<PAGE> 1
American Capital
Convertible
Securities, Inc.
Annual Report
December 31, 1994
[AMERICAN CAPITAL LOGO]
<PAGE> 2
SHAREHOLDERS' MESSAGE
January 27, 1995 [Photo of Don G. Powell]
Dear Shareholder,
For more than six decades, American Capital has helped investors achieve
their financial goals. As a shareholder, you know that American Capital's
goal is to provide you with consistent, competitive returns and outstanding
customer service. Those goals will remain unchanged as we embark on a new era
as Van Kampen American Capital.
In December, shareholders of American Capital funds approved new
agreements with the funds' manager that cleared the way for completion of the
merger between American Capital Management & Research, Inc., the company that
owns your Fund's manager, and The Van Kampen Merritt Companies, Inc. on
December 20, 1994. While this merger will have no direct impact on your Fund
shares, it will create a stronger company that will be able to provide
shareholders with a broader range of investment options and nearly 100 years
of combined investment experience.
The strength and experience of Van Kampen American Capital is
enhanced further by the international and emerging markets expertise of John
Govett & Co. Limited. Last fall, Van Kampen American Capital Distributors,
Inc., formerly American Capital Marketing, Inc., became the exclusive U.S.
distributor of The Govett Funds, Inc. This relationship will provide six
additional fund options for Van Kampen American Capital shareholders who want
to add an international or global component to their portfolios.
Although 1994 was a year of significant change for American Capital,
one thing has not changed: our belief in investing for the long term. The
past year was extremely challenging for both the stock and bond market, as
concerns about rising inflation prompted repeated increases in short-term
interest rates that made many investors nervous. While the markets did not
perform as well in 1994 as in previous years, investing in a stock mutual
fund still is one of the best ways to achieve long-term capital appreciation
and bond funds are an excellent option for investors who need regular income.
We will continue to communicate with you on a regular basis as we go
forward, providing information about both market conditions and new investment
opportunities. We appreciate your continued confidence in your Fund and Van
Kampen American Capital.
Sincerely,
/s/ DON G. POWELL
- ------------------------
Don G. Powell
President
1
<PAGE> 3
PORTFOLIO PERSPECTIVE
- -----------------------------------------------------------------------------
THE FOLLOWING IS AN INTERVIEW WITH THE MANAGEMENT TEAM OF AMERICAN CAPITAL
CONVERTIBLE SECURITIES INC. THE TEAM IS LED BY PORTFOLIO MANAGER JAMES H.
BEHRMANN AND ALAN T. SACHTLEBEN, EXECUTIVE VICE PRESIDENT FOR EQUITY
INVESTMENTS.
- -----------------------------------------------------------------------------
Q. SHORT-TERM INTEREST RATES ROSE THROUGH MOST OF 1994. HOW DID THIS
AFFECT THE FUND'S PERFORMANCE?
A. The Federal Reserve Board raised short-term interest rates six times
during 1994 because it was concerned that the economy was growing too
quickly, which could cause inflation to increase. The increases negatively
impacted the performance of most convertible securities funds last year,
including your Fund.
The increases in interest rates hampered the Fund's performance in two
ways. First, the Fund invests primarily in high-grade convertible
securities, and these types of convertibles fell in value more than other
types as a result of the rate hikes. Investors worried that higher interest
rates would increase corporate borrowing costs and depress earnings. Second,
at the beginning of the year the Fund was invested heavily in the securities
of cyclical companies, which generally fell in value because these firms are
most susceptible to changes in the economy and investors believed higher
interest rates would cause economic growth to slow.
Q. HOW DID YOU ADJUST THE PORTFOLIO'S STRUCTURE TO DEAL WITH THE IMPACT OF
HIGHER RATES?
A. As the Fed started to raise rates, we began to make the portfolio more
defensive. We reduced the Fund's holdings of common stocks and convertible
preferred stocks, since the latter tend to be more volatile in a turbulent
market. Instead, we increased the Fund's holdings of convertible bonds.
Also, we significantly reduced the percentage of the portfolio that was
invested in cyclical securities.
We focused instead on the securities of consumer non-durables
companies. These securities offered a higher yield with less potential for
a decline in value than cyclicals. Some of the companies whose securities
we purchased during the reporting period included tobacco manufacturer
American Brands, the Price Company warehouse chain and Rite Aid Corp.,
which operates drug stores.
[Pie Chart showing Portfolio Composition]
At the end of December 1994, the top four industries in which the Fund
was invested were consumer durables (such as tobacco), consumer services
(such as movies and entertainment), energy (such as integrated oil
companies) and finance (such as banks and life insurance). The
2
<PAGE> 4
largest long-term holding in the portfolio was media giant Time Warner, Inc.
The Fund's cash position also was slightly higher than normal during the
past year because we were very selective about the issues in which we
invested. The diversification of the portfolio at year-end is illustrated
by the chart on page 2.
James H. Behrmann, vice president of Van Kampen American Capital Asset
Management, has been your Fund's manager since 1984.
Q. HOW DID THE FUND PERFORM DURING 1994?
A. American Capital Convertible Securities achieved a total return at market
value of -11.71%. This return reflects a decrease in market price per share
on the New York Stock Exchange from $22.38 to $18.13, and reinvestment of
dividends totalling $1.10 per share and a capital gains distribution of $.69
per share. The net asset value of American Capital Convertible Securities
decreased from $24.88 to $21.62 during the year, for a total return at net
asset value of -5.29%, including reinvestment of dividends and capitals
gains distribution.
Q. HOW DID STOCKS PERFORM LAST YEAR?
A. The Standard & Poor's 500-Stock Index achieved a total return of 1.36%. The
Index is a broad-based, unmanaged index that reflects general stock market
performance. The Merrill Lynch Index of all convertible securities achieved
a total return of -7.1%. This unmanaged index is used as a benchmark for
many convertible securities funds. Neither index reflects any commissions or
fees that would be paid by an investor purchasing the securities they
represent.
Q. WHAT IS THE INVESTMENT OUTLOOK FOR THE NEXT SIX MONTHS?
A. The Fed will probably raise interest rates again in early 1995. Short-term
interest rates should begin to stabilize, creating an environment that
typically helps high-grade securities. The Fund continues to be defensively
structured, with our sell-off of cyclical securities complete, which will
help us get through the period of uncertainty that will remain until
investors believe the rate hikes are over.
Despite the challenges of 1994, convertible securities should continue
to be an attractive investment option for investors who want the potential
for higher income than that generally provided by stocks, along with the
potential for capital appreciation. We will continue to emphasize careful
stock selection to purchase those securities that we believe offer the best
potential for meeting the Fund's investment objectives.
/s/ ALAN T. SACHTLEBEN /s/ JAMES H. BEHRMANN
---------------------------- -----------------------------
Alan T. Sachtleben James H. Behrmann
Executive Vice President Portfolio Manager
Equity Investments
3
<PAGE> 5
DIVIDEND REINVESTMENT PLAN
The Fund pays distributions in cash, but if you own more than 100 shares in
your own name, you may elect to participate in the Fund's dividend
reinvestment plan (the "Plan"). Under the Plan, shares will be issued by the
Fund at net asset value on a date determined by the Board of Directors
between the record and payable dates on each distribution; however, if the
market price, including brokerage commissions, is less than the net asset
value, the amount of the distribution will be paid to the Fund's custodian,
State Street Bank and Trust Company ("State Street"), which will buy such
shares as are available at prices below the net asset value. (If the market
price is not significantly less than the net asset value, it is possible that
open market purchases of shares may increase the market price so that such
price plus brokerage commissions would equal or exceed the net asset value of
such shares.) If State Street cannot buy the necessary shares at less than
net asset value before the distribution date, the balance of the distribution
will be made in authorized but unissued shares of the Fund at net asset
value. The cost per share will be the average cost, including brokerage
commissions, of all shares purchased. Since all shares purchased from the Fund
are at net asset value, there will be no dilution, and no brokerage
commissions are charged on such shares.
You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment
of dividends and capital gain distributions does not relieve you of any
income tax which may be payable (or required to be withheld) on dividends or
distributions.
You may begin or discontinue participation in the Plan at any time by written
notice to the address below. If you withdraw from the Plan, you may rejoin at
any time if you own of record the required 100 shares. Elections and
terminations will be effective for distributions declared after receipt. If you
withdraw from the Plan, a certificate for the whole shares and a check for the
fractional shares, if any, credited to your Plan account will be sent as soon
as practicable after receipt of your election to withdraw. Except for
brokerage commissions, if any, which are borne by Plan participants, all costs
of the Plan are borne by the Fund. The Fund reserves the right to amend or
terminate the Plan on 30 days' written notice prior to the record date of the
distribution for which such amendment or termination is effective.
Record stockholders should address all notices, correspondence, questions or
other communications about the Plan to:
STATE STREET BANK AND TRUST COMPANY
P.O. BOX 8200
BOSTON, MA 02266-8200
1-800-821-1238
If your shares are not held directly in your name, you should contact your
brokerage firm, bank or other nominee for more information and to see if your
nominee will participate in the Plan on your behalf. If you participate
through your broker and choose to move your account to another broker, you
will need to re-enroll in the Plan through your new broker.
4
<PAGE> 6
INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE CORPORATE OBLIGATIONS 54.5%
CONSUMER DISTRIBUTION 8.3%
$ 9,000 Best Buy Corp., MIPS, 6.50%, 11/3/24 ............................................... $ 385,796
240,000 Carter Hawley Hale Stores, Inc., 6.25%, 12/31/00 ................................... 187,200
600,000 Federated Department Stores, Inc., LYON, Zero Coupon, 2/15/04 ...................... 576,000
245,000 Fisher Scientific International, Inc., 4.75%, 3/1/03 ............................... 221,113
400,000 Home Depot, Inc., 4.50%, 2/15/97 ................................................... 482,000
215,000 Lowe's Companies, Inc., 3.00%, 7/22/03 ............................................. 289,175
600,000 Office Depot, Inc., LYON, Zero Coupon, 11/1/08 ..................................... 328,500
450,000 Pep Boys-Manny, Moe & Jack, 4.00%, 9/1/99 .......................................... 432,000
600,000 President Enterprises, Zero Coupon, 7/22/01 ........................................ 642,750
1,050,000 Price Co., 6.75%, 3/1/01 ........................................................... 955,500
2,985,000 Rite Aid Corp., LYON, Zero Coupon, 7/24/06 ......................................... 1,343,250
------------
TOTAL CONSUMER DISTRIBUTION ...................................................... 5,843,284
------------
CONSUMER NON-DURABLES 4.8%
American Brands, Inc.
1,500,000 5.75%, 4/11/05 ................................................................... 1,713,750
765,000 7.625%, 3/5/01 ................................................................... 763,088
900,000 S.A.B. Finance Corp., 7.50%, 8/2/98 ................................................ 897,750
------------
TOTAL CONSUMER NON-DURABLES ...................................................... 3,374,588
------------
CONSUMER SERVICES 7.8%
375,000 Hospitality Franchise System, Inc., 4.50%, 10/1/99 ................................. 364,688
250,000 Omnicom Group, Increasing Rate Notes (4.50% at 12/31/94), 9/1/00 ................... 256,250
570,000 Service Corp. International, 6.50%, 9/1/01 ......................................... 773,775
Time Warner, Inc.
2,000,000 LYON, Zero Coupon, 12/17/12 ...................................................... 610,000
877,000 LYON, Zero Coupon, 6/22/13 ...................................................... 310,239
1,985,150 8.75%, 1/10/15 ................................................................... 1,875,967
1,450,000 Turner Broadcasting System, Inc., LYON, Zero Coupon, 2/13/07 ....................... 572,750
530,000 Wendy's International, Inc., 7.00%, 4/1/06 ......................................... 672,438
------------
TOTAL CONSUMER SERVICES .......................................................... 5,436,107
------------
ENERGY 6.1%
775,000 Ashland Oil, Inc., 6.75%, 7/1/14 ................................................... 695,563
1,025,000 Consolidated Natural Gas Co., 7.25%, 12/15/15 ...................................... 989,125
450,000 Oryx Energy Co., 7.50%, 5/15/14 .................................................... 311,625
420,000 Pogo Producing Co., 5.50%, 3/15/04 ................................................. 402,150
1,100,000 SFP Pipeline Holdings, Inc., 10.42%, 8/15/10 ....................................... 1,294,673
1,360,000 USX-Marathon Group, LYON, Zero Coupon, 8/9/05 ...................................... 595,000
------------
TOTAL ENERGY ..................................................................... 4,288,136
------------
FINANCE 7.6%
570,000 Aegon, N.V., 4.75%, 11/1/04 ........................................................ 595,650
1,549,000 Alexander & Alexander Services, Inc., 11.00%, 4/15/07 .............................. 1,572,235
355,000 Central International, 10.00%, 8/7/96 .............................................. 241,400
900,000 Chubb Corp., 6.00%, 5/15/98 ........................................................ 913,500
780,000 Henderson Capital International, 4.50%, 10/27/96 ................................... 746,850
480,000 Statesman Group, Inc., 6.25%, 5/1/03 ............................................... 492,000
790,000 USLICO Corp., 8.50%, 12/15/14 ...................................................... 786,050
------------
TOTAL FINANCE .................................................................... 5,347,685
------------
</TABLE>
5
<PAGE> 7
INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE 1.6%
$ 2,000,000 Alza Corp., LYON, Zero Coupon, 7/14/14 ............................................. $ 665,000
300,000 Genesis Health Ventures, Inc., 6.00%, 11/30/03 ..................................... 426,375
------------
TOTAL HEALTH CARE ................................................................ 1,091,375
------------
PRODUCER MANUFACTURING 7.0%
750,000 Browning-Ferris Industries, Inc., 6.75%, 7/18/05 ................................... 675,000
500,000 Cemex S.A., 4.25%, 11/1/97 ......................................................... 402,500
843,000 Cooper Industries, Inc., 7.05%, 1/1/15 ............................................. 762,047
600,000 CRH Capital, 5.75%, 4/30/05 ........................................................ 726,000
600,000 Flagstar Corp., 10.00%, 11/1/14 .................................................... 420,000
958,000 Hanson PLC, ADR, 2.39%, 3/1/01 ..................................................... 687,365
1,500,000 Valhi, Inc., LYON, Zero Coupon, 10/20/07 ........................................... 453,750
2,250,000 Waste Management, Inc., LYON, Zero Coupon, 4/13/12 ................................. 798,750
------------
TOTAL PRODUCER MANUFACTURING ..................................................... 4,925,412
------------
RAW MATERIALS/PROCESSING INDUSTRIES 2.1%
700,000 Freeport-McMoRan, Inc., LYON, Zero Coupon, 8/5/06 .................................. 251,125
155,000 Inco, Ltd.,7.75%, 3/15/16 .......................................................... 153,450
300,000 NTS Steel, 4.00%, 12/16/08 ......................................................... 182,250
200,000 PT Indorayon, 7.00%, 5/2/06 ........................................................ 178,000
440,000 Repap Enterprises, Inc., 8.50%, 8/1/97 ............................................. 415,800
300,000 Stone Container Corp., 6.75%, 2/15/07 .............................................. 225,000
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES ........................................ 1,405,625
------------
TECHNOLOGY 7.2%
400,000 Arrow Electronics, Inc., 5.75%, 10/15/02 ........................................... 463,000
2,800,000 Automatic Data Processing, Inc., LYON, Zero Coupon, 2/20/12 ........................ 1,176,000
600,000 Data General Corp., 7.75%, 6/1/01 .................................................. 522,000
260,000 General Instrument Corp., 5.00%, 6/15/00 ........................................... 348,400
1,020,000 Motorola, Inc., LYON, Zero Coupon, 9/27/13 ......................................... 719,100
900,000 Silicon Graphics, Inc., LYON, Zero Coupon, 11/2/13 ................................. 482,625
800,000 Texas Instruments, Inc., 2.75%, 9/29/02 ............................................ 776,000
300,000 Unisys Corp., 8.25%, 8/1/00 ........................................................ 304,500
250,000 3Com Corp., 10.25%, 11/1/01 ........................................................ 265,000
------------
TOTAL TECHNOLOGY ................................................................... 5,056,625
------------
UTILITIES 2.0%
1,205,000 Potomac Electric Power Co., 5.00%, 9/1/02 .......................................... 951,950
500,000 Technology Resource Industries, 2.75%, 11/28/04 .................................... 478,750
------------
TOTAL UTILITIES ................................................................... 1,430,700
------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $38,988,188) ............................................................. 38,199,537
------------
NON-CONVERTIBLE CORPORATE OBLIGATION 0.9%
785,000 Enquirer/Star, Inc., Zero Coupon, 5/15/97 (Cost $628,330) .......................... 628,000
------------
</TABLE>
<TABLE>
<CAPTION>
Number
of Shares CONVERTIBLE PREFERRED STOCK 14.8%
- ------------
<S> <C> <C>
CONSUMER DISTRIBUTION 1.6%
20,000 Sears, Roebuck & Co., Series A, PERCS, $3.75 ....................................... 1,112,500
------------
CONSUMER NON-DURABLES 0.3%
40,000 RJR Nabisco Holdings Corp., Inc., PERCS, $.60125 ................................... 240,000
------------
</TABLE>
6
<PAGE> 8
INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES 0.9%
*12,600 SCI Finance N.V., LLC, 6.25% ....................................................... $ 655,200
------------
ENERGY 2.2%
13,000 Occidental Petroleum Corp., 7.75% .................................................. 633,750
12,000 Snyder Oil Corp., $1.50 ............................................................ 241,500
7,100 Transco Energy Co., $3.50 .......................................................... 325,713
7,500 USX Corp., Series A, $3.25 ......................................................... 335,625
------------
TOTAL ENERGY ..................................................................... 1,536,588
------------
FINANCE 5.3%
28,000 Citicorp, $1.22 .................................................................... 535,500
7,500 Citicorp, $5.375 ................................................................... 859,688
12,000 Conseco, Inc., Series D, $3.25 ..................................................... 489,000
15,150 First Chicago Corp., $2.875 ........................................................ 723,413
12,700 Great Western Financial Corp., $4.375 .............................................. 636,588
7,400 Roosevelt Financial Group, Inc., $3.25 ............................................. 438,450
------------
TOTAL FINANCE .................................................................... 3,682,639
------------
PRODUCER MANUFACTURING 0.6%
30,000 Westinghouse Electric Co., $1.53 ................................................... 397,500
------------
RAW MATERIALS/PROCESSING INDUSTRIES 2.3%
20,000 Boise Cascade Corp., Series E, ACES, $1.58 ......................................... 477,500
9,600 Reynolds Metals Co., PRIDES, 7.00% ................................................. 464,400
16,500 WHX Corp., Series B, $3.75 ......................................................... 705,375
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES ........................................ 1,647,275
------------
TECHNOLOGY 1.6%
14,000 General Motors Corp., Series C, $3.25 .............................................. 803,250
9,800 Unisys Corp., Series A, $3.75 ...................................................... 311,150
------------
TOTAL TECHNOLOGY ................................................................. 1,114,400
------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $10,611,910) ............................. 10,386,102
------------
COMMON STOCK 15.9%
CONSUMER DISTRIBUTION 0.3%
11,000 Limited, Inc. ...................................................................... 199,375
------------
CONSUMER NON-DURABLES 2.4%
11,500 Anheuser-Busch Companies, Inc. ..................................................... 585,063
10,900 Philip Morris Companies, Inc. ..................................................... 626,750
8,000 Proctor & Gamble Co. ............................................................... 496,000
------------
TOTAL CONSUMER NON-DURABLES ...................................................... 1,707,813
------------
CONSUMER SERVICES 0.5%
8,200 Walt Disney Co. ................................................................... 378,225
------------
ENERGY 2.1%
4,000 British Petroleum Co., PLC, ADR .................................................... 319,500
13,000 Exxon Corp. ....................................................................... 789,750
4,300 Mobil Corp. ....................................................................... 362,275
------------
TOTAL ENERGY ..................................................................... 1,471,525
------------
</TABLE>
7
<PAGE> 9
INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
Number Market
of Shares Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE 1.5%
14,500 Baxter International, Inc. ......................................................... $ 409,625
10,300 Upjohn Co. ......................................................................... 316,725
4,500 Warner Lambert Co. ................................................................. 346,500
------------
TOTAL HEALTH CARE ................................................................ 1,072,850
------------
PRODUCER MANUFACTURING 1.5%
*30,400 Chemical Waste Management, Inc. .................................................... 285,000
9,510 Tenneco, Inc. ...................................................................... 404,175
5,000 TRW, Inc. .......................................................................... 330,000
------------
TOTAL PRODUCER MANUFACTURING ..................................................... 1,019,175
------------
RAW MATERIALS/PROCESSING INDUSTRIES 1.0%
12,000 DuPont (E.I.) de Nemours & Co., Inc. ............................................... 675,000
------------
TECHNOLOGY 1.6%
7,500 Boeing Co. ......................................................................... 350,625
3,500 International Business Machines Corp. .............................................. 257,250
15,000 Rockwell International Corp. ....................................................... 536,250
------------
TOTAL TECHNOLOGY ................................................................. 1,144,125
------------
UTILITIES 5.0%
9,000 Ameritech Corp. .................................................................... 363,375
7,000 AT&T Corp. ......................................................................... 351,750
11,000 Bellsouth Corp. .................................................................... 595,375
24,000 CMS Energy Group ................................................................... 549,000
34,700 Illinova Corp. ..................................................................... 754,725
27,000 Peco Energy Co. .................................................................... 661,500
11,000 Southern Co. ....................................................................... 220,000
------------
TOTAL UTILITIES .................................................................. 3,495,725
------------
TOTAL COMMON STOCK (Cost $11,224,351) ............................................ 11,163,813
------------
EQUITY-LINKED SECURITY 0.1%
3,500 Atlantic Richfield Co. (Lyondell Petroleum Co.), 9.00%, 9/15/97
(Cost $86,624) ................................................................... 91,065
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount SHORT-TERM INVESTMENTS 14.3%
- ------------
<S> <C> <C>
$ 3,000,000 General Electric Capital Corp., 5.50%, 1/3/95 ...................................... 2,998,625
6,995,000 Repurchase Agreement with Lehman Government Securities, Inc.,
dated 12/30/94, 5.35%, due 1/3/95 (collateralized by
U.S. Government securities in a pooled cash account)
repurchase proceeds $6,999,158 ................................................... 6,995,000
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $9,993,625) ..................................... 9,993,625
------------
TOTAL INVESTMENTS (Cost $71,533,028) 100.5% ...................................... 70,462,142
Other assets and liabilities, net (0.5%) ........................................... (385,391)
------------
NET ASSETS 100% ................................................................... $ 70,076,751
============
</TABLE>
*Non-income producing security. ACES--Automatically Convertible
Equity Securities
LYON--Liquid Yield Option Notes
MIPS--Monthly Income Paying Security
PERCS--Preferred Equity Redeemable
Cumulative Stock
PRIDES--Preferred Redeemable Increased
Dividend Equity Security
See Notes To Financial Statements.
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $71,533,028)........................... $70,462,142
Cash...................................................................... 6,753
Receivable for investments sold........................................... 849,945
Interest and dividends receivable......................................... 710,711
Other assets.............................................................. 15,244
-----------
TOTAL ASSETS........................................................... 72,044,795
-----------
LIABILITIES
Dividends payable......................................................... 1,142,743
Payable for investments purchased......................................... 762,047
Accrued expenses.......................................................... 33,923
Due to Adviser............................................................ 29,331
-----------
TOTAL LIABILITIES...................................................... 1,968,044
-----------
NET ASSETS, equivalent to $21.62 per share on 3,241,824 shares of
common stock outstanding............................................... $70,076,751
===========
NET ASSETS WERE COMPRISED OF:
Common stock, par value $1 per share; 12,500,000 shares authorized;
3,251,324 shares issued, of which 9,500 shares are held in treasury.... $ 3,251,324
Capital surplus........................................................... 68,191,353
Accumulated net realized loss on securities............................... (206,029)
Net unrealized depreciation of investments................................ (1,070,886)
Undistributed net investment income....................................... 67,616
-----------
70,233,378
Less cost of treasury shares.............................................. (156,627)
-----------
NET ASSETS at December 31, 1994........................................... $70,076,751
===========
</TABLE>
See Notes to Financial Statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.................................................................. $ 2,633,576
Dividends................................................................. 1,514,187
-----------
Investment income...................................................... 4,147,763
-----------
EXPENSES
Management fees........................................................... 375,531
Accounting services....................................................... 51,063
Directors' fees and expenses.............................................. 34,620
Shareholder service agent's fees and expenses............................. 31,575
Reports to shareholders................................................... 24,315
Custodian fees............................................................ 17,869
Audit fees................................................................ 17,650
Registration and filing fees.............................................. 16,436
Legal fees................................................................ 12,432
State franchise fees...................................................... 8,786
Miscellaneous............................................................. 28,138
-----------
Total expenses......................................................... 618,415
-----------
Net investment income.................................................. 3,529,348
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities........................................... 893,910
Net unrealized depreciation of securities during the year................. (9,212,251)
-----------
Net realized and unrealized loss on securities......................... (8,318,341)
-----------
Decrease in net assets resulting from operations....................... $(4,788,993)
===========
</TABLE>
See Notes to Financial Statements.
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1994 1993
----------- -----------
<S> <C> <C>
NET ASSETS, beginning of year................................................. $80,669,376 $76,626,501
----------- -----------
OPERATIONS
Net investment income........................................................ 3,529,348 3,699,461
Net realized gain on securities.............................................. 893,910 7,192,564
Net unrealized depreciation of securities during the year.................... (9,212,251) (625,092)
----------- -----------
Increase (decrease) in net assets resulting from operations ................ (4,788,993) 10,266,933
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income................................................... (3,566,966) (3,630,600)
From net realized gain on securities......................................... (893,910) (2,593,458)
In excess of book-basis net realized gain on securities (Note 1E) ........... (1,342,756) --
----------- -----------
Total dividends and distributions........................................... (5,803,632) (6,224,058)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS............................................. (10,592,625) 4,042,875
----------- -----------
NET ASSETS, end of year....................................................... $70,076,751 $80,669,376
=========== ===========
</TABLE>
See Notes to Financial Statements.
11
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
American Capital Convertible Securities, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified closed-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. INVESTMENT VALUATIONS
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which
the last sale price is not available are valued at the mean between the
last reported bid and asked price.
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.
Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade
holdings. These securities are often subordinated to the prior claims of
other senior lenders and uncertainties exist as to an issuer's ability to
meet principal and interest payments. Debt securities rated below
investment grade and comparable unrated securities represented
approximately 22% of the investment portfolio at December 31, 1994.
B. REPURCHASE AGREEMENTS
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to repurchase
the security at a future time and specified price. The Fund may invest
independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised or subadvised by Van Kampen American Capital Asset Management, Inc.
(the "Adviser"), the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are collateralized by the underlying debt
security. The Fund will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of the custodian
bank. The seller is required to maintain the value of the underlying
security at not less than the repurchase proceeds due the Fund.
C. FEDERAL INCOME TAXES
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders.
D. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued weekly. Issuers of payment-in-kind securities may make dividend or
interest payments by issuing additional stocks or bonds in lieu of cash
payments.
12
<PAGE> 14
E. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which may
differ from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
F. DEBT DISCOUNT AND PREMIUM
The Fund accounts for discounts and premiums on the same basis as is used
for federal income tax reporting. Accordingly, original issue discounts on
debt securities purchased are amortized over the life of the security.
Premiums on debt securities are not amortized. Market discounts are
recognized at the time of sale as realized gains for book purposes and
ordinary income for tax purposes.
NOTE 2-MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average weekly net assets of the Fund at an annual rate
of .50% of the first $150 million, .45% of the next $100 million, .40% of the
next $100 million, and .35% of the amount in excess of $350 million.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or subadvised by the Adviser.
For the year ended December 31, 1994, these charges included $6,825 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
During the year, the Fund paid brokerage commissions of $11,385 to companies
which are deemed affiliates of the Adviser's parent because it owns more than
5% of the companies' outstanding voting securities.
Certain officers and directors of the Fund are officers and directors of the
Adviser.
NOTE 3-INVESTMENT ACTIVITY
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $77,228,324 and $88,529,672,
respectively.
For federal income tax purposes, the identified cost of investments owned at
December 31, 1994, was $71,554,211. Net unrealized depreciation of investments
aggregated $1,092,069, gross unrealized appreciation of investments aggregated
$1,805,672 and gross unrealized depreciation of investments aggregated
$2,897,741.
NOTE 4-DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,560 plus a fee of $103 per Board meetings
attended. During the year, such fees aggregated $31,895.
13
<PAGE> 15
NOTE 5-QUARTERLY DATA (UNAUDITED)
The following is a summary of quarterly results of operations for each of the
two years in the period ended December 31, 1994.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
3/31/94 6/30/94 9/30/94 12/31/94 Total
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net realized and unrealized
gain (loss) on securities.................... $(3,788,187) $(3,073,156) $1,559,014 $(3,016,012) $(8,318,341)
Net realized and unrealized gain (loss) on
securities per share......................... (1.16) (.94) .47 (.93) (2.56)
Total investment income ....................... 998,290 1,039,323 1,034,118 1,076,032 4,147,763
Net investment income.......................... 822,503 881,617 870,592 954,636 3,529,348
Net investment income per share................ .25 .27 .27 .30 1.09
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
3/31/93 6/30/93 9/30/93 12/31/93 Total
------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net realized and unrealized gain
(loss) on securities......................... $3,657,042 $ 780,984 $2,216,127 $ (86,681) $ 6,567,472
Net realized and unrealized gain
(loss) on securities per share............... 1.12 .24 .69 (.04) 2.01
Total investment income........................ 1,180,200 1,123,470 1,079,189 1,016,834 4,399,693
Net investment income.......................... 1,016,437 947,991 907,489 827,544 3,699,461
Net investment income per share................ .32 .29 .28 .26 1.15
</TABLE>
14
<PAGE> 16
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year......... $24.88 $23.64 $22.23 $19.41 $22.73
------ ------ ------ ------ --------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... 1.28 1.36 1.37 1.50 1.65
Expenses................................... (.19) (.21) (.195) (.18) (.18)
------ ------ ------- ------ -------
Net investment income...................... 1.09 1.15 1.175 1.32 1.47
Net realized and unrealized gain or loss
on securities............................ (2.56) 2.01 1.415 2.90 (3.2475)
------ ------ ------- ------ --------
Total from investment operations........... (1.47) 3.16 2.59 4.22 (1.7775)
------ ------ ------- ------ --------
LESS DISTRIBUTIONS
Dividends from net investment income....... (1.10) (1.12) (1.18) (1.40) (1.40)
Distributions from net realized gains
on securities............................ (.28) (.80) -- -- (.1425)
Distributions in excess of book-basis net
realized gains on securities (Note 1E).. (.41) -- -- -- --
------ ------ ------ ------ --------
Total distributions........................ (1.79) (1.92) (1.18) (1.40) (1.5425)
------ ------ ------ ------ --------
Net asset value, end of year............... $21.62 $24.88 $23.64 $22.23 $19.41
====== ====== ====== ====== ========
Market price, end of year.................. $18.13 $22.38 $20.38 $19.25 $16.63
====== ====== ====== ====== ========
TOTAL RETURN, at net asset value........... (5.29%) 14.50% 12.84% 23.32% (7.37%)
TOTAL RETURN, at market price.............. (11.71%) 19.43% 12.31% 24.68% (10.39%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)......... $70.1 $80.7 $76.6 $72.1 $62.9
Average net assets (millions).............. $75.1 $80.4 $72.1 $66.7 $68.2
Ratios to average net assets
Expenses................................. .82% .87% .88% .89% .86%
Net investment income ................... 4.70% 4.60% 5.28% 6.41% 7.01%
Portfolio turnover rate.................... 111% 128% 87% 168% 95%
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL CONVERTIBLE SECURITIES, INC.
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio of American Capital Convertible Securities, Inc., as
of December 31, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian . An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of American Capital Convertible Securities, Inc. at December 31, 1994,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
January 27, 1995
16
<PAGE> 18
AMERICAN CAPITAL CONVERTIBLE SECURITIES, INC.
BOARD OF DIRECTORS
Donald M. Carlton Steve Muller
A. Benton Cocanougher F. Robert Paulsen
Stephen R. Gross R. Richardson Pettit
Norman Hackerman Don G. Powell
Robert D.H. Harvey Alan B. Shepard, Jr.
Jeffrey B. Lane Miller Upton
Alan G. Merten Benjamin N. Woodson
- --------------------------------------------------------------------------------
TAX NOTICE TO CORPORATE SHAREHOLDERS
For 1994, 42.56% of the dividends taxable as ordinary income qualified for the
70% dividends received deduction for corporations.
- --------------------------------------------------------------------------------
OFFICERS
Don G. Powell Tanya M. Loden
Chairman of the Board Vice President
and President and Controller
Curtis W. Morell Nori L. Gabert
Vice President Vice President
and Treasurer and Secretary
James H. Behrmann J. David Wise
Alan T. Sachtleben Vice President and
Paul R. Wolkenberg Assistant Secretary
Vice Presidents
Perry F. Farrell
M. Robert Sullivan
Assistant Treasurers
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Blvd., Houston,Texas 77056
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT
Boston Financial Data Services, Inc.
P.O. Box 366, Boston, Massachusetts 02101
- --------------------------------------------------------------------------------
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, Massachusetts 02110
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young LLP
1221 McKinney St., Houston, Texas 77010
- --------------------------------------------------------------------------------
NEW YORK STOCK EXCHANGE SYMBOL: ACS
- --------------------------------------------------------------------------------
INQUIRIES ABOUT AN INVESTOR'S
ACCOUNT SHOULD BE REFERRED
TO THE FUND'S TRANSFER AGENT:
BOSTON FINANCIAL DATA SERVICES, INC.
P.O. BOX 366
BOSTON, MASSACHUSETTS 02101
TELEPHONE: (800) 821-1238
- --------------------------------------------------------------------------------
Nationally distributed by Van Kampen American Capital Distributors, Inc.
<PAGE> 19
American Capital
Convertible Securities, Inc.
C/O BFDS
P.O. Box
Boston, MA 02101
