-to-day management of
the Fund's investment portfolio. Ms. Byrne has been primarily responsible for
managing the Fund's investment portfolio since May 20, 1994. Prior to that she
was associate portfolio manager of the Fund. Ms. Byrne is Vice President of
the Fund and has been a portfolio manager with the Adviser since 1994. Ms.
Byrne was an associate portfolio manager with the Adviser from 1992 to 1994.
Prior to that time, Ms. Byrne was a senior equity analyst at Texas Commerce
Investment Management Company. Thomas Copper is associate portfolio manager of
the Fund. In that role he assists Ms. Byrne in the day-to-day management of
the Fund's investment portfolio. He has served in that capacity since the
inception of the Fund. Mr. Copper is also Vice President of the Fund and has
been an associate portfolio manager of the Adviser since 1992. Prior to that
time Mr. Copper was a credit analyst with the Adviser.

15
<PAGE>

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

GENERAL

The Fund offers three classes of shares to the general public. Class A shares
are sold with an initial sales charge; Class B shares and Class C shares are
sold without an initial sales charge and are subject to a contingent deferred
sales charge upon certain redemptions. See "Multiple Pricing System" for a
discussion of factors to consider in selecting which class of shares to
purchase. Contact the Service Department at (800) 421-5666 for further
information and appropriate forms.

Shares of the Fund are offered continuously for sale by the Distributor and
are available through authorized investment dealers. Initial investments must
be at least $500 and subsequent investments must be at least $25. Both
minimums may be waived by the Distributor for plans involving periodic
investments. The Fund and the Distributor reserve the right to refuse any
order for the purchase of shares. Shares of the Fund may be sold in foreign
countries where permissible. 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 of the Fund 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, Van Kampen/American Capital
Shareholder Services, Inc. ("ACCESS"). When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A, Class B or Class C
shares.

Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York
time) each day the Exchange is open. Net asset value per share for each class
is determined by dividing the value of the Fund's securities, cash and other
assets (including accrued interest) attributable to such class less all
liabilities (including accrued expenses) attributable to such class, by the
total number of shares of the class outstanding. Such computation is made by
using prices as of the close of trading on the Exchange and (i) valuing
securities listed or traded on a national securities exchange at the last
reported sale price, or if there has been no sale that day, at the last
reported bid price, (ii) valuing over-the-counter securities for which the
last sale price is available from the National Association of Securities
Dealers Automated Quotations ("NASDAQ") at that price, 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 Fund. Short-term investments with a maturity of 60 days or
less when purchased are valued at cost plus interest earned (amortized cost),
which approximates market value. Short-term investments with a maturity of
more than 60 days when purchased are valued based on market quotations until
the remaining days to maturity becomes less than 61 days. From such time,
until maturity, the investments are valued at amortized cost using the value
of the investment on the 61st day. See the notes to financial statements in
the Statement of Additional Information.

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

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

16
<PAGE>

===============================================================================

AMERICAN CAPITAL
FAMILY OF FUNDS

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

NEW ACCOUNT
APPLICATION*
FOR CLASS A, CLASS B, AND CLASS C SHARES

FOR ASSISTANCE CALL 1-800-421-5666

*IF YOU WISH TO OPEN A RETIREMENT PLAN WITH
AMERICAN CAPITAL TRUST COMPANY AS CUSTODIAN,
PLEASE CALL US FOR AN APPROPRIATE APPLICATION.

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

[AMERICAN CAPITAL LOGO APPEARS HERE]

999APL-007 REV 1294

================================================================================
<PAGE>

AMERICAN CAPITAL'S CHECK-WRITING PRIVILEGE
(AVAILABLE ON CLASS A SHARES, FIXED-INCOME ACCOUNTS ONLY)

American Capital offers a check-writing privilege to provide you with
quick liquidity for major purchases and emergency needs. Simply complete the
AUTHORIZATION FOR REDEMPTION BY CHECK below.

When your application for this privilege has been received and
processed, you will receive a supply of special checks which you may write
against your fund account made payable to any person in amounts of $100 or
more. When a check is presented to the Custodian for payment, full and
fractional shares required to cover the amount of the check will be redeemed
from your account at the next determined net asset value.

Please note that, since the share prices of the selected income funds
fluctuate daily, use of the check-writing privilege in these funds can result
in the liquidation of shares at a profit or a loss from the time of your
purchase and may be considered a taxable event. Consequently, while this
privilege can provide you with easy liquidity, it is not meant to be used as
a regular checking account.

- -If the amount of your check is greater than the value of your fund account
at the time the redemption is processed by ACCESS (the fund's service agent),
the check will be returned and you may be subject to additional charges.

- -You may not liquidate your entire account by means of a check.

- -No check will be accepted if written for an amount less than $100.

- -A "stop payment" system is not available with this privilege.

- -Checks will not be honored for redemption of shares held less than 15 days,
unless these shares were paid for by bank wire.

- -Any shares which are escrowed due to Letter of Intent requirements or which
are represented by outstanding certificates may not be redeemed by check.

- -If the shareholder is a corporation, partnership, trust, fiduciary, executor
or administrator, the appropriate documents appointing authorized signers
(corporate resolutions, partnership or trust agreements) must accompany the
Authorization Card. The documents must be certified in original form and the
certifications must be dated within 60 days of their receipt by ACCESS.

- -All signatures on the Authorization Card must be guaranteed if any of the
signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its
records.

- -This privilege is not available to accounts with missing social security
numbers, uncertified TIN numbers, accounts subject to backup withholding or
retirement plan accounts.

- -The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.

- -For additional information on the Check-Writing Privilege, call the American
Capital Service Line toll-free at 1-800-421-5666. This line is available from
7a.m. to 7p.m. central time any business day.

CUT ON PERFORATED LINE
- --------------------------------------------------------------------------------
AUTHORIZATION FOR REDEMPTION BY CHECK - CLASS A SHARES, FIXED INCOME ACCOUNT
ONLY

- ----------------------------------- -------------------- ------------------
American Capital Fund Name ("Fund") Acct # (If Existing) # of signatures
required on checks

- --------------------------------------------------------------------------------
Name(s) of all authorized persons as they will appear on checks: (Please Print)

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

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

Signature(s) of all registrants as they appear on the account:

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

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

By signing, the signator(s) agrees to the conditions on the reverse side
hereof. If multiple signatures, each signatory guarantees the other's
signature. If the account has been established for more than 30 days or any
signator is not referenced in the account registration, all signatures must
be guaranteed.

SIGNATURE GUARANTEE
All signatures must be guaranteed.
GUARANTEE STAMP HERE

- ---------------------------------------------
SIGNATURE GUARANTEED BY (a Bank or Trust
Company; a Broker/Dealer; a Credit Union;
a National Securities Association or Clearing
Agency; a Savings and Loan Association; or a
Federal Savings Bank.)
<PAGE>

EASY TEAROUT
APPLICATION

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

DETACH APPLICATION
FROM THE PERFORATED EDGE

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

ENCLOSE CHECK WITH
THE COMPLETED APPLICATION
AND MAIL TO:

AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 419319
KANSAS CITY, MO 64141-6319

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

[AMERICAN CAPITAL LOGO APPEARS HERE]
<PAGE>

TELEPHONE TRANSACTION AUTHORIZATION

AUTHORIZATION AND AGREEMENT

The registrant hereby authorizes ACCESS to accept and act conclusively upon
telephone instructions from me, anyone other than me representing himself to
be me, or any person purporting to represent me in effecting a redemption of
specified share or dollar amount or in effecting exchanges of shares of one
(or more) American Capital managed fund(s) (the "Fund" or "Fund(s)" or
"Funds") for which such an exchange is available. American Capital Management
& Research, Inc. 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. I understand and agree
to indemnify and hold harmless American Capital and the Funds from any
liability (including attorney's fees) arising directly or indirectly from any
act or omission to act hereunder not occasioned by their gross negligence or
willful misconduct. I understand that the redemption and/or exchange
privilege may be modified or terminated at any time. I also understand that
these privileges are subject to the conditions and provisions set forth
herein and in the current prospectuses of the Funds. For each exchange, I
will have received and perused a copy of the then current prospectus of the
Fund being purchased. In the case of a registrant other than an individual, I
certify that the organization has the authority to transact telephone
exchanges. I will notify ACCESS of any change in such authority. Telephone
Redemptions may be executed on all accounts other than retirement accounts.
This Authorization shall be effective upon receipt by ACCESS. It
shall in all respects be interpreted, enforced and governed under the laws of
the State of Missouri. Any suit, claim or action hereunder against American
Capital and the Funds shall have as its sole venue the County of Harris,
State of Texas.
If any provision of this Authorization is declared by any court to
be illegal or invalid, the validity of the remaining parts shall not be
affected thereby, and the illegal or invalid portion shall be deemed stricken
from this Authorization.

CONDITIONS
1. Telephone redemption and/or exchange instructions received before the
pricing of the Fund on any day on which the New York Stock Exchange is
open for business (a "Business Day"), but not later than 3:00 p.m. central
time, will be processed at that day's closing net asset value. For each
exchange my account shall be charged an exchange fee noted in the then
current prospectus. There is no fee for telephone redemption; however,
redemptions of Class B and Class C shares are subject to a contingent
deferred sales charge (See "Redemption of Shares" in the appropriate
Funds' prospectus.
2. Telephone redemption and/or exchange instructions should be made by
dialing 1-800-421-5684.
3. A waiting period as described in each Fund's Prospectus may apply to
exchanges. Exchanges will not be requested prior to the expiration of any
waiting period or in violation of any of the terms and conditions of any
of the Funds' prospectuses and I agree to indemnify American Capital and
the Funds against any harm occasioned by their compliance with an improper
order under any of the Funds' prospectus.
4. Telephone redemption requests in excess of $50,000 will not be allowed.
To transact redemptions over this dollar amount, a written request must be
directed to ACCESS. (See "Redemption of Shares" in the appropriate
Funds' prospectus for any additional requirements.)
5. Telephone redemption requests must meet the following conditions to be
accepted by ACCESS:
(a) Proceeds of the redemption may be directly deposited into
predetermined bank account, or the current address on the
registration. This address cannot reflect any change within the
previous sixty (60) days.
(b) Certain account information will need to be provided for verification
purposes before the redemption will be executed.
(c) Only one telephone redemption can be processed within a 30 day
period.
6. If the Fund to which an exchange of Class A Shares is made has a sales
charge greater than the Fund from which the exchange is made, either a
full, partial or no sales charge may be imposed depending on the
particular Fund from which such exchange has occurred. See the current
prospectus.
7. If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment
requirement of the Fund being acquired.
8. Any new account established through the exchange privilege will have
the same account information and options except as stated in the current
prospectus and be subject to this authorization.
9. Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to ACCESS and deposited into the customer's account
before any transaction may be processed.
10. If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares of
the Fund to be purchased on the exchange having the same aggregate net
asset value as the shares being exchanged shall be substituted in the
escrow account. Shares held in escrow may not be redeemed until the Letter
of Intent has expired and/or the appropriate adjustments have been made to
the account.
11. Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to each Fund's current
prospectus.
12. I agree that my ability to exchange and/or redeem under this
authorization may be cancelled, modified or restricted at any time
indiscriminately at the sole discretion of American Capital or by the
Fund(s).

INFORMATION PERTAINING TO THIS LETTER OF INTENT
Subject to conditions specified below, each purchase of shares of the Fund or
shares of one or more of the Participating Funds within the American Capital
family of funds during the 13-month period subsequent to the effective date
of this Application will be made at the public offering price applicable to a
single transaction of the dollar amount indicated, as described in the then
effective prospectus. The offering price may be further reduced under the
Cumulative Purchase Discount if ACCESS is advised of any shares of this or
other American Capital fund(s) previously purchased and still owned. The
purchaser may at any time during the period revise upward the stated
intention by submitting a written request to this effect. Such revision shall
provide for the escrowing of additional shares. The original period of the
Letter, however, shall remain unchanged. Each separate purchase made pursuant
to the Letter is subject to the terms and conditions contained in the
prospectus in effect at the time of that particular purchase. It is
understood that the purchaser makes no commitment to purchase additional
shares, but that if those shares previously purchased at public offering
price under the Cumulative Purchase Discount, together with purchases so made
within thirteen months from this date do not aggregate the amount specified
when valued at the public offering price, the purchaser will pay the
increased amount of sales charge prescribed in the terms of escrow. The
purchaser(s) or the purchaser's dealer must refer to this Letter of Intent in
placing each future order for shares while this Letter is in effect. It is
understood that, when remitting funds directly to ACCESS for investment in an
account, specific reference must be made to this Letter. This cancels and
supersedes any previous instructions which the purchaser may have given
inconsistent with the above.

TERMS OF ESCROW
1. To assure compliance with provisions of the Investment Company Act of
1940, out of the initial purchase 5% of the dollar amount indicated on the
Application will be held in escrow in the form of shares (computed to the
nearest full share at the applicable public offering price) registered in
the purchaser's name. These shares will be held at ACCESS and be subject
to the terms of escrow.
2. If total purchases pursuant to this Letter equal the amount specified at
the expected aggregate purchases, escrow shares will be released from
restriction.
3. If the total purchases pursuant to this Letter are less than the amount
specified, the purchaser shall remit to ACCESS an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases
if all such purchases had been made at a single time. If ACCESS, within 10
business days after request, does not receive said difference in sales
charge, ACCESS will redeem an appropriate number of escrow shares to
realize such difference. If the proceeds from this redemption are
inadequate, the purchaser will be liable to ACCESS for the difference. The
remaining shares after the redemption will be deposited to the purchaser's
account unless otherwise instructed.
4. The purchaser hereby irrevocably constitutes and appoints ACCESS as
attorney to surrender for redemption any or all shares on the books of the
Fund, under the conditions previously outlined, with full power of
substitutions in the premises.

PROVISIONS FOR PRICE ADJUSTMENT
If total purchases made under this Letter of Intent and the Cumulative
Purchase Discount are large enough to qualify for a lower sales charge than
that applicable to the amount initially specified, or if trades not initially
made under this Letter subsequently qualify for a lower sales charge through
the 90-day back-dating provisions, an adjustment will be made at the
expiration of this Letter to give effect to the lower charge. Such adjustment
in sales charge will be used to purchase additional shares for the shareowner
at the applicable discount category.

CANCELLATION OR LIQUIDATION
If at any time prior to or after completion of this Letter of Intent the
purchaser wishes to cancel this Letter, the purchaser must notify ACCESS in
writing. If at any time prior to the completion of this Letter of Intent the
purchaser requests ACCESS to liquidate his total shares, a cancellation of
this Letter will be effected automatically. Under either of the above
conditions the total purchased pursuant to this Letter may be less than the
amount specified as the expected aggregate purchases. If so, ACCESS will
redeem at net asset value an appropriate number of escrow shares to remit to
the Distributor and to the appropriate dealer an amount equal to the
difference between the dollar amount of sales charge actually paid and the
amount of sales charge which would have been paid on the total purchases if
all such purchases would have been made at a single time.

REDUCED SALES CHARGES
Some defined individuals may qualify for a reduced sales charge. (See the
"Purchase of Shares -- Volume Discounts" in the prospectus.)

DEALER AGREEMENT
Under these plans, the dealer signing the application acts as principal in
all purchases of Fund shares and appoints ACCESS as its agent to execute the
purchases and to confirm each purchase to the investor. ACCESS remits monthly
to the dealer the amount of its commissions. The dealer hereby guarantees the
genuineness of the signature(s) on the application and represents that he is
a duly licensed dealer and may lawfully sell Fund shares in the state
designated by the investor's mailing address, and that he has entered into a
Selling Group Agreement with the Distributor with respect to the sale of Fund
shares. The dealer signature on the Application, signifies acceptance of the
concession terms, and acceptance of responsibility for obtaining additional
sales charges if specified purchases are not completed.

CUT ON PERFORATED LINE
- -------------------------------------------------------------------------------

I/WE HAVE READ AND UNDERSTAND THE CONDITIONS THAT FOLLOW:
When a check is presented to the Bank for payment, the Bank will present
the check to the Fund as authority to redeem a sufficient number of shares
presently or hereafter registered in the previous account name on the
shareholder records of the Fund to cover the amount of the check. Checks may
not be for less than $100. The Fund is hereby authorized and directed to
accept and act upon checks presented by the Bank and to redeem a sufficient
number of shares presently or hereafter registered in the previous account
name on the shareholder records of the Fund and forward the proceeds of such
redemption to the Bank. The signator(s) understands and agrees that the Fund
and/or its agents will not be liable for any loss, expense or cost arising
out of check redemptions. The signator(s) will be subject to the terms of the
Fund's current offering prospectus and the Bank's rules and regulations, as
now in effect and as amended from time to time, including the right of the
Bank not to honor checks in amounts exceeding the value of the account at the
time the check is presented for payment. The Bank has reserved the right to
change, modify or terminate this check-writing privilege at any time. Checks
will not be honored for redemption of shares held less than fifteen (15) days
unless such shares have been paid for by bank wire.
I/We certify and agree that the certifications, authorizations and
appointments contained in this document will continue in effect until ACCESS,
the Fund's service agent, receives actual written notice of any change
thereof, and, to the extent of the amount of any check accepted by the Fund
for the purchase of shares or as authorization to redeem shares, the Fund
shall have a security interest in such shares.
<PAGE>

ALL SECTIONS ON THIS PAGE MUST BE COMPLETED FOR ACCOUNT TO BE ESTABLISHED.

AMERICAN CAPITAL FAMILY OF FUNDS [AMERICAN CAPITAL
NEW ACCOUNT APPLICATION LOGO APPEARS HERE]

SEND COMPLETED APPLICATION TO: AMERICAN CAPITAL COMPANIES SHAREHOLDER
SERVICES, INC., P.O. Box 419319, Kansas City, Missouri 64141-6319

================================================================================

1. ACCOUNT OWNER INFORMATION
TYPE OF ACCOUNT
(Check one only)

/ / INDIVIDUAL __________ ______________ ___________ _______________________
First Name Middle Initial Last Name Social Security Number
(first individual only)

/ / JOINT ______________ ______________ __________________________
TENANT Joint Tenant's Middle Initial Last Name
First Name

/ / GIFT/
TRANSFER
TO MINOR __________________________________ __________________________
Custodian's Name (one only) Minor's Name (one only)

/ / GUARDINSHIP/
CONSERVATOR-
SHIP ____________________ ___________________ ___________________
Guardian/Conservator Ward/Incompetent Ward/Incompetent
or Minor's Name or Minor's Social
(one only) Security Number

/ / CORPORATION,
PARTNERSHIP, __________________________________________ __________________
TRUST OR Exact Name of Corporation, Tax Identification
OTHER Partnership or other Organization Number
ORGANIZATION _______________________________________________________________
Trustee Accounts Only: Name of all Trustees required by trust
agreement to sell/purchase shares

______________ _________________ _________________________
Date of Trust Name of Trust Tax Identification Number

/ / OTHER _______________________________________________________________

/ / CHECK HERE IF YOU ARE SUBJECT TO BACKUP WITHHOLDING

================================================================================

2. MAILING ADDRESS
____________ ____________ ____________ ____________ ____________
Street Apartment City State Zip Code
Address Number

( ) ( )
______________ ____________ Citizenship ______________________
Business Phone Home Phone / / U.S. / / Other Indicate County

================================================================================

3. FUND SECTION

PLEASE INDICATE DOLLAR AMOUNT IN SPACE PROVIDED, $500 MINIMUM FOR EACH
FUND. IF MORE THAN ONE FUND IS SELECTED, ACCOUNTS MUST HAVE IDENTICAL
REGISTRATIONS, CLASS OF SHARES AND OPTIONS.

FIXED INCOME FUNDS
$________ AC Corporate Bond Fund
$________ AC Federal Mortgage Trust
$________ AC Global Government Securities Fund
$________ AC Government Securities
$________ AC High Yield Investments
$________ AC Municipal Bond Fund
$________ AC Reserve Fund (A shares only)
$________ AC Tax-Exempt Trust High Yield Municipal Portfolio
$________ AC Tax-Exempt Trust Insured Municipal Portfolio
$________ AC Texas Municipal Securities
$________ AC U.S. Government Trust for Income
$________ Other ______
$________ TOTAL AMOUNT ENCLOSED

EQUITY FUNDS
$________ AC Comstock Fund
$________ AC Emerging Growth Fund
$________ AC Enterprise Fund
$________ AC Equity Income Fund
$________ AC Global Equity Fund
$________ AC Global Managed Assets Fund
$________ AC Growth & Income Fund
$________ AC Harbor Fund
$________ AC Pace Fund
$________ AC Real Estate Securities Fund
$________ AC Utilities Income Fund
$________ Other
$________ TOTAL AMOUNT ENCLOSED

CLASS OF SHARES
(Must select one only)

/ / A SHARES
(front-end sales charge)

/ / B SHARES
(contingent deferred sales charge)

Class B shares are not available for
purchases of $250,000 or more

/ / C SHARES
(contingent deferred sales charge)

Class C shares are not available for
purchases of $1 million or more

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

MAKE CHECK PAYABLE TO THE SPECIFIC AMERICAN CAPITAL FUND. IF MORE
THAN ONE FUND IS SELECTED, MAKE CHECK PAYABLE TO "AMERICAN CAPITAL
FAMILY OF FUNDS."

================================================================================

4. DISTRIBUTION OPTIONS

(Check one only) -- If no option is selected, all distributions will be
reinvested into the Fund that pays them.

/ / Reinvest all dividend and capital gains into the Fund that pays them.

/ / Reinvest all dividends and capital gains into an existing account in
another American Capital Fund. (Must be like class of shares.)

__________________________________ _____________________________________
Fund Name Account Number

/ / Pay all dividends and reinvest capital gains.
OR
/ / Pay all dividends and capital gains.
(IF EITHER PAY OPTION IS SELECTED,
COMPLETE INFORMATION AT RIGHT)

I request the payable distributions be: (Check one.)

/ / Sent to the address in Section 2.

/ / Directly deposited in my bank account. (Please attach a voided check to
Section 6.) If voided check is not enclosed, will be sent to address in
Section 2.

/ / Sent to special payee listed in Section 10.

===============================================================================

5. INVESTMENT PROFESSIONAL

____________________________________ ______________________________________
Broker/Dealer Name Investment Professional's Name

____________________________________ ______________________________________
Branch Office Address Investment Professional's
Representative Number

____________________________________ ________________ __________________
City State Zip Code

____________________________________ ______________________________________
Investment Professional's Phone Authorized Signature of Broker/dealer

===============================================================================

6. SIGNATURES

I have read the prospectus and application for the Fund in which I am
investing and agree to its terms. I am also aware that a Telephone
Exchange Privilege exists and that this privilege is automatically
available unless affirmatively declined. I also understand that if the
Fund fails to follow the procedures outlined in the prospectus and in the
Telephone Transaction Authorization hereto, it may be liable for any
losses due to unauthorized or fraudulent instructions. See Telephone
Transaction Authorization section for procedures. I am of legal age.
Sign below exactly as printed in registration. For joint registration,
both must sign. Under penalty of perjury, I certify with my signature
below that the number shown in section one is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
__________________________________________________________________________
Signature Date

__________________________________________________________________________
Signature Date

ATTACH VOIDED CHECK HERE _____________________
(IF APPROPRIATE)

For Corporations, Trusts, or Partnerships: We hereby certify that each of
the persons listed below has been duly elected, and is now legally holding
the office set forth opposite his/her name and has the authority to make
this authorization.

Please print titles below if signing on behalf of a business or trust to
establish this account.

__________________________________________________________________________
President, Trustee, General Partner or Title

__________________________________________________________________________
Co-owner, Secretary of Corporation, Co-trustee, etc.

================================================================================

7. ACCOUNT OPTIONS

For account options, please complete the reverse side of this account
application. Account options are:

- Cumulative Purchase Discount
- Letter of Intent
- Automatic Investment Plan (AIP)
- Systematic Exchange
- Telephone Exchange
- Checkwriting (Available on Class A shares, Fixed Income Accounts Only)
- Dividend Mail
- Interested Party Mail
- Systematic Withdrawal (for Class B and Class C shares see prospectus)
- Telephone Redemption

================================================================================

THIS APPLICATION IS NOT A PART OF THE PROSPECTUS.
<PAGE>

================================================================================
8. PURCHASE OPTIONS

CUMULATIVE PURCHASE DISCOUNT

/ / I qualify for cumulative discount with the account(s) listed below.

_____________________________________ _____________________________________
Fund Name Account Number

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

LETTER OF INTENT (Check one only)

/ / I wish to establish a new letter of intent. (If cumulative discount or
90-day backdate privilege is applicable, provide the amount and
account(s) information below.)

/ / Please apply this purchase to an existing Letter of Intent with the
account(s) listed below.

/ / Please amend my existing Letter of Intent with the new amount indicated
below.

If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the prospectus.
The aggregate amount of these purchases will be at least equal to the amount
listed below:

/ / $50,000* / / $100,000 / / $250,000 / / $500,000 / / $1,000,000
*Equity Funds Only

_____________________________________ _____________________________________
Fund Name Account Number

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

AUTOMATIC INVESTMENT PLAN (AIP)--AUTOMATIC MONTHLY INVESTING

/ / I wish to invest on a monthly basis, directly from my checking account into
the following fund(s).
(PLEASE ATTACH A VOIDED CHECK TO SECTION 6.)

____________________ ____________________ _____________________
Fund Name Fund Name Fund Name

Amount $____________, to start _____________ of _____________, _____________
Minimum $25 Day Month Year

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

STEP UP PLAN OPTION -- THIS OPTION IS AVAILABLE WHEN AN AUTOMATIC INVESTMENT
PLAN IS SELECTED. (ALL SECTIONS MUST BE COMPLETED TO ESTABLISH OPTION)

A. I wish to increase my AIP / / Quarterly / / Semi-Annually / / Annually
B. To start ______________ of ___________.
Month Year
C. Check one only:
Amount Increase / / $10 / / $25 / / $50 Other (Specify amount-
min. $10) _________________
OR
Percentage Increase / / 10% / / 25% / / 50% Other (Specify percentage-
min. 10%) _________________

===============================================================================

9. ADDITIONAL OPTIONS

SYSTEMATIC EXCHANGE--ACCOUNTS MUST HAVE THE SAME CLASS OF SHARES.

/ / I wish to establish a systematic monthly exchange
from ______________ into the ______________ Fund.
Fund Name Fund Name

/ / Exchange $___________ monthly into my existing account ______________.
Minimum $25 Account Number

/ / Exchange $____________ monthly into a new account.
Minimum $100

Start the exchanges on _______________ of _______________, _______________.
Day Month Year

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

TELEPHONE EXCHANGE--IF ACCEPTED ACCOUNTS MUST HAVE THE SAME ACCOUNT
INFORMATION, OPTIONS AND CLASS OF SHARES.

/ / I decline telephone exchange, and do not want this privilege. (See
Telephone Transaction Authorization section for procedures.)

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

SYSTEMATIC WITHDRAWAL PLAN--FOR CLASS B AND CLASS C SHARE LINITATIONS,
SEE PROSPECTUS.
(Minimum account balance for monthly SWP is $10,000 and quaterly SWP is
$5,000.)

/ / I wish to automatically withdraw $_____________ from this account.
Minimum $25

/ / Monthly / / Quarterly / / Semi-Annually / / Annually

I request this distribution be: (Check One)

/ / Sent to the address listed in Section 2. To begin ____________
Month
of __________. (Will occur about the 21st of the month.)
Year

/ / Sent to the special payee listed in Section 10. to begin __________
Month
of __________. (Will occur about the 21st of the month.)
Year

/ / Directly deposited in my bank account. (PLease attach a voided check
to Section 6.) To begin __________ of __________, __________.
Day Month Year

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

TELEPHONE REDEMPTION--AVAILABLE ON ALL NON-RETIREMENT ACCOUNTS.

/ / I wish to redeem shares by telephone and request that the redemption
proceeds be sent to the address listed in Section 2.

/ / I wish to redeem shares by telephone and request that the proceeds be
directly deposited into my bank account. (Please attach a voided
check to Section 6.) (if voided check is not enclosed, will be sent
to address in Section 2.)

/ / I decline telephone redemption, and do not want this privilege.

See Telephone Authorization section for procedures.

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

CHECKWRITING--AVAILABLE ON CLASS A SHARES, FIXED-INCOME ACCOUNTS ONLY.

/ / I wish to redeem shares by check ($100 minimum per check).

Please complete the Authorization for Redemption by Check (on back
cover) and attach to the application in Section 6.

================================================================================

10. INTERESTED PARTY MAIL/DIVIDENDS MAIL

/ / I wish to have my distributions sent to the address listed below.

/ / I wish to have duplicate confirmation statements sent to the
interested party listed below.

___________________________________________________________________________
Name of Individual

___________________________________________________________________________
Street Address

___________________________ _____________________ ___________________
City State Zip Code

===============================================================================

THIS APPLICATION IS NOT A PART OF THIS PROSPECTUS.
<PAGE>

EASY TEAROUT
APPLICATION

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

DETACH APPLICATION
FROM THE PERFORATED EDGE

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

ENCLOSE CHECK WITH
THE COMPLETED APPLICATION
AND MAIL TO:

AMERICAN CAPITAL COMPANIES
SHAREHOLDER SERVICES, INC.
P.O. BOX 419319
KANSAS CITY, MO 64141-6319

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

[AMERICAN CAPITAL LOGO APPEARS HERE]
<PAGE>

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 higher
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.

Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.

The Distributor may from time to time implement programs under which a
broker, dealer or financial intermediary's sales force may be eligible to win
nominal awards for certain sales efforts or under which the Distributor will
reallow to any broker, dealer or financial intermediary that sponsors sales
contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor,
an amount not exceeding the total applicable sales charges on sales generated
by the broker or dealer during such programs. Also, the Distributor in its
discretion may from time to time, pursuant to objective criteria established
by it, pay fees to, and sponsor business seminars for, qualifying brokers,
dealers or financial intermediaries for certain services or activities which
are primarily intended to result in sales of shares of the Fund. Such fees
paid for such services and activities with respect to the Fund will not exceed
in the aggregate 1.25% of the average total daily net assets of the Fund on an
annual basis.

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
SIZE OF AS % OF NET AS % OF (AS A
INVESTMENT AMOUNT INVESTED OFFERING PRICE % OF OFFERING PRICE)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.99% 4.75% 4.25%
$100,000 but less than
$250,000 3.90% 3.75% 3.25%
$250,000 but less than
$500,000 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000 2.04% 2.00% 1.75%
$1,000,000 and over (see herein) (see herein) (see herein)
</TABLE>
- -------------------------------------------------------------------------------

No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 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 full service participant directed profit sharing and money purchase
plans and qualified 401(k) retirement plans administered by Van Kampen American
Capital Trust Company's (k) Advantage Program, or similar recordkeeping programs
made available through the 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
include Participating Funds as described herein under "Purchase of Shares --
Class A Shares -- Volume Discounts," and American Capital Reserve Fund, Inc.
("Reserve"). For such investments the Fund imposes a contingent deferred sales
charge of 1% in the event of certain redemptions within one year of the
purchase. 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.

17
<PAGE>

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
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.

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

Class A shares of the Fund may be purchased at net asset value, upon written
assurance that the purchase is made for investment purposes and that the
shares will not be resold except through redemption by the Fund, by (a)
current or retired Directors of the Fund; current or retired employees of
VK/AC Holding, Inc. or any of its subsidiaries; spouses, minor children and
grandchildren of the above persons; and parents of employees and parents of
spouses of employees of VK/AC Holding, Inc. and any of its subsidiaries;
trustees, directors and employees of Clayton, Dubilier & Rice, Inc.; (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; (d) trustees
or other fiduciaries purchasing shares for retirement plans of organizations
with retirement plan assets of $10 million or more; and (e) clients of Service
Organizations that 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. 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 (f) 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 (g) 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 in the Prospectus 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 (g) 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 (g) herein 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 (g) above for

18
<PAGE>

transactions of $1 million or more an amount up to 0.50% of the amount
invested, over a twelve month period following the pertinent transaction. The
Fund may terminate, or amend the terms of, offering shares of the Fund at net
asset value to such groups at any time.

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

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

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

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

19
<PAGE>

purposes of determining the number of years from the time of any payment for
the purchases of shares, all payments during a month are aggregated and deemed
to have been made on the last day of the month.

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

In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the
redemption is first, of any shares in the shareholder's Fund account that are
not subject to a contingent deferred sales charge, second, of shares held for
over five years or shares acquired pursuant to reinvestment of dividends or
distributions and third of shares held longest during the five-year period.
The charge is not applied to dollar amounts representing an increase in the
net asset value since the time of purchase.

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
ten additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), ten shares
will not be subject to charge because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds is subject to a deferred sales
charge at a rate of 4% (the applicable rate in the second year after
purchase).

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

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, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's
account as described herein under "Redemption of Shares." The contingent
deferred sales

20
<PAGE>

charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.

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

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

The Distribution Plans provide that the Distributor shall use the Class A,
Class B and Class C service fees to compensate Service Organizations for
personal services and/or the maintenance of shareholder accounts. Under the
Class B Plan, the Distributor receives additional payments from the Fund in
the form of a distribution fee at the annual rate of up to 0.75% of the net
assets of the Class B shares as reimbursement for (i) upfront commissions and
transaction fees of up to 4% of the purchase price of Class B shares purchased
by the clients of broker-dealers and other Service Organizations, and (ii)
other distribution expenses as described in the Statement of Additional
Information. Under the Class C Plan, the Distributor receives additional
payments from the Fund in the form of a distribution fee at the annual rate of
up to 0.75% of the net assets of the Class C shares as reimbursements for (i)
upfront commissions and transaction fees of up to 0.75% of the purchase price
of Class C shares purchased by the clients of broker-dealers and other Service
Organizations and ongoing commissions and transaction fees of up to 0.65% of
the average daily 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

21
<PAGE>

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 period
November 23, 1993 through June 30, 1994, the unreimbursed expenses incurred by
the Distributor under the Class B Plan and carried forward were approximately
$405,000 or 4.4% of the Class B shares' net assets. The unreimbursed expenses
incurred by the Distributor under the Class C Plan and carried forward were
approximately $25,000 or 1.6% 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 and has no liability to pay the
Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.

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

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

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Stock certificates are not issued except upon
shareholder request. Most shareholders elect not to receive certificates in
order to facilitate redemptions and transfers. A shareholder may incur an
expense to replace a lost certificate. Except as described 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 shareholder also
will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized investment dealers or
by mailing a check directly to ACCESS.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the record date. Unless the shareholder instructs otherwise, the
reinvestment plan is automatic. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and
capital gains distributions be reinvested at net asset value, or that both
dividends and capital gains distributions be paid in cash.

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

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

FUND TO FUND DIVIDENDS. A shareholder may, upon written request or by
completing the appropriate section of the application form in this Prospectus,
elect to have all dividends and other distributions paid on a Class A, Class B
or Class C account in the Fund invested into a pre-existing Class A, Class B
or Class C account in any of the Participating Funds listed under "Purchase of
Shares--Class A Shares--Volume Discounts," or Reserve.

22
<PAGE>

Both accounts must be of the same class and of the same type, either non-
retirement or retirement. Any two non-retirement accounts can be used. If the
accounts are retirement accounts, they must both be for the same class and of
the same type of retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual. If a qualified, pre-existing account does
not exist, the shareholder must establish a new account subject to minimum
investment and other requirements of the fund into which distributions would
be invested. Distributions are invested into the selected fund at its net
asset value as of the payable date of the distribution.

EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund (listed
under "Purchase of Shares--Class A Shares--Volume Discounts"), other than
Government Target, may be exchanged for shares of the same class of shares of
any other fund without sales charge, provided that shares of the Fund,
Corporate Bond, Federal Mortgage, Global Managed, Government Trust, High
Yield, Municipal Bond, Real Estate, Tax-Exempt, Texas Municipal and the
American Capital Global Government Securities Fund of World Portfolio are
subject to a 30-day holding period requirement. Shares of Government Target
may be exchanged for Class A shares of the 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 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 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.

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 for more information.

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form included in this Prospectus. VKAC
and its subsidiaries, including ACCESS (collectively "Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable
to confirm that instructions communicated by telephone are genuine. Such
procedures include requiring certain personal identification information prior
to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither Van
Kampen American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. Van Kampen American
Capital and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Exchanges
are effected at the net asset value per share next calculated after the
request is received in good order with adjustment for any additional sales
charge. See both "Purchase of Shares" and "Redemption of Shares." If the
exchanging shareholder does not have an account in the fund whose shares are
being acquired, a new account will be established with the same registration,
dividend and capital gain options (except fund to fund dividends) and dealer
of record as the account from which shares are exchanged, unless otherwise
specified by the shareholder. In order to

23
<PAGE>

establish a systematic withdrawal plan for the new account or reinvest
dividends from the new account into another fund, however, an exchanging
shareholder must file a specific written request. The Fund reserves the right
to reject any order to acquire its shares through exchange, or otherwise to
modify, restrict or terminate the exchange privilege at any time on 60 days'
notice to its shareholders of any termination or material amendment.

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

SYSTEMATIC EXCHANGE. A shareholder may invest regularly in 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 under "Shareholder Services--Exchange Privilege" will be waived for
such systematic exchanges. Additional information on how to establish this
option is available from the Distributor.

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

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

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

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

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status
may appoint ACCESS as agent by completing the Authorization for Redemption by
Check form and the appropriate section of the application and returning the
form and the application to ACCESS. Once the form is properly completed,
signed and returned to the agent, a supply of checks drawn on State Street
Bank and Trust Company ("State Street Bank") will be sent to the Class A
shareholder. Those checks may be made payable by the shareholder to the order
of any person in any amount of $100 or more.

When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are
redeemed from the shareholder's Class A account by ACCESS at the next
determined net asset value. Check writing redemptions represent the sale of
Class A shares. Any gain or loss realized on the sale of shares is a taxable
event. See "Redemption of Shares."

24
<PAGE>

Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be
redeemed by check. If the amount of the check is greater than the proceeds of
all uncertificated shares held in the shareholder's Class A account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or State Street Bank. Retirement plans and accounts that are subject to
backup withholding are not eligible for the privilege. A "stop payment" system
is not available on these checks. See the Statement of Additional Information
for further information regarding the establishment of the privilege.

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

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

As described herein under "Purchase of Shares," redemptions of Class B or
Class C shares are subject to a contingent deferred sales charge. 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
and for certain qualified 401(k) retirement plans. The contingent deferred
sales charge incurred upon redemption is paid to the Distributor in
reimbursement for distribution-related expenses. See "Purchase of Shares." A
custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.

The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if
the record address has changed within the previous 60 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-
dealer; a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank.

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

In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any
other necessary documents in proper order. Such payment may be postponed or
the right of redemption suspended as provided by the rules of the SEC. If the
shares to be redeemed have been recently purchased by check, ACCESS may delay
mailing a redemption check until it confirms the purchase check has cleared,
usually a period of up to 15 days. Any taxable gain or loss will be recognized
by the shareholder upon redemption of shares.

The Fund may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum investment as specified
by the Board of Directors. At least 60 days advance

25
<PAGE>

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. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.

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 herein. To establish such privilege a shareholder must
complete the appropriate section of the application form in this Prospectus or
call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares
contact the telephone transaction line at (800) 421-5684. Van Kampen American
Capital and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such
procedures include requiring certain personal identification information prior
to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither Van
Kampen American Capital nor the Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. Van Kampen American
Capital and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. ACCESS will
record any calls. 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 Van Kampen American Capital Trust Company for
repayment of principal (and interest) on their borrowings on such plans.

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

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

DIVIDENDS. Income dividends are paid each business day and distributed
monthly. The daily dividend is a fixed amount determined for each class at
least monthly. Shares become entitled to dividends on the day ACCESS receives
payment for the shares, and remain entitled to dividends through the day
before the day such shares are priced for redemption purposes, which is the
day a valid redemption request with respect to such shares is received by
ACCESS. Therefore, if a dealer delays forwarding to ACCESS payment for shares
which an investor has made to the dealer, this will in effect cost the
investor money because it will delay the date upon which he or she becomes
entitled to dividends.

26
<PAGE>

The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
higher incremental transfer agency fees applicable to such classes of shares.

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

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

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

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

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

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

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 Untied States may reduce or eliminate such taxes.

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 advisers for more
detailed tax advice including state and local tax considerations. Foreign
investors should consult their own counsel for further information as to the
U.S. and their country of residence or citizenship tax consequences of receipt
of dividends and distributions from the Fund.

27
<PAGE>

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

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

The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are
reinvested in Fund shares at net asset value; and that any applicable
contingent deferred sales charge has been paid. The Fund's total return will
vary depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and unrealized net capital gains or
losses during the period. Total return is based on historical earnings and
asset value fluctuations and is not intended to indicate future performance.
No adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Fund.

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

To increase the Fund's yield the Adviser may, from time to time, absorb a
certain amount of the future ordinary business expenses. The Adviser may stop
absorbing these expenses at any time without prior notice.

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
4.75%; Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.

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

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

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

28
<PAGE>

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

ORGANIZATION OF THE FUND. The Fund was incorporated in Maryland on August 31,
1993. The Fund may offer three classes of shares: Class A, Class B and Class C
shares. Each class of shares represents interests in the assets of the Fund
and has identical voting, dividend, liquidation and other rights on the same
terms and conditions except that the distribution fees and/or service fees
related to each class of shares are borne solely by that class and each class
of shares has exclusive voting rights with respect to provisions of the Fund's
Class A Plan, Class B Plan and Class C Plan which pertain to that class. An
order has been received from the SEC permitting the issuance and sale of
multiple classes of shares representing interests in the Fund's existing
portfolio. Shares issued are fully paid, non-assessable and have no preemptive
or conversion rights.

PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and
the Adviser and its employees. The Codes permit directors, officers and
employees to buy and sell securities for their personal accounts subject to
preclearance and other procedures designed to prevent conflicts of interest.

VOTING RIGHTS. The Bylaws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the 1940 Act.
Such event is likely to occur infrequently. In addition, a special meeting of
the shareholders will be called, if requested by the holders of ten percent of
the Fund's outstanding shares, for the purposes, and to act upon the matters,
specified in the request (which may include election or removal of directors).
When matters are submitted for a shareholder vote, each shareholder is
entitled to one vote for each share owned. The shares have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and in such an event the holders of the remaining less than
50% of the shares voting for the election of directors will not be able to
elect any person to the Board of Directors.

SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund
at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.

SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256, serves as transfer agent, shareholder service agent and dividend
disbursing agent for the Fund. ACCESS, a wholly owned subsidiary of the
Adviser's parent, provides these services at cost plus a profit.

LEGAL COUNSEL. O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071 is legal counsel to the Fund.

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

29
<PAGE>

- --------------------------------------------------------------------------------
INVESTMENT HOLDINGS
- --------------------------------------------------------------------------------
September 30, 1994

CORPORATE OBLIGATIONS COMMON STOCK

<TABLE>
<CAPTION>
<S> <C>
NUMBER
PRINCIPAL OF
AMOUNT SHARES
</TABLE>
- --------------------------------------------------------------------------------

CONSUMER SERVICES
<TABLE>
<C> <S>
$600,000 Tele-Communications, Inc.,
7.25%, 8/1/05
ENERGY
500,000 Colorado Interstate Gas
Co., 10.00%, 6/15/05
95,000 Enron Corp., 6.75%, 7/1/05
400,000 ENSERCH Corp., 6.375%,
2/1/04
330,000 Laclede Gas Co., 8.50%,
11/15/04
75,000 Occidental Petroleum,
10.125%, 9/15/09
500,000 Panhandle Eastern Corp.,
7.875%, 8/15/04
400,000 Southern Union Co., 7.60%,
2/1/24
100,000 Texas Eastern Transmission
Corp., 8.00%, 7/15/02
Union Oil of California
100,000 6.375%, 2/1/04
85,000 8.75%, 8/15/01
TECHNOLOGY
485,000 Motorola, Inc., 7.60%,
1/1/07
UTILITIES
380,000 Alabama Power Co., 6.375%,
8/1/99
600,000 American Telephone &
Telegraph Corp., 7.50%,
6/1/06
100,000 Baltimore Gas & Electric
Co., 7.50%, 1/15/07
200,000 Cincinnati Gas & Electric
Co., 6.45%, 2/15/04
100,000 Duke Power Co., 7.00%,
6/1/00
355,000 GTE Corp., 9.375%, 12/1/00
Hydro-Quebec
200,000 7.375%, 2/1/03
500,000 8.05%, 7/7/24
500,000 Idaho Power Co., 8.00%,
3/15/04
300,000 Iowa Electric Light &
Power, 8.625%, 5/15/01
390,000 MCI Communications Corp.,
7.50%, 8/20/04
80,000 Northwestern Bell
Telephone Co., 9.50%,
5/1/00
450,000 Pacific Telephone &
Telegraph Co., 6.00%,
11/1/02
200,000 San Diego Gas & Electric
Co., 7.625%, 6/15/02
250,000 Texas Utilities Electric
Co., 6.25%, 10/1/04
500,000 Union Electric Co.,
7.375%, 12/15/04
617,000 United Telecommunications,
Inc., 9.75%, 4/1/00
Virginia Electric & Power
Co.
200,000 6.00%, 8/1/01
200,000 8.875%, 6/1/99
</TABLE>
ENERGY
<TABLE>
<C> <S>
13,500 Nicor, Inc.
22,100 Pacific Enterprises
FINANCE
7,500 Equity Residential
Properties Trust
6,100 Weingarten Realty
Investors
UTILITIES
14,600 Ameritech Corp.
20,500 Baltimore Gas & Electric
Co.
9,600 Bellsouth Corp.
13,100 CMS Energy Corp.
25,800 DPL, Inc.
12,600 Duke Power Co.
16,600 FPL Group, Inc.
14,100 NYNEX Corp.
14,200 Pacific Telesis Group
28,500 Pacificorp
17,100 Peco Energy Co.
15,500 Public Service Company of
Colorado
16,800 Public Service Enterprise
Group
10,600 SCANA Corp.
24,100 Southern Co.
16,900 Western Resources, Inc.

CONVERTIBLE PREFERRED STOCK
10,000 Transco Energy Co., $3.50
(Cost $461,250)
<CAPTION>
PRINCIPAL
AMOUNT
- ------------------------------------
SHORT-TERM INVESTMENTS
<C> <S>
$560,000 Prudential Funding Corp.,
4.70%, 10/3/94
200,000 United States Trasury
Note, 7.75%, 2/15/95
</TABLE>

30
<PAGE>

BACKUP WITHHOLDING INFORMATION

Step 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with the
following guidelines:

Account Type Give Social Security Number or Tax
Identification Number of:
- ------------------------------|-------------------------------------------------
Individual | Individual
- ------------------------------|-------------------------------------------------
Joint (or Joint Tenant) | Owner who will be paying tax
- ------------------------------|-------------------------------------------------
Uniform Gifts to Minors | Minor
- ------------------------------|-------------------------------------------------
Legal Guardian | Ward, Minor or Incompetent
- ------------------------------|-------------------------------------------------
Sole Proprietor | Owner of Business
- ------------------------------|-------------------------------------------------
Trust, Estate, Pension | Trust, Estate, Pension Plan Trust
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>

- -------------------------------------------------------------------------------
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
- -------------------------------------------------------------------------------
PROSPECTUS
January 31, 1995
NATIONAL DISTRIBUTOR
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181

INVESTMENT ADVISER
Van Kampen American Capital
Asset Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056

TRANSFER, DISBURSING, REDEMPTION
AND SHAREHOLDER SERVICE AGENT
Van Kampen/American Capital
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,
Van Kampen/American Capital Shareholder
Services, Inc. (ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor, Van Kampen American
Capital Distributors, Inc., One Parkview Plaza,
Oakbrook Terrace, IL 60181.

American Capital C/O ACCESS
Utilities Income P.O. Box 418256
Fund, Inc. Kansas City, MO 64141-9256

For conservative investors
seeking current income and
the potential for capital
appreciation through a
combination of utility bonds
and stocks.
-----------------------------

[AMERICAN CAPITAL LOGO APPEARS HERE]

PRINTED MATTER
Printed in U S A /072PRO-001 ------------------------------

<PAGE>

Part B: Statement of Additional Information

AMERICAN CAPITAL UTILITIES INCOME FUND, INC.

January 31, 1995

This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated January 31,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
GENERAL INFORMATION.......................................................... 2
INVESTMENT POLICIES AND TECHNIQUES........................................... 3
DEPOSITARY RECEIPTS.......................................................... 3
REPURCHASE AGREEMENTS........................................................ 3
FORWARD COMMITMENTS.......................................................... 3
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.................. 4
LOANS OF PORTFOLIO SECURITIES............................................... 10
INVESTMENT RESTRICTIONS..................................................... 11
DIRECTORS AND EXECUTIVE OFFICERS............................................ 12
INVESTMENT ADVISORY AGREEMENT............................................... 15
DISTRIBUTOR................................................................. 16
DISTRIBUTION PLANS.......................................................... 16
TRANSFER AGENT.............................................................. 18
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 18
DETERMINATION OF NET ASSET VALUE............................................ 19
PURCHASE AND REDEMPTION OF SHARES........................................... 20
EXCHANGE PRIVILEGE.......................................................... 24
CHECK WRITING PRIVILEGE..................................................... 24
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.................................. 25
PRIOR PERFORMANCE INFORMATION............................................... 27
OTHER INFORMATION........................................................... 27
FINANCIAL STATEMENTS........................................................ 28
APPENDIX - DESCRIPTION OF BOND RATINGS...................................... 29
</TABLE>
<PAGE>

GENERAL INFORMATION

American Capital Utilities Income Fund, Inc. (the "Fund") was incorporated in
Maryland on August 31, 1993.

Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor") and Van
Kampen/American Capital Shareholder Services, Inc. ("ACCESS") are wholly owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is a wholly
owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled,
through the ownership of a substantial majority of its common stock, by The
Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a
Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier &
Rice, Inc. a New York based private investment firm. The General Partner of C&D
L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates
L.P."). The general partners of C&D Associates L.P. are Joseph L. Rice, III, B.
Charles Ames, Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of
whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain
officers, directors and employees of VKAC own, in the aggregate, not more than
6% of the common stock of VK/AC Holding, Inc. and have the right to acquire,
upon the exercise of options, approximately an additional 10% of the common
stock of VK/AC Holding, Inc. Advantage Capital Corporation, a retail broker-
dealer affiliate of the Distributor, is a wholly owned subsidiary of VK/AC
Holding, Inc. See "The Fund and Its Management" in the Prospectus.

As of December 19, 1994, no person was known by management to own beneficially
or of record as much as five percent of the outstanding shares of any class
except the following:

<TABLE>
<CAPTION>
Amount and Nature Class
Name and Address of Ownership at of Percentage
of Holder December 21, 1994 Shares Ownership
- ------------------ ----------------- ------ ----------
<S> <C> <C> <C>
Van Kampen American Capital 223,461 shares of Class A 23.84%
Asset Management Inc. beneficial ownership
2800 Post Oak Boulevard
Houston, Texas 77056

Van Kampen American Capital 223,537 shares held of Class A 23.85%
Trust Company record
2800 Post Oak Boulevard
Houston, Texas 77056 267,537 shares held of Class B 11.94%
record

Donaldson Lufkin Jenrette 32,575 shares held of Class C 14.13%
1 Pershing Plaza 5th floor record
Jersey City, New Jersey 07399-0002

Merrill Lynch Pierce Fenner & Smith 14,334 shares held of Class C 6.22%
P.O. Box 45286 record
Jacksonville, Florida 32232-5286
</TABLE>

2
<PAGE>

<TABLE>
<S> <C> <C> <C>
Smith Barney Shearson Inc. 62,742 shares held of Class A 6.69%
388 Greenwich Street - 22nd Floor record
New York, New York 10013-2375
108,516 shares held of Class C 47.09%

record
</TABLE>

The outstanding shares of the Fund were held of record by Van Kampen
American Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056,
acting as custodian for certain employee benefit plans and retirement
accounts.

INVESTMENT POLICIES AND TECHNIQUES

The Fund's primary investment objective is to seek current income. Capital
appreciation is a secondary objective which is sought only when consistent with
the primary objective. The Fund will seek to achieve its investment objectives
by investing in a diversified portfolio of common stocks and income securities
issued by companies engaged in the utilities industry. The following
disclosures supplement disclosures set forth in the Prospectus. Readers must
refer also to the Prospectus for a complete presentation.

DEPOSITARY RECEIPTS

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.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements with broker-dealers or domestic
banks (or a foreign branch or subsidiary thereof). A repurchase agreement is a
short-term investment in which the purchaser (i.e., the Fund) acquires ownership
of a debt security and the seller agrees to repurchase the obligation at a
future time and set price, usually not more than seven days from the date of
purchase, thereby determining the yield during the purchaser's holding period.
Repurchase agreements are collateralized by the underlying debt securities and
may be considered to be loans under the Investment Company Act of 1940, as
amended ("1940 Act"). The Fund will make payment for such securities only upon
physical delivery or evidence of book entry transfer to the account of a
custodian or bank acting as agent. The seller under a repurchase agreement is
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 security unless the
seller defaults under its repurchase obligation. See the Prospectus for further
information.

FORWARD COMMITMENTS

Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash, cash equivalents, liquid high
grade debt securities or U.S. Government securities (which may have maturities
which are longer than the term of the Forward Commitment) with the Fund's
custodian in an aggregate amount equal to the amount of its commitment as long
as the obligation to purchase continues. Since the market value of both the
securities subject to the Forward Commitment and the securities held in the
segregated

3
<PAGE>

account may fluctuate, the use of Forward Commitments may magnify the impact of
interest rate changes on the Fund's net asset value.

A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered by the
securities subject to the Forward Commitment, but is designed to provide a hedge
against a decline in value of a security which the Fund owns or has the right to
acquire. In either circumstance, the Fund maintains in a segregated account
(which is marked to market daily) either the security covered by the Forward
Commitment or cash, cash equivalents, liquid high grade debt securities or U.S.
Government securities (which may have maturities which are longer than the term
of the Forward Commitment) with the Fund's custodian in an aggregate amount
equal to the amount of its commitment as long as the obligation to sell
continues. By entering into a Forward Commitment sale transaction, the Fund
forgoes or reduces the potential for both gain and loss in the security which is
being hedged by the Forward Commitment sale. See Prospectus for further
information.

OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The Fund may engage in transactions in options, futures contracts and options
on futures contracts. Set forth below is certain additional information
regarding options, futures contracts and options on futures contracts. See
Prospectus for further information.

WRITING CALL AND PUT OPTIONS

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

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 writes call options
either on a covered basis or for cross-hedging purposes. A call option is
covered if at all times during the option period the Fund owns or has the right
to acquire securities of the type that it would be obligated to deliver if any
outstanding option were exercised. An option is for cross-hedging purposes if
it is not covered by the security subject to the option, but is designed to
provide a hedge against a security which the Fund owns or has the right to
acquire. In such circumstances, the Fund maintains in a segregated account with
the Fund's Custodian, cash or U.S. Government securities in an amount not less
than the market value of the underlying security, marked to market daily, while
the option is outstanding.

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

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

4
<PAGE>

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

The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.

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

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. In
addition, the Fund may purchase call options 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. In addition, the Fund may purchase put
options 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.

The Fund will not purchase call or put options on securities if as a result,
more than ten percent of its net assets would be invested in premiums on such
options.

The Fund may purchase either listed or over-the-counter options, which are
considered illiquid.

RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES

Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes

5
<PAGE>

will thus be phased out as new options are listed on more recent issues, and
options representing a full range of expirations will not ordinarily be
available for every issue on which options are traded.

Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian so that it will be
treated as being covered.

Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options
are only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Fund as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Fund will purchase additional mortgage-related securities from the same pool (if
obtainable) or replacement mortgage-related securities in the cash market in
order to maintain its cover. A mortgage-related security held by the Fund to
cover an option position in any but the nearest expiration month may cease to
represent cover for the option in the event of a decline in the coupon rate at
which new pools are originated under the FHA/VA loan ceiling in effect at any
given time. If this should occur, the Fund will no longer be covered, and the
Fund will either enter into a closing purchase transaction or replace such
mortgage-related security with a mortgage-related security which represents
cover. When the Fund closes its position or replaces such mortgage-related
security, it may realize an unanticipated loss and incur transaction costs.

OPTIONS ON STOCK INDEXES

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

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

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

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

6
<PAGE>

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 Adviser believes 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. Options 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 rules and interpretations of the Commodity Futures
Trading Commission ("CFTC") under which the Fund is exempt from registration as
a "commodity pool."

Types of Contracts. An interest rate futures contract is an agreement
pursuant to which a party agrees to take or make delivery of a specified debt
security (such as U.S. Treasury bonds, U.S. Treasury notes, U.S. Treasury bills
and GNMA Certificates) at a specified future time and at a specified price.
Interest rate futures contracts also include cash settlement contracts based
upon a specified interest rate such as the London interbank offering rate for
dollar deposits, LIBOR.

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.

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
Chicago Mercantile Exchange 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.

7
<PAGE>

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

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

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

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

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

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

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

8
<PAGE>

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

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

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

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

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

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

9
<PAGE>

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

OPTIONS ON FUTURES CONTRACTS

The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option
on a futures contract, the Fund is 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 purposes as, the sale of a futures contract; at the same time,
it could write put options at a lower strike price (a "put bear spread") to
offset part of the cost of the strategy to the Fund. The purchase of call
options on futures contracts is intended to serve the same purpose as the actual
purchase of the futures contract.

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

LOANS OF PORTFOLIO SECURITIES

The Fund may lend portfolio securities to unaffiliated brokers, dealers and
financial institutions provided that cash equal to 100% of the market value of
the securities loaned is deposited by the borrower with the Fund and is
maintained each business day. While such securities are on loan, the borrower
is required to pay the Fund any income accruing thereon. Furthermore, the Fund
may invest the cash collateral in portfolio securities thereby increasing the
return to the Fund as well as increasing the market risk to the Fund.

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.

10
<PAGE>

INVESTMENT RESTRICTIONS

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

1. 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 and foreign currency futures and
options thereon, 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".

2. Borrow in excess of five percent of the market or other fair value of its
total assets; or pledge its assets to an extent greater than five percent
of the market or other fair value of its total assets. Any such borrowings
shall be from banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Margin deposits or payments in
connection with the writing of options, or in connection with the purchase
or sale of forward contracts, futures contracts and foreign currency
futures and options thereon, are not deemed to be a pledge or other
encumbrance.

3. Make any investment in real estate except that the Fund may purchase or
sell securities which are secured by real estate and securities issued by
real estate investment trusts and corporation engaged primarily in real
estate.

4. Invest more than five percent of its assets in the securities of any one
issuer (except the U.S. Government, its agencies and instrumentalities) or
purchase more than ten percent of the outstanding voting securities of any
one issuer.

5. Purchase or sell commodities or commodity contracts except that the Fund
may enter into transactions in options, futures contracts and foreign
currency futures or options thereon and forward contracts.

6. Underwrite securities of other companies, except insofar as the Fund might
be deemed to be an underwriter for purposes of the Securities Act of 1933
in the resale of any securities owned by the Fund.

7. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (a) write covered or fully collateralized call options, write
secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (b) purchase options to the
extent that the premiums paid for all such options owned at any time do not
exceed ten percent of its total assets, and enter into closing or
offsetting transactions with respect to such options, and (c) engage in
transactions in interest rate futures contracts and related options
provided that such transactions are entered into for bona fide hedging
purposes (or that the underlying commodity value of the Fund's long
positions do not exceed the sum of certain identified liquid investments as
specified in CFTC regulations), provided further that the aggregate initial
margin and premiums do not exceed five percent of the fair market value of
the Fund's total assets, and provided further that the Fund may not
purchase futures contracts or related options if more than 30% of the
Fund's total assets would be so invested.

8. Make loans of money or securities, except (a) by investment in repurchase
agreements in accordance with applicable requirements set forth in the
Fund's Prospectus or (b) by lending its portfolio securities in amounts not
to exceed 33% of the Fund's total assets, provided that such loans are
secured by cash

11
<PAGE>

collateral that is at least equal to the market value. See "Repurchase
Agreements" and "Lending of Securities" herein and "Investment Practices
and Restrictions" in the Prospectus.

The Fund has adopted additional investment restrictions, which may be changed
by the Directors without a vote of shareholders. These restrictions provide
that the Fund shall not:

1. Make short sales of securities, unless at the time of the sale the Fund
owns an equal amount of such securities. Notwithstanding the foregoing,
the Fund may engage in transactions in options, forward contacts, futures
contracts, foreign currency futures and options thereon.

2. Purchase securities on margin, except that the Fund may obtain such short-
term credits as may be necessary for the clearance of purchases and sales
of securities. Transactions in forward contracts, options, futures
contracts, foreign currency futures and options on such contracts,
including deposits or payments by the Fund of initial or maintenance margin
in connection with any such transaction, are not considered to be purchases
of securities on margin.

3. Invest in securities of any company if any officer or director of the Fund
or of the Adviser owns more than one-half of one percent of the outstanding
securities of such company, and such officers and directors own in the
aggregate more than five percent of the outstanding securities of such
issuer.

4. Invest in interests in oil, gas, or other mineral exploration or
development programs.

5. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition.

6. Purchase an illiquid security if, as a result of such purchase, more than
15% of the Fund's net assets would be invested in such securities.
Illiquid securities include securities subject to legal or contractual
restrictions on resale, which include repurchase agreements which have a
maturity of longer than seven days.

7. Invest in warrants or rights except where acquired in units or attached to
other securities. This restriction does not apply to options, futures
contracts or options on futures contracts.

8. Purchase securities of unseasoned issuers, including their predecessors or
sponsors, which have been in operation for less than three years, and
equity securities of issuers which are not readily marketable if by reason
thereof the value of its aggregate investment in such classes of securities
will exceed five percent of its total assets.

The Fund may, notwithstanding any other fundamental investment policy or
limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.

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. The Fund has also undertaken to
invest no more than 10% of its total assets in securities of real estate
investment trusts.

DIRECTORS AND EXECUTIVE OFFICERS

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

12
<PAGE>

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

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

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

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

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

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

**LAWRENCE J. SHEEHAN, Director. 1999 Avenue of the Stars, Suite 700, Los
Angeles, California 90067-6035. Of Counsel to and formerly Partner (1969-
1994) of the law firm of O'Melveny & Myers, legal counsel to the
Fund.(1)(3)(5)

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

MARY JAYNE BYRNE, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Portfolio Manager of the Adviser. Formerly senior equity analyst with Texas
Commerce Investment Management Company.(4)

THOMAS COPPER, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Associate Portfolio Manager of the Adviser. Formerly credit analyst with the
Adviser.

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

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

13
<PAGE>

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

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

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

PAUL R. WOLKENBERG, Vice President, 2800 Post Oak Blvd., Houston, Texas
77056. Senior Vice President of the Adviser; President, Chief Operating
Officer and Director of Van Kampen American Capital Services, Inc.; Executive
Vice President, Chief Operating Officer and Director of Van Kampen American
Capital Trust Company and the Distributor; Executive Vice President and
Director of Van Kampen American Capital Shareholder Services, Inc.
("ACCESS").(4)
* Director who is an interested person of the Adviser and of the Fund within the
meaning of the 1940 Act by virtue of his affiliation with the Adviser.

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

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

(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund and American Capital Income Trust, investment companies
advised by the Adviser, and a trustee of Common Sense Trust, an open-end
investment company for which the Adviser serves as adviser for eight of the
portfolios.

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

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

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

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

The officers and directors of the Fund as a group own less than one percent of
the outstanding shares of the Fund. During the fiscal year ended September 30,
1994, the Directors who were not affiliated with the Adviser or its parent
received as a group $1,575 in directors' fees from the Fund in addition to
certain out-of-pocket expenses. Such

14
<PAGE>

directors also received compensation for serving as directors of other
investment companies advised by the Adviser as identified in the notes to the
foregoing table. For legal services rendered during the fiscal year, the Fund
paid legal fees of $2,975 to the law firm of O'Melveny & Myers of which Mr.
Sheehan is Of Counsel. The firm also serves as legal counsel to the American
Capital funds listed in Footnote 1 above.

INVESTMENT ADVISORY AGREEMENT

The Fund and the Adviser are parties to an investment advisory agreement,
dated December 20, 1994 (the "Advisory Agreement"). Under the Advisory
Agreement, the Fund retains the Adviser to manage the investment of its assets
and to place orders for the purchase and sale of its portfolio securities. The
Adviser is responsible for obtaining and evaluating economic, statistical, and
financial data and for formulating and implementing investment programs in
furtherance of the Fund's investment objectives. The Adviser also furnishes at
no cost to the Fund (except as noted herein) the services of sufficient
executive and clerical personnel for the Fund as are necessary to prepare
registration statements, prospectuses, shareholder reports, and notices and
proxy solicitation materials. In addition, the Adviser furnishes at no cost to
the Fund the services of a President of the Fund, one or more Vice Presidents as
needed, and a Secretary.

Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser.
A portion of these amounts were paid to the Adviser or its parent in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. The services
provided by the Adviser are at cost. The Fund also pays shareholder service
agency fees, distribution fees, service fees, custodian fees, legal and auditing
fees, the costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser. 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 Fund pays to the Adviser as compensation for
the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at annual rate
of 0.65% of the average daily net assets of the Fund.

The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each business day during a given calendar month. Such fee is payable for
each calendar month as soon as practicable after the end of that month. The
Adviser agrees to use its best efforts to recapture tender solicitation fees and
exchange offer fees for the Fund's benefit, and to advise the Board of Directors
of the Fund of any other commissions, fees, brokerage or similar payments which
may be possible under applicable laws for the Adviser or any other direct or
indirect majority owned subsidiary of VK/AC Holding, Inc. to receive in
connection with the Fund's portfolio transactions or other arrangements which
may benefit the Fund.

The Advisory Agreement also provides that, in the event the ordinary business
expenses of the Fund for any fiscal year exceed the most restrictive expense
limitations applicable in the states where the Fund's shares are qualified for
sale, the compensation due the Adviser will be reduced by the amount of such
excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Fund monthly an amount sufficient to make
up the deficiency, subject to readjustment during the year. Ordinary business
expenses include the investment advisory fee and other operating costs paid by
the Fund except (1) interest and taxes, (2) brokerage commissions, (3) certain
litigation and indemnification expenses as described in the Advisory Agreement
and (4) payments made by the Fund pursuant to the Distribution Plans.

15
<PAGE>

Currently, the most restrictive applicable limitations are 2 1/2% of the first
$30 million, 2% of the next $70 million, and 1 1/2% of the remaining average net
assets.

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

During the fiscal year ended September 30, 1994, the Adviser received $-0- in
advisory fees from the Fund. For such period, the Fund paid $17,596 for
accounting services.

DISTRIBUTOR

The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, dated December 20, 1994 (the "Underwriting
Agreement"). The Distributor has the exclusive right to distribute shares of
the Fund through affiliated and unaffiliated dealers. The Distributor's
obligation is an agency or "best efforts" arrangement under which the
Distributor is required to take and pay for only such shares of the Fund as may
be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and the cost and
expense of supplemental sales literature, promotion and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Fund's Board of Directors or by a vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Directors who
are not parties to the Underwriting Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
During the fiscal year ended September 30, 1994, total underwriting commissions
on the sale of shares of the Fund were $118,639. Of such total, the amount
retained by the Distributor was $18,378. The remainder was reallowed to
dealers. Of such dealer reallowances, $30,810 was received by Advantage Capital
Corporation, an affiliated dealer of the Distributor.

DISTRIBUTION PLANS

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

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

16
<PAGE>

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 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 semiannual 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. ("NASD") for asset-based charges.

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

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

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

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

For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $7,768 or .15%, (not annualized) respectively, of
the Class A shares' average net assets. Such expenses were paid to reimburse
the Distributor for payments made to Service Organizations for servicing Fund
shareholders and for administering the Class A Plan. For the fiscal year ended
September 30, 1994, the Fund's aggregate expenses under the Class B Plan were
$50,180 or .83% (not annualized) of the Class B shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$45,162 for commissions and transaction fees paid to broker-dealers and other
Service Organizations in respect of sales of Class B shares of the Fund and
$5,018 for fees paid to Service Organizations for servicing Class B shareholders
and administering the Class B Plan. For

17
<PAGE>

the fiscal year ended September 30, 1994, the Fund's aggregate expenses under
the Class C Plan were $7,517 or .83% (not annualized) of the Class C shares'
average net assets. Such expenses were paid to reimburse the Distributor for
the following payments: $6,765 for commissions and transaction fees paid to
broker-dealers and other Service Organizations in respect of sales of Class C
shares of the Fund and $752 for fees paid to Service Organizations for servicing
Class C shareholders and administering the Class C Plan.

TRANSFER AGENT

During the fiscal year ended September 30, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$6,315 for these services. These services are provided at cost plus a profit.

PORTFOLIO TRANSACTIONS AND BROKERAGE

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

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

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

The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the

18
<PAGE>

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

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

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

Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal year ended September 30, 1994 totalled $39,197. During the year ended
September 30, 1994, the Fund paid $28,916 in brokerage commissions on
transactions totalling $12,656,588 to brokers selected primarily on the basis of
research services provided to the Adviser.

Prior to December 20, 1994, the Fund placed brokerage transactions with
brokers that were considered affiliated persons of the Adviser's former parent,
Travelers. Such affiliated persons included Smith Barney and Robinson Humphrey.
Effective December 20, 1994, Smith Barney and Robinson Humphrey ceased to be
affiliates of the Adviser. 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
commission to these brokers during the periods shown:

<TABLE>
<CAPTION>
Robinson
Smith Barney Humphrey
------------- --------
<S> <C> <C>
Commissions Paid:
Fiscal 1994 $3,150 $2,058
Fiscal 1994 Percentages:
Commissions with affiliate
to total commissions 8.04% 5.25%
Value of brokerage transactions
with affiliate to total
transactions 7.74% 3.24%
</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

19
<PAGE>

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 in Japanese markets on certain
Saturdays and in various foreign markets including Japanese markets on days
which are not business days in New York. The Fund's net asset value is not
calculated and the Fund does not effect sales, redemptions and repurchases of
its shares on days which are not business days in New York. There may be
significant variations in the net asset value of Fund shares on account of
changes in prices of stocks traded in foreign stock markets on days when net
asset value is not calculated and on which shareholders cannot redeem.

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 pursuant to an order issued by the
Securities and Exchange Commission.

PURCHASE AND REDEMPTION OF SHARES

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

PURCHASE OF SHARES

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

MULTIPLE PRICING SYSTEM

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

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

INVESTMENTS BY MAIL

A shareholder investment account may be opened by completing the application
included in this prospectus and forwarding the application, through the
designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri 64141-
6319. The account is opened only upon acceptance of the application by the
shareholder service agent. 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.

20
<PAGE>

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 $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single purchaser, as is a trustee or other fiduciary purchasing for a
single fiduciary account. An aggregate investment includes all shares of the
Fund and all shares of certain other participating American Capital mutual funds
described in the Prospectus (the "Participating Funds") which have been
previously purchased and are still owned, plus the shares being purchased. The
current offering price is used to determine the value of all such shares. If,
for example, an investor has previously purchased and still holds Class A shares
of the Fund and shares of other Participating Funds having a current offering
price of $40,000, and that person purchases $65,000 of additional Class A shares
of the Fund, the charge applicable to the $65,000 purchase would be 3.75% 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.

LETTER OF INTENT

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

VOLUME DISCOUNTS

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

REDEMPTION OF SHARES

Redemptions are not made on days during which the New York Stock Exchange is
closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended and the payment therefor may
be postponed for more than seven days during any period when (a) the New York
Stock Exchange is closed for other than customary weekends or holidays; (b)
trading on the New York Stock Exchange

21
<PAGE>

is restricted; (c) an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the Securities and Exchange Commission, by order, so permits.

CONTINGENT DEFERRED SALES CHARGE - CLASS A

For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC-Class A") of one percent is imposed in the event of certain
redemptions within one year of the purchase. If a CDSC-Class A is imposed upon
redemption, the amount of the CDSC-Class A will be equal to the lesser of a
specified percentage of the net asset value of the shares at the time of
purchase, or one percent of the net asset value of the shares at the time of
redemption.

The CDSC-Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one year period prior to the redemption. The CDSC-Class
A will be waived in connection with redemptions by certain Qualified Purchasers
(e.g., retirement plans qualified under Section 401(a) of the Code and deferred
compensation plans under Section 457 of the Code) required to obtain funds to
pay distributions to beneficiaries pursuant to the terms of the plans. Such
payments include, but are not limited to, death, disability, retirement, or
separation from service. No CDSC-Class A will be imposed on exchanges between
funds. For purposes of the CDSC-Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a CDSC-
Class A rather than a front-end load sales charge. In determining whether a
CDSC-Class A is payable, it is assumed that shares held the longest are the
first to be redeemed.

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

As described in the Prospectus under "Redemptions of Shares," redemption of
Class B and Class C shares is subject to a contingent deferred sales charge.

WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE.

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.

22
<PAGE>

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

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

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

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

(c) 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.

(d) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
----------------------------------------------------------

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

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

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

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

23
<PAGE>

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. VKAC and its subsidiaries, including ACCESS
(collectively, " Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine, Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.

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

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.

CHECK WRITING PRIVILEGE

To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signatures are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.

24
<PAGE>

The privilege does not carry over to accounts established through exchanges or
transfers. It must be requested separately for each fund account.

DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES

The Fund declares dividends each business day on Class A shares, Class B
shares and Class C shares and distributes monthly substantially all of its net
investment income to shareholders of Class A, Class B and Class C shares. The
daily dividends are a fixed amount determined for each class at least monthly.
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 similarly to distribute to shareholders any taxable net realized
capital gains. 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 has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders and meet certain diversification and other requirements. By
qualifying as a regulated investment company, the Fund is not subject to federal
income taxes to the extent it distributes its taxable net investment income and
taxable net realized capital gains. If for any taxable year the Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders).

The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least 98% of its
ordinary net investment income for the twelve months ended December 31, plus 98%
of its capital gains net income for the twelve months ended October 31 of such
calendar year. The Fund intends to distribute sufficient amounts to avoid
liability for the excise tax.

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

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

Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such dividends 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 the Fund as to the federal tax
status of dividends and distributions paid by the Fund.

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

25
<PAGE>

charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.

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

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

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

BACK-UP WITHHOLDING

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

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Code includes special rules applicable to listed options (excluding equity
options as defined in the Code), futures contracts, and options on futures
contracts which the Fund may write, purchase or sell. Such options and
contracts are classified as Section 1256 contracts under the Code. The
character of gain or loss resulting from the sale, disposition, closing out,
expiration or other terminations of Section 1256 contracts is generally treated
as long-term capital gain or loss to the extent of 60% thereof and short-term
capital gain or loss to the extent of 40% thereof ("60/40 gain or loss"). Such
contracts, when held by the Fund at the end of a fiscal year, generally are
required to be treated as sold at market value on the last day of such fiscal
year for federal income tax purposes ("marked-to- market"). Over-the-counter
options are not classified as Section 1256 contracts and are not subject to the
mark-to-market rule or to 60/40 gain or loss treatment. Any gains or losses
recognized by the Fund from transactions in over-the-counter options generally
constitute short-term capital gains or losses. If over-the-counter call options
written, or over-the-counter put options purchased, by the Fund are exercised,
the gain or loss realized on the sale of the underlying securities may be either
short-term or long-term, depending on the holding period of the securities. In
determining the amount of gain or loss, the sales proceeds are reduced by the
premium paid for over-the-counter puts or increased by the premium received for
over-the-counter calls.

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

The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for

26
<PAGE>

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 overall total return (computed in the manner described in the
Prospectus) for Class A shares of the Fund for the ten-month period (the period
since the initial public offering of the Fund), ended September 30, 1994, was -
11.64%. The Fund's overall total return (computed in the manner described in
the Prospectus) for Class B shares for the same period was -11.28%. The Fund's
overall total return (computed in the manner described in the Prospectus) for
Class C shares for the same period was -8.71%. These results are based on
historical earnings and net asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objective and policies as well as the risks incurred in
the Fund's investment practices.

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

From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by American Capital in 1994.

From time to time, VKAC 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.

The Fund may, from time to time: (1) illustrate the benefits of tax-
deferral by comparing taxable investments to investments made through tax-
deferred retirement plans; (2) illustrate in graph or chart form, or otherwise,
the benefits of dollar cost averaging by comparing investments made pursuant to
a systematic investment plan to investments made in a rising market; (3)
illustrate allocations among different types of mutual funds for investors at
different stages of their lives; and (4) in reports or other communications to
shareholders or in advertising material, illustrate the benefits of compounding
at various assumed rates of return. Such illustrations may be in the form of
charts or graphs and will not be based on historical returns experienced by the
Fund.

From time to time, the Fund may also illustrate allocations among
different types of mutual funds for investors at different stages of their
lives.

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 which are 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.

27
<PAGE>

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

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

FINANCIAL STATEMENTS

Financial Statements including Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets, Notes
to Financial Statements, Financial Highlights and Report of Independent
Accountants on such financial statements, are hereby incorporated by reference
to the Fund's Annual Report previously filed with the SEC on or about December
1, 1994.

The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund.

<TABLE>
<CAPTION>
September 30,
1994
-------------
<S> <C>

Net Asset Value per Class A Share $8.39

Class A Per Share Sales Charge - 4.75%
of offering price (4.99%
of net asset value per share) $ .42

Class A Per Share Offering Price to the
Public $8.81
</TABLE>

28
<PAGE>

APPENDIX - DESCRIPTION OF BOND RATINGS

MOODY'S INVESTORS SERVICE

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. such bonds lack outstanding investment characteristics and in
fact, have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Nonrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities that are not rated as
a matter of policy.

3. There is a lack of essential data pertaining to the issue or issuer.

29
<PAGE>

4. The issue was privately placed, in which case the rating is not published
in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption, or for other reasons.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.

STANDARD & POOR'S CORPORATION

AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.

A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.

CI: The rating CI is reserved for income bonds on which no interest is being
paid.

D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.

PREFERRED STOCK RATINGS

Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.