<PAGE> 1
AMERICAN CAPITAL
EQUITY INCOME
FUND, INC.
[Photo of 2 Couples having meal]
ANNUAL REPORT
DECEMBER 31, 1994
[LOGO]
This brochure includes a prospectus which describes in detail the Fund's
objectives, investment policies, risks, sales charges, fees and other matters
of interest. Please read the prospectus carefully before you invest or send
money.
<PAGE> 2
AMERICAN CAPITAL EQUITY INCOME FUND HIGHLIGHTS
[Photo of Man and Woman]
For equity investors seeking income and growth opportunities
American Capital's Quality Commitment
American Capital has been recognized for providing the highest quality service
in the mutual fund industry in 1994. for the second consecutive year, DALBAR
Surveys, Inc., an independent research firm in the mutual fund industry,
awarded American Capital its coveted crystal pyramid for ranking number one in
service. This ranking is based on evaluations by investment professionals
across the country.
[Photo of 2 Awards]
American Capital also has received the DALBAR Quality Tested Service Seal for
outstanding customer service five years in a row.
Not a part of the Prospectus
<PAGE> 3
Shareholders' Message
January 30, 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. 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., Ltd. 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 markets, 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 the one of
the best ways to achieve long-term capital appreciation.
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
Not a part of the Prospectus 1
<PAGE> 4
PORTFOLIO PERSPECTIVE
THE FOLLOWING IS AN INTERVIEW WITH THE MANAGEMENT TEAM OF AMERICAN CAPITAL
EQUITY INCOME FUND. THE TEAM IS LED BY PORTFOLIO MANAGER JAMES A. GILLIGAN AND
ALAN T. SACHTLEBEN, EXECUTIVE VICE PRESIDENT FOR EQUITY INVESTMENTS.
Q. WHAT MARKET CONDITIONS HAD THE GREATEST IMPACT ON THE FUND'S
PERFORMANCE DURING THE REPORTING PERIOD?
A. The economy grew strongly in 1994, which helped corporate earnings.
But the rapid growth triggered concerns about inflation, and
the Federal Reserve Board responded by raising interest rates six
times during the year. The first increases brought interest rates into
a more neutral position the low rates of the past two years were
designed to spur growth. The later increases were designed to slow
growth and prevent the economy from overheating.
Rising interest rates put pressure on stock prices for two
reasons. First, investors anticipated that the rising rates would
affect corporate profits by increasing companies borrowing costs.
Second, they were concerned that if the economy began slowing,
revenues would be affected.
Rising interest rates also affected the prices of existing
bonds negatively, since they must compete in the marketplace with new
bonds being issued at higher interest rates. This factor also affected
convertible securities, in which the fund invests.
Q. HOW DID THE INVESTMENT TEAM RESPOND TO CHANGING MARKET CONDITIONS?
A. Typically, the Fund has significant holdings in utilities, energy
companies, and financial companies. During 1994, prices of
these types of stocks did not perform well as a group. Utilities and
financial companies in particular had benefitted from the environment
of declining interest rates we experienced over the past several
years, and are negatively affected when interest rates are rising.
In anticipation of rising interest rates, we had lessened our
holdings in utilities and financials primarily banking stocks, which
are the most interest-sensitive at the end of 1993. Another area where
we increased our emphasis was real estate. This is an asset class
where values have been depressed and yields are attractive, which
provides the Fund with both current income and potential appreciation.
We also took a conservative view of stock market prices in
general, and increased our weighting in bonds slightly as a defensive
measure early in the year. We maintained this position, with slight
variations, throughout the year. The chart shows the Fund's weightings
as of December 31, 1994.
[INDUSTRY HOLDINGS CHART]
Not a part of the Prospectus 2
<PAGE> 5
[Photo of Woman and 2 Men at Computer Screens]
Q. WHAT OTHER FACTORS INFLUENCED YOUR INVESTMENTS DURING THE YEAR?
A. About mid-year, cyclical stocks, such as manufacturing stocks and
chemical companies, rapidly fell out of favor. These stocks
traditionally do best in the early stages of an economic recovery. We
had anticipated this shift to some degree and lessened our holdings in
automobile manufacturers and other heavy industries during the first
half of the year.
We increased our emphasis instead on growth-oriented companies such as
consumer products manufacturers, which picked up momentum in the
fourth quarter of the year.
Q. WHAT INDIVIDUAL STOCKS DID YOU FAVOR DURING THE YEAR?
A. Technology stocks were one of the best-performing areas during the
year, and IBM, which the Fund holds, increased in price 30%
during the year. Health-care stocks bounced back as well. One stock we
benefitted from holding was McKesson, which was positively affected by
the sale of its PCS division to Lilly for $4 billion. Of course, not
all stocks in the Fund performed this well.
Q. HOW DID THE FUND PERFORM DURING 1994?
A. Class A shares achieved a total return at net asset value (without a
sales charge) of 1.98%, including reinvestment of dividends
totaling $.1855 per share. Class B and Class C shares achieved a total
return at net asset value of 2.70%, including reinvestment of
dividends totalling $.1455 per share. Each class of shares paid a
capital gains distribution of $.0975.
Q. HOW DID STOCKS PERFORM IN GENERAL LAST YEAR?
A. The Standard & Poor's 500 Stock Index, a broad-based, unmanaged index
that reflects general stock performance achieved a total return
of 1.36% during 1994. The Index does not reflect any commissions or
fees that would be paid by an investor purchasing the securities it
represents.
Not a part of the Prospectus 3
<PAGE> 6
Q. WHAT IS YOUR OUTLOOK FOR THE FUND?
A. It is generally anticipated that the Federal Reserve Board will raise
rates once more. We are already, however, seeing some
indications of an economic slowdown, and we believe that this will
become more evident by summer. With this expectation, we are
maintaining our current level of bond holdings, since these holdings
should benefit from a slower economy.
We also continue to favor consumer products stocks, and we are
beginning to add more utilities to the Fund's portfolio in
anticipation of the peak in interest rates.
While the outlook remains uncertain, our conservative approach
and careful stock selection should benefit the Fund's shareholders
whatever conditions we encounter.
/s/ ALAN T. SACHTLEBEN /s/ JAMES A. GILLIGAN
Alan T. Sachtleben James A. Gilligan
Executive Vice President Portfolio Manager
Equity Investments
Not a part of the Prospectus 4
<PAGE> 7
AMERICAN CAPITAL EQUITY INCOME FUND
YOUR DIVERSIFIED PORTFOLIO
Your investment in American Capital Equity Income Fund makes you a part owner
of a diversified portfolio of stocks (S), bonds (B) and convertible securities
(CV). Here's a list of the 10 largest holdings excluding short-term investments
in the portfolio as of December 31, 1994.
TOP 10 HOLDINGS
<TABLE>
<CAPTION>
% OF FUND'S
% OF FUND'S NET ASSETS
NET ASSETS 6 MONTHS AGO
------------ -------------
<S> <C> <C>
U.S. Treasury Securities (B) 5.57% 3.88%
International Business Machines Corp.(S) 1.33 1.03
One of the world's largest manufacturers
of computer and information-technology
equipment.
British Petroleum Co., PLC (S) 1.22 1.12
Major diversified energy company with
operations in the United Kingdom,
United States and elsewhere.
Sears Roebuck & Co. (B) 1.04 0.37
One of the country's largest retailers,
with other operations in consumer
finance and insurance.
Pacificorp (S) 1.03 0.74
Provides electric service in several
Western states. Also has major subsidiaries
in the telecommunications and financial
services industries.
Aegon N.V. (CV) 1.03 N.A.
Major international insurance company.
Enron Corp. (B) 1.02 0.50
Diversified producer and distributor
of natural gas and energy related services.
Duke Power Co. (S) 1.00 0.61
Major electric utility serving states in the
Southeast U.S.
Exxon Corp. (S) 0.99 N.A.
One of the largest energy companies
in the world.
Panhandle Eastern Corp. (B) 0.94 N.A.
Major natural gas transmission company.
</TABLE>
For a complete listing of portfolio holdings, see the Investment Portfolio
section beginning on page 9.
Not a part of the Prospectus 5
<PAGE> 8
AMERICAN CAPITAL EQUITY INCOME FUND
AMERICAN CAPITAL EQUITY INCOME FUND:
GROWTH FOR THE LONG-TERM INVESTOR
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/94
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Class A Shares (Based on maximum sales charge of 5.75%)
- ------------------------------------------------------------------------------------------------
<S> <C>
1 Year: (7.64)% 10 Years: 10.23%
5 Years: 7.47% Inception: 10.29%
(8/3/60)
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Class B Shares Total Return If withdrawn early*
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Year (2.70)% (7.35)%
Inception (12/20/91) 7.76% 6.76%
- ------------------------------------------------------------------------------------------------
</TABLE>
*Early withdrawal figures are adjusted for the applicable contingent deferred
sales charge (maximum 5%).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Class C Shares Total Return If withdrawn early*
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1 Year (2.70)% (3.63)%
Inception (7/20/93) 3.55% 3.55%
- ------------------------------------------------------------------------------------------------
</TABLE>
*Early withdrawal figures are adjusted for the applicable contingent deferred
sales charge (maximum 1%).
Figures quoted on the chart at right represent past performance based on
$10,000 investment in Class A shares made on August 3, 1960, using the
applicable sales charge of 5.75%. Past performance is not indicative of future
performance.
All figures include reinvestment of all dividends, and capital gains
distributions. Investment results prior to 7/3/90 do not reflect the effect of
fees currently paid pursuant to a plan of distribution which went into effect
7/2/90. No adjustments have been made to reflect any income taxes payable by a
shareholder. Investment return and net asset value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. While the period covered was, on the whole, one
of generally rising common stock prices, it may have included interim periods
of substantial market decline.
[GRAPH]
Not a part of the Prospectus 6
<PAGE> 9
[Graph indicating Total Value of Investment. Graph starts on bottom of Page 6
and ends on Page 7, taking up most of the page.]
Not a part of the Prospectus 7
<PAGE> 10
AMERICAN CAPITAL EQUITY INCOME FUND
THE AMERICAN CAPITAL ADVANTAGE
As a shareholder in an American Capital fund you have the option of
automatically investing your dividends and capital gains into most other
American Capital funds without a sales charge. This fund-to-fund privilege,
which can help you create a diversified portfolio, is just one of the many
shareholder services available to you at no charge.
[5 Dalbar Quality Tested Service Seals dated 1990 to 1995]
Van Kampen American Capital is extremely proud of its shareholder
services, and is committed to continuing to provide outstanding service. For
the fifth consecutive year, American Capital received the Quality Tested
Service Seal awarded by DALBAR Surveys, Inc., a well-respected independent
research firm in the mutual fund industry. American Capital was one of only
five mutual fund groups in the nation in 1994 to receive this prestigious award
for consistent, quality service, and one of only two fund groups to receive the
award every year since its inception. In addition, our shareholder services
agent, ACCESS, won the 1993 Missouri Quality Award. TO EXPERIENCE OUR
AWARD-WINNING CUSTOMER SERVICE CALL 1-800-421-5666 BETWEEN 7A.M. AND 7P.M.
CENTRAL TIME MONDAY THROUGH FRIDAY.
<TABLE>
<S> <C>
Service When To help meet the needs of busy shareholders, American Capital offers 24-hour account
You Want It information through ACCESS PLUS, our automated telephone service. Just call 1-800-
847-2424 from a Touch-Tone phone to check your account balance, obtain current fund
prices, exchange between funds and more.
Variety of Dividends from net investment income for American Capital Equity Income Fund are paid
Distribution quarterly and capital gains, if any, are distributed at least annually. You may
Options automatically reinvest these distributions into additional shares to build your
account value, take them in cash, or have them automatically invested into any other
American Capital fund.
Low Subsequent You can make additional investments in American Capital Equity Income Fund for as
Investments little as $25.
Automatic An automatic investment plan can help you carry out a disciplined financial plan by
Investment Plan allowing you to invest regularly into your mutual fund account through automatic
deductions from your personal bank account. With our Step Up option, you also can
increase your investment amount on a pre-established schedule.
</TABLE>
Not a part of the Prospectus 8
<PAGE> 11
INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 54.6%
CONSUMER DISTRIBUTION 2.4%
62,000 American Stores Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,666,250
29,000 Dayton Hudson Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,051,750
70,000 Limited, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,268,750
45,000 May Department Stores Co. . . . . . . . . . . . . . . . . . . . . . . . . . 1,518,750
*38,000 Michaels Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320,500
*59,000 Nine West Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,674,125
24,000 Nordstrom, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,008,000
39,000 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,794,000
----------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . 12,302,125
----------------
CONSUMER DURABLES 1.4%
68,000 Black & Decker Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,615,000
32,000 Daimler-Benz A.G., ADS . . . . . . . . . . . . . . . . . . . . . . . . . . 1,576,000
28,000 Eastman Kodak Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,337,000
50,000 Echlin, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
32,000 Stanley Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,144,000
----------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . . . . . . 7,172,000
----------------
CONSUMER NON-DURABLES 5.4%
43,000 Anheuser-Busch Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . 2,187,625
33,000 Clorox Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,942,875
*81,000 Dr Pepper/Seven-Up Companies, Inc. . . . . . . . . . . . . . . . . . . . . 2,075,625
33,000 Hershey Foods Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,596,375
55,000 H.J. Heinz Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,021,250
46,600 Liz Claiborne, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 786,375
154,000 Pet, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,041,500
59,000 Procter & Gamble Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,658,000
59,000 Ralston Purina Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,632,875
52,000 Reebok International, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . 2,054,000
73,000 Rubbermaid, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,098,750
61,000 Sara Lee Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,540,250
100,000 U.S. Shoe Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,875,000
----------------
TOTAL CONSUMER NON-DURABLES . . . . . . . . . . . . . . . . . . . . . . . 27,510,500
----------------
CONSUMER SERVICES 2.8%
20,000 Capital Cities ABC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 1,705,000
27,000 Dun & Bradstreet Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485,000
36,000 Gaylord Entertainment Co., Class A . . . . . . . . . . . . . . . . . . . . 819,000
63,000 McDonald's Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,842,750
26,000 Omnicom Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,345,500
35,000 Readers Digest Association, Inc. . . . . . . . . . . . . . . . . . . . . . 1,719,375
29,000 Tribune Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,587,750
41,000 Walt Disney Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,891,125
118,000 Wendy's International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 1,696,250
----------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . 14,091,750
----------------
ENERGY 5.9%
39,000 Amoco Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,305,875
78,000 British Petroleum Co., PLC, ADR . . . . . . . . . . . . . . . . . . . . . . 6,230,250
83,000 Exxon Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,042,250
36,000 Mobil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,033,000
203,000 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,313,750
135,000 Panhandle Eastern Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,666,250
39,000 Royal Dutch Petroleum Co., ADR . . . . . . . . . . . . . . . . . . . . . . 4,192,500
122,000 USX-Marathon Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,997,750
----------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,781,625
----------------
</TABLE>
Not a part of the Prospectus 9
<PAGE> 12
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 9.0%
73,000 Ahmanson (H.F.) & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,177,125
53,000 American General Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,497,250
21,000 American International Group, Inc. . . . . . . . . . . . . . . . . . . . . 2,058,000
34,000 BankAmerica Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,343,000
95,000 Bank of Boston Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,458,125
59,000 Beacon Properties Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,121,000
56,000 Carr Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,008,000
101,000 Chemical Banking Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,623,375
35,000 CoreStates Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . 910,000
32,000 Crestar Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,204,000
119,000 DeBartolo Realty Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,785,000
37,300 Equity Residential Properties Trust . . . . . . . . . . . . . . . . . . . . 1,119,000
36,000 Federal National Mortgage Association . . . . . . . . . . . . . . . . . . . 2,623,500
67,000 Federal Realty Investment Trust . . . . . . . . . . . . . . . . . . . . . . 1,381,875
60,000 First Bank System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,995,000
30,000 First Fidelity Bancorp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,346,250
12,000 General RE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485,000
28,000 Health Care Property Investments . . . . . . . . . . . . . . . . . . . . . 843,500
51,000 Liberty Property Trust . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,875
79,000 Manufactured Home Communities, Inc. . . . . . . . . . . . . . . . . . . . . 1,570,125
47,000 Mid-America Apartment Communities, Inc. . . . . . . . . . . . . . . . . . . 1,257,250
30,000 NationsBank Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,353,750
24,000 Post Properties, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 756,000
61,000 RFS Hotel Investments, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 892,125
34,000 Security Capital Industrial Trust . . . . . . . . . . . . . . . . . . . . . 578,000
47,000 St. Paul Companies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 2,103,250
37,000 Transamerica Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,840,750
52,000 Weeks Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,137,500
48,000 Weingarten Realty Investors . . . . . . . . . . . . . . . . . . . . . . . . 1,818,000
17,000 Wells Fargo & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,465,000
29,200 Winston Hotels, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 292,000
----------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,043,625
----------------
HEALTH CARE 6.4%
64,000 Abbott Laboratories, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 2,088,000
*52,000 Amgen, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,068,000
93,000 Baxter International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 2,627,250
57,000 Bristol-Myers Squibb Co. . . . . . . . . . . . . . . . . . . . . . . . . . 3,298,875
*27,000 Genentech, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,225,125
*41,000 Genetics Institute, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 1,476,000
41,700 Lilly (Eli) & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,736,563
104,000 Merck & Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,965,000
45,000 Mylan Labs, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,215,000
*48,000 Nellcor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,584,000
19,000 Pfizer, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,467,750
32,000 Schering Plough Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,368,000
103,000 Upjohn Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,167,250
31,000 Warner-Lambert Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,387,000
----------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,673,813
----------------
PRODUCER MANUFACTURING 3.7%
69,000 Allied-Signal, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,346,000
101,000 Browning-Ferris Industries, Inc. . . . . . . . . . . . . . . . . . . . . . 2,865,875
34,000 Fluor Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,466,250
59,000 General Electric Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,009,000
38,000 Illinois Tool Works, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 1,662,500
97,000 Philips N.V., ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,849,375
24,000 United Technologies Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 1,509,000
*38,000 Varity Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,377,500
75,000 WMX Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,968,750
----------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . 19,054,250
----------------
</TABLE>
Not a part of the Prospectus 10
<PAGE> 13
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES 3.0%
40,000 Ball Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,260,000
72,000 Bemis, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,728,000
53,000 Cabot Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,503,875
22,000 Dow Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,479,500
25,000 DuPont (E.I.) de Nemours & Co., Inc. . . . . . . . . . . . . . . . . . . . 1,406,250
41,000 Eastman Chemical Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,070,500
182,000 Ethyl Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,751,750
21,000 International Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,582,875
34,000 Scott Paper Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,350,250
----------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . . . . 15,133,000
----------------
TECHNOLOGY 4.8%
47,000 Adobe Systems, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,398,250
39,000 Boeing Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,823,250
54,000 Computer Associates International, Inc. . . . . . . . . . . . . . . . . . . 2,619,000
*45,000 DSC Communications Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 1,614,375
17,000 E-System, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707,625
92,000 International Business Machines Corp. . . . . . . . . . . . . . . . . . . . 6,762,000
37,000 Loral Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,401,375
12,000 McDonnell Douglas Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,704,000
51,000 Northern Telecom, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,702,125
41,000 Rockwell International Corp. . . . . . . . . . . . . . . . . . . . . . . . 1,465,750
32,000 Xerox Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,168,000
----------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,365,750
----------------
UTILITIES 9.8%
43,000 AT&T Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,160,750
69,000 Bellsouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,734,625
134,000 Duke Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,108,750
98,200 General Public Utilities Corp. . . . . . . . . . . . . . . . . . . . . . . 2,577,750
57,000 GTE Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,731,375
71,000 Hong Kong Telecommunications, Ltd., ADR . . . . . . . . . . . . . . . . . . 1,357,875
*85,000 Huaneng Power International, ADR . . . . . . . . . . . . . . . . . . . . . 1,253,750
131,000 NIPSCO Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,897,250
52,000 NYNEX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,911,000
289,000 Pacificorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,238,125
72,000 Pacific Telesis Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,052,000
143,000 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,503,500
105,000 Public Service Enterprise Group . . . . . . . . . . . . . . . . . . . . . . 2,782,500
153,000 Rochester Telephone Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 3,232,125
139,000 Southern Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,780,000
137,000 Sprint Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,784,625
36,000 Telefonos de Mexico, S.A., ADR . . . . . . . . . . . . . . . . . . . . . . 1,476,000
42,000 Texas Utilities Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,344,000
----------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,926,000
----------------
TOTAL COMMON STOCK (Cost $272,421,584) . . . . . . . . . . . . . . . . . 278,054,438
----------------
CONVERTIBLE PREFERRED STOCK 4.8%
CONSUMER NON-DURABLES 0.4%
300,000 RJR Nabisco Holdings Corp., PERCS, $.60125 . . . . . . . . . . . . . . . . 1,800,000
----------------
CONSUMER SERVICES 0.5%
50,000 SCI Finance N.V., LLC, 6.25% . . . . . . . . . . . . . . . . . . . . . . . 2,600,000
----------------
ENERGY 1.3%
40,000 NorAm Energy Corp., $3.00 . . . . . . . . . . . . . . . . . . . . . . . . . 1,195,000
50,000 Occidental Petroleum Corp., $7.75 . . . . . . . . . . . . . . . . . . . . . 2,437,500
61,000 Transco Energy Co., $3.50 . . . . . . . . . . . . . . . . . . . . . . . . . 2,798,375
----------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,430,875
----------------
</TABLE>
Not a part of the Prospectus 11
<PAGE> 14
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF MARKET
SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 1.1%
100,000 Citicorp, $1.22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,912,500
22,000 Citicorp, $5.375 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,521,750
33,000 First Fidelity Bancorp, $2.15 . . . . . . . . . . . . . . . . . . . . . . . 1,150,875
----------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,585,125
----------------
PRODUCER MANUFACTURING 1.0%
70,000 Corning Glassworks, 6.00% . . . . . . . . . . . . . . . . . . . . . . . . . 3,272,500
175,000 Westinghouse Electric Co., $1.30 . . . . . . . . . . . . . . . . . . . . . 2,351,563
----------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . 5,624,063
----------------
RAW MATERIALS/PROCESSING INDUSTRIES 0.5%
120,000 James River Corp., $1.55 . . . . . . . . . . . . . . . . . . . . . . . . . 2,430,000
----------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost $25,323,488) . . . . . . . . . . 24,470,063
----------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ---------------
<S> <C> <C>
CONVERTIBLE CORPORATE OBLIGATIONS 9.2%
CONSUMER DISTRIBUTION 0.7%
$ 1,000,000 Federated Department Stores, Inc., Zero Coupon, 2/15/04 . . . . . . . . . . 960,000
3,000,000 Price/Costco, Inc., 6.75%, 3/1/01 . . . . . . . . . . . . . . . . . . . . . 2,730,000
----------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . 3,690,000
----------------
CONSUMER SERVICES 1.7%
Time Warner, Inc.
1,059,000 8.75%, 1/10/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,755
11,400,000 Zero Coupon, 12/17/12 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,477,000
9,700,000 Zero Coupon, 6/22/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,431,375
500,000 Wendy's International, Inc., 7.00%, 4/1/06 . . . . . . . . . . . . . . . . 634,375
----------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . 8,543,505
----------------
ENERGY 1.9%
2,800,000 Amoco CDA Petroleum Co., 7.375%, 9/1/13 . . . . . . . . . . . . . . . . . . 3,220,000
2,710,000 Ensearch Corp., 6.375%, 4/1/02 . . . . . . . . . . . . . . . . . . . . . . 2,317,050
2,180,000 Oryx Energy Co., 7.50%, 5/15/14 . . . . . . . . . . . . . . . . . . . . . . 1,509,650
2,415,000 Western Co. of North America, 7.25%, 1/15/15 . . . . . . . . . . . . . . . 2,559,900
----------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,606,600
----------------
FINANCE 1.0%
5,000,000 Aegon N.V., 4.75%, 11/1/04 . . . . . . . . . . . . . . . . . . . . . . . . 5,225,000
----------------
PRODUCER MANUFACTURING 1.9%
2,500,000 Browning-Ferris Industries, Inc., 6.75%, 7/18/05 . . . . . . . . . . . . . 2,250,000
2,553,000 Cooper Industries, Inc., 7.05%, 1/1/15 . . . . . . . . . . . . . . . . . . 2,306,250
2,825,000 Trinova Corp., 6.00%, 10/15/02 . . . . . . . . . . . . . . . . . . . . . . 2,450,688
8,300,000 Valhi, Inc., Zero Coupon, 10/20/07 . . . . . . . . . . . . . . . . . . . . 2,510,750
----------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . 9,517,688
----------------
RAW MATERIALS/PROCESSING INDUSTRIES 1.1%
3,100,000 Albany International Corp., 5.25%, 3/15/02 . . . . . . . . . . . . . . . . 2,658,250
7,500,000 RPM, Inc., Zero Coupon, 9/30/12 . . . . . . . . . . . . . . . . . . . . . . 2,812,500
----------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES . . . . . . . . . . . . . . . 5,470,750
----------------
</TABLE>
Not a part of the Prospectus 12
<PAGE> 15
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 0.9%
$ 2,500,000 3Com Corp., 10.25%, 11/1/01 . . . . . . . . . . . . . . . . . . . . . . . . $ 2,650,000
1,500,000 General Instrument Corp., 5.00%, 6/15/00 . . . . . . . . . . . . . . . . . 2,010,000
----------------
TOTAL TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,660,000
----------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS (Cost $51,817,240) . . . . . . . 46,713,543
----------------
NON-CONVERTIBLE CORPORATE OBLIGATIONS 12.0%
CONSUMER DISTRIBUTION 2.1%
1,500,000 Harcourt General, Inc., 8.25%, 6/1/02 . . . . . . . . . . . . . . . . . . . 1,476,750
4,000,000 May Department Stores Co., 8.375%, 8/1/24 . . . . . . . . . . . . . . . . . 3,801,640
5,000,000 Sears, Roebuck & Co., 9.375%, 11/1/11 . . . . . . . . . . . . . . . . . . . 5,303,000
----------------
TOTAL CONSUMER DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . 10,581,390
----------------
CONSUMER DURABLES 1.1%
3,000,000 Ford Motor Co., 9.00%, 9/15/01 . . . . . . . . . . . . . . . . . . . . . . 3,054,900
3,000,000 General Motors Corp., 7.00%, 6/15/03 . . . . . . . . . . . . . . . . . . . 2,718,900
----------------
TOTAL CONSUMER DURABLES . . . . . . . . . . . . . . . . . . . . . . . . . 5,773,800
----------------
CONSUMER SERVICES 1.2%
3,000,000 Hertz Corp., 7.00%, 4/15/01 . . . . . . . . . . . . . . . . . . . . . . . . 2,792,400
2,000,000 Tele-Communications, Inc., 9.80%, 2/1/12 . . . . . . . . . . . . . . . . . 2,017,400
1,500,000 Time Warner, Inc., 7.95%, 2/1/00 . . . . . . . . . . . . . . . . . . . . . 1,425,600
----------------
TOTAL CONSUMER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . 6,235,400
----------------
ENERGY 3.7%
1,000,000 Burlington Resources, Inc., 9.875%, 6/15/10 . . . . . . . . . . . . . . . . 1,113,700
5,000,000 Enron Corp., 9.125%, 4/1/03 . . . . . . . . . . . . . . . . . . . . . . . . 5,173,500
4,000,000 Occidental Petroleum Corp., 10.125%, 11/15/01 . . . . . . . . . . . . . . . 4,307,000
5,000,000 Panhandle Eastern Corp., 7.875%, 8/15/04 . . . . . . . . . . . . . . . . . 4,788,000
1,500,000 Texaco Capital, Inc., 8.25%, 10/1/06 . . . . . . . . . . . . . . . . . . . 1,491,750
2,000,000 Western Atlas, Inc., 7.875%, 6/15/04 . . . . . . . . . . . . . . . . . . . 1,908,800
----------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,782,750
----------------
FINANCE 0.4%
2,000,000 General Electric Capital Corp., 8.90%, 9/15/04 . . . . . . . . . . . . . . 2,080,400
----------------
PRODUCER MANUFACTURING 0.6%
1,500,000 Deere & Co., 9.125%, 7/1/96 . . . . . . . . . . . . . . . . . . . . . . . . 1,527,345
1,500,000 Reliance Electric Co., 6.80%, 4/15/03 . . . . . . . . . . . . . . . . . . . 1,353,000
----------------
TOTAL PRODUCER MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . 2,880,345
----------------
RAW MATERIALS/PRODUCER INDUSTRIES 1.3%
4,000,000 Georgia-Pacific Corp., 9.95%, 6/15/02 . . . . . . . . . . . . . . . . . . . 4,263,320
2,000,000 Scott Paper Co., 10.00%, 3/15/05 . . . . . . . . . . . . . . . . . . . . . 2,275,000
----------------
TOTAL RAW MATERIALS/PRODUCER INDUSTRIES . . . . . . . . . . . . . . . . . 6,538,320
----------------
TECHNOLOGY 0.7%
4,000,000 Philips Electronics N.V., 7.75%, 4/15/04 . . . . . . . . . . . . . . . . . 3,787,600
----------------
UTILITIES 0.9%
2,500,000 MCI Communications Corp., 7.125%, 1/20/00 . . . . . . . . . . . . . . . . . 2,388,675
2,000,000 Texas Utilities Electric Co., 8.25%, 4/1/04 . . . . . . . . . . . . . . . . 1,970,600
----------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,359,275
----------------
TOTAL NON-CONVERTIBLE CORPORATE OBLIGATIONS (Cost $64,749,520) . . . . . 61,019,280
----------------
</TABLE>
Not a part of the Prospectus 13
<PAGE> 16
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT OBLIGATIONS 6.0%
$ 1,000,000 Federal Farm Credit Banks, 9.00%, 3/7/97 . . . . . . . . . . . . . . . . . $ 1,026,490
1,500,000 Republic of Columbia Notes, 7.25%, 2/23/04 . . . . . . . . . . . . . . . . 1,278,750
20,000,000 United States Treasury Bonds, 8.125%, 8/15/19 . . . . . . . . . . . . . . . 20,246,800
United States Treasury Notes
5,000,000 8.00%, 10/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,025,000
1,000,000 9.125%, 5/15/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,045,780
2,000,000 9.25%, 1/15/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,036,870
----------------
TOTAL GOVERNMENT OBLIGATIONS (Cost $30,652,315) . . . . . . . . . . . . . 30,659,690
----------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ----------------
<S> <C> <C>
EQUITY-LINKED SECURITIES 1.1%
40,000 American Express Co., (First Data Corp.), 6.25%, 10/15/96 . . . . . . . . . 1,708,744
95,000 Atlantic Richfield Co., 9.00%, 9/15/97 . . . . . . . . . . . . . . . . . . 2,474,297
30,000 Salomon, Inc., (Oracle Systems Corp.), 6.50%, 2/1/97 . . . . . . . . . . . 1,551,920
----------------
TOTAL EQUITY-LINKED SECURITIES (Cost $2,940,000) . . . . . . . . . . . . 5,734,961
----------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- ---------------
<S> <C> <C>
SHORT-TERM INVESTMENTS 11.5%
**$ 2,600,000 Federal National Mortgage Association, 5.86%, 1/9/95 . . . . . . . . . . . 2,596,198
25,003,819 General Electric Capital Corp., 5.50%, 1/3/95 . . . . . . . . . . . . . . . 24,988,541
5,070,000 Repurchase agreement with Lehman Government Securities, Inc.,
dated 12/30/94, 5.35%, due 1/3/95 (Collateralized by U.S.
Government Obligations in a pooled cash account) repurchase
proceeds $5,073,014 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,070,000
**26,000,000 United States Treasury Bills, 5.03% to 5.54%, 1/5/95 to 3/30/95 . . . . . . 25,942,824
----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $58,598,581) . . . . . . . . . . . . . 58,597,563
----------------
TOTAL INVESTMENTS (Cost $506,502,728) 99.2% . . . . . . . . . . . . . . . 505,249,538
Other assets and liabilities, net 0.8% . . . . . . . . . . . . . . . . . 4,149,847
----------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 509,399,385
================
</TABLE>
* Non-income producing security.
** Securities placed as collateral for futures contracts (Note 1B).
PERCS-Preferred equity redeemable cumulative stock
Not a part of the Prospectus 14
<PAGE> 17
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $506,502,728) . . . . . . . . . . . . . . . . . . . $ 505,249,538
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,166
Dividends and interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,937,727
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,654,035
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,328,307
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,466
-------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513,185,239
-------------------
LIABILITIES
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,170,293
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . 718,912
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 711,680
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448,475
Due to broker - variation margin . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,771
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,838
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,865
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 238,020
------------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,785,854
------------------
NET ASSETS, equivalent to $5.16 per share for Class A, Class B and Class C shares . . $ 509,399,385
==================
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 46,604,828 Class A, 46,930,223 Class B and 5,224,037
Class C shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 987,591
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 511,331,018
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . (1,834,071)
Unrealized appreciation (depreciation) of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,253,190)
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,679
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,642)
------------------
NET ASSETS at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 509,399,385
==================
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 15
<PAGE> 18
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,047,812
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,826,696
-----------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,874,508
-----------------
EXPENSES
Service fees - Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,111
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . . . . . . . . 1,927,432
Distribution and service fees - Class C . . . . . . . . . . . . . . . . . . . . . . . . 217,701
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,875,881
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . . . 1,040,038
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,186
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,603
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,630
State franchise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,193
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,103
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,087
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,145
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,369
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,201
-----------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,082,680
-----------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,791,828
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,793,804
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,768,903)
Net unrealized appreciation (depreciation) of securities during the year
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,088,971)
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,529
-----------------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . . . (23,884,541)
-----------------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . . . . $ (10,092,713)
=================
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 16
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1994 1993
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . $312,995,062 $137,074,872
------------ ------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,791,828 6,480,281
Net realized gain on securities . . . . . . . . . . . . . . . . . . . . . . 4,024,901 12,517,779
Net unrealized appreciation (depreciation) of securities during the
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,909,442) 10,925,800
------------ ------------
Increase (decrease) in net assets resulting from operations . . . . . . (10,092,713) 29,923,860
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,565,034) (4,775,222)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,449,845) (1,475,949)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (616,081) (58,964)
------------ ------------
(13,630,960) (6,310,135)
------------ ------------
In excess of book-basis net investment income (Note 1F)
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (203,788) --
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,526) --
------------ ------------
(230,314) --
------------ ------------
From net realized gain on securities
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,994,687) (7,071,374)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,771,623) (3,840,630)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (421,966) (305,758)
------------ ------------
(8,188,276) (11,217,762)
------------ ------------
Total dividends and distributions . . . . . . . . . . . . . . . . . . . . (22,049,550) (17,527,897)
------------ ------------
NET EQUALIZATION CREDITS (Note 1G) . . . . . . . . . . . . . . . . . . . . . 818,258 269,145
------------ ------------
FUNDS SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,769,448 76,892,651
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,314,454 99,155,135
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,343,775 10,141,387
------------ ------------
275,427,677 186,189,173
------------ ------------
Proceeds from shares issued for dividends and distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,530,860 9,564,663
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,619,248 4,948,254
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 853,040 283,638
------------ ------------
19,003,148 14,796,555
------------ ------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35,662,551) (32,913,458)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,416,978) (4,523,104)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,622,968) (294,084)
------------ ------------
(66,702,497) (37,730,646)
------------ ------------
Increase in net assets resulting from Fund share transactions . . . . . . . 227,728,328 163,255,082
------------ ------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,404,323 175,920,190
------------ ------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $509,399,385 $312,995,062
============ ============
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
American Capital Equity Income Fund, Inc. (the "Fund'') is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. INVESTMENT VALUATIONS
Securities, 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.
B. FUTURES CONTRACTS
Transactions in futures contracts are utilized in strategies to manage
the market risk of the Fund's investments. The purchase of a futures
contract increases the impact of changes in the market price of
investments on net asset value. There is a risk that the market
movement of such instruments may not be in the direction forecasted.
Note 3 - Investment Activity contains additional information.
Upon entering into futures contracts, the Fund maintains, in a
segregated account with its custodian, securities with a value equal
to its obligation under the futures contracts. A portion of these
funds is held as collateral in an account in the name of the broker,
the Fund's agent in acquiring the futures position. During the period
the futures contract is open, changes in the value of the contract
("variation margin") are recognized by marking the contract to market
on a daily basis. As unrealized gains or losses are incurred,
variation margin payments are received from or made to the broker.
Upon the closing or cash settlement of a contract, gains or losses are
realized. The cost of securities acquired through delivery under a
contract is adjusted by the unrealized gain or loss on the contract.
C. REPURCHASE AGREEMENTS
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund
may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised or 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 securities. The Fund will make
payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not
less than the repurchase proceeds due the Fund.
D. FEDERAL INCOME TAXES
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized gains on investments to its shareholders.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Dividend income is recorded on the ex-dividend date.
Interest income is accrued daily.
F. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which
may differ from generally accepted accounting principles. Such
dividends or distributions may exceed financial statement earnings.
G. EQUALIZATION
At December 31, 1994, the Fund discontinued the accounting practice of
equalization, which it had used since its inception. Equalization is
a practice whereby a portion of the proceeds from sales and costs of
redemptions of Fund shares, equivalent on a per-share basis to the
amount of the undistributed net investment income, is charged or
credited to undistributed net investment income.
Not a part of the Prospectus 18
<PAGE> 21
The balance of equalization included in undistributed net investment
income at the date of change, which was $99,049, was reclassified to
capital surplus. Such reclassification had no effect on net assets,
results of operations, or net asset value per share of the Fund.
H. DEBT DISCOUNT AND PREMIUM
For financial reporting purposes, debt discounts or premiums are
accounted for on the same basis as is followed for federal income tax
reporting. Accordingly, original issue debt discounts 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 the investment manager of the Fund. Management fees are
paid monthly, based on the average daily net assets of the Fund at an annual
rate of .50% of the first $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 $11,167 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.
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended December 31, 1994, the fees
for these services aggregated $791,935.
The Fund was advised that Van Kampen American Capital Distributors, Inc. (the
"Distributor") and Advantage Capital Corporation (the "Retail Dealer"), both
affiliates of the Adviser, received $183,464 and $168,108, respectively, as
their portion of the commissions charged on sales of Fund shares during the
year.
The Fund paid brokerage commissions of $69,839 to a company which is deemed an
affiliate of the Adviser's parent because it owns more than 5% of the company's
outstanding voting securities.
Under the Distribution Plans, the Fund pays up to .25% per annum of its average
net assets to the Distributor for expenses and service fees incurred. The Class
B shares and Class C shares pay an additional fee up to .75% per annum of their
average daily net assets to reimburse the Distributor for its distribution
expenses. Actual distribution expenses incurred by the Distributor for Class B
shares and Class C shares may exceed the amounts reimbursed to the Distributor
by the Fund. At December 31, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B and Class C plans aggregated approximately $9.0
million and $315,000, respectively, and may be carried forward and reimbursed
through either the collection of the contingent deferred sales charges from
share redemptions or, subject to the annual renewal of the plans, future Fund
reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 3 - INVESTMENT ACTIVITY
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $532,538,498 and $345,051,777,
respectively.
For federal income tax purposes, the identified cost of investments owned at
December 31, 1994 was $506,861,381. Net unrealized depreciation of investments
aggregated $1,611,843, gross unrealized appreciation of investments aggregated
$19,428,404 and gross unrealized depreciation of investments aggregated
$21,040,247. Approximately $1.5 million of financial statement losses are
deferred for federal income tax purposes to the 1995 fiscal year.
At December 31, 1994, the Fund held 140 long Standard & Poor's 500 Index
futures contracts expiring in March 1995. The market value of such contracts
was $32,294,500, and the unrealized appreciation was $176,679.
NOTE 4 - DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,470 plus a fee of $40 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $550. During the year, such fees aggregated
$16,513.
Not a part of the Prospectus 19
<PAGE> 22
The directors may participate in a voluntary Deferred Compensation Plan ("the
Plan"). The Plan is not funded and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At December 31, 1994, the liability for the Plan aggregated
$42,836. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
NOTE 5 - CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
The Fund has $200 million of each class of $.01 par value shares of capital
stock authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1993
---- ----
<S> <C> <C>
Shares sold
Class A .......................... 17,663,518 14,025,473
Class B .......................... 29,471,357 18,121,105
Class C .......................... 4,133,514 1,800,500
----------- ----------
51,268,389 33,947,078
----------- ----------
Shares issued for dividends reinvested
Class A .......................... 1,805,958 1,758,061
Class B .......................... 1,635,157 907,984
Class C .......................... 161,557 52,000
----------- ----------
3,602,672 2,718,045
Shares redeemed
Class A .......................... (6,664,087) (6,040,736)
Class B .......................... (4,963,223) (823,993)
Class C .......................... (871,369) (52,165)
----------- ----------
(12,498,679) (6,916,894)
----------- ----------
Increase in shares outstanding ..... 42,372,382 29,748,229
=========== ==========
</TABLE>
Not a part of the Prospectus 20
<PAGE> 23
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------
YEAR ENDED DECEMBER 31
---------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . . . . . $5.55 $5.15 $4.83 $4.00 $4.48
------- ------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . . .27 .25 .255 .26 .255
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . (.06) (.06) (.05) (.045) (.035)
------- ------- ------ ------ ------
Net investment income . . . . . . . . . . . . . . . . . . . .21 .19 .205 .215 .22
Net realized and unrealized gains or losses
on securities . . . . . . . . . . . . . . . . . . . . . . (.317) .6055 .31 .83 (.42)
------- ------- ------ ------ ------
Total from investment operations . . . . . . . . . . . . . (.107) .7955 .515 1.045 (.20)
------- ------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . . . . . (.1855) (.168) (.195) (.215) (.235)
Distributions from net realized gains
on securities . . . . . . . . . . . . . . . . . . . . . . (.0975) (.2275) - - (.045)
------- ------- ------ ------ ------
Total distributions . . . . . . . . . . . . . . . . . . . . (.283) (.3955) (.195) (.215) (.28)
------- ------- ------ ------ ------
Net asset value, end of period . . . . . . . . . . . . . . $5.16 $5.55 $5.15 $4.83 $4.00
======= ======= ====== ====== ======
TOTAL RETURN(1) . . . . . . . . . . . . . . . . . . . . . . (1.98%) 16.00% 10.72% 26.67% (4.68%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . . $240.5 $187.6 $123.8 $103.1 $85.4
Average net assets (millions) . . . . . . . . . . . . . . . $214.4 $152.1 $109.6 $ 93.7 $91.7
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1.02% 1.06% 1.01% 1.02% .89%
Net investment income . . . . . . . . . . . . . . . . . . 3.60% 3.33% 3.95% 4.88% 5.39%
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 92% 101% 74% 80% 150%
</TABLE>
(1) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
Not a part of the Prospectus 21
<PAGE> 24
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------------------- ----------------------------
MAY 1, 1992(1) YEAR JULY 6,
YEAR ENDED DECEMBER 31 THROUGH ENDED 1993(1) THROUGH
----------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993(2) 1992(2) 1994 1993(2)
------------- ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . $5.55 $5.15 $4.83 $5.55 $5.37
------- ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . .21 .24 .16 .23 .11
Expenses . . . . . . . . . . . . . . . . . . (.08) (.10) (.06) (.09) (.05)
------- ------- ------ ------- ------
Net investment income . . . . . . . . . . . .13 .14 .10 .14 .06
Net realized and unrealized gains
or losses on securities . . . . . . . . . . (.277) .6155 .337 (.287) .379
------- ------- ------ ------- ------
Total from investment operations . . . . . . (.147) .7555 .437 (.147) .439
------- ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . (.13) (.128) (.117) (.14) (.064)
Dividends in excess of book-basis net
investment income (Note 1F) . . . . . . . . (.0155) - - (.0055) -
Distributions from net realized gains
on securities . . . . . . . . . . . . . . . (.0975) (.2275) - (.0975) (.195)
------- ------- ------ ------- ------
Total distributions . . . . . . . . . . . . . (.243) (.3555) (.117) (.243) (.259)
------- ------- ------ ------- ------
Net asset value, end of period . . . . . . . $5.16 $5.55 $5.15 $5.16 $5.55
======= ======= ====== ======= ======
TOTAL RETURN(3) . . . . . . . . . . . . . . . (2.70%) 14.94% 9.17% (2.70%) 8.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . $242.0 $115.4 $13.3 $26.9 $10.0
Average net assets (millions) . . . . . . . . $192.9 $ 56.2 $ 4.4 $21.8 $ 3.4
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . . 1.82% 1.89% 1.87%(4) 1.82% 1.98%(4)
Net investment income . . . . . . . . . . . 2.82% 2.45% 3.06%(4) 2.83% 2.27%(4)
Portfolio turnover rate . . . . . . . . . . . 92% 101% 74% 92% 101%
</TABLE>
(1) Commencement of offering of sales
(2) Based on average month-end shares outstanding
(3) Total return for periods of less than one full year are not
annualized. Total return does not consider the effect of sales
charges.
(4) Annualized
See Notes to Financial Statements.
Not a part of the Prospectus 22
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL EQUITY INCOME FUND, INC.
In our opinion, the accompanying statement of assets and liabilities including
the investment portfolio and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Equity Income
Fund, 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 selected per share data and ratios for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and selected per share data and ratios
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
February 2, 1995
Not a part of the Prospectus 23
<PAGE> 26
FUND PERFORMANCE DATA
MANAGEMENT DISCUSSION
American Capital Equity Income Fund invests in stocks and corporate debt
securities with a primary investment objective of the highest possible income
consistent with safety of principal. Long-term growth is an important secondary
consideration.
During 1994, the performance of stocks was adversely impacted by
repeated increases in short-term interest rates and concerns about rising
inflation. For additional information on market conditions and the Fund's
performance during the reporting period, see pages 2-4 of this report.
CHANGE IN VALUE OF A $10,000 INVESTMENT
IN AMERICAN CAPITAL EQUITY INCOME FUND VS.
THE STANDARD & POOR'S 500-STOCK INDEX
12/31/74--12/31/94
[Graph indicating change in value of $10,000 Investment in comparision to
Standard & Poor's 500-Stock Index.]
Past performance is not indicative of future performance. Performance of other
classes of the Fund will be greater or less than the lines shown based on the
differences in loads or fees paid by shareholders investing in the different
classes.
*THE STANDARD & POOR'S 500-STOCK INDEX IS A BROAD-BASED UNMANAGED INDEX OF
STOCKS. THE INDEX DOES NOT REFLECT ANY COMMISSIONS OR FEES WHICH WOULD BE
INCURRED BY AN INVESTOR PURCHASING THE STOCKS IT REPRESENTS. ALL SALES CHARGES
AND ALL OTHER FEES AND EXPENSES ARE INCLUDED IN THE PERFORMANCE SHOWN FOR
AMERICAN CAPITAL EQUITY INCOME FUND CLASS A SHARES WITH ENDING VALUE OF
$113,667. IN ADDITION,SINCE INVESTORS PURCHASE SHARES OF THE FUND WITH VARYING
SALES CHARGES DEPENDING PRIMARILY ON VOLUME PURCHASED, THE FUND'S CLASS A
PERFORMANCE AT NET ASSET VALUE IS ALSO SHOWN.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Average Annual Total Return - Class A (as of 12/31/94) 1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
At Net Asset Value -1.98% 8.74% 10.88%
- -------------------------------------------------------------------------------------
With Maximum 5.75% Sales Charge -7.64% 7.47% 10.23%
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Average Annual Total Return - Class B (as of 12/31/94) 1 Year Since Inception (5/1/92)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
At Net Asset Value -2.70% 7.76%
- ---------------------------------------------------------------------------------------------
With Applicable Contingent Deferred Sales Charge
Upon Redemption (Maximum 5%) -7.35% 6.76%
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Average Annual Total Return - Class C (as of 12/31/94) 1 Year Since Inception (7/6/93)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
At Net Asset Value -2.70% 3.55%
- ---------------------------------------------------------------------------------------------
With Applicable Contingent Deferred Sales Charge
Upon Redemption (Maximum 1%) -3.63% 3.55%
- ---------------------------------------------------------------------------------------------
</TABLE>
Not a part of the Prospectus 24
<PAGE> 27
AMERICAN CAPITAL EQUITY INCOME FUND INC.
BOARD OF DIRECTORS
<TABLE>
<S> <C> <C>
J. Miles Branagan Lawrence J. Sheehan ***************************************************
Richard E. Caruso Fernando Sisto* * *
Roger Hilsman William S. Woodside * Tax Notice to Corporate *
Don G. Powell * Shareholders *
David Rees *Chairman of the Board * *
* For 1994, 64.35% of the dividends taxable *
* as ordinary income qualified for the 70% *
* dividends received deduction for corporations. *
* *
***************************************************
</TABLE>
- --------------------------------------------------------------------------------
OFFICERS
Don G. Powell Nori L. Gabert
PRESIDENT VICE PRESIDENT AND
SECRETARY
Curtis W. Morell J. David Wise
VICE PRESIDENT VICE PRESIDENT AND
AND TREASURER ASSISTANT SECRETARY
James A. Gilligan
Peter G. Kapourelos Perry F. Farrell
Alan T. Sachtleben M. Robert Sullivan
Paul R. Wolkenberg ASSISTANT TREASURERS
VICE PRESIDENTS
Tanya M. Loden Huey P. Falgout, Jr.
VICE PRESIDENT AND ASSISTANT SECRETARY
CONTROLLER
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Blvd., Houston, Texas 77056
- --------------------------------------------------------------------------------
DISTRIBUTOR
Van Kampen American Capital Distributors, Inc.
2800 Post Oak Blvd., Houston, Texas 77056
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT
Van Kampen American Capital Shareholder Services, Inc.
P.O. Box 418256, Kansas City, Missouri 64141-9256
- --------------------------------------------------------------------------------
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, Massachusetts 02110
- --------------------------------------------------------------------------------
COUNSEL
O'Melveny & Myers
400 South Hope Street, Los Angeles, California 90071
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1201 Louisiana, Houston, Texas 77002
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund
which contains additional information on how to purchase shares, the sales
charge, and other pertinent data. If used for distribution to prospective
investors after 3/31/95, this annual report must be accompanied by an American
Capital Equity Income Fund performance data update for the most recent calendar
quarter.
- --------------------------------------------------------------------------------
<PAGE> 28
AMERICAN CAPITAL FAMILY OF FUNDS
<TABLE>
<S> <C>
EMERGING GROWTH FUND CORPORATE BOND FUNDS
American Capital Emerging Growth Fund, Inc. American Capital High Yield Investments, Inc.
MIDCAP FUND American Capital Corporate Bond Fund, Inc.
American Capital Enterprise Fund, Inc. GOVERNMENT SECURITIES FUNDS
CORE GROWTH FUNDS American Capital Global Government Securities Fund
American Capital Pace Fund, Inc. American Capital U.S. Government Trust for Income
American Capital Global Equity Fund American Capital Government Securities, Inc.
REAL ESTATE FUND American Capital Federal Mortgage Trust
American Capital Real Estate Securities Fund, Inc. TAX-FREE FUNDS
GROWTH-INCOME FUNDS American Capital Tax-Exempt Trust High Yield Municipal Portfolio
American Capital Comstock Fund, Inc. American Capital Texas Municipal Securities, Inc.
American Capital Growth and Income Fund, Inc. American Capital Municipal Bond Fund, Inc.
American Capital Equity Income Fund, Inc. American Capital Tax-Exempt Trust Insured Municipal Portfolio
American Capital Global Managed Assets Fund, Inc. MONEY MARKET FUND
American Capital Harbor Fund, Inc. American Capital Reserve Fund, Inc.
INCOME-GROWTH FUND
American Capital Utilities Income Fund, Inc.
</TABLE>
THE GOVETT FUNDS, INC.
Nationally Distributed by Van Kampen American Capital Distributors, Inc.
(Formerly American Capital Marketing, Inc.)
Govett Latin America Fund Govett Smaller Companies Fund
Govett Pacific Strategy Fund Govett International Equity Fund
Govett Emerging Markets Fund Govett Global Government Income Fund
For more complete information about any American Capital or Govett Fund,
including charges and expenses, obtain a prospectus from your investment
professional or write Van Kampen American Capital Distributors, Inc., P.O. Box
1411, Houston, TX 77251-1411. Read the prospectus carefully before you invest
or send money.
American Capital
Equity Income Fund, Inc.
C/O ACCESS
P.O. Box 418256
Kansas City, MO 64141-9256
PRINTED MATTER
Printed in U.S.A./025RPT-001
