<PAGE> 1
American Capital
Income Trust
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 bond mutual fund still is 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 INCOME TRUST. THE TEAM IS LED BY PORTFOLIO MANAGER ELLIS BIGELOW
AND ROBERT C. PECK, JR., EXECUTIVE VICE PRESIDENT.
Q. SHORT-TERM INTEREST RATES ROSE STEADILY THROUGHOUT 1994. HOW DID THIS
AFFECT THE TRUST'S PERFORMANCE?
A. The Federal Reserve Board was concerned that the economy was growing
too quickly, which would cause the inflation rate to rise. In an effort
to slow economic growth to a more sustainable level, the Fed raised
short-term interest rates six times in 1994. As a result, the yields
on fixed-income securities increased and the prices decreased. The
extremely rapid decline in price had a negative impact on both
high-yield and government markets and, therefore, on the Trust.
While the Fed was concerned about the economy growing too quickly,
investors who prefer high-yield securities were worried about the impact
of the Fed's moves. If rising rates caused the economy to slow too much,
corporate profits could be reduced, raising questions about companies'
abilities to repay their debt.
Q. HOW DID YOU REACT TO THE CHANGING INVESTMENT CLIMATE?
A. As interest rates rose, we reduced our exposure to homebuilders, such
as Ryland Homes and MDC Homes, because higher rates usually depress
homebuilding activity. As commodity prices rose, we increased our exposure
to raw materials, including paper companies such as Stone Container and
steel companies such as Geneva, Florida Steel and Republic Engineered
Steel. We also added to the Trust's investment in the textile, health
care and gaming industries.
The portfolio remained about evenly divided between U.S. Government and
agency securities, and corporate issues. Because the corporate issues can
be considered speculative, we research each issue thoroughly and utilize
stringent standards in selecting high-yield bonds for inclusion in
American Capital Income Trust.
Q. HOW DID THE TRUST PERFORM IN 1994?
A. American Capital Income Trust achieved a total return at market value of
-8.06% for 1994, including reinvestment of dividends totalling $.6623 per
share. The net asset value of the Fund decreased during the period from
$8.15 to $7.28, for a total return at net asset value of -2.08%,
including reinvestment of dividends.
Ellis S. Bigelow, senior investment vice president of Van Kampen
American Capital Asset Management, Inc., has been your Fund's portfolio
manager since its inception in 1988.
2
<PAGE> 4
Q. HOW DID THAT COMPARE WITH OTHER COMPARABLE INVESTMENTS?
A. For the same period, the Shearson Lehman Treasury Index had a total
return of -3.38% and the Shearson Lehman High Yield Index achieved a
total return of -1.03%. Both indexes are broad-based, unmanaged indexes
that reflect the general performance of Treasury and high-yield
securities, respectively. Neither Index reflects any commissions or fees
that would be paid by an investor purchasing the securities it
represents.
Q. WHAT'S AHEAD FOR THE TRUST?
A. As we expected the Fed raised short-term interest rates again in early
1995. The lagging impact of this and previous increases should begin to
impact the economy later in the year. We also expect inflation to be
slightly higher this year than it was last year. However, profit growth
in 1995 looks good, with increases expected to range between 5% and 10%.
An environment of greater stability in Treasury prices and controlled
inflation should be good for high yield investments.
/s/ ROBERT C. PECK, JR. /s/ ELLIS S. BIGELOW
Robert C. Peck, Jr. Ellis S. Bigelow
Executive Vice President Portfolio Manager
3
<PAGE> 5
DIVIDEND REINVESTMENT PLAN
The Fund pays distributions in cash, but if you own shares in your own
name, you may elect to participate in the Fund's dividend reinvestment plan
(the "Plan"). Under the Plan, if the Fund declares a dividend or capital gain
distribution payable either in cash or shares of the Fund, and the market price
of shares on the payment date equals or exceeds their net asset value, the Fund
will issue new shares to you at a value equal to the higher of the net asset
value or 95% of the market price. If such market price is lower than net asset
value, or if dividends or capital gain distributions are payable only in cash,
then you will receive shares purchased on the New York Stock Exchange or
otherwise on the open market. If the market price exceeds net asset value
before the Plan Agent has completed its purchases, the average purchase price
may exceed net asset value, resulting in fewer shares being acquired than if
the Fund had issued new 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 do 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 shares of record. 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, or, if you wish, State Street Bank and
Trust Company, the Fund's custodian, will sell your shares and send you the
proceeds less a service fee of $2.50 and less brokerage commissions. Under the
rules generally applicable to sales of securities, a sale of shares (including
fractional shares) will be a taxable event for U.S. federal income tax purposes
and may be a taxable event for state, local and foreign tax purposes. 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
(800) 421-9696
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
- ------------------------------------------------------------------------------------
<C> <S> <C>
Corporate Obligations 41.3%
CONSUMER DISTRIBUTION 7.7%
$1,000,000 Big 5 Holdings, 13.625%, 9/15/02...................... $1,045,000
500,000 Big V Supermarkets, Inc., 11.00%, 2/15/04............. 400,000
1,000,000 Brylane Capital, 10.00%, 9/01/03...................... 980,000
250,000 Dairy Mart Convenience Stores, Inc., 10.25%, 3/15/04.. 185,000
600,000 Farm Fresh, Inc., 12.25%, 10/1/00..................... 519,000
770,515 FF Holdings Corp., 14.25% Payment-in-Kind, 10/1/02.... 485,425
300,000 Finlay Enterprises, Inc., Step Bonds (0% to 12.00% at
5/1/98), 5/01/05...................................... 172,500
500,000 Finlay Fine Jewelry Corp., 10.625%, 5/1/03............ 457,500
1,500,000 Food 4 Less Supermarkets, Inc., 13.75%, 6/15/01....... 1,627,500
*500,000 Kash N Karry Food Stores, Inc., 14.00%, 2/1/01........ 188,200
500,000 Levitz Furniture, 9.625%, 7/15/03..................... 397,500
1,000,000 Pathmark Stores, Inc., Step Bonds (0% to 10.75% at
11/1/99), 11/1/03..................................... 510,000
1,250,000 Specialty Retailers, Inc., 11.00%, 8/15/03............ 1,112,500
500,000 Wickes Lumber Co., 11.625%, 12/15/03.................. 480,000
----------
TOTAL CONSUMER DISTRIBUTION.......................... 8,560,125
----------
CONSUMER DURABLES 0.7%
750,000 Oriole Homes Corp., 12.50%, 1/15/03................... 675,000
*200,000 UDC Homes, Inc., 11.75%, 4/30/03...................... 110,000
----------
TOTAL CONSUMER DURABLES.............................. 785,000
----------
CONSUMER NON-DURABLES 4.1%
350,000 Consoltex Group, Inc., 11.00%, 10/1/03................ 322,000
1,000,000 Dan River, Inc., 10.125%, 12/15/03.................... 895,000
100,000 Dr Pepper Bottle Holdings, Step Bonds (0% to 11.625%
at 2/15/98), 2/15/03................................. 69,500
500,000 Fieldcrest Cannon, 11.25%, 6/15/04.................... 502,500
500,000 Health O Meter, Inc., 13.00%, 8/15/02................. 450,000
1,850,000 Synthetic Industries, Inc., 12.75%, 12/01/02.......... 1,646,500
750,000 Westpoint Stevens, 9.375%, 12/15/05................... 678,750
----------
TOTAL CONSUMER NON-DURABLES.......................... 4,564,250
----------
CONSUMER SERVICES 5.4%
250,000 Act III Broadcasting, 9.625%, 12/15/03................ 232,500
250,000 Act III Theatres, Inc., 11.875%, 2/1/03............... 255,000
800,000 AMC Entertainment, Inc., 12.625%, 8/1/02.............. 848,000
650,000 American Restaurant Group, 12.00%, 9/15/98............ 617,500
500,000 American Standard, Inc., 11.375%, 5/15/04............. 510,000
250,000 Bally's Grand, Inc., 10.375%, 12/15/03................ 217,500
1,000,000 California Hotel Finance Corp., 11.00%, 12/1/02....... 915,000
250,000 Carrols Corp., 11.50%, 8/15/03........................ 233,125
250,000 Continental Cablevision, Inc., 9.50%, 8/1/13.......... 228,438
750,000 Flagstar Corp., 11.25%, 11/1/04....................... 616,875
750,000 Outlet Broadcasting, Inc., 10.875%, 7/15/03........... 742,500
750,000 Resorts International, Inc., Increasing Rate Notes
(7.888% at 12/31/94), 6/30/00........................ 610,332
----------
TOTAL CONSUMER SERVICES.............................. 6,026,770
----------
</TABLE>
5
<PAGE> 7
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ------------------------------------------------------------------------------------
<C> <S> <C>
ENERGY 2.9%
$ 500,000 Clark (R & M) Holdings, Inc., Zero Coupon, 2/15/00. $ 280,625
250,000 Dual Drilling Co., 9.875%, 1/15/04................. 222,500
500,000 Global Marine, Inc., 12.75%, 12/15/99.............. 535,000
800,000 Maxus Energy Corp., 9.875%, 10/15/02............... 720,000
844,000 Mesa Capital Corp., Step Bonds (0% to 12.75% at
6/30/95), 6/30/98................................ 725,840
500,000 Petroleum Heat & Power, Inc., 10.125%, 4/1/03...... 455,000
250,000 Wainoco Oil Corp., 12.00%, 8/1/02.................. 257,500
------------
TOTAL ENERGY...................................... 3,196,465
------------
FINANCE 3.2%
500,000 American Annuity Group, Inc., 11.125%, 2/1/03...... 492,500
American Financial Corp.
700,000 Series B, 12.00%, 9/3/99.......................... 708,749
59,000 12.25%, 9/15/03................................... 60,033
1,000,000 Americo Life, Inc., 9.25%, 6/1/05.................. 845,000
1,200,000 Blue Bell Funding, Inc., 11.85%, 5/1/99............ 1,239,000
250,000 Phoenix Re Corp., 9.75%, 8/15/03................... 247,500
------------
TOTAL FINANCE..................................... 3,592,782
------------
HEALTH CARE 1.4%
277,794 Amerisource Distribution Corp., 11.25% Payment-in-
Kind, 7/15/05..................................... 277,100
250,000 Hillhaven Corp., 10.125%, 9/1/01................... 250,000
500,000 ORNDA Health Corp., 11.375%, 8/15/04............... 511,250
500,000 Paracelsus Healthcare Corp., 9.875%, 10/15/03...... 472,500
------------
TOTAL HEALTH CARE................................. 1,510,850
------------
PRODUCER MANUFACTURING 4.6%
250,000 American Standard, Inc. 10.875%, 5/15/99........... 253,125
200,000 EnviroSource, Inc., 9.75%, 6/15/03................. 174,000
250,000 IMO Industries, Inc., 12.00%, 11/1/01.............. 249,375
1,100,000 Jordan Industries, Inc., Step Bonds (0% to 11.75%
at 8/1/98), 8/1/05................................. 566,500
1,573,040 Robertson Ceco Corp., Step Bonds (10% to 12% at
5/31/95) Payment-in-Kind, 11/30/99................ 1,217,140
250,000 Southdown, Inc., Series B, 14.00%, 10/15/01........ 275,000
Thermadyne Holdings, Inc.
1,583,000 10.25%, 5/1/02.................................... 1,519,680
377,700 10.75%, 11/1/03................................... 353,150
500,000 USG Corp., 10.25%, 12/15/02........................ 509,375
------------
TOTAL PRODUCER MANUFACTURING...................... 5,117,345
------------
RAW MATERIALS/PROCESSING INDUSTRIES 6.4%
500,000 Buckeye Cellulose Corp., 10.25%, 5/15/01........... 467,500
500,000 Container Corp. of America, 9.75%, 4/1/03.......... 468,750
1,500,000 Fort Howard Corp., 14.125%, 11/1/04................ 1,511,250
Gaylord Container Corp.
250,000 11.50%, 5/15/01................................... 255,625
1,000,000 Step Bonds (0% to 12.75% at 5/15/96), 5/15/05..... 885,000
300,000 Geneva Steel Co., 9.50%, 1/15/04................... 252,000
500,000 INDSPEC Chemical Corp., Step Bonds (0% to 11.50% at
12/1/98), 12/1/03................................. 275,000
*300,000 Lanesborough Corp., 12.375%, 3/15/97............... 92,250
500,000 NL Industries, Inc., Step Bonds (0% to 13.00% at
10/15/98), 10/15/05............................... 310,000
</TABLE>
6
<PAGE> 8
Investment Portfolio, continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- ------------------------------------------------------------------------------------
<C> <S> <C>
RAW MATERIALS/PROCESSING INDUSTRIES -- CONTINUED
$ 250,000 Plastic Specialties & Technology Corp., 11.25%,
12/1/03........................................... $ 221,250
250,000 Republic Engineered Steel, 9.875%, 12/15/01........ 225,000
500,000 Stone Container Corp., 10.75%, 10/1/02............. 496,250
750,000 Sweetheart Cup, Inc., 10.50%, 9/1/03............... 701,250
500,000 Riverwood International Corp., 10.375%, 6/30/04.... 497,500
UCC Investors Holding, Inc.
250,000 10.50%, 5/1/02.................................... 246,250
250,000 11.00%, 5/1/03.................................... 246,250
------------
TOTAL RAW MATERIALS/PROCESSING INDUSTRIES......... 7,151,125
------------
TECHNOLOGY 3.1%
500,000 Harman International Industries, Inc., 12.00%,
8/1/02............................................ 540,000
500,000 MFS Communication Corp.,
Step Bonds (0% to 9.375% at 1/15/99), 1/15/04..... 296,250
500,000 Mobile Telecom, Inc., 13.50%, 12/15/02............. 506,875
2,000,000 Unisys Corp., 13.50%, 7/1/97....................... 2,145,000
------------
TOTAL TECHNOLOGY.................................. 3,488,125
------------
TRANSPORTATION 1.5%
Sea Containers, Ltd.
250,000 9.50%, 7/1/03..................................... 221,875
250,000 12.50%, 12/1/04................................... 251,250
Southern Pacific Transportation Co., 10.50%,
500,000 7/1/99............................................. 510,000
500,000 Trism, Inc., 10.75%, 12/15/00...................... 467,500
500,000 USAir, Inc., 10.00%, 7/1/03........................ 265,000
------------
TOTAL TRANSPORTATION.............................. 1,715,625
------------
UTILITIES 0.3%
500,000 PanAmSat L.P., Step Bonds (0% to 11.375% at
8/1/98), 8/1/03................................... 310,000
------------
TOTAL CORPORATE OBLIGATIONS (Cost $48,102,850).... 46,018,462
------------
United States Agency and Government Obligations 48.4%
3,000,000 Federal Farm Credit Banks, 5.425%, 9/15/03......... 2,497,470
1,250,000 Federal National Mortgage Association, 11.95%,
1/10/95........................................... 1,250,250
Government National Mortgage Association
7,776,981 7.50% Pools, 7/15/23 to 8/15/23................... 7,215,560
8,833,850 8.00% Pools, 3/15/17 to 10/15/22.................. 8,444,630
3,960,002 8.50% Pools, 1/15/23 to 12/15/24.................. 3,889,474
10,306,103 9.00% Pools, 5/15/16 to 12/15/24.................. 10,396,281
1,961,394 9.50% Pools, 11/15/09 to 6/15/20.................. 2,023,923
United States Treasury Bonds
3,000,000 7.25%, 5/15/16.................................... 2,770,320
3,000,000 7.50%, 11/15/16................................... 2,843,910
11,500,000 8.875%, 2/15/19................................... 12,543,970
------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT
OBLIGATIONS
(Cost $58,911,269)............................... 53,875,788
------------
</TABLE>
7
<PAGE> 9
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of
Shares
-----------
<C> <S> <C>
Preferred Stock 1.2%
*58,550 Supermarkets General Holdings Corp., $3.52 Payment-
in-Kind (Cost $1,418,140)........................... $1,288,100
----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
-----------
<C> <S> <C>
Private Placements 1.9%
CORPORATE OBLIGATIONS 1.7%
$ 1,500,000 GPA Holland, 9.90%, 7/24/96 (purchased 12/21/93 and
1/7/94)............................................. 1,402,500
45,370 Hemmeter Enterprises, Inc., 12.00%, Payment-in-Kind,
12/15/00 (purchased 2/1/94)......................... 21,778
500,000 Smitty's Supervalue, 12.75%, 6/15/04 (purchased
6/22/94)............................................ 490,000
----------
TOTAL CORPORATE OBLIGATIONS ........................ 1,914,278
----------
UNITS 0.2%
500 Hemmeter Enterprises, Inc., each unit consists of a
$1,000 face amount Payment-in-Kind note, 12.00%,
12/15/99 and 15 warrants (purchased 12/14/93;
expiring 12/15/99).................................. 250,000
----------
COMMON STOCK 0.0%
*7,500 FF Holdings Corp. (purchased 10/6/92 and 1/13/94).... 15,000
----------
TOTAL PRIVATE PLACEMENTS (Cost $2,330,359).......... 2,179,278
----------
Units 1.0%
50 Empire Gas Corp., each unit consists of a $1,000 face
amount step note (7% to 12.875% at 1/15/00), 7/15/04
and 1.38 warrants (expiring 7/14/04)................ 367,500
500 ICF Kaiser International, each unit consists of a
$1,000 face amount note, 12.00%, 12/31/03 and 5
warrants (expiring 12/31/98)........................ 442,500
25 Santa Fe, Inc., each unit consists of a $10,000 face
amount bond, 11.00%, 12/15/00 and 1 warrant
(expiring 12/15/96)................................. 218,125
----------
TOTAL UNITS (Cost $1,145,261)....................... 1,028,125
----------
</TABLE>
<TABLE>
<CAPTION>
Number of
Shares/
Warrants
----------
<C> <S> <C>
Common Stock & Warrants 0.0%
625 Capital Gaming, warrants, exiring 2/1/99............ 430
*600 Finlay Enterprises, Inc............................. 9,000
*2,073 Thermadyne Holdings Corp............................ 23,580
------------
TOTAL COMMON STOCK & WARRANTS (Cost $28,859)....... 33,010
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
- ------------
<C> <S> <C>
Repurchase-Agreement 4.2%
$ 4,710,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%, due
1/3/95 (collateralized by U.S. Government
obligations in a pooled cash account) repurchase
proceeds $4,713,009 (Cost $4,710,000).............. 4,710,000
------------
TOTAL INVESTMENTS (Cost $116,646,738) 98.0%......... 109,132,763
Other assets and liabilities, net 2.0%.............. 2,221,705
------------
NET ASSETS 100%...................................... $111,354,468
============
</TABLE>
*Non-income producing 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 $116,646,738)................. $109,132,763
Cash............................................................. 2,627
Interest receivable.............................................. 2,065,306
Receivable for investments sold.................................. 776,940
Other assets..................................................... 2,175
------------
TOTAL ASSETS.................................................... 111,979,811
------------
LIABILITIES
Payable for investments purchased................................ 257,251
Accrued expenses and other liabilities........................... 209,184
Dividends payable................................................ 98,721
Due to Adviser................................................... 60,187
------------
TOTAL LIABILITIES............................................... 625,343
------------
NET ASSETS, equivalent to $7.28 per share........................ $111,354,468
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, no par value; unlimited shares
authorized; 15,290,019 shares outstanding....................... $141,137,820
Accumulated net realized loss on securities...................... (22,536,260)
Net unrealized depreciation of investments....................... (7,513,975)
Undistributed net investment income.............................. 266,883
------------
NET ASSETS at December 31, 1994.................................. $111,354,468
============
</TABLE>
See Notes to Financial Statements.
9
<PAGE> 11
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest......................................................... $ 10,219,389
Dividends........................................................ 269,942
------------
Investment income............................................... 10,489,331
------------
EXPENSES
Management fees.................................................. 766,305
Administrative fees.............................................. 118,181
Accounting services.............................................. 59,673
Reports to shareholders.......................................... 33,953
Trustees' fees and expenses...................................... 37,512
Shareholder service agent's fees and expenses.................... 31,391
Registration and filing fees..................................... 24,200
Legal fees....................................................... 14,821
Audit fees....................................................... 16,825
Custodian fees................................................... 11,294
Miscellaneous.................................................... 13,310
------------
Total expenses.................................................. 1,127,465
------------
Net investment income........................................... 9,361,866
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities.................................. (357,996)
Net unrealized depreciation of securities during the year........ (12,191,929)
------------
Net realized and unrealized loss on securities.................. (12,549,925)
------------
Decrease in net assets resulting from operations................ $ (3,188,059)
============
</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 .................... $124,668,219 $119,577,068
------------ ------------
OPERATIONS
Net investment income............................ 9,361,866 11,074,741
Net realized gain (loss) on securities........... (357,996) 2,269,362
Net unrealized appreciation (depreciation) of
securities during the year...................... (12,191,929) 2,891,932
------------ ------------
Increase (decrease) in net assets resulting from
operations..................................... (3,188,059) 16,236,035
------------ ------------
Dividends to shareholders from net investment
income.......................................... (10,125,692) (11,676,465)
------------ ------------
SHARE TRANSACTIONS
Proceeds from shares issued for dividends
reinvested...................................... -- 531,581
------------ ------------
INCREASE (DECREASE) IN NET ASSETS................. (13,313,751) 5,091,151
------------ ------------
NET ASSETS, end of year........................... $111,354,468 $124,668,219
============ ============
SHARE TRANSACTIONS
Shares issued for dividends reinvested........... -- 65,906
------------ ------------
Increase in shares outstanding.................. -- 65,906
============ ============
</TABLE>
See Notes to Financial Statements.
11
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
Note 1--Significant Accounting Policies
American Capital Income Trust (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 actively traded in the over-the-counter market, including listed
securities for which the primary market is believed to be over-the-counter,
are valued at the most recently quoted bid price. Securities for which the
primary market is on a national securities exchange are valued at the last
reported sale price, or, if no sale is reported, at the last reported bid
price. If no sale or bid price is reported, securities are valued at the
most recent sale price. Private placements are valued at fair value under a
method approved by the Board of Trustees.
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 49% 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. It is anticipated that no
distributions of capital gains will be made until tax basis capital loss
carryforwards expire or are offset by net realized capital gains.
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.
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 purchases and
ordinary income for tax purposes.
12
<PAGE> 14
G. Private Placements
The Fund may purchase securities through private placement transactions
without registration under the Securities Act of 1933. Such securities
generally may be resold only in a privately negotiated transaction with a
limited number of purchasers or in a public offering after registration
under the Securities Act of 1933. The issuers generally have agreed to
register these securities within six months of purchase by the Fund.
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 an annual rate of .65% of the Fund's average weekly net
assets.
Van Kampen American Capital Distributors, Inc., an affiliate of the Adviser,
serves as administrative agent for the Fund by providing a shareholder
relations program. Administrative fees are paid monthly, based on the Fund's
average weekly net assets at an annual rate of .10% of the first $250 million
and .05% of the amount in excess of $250 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 $7,360 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting service 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.
Certain officers and trustees of the Fund are officers and directors of the
Adviser and the administrative agent.
Note 3--Investment Activity
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $50,025,277 and $55,173,256,
respectively.
The identified cost of investments owned at December 31, 1994 was the same for
federal income tax and financial reporting purposes. Net unrealized
depreciation of investments aggregated $7,513,975, gross unrealized
appreciation of investments aggregated $1,598,134 and gross unrealized
depreciation aggregated $9,112,109. The net realized capital loss carryforward
of approximately $21.9 million at December 31, 1994 may be utilized to offset
current or future capital gains until expiration in 1997 through 2002.
Note 4--Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $1,720 plus $111 per meeting attended. During the year, such
fees aggregated $34,633.
Note 5--Subsequent Dividends
The Board of Trustees declared a dividend of $.05375 per share from net-
investment income, payable January 31, 1995 and February 28, 1995 to
shareholders of record January 13, 1995 and February 10, 1995, respectively.
13
<PAGE> 15
Note 6--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.......... $(3,426,652) $(3,169,106) $(4,115,714) $(1,838,453) $(12,549,925)
Net realized and
unrealized gain (loss)
on securities per
share.................. (.22) (.21) (.22) (.2077) (.8577)
Total investment income. 2,783,479 2,595,373 2,764,588 2,345,891 10,489,331
Net investment income... 2,472,827 2,308,652 2,486,907 2,093,480 9,361,866
Net investment income
per share.............. .16 .15 .16 .18 .65
</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.......... $ 2,753,525 $2,197,962 $(1,204,908) $ 1,414,715 $ 5,161,294
Net realized and
unrealized gain (loss)
on securities per
share.................. .181 .146 (.078) .036 .285
Total investment income. 3,189,459 3,134,711 3,019,753 2,963,319 12,307,242
Net investment income... 2,887,127 2,821,509 2,730,072 2,636,033 11,074,741
Net investment income
per share.............. .19 .18 .18 .23 .78
</TABLE>
14
<PAGE> 16
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest 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................... $8.15 $7.85 $7.70 $6.66 $7.90
--------- -------- ---------- --------- ---------
INCOME FROM INVESTMENT OP-
ERATIONS
Investment income.......... .73 .87 .925 .955 1.047
Expenses................... (.08) (.09) (.08) (.075) (.073)
--------- -------- ---------- --------- ---------
Net investment income...... .65 .78 .845 .88 .974
Net realized and unrealized
gain or (loss)
on securities............. (.8577) .285 .1625 1.05 (1.242)
--------- -------- ---------- --------- ---------
Total from investment
operations................ (.2077) 1.065 1.0075 1.93 (.268)
--------- -------- ---------- --------- ---------
DIVIDENDS FROM NET
INVESTMENT INCOME......... (.6623) (.765) (.8575) (.89) (.972)
--------- -------- ---------- --------- ---------
Net asset value, end of
year...................... $7.28 $8.15 $7.85 $7.70 $6.66
========= ======== ========== ========= =========
Market price, end of year.. $6.50 $7.75 $7.63 $7.38 $5.63
========= ======== ========== ========= =========
TOTAL RETURN, market price. (8.06)% 11.82% 15.22% 48.73% (13.17%)
TOTAL RETURN, net asset
value..................... (2.08)% 14.36% 13.61% 31.16% (2.40%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(millions)................ $111.4 $124.7 $119.6 $116.3 $100.6
Average net assets
(millions)................ $117.9 $123.2 $119.8 $109.9 $111.1
Ratios to average net
assets
Expenses.................. .96% 1.00% .99% 1.03% 1.00%
Net investment income..... 7.94% 8.99% 10.71% 12.11% 13.25%
Portfolio turnover rate.... 45% 53% 54% 50% 29%
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
of American Capital Income Trust
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio of American Capital Income Trust, 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 Income Trust at December 31, 1994, the results of its
operations for the year ended, the 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, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
January 27, 1995
16
<PAGE> 18
AMERICAN CAPITAL INCOME TRUST
Board of Trustees
TAX NOTICE TO CORPORATE
SHAREHOLDERS
Donald M. Carlton Steve Muller
A. Benton Cocanougher F. Robert Paulsen For 1994, 2.74% of the
Stephen R. Gross R. Richardson Pettit dividends taxable as
Norman Hackerman Don G. Powell ordinary income qualifies
Robert D.H. Harvey Alan B. Shepard, Jr. for the 70% dividends
Jeffrey B. Lane Miller Upton received deduction for
Alan G. Merten Benjamin N. Woodson corporations.
- ----------------------------------------------
Officers
Don G. Powell Tanya M. Loden
Chairman of the Vice President and Controller
Board and President
Nori L. Gabert
Curtis W. Morell Vice President and Secretary
Vice President and Treasurer
J. David Wise
Ellis S. Bigelow Vice President and
Robert C. Peck, Jr. Assistant Secretary
David R. Troth
Paul R. Wolkenberg Perry F. Farrell
Vice Presidents M. Robert Sullivan
Assistant Treasurers
- ----------------------------------------------------------------
Investment Adviser
Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Blvd., Houston, Texas 77056
- -------------------------------
Custodian
State Street Bank and Trust Co.
225 Franklin Street, Boston, Massachusetts 02110
- -------------------------------
Shareholder Service Agent
Boston Financial Services, Inc.
P.O. Box 366, Boston, Massachusetts 02101
- ------------------------------- -------------------------------
Administrative Agent
NEW YORK STOCK EXCHANGE
Van Kampen American Capital Distributors, Inc. SYMBOL: ACD
2800 Post Oak Blvd., Houston, Texas 77056
- --------------------------------------- -------------------------------
INQUIRIES ABOUT AN INVESTOR'S
Independent Auditors ACCOUNT SHOULD BE REFERRED TO
THE FUND'S ADMINISTRATIVE
Ernst & Young LLP AGENT: VAN KAMPEN AMERICAN
1221 McKinney, Houston, Texas 77010 CAPITAL DISTRIBUTORS, INC.
TELEPHONE: (800) 421-9696
- -------------------------------------- -------------------------------
Nationally distributed by Van Kampen American Capital Distributors, Inc.
<PAGE> 19
American Capital Bulk Rate
Income Trust U.S. Postage
PAID
C/O BFDS Houston, Texas
P.O. Box 366 Permit No. 3736
Boston, MA 02101
