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AMERICAN CAPITAL REAL ESTATE SECURITIES FUND, INC.
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2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666
May 1, 1995
American Capital Real Estate Securities Fund, Inc. (the "Fund") is a mutual
fund seeking as its primary objective long-term growth of capital by investing
principally in securities of companies operating in the real estate industry
("Real Estate Securities"). Current income is a secondary consideration. A "real
estate industry company" is a company that derives at least 50% of its assets
(marked-to-market), gross income or net profits from the ownership,
construction, management or sale of residential, commercial or industrial real
estate. Under normal market conditions, at least 65% of the Fund's total assets
will be invested in Real Estate Securities, primarily equity securities of real
estate investment trusts. 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.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Prospectus Summary...... 2
Expense Synopsis........ 5
Financial Highlights.... 7
Multiple Pricing
System................ 8
Investment Objectives
and Policies.......... 11
Risk Factors............ 14
Investment Practices and
Restrictions.......... 15
The Fund and Its
Management............ 19
Purchase of Shares...... 21
Distribution Plans...... 28
Shareholder Services.... 30
Redemption of Shares.... 34
Dividends, Distributions
and Taxes............. 36
Prior Performance
Information........... 38
Additional
Information........... 40
Appendix -- Description
of Bond Ratings....... 41
</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 OBJECTIVES. The Fund's primary investment objective is to seek
long-term growth of capital. Current income is a secondary consideration. 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 portfolio of securities of companies operating in
the real estate industry ("Real Estate Securities"). Real Estate Securities
include equity securities, including common stocks and convertible securities,
as well as non-convertible preferred stocks and debt securities of real estate
industry companies. A "real estate industry company" is a company that derives
at least 50% of its assets (marked-to-market), gross income or net profits from
the ownership, construction, management or sale of residential, commercial or
industrial real estate. Under normal market conditions, at
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least 65% of the Fund's total assets will be invested in Real Estate Securities,
primarily equity securities of real estate investment trusts. The Fund's
investment in debt securities will be rated, at the time of investment, at least
Baa by Moody's Investors Service ("Moody's") or BBB by Standard & Poor's
Corporation ("S&P"), a comparable rating by any other nationally recognized
statistical rating organization or if unrated, determined by Van Kampen American
Capital Asset Management, Inc. (the "Adviser") to be of comparable quality.
Under normal market conditions, the Fund may invest up to 35% of its total
assets in equity and debt securities of companies outside the real estate
industry, U.S. Government securities, cash and money market instruments. There
can be no assurance that the Fund will achieve its investment objectives.
Because of the Fund's policy of concentrating its investments in Real
Estate 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 real estate 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 Real Estate
Securities, see "Risk Factors."
The Fund may invest up to 25% of its total assets in securities issued by
foreign issuers, some or all of which may also be Real Estate 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 --
Foreign Securities."
The Fund may purchase or sell debt securities on a forward commitment
basis. See "Investment Practices and Restrictions -- Forward Commitments." The
Fund may use portfolio management techniques and strategies involving options,
futures contracts and options on futures. The utilization of options, futures
contracts and options on futures contracts may involve greater than ordinary
risks and the likelihood of more volatile price fluctuation. See "Investment
Practices and Restrictions -- Using Options, Futures Contracts and Options on
Futures Contracts."
INVESTMENT ADVISERS. The Adviser has served as investment adviser to the
Fund since its inception. The Adviser serves as investment adviser to 50
investment company portfolios. Hines Interests Realty Advisors Limited
Partnership (hereinafter referred to either as the "Subadviser" or "Hines Realty
Advisors") provides advisory services to the Adviser of the Fund with respect to
the real estate industry. See "The Fund and Its Management."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor"), One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
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
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and Class C shares. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class of shares that best
suits their circumstances and objectives. See "Multiple Pricing
System -- Factors for Consideration." Each class of shares represents an
interest in the same portfolio of investments of the Fund. The per share
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Multiple Pricing System." For information on
redeeming shares see "Redemption of Shares."
CLASS A SHARES. These shares are offered at net asset value per share plus
a maximum initial sales charge of 4.75% of the offering price. The Fund pays an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares -- Class A Shares" and
"Distribution Plans."
CLASS B SHARES. These shares are offered at net asset value per share and
are subject to a maximum contingent deferred sales charge of four percent of
redemption proceeds during the first and second years, declining each year
thereafter to zero percent after the fifth year. See "Redemption of Shares." The
Fund pays a combined annual distribution fee and service fee of up to one
percent of its average daily net assets attributable to such class of shares.
See "Purchase of Shares -- Class B Shares" and "Distribution Plans." Class B
shares will convert automatically to Class A shares six years after the end of
the calendar month in which the shareholder's order to purchase was accepted.
See "Multiple Pricing System -- Conversion Feature."
CLASS C SHARES. These shares are offered at net asset value per share and
are subject to a contingent deferred sales charge of one percent on redemptions
made within one year of purchase. See "Redemption of Shares." The Fund pays a
combined annual distribution fee and service fee of up to one percent of its
average daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class C Shares" and "Distribution Plans." Class C shares will convert
automatically to Class A shares ten years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Multiple Pricing
System -- Conversion Feature."
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income are
distributed quarterly; 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."
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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 CLASS B CLASS C
SHARES** SHARES** SHARES**
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<S> <C> <C> <C>
SHAREHOLDER
TRANSACTION EXPENSES
Maximum sales charge
imposed on purchases
(as a percentage of
offering price)..... 4.75%(a) None None
Sales charge imposed
on dividend
reinvestments....... None None None
Deferred sales charge
(as a percentage of
original purchase
price or redemption
proceeds, whichever 4% during the first year, 1% during the
is lower)........... None* 4% during second year, first year(b)
3% during the third year,
2.5% during the fourth year,
1.5% during the fifth year
and 0% after the fifth year(b)
Exchange fee(c)....... $5.00 $5.00 $5.00
ANNUAL FUND OPERATING
EXPENSES (as a
percentage of
average
net assets)
Management fees....... .00%(g) .00%(g) .00%(g)
Rule 12b-1 fees(d).... .18% .90%(f) .42%(f)
Other expenses(e)..... 1.08%(h) .94%(h) 1.20%(h)
Total fund operating
expenses............ 1.26%(h) 1.84%(h) 1.62%(h)
</TABLE>
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(a) Reduced for purchases of $100,000 and over. See "Purchase of Shares--Class
A Shares"--page 23.
(b) See "Purchase of Shares--Class B Shares" and "--Class C Shares"--pages 26
and 28, respectively.
(c) Not charged in certain circumstances. See "Shareholder Services--Systematic
Exchange" and ". . . --Automatic Exchange" -- page 31 and 33, respectively.
(d) Up to 0.25% for Class A shares and one percent for Class B and C shares.
See "Distribution Plans"--page 28.
(e) See "The Fund and Its Management"--page 19. "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) After expense reimbursement. In the absence of such reimbursement,
management fees for all classes of shares would be one percent.
(h) After expense reimbursement. In the absence of such reimbursement, other
expenses and total fund operating expenses would be 1.85% and 3.03% for
Class A shares, 1.70% and 3.60% for Class B shares, and 1.96% and 3.38% for
Class C shares, respectively.
* 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 one percent
may be imposed on certain redemptions made within one year of the purchase.
** For the period June 9, 1994 through December 31, 1994 on an annualized
basis.
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<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID
FOR THE PERIOD OF:
EXAMPLE: 1 YEAR 3 YEARS
<S> <C> <C>
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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
1.26% for Class A shares, 1.84% for Class B shares
and 1.62% for Class C shares, (2) a five percent
annual return throughout the period and (3)
redemption at the end of the period:
Class A............................................ $60 $86
Class B............................................ $60 $91
Class C............................................ $27 $51
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at the
end of the period:
Class A............................................ $60 $86
Class B............................................ $19 $58
Class C............................................ $16 $51
</TABLE>
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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
not a projection of future performance. The example should not be considered a
representation of future expenses. Actual expenses may be greater or less than
those shown.
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FINANCIAL HIGHLIGHTS
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(Selected data for a share of capital stock outstanding throughout the period
indicated).
The following information for the period June 9, 1994 through December 31,
1994 has been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the financial statements and notes thereto included in the Fund's Annual
Report to shareholders for the period ended December 31, 1994, which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
JUNE 9, 1994(1) THROUGH
DECEMBER 31, 1994
-----------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(2)
Net asset value, beginning of
period............................. $9.43 $9.43 $9.43
------- ------- -------
Income from operations
Investment income.................... .30 .30 .31
Expenses............................. (.07) (.10) (.09)
------- ------- -------
Net investment income................ .23 .20 .22
Net realized and unrealized losses on
securities......................... (.18) (.176) (.178)
------- ------- -------
Total from investment operations..... .05 .024 .042
------- ------- -------
Dividends and distributions to the
shareholders
from net investment income......... (.153) (.1268) (.1399)
Return of capital distribution....... (.057) (.0472) (.0521)
------- ------- -------
Total dividends and distribution..... (.21) (.174) (.192)
------- ------- -------
Net asset value, end of period....... $9.27 $9.28 $9.28
======= ======= =======
TOTAL RETURN(3)...................... .24% (.04%) .15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)......................... $4.6 $9.1 $1.3
Ratios to average net assets
(annualized)
Expenses........................... 1.26% 1.84% 1.62%
Expenses, without expense
reimbursement................... 3.03% 3.60% 3.38%
Net investment income.............. 4.28% 3.81% 3.92%
Net investment income, without
expense reimbursement........... 2.52% 2.05% 2.15%
Portfolio turnover rate.............. 28% 28% 28%
</TABLE>
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(1) Commencement of operations.
(2) Based on average month-end shares outstanding.
(3) Total returns for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
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MULTIPLE PRICING SYSTEM
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The Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value 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 the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of
Shares -- Class B Shares." Class B shares will automatically convert to Class A
shares six years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "Conversion Feature" below for discussion on
applicability of 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
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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 fees and, for a five-year or one-year period, respectively, being
subject to a contingent deferred sales charge. Ongoing distribution fees on
Class B shares and Class C shares will be offset to the extent of the additional
funds originally invested and any return realized on those funds. However, there
can be no assurance as to the return, if
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any, which will be realized on such additional funds. For investments held for
ten years or more, the relative value upon liquidation of the three classes
tends to favor Class A or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contingent deferred sales charge schedule.
Under most circumstances, for investments aggregating less than $100,000 at
the time of purchase, investments originally made in Class C shares will tend to
have a slightly higher value upon liquidation than investments originally made
in either Class A or Class B shares if liquidated within approximately the first
six years after the date of the original investment and investments originally
made in Class B shares will tend to have a slightly higher value upon
liquidation than investments originally made in either Class A or Class C shares
for investments held longer. Under most circumstances, for investments
aggregating $100,000 or more at the time of purchase, investments originally
made in Class C shares will tend to have a slightly higher value upon
liquidation than either investments originally made in Class A or Class B shares
if liquidated within approximately the first two to the first six years after
the date of the original investment, but investments originally made in Class A
and Class B shares will tend to have a slightly higher value upon liquidation
for investments held longer. The foregoing will not, however, be true in all
cases. Particularly, if the Fund experiences a consistently negative or widely
fluctuating total return, results may differ.
The distribution expenses incurred by the Distributor in connection with
the sale of the shares will be reimbursed, in the case of Class A shares, from
the proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling 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
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the same class of other mutual funds advised by the Adviser. See "Shareholder
Services -- Exchange Privilege."
The Directors of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940 (the "1940 Act") and state laws, will seek to ensure that no
such conflict arises.
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INVESTMENT OBJECTIVES AND POLICIES
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GENERAL. The Fund's primary investment objective is to provide shareholders
with long-term growth of capital. Current income is a secondary consideration.
The Fund will seek to achieve its investment objectives by investing principally
in a diversified portfolio of Real Estate Securities which include equity
securities, including common stocks and convertible securities, as well as
non-convertible preferred stocks and debt securities of real estate industry
companies. A "real estate industry company" is a company that derives at least
50% of its assets (marked to market), gross income or net profits from the
ownership, construction, management or sale of residential, commercial or
industrial real estate. Real estate industry companies may include among others:
equity real estate investment trusts, which pool investors' funds for investment
primarily in commercial real estate properties; mortgage real estate investment
trusts, which invest pooled funds in real estate related loans; brokers or real
estate developers; and companies with substantial real estate holdings, such as
paper and lumber producers and hotel and entertainment companies. Under normal
market conditions, at least 65% of the Fund's total assets will be invested in
Real Estate Securities, primarily equity securities of real estate investment
trusts. The Fund's investment in debt securities will be rated, at the time of
investment, at least Baa by Moody's or BBB by S&P, 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
Baa by Moody's or BBB by S&P 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
rating 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. The Fund may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Fund may invest up to 35% of its total
assets in equity and debt securities of companies outside the real estate
industry, U.S. Government securities, cash and money market instruments.
The Fund may invest up to 25% of its assets in securities issued by foreign
issuers. See "Investment Objectives and Policies -- Foreign Securities." The
Fund may engage in portfolio management strategies and techniques involving
options, futures contracts and
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options on futures. Options, futures contracts and related options are described
in "Investment Practices and Restrictions -- Using Options, Futures Contracts
and Options on Futures Contracts" and the Statement of Additional Information.
For temporary defensive purposes, the Fund may invest up to 100% of its
total assets in short-term investments as described below. The Fund will assume
a temporary defensive posture only when economic and other factors affect the
real estate industry market to such an extent that the Adviser believes there to
be extraordinary risks in being primarily in Real Estate Securities.
There can be no assurance that the Fund will achieve its investment
objectives.
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 Board of 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.
SHORT-TERM INVESTMENTS. The Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, commercial
paper, bankers' acceptances, certificates of deposit, repurchase agreements
collateralized by these securities, and other short-term evidences of
indebtedness. The Fund will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. Such temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.
FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in
securities issued by foreign issuers of developed countries of similar quality
as the securities described above as determined by the Adviser. Some of such
securities may also be Real Estate 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.
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
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<PAGE> 13
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.
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
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<PAGE> 14
contracts") and purchase and sell foreign currency futures contracts to hedge
against changes in foreign currency exchange rates. A foreign currency forward
contract is a negotiated agreement between the contracting parties to exchange a
specified amount of currency at a specified future time at a specified rate. The
rate can be higher or lower than the spot rate between the currencies that are
the subject of the contract.
The Fund may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency futures contract for
such amount. Such hedging strategies may be employed before the Fund purchases a
foreign security traded in the hedged currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefore is made or received. Hedging against a change in
the value of a foreign currency in the fore-going 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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RISK FACTORS
- ------------------------------------------------------------------------------
Although the Fund does not invest directly in real estate, an investment in
the Fund will generally be subject to the risks associated with real estate
because of its policy of concentration in the securities of companies in the
real estate industry. These risks include, among others: declines in the value
of real estate; risks related to general and local economic conditions;
overbuilding and increased competition; increases in property taxes and
operating expenses; changes in zoning laws; casualty or condemnation losses;
variations in rental income; changes in neighborhood values; the appeal of
properties of tenants and changes in interest rates. The value of securities of
companies which service the real estate industry will also be affected by such
risks. If the Fund has rental income or income from the disposition of real
property acquired as a result of a default on securities the Fund owns, the
receipt of such income may adversely affect its ability to retain its tax status
as a regulated investment company.
In addition, equity real estate investment trusts may be affected by
changes in the value of the underlying property owned by the trusts, while
mortgage real estate investment trusts may be affected by the quality of credit
extended. Equity and mortgage real estate investment trusts are dependent upon
management skill, may not be diversified and are subject to the risks of
financing projects. Such real estate investment trusts are also subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Code and to maintain exemption from the 1940 Act. Changes in interest rates may
also affect the value of the debt securities in the Fund's portfolio. Like
investment companies such as the Fund, real estate investment trusts are not
taxed on income distributed to shareholders provided they comply with several
requirements of the Code.
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<PAGE> 15
The Fund will indirectly bear its proportionate share of any expenses paid by
the real estate investment trusts in which it invests in addition to the
expenses paid by the Fund.
Because of the Fund's policy of concentrating its investments in Real
Estate 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 real estate industry.
Additional information about the Fund's investment practices and the risks
associated with such practices are contained in "Investment Objectives and
Policies" and "Investment Practices and Restrictions" herein and in the
Statement of Additional Information.
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INVESTMENT PRACTICES AND RESTRICTIONS
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic or foreign banks or broker-dealers in order to earn a return on
temporarily available cash. A repurchase agreement is a short-term investment in
which the purchaser (i.e., the Fund) acquires ownership of a debt security and
the seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the holding period. The Fund will not
invest more than 15% of its net assets in 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.
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 debt securities in the Fund's portfolio generally are
traded in the over-the-counter market through dealers. A dealer is a securities
firm or bank which makes a market for
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<PAGE> 16
securities by opening a position at one price and closing the position at a
slightly more favorable price. The difference between the prices is known as a
spread. Foreign currency and forward currency exchange contracts are traded in a
similar fashion in a dealer market maintained primarily by large commercial
banks. The Fund will pay brokerage commissions in connection with transactions
in exchange-traded options, futures contracts and related options. Spreads or
commissions for transactions executed in foreign markets often are higher than
in the United States. 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.
PORTFOLIO TURNOVER. The Fund may purchase and sell securities without
regard to the length of time the security is to be, or has been held. The annual
portfolio turnover rate may exceed 100%, which is higher than that of many other
investment companies. A 100% turnover rate would occur, for example, if all the
securities held by the Fund were replaced in a period of one year. High
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."
RESTRICTED SECURITIES. The Fund may invest up to 15% of its net assets in
restricted securities and other illiquid assets (see herein 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 ("1933 Act") and are thus subject to restrictions on
resale. Excluded from the limitation, however, are any restricted securities
which are eligible for resale pursuant to Rule 144A under the 1933 Act and which
have been determined to be liquid by the Board of Directors or by the Adviser
pursuant to Board-approved guidelines. The determination of liquidity is based
on the volume of reported trading in the institutional secondary market for each
security. Since it is not possible to predict with assurance how the markets for
restricted securities sold and offered under Rule 144A will develop, the
Directors will carefully monitor the Fund's investment in these securities
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
These difficulties and delays could result in the Fund's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time desired by the Fund
impossible. Since market quotations are not readily available for restricted
securities, such securities will be valued by a method that the Fund's Board of
Directors believes accurately reflects fair value.
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<PAGE> 17
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.
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 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 options on futures contracts 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.
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<PAGE> 18
The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or before
the settlement date in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction. Should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure.
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.
INVESTMENT RESTRICTIONS. The Fund has adopted a number of investment
restrictions that may not be changed without the approval of the holders of a
majority of the Fund's shares. See the Statement of Additional Information. The
percentage limitations need only be met at the time the investment is made or
other relevant action taken. These restrictions provide, among other things,
that the Fund may not:
1. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than ten percent of its net assets in
connection with permissible borrowings or purchase additional
securities when money borrowed exceeds five percent of its net assets.
Margin deposits or payments in connection with the writing of options,
or in connection with the purchase or sale of forward contracts,
futures, foreign currency futures and related options, are not deemed
to be a pledge or other encumbrance.
2. With respect to 75% of its total assets, 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.
Neither limitation shall apply to the acquisition of shares of other
open-end investment companies to the extent permitted by rule or order
of the SEC exempting the Fund from the limitations imposed by Section
12(d)(1) of the 1940 Act.
3. Lend money or securities except by the purchase of a portion of an
issue of bonds, debentures or other obligations of types commonly
distributed to institutional investors publicly or privately (in the
latter case the investment will be subject to the stated limits on
investments in "restricted securities"), and except by the purchase of
securities subject to repurchase agreements.
4. Concentrate its investment in any one industry, except that the Fund
will invest more than 25% of its total assets in the real estate
industry. This limitation excludes shares of other open-end investment
companies owned by the Fund but includes the Fund's pro rata portion of
the securities and other assets owned by such company.
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<PAGE> 19
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 restrictions as the Fund.
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THE FUND AND ITS MANAGEMENT
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The Fund is an open-end, diversified management investment company,
incorporated as a Maryland corporation on April 14, 1994. A mutual fund
provides, for those who have similar investment goals, a practical and
convenient way to invest in a more diversified portfolio of securities 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 and the Subadviser, both located at 2800 Post
Oak Blvd., Houston, Texas 77056, are responsible for the provision of advisory
services in relation to the Fund's assets. The Adviser also provides
administrative services and manages the Fund's business and affairs. The
Adviser, together with its predecessors, has been in the investment advisory
business since 1926 and has served as investment adviser to the Fund since its
inception. As of March 31, 1995, the Adviser provided investment advice to 47
investment company portfolios with total net assets of approximately $16.4
billion.
The Adviser and the Distributor are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by the Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph I. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald 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 six percent
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.
Hines Realty Advisors provides real estate advisory services to the Adviser
of the Fund. Hines Realty Advisors is a limited partnership among Hines
Holdings, Inc. (as general partner), and Hines 1980 A, Ltd and Gerald D. Hines
(as limited partners). Mr. William S. Wardrop, Jr. is President and Mr. Glenn L.
Lowenstein is Vice President of the Subadviser. Although Hines Realty Advisors
has no previous experience as an investment adviser to mutual funds, affiliates
of the Subadviser have extensive domestic and international experience in owning
and managing real estate. Hines Realty Advisors,
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<PAGE> 20
an affiliate of the Hines real estate organization ("Hines"), provides a
comprehensive evaluation of the real estate market. Founded in 1957, Hines has
proven experience in a full range of real estate services: strategic asset
management, property management, development, marketing and leasing,
acquisition/disposition and financing. Headquartered in Houston, Texas, Hines
has regional offices in New York, San Francisco, Atlanta and Chicago as well as
29 additional submarkets. The firm also has offices in Mexico City, Berlin and
Moscow. Hines Interests owns and/or manages more than 61 million square feet of
prime office, retail and industrial space representing more than 451 projects.
Major projects include: Pennzoil Place in Houston, the Gallerias in Houston and
Dallas, 53rd At Third in New York, 101 California in San Francisco, One Ninety
One Peachtree in Atlanta, Three First National Plaza in Chicago and Huntington
Center in Columbus.
Associates in field offices nationwide generate regional economic analysis
based on demographic factors such as job growth and population movement. Hines
also provides a regional property-type analysis, determining whether the
property -- outlet mall, strip shopping center or apartment complex, among
others -- makes sense in the area.
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 one percent of the Fund's average
daily net assets. This fee is higher than that charged by most other mutual
funds but the Board believes it is justified by the special nature of the Fund
and is not necessarily higher than the fees charged by certain mutual funds with
investment objectives and policies similar to those of the Fund. Under the
Advisory Agreement, the Fund also reimburses the Adviser for the cost of the
Fund's accounting services, which include maintaining its financial books and
records and calculating its daily net asset value. Operating expenses paid by
the Fund include shareholder service agency fees, distribution fees, service
fees, 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.
The Adviser has entered into an investment sub-advisory agreement dated December
20, 1994 (the "Sub-advisory Agreement") with the Subadviser to assist it in
performing its investment advisory functions. The Subadviser is primarily
responsible for the following areas: (i) providing regional economic analysis of
the areas in which properties owned by real estate investment trusts are
located; (ii) analyzing attractiveness of the property-type within the
geographic region; (iii) evaluating and assessing real estate valuation and the
condition of property; (iv) evaluating property managers and sponsors of real
estate investment trusts; and (v) continuously reviewing and monitoring the real
estate investments in the Fund's portfolio. Pursuant to the Sub-advisory
Agreement, the Subadviser receives on an annual basis 50% of the compensation
received by the Adviser. The Adviser and the Subadviser may, from time to time,
agree to waive their respective investment advisory fees or any portion thereof
or elect to reimburse the Fund for ordinary business expenses in excess of an
agreed upon amount.
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<PAGE> 21
The Adviser may utilize at its own expense credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp. (formerly Van Kampen Merritt Investment Advisory
Corp.).
Mary Jayne Maly is primarily responsible for the day-to-day management of
the Fund's investment portfolio. She has served in that capacity since the
inception of the Fund. Ms. Maly is Vice President of the Fund and has been a
portfolio manager with the Adviser since 1992. Prior to that time, Ms. Maly was
a senior equity analyst at Texas Commerce Management Company.
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PURCHASE OF SHARES
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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 are offered continuously for sale by the Distributor and are
available through authorized investment dealers. Initial investments must be at
least $500 and subsequent investments must be at least $25. Both minimums may be
waived by the Distributor for plans involving periodic investments. Shares of
the Fund may be sold in foreign countries where permissible. The Fund and the
Distributor reserve the right to refuse any order for the purchase of shares.
The Fund also reserves the right to suspend the sale of the Fund's shares in
response to conditions in the securities markets or for other reasons.
Shares 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, ACCESS Investor Services, Inc. ("ACCESS"),
P.O. Box 418256, Kansas City, Missouri 64141-9256. 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, (ii) valuing
over-the-counter
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<PAGE> 22
securities for which the last sale price is available from the National
Association of Securities Dealers Automated Quotations ("NASDAQ") at that price,
(iii) unlisted securities and listed securities for which the last sale price is
not available are valued at the last reported bid price, (iv) options and
futures contracts are valued at the last sale price or if no sales are reported,
at the mean between the bid and asked prices, and (v) 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 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.
Generally, the net asset values per share of the Class A, Class B and Class
C shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the next
calculation of net asset value, plus applicable Class A sales charges, after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. Orders
received by dealers after the close of the Exchange are priced based on the next
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
orders received by them to the Distributor so they will be received prior to
such time. Orders of less than $500 are mailed by the dealer and processed at
the offering price next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific class, and (iii) Class B and Class C
shares are subject to a conversion feature. Each class has different exchange
privileges and certain different shareholder service options available. See
"Distribution Plans" and "Shareholder Services -- Exchange Privilege." The net
income attributable to Class B and Class C shares and the dividends payable on
Class B and Class C shares will be reduced by the amount of the distribution fee
and incremental expenses associated with such distribution fees. Sales personnel
of broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling such shares may receive differing compensation
for selling Class A, Class B or Class C shares.
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.
22
<PAGE> 23
The Distributor may from time to time implement programs under which a
broker, dealer or financial intermediary's sales force may be eligible to win
nominal awards for certain sales efforts or under which the Distributor will
reallow to any broker, dealer or financial intermediary that sponsors sales
contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on sales generated by
the broker or dealer during such programs. Also, the Distributor in its
discretion may from time to time, pursuant to objective criteria established by
it, pay fees to, and sponsor business seminars for, qualifying brokers, dealers
or financial intermediaries for certain services or activities which are
primarily intended to result in sales of shares of the Fund. Such fees paid for
such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature.
CLASS A SHARES
The public offering price of Class A shares is the next determined net
asset value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
SIZE OF AS % OF NET AS % OF REALLOWED TO DEALERS
INVESTMENT AMOUNT INVESTED OFFERING PRICE (AS A % OF OFFERING PRICE)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Less than $100,000.... 4.99% 4.75% 4.25%
$100,000 but less than
$250,000............ 3.90% 3.75% 3.25%
$250,000 but less than
$500,000............ 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000.......... 2.04% 2.00% 1.75%
$1,000,000 and over... (see herein) (see herein) (see herein)
- ------------------------------------------------------------------------------
</TABLE>
No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of one percent in the event of certain redemptions within
one year of the purchase. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A commission will be paid to dealers who initiate and are responsible
for purchases of $1 million or more as follows: one percent on sales to $2
million, plus 0.80% on the next million, plus 0.20% on the next $2 million and
0.08% on the excess over $5 million.
In addition to the reallowances from the applicable public offering price
described herein, the Distributor may, from time to time, pay or allow
additional reallowances or
23
<PAGE> 24
promotional incentives, in the form of cash or other compensation, to dealers
that sell shares of the Fund. Dealers which are reallowed all or substantially
all of the sales charges may be deemed to be underwriters for purposes of the
1933 Act.
The Distributor may also pay financial institutions (which may include
banks) and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of 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:
(1) Current or retired Trustees/Directors of funds advised by the Adviser,
Van Kampen American Capital Investment Advisory Corp. or John Govert &
Co. Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any such fund or an affiliate
of such subadviser; and such persons' families and their beneficial
accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and minor children when purchasing for
any accounts they beneficially own, or, in the case of any such
financial institution, when purchasing for retirement plans for such
institution's employees.
(4) Registered investment advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in the Fund alone, or in
any combination of shares of the Fund and shares of certain other
participating American Capital funds as described herein under
"Purchase of Shares -- Class A Shares -- Volume Discounts," during the
13-month period commencing with the first investment pursuant hereto
equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made an amount up to 0.50% of
the amount invested, over a twelve-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
of organizations with retirement plan assets of $10 million or more.
The Distributor may pay commissions of up to one percent for such
purchases.
24
<PAGE> 25
(6) Accounts as to which a bank or broker-dealer charges an account
management fee ("wrap accounts"), provided the bank or broker-dealer
has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to
such purchase.
(8) Full service participant directed profit sharing and money purchase
plans, full service 401(k) plans, or similar full service recordkeeping
programs made available through Van Kampen American Capital Trust
Company with at least 50 eligible employees or investing at least
$250,000 in Participating Funds (as hereinafter defined) or American
Capital Reserve Fund, Inc. ("Reserve"). For such investments the Fund
imposes a contingent deferred sales charge of one percent in the event
of redemptions within one year of the purchase other than redemptions
required to make payments to participants under the terms of the plan.
The contingent deferred sales charge incurred upon certain redemptions
is paid to the Distributor in reimbursement for distribution-related
expenses. A commission will be paid to dealers who initiate and are
responsible for such purchases as follows: one percent on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess
over $10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described 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. ("Equity Income"), American Capital Federal Mortgage
25
<PAGE> 26
Trust ("Federal Mortgage"), American Capital Global Managed Assets Fund, Inc.
("Global Managed"), American Capital Government Securities, Inc., American
Capital Government Target Series ("Government Target"), American Capital Growth
and Income Fund, Inc., American Capital Harbor Fund, Inc., American Capital High
Yield Investments, Inc. ("High Yield"), American Capital Municipal Bond Fund,
Inc. ("Municipal Bond"), American Capital Pace Fund, Inc., American Capital Real
Estate Securities Fund, Inc.("Real Estate"), American Capital Tax-Exempt Trust
("Tax-Exempt"), American Capital Texas Municipal Securities, Inc. ("Texas
Municipal"), American Capital U.S. Government Trust for Income ("Government
Trust"), American Capital Utilities Income Fund, Inc. ("Utilities Income") and
American Capital World Portfolio Series, Inc. ("World Portfolio"). A person
eligible for a volume discount includes an individual; members of a family unit
comprising husband, wife and minor children; or a trustee or other fiduciary
purchasing for a single fiduciary account.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the
preceding table may also be determined by combining the amount being invested in
shares of the Participating Funds plus the current offering price of all shares
of the Participating Funds which have been previously purchased and are still
owned. Shares previously purchased are only taken into account, however, if the
Distributor is notified by the investor or the investor's dealer at the time an
order is placed for a purchase which would qualify for a reduced sales charge on
the basis of previous purchases and if sufficient information is furnished to
permit confirmation of such purchases.
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
26
<PAGE> 27
of the then current market value or the cost of the shares being redeemed.
Accordingly, no sales charge is imposed on increases in net asset value above
the initial purchase price. In addition, no charge is assessed on shares derived
from reinvestment of dividends or capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies
depending on the number of years from the time of payment for the purchase of
Class B shares until the time of redemption of such shares. Solely for purposes
of determining the number of years from the time of any payment for the
purchases of shares, all payments during a month are aggregated and deemed to
have been made on the last day of the month.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
- ---------------------------------------------------------------------------
First..................................... 4%
Second.................................... 4%
Third..................................... 3%
Fourth.................................... 2.5%
Fifth..................................... 1.5%
Sixth..................................... None
</TABLE>
- ------------------------------------------------------------------------------
In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first, of any shares in the shareholder's Fund account that are not subject
to a contingent deferred sales charge, second, of shares held for over five
years or shares acquired pursuant to reinvestment of dividends or distributions
and third of shares held longest during the five-year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of four percent (the applicable rate in the second year after purchase).
A commission or transaction fee of four percent of the purchase amount will
be paid to broker-dealers and other Service Organizations at the time of
purchase. Additionally, the Distributor may, from time to time, pay additional
promotional incentives in the form of cash or other compensation to Service
Organizations that sell Class B shares of the Fund.
27
<PAGE> 28
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of one percent. The charge is assessed on an
amount equal to the lesser of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no charge is
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of one percent of the purchase amount will
be paid to broker-dealers and other Service Organizations at the time of
purchase. Broker-dealers and other Service Organizations will also be paid
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares for the second through tenth year after
purchase. Additionally, the Distributor may, from time to time, pay additional
promotional incentives in the form of cash or other compensation to Service
Organizations that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B
and Class C shares (i) following the death or disability (as defined in the
Code) of a shareholder, (ii) in connection with certain distributions from an
IRA or other retirement plan, (iii) pursuant to the Fund's systematic withdrawal
plan but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
- ------------------------------------------------------------------------------
DISTRIBUTION PLANS
- ------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment
company to directly or indirectly pay expenses associated with the distribution
of its shares ("distribution expenses") and servicing its shareholders in
accordance with a plan adopted by the investment company's board of directors
and approved by its shareholders. Pursuant to such Rule, the Directors of the
Fund, and the shareholders of each class have adopted three Distribution Plans
hereinafter referred to as the "Class A Plan," the "Class B Plan" and the "Class
C Plan." Each Distribution Plan is in compliance with the
28
<PAGE> 29
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 or Class C
shares to reimburse the Distributor for service fees paid by it to Service
Organizations and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to four
percent of the purchase price of Class B shares purchased by the clients of
broker-dealers and other Service Organizations, and (ii) other distribution
expenses as described in the Statement of Additional Information. Under the
Class C Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class C shares as reimbursements for (i) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares, and (ii) other distribution expenses as
described in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Directors of the Fund determined that there was a reasonable likelihood that
such Plans would benefit the Fund and its shareholders. Information with respect
to distribution and service revenues and expenses is presented to the Directors
each year for their consideration in connection with their deliberations as to
the continuance of the Distribution Plans. In their review of the Distribution
Plans, the Directors are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be
paid from the Class A service fee 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
29
<PAGE> 30
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 and may be reimbursed by the Fund or its shareholders from payments
received through contingent deferred sales charges in future years and from
payments under the Class B Plan and Class C Plan so long as such Plans are in
effect. For example, if in a fiscal year the Distributor incurred distribution
expenses under the Class B Plan of $1 million, of which $500,000 was recovered
in the form of contingent deferred sales charges paid by investors and $400,000
was reimbursed in the form of payments made by the Fund to the Distributor under
the Class B Plan, the balance of $100,000, would be subject to recovery in
future fiscal years from such sources. For the plan year ended June 30, 1994,
the unreimbursed expenses incurred by the Distributor under the Class B Plan and
carried forward were approximately $4,221 or 840.8% of the Class B shares'
average daily net assets. The unreimbursed expenses incurred by the Distributor
under the Class C Plan and carried forward were approximately $4,206 or 837.9%
of the Class C shares' average daily net assets. For the period ended July 31,
1994, the unreimbursed expenses incurred by the Distributor under the Class B
Plan and carried forward were approximately $40,831 or 2.3% of the Class B
shares' average daily net assets. The unreimbursed expenses incurred by the
Distributor under the Class C Plan and carried forward were approximately $6,428
or 1.1% of the Class C shares' average daily net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the
Fund would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investments in its shares at little or no extra cost to the investor. Below is a
description of such services.
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
30
<PAGE> 31
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.
Both accounts must be of the same class and of the same type, either non-
retirement or retirement. Any two non-retirement accounts can be used. If the
accounts are retirement accounts, they must both be for the same class and of
the same type of retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual. If a qualified, pre-existing account does
not exist, the shareholder must establish a new account subject to minimum
investment and other requirements of the fund into which distributions would be
invested. Distributions are invested into the selected fund at its net asset
value as of the payable date of the distribution only if shares of such selected
fund have been registered in the investor's state.
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 and
shares of Corporate Bond, Federal Mortgage, Global Managed, Government Trust,
High Yield, Municipal
31
<PAGE> 32
Bond, Tax-Exempt, Texas Municipal, Utilities Income and the Global Government
Securities Fund of World Portfolio are subject to a 30-day holding period
requirement. Shares of Government Target may be exchanged for Class A shares of
the Fund without sales charge. Class A shares of Reserve that were not acquired
in exchange for Class B or Class C shares of a Participating Fund may be
exchanged for Class A shares of the Fund upon payment of the excess, if any, of
the sales charge rate applicable to the shares being acquired over the sales
charge rate previously paid. Shares of Reserve acquired through an exchange of
Class B or Class C shares may be exchanged only for the same class of shares of
a Participating Fund without incurring a contingent deferred sales charge.
Shares of a Participating Fund or Reserve may be exchanged for shares of any
other Participating Fund if shares of that Participating Fund are available for
sale; however, during periods of suspension of sales, shares of a Participating
Fund may be available for sale only to existing shareholders of a Participating
Fund. Additional funds may be added from time to time as a Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other
American Capital fund that offers such 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 or Class C shareholders would remain subject to the contingent deferred
sales charge imposed by the original fund upon their redemption from the
American Capital complex of funds. The contingent deferred sales charge is based
on the holding period requirements of the original fund.
Shares of the fund to be acquired must be registered for sale in the
investor's state and an exchange fee, currently $5 per transaction, is charged
by ACCESS except as described herein under "Systematic Exchange" and "Automatic
Exchange." Exchanges of shares are sales and may result in a gain or loss for
federal income tax purposes, although if the shares exchanged have been held for
less than 91 days, the sales charge paid on such shares is not included in the
tax basis of the exchanged shares, but is carried over and included in the tax
basis of the shares acquired. See the Statement of Additional Information 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
32
<PAGE> 33
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed. Exchanges are effected at the net asset value per share next
calculated after the request is received in good order with adjustment for any
additional sales charge. See both "Purchase of Shares" and "Redemption of
Shares." If the exchanging shareholder does not have an account in the fund
whose shares are being acquired, a new account will be established with the same
registration, dividend and capital gain options (except fund to fund dividends)
and dealer of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or reinvest dividends from the new account
into another fund, however, an exchanging shareholder must file a specific
written request. The Fund reserves the right to reject any order to acquire its
shares through exchange, or otherwise to modify, restrict or terminate the
exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional 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, semi-annual 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,
semi-annual 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
33
<PAGE> 34
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.
- ------------------------------------------------------------------------------
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 one percent may be imposed on certain redemptions of
Class A shares made within one year of purchase for investments of $1 million or
more and for certain qualified 401(k) retirement plans. The contingent deferred
sales charge incurred upon redemption is paid to the Distributor in
reimbursement for distribution-related expenses. See "Purchase of Shares." A
custodian of a retirement plan account may charge fees based on the custodian's
fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 60 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of
34
<PAGE> 35
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 amount as
specified by the Board of Directors. At least 60 days advance 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 involuntary redemption may
only occur if the shareholder account is less than the minimum initial
investment due to shareholder redemptions. Any applicable contingent deferred
sales charge will be deducted from the proceeds of this redemption.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth above, the Fund permits shareholders and the dealer
representative of record to redeem shares by telephone and to have redemption
proceeds sent to the address of record for the account or to a bank account of
record as described below. To establish such privilege, a shareholder must
complete the appropriate section of the application form in this Prospectus or
call the Fund at (800) 421-5666 to request that a copy of the Telephone
Redemption Authorization form be sent to them for completion. To redeem shares,
contact the telephone transaction line at (800) 421-5684. Van Kampen American
Capital and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. ACCESS will record any calls.
35
<PAGE> 36
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. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed quarterly as dividends to shareholders. Dividends are
automatically applied to purchase additional shares of the Fund at the next
determined net asset value. See "Shareholder Services -- Reinvestment Plan."
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the distribution fees
and higher incremental transfer agency fees applicable to such classes of
shares.
36
<PAGE> 37
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 intends to qualify as a "regulated investment company"
under Subchapter M of 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. The Fund's policy is to
distribute to its Class A, Class B and Class C shareholders substantially all of
its taxable net income quarterly. 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. The real estate investment trust securities
that the Fund will primarily invest in customarily pay tax basis return of
capital distributions, and these distributions will be received by the Fund.
Generally, your tax basis in your Fund shares will be reduced to the extent that
an amount distributed to you is treated as a return of capital.
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.
Distributions by the Fund of the dividend income it receives from U.S.
domestic corporations, if any, may qualify for the corporate dividends-received
deduction for corporate shareholders, subject to minimum holding requirements
and debt-financing restrictions under the Code.
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
37
<PAGE> 38
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 United States may reduce or eliminate such taxes. Investors
may be entitled to claim United States foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code. If
more than 50% in value of the Fund's total assets at the close of its fiscal
year consists of securities of foreign issuers, the Fund will be eligible, and
may file elections with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their respective pro rata
portions of such taxes in their United States income tax returns as gross
income, treat such respective pro rata portions as taxes paid by them, and
deduct such respective pro rata portions in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their United States
income taxes. The Fund will report annually to its shareholders the amount per
share of such withholding.
Under Code Section 988, foreign currency gains or losses from certain
forward contracts not traded in the interbank market are typically treated as
ordinary income or loss. Such income or loss may increase or decrease (or
possibly eliminate) the Fund's income available for distribution. If, under the
rules governing the tax treatment of foreign currency gains and losses, the
Fund's income available for distribution is decreased or eliminated, all or a
portion of the dividends declared by the Fund may be treated for federal income
tax purposes as a return of capital or, in some circumstances, as capital gain.
Generally, your tax basis in your Fund shares will be reduced to the extent that
an amount distributed to you is treated as a return of capital.
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 or receipt of
dividends and distributions from the Fund.
- ------------------------------------------------------------------------------
PRIOR PERFORMANCE INFORMATION
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one, five and ten-year periods 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
38
<PAGE> 39
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, NAREIT Equity REIT Index, Lehman Brothers REIT
Index, Salomon Brothers High Grade Bond 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.
39
<PAGE> 40
The Fund's Annual Report contains additional performance information. A
copy of the Annual Report may be obtained, without charge, by calling or writing
the Fund at the telephone number and address printed on the cover page of this
prospectus.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
ORGANIZATION OF THE FUND. The Fund was incorporated in Maryland on April
14, 1994. 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 distribution fees and/or service fees related
to each class of shares are borne solely by that class, and each class of shares
has exclusive voting rights with respect to provisions of the Fund's Class A
Plan, Class B Plan and Class C Plan which pertain to that class. An order has
been received from the SEC permitting the issuance and sale of multiple classes
of shares representing interests in the Fund's existing portfolio. Shares issued
are fully paid, non-assessable and have no preemptive or conversion rights.
VOTING RIGHTS. The Bylaws of the Fund provide that shareholder meetings are
required to be held to elect directors only when required by the 1940 Act. Such
event is likely to occur infrequently. In addition, a special meeting of the
shareholders will be called, if requested by the holders of 10% of the Fund's
outstanding shares, for the purposes, and to act upon the matters, specified in
the request (which may include election or removal of directors). When matters
are submitted for a shareholder vote, each shareholder is entitled to one vote
for each share owned. The shares have non-cumulative voting rights, which means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and in such
an event the holders of the remaining less than 50% of the shares voting for the
election of directors will not be able to elect any person to the Board of
Directors.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, officers and employees to
buy and sell securities for their personal accounts subject to certain
restrictions. Persons with access to certain sensitive information are subject
to pre-clearance and other procedures designed to prevent conflicts of interest.
SHAREHOLDER INQUIRIES. Shareholder inquiries should be directed to the Fund
at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
SHAREHOLDER SERVICE AGENT. ACCESS, P.O. Box 418256, Kansas City, Missouri
64141-9256, 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.
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<PAGE> 41
- ------------------------------------------------------------------------------
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.
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<PAGE> 42
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.
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.
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<PAGE> 43
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.
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<PAGE> 44
BACKUP WITHHOLDING INFORMATION
STEP 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies with
the following guidelines:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Account Type Give Social Security Number or Tax
Identification Number of:
- --------------------------------------------------------------------------------
Individual Individual
- --------------------------------------------------------------------------------
Joint (or Joint Tenant) Owner who will be paying tax
- --------------------------------------------------------------------------------
Uniform Gifts to Minors Minor
- --------------------------------------------------------------------------------
Legal Guardian Ward, Minor or Incompetent
- --------------------------------------------------------------------------------
Sole Proprietor Owner of Business
- --------------------------------------------------------------------------------
Trust, Estate, Pension
Plan Trust Trust, Estate, Pension Plan Trust (NOT
personal TIN of fiduciary)
- --------------------------------------------------------------------------------
Corporation, Partnership,
Other Organization Corporation, Partnership, Other
Organization
- --------------------------------------------------------------------------------
Broker/Nominee Broker/Nominee
- --------------------------------------------------------------------------------
</TABLE>
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> 45
AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND, INC.
PROSPECTUS
May 1, 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
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, MO 64141-9256
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana
Houston, TX 77002
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Inquiries concerning transfer of
registration, distributions, redemptions
and shareholder service should be
directed to the Shareholder Service Agent,
ACCESS Investor Services, Inc.
(ACCESS), P.O. Box 418256,
Kansas City, MO 64141-9256.
Inquiries concerning sales should be
directed to the Distributor,
Van Kampen American Capital Distributors, Inc.,
One Parkview Plaza
Oakbrook Terrace, IL 60181
American Capital C/O ACCESS
Real Estate P.O. Box 418256
Securities, Fund, Inc. Kansas City, MO 64141-9256
For investors seeking protection
of capital and current income
through investments in money
market instruments.
[AMERICAN CAPITAL LOGO]
PRINTED MATTER
Printed in U.S.A./023 PRO-001
<PAGE> 46
PART B: STATEMENT OF ADDITIONAL INFORMATION
AMERICAN CAPITAL REAL ESTATE SECURITIES FUND, INC.
MAY 1, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated May 1, 1995.
A Prospectus may be obtained without charge by calling or writing Van Kampen
American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181 at (800) 421-5666.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
INVESTMENT POLICIES AND TECHNIQUES.................................................... 3
INVESTMENT RESTRICTIONS............................................................... 11
DIRECTORS AND EXECUTIVE OFFICERS...................................................... 13
INVESTMENT ADVISORY AGREEMENTS........................................................ 16
DISTRIBUTOR........................................................................... 17
DISTRIBUTION PLANS.................................................................... 17
TRANSFER AGENT........................................................................ 19
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 19
DETERMINATION OF NET ASSET VALUE...................................................... 20
PURCHASE AND REDEMPTION OF SHARES..................................................... 21
EXCHANGE PRIVILEGE.................................................................... 24
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 25
PRIOR PERFORMANCE INFORMATION......................................................... 27
OTHER INFORMATION..................................................................... 28
FINANCIAL STATEMENTS.................................................................. 28
</TABLE>
<PAGE> 47
GENERAL INFORMATION
American Capital Real Estate Securities Fund, Inc. (the "Fund") was
incorporated in Maryland on April 14, 1994.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D 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 six percent
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.
Hines Interests Realty Advisors Limited Partnership (the "Subadviser") is a
limited partnership among Hines Holdings, Inc. (as general partner), and Hines
1980 A, Ltd. and Gerald D. Hines (as limited partners).
As of April 19, 1995, no person was known by the Fund to own beneficially
or to hold of record as much as five percent of any class of its outstanding
shares, except that the Adviser held beneficially and of record the following:
<TABLE>
<CAPTION>
AMOUNT AND NATURE CLASS
NAME AND ADDRESS OF OWNERSHIP AT OF PERCENTAGE
OF HOLDER APRIL 19, 1995 SHARES OWNERSHIP
----------------------------------------- ------------------ -------- ---------
<S> <C> <C> <C>
Van Kampen American Capital Asset 54,543.788 shares Class C 31.67%
Management, Inc.
2800 Post Oak Blvd.
Houston, TX 77056
Hines Interests Realty Advisers Ltd. 52,854.123 shares Class A 8.38%
Partnership
2800 Post Oak Blvd.
Houston, Texas 77056-6106
Donaldson Lufkin 20,964 shares Class C 12.17%
1 Pershing Plaza, 5th Floor
Jersey City, NJ 07399-0001
Van Kampen American Capital Trust 73,198.732 shares Class A 11.60%
Company 107,139.563 shares Class B 9.37%
2800 Post Oak Blvd. 9,471.605 shares Class C 5.50%
Houston, Texas 77056
Merrill Lynch Pierce Fenner 53,117 shares Class A 8.42%
P.O. Box 45286 224,394 shares Class B 19.63%
Jacksonville, FL 32232-5286
Smith Barney Inc. 45,601 shares Class A 7.23%
388 Greenwich Street, 11th Floor 188,707 shares Class B 16.51%
New York, NY 10013-2375 13,712 shares Class C 7.96%
</TABLE>
(Table continued on following page)
2
<PAGE> 48
<TABLE>
<CAPTION>
AMOUNT AND NATURE CLASS
NAME AND ADDRESS OF OWNERSHIP AT OF PERCENTAGE
OF HOLDER APRIL 19, 1995 SHARES OWNERSHIP
----------------------------------------- ------------------ -------- ---------
<S> <C> <C> <C>
Robinson-Humphrey 109,376 shares Class B 9.57%
388 Greenwich Street, 11th Floor
New York, NY 10013-2375
PaineWebber Inc. 19,454 shares Class C 7.96%
1285 Avenue of The Americas
15th Floor
New York, NY 10019
First Southwest Company 60,294 shares Class A 9.55%
1700 Pacific Ave.
500 First City C.
Dallas, TX 75201
</TABLE>
The shares held by American Capital Trust Company were held of record for
certain employee benefits and individual retirement accounts.
INVESTMENT POLICIES AND TECHNIQUES
As its primary objective, the Fund seeks long-term growth of capital by
investing principally in securities of companies operating in the real estate
industry. Current income is a secondary consideration. 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.
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.
SELLING CALL AND PUT OPTIONS
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return or total return than would be
realized on the underlying securities alone.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund sells call options
either on a covered basis or for cross-hedging purposes. A call option is
covered if, at all times during the option period, the Fund would own or have
the right to acquire securities of the type that it would be obligated to
deliver if any outstanding option were exercised. An option is for cross-hedging
purposes if it is not covered but is designed to provide a hedge against a
security which the Fund owns or has the right to acquire. In such circumstances,
the Fund collateralizes the option by maintaining in a segregated account with
the Fund's Custodian, cash, cash equivalents or high quality, liquid debt
securities in an amount not less than the market value of the underlying
security, marked to market daily, while the option is outstanding.
3
<PAGE> 49
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund sells put options only on a
secured basis, which means that, at all times during the option period, the Fund
would maintain in a segregated account with its Custodian cash, cash equivalents
or high quality, liquid debt securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a seller of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as seller 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 seller, 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 Selling Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option 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.
4
<PAGE> 50
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 seller 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. The Fund may sell or purchase options which are listed on an exchange
as well as options which are traded over-the-counter.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES
Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the Exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, sellers 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 seller 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.
5
<PAGE> 51
FOREIGN CURRENCY OPTIONS
The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than five percent of the Fund's net assets at
any given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the Fund from time to
time and over-the-counter options may also be purchased, but only when the
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 Options on Futures Contracts" 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
6
<PAGE> 52
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.
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, currency or index the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation, or no correlation, between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities, currency or index upon which the
futures contract is based. If the price of the futures contract moves less than
the price of the securities being hedged, the hedge will not be fully effective.
To compensate for 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, currency or
7
<PAGE> 53
index underlying the futures contract. Conversely, the Fund could buy or sell
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, currency or
index underlying the futures contract. It is also possible that the value of
futures contracts held by the Fund could decline at the same time as portfolio
securities being hedged; if this occurred, the Fund would lose money on the
futures contract in addition to suffering a decline in value in the portfolio
securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities, currency 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 to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed five percent of the fair market value of the Fund's assets. In
order to prevent leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the Custodian.
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 sold 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.
8
<PAGE> 54
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. Option on futures contracts to be sold or purchased by the
Fund will be traded on United States or foreign exchange or over-the-counter.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and sell options on futures contracts. Options
on futures contracts to be sold or purchased by the Fund will be traded on
United States or foreign exchanges or over-the-counter. 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 sell 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 or in the price of the underlying
security, when the use of an option on a future would result in a loss to the
Fund when the use of a future would not.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES
Unlike transactions entered into by the Fund in futures contracts, options
on foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) by the Securities and Exchange Commission ("SEC"). To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. Similarly, options on
currencies may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could, therefore, continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option seller and a trader of forward contracts could
lose
9
<PAGE> 55
amounts substantially in excess of their initial investments, due to the margin
and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the Fund
to liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
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 or currency subject to the Forward Commitment and the securities or
currency held in the segregated account may fluctuate, the use of Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities or currency subject to the Forward Commitment.
A Forward Commitment sale is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in value of a security or
currency 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 or currency 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 foregoes or
reduces the potential for both gain and loss in the security which is being
hedged by the Forward Commitment sale. See the Prospectus for further
information.
10
<PAGE> 56
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic or foreign
banks or broker-dealers deemed to be creditworthy by the Adviser under
guidelines approved by the Board of Directors. A repurchase agreement is a
short-term investment in which the purchaser (i.e., the Fund) acquires ownership
of a debt security and the seller agrees to repurchase the obligation at a
future time and set price, usually not more than seven days from the date of
purchase, thereby determining the yield during the purchaser's holding period.
Repurchase agreements are fully collateralized by the underlying debt securities
and are considered to be loans under the Investment Company Act of 1940, as
amended ("1940 Act"). The Fund pays for such securities only upon physical
delivery or evidence of book entry transfer to the account of a custodian or
bank acting as agent. The seller under a repurchase agreement will be required
to maintain the value of the underlying securities marked to market daily at not
less than the repurchase price. The underlying securities (normally securities
of the U.S. Government, or its agencies and instrumentalities), may have
maturity dates exceeding one year. The Fund does not bear the risk of a decline
in value of the underlying securities unless the seller defaults under its
repurchase obligation. See "Investment Practices and Restrictions -- Repurchase
Agreements" in the Prospectus for further information.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without approval by the holders of a majority of its outstanding shares. Such
majority is defined as the lesser of (i) 67% or more of the voting securities
present at the meeting, if the holders of more than 50% of the outstanding
voting securities of the Fund are present or represented by proxy; or (ii) more
than 50% of the Fund's outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed
to be an underwriter under the federal securities laws.
2. With respect to 75% of its total assets, 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
10% of the outstanding voting securities of any one issuer. Neither
limitation shall apply to the acquisition of shares of other open-end
investment companies to the extent permitted by rule or order of the
SEC exempting the Fund from the limitations imposed by Section 12(d)(1)
of the 1940 Act.
3. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than 10% of its net assets in connection
with permissible borrowings or purchase additional securities when
money borrowed exceeds five percent of its net assets. Margin deposits
or payments in connection with the writing of options, or in connection
with the purchase or sale of forward contracts, futures, foreign
currency futures and related options, are not deemed to be a pledge or
other encumbrance.
4. Lend money or securities except by the purchase of a portion of an
issue of bonds, debentures or other obligations of types commonly
distributed to institutional investors publicly or privately (in the
latter case the investment will be subject to the stated limits on
investments in "restricted securities"), and except by the purchase of
securities subject to repurchase agreements.
5. Buy or sell real estate including real estate limited partnerships,
provided that the foregoing prohibition does not apply to a purchase
and sale of (i) securities which are secured by real estate, (ii)
securities representing interests in real estate, and (iii) securities
of companies operating in the real estate industry, including real
estate investment trusts. The Fund may hold and sell real estate
acquired as a result of the ownership of its securities.
6. Invest in commodities or commodity contracts, except that the Fund may
enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related
options and forward contracts.
11
<PAGE> 57
7. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts, forward contracts, forward commitments and other investment
strategies and instruments that would be considered "senior securities"
but for the maintenance by the Fund of a segregated account with its
custodian or some other form of "cover."
8. Concentrate its investment in any one industry, except that the Fund
will invest more than 25% of its total assets in the real estate
industry. This limitation excludes shares of other open-end investment
companies owned by the Fund but includes the Fund's pro rata portion of
the securities and other assets owned by any such company.
9. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or
offsetting purchase transactions with respect to such options, (b)
purchase and sell options to the extent that the premiums paid for all
such options owned at any time do not exceed 10% of its total assets
and (c) engage in transactions in futures contracts and related options
transactions provided that such transactions are entered into for bona
fide hedging purposes (or meet certain conditions as specified in CFTC
regulations), and 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.
10. The Fund may not make short sales of securities, unless at the time of
the sale it owns or has the right to acquire an equal amount of such
securities; provided that this prohibition does not apply to the
writing of options or the sale of forward contracts, futures, foreign
currency futures or related options.
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Fund is subject to the following policies
which may be amended by the Fund's Board of Directors and which apply at the
time of purchase of portfolio securities.
1. The Fund may not make investments for the purpose of exercising control
or management although the Fund retains the right to vote securities
held by it.
2. The Fund may not purchase securities on margin but the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities. The deposit or payment by the Fund
of initial or maintenance margin in connection with forward contracts,
futures, foreign currency futures or related options is not considered
the purchase of a security on margin.
3. The Fund may not invest in the securities of other open-end investment
companies, or invest in the securities of closed-end investment
companies except through purchase in the open market in a transaction
involving no commission or profit to a sponsor or dealer (other than
the customary broker's commission) or as part of a merger,
consolidation or other acquisition except to acquire shares of other
open-end investment companies to the extent permitted by rule or order
of the SEC exempting the Fund from the limitations imposed by Section
12(d)(1) of the 1940 Act.
4. The Fund may not invest more than five percent of its net assets in
warrants or rights valued at the lower of cost or market, nor more than
two percent of its net assets in warrants or rights (valued on such
basis) which are not listed on the New York or American Stock
Exchanges. Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitation.
5. The Fund may not invest in securities of any company if any officer or
director of the Fund or of the Adviser owns more than one-half of one
percent of the outstanding securities of such company, and such
officers and directors who own more than one-half of one percent own in
the aggregate more than five percent of the outstanding securities of
such issuer.
6. The Fund may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Fund may acquire securities of public companies
which themselves are engaged in such activities.
12
<PAGE> 58
7. The Fund may not invest more than five percent of its total assets in
securities of unseasoned issuers which have been in operation directly
or through predecessors for less than three years, provided, however,
that this limitation excludes shares of other open-end investment
companies owned by the Fund but includes the Fund's pro rata portion of
the securities and other assets owned by any such company.
8. The Fund may not purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets, taken at current value, would
be invested in securities that are illiquid by virtue of the absence of
a readily available market. This policy does not apply to restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 which the Board of Directors or the Adviser
under Board approved guidelines, may determine are liquid nor does it
apply to other securities for which, notwithstanding legal or
contractual restrictions on resale, a liquid market exists.
The Fund 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 restrictions as the Fund.
The Fund has made an undertaking with certain states to provide written
notification to shareholders of any change in its investment objective at least
30 days prior to implementing such change. The Fund has undertaken with a
certain state that it will engage in option transactions in compliance with the
provisions of certain state regulations except that the Fund may engage in
over-the-counter options, but only when the desired options are not traded on
exchanges and will engage in these transactions only with dealers in primary
securities approved by the Federal Reserve Bank of New York and who can
establish pricing and liquidity for these instruments.
The Fund has undertaken with a certain state to invest no more than 15% of
its total assets in the securities of unseasoned issuers, restricted securities
or investment companies; restricted securities eligible for resale pursuant to
Rule 144A are included in this limitation. With respect to another state, the
Fund has undertaken not to invest more than 10% of its net assets in restricted
securities; restricted securities eligible for resale pursuant to Rule 144A are
not included in this limitation. In addition, the Fund has undertaken that in
the event it converts to a master-feeder structure it will comply with the NASAA
Guidelines for Registration of a Master Fund/Feeder Fund. The Fund has
undertaken with a certain state to invest no more than 15% of its total assets
in non self-administered and non self-managed equity 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.
FERNANDO SISTO, Chairman of the Board and Director. Stevens Institute of
Technology, Castle Point Station, Hoboken, New Jersey 07030-5991. Dean of
Graduate School, George M. Bond Professor and formerly 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)
13
<PAGE> 59
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; Vice Chairman of the Board of Trustees, 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 MALY, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Portfolio Manager of the Adviser; formerly senior equity analyst at Texas
Commerce Management Company.(4)
HUEY P. FALGOUT, JR., Assistant Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Staff Attorney of the Adviser; former associate with Johnson and
Gibbs.(4)
NORI L. GABERT, Vice President and Secretary. 2800 Post Oak Blvd., Houston,
Texas 77056. Vice President, Associate General Counsel and Corporate Secretary
of the Adviser.(4)
JAMES GILLIGAN, Vice President. 2800 Post Oak Blvd., Houston, Texas 77056.
Vice President -- Portfolio Manager of the Adviser. Mr. Gilligan also serves as
Vice President of American Capital Growth and Income Fund, Inc. Formerly
Security Analyst of the Adviser.(4)
TANYA M. LODEN, Vice President and Controller. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Controller of most of the investment
companies advised by the Adviser; formerly Tax Manager/ Assistant Controller.(4)
DENNIS J. MCDONNELL, Vice President. One Parkview Plaza, Oakbrook Terrace,
IL 60181. Director of VK/AC Holding, Inc. and VKAC, President, Chief Operating
Officer and Director of Van Kampen American Capital Investment Advisory Corp.;
and Director of McCarthy, Crisanti & Maffei, Inc.(4)
CURTIS W. MORELL, Vice President and Treasurer. 2800 Post Oak Blvd.,
Houston, Texas 77056. Vice President and Treasurer of most of the investment
companies advised by the Adviser.(4)
RONALD A. NYBERG, Vice President. One Parkview Plaza, Oakbrook Terrace, IL
60181. Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc., Vice President of ACCESS and Van Kampen American Services Inc., Vice
President, General Counsel and Assistant Secretary of Van Kampen American
Capital Investment Advisory Corp., Senior Vice President and General Counsel of
the Adviser, Executive Vice President and General Counsel and Director of the
Distributors.(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)
14
<PAGE> 60
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; Executive Vice President and Director of ACCESS.(4)
- ---------------
* Director who is an interested person of the Adviser and of the Fund within
the meaning of the 1940 Act by virtue of his affiliation with the Adviser.
** Director who is an interested person of the Fund and may be an interested
person of the Adviser within the meaning of the 1940 Act by virtue of his
affiliation with legal counsel of the Fund.
(1) Also a director or trustee of American Capital Comstock Fund, Inc., American
Capital Corporate Bond Fund, Inc., American Capital Emerging Growth Fund,
Inc., American Capital Enterprise Fund, Inc., American Capital Equity Income
Fund, Inc., American Capital Federal Mortgage Trust, American Capital Global
Managed Assets Fund, Inc., American Capital Government Securities, Inc.,
American Capital Government Target Series, American Capital Growth and
Income Fund, Inc., American Capital Harbor Fund, Inc., American Capital High
Yield Investments, Inc., American Capital Life Investment Trust, American
Capital Municipal Bond Fund, Inc., American Capital Pace Fund, Inc.,
American Capital Reserve Fund, Inc., American Capital Small Capitalization
Fund, Inc., American Capital Tax-Exempt Trust, American Capital Texas
Municipal Securities, Inc., American Capital U.S. Government Trust for
Income, American Capital Utilities Income Fund, Inc. and American Capital
World Portfolio Series, Inc.
(2) A director/trustee/managing general partner of American Capital Bond Fund,
Inc., American Capital Convertible Securities, Inc., American Capital
Exchange Fund, and American Capital Income Trust, American Capital Exchange
Fund, investment companies advised by the Adviser, and a trustee of Common
Sense Trust, an open-end investment company for which the Adviser serves as
adviser for nine of the portfolios.
(3) A director of Source Capital, Inc., a closed-end investment company not
advised by the Adviser.
(4) An officer and/or Director/Trustee of other investment companies advised or
subadvised by the Adviser.
(5) A director of FPA Capital Fund, Inc., FPA New Income, Inc. and FPA Perennial
Fund, Inc., investment companies not advised by the Adviser and TCW
Convertible Securities Fund, Inc., a closed-end investment company not
advised by the Adviser.
The Executive Committee, consisting of Messrs. Hilsman, Powell, Sheehan and
Sisto, may act for the Board of Directors between Board meetings except where
board action is required by law.
The directors and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. During the period June 9, 1994 through
December 31, 1994, the Directors not affiliated with the Adviser or its parent
received as a group $2,585 in director's fees from the Fund for certain
out-of-pocket expenses. Such directors also received compensation for serving as
directors or trustees of other investment companies advised by the Adviser as
identified in the notes to the foregoing table. For legal services rendered
during the period June 9, 1994 through December 31, 1994, the Fund paid legal
fees of $1,900 to the law firm of O'Melveny & Myers, of which Mr. Sheehan is of
counsel. The firm also serves as legal counsel to the American Capital funds
listed in Footnote 1 above.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Directors serve as directors or trustees
noted in Footnote 1 above. The compensation shown for the Fund and the total
compensation shown for the Fund and other related mutual funds are for the year
ended December 31, 1994, is set forth below. Mr. Powell is not compensated for
his service as Director because of his affiliation with the Advisor.
15
<PAGE> 61
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED AND FUND
FROM AS PART OF FUND COMPLEX PAID TO
NAME OF PERSONS REGISTRANT EXPENSES DIRECTORS(1)(4)
- ------------------------------------------------- ------------ ---------------- ---------------
<S> <C> <C> <C>
J. Miles Branagan................................ $800 -0- $64,000
Dr. Richard E. Caruso(2)......................... 780 -0- 64,000
Dr. Roger Hilsman................................ 820 -0- 66,000
David Rees....................................... 800 -0- 64,000
Lawrence J. Sheehan.............................. 820 -0- 67,000
Dr. Fernando Sisto............................... 885 -0- 82,000
William S. Woodside(3)........................... 300 -0- 54,000
</TABLE>
- ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $780 for Dr. Caruso.
(3) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, of the amount reflected in the fourth column, $17,000
was paid by the registrant and the fund complex in the aggregate.
(4) Includes the following amounts for which the various funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000, Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in footnote 3 above).
INVESTMENT ADVISORY AGREEMENTS
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 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 an annual rate of one percent of the average daily net assets of
the Fund.
The Adviser has entered into an investment sub-advisory agreement dated
December 20, 1994 (the "Sub-advisory Agreement"), with the Subadviser to assist
it in performing its investment advisory functions. The Subadviser will be
primarily responsible for the following areas: (i) providing regional economic
analysis of the areas in which properties owned by real estate investment trusts
are located; (ii) analyzing attractiveness of the property-type within the
geographic region; (iii) evaluating and assessing real estate valuation and
condition of property; (iv) evaluating property managers and sponsors of real
estate investment trusts; and (v) continuously reviewing and monitoring the
investments in the Fund's portfolio. For its services, the Subadviser receives
from the Adviser a fee at the annual rate of 50% of the compensation received by
the Adviser. The Adviser and Subadviser are hereinafter sometimes referred to as
the "Advisers."
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
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<PAGE> 62
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.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each business day during a given calendar month. Such fee is payable for
each calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any direct
or indirect majority owned subsidiary of VK/AC Holding, Inc., in connection with
the purchase and sale of portfolio investments of the Fund, less any direct
expenses incurred by such subsidiary of VK/AC Holding, Inc. in connection with
obtaining such payments. The Adviser agrees to use its best efforts to recapture
tender solicitation fees and exchange offer fees for the Fund's benefit, and to
advise the Board of Directors of the Fund of any other commissions, fees,
brokerage or similar payments which may be possible under applicable laws for
the Adviser or any 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.
Currently, the most restrictive applicable limitations are 2.5% of the
first $30 million, two percent of the next $70 million, and 1.5% of the
remaining average net assets.
The Advisory Agreement has an initial term of two years and thereafter may
be continued from year to year if specifically approved at least annually (a)(i)
by the 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.
For the period June 9, 1994 through December 31, 1994 the Fund paid no
management fees to the Adviser and incurred no charges for accounting services.
A substantial portion of these amounts was paid to the Adviser in reimbursement
of personnel, facilities and equipment costs attributable to the provision of
accounting services to the Fund.
DISTRIBUTOR
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
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<PAGE> 63
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. Advantage Capital
Corporation is an affiliated dealer of the Distributor.
During the period June 9, 1994 through December 31, 1994, total
underwriting commissions on the sale of share of the Fund were $104,027. Of such
totals, the amount retained by the Distributor was $4,695. The remainder was
reallowed to dealers. Of such dealer reallowances, $7,737 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 Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to four percent of the purchase price of Class B
shares purchased by the clients of broker-dealers and other Service
Organizations, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals and (5) advertising and promotion expenses, including conducting
and organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses. With respect to the Class C Plan, authorized payments
by the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class C shares to reimburse the Distributor for (1) upfront
commissions and transaction fees of up to 0.75% of the purchase price of Class C
shares purchased by the clients of broker-dealers and other Service
Organizations and ongoing commissions and transaction fees paid to
broker-dealers and other Service Organizations in an amount up to 0.75% of the
average daily net assets of the Fund's Class C shares, (2) out-of-pocket
expenses of printing and distributing prospectuses and annual and 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
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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 agreements were approved by the Directors, including a majority of the
Directors who are not affiliated persons (as defined in the 1940 Act) of the
Fund and who have no direct or indirect financial interest in the operation of
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 their 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
respective class. 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 period June 9, 1994 through December 31, 1994, the Fund's aggregate
expenses under the Class A Plan were $2,780 or 0.11% (not annualized) 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 period June 9, 1994
through December 31, 1994, the Fund's aggregate expenses under the Class B Plan
were $24,761 or 0.52% (not annualized) of the Class B shares' average net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $18,571 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 $6,190 for fees paid to Service Organizations for servicing Class B
shareholders and administering the Class B Plan. For the period June 9, 1994
through December 31, 1994, the Fund's aggregate expenses under the Class C Plan
were $1,791 or 0.24% (not annualized) of the Class C shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$1,343 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 $448
for fees paid to Service Organizations for servicing Class C shareholders and
administering the Class C Plan.
TRANSFER AGENT
For the period June 9, 1994 through December 31, 1994, ACCESS, shareholder
service agent and dividend disbursing agent for the Fund, received no transfer
agency fees.
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
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<PAGE> 65
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 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 they exercise 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 Advisory
Agreement is not reduced as a result of the Adviser's receipt of research
services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts, including the Fund,
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
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.
During the period June 9, 1994 through December 31, 1994, the Fund paid
$38,935 in brokerage commissions on portfolio transactions. During that same
period, the Fund paid $32,160 in brokerage commissions on transactions totalling
$14,511,168 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,
The Travelers Inc. Such affiliated persons included Smith
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<PAGE> 66
Barney, Inc. Effective December 20, 1994, Smith Barney, Inc. ceased to be an
affiliate of the Adviser. The Fund paid Smith Barney, Inc. $1,260 in
commissions, representing 3.24% of transactions to total commissions and
representing 2.18% of value of brokerage transactions to total brokerage
transactions.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place on all business days in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Fund's net asset value is not
calculated and on which the Fund does not effect sales, redemptions and
repurchases of its shares. There may be significant variations in the net asset
value of Fund shares on days when net asset value is not calculated and on which
shareholders cannot redeem on account of changes in prices of stocks traded in
foreign stock markets.
The 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 SEC.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.
MULTIPLE PRICING SYSTEM
The Fund 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
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receipt of payment by ACCESS. Confirmations of the opening of an account and of
all subsequent transactions in the account are forwarded by ACCESS to the
investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to purchases of Class A shares of the Fund where the
aggregate investment is $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 four percent
of the offering price. The same reduction is applicable to purchases under a
Letter of Intent as described in the next paragraph. THE DEALER MUST NOTIFY THE
DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY
FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION
MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. The reduced sales
charge will not be applied if such notification is not furnished at the time of
the order. The reduced sales charge will also not be applied should a review of
the records of the Distributor or ACCESS fail to confirm the 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")),
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although more than one beneficiary is involved; and (3) tax-exempt organizations
enumerated in Section 501 (c)(3) or (13) of the Code.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC -- Class A") of one percent is imposed in the event of
certain redemptions within one year of the purchase. If a CDSC -- Class A is
imposed upon redemption, the amount of the CDSC -- Class A will be equal to the
lesser of 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.
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
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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 (the
"Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC -- Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC -- Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C shares of the Fund, provided that the reinvestment is
effected within 120 days after such redemption and the shareholder has not
previously exercised this reinvestment privilege with respect to Class C shares
of the Fund. Shares acquired in this manner will be deemed to have the original
cost and purchase date of the redeemed shares for purposes of applying the
CDSC -- Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
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<PAGE> 70
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
The Fund may amend the signature guarantee procedures set forth in the
Prospectus under "Redemption of Shares" if a viable signature guarantee program
is established.
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.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Fund's policy is to distribute substantially all of its taxable net
investment income at least quarterly to shareholders of Class A, Class B and
Class C shares. The per share dividends on Class B and Class C shares will be
lower than the per share dividends on Class A shares as a result of the
distribution fees and higher transfer agency fees applicable to the Class B and
Class C shares. The Fund intends 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,
25
<PAGE> 71
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 unless such amount is
less than $10.00, in which case no notice is provided.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized on
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.
26
<PAGE> 72
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
The Fund may qualify and may make an election permitted under Section 853
of the Code so that shareholders will be able to claim a credit or deduction on
their income tax returns for, and will be required to treat as part of the
amounts distributed to them, their pro rata portion of qualified taxes paid by
the Fund to foreign countries (which taxes relate primarily to investment
income). The shareholders of the Fund may claim a foreign tax credit by reason
of the Fund's election under Section 853 of the Code subject to the certain
limitations imposed by Section 904 of the Code. Also under Section 63 of the
Code, no deduction for foreign taxes may be claimed by shareholders who do not
itemize deductions on their Federal income tax returns, although any such
shareholder may claim a credit for foreign taxes and in any event will be
treated as having taxable income in respect to the shareholder's pro rata share
of foreign taxes paid by the Fund. It should also be noted that a tax-exempt
shareholder, like other shareholders, will be required to treat as part of the
amounts distributed to it a pro rata portion of the income taxes paid by the
Fund to foreign countries. However, that income will generally be exempt from
United States taxation by virtue of such shareholder's tax-exempt status and
such a shareholder will not be entitled to either a tax credit or a deduction
with respect to such income.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% back-up withholding tax is not an additional tax and may be credited against
a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Code includes special rules applicable to listed options (excluding
equity options as defined in the Code), futures contracts, and options on
futures contracts which the Fund may write, purchase or sell. Such options and
contracts are classified as Section 1256 contracts under the Code. The character
of gain or loss resulting from the sale, disposition, closing out, expiration or
other terminations of Section 1256 contracts is generally treated as long-term
capital gain or loss to the extent of 60% thereof and short-term capital gain or
loss to the extent of 40% thereof ("60/40 gain or loss"). Such contracts, when
held by the Fund at the end of a fiscal year, generally are required to be
treated as sold at market value on the last day of such fiscal year for federal
income tax purposes ("marked-to-market"). Over-the-counter options are not
classified as Section 1256 contracts and are not subject to the mark-to-market
rule or to 60/40 gain or loss treatment. Any gains or losses recognized by the
Fund from transactions in over-the-counter options generally constitute
short-term capital gains or losses. If over-the-counter call options written, or
over-the-counter put options purchased, by the Fund are exercised, the gain or
loss realized on the sale of the underlying securities may be either short-term
or long-term, depending on the holding period of the securities. In determining
the amount of gain or loss, the sales proceeds are reduced by the premium paid
for over-the-counter puts or increased by the premium received for
over-the-counter calls.
Certain of the Fund's transactions in options, futures contracts, and
options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle in which at least one, but not
all, of the positions are Section 1256 contracts is a "mixed straddle" under the
code if certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is
27
<PAGE> 73
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 six month period from June
30, 1994 to December 31, 1994, was -5.55%. The Fund's overall total return,
computed in the manner described in this Prospectus, for Class B shares of the
Fund for the six month period from June 30, 1994 to December 31, 1994, was
- -3.97%. The overall total return for Class C shares of the Fund for the six
month period from June 30, 1994 to December 31, 1994, was -0.83%. These results
are based on historical earnings and asset value fluctuations and are not
intended to indicate future performance. Such information should be considered
in light of the Fund's investment objectives and policies as well as the risks
incurred in the Fund's investment practices. Future results will be affected by
changes in the general level of prices of securities available for purchase and
sale by the Fund.
Total return is computed separately for Class A, Class B and Class C
shares.
From time to time VKAC will announce the results of monthly polls of U.S.
investor intentions -- the Van Kampen American Capital Index of Investor
Intentions and the Van Kampen American Capital Mutual Fund Index -- which polls
measure how Americans plan to use their money.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality,
received by American Capital in 1994.
The 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 Funds.
OTHER INFORMATION
CUSTODY OF ASSETS -- State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as Custodian for the Fund. It is also
anticipated that foreign sub-custodians will be used for certain of the Fund's
investments in foreign securities. Any such sub-custodian shall be utilized
pursuant to an agreement between the custodian and the foreign sub-custodian
that has been approved by the Directors pursuant to Rule 17f-5 under the 1940
Act. The Custodian and sub-custodians generally domestically, and frequently
abroad, do not actually hold certificates for the securities in their custody,
but instead have book records with domestic and foreign securities depositories,
which in turn have book records with the transfer agents of the issuers of the
securities.
SHAREHOLDER REPORTS -- Semi-annual 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.
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<PAGE> 74
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 to shareholders for the year ended December 31,
1994, previously filed with the SEC on or about March 10, 1995. The Fund will
furnish, without charge, a copy of such Annual Report on request by calling or
writing the Fund at 2800 Post Oak Boulevard, Houston, Texas 77056, (800)
421-5666.
The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
<S> <C>
Net Asset Value per Class A Share.................................... $9.27
Class A Per Share Sales Charge -- 4.75% of offering price (4.99% of
net asset value per share)......................................... $0.46
------
Class A Per Share Offering Price to the Public....................... $9.73
</TABLE>
29
