<PAGE> 1
AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1994
[Photo of 2 Men in front of Building]
[AMERICAN CAPITAL 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 REAL ESTATE SECURITIES FUND, INC. HIGHLIGHTS
[Photo of 2 Men]
FOR INVESTORS SEEKING TO DIVERSIFY THEIR
PORTFOLIOS WITH REAL ESTATE SECURITIES
AMERICAN CAPITAL'S QUALITY COMMITMENT
[Photo of 2 DALBAR Awards]
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.
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 25, 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. 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 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 real estate fund
continues to be an excellent way to diversify your portfolio.
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 REAL ESTATE SECURITIES FUND, INC. THE TEAM
IS LED BY PORTFOLIO MANAGER MARY JAYNE BYRNE AND ALAN T. SACHTLEBEN,
EXECUTIVE VICE PRESIDENT FOR EQUITY INVESTMENTS.
- --------------------------------------------------------------------------------
Q. THIS IS THE FIRST TIME YOU HAVE HAD A CHANCE TO TELL SHAREHOLDERS ABOUT
THE FUND'S INVESTMENT STRATEGY. HOW DID YOU STRUCTURE THE PORTFOLIO
INITIALLY?
[Pie Chart showing Sector Holdings]
A. When we started the Fund, we structured the portfolio defensively
because we anticipated that interest rates would continue to rise and
hurt the performance of certain sectors of the real estate
market. So, we invested a little more than 25% of the portfolio
in the retail sector, which includes shopping centers, malls and
factory outlet centers. We also invested nearly 25% of the
portfolio in apartments and 20% in the office/industrial sector.
Real estate investment trusts ("REITs") that invest in these
properties have the ability to raise rents, which tends to make
them less vulnerable to the impact of rising interest rates.
Additionally, retail and office/industrial REITs had become very
inexpensive compared to their underlying value.
As interest rates rose, we increased the Fund's investment in these
areas. At the end of December, about one-third of the portfolio was invested
in the retail sector, 25% in apartments and 20% in office/industrial.
The Fund's diversification is illustrated by the chart above.
Q. WHAT DO YOU LOOK FOR WHEN EVALUATING REIT STOCKS FOR POSSIBLE
INVESTMENT?
A. We look for four characteristics. First, we look for REITs that are
inexpensive compared to their peers and compared to the value of the real
estate they own. Then, we focus on those REITs that have financial
flexibility. This means they have the ability to borrow more money,
they do not carry a lot of variable-rate debt and they pay a reasonable
dividend. Third, we look for a strong management team, and fourth we look
for a company that has projects that make sense given the fundamentals
of the markets in which they operate.
Q. WHAT FACTORS IMPACTED THE PERFORMANCE OF REITS DURING THE REPORTING
PERIOD?
A. Rising interest rates and concerns about inflation had the biggest impact.
The Federal Reserve Board raised short-term interest rates three times
during the second half of 1994 because it was concerned that the economy
was growing too quickly and inflation might increase. As interest rates
Not a part of the Prospectus 2
<PAGE> 5
increase, the costs of borrowing money increases, which makes new real
estate projects more expensive. This limited the number of new projects,
providing a stronger environment for the existing projects owned by REITs in
which the Fund was invested. Also, real estate becomes more attractive to
investors when inflation is a concern, because the ability to raise rents should
help provide a return that keeps pace with inflation. On the down side, many
investors who try to find the fastest-growing opportunities put money into REITs
in the early part of 1994 and then pulled their money out when other investments
appeared to be growing more quickly. Their action made other investors nervous,
which had a negative impact on REITs.
Q. HOW DID THE FUND PERFORM DURING ITS FIRST SIX MONTHS
OF OPERATION?
A. Class A shares achieved a total return at net asset value (without a
sales charge) of 0.24%, including reinvestment of distributions
totalling $.21 per share. Class B shares achieved a total return at net
asset value of -0.04%, including reinvestment of distributions totalling
$.174 per share. Class C shares achieved a total return at net asset value
of 0.15%, including reinvestment of distributions totalling $.192 per share.
Shareholders should note that 27% of the Fund's total distributions during
1994 represents return of capital, which is not taxed. The Fund is passing
on the return of capital it receives from the REITs in which it invests. The
REITs pay a return of capital when they distribute more money than they earn
from taxable net investment income. The REITs pay dividends based on cash
flow, without regard to depreciation and amortization. As a result, much of
the income paid to the Fund is a return of capital. The monies received from
portfolio securities are then distributed to shareholders, resulting in the
aforementioned 27% of dividends being a return of capital.
Q. HOW DID THE FUND PERFORM COMPARED TO OTHER EQUITY INVESTMENTS?
A. During the same period, the Standard & Poor's 500-Stock Index, a
broad-based, unmanaged index that reflects general stock market
performance, achieved a total return of 4.87%. The NAREIT Equity REIT Index,
an unmanaged index that reflects the general performance of equity REITs,
achieved a total return of -2.03%. Neither index reflects any commissions or
fees that would be paid by an investor purchasing the securities they
represent.
Q. WHAT'S THE OUTLOOK FOR THE NEXT SIX MONTHS?
A. The Fed raised short-term interest rates again in early 1995. If the
Fed is able to slow the economy without pushing it into a recession,
REITs should do well. The supply and demand fundamentals remain strong,
which should allow REITs to continue to provide attractive yields. We will
continue to maintain a defensive portfolio until interest rates stabilize.
/s/ ALAN T. SACHTLEBEN /s/ MARY JANE BYRNE
------------------------ -----------------------
Alan T. Sachtleben Mary Jayne Byrne
EXECUTIVE VICE PRESIDENT PORTFOLIO MANAGER
EQUITY INVESTMENTS
Not a part of the Prospectus 3
<PAGE> 6
AMERICAN CAPITAL REAL ESTATE SECURITIES FUND, INC.
YOUR DIVERSIFIED PORTFOLIO
Your investment in American Capital Real Estate Securities Fund makes
you a part owner of a diversified portfolio of stocks of real estate
investment trusts. Here's a list of the 10 largest holdings in the portfolio
as of December 31, 1994.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Top 10 Holdings
---------------------------------------------------------------------
% OF FUND'S
NET ASSETS
---------------------------------------------------------------------
<S> <C>
Weingarten Realty Investors 3.03%
OWNS OR HAS INTEREST IN ABOUT 150 REAL ESTATE
PROJECTS IN EIGHT STATES, PRIMARILY SHOPPING CENTERS.
Vornado Realty Trust 2.87
OWNS, LEASES, DEVELOPS AND MANAGES RETAIL AND
INDUSTRIAL PROPERTIES, MAINLY IN THE MID-ATLANTIC
AND NORTHEASTERN SECTIONS OF THE COUNTRY.
Developers Diversified Realty, Inc. 2.71
OWNS AND MANAGES SHOPPING CENTERS IN 20 STATES,
MAINLY IN THE EAST AND MIDWEST.
Nationwide Health Properties, Inc. 2.62
OWNS AND OPERATES LONG-TERM HEALTH CARE FACILITIES
THROUGHOUT THE UNITED STATES.
Health Care Property Investors, Inc. 2.61
OWNS AND LEASES A DIVERSIFIED PORTFOLIO OF
HEALTH CARE FACILITIES.
Storage USA,Inc. 2.57
OWNS, MANAGES AND DEVELOPS SELF-STORAGE
FACILITIES NATIONWIDE.
Macerich Co. 2.56
OWNS AND OPERATES REGIONAL AND COMMUNITY
SHOPPING CENTERS IN THE WESTERN AND CENTRAL
UNITED STATES.
Post Properties, Inc. 2.52
OWNS AND OPERATES ABOUT 40 UPSCALE APARTMENT
COMMUNITIES IN ATLANTA, TAMPA AND ORLANDO.
Debartolo Realty Corp. 2.50
MAJOR DEVELOPER OF REGIONAL SHOPPING CENTERS.
Mid-America Apartment Communities, Inc. 2.50
OWNS AND MANAGES APARTMENT COMMUNITIES IN
THE SOUTHEASTERN UNITED STATES.
---------------------------------------------------------------------
</TABLE>
For a complete list of portfolio holdings, see the Investment Portfolio section
beginning on page 6.
Not a part of the Prospectus 4
<PAGE> 7
AMERICAN CAPITAL REAL ESTATE SECURITIES FUND, INC.
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
You Want It Capital offers 24-hour account 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 Distributions from American Capital Real Estate Securities
Distribution Fund are paid quarterly and capital gains, if any, are
Options distributed at least annually. You may 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
Investments Real Estate Securities Fund for as little as $25.
Automatic An automatic investment plan can help you carry out a
Investment disciplined financial plan by allowing you to invest
Plan 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 5
<PAGE> 8
INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Market
Shares Value
- --------------------------------------------------------------------------------
<S> <C>
Common Stock 95.3%
APARTMENTS 23.5%
17,000 Associated Estates Realty Corp. ........................ $ 357,000
15,000 Avalon Properties, Inc. ................................ 345,000
18,000 Bay Apartment Communities, Inc. ........................ 362,250
12,000 Equity Residential Properties Trust .................... 360,000
16,000 Evans Withycombe Residential ........................... 336,000
15,000 Merry Land and Investment Co. .......................... 328,125
14,000 Mid America Apartment Communities, Inc. ................ 374,500
14,000 Oasis Residential, Inc. ................................ 343,000
12,000 Post Properties, Inc. .................................. 378,000
19,000 Property Trust of America............................... 342,000
------------
TOTAL APARTMENTS ..................................... 3,525,875
------------
DIVERSIFIED AND OTHER 6.8%
15,000 Colonial Properties Trust .............................. 337,500
19,900 RFS Hotel Investors, Inc. .............................. 291,038
14,000 Storage USA, Inc. ...................................... 385,000
------------
TOTAL DIVERSIFIED AND OTHER .......................... 1,013,538
------------
FACTORY OUTLET CENTERS 4.4%
12,500 Chelsea GCA Realty, Inc. ............................... 340,625
13,600 Tanger Factory Outlet Centers, Inc. .................... 319,600
------------
TOTAL FACTORY OUTLET CENTERS.......................... 660,225
------------
HEALTH CARE FACILITIES 7.5%
13,000 Health Care Property Investors, Inc. ................... 391,625
25,000 LTC Properties, Inc. ................................... 331,250
11,000 Nationwide Health Properties, Inc. ..................... 393,250
------------
TOTAL HEALTH CARE FACILITIES ......................... 1,116,125
------------
SHOPPING MALLS 14.3%
24,000 Crown American Realty Trust ............................ 324,000
25,000 Debartolo Realty Corp. ................................. 375,000
18,000 Macerich Co. ........................................... 384,750
19,000 Rouse Co. .............................................. 365,750
15,000 Simon Property Group, Inc. ............................. 363,750
17,000 Urban Shopping Centers, Inc. ........................... 337,875
------------
TOTAL SHOPPING MALLS ................................. 2,151,125
------------
MANUFACTURED HOME PARKS 7.2%
17,000 Chateau Properties, Inc. ............................... 371,875
18,000 Manufactured Home Communities, Inc. .................... 357,750
17,000 ROC Communities, Inc. .................................. 357,000
------------
TOTAL MANUFACTURED HOME PARKS ........................ 1,086,625
------------
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 6
<PAGE> 9
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Market
Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
OFFICE/INDUSTRIAL 18.7%
19,000 Beacon Properties Corporation.......................... $ 361,000
18,000 Carr Realty Corporation................................ 324,000
18,000 Cousins Properties, Inc. .............................. 312,750
13,000 Duke Realty Investment, Inc. .......................... 367,250
18,000 Liberty Property Trust................................. 353,250
22,000 Security Capital Industrial Trust...................... 374,000
17,000 Spieker Properties, Inc. .............................. 346,375
17,000 Weeks Corp. ........................................... 371,875
------------
TOTAL OFFICE/INDUSTRIAL.............................. 2,810,500
------------
SHOPPING CENTERS 12.9%
13,000 Developers Diversified Realty, Inc. ................... 406,250
18,000 Federal Realty Investment Trust........................ 371,250
16,000 Regency Realty Corp. .................................. 268,000
12,000 Vornado Realty Trust .................................. 430,500
12,000 Weingarten Realty Investors ........................... 454,500
------------
TOTAL SHOPPING CENTERS............................... 1,930,500
------------
TOTAL COMMON STOCK (Cost $14,039,950)................ 14,294,513
------------
<CAPTION>
Principal
Amount
- ---------
REPURCHASE AGREEMENT 3.8%
<S> <C> <C>
$580,000 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 $580,345 (Cost $580,000).................... 580,000
------------
TOTAL INVESTMENTS (Cost $14,619,950) 99.1%............ 14,874,513
Other assets and liabilities net 0.9%................. 127,771
------------
NET ASSETS 100%....................................... $ 15,002,284
============
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 7
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $14,619,950)............................ $14,874,513
Cash....................................................................... 1,105
Dividends and interest receivable.......................................... 117,829
Receivable for Fund shares sold............................................ 115,095
Due from Adviser........................................................... 40,000
Other assets............................................................... 55,298
-----------
TOTAL ASSETS........................................................... 15,203,840
-----------
LIABILITIES
Payable for investments purchased.......................................... 80,530
Dividends payable.......................................................... 44,667
Payable for Fund shares redeemed........................................... 27,814
Due to Distributor......................................................... 14,162
Due to Adviser............................................................. 8,714
Accrued expenses........................................................... 25,669
-----------
TOTAL LIABILITIES...................................................... 201,556
-----------
NET ASSETS, equivalent to $9.27 per share for Class A shares and
$9.28 per share for Class B and Class C shares........................... $15,002,284
===========
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 498,816 Class A, 979,792 Class B and 138,867
Class C shares outstanding............................................... $ 16,175
Capital surplus............................................................ 14,895,269
Accumulated net realized loss on securities................................ (162,943)
Net unrealized appreciation of securities.................................. 254,563
Accumulated net investment loss............................................ (780)
-----------
NET ASSETS at December 31, 1994............................................ $15,002,284
===========
</TABLE>
See Notes to Financial Statements.
Not a part of the Prospectus 8
<PAGE> 11
STATEMENT OF OPERATIONS
June 9, 1994* through December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends...................................................................... $ 240,015
Interest...................................................................... 23,439
---------
Investment income.............................................................. 263,454
---------
EXPENSES
Management fees (net of expense reimbursement of $47,026)...................... --
Registration and filing fees................................................... 46,426
Service fees--Class A.......................................................... 2,780
Distribution and service fees--Class B......................................... 24,761
Distribution and service fees--Class C......................................... 1,791
Audit fees..................................................................... 18,000
Reports to shareholders........................................................ 5,148
Shareholder service agent's expenses........................................... 4,943
Directors' fees and expenses................................................... 2,756
Legal fees..................................................................... 1,900
Organization expenses.......................................................... 1,892
Miscellaneous.................................................................. 2,225
Expense reimbursement in excess of management fees............................. (36,015)
---------
Total expenses............................................................... 76,607
---------
Net investment income........................................................ 186,847
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities............................................... (156,311)
Net unrealized appreciation of securities..................................... 254,563
---------
Net realized and unrealized gain on securities............................... 98,252
---------
Increase in net assets resulting from operations............................. $ 285,099
=========
</TABLE>
*Commencement of Operations.
See Notes to Financial Statements.
Not a part of the Prospectus 9
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
June 9, 1994* through December 31, 1994
<TABLE>
<S> <C>
NET ASSETS, beginning of period............................................ $ 101,000
-----------
OPERATIONS
Net investment income..................................................... 186,847
Net realized loss on securities........................................... (156,311)
Net unrealized appreciation of securities................................. 254,563
-----------
Increase in net assets resulting from operations........................ 285,099
-----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A................................................................ (65,583)
Class B................................................................ (104,448)
Class C................................................................ (16,816)
-----------
(186,847)
-----------
Return of capital distribution
Class A................................................................ (26,158)
Class B................................................................ (46,682)
Class C................................................................ (6,491)
-----------
(79,331)
----------
Total dividends and distributions...................................... (266,178)
-----------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A................................................................ 4,655,266
Class B................................................................ 9,466,094
Class C................................................................ 1,273,661
-----------
15,395,021
-----------
Proceeds from shares issued for dividends and distributions reinvested
Class A................................................................ 66,253
Class B................................................................ 99,061
Class C................................................................ 21,499
-----------
186,813
-----------
Cost of shares redeemed
Class A................................................................ (191,319)
Class B................................................................ (500,197)
Class C................................................................ (7,955)
-----------
(699,471)
-----------
Increase in net assets from Fund share transactions........................ 14,882,363
-----------
INCREASE IN NET ASSETS..................................................... 14,901,284
-----------
NET ASSETS, end of period.................................................. $15,002,284
===========
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
Not a part of the Prospectus 10
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
Note 1--Organization
American Capital Real Estate Securities Fund, Inc. (the "Fund") was organized
under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company in Maryland on April 14, 1994. The
Fund's investment manager, Van Kampen American Capital Asset Management, Inc.
(the "Adviser") contributed the initial capital of $101,000 on June 2, 1994
and an additional $2,000,000 on June 30, 1994. The Fund began offering shares
on June 9, 1994.
Note 2--Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Investment Valuations
Investments 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 last reported bid price. Securities for which market quotations
are not readily available are valued at a fair value as determined in
good faith by the Board of Directors of the Fund.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days
to maturity becomes less than 61 days. From such time, until maturity,
the investments are valued at amortized cost.
B. Repurchase Agreements
A repurchase agreement is a short-term investment in which a 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 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.
C. Federal Income Taxes
No provision for federal income taxes is required because the Fund
intends to elect 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 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 daily.
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.
For the period ended December 31, 1994, the Fund was in a return of
capital position. As a result, the Fund decreased capital surplus and
accumulated net investment loss by $71,919. Such reclassification had
no effect on current year net investment income, net realized gains, net
assets, and net asset value per share.
F. Organization Costs
Organization expenses of approximately $16,000 were deferred and are
being amortized over a five year period ending May, 1999.
Not a part of the Prospectus 11
<PAGE> 14
Note 3--Management Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Fund. The Adviser has entered
into a subadvisory agreement with Hines Interest Realty Advisers Limited
Partnership (the "Subadviser"), who provides advisory services to the Fund
and the Adviser with respect to the Fund's investments in real estate.
Management fees are calculated monthly, based on the average daily net assets
of the Fund at the annual rate of 1.00%. The Adviser pays 50% of its
management fee to the Subadviser.
The Adviser has agreed that it will reimburse the Fund for any expenses
(including the management fee, but excluding interest, brokerage commissions,
distribution and service fees, and other extraordinary expenses) in excess of
the most restrictive limitation imposed by state securities commissions. The
most restrictive expense limitation is presently 2.5% of the Fund's average
daily net assets up to $30 million, 2.0% of the next $70 million of such net
assets and 1.5% of the Fund's net assets in excess of $100 million. For the
period ended December 31, 1994, the Adviser reimbursed $12,741 to the Fund due
to such expense limitation. Additionally, the Adviser voluntarily reimbursed
the Fund $70,300 in order to offset certain Fund expenses.
The Adviser prepaid the Fund's initial registration and filing expenses of
$84,000. The Fund is amortizing such expenses over a ten month period ending
May 1995.
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 $4,695 and $7,737, respectively, as their
portion of the commissions charged on sales of Fund shares during the period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its
average daily net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average 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 plan and
Class C plan aggregated approximately $382,000 and $19,000, 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 and the Retail Dealer.
Note 4--Investment Activity
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $16,249,649 and
$2,052,274, respectively.
For federal income tax purposes, the identified cost of investments owned at
December 31, 1994, was $14,620,214. Net unrealized appreciation of investments
aggregated $254,299, gross unrealized appreciation of investments aggregated
$594,389, and gross unrealized depreciation of investments aggregated $340,090.
Additionally, approximately $163,000 in realized losses are being deferred for
tax purposes to the 1995 fiscal year.
Note 5--Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $710 plus a fee of $20 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at an annual rate of $270. During the period, such fees aggregated $2,585.
Not a part of the Prospectus 12
<PAGE> 15
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
$780. 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 6--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 an unlimited number of shares of each class of $.01 par value of
capital stock authorized. Transactions in shares of capital stock for the
period ended December 31, 1994, were as follows:
<TABLE>
<S> <C>
Shares sold
Class A.............................................................. 513,570
Class B.............................................................. 1,025,079
Class C.............................................................. 137,463
---------
1,676,112
---------
Shares issued for dividends and distributions reinvested
Class A.............................................................. 7,181
Class B.............................................................. 10,726
Class C.............................................................. 2,326
---------
20,233
---------
Shares redeemed
Class A.............................................................. (21,935)
Class B.............................................................. (56,013)
Class C.............................................................. (922)
---------
(78,870)
---------
Shares outstanding................................................... 1,617,475
=========
</TABLE>
Not a part of the Prospectus 13
<PAGE> 16
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the period
indicated.
<TABLE>
<CAPTION>
JUNE 9, 1994(1) THROUGH
DECEMBER 31, 1994
----------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(2)
Net asset value, beginning of period ................... $9.43 $9.43 $9.43
----- ------ -------
INCOME FROM OPERATIONS
Investment income....................................... .30 .30 .31
Expenses................................................ (.07) (.10) (.09)
----- ------ -------
Net investment income................................... .23 .20 .22
Net realized and unrealized losses on securities........ (.18) (.176) (.178)
----- ------ -------
Total from investment operations........................ .05 .024 .042
----- ------ -------
DIVIDENDS AND DISTRIBUTIONS TO THE SHAREHOLDERS
From net investment income ............................. (.153) (.1268) (.1399)
Return of capital distribution ......................... (.057) (.0472) (.0521)
----- ------ -------
Total dividends and distributions ...................... (.21) (.174) (.192)
----- ------ -------
Net asset value, end of period ......................... $9.27 $9.28 $9.28
===== ====== =======
TOTAL RETURN(4)......................................... .24% (.04%) .15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $4.6 $9.1 $1.3
Average net assets (millions)........................... $2.6 $4.7 $0.7
Ratios to average net assets (annualized)
Expenses............................................... 1.26% 1.84% 1.62%
Expenses, without expense reimbursement(3)............. 3.03% 3.60% 3.38%
Net investment income.................................. 4.28% 3.81% 3.92%
Net investment income, without expense reimbursement(3) 2.52% 2.05% 2.15%
Portfolio turnover rate................................. 28% 28% 28%
</TABLE>
(1) Commencement of operations.
(2) Based on average month-end shares outstanding
(3) See note 2.
(4) Total return calculated from June 30, 1994 (date the Fund began meeting
its investment objective) through december 31, 1994. Total returns are
not annualized and do not consider the effect of sales charges.
See Notes to Financial Statements.
Not a part of the Prospectus 14
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL REAL ESTATE SECURITIES 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 Real Estate
Securities Fund, Inc. (the "Fund") at December 31, 1994, the results of its
operations, the changes in its net assets and the selected per share data and
ratios for the period June 9, 1994 (commencement of operations) through
December 31, 1994, 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 audit. We conducted our audit 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 audit, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
January 26, 1995
Not a part of the Prospectus 15
<PAGE> 18
FUND PERFORMANCE DATA
MANAGEMENT DISCUSSION
American Capital Real Estate Securities Fund seeks to achieve capital
appreciation by investing principally in the equity securities of companies
operating in the real estate industry. Current income is a secondary
consideration. During its first six months of operation, the Fund's
performance was adversely impacted by repeated increases in interest rates.
For more information on the Fund's performance, please see pages 2-3
of this report.
CHANGE IN VALUE OF A $10,000 INVESTMENT IN
AMERICAN CAPITAL REAL ESTATE SECURITIES FUND VS.
THE STANDARD & POOR'S 500-STOCK INDES AND
THE NAREIT EQUITY REIT INDEX
[CHART]
Past performance is not indicative of future performance.
*THE STANDARD & POOR'S 500-STOCK INDEX IS A BROAD-BASED, UNMANAGED INDEX THAT
REFLECTS GENERAL STOCK MARKET PERFORMANCE. THE NAREIT EQUITY REIT INDEX IS AN
UNMANAGED INDEX THAT REFLECTS THE GENERAL PERFORMANCE OF EQUITY REAL ESTATE
INVESTMENT TRUSTS. NEITHER INDEX REFLECTS ANY COMMISSIONS OR FEES THAT WOULD
BE PAID BY AN INVESTOR PURCHASING THE SECURITIES THEY REPRESENT. ALL SALES
CHARGES AND ALL OTHER FEES AND EXPENSES ARE INCLUDED IN THE PERFORMANCE SHOWN
FOR ALL CLASSES OF SHARES OF AMERICAN CAPITAL REAL ESTATE SECURITIES FUND AT
MAXIMUM OFFERING PRICE. IN ADDITION, SINCE INVESTORS PURCHASE SHARES OF THE
FUND WITH VARYING SALES CHARGES DEPENDING PRIMARILY ON VOLUME PURCHASED, THE
FUND'S PERFORMANCE AT NET ASSET VALUE ALSO IS SHOWN.
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN -- CLASS A (AS OF 12/31/94) SINCE 6/30/94*
<S> <C>
At Net Asset Value 0.24%
With Maximum 4.75% Sales Charge -4.51%
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN -- CLASS B (AS OF 12/31/94) SINCE 6/30/94*
<S> <C>
At Net Asset Value -0.04%
With Applicable Contingent Deferred Sales Charge
Upon Redemption (Maximum 4%) -3.97%
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN -- CLASS C (AS OF 12/31/94) SINCE 6/30/94*
<S> <C>
At Net Asset Value 0.15%
With Applicable Contingent Deferred Sales Charge
Upon Redemption (Maximum 1%) -0.83%
</TABLE>
*DATE THE FUND BEGAN MEETING ITS INVESTMENT OBJECTIVE.
Not a part of the Prospectus 16
<PAGE> 19
AMERICAN CAPITAL REAL ESTATE SECURITIES FUND, INC.
Board of Directors
Richard E. Caruso Lawrence J. Sheehan
J. Miles Branagan Fernando Sisto*
Roger Hilsman William S. Woodside
Don G. Powell
David Rees *Chairman of the Board
_________________________________________________________
Tax Notice to Corporate
Shareholders
For 1994, none of the dividends taxable
as ordinary income qualified for the
70% dividends received deduction for
corporations.
__________________________________________________________
Officers
Don G. Powell Nori L. Gabert
President Vice President and
Secretary
Curtis W. Morell J. David Wise
Vice President and Vice President and
Treasurer Assistant Secretary
Mary J. Byrne
James Gilligan Perry F. Farrell
Alan T. Sachtleben M. Robert Sullivan
Paul R. Wolkenberg Assistant Treasurers
Vice Presidents
Huey P. Falgout, Jr.
Tanya M. Loden Assistant Secretary
Vice President and
Controller
_______________________________________________________
Investment Adviser
Van Kampen American Capital Asset Management, Inc.
2800 Post Oak Blvd., Houston,Texas 77056
_______________________________________________________
Investment Subadviser
Hines Interest Realty Advisers
Limited Partnership
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 Real Estate Securities Fund performance data update for the most recent
calendar quarter.
_______________________________________________________________________________
Not a part of the Prospectus
<PAGE> 20
AMERICAN CAPITAL FAMILY OF FUNDS
Emerging Growth Fund
American Capital Emerging Growth Fund, Inc.
Midcap Fund
American Capital Enterprise Fund, Inc.
Core Growth Funds
American Capital Pace Fund, Inc.
American Capital Global Equity Fund
Real Estate Fund
American Capital Real Estate Securities Fund, Inc.
Growth-Income Funds
American Capital Comstock Fund, Inc.
American Capital Growth and Income Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Global Managed Assets Fund, Inc.
American Capital Harbor Fund, Inc.
Income-Growth Fund
American Capital Utilities Income Fund, Inc.
Corporate Bond Funds
American Capital High Yield Investments, Inc.
American Capital Corporate Bond Fund, Inc.
Government Securities Funds
American Capital Global Government Securities Fund
American Capital U.S. Government Trust for Income
American Capital Government Securities, Inc.
American Capital Federal Mortgage Trust
Tax-Free Funds
American Capital Tax-Exempt Trust
High Yield Municipal Portfolio
American Capital Texas Municipal Securities, Inc.
American Capital Municipal Bond Fund, Inc.
American Capital Tax-Exempt Trust
Insured Municipal Portfolio
Money Market Fund
American Capital Reserve Fund, Inc.
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
Real Estate Securities Fund, Inc.
C/O ACCESS
P.O. Box 418256
Kansas City, MO 64141-9256
