<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders...................... 1
Performance Results......................... 3
Performance Perspective..................... 4
Portfolio Management Review................. 5
Portfolio of Investments.................... 7
Statement of Assets and Liabilities......... 14
Statement of Operations..................... 15
Statement of Changes in Net Assets.......... 16
Financial Highlights........................ 17
Notes to Financial Statements............... 20
Report of Independent Accountants........... 25
</TABLE>
EQI ANR 2/96
<PAGE>
LETTER TO SHAREHOLDERS
[PHOTO OF DENNIS J. MCDONNELL AND DON G. POWELL]
January 24, 1996
Dear Shareholder,
For most investors, it would be hard to surpass the success enjoyed during
1995. The stock and bond markets achieved substantial gains, driven by a
combination of continuing economic growth and low inflation. The strength of
equity and fixed-income securities in 1995 was particularly impressive because
it followed a year in which both markets declined. People who remained
invested during 1995 generally shared in the growth of the markets, while
investors who retreated after 1994's downturn may have missed out on the
double-digit returns.
The rebound in the markets last year reinforces the importance of maintain-
ing a long-term perspective for your investments. While the environment for
stocks and bonds remains positive, it is unlikely that 1996 will see a repeat
of the markets' strong 1995 performance. However, over the long-term, stocks
have outperformed virtually all other types of investments, and bonds have met
the needs of investors who seek capital preservation and regular income.
ECONOMIC OVERVIEW
The U.S. economy grew throughout 1995, though the rate of growth slowed to-
ward year-end. The gross domestic product (the value of all goods and services
produced in the United States) grew at an annual rate of more than 4.2 percent
in the third quarter of 1995, but slowed to an estimated 2 to 3 percent in the
fourth quarter, with retail and auto sales particularly sluggish. The slower
growth rate eased concerns about a rise in inflation and allowed the Federal
Reserve Board to lower short-term interest rates by a quarter-percentage point
in late December. The reduction in rates during the latter half of 1995 is ex-
pected to help generate moderate economic growth in 1996, just as the Fed's
raising of short-term rates in 1994 helped slow economic growth in 1995.
The cut in short-term rates, combined with modest growth forecasts, was
viewed by the financial markets as a positive event, pushing up both stock and
bond prices. For the year ended December 31, 1995, the Standard & Poor's 500-
Stock Index achieved a total return of 37.45 percent. The yield on 10-year
Treasury notes was 5.57 percent on December 31, compared to 7.83 percent at
the beginning of the year. Because bond prices and yields move in opposite di-
rections, bond prices rose. Many observers expect the Fed to cut rates further
if Congress and the President are able to reach an agreement on the federal
budget, provided economic conditions justify further easing.
With a low inflation, low interest rate environment, corporate earnings re-
mained quite strong during the year, helping to push stocks to new highs. The
strongest sectors were technology and finance, as these stocks benefited from
the impact of the Internet, telecommunications deregulation and bank mergers.
U.S. companies with global operations also did well, aided by a declining U.S.
dollar.
Continued on page two
1
<PAGE>
ECONOMIC OUTLOOK
Looking ahead, we are cautiously optimistic. We expect the economy to grow at
a rate of 2 to 3 percent throughout 1996, with growth stronger in the second
half of the year as the full impact of the Fed's rate cuts take effect. Lower
rates will have the greatest impact on interest-sensitive industries, such as
housing. Although inflation appears to be under control, there probably will be
some cyclical upward pressure in 1996.
The current economic conditions are ideal for stocks, especially those of
smaller companies, because they tend to be affected less by economic cycles.
The outlook for the fixed-income market--including municipal bonds--is
positive, too. In the near-term, we believe domestic markets will benefit from
a stable U.S. dollar and increased business activity driven in part by a number
of recently announced strategic reorganizations of some of the nation's blue
chip industry leaders.
During recent months, debate over tax reform and the federal deficit has dom-
inated the agenda in Washington. Now that we are in a presidential election
year, tax reform likely will replace the budget battle as the top issue in
Washington. There has been varied speculation about the impact tax reform could
have on the economy and on various types of investments. We are following the
tax reform debate very closely, and we will keep you updated on this issue
throughout the year. See the winter issue of Your Portfolio for a detailed dis-
cussion of tax reform.
On the following pages, you can read about your Fund's performance in 1995,
as well as the portfolio management team's outlook for the Fund in the coming
months. We hope that you will find this information helpful.
CORPORATE NEWS
As part of our commitment to helping you achieve your investment goals, Van
Kampen American Capital strives to provide shareholders with the best service
in the mutual fund industry. That is why we are especially pleased to have re-
ceived the 1995 Quality Tested Service Seal, which is awarded annually by
DALBAR, Inc., an independent research firm.The Seal, which symbolizes the
achievement of the highest tier of service in the mutual fund industry, was
awarded to American Capital annually from 1990 to 1994 and we are honored
that the service provided by Van Kampen American Capital has achieved the same
level of excellence.
Sincerely,
/s/ Don G. Powell /s/ Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.
2
<PAGE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1995
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
TOTAL RETURNS
<S> <C> <C> <C>
One-year total return based on NAV1.................. 32.57% 31.51% 31.51%
One-year total return2............................... 25.06% 26.51% 30.51%
Five-year average annual total return2............... 14.81% N/A N/A
Ten-year average annual total return2................ 11.53% N/A N/A
Life-of-Fund average annual total return2............ 10.86% 13.29% 13.98%
Commencement Date.................................... 08/03/60 05/01/92 07/06/93
N/A= Not Applicable
</TABLE>
1Assumes reinvestment of all distributions for the period and does not include
payment of the maximum sales charge (5.75% for A shares) or contingent
deferred sales charge for early withdrawal (5% for B shares and 1% for C
shares).
2Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B shares and C shares).
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth
more or less than their original cost.
3
<PAGE>
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular inter-
vals. A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison
can:
. Reflect the impact of favorable market trends or difficult market con-
ditions
. Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Standard & Poor's 500-Stock
Index and the Lipper Equity Income Fund Index over time. These indices are un-
managed statistical composites and do not reflect any commissions or fees
which would be incurred by an investor purchasing the securities they repre-
sent. Similarly, their performance does not reflect any sales charges or other
costs which would be applicable to an actively managed portfolio, such as that
of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Equity Income Fund vs. Standard & Poor's 500-
Stock Index and the Lipper Equity Income Fund Index (December 1985 through
December 1995)
<TABLE>
[GRAPH APPEARS HERE]
<CAPTION>
S&P LIPPER
Measurement Period VKAC EQUITY 500-STOCK EQUITY INCOME
(Fiscal Year Covered) INCOME FUND INDEX* FUND INDEX
- ------------------- ----------- --------- -------------
<S> <C> <C> <C>
Measurement Pt-
Dec 1985 $ 9,425 $10,000 $10,000
Dec 1986 $10,576 $11,862 $11,823
Dec 1987 $10,777 $12,476 $11,886
Dec 1988 $12,133 $14,534 $13,911
Dec 1989 $14,770 $19,125 $17,064
Dec 1990 $14,081 $18,530 $16,189
Dec 1991 $17,837 $24,151 $20,491
Dec 1992 $19,749 $25,988 $22,489
Dec 1993 $22,910 $28,596 $25,828
Dec 1994 $22,455 $28,984 $25,596
Dec 1995 $29,775 $39,837 $33,204
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions for the period ended December 31,
1995, and includes payment of the maximum sales charge (5.75% for A shares).
While past performance is not indicative of future performance, the above in-
formation provides a broader vantage point from which to evaluate the discus-
sion of the Fund's performance found in the following pages.
*The Standard & Poor's 500-Stock Index represents general stock market perfor-
mance and was initially selected as a benchmark for the Fund's performance;
additionally the Lipper Equity Income Fund Index was selected to represent a
more narrow-based comparison for the Fund.
4
<PAGE>
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Equity Income Fund about the key events and economic forces which shaped the
markets during the past fiscal year. The team includes James A. Gilligan,
portfolio manager, and Alan T. Sachtleben, executive vice president, equity
investments. The following excerpts reflect their views on the Fund's
performance during the twelve-month period ended December 31, 1995.
Q THE STOCK AND BOND MARKETS ENJOYED STRONG RETURNS DURING 1995. WHAT
FACTORS HAD THE MOST IMPACT ON THE FUND'S PERFORMANCE
DURING THE PAST YEAR?
A The stock market as a whole benefited from continued--although slower--
economic growth that generated strong corporate profits without experi-
encing increased inflation. The Fund benefited from being heavily invested in
finance and health care stocks, as well as the strong performance of technol-
ogy stocks. Technology was one of the best performing sectors of the market
during the past year. While the Fund benefited from technology's strong per-
formance during most of the year, our insistence on being diversified limited
our investment in technology stocks, which benefited the Fund in the latter
part of the year as the technology sector began to show some signs of weak-
ness.
We continued to focus on stock selection, identifying those companies that
are poised to benefit from a restructuring or repositioning. The Fund's diver-
sification at the end of the year is illustrated by the chart below.
[LOGO/ART APPEARS HERE]
[Pie Chart of Portfolio Holdings by Sector
as of December 31, 1995 appears here.]
Energy................................... 12%
Raw Materials/Processing Industries...... 8%
Producer Manufacturing................... 5%
Technology............................... 9%
Consumer Non-Durables.................... 7%
Consumer Distribution.................... 4%
Consumer Services........................ 7%
Finance.................................. 14%
Health Care.............................. 8%
Utilities................................ 9%
Other.................................... 17%
Q CAN YOU GIVE A FEW EXAMPLES OF STOCKS THE FUND OWNED DURING THE PAST YEAR
THAT FIT THIS CRITERIA?
A In the financial services area, we owned shares of both Chemical Bank and
Chase Manhattan, which recently announced plans to merge. The price of
both stocks increased substantially before and after the merger announcement.
In the health care arena, the Fund owned shares of Merck, which enjoyed a rise
in its stock price after the company received approval from the Food and Drug
Administration for a new drug to combat
5
<PAGE>
osteoporosis. Ralston-Purina, which the Fund owned during the past year, con-
tinued restructuring to focus on its core pet food and battery businesses,
pushing up the price of its stock.
Of course, not all of the securities in the portfolio performed as well and
past performance is no guarantee of future performance.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE PAST YEAR?
A During the early part of the year, we gradually reduced the Fund's hold-
ings of stocks that were most affected by changing economic conditions,
often called cyclical stocks. As a result, we reduced the percentage of the
Fund's assets invested in the stocks of raw materials and manufacturing compa-
nies.
These assets were invested instead in a broader range of stocks, including
those of health care and retail companies. We expect the retail industry to be
one of the next sectors to benefit from renewed economic growth.
In anticipation of renewed economic growth, during the latter part of the
year we purchased several cyclical stocks. An example of this is Chrysler. We
also continued to look for other stocks that had underperformed the market in
1995 but should do well in 1996 in light of current economic trends.
Q HOW DID THE FUND PERFORM DURING THE YEAR ENDED DECEMBER 31, 1995?
A Class A shares of the Fund achieved a total return at net asset value of
32.57 percent/1/, including reinvestment of dividends totaling $0.188 per
share and a capital gains distribution of $0.32 per share. By comparison, the
Standard & Poor's 500-Stock Index, a broad-based, unmanaged index that re-
flects general stock market performance, achieved a total return of 37.45 per-
cent for the period. The Lipper Equity Income Fund Index, which represents the
average performance of the largest equity income funds, achieved a total re-
turn of 29.73 percent. Neither index reflects any commissions or fees that
would be paid by an investor purchasing the securities it represents. In addi-
tion, the S&P 500 is comprised solely of equity securities, while your Fund is
currently invested in stocks, convertible and Treasury securities. (Please re-
fer to the chart on page three for additional Fund performance results.)
Q WHAT IS THE OUTLOOK FOR STOCKS?
A The outlook is excellent, which is not to say that a correction could not
occur in the near-term. However, some very positive forces are present:
moderate economic growth, low inflation and acceptable levels of interest
rates. These should limit any decline to a modest one. Looking further into
the future, these three conditions--aided by the Federal Reserve Board's deci-
sion in December to lower short-term interest rates--should lead to increasing
corporate profits which, in turn, should lead to higher stock prices.
/s/ Alan T. Sachtleben /s/ James A. Gilligan
Alan T. Sachtleben James A. Gilligan
Executive Vice President Portfolio Manager
Equity Investments
Please see footnotes on page three.
6
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
DOMESTIC COMMON STOCK 55.9%
CONSUMER DISTRIBUTION 3.2%
*52 Ann Taylor Stores, Inc................................. $ 533,000
30 Dayton Hudson Corp..................................... 2,250,000
*145 Federated Department Stores, Inc....................... 3,987,500
48 Gap, Inc............................................... 2,016,000
37 Home Depot, Inc........................................ 1,771,375
14 Interstate Bakeries Co................................. 308,775
145 May Department Stores Co............................... 6,126,250
*27 Nine West Group, Inc................................... 1,001,250
75 Nordstrom, Inc......................................... 3,037,500
82 Sears, Roebuck & Co.................................... 3,198,000
*54 Vons Companies, Inc.................................... 1,525,500
------------
25,755,150
------------
CONSUMER DURABLES 1.5%
68 Chrysler Corp.......................................... 3,765,500
18 Eastman Kodak Co....................................... 1,206,000
105 General Motors Corp.................................... 5,551,875
92 Sunbeam-Oster Inc...................................... 1,403,000
------------
11,926,375
------------
CONSUMER NON-DURABLES 5.8%
43 Coca-Cola Co........................................... 3,192,750
30 CPC International, Inc................................. 2,058,750
71 Gillette Co............................................ 3,700,875
241 Nabisco Holdings Corp., Class A........................ 7,862,625
30 Nike, Inc., Class B.................................... 2,088,750
111 Philip Morris Companies, Inc........................... 10,045,500
66 Procter & Gamble Co.................................... 5,478,000
106 Quaker Oats Co......................................... 3,657,000
87 Ralston-Purina Group................................... 5,426,625
80 RJR Nabisco Holdings Corp.............................. 2,470,000
------------
45,980,875
------------
CONSUMER SERVICES 2.3%
25 Capital Cities ABC, Inc................................ 3,084,375
63 Disney (Walt) Co....................................... 3,717,000
104 McDonald's Corp........................................ 4,693,000
52 Omnicom Group, Inc..................................... 1,937,000
*53 Viacom, Inc., Class B.................................. 2,510,875
118 Wendy's International, Inc............................. 2,507,500
------------
18,449,750
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
ENERGY 5.1%
134 Exxon Corp............................................. $ 10,736,750
116 Mobil Corp............................................. 12,992,000
203 Pacific Enterprises.................................... 5,734,750
83 Panhandle Eastern Corp................................. 2,313,625
120 Texaco, Inc............................................ 9,420,000
------------
41,197,125
------------
FINANCE 11.3%
50 Ahmanson (H. F.) & Co.................................. 1,325,000
62 American International Group, Inc...................... 5,735,000
90 Banc One Corp.......................................... 3,397,500
72 Bank of Boston Corp.................................... 3,330,000
110 Bankers Trust New York Corp............................ 7,315,000
27 BayBanks, Inc.......................................... 2,613,450
59 Beacon Properties Corp................................. 1,357,000
51 Chemical Banking Corp.................................. 2,996,250
35 Chubb Corp............................................. 3,386,250
8 Citicorp............................................... 559,520
45 CoreStates Financial Corp.............................. 1,704,375
119 Debartolo Realty Corp.................................. 1,547,000
31 Duke Realty Investments, Inc........................... 972,625
123 Federal National Mortgage Association.................. 15,267,375
28 Health Care Property Investors, Inc.................... 983,500
105 Horace Mann Educators Corp............................. 3,281,250
125 Morgan (J. P.) & Co., Inc.............................. 10,031,250
70 Northern Trust Corp.................................... 3,920,000
187 Prudential Reinsurance Holdings........................ 4,371,125
163 State Street Boston Corp............................... 7,335,000
105 Travelers Group, Inc................................... 6,601,875
48 Weingarten Realty Investors............................ 1,824,000
------------
89,854,345
------------
HEALTH CARE 4.8%
*104 Amgen, Inc............................................. 6,175,000
*75 Magellan Health Services, Inc.......................... 1,800,000
132 Merck & Co., Inc....................................... 8,679,000
74 Pfizer, Inc............................................ 4,662,000
118 Pharmacia & Upjohn, Inc................................ 4,572,500
95 Schering Plough Corp................................... 5,201,250
*130 Tenet Healthcare Corp.................................. 2,697,500
32 United Healthcare Corp................................. 2,096,000
*74 Vencor, Inc............................................ 2,405,000
------------
38,288,250
------------
</TABLE>
See Notes to Financial Statements
8
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
PRODUCER MANUFACTURING 3.8%
84 Allied-Signal, Inc..................................... $ 3,990,000
56 Fluor Corp............................................. 3,696,000
62 Foster Wheeler Corp.................................... 2,635,000
57 General Electric Co.................................... 4,104,000
79 Honeywell, Inc......................................... 3,841,375
52 Illinois Tool Works, Inc............................... 3,068,000
72 Stewart & Stevenson Services, Inc...................... 1,818,000
154 WMX Technologies, Inc.................................. 4,600,750
51 York International Corp................................ 2,397,000
------------
30,150,125
------------
RAW MATERIALS/PROCESSING INDUSTRIES 3.7%
66 Aluminum Co. of America................................ 3,489,750
92 Bemis, Inc............................................. 2,357,500
*30 Crown Cork & Seal Co., Inc............................. 1,252,500
44 Grace (W. R.) & Co..................................... 2,601,500
65 James River Corp....................................... 1,568,125
59 Kimberly Clark Corp.................................... 4,905,420
56 Monsanto Co............................................ 6,860,000
128 Praxair, Inc........................................... 4,304,000
42 Sigma-Aldrich Corp..................................... 2,079,000
------------
29,417,795
------------
TECHNOLOGY 5.9%
47 Adobe Systems, Inc..................................... 2,914,000
63 Boeing Co.............................................. 4,937,625
105 Computer Associates International, Inc................. 5,971,875
*75 Digital Equipment Corp................................. 4,809,375
69 General Signal Corp.................................... 2,233,875
42 Harris Corp............................................ 2,294,250
25 Hewlett-Packard Co..................................... 2,093,750
20 International Business Machines Corp................... 1,835,000
74 Loral Corp............................................. 2,617,750
36 McDonnell Douglas Corp................................. 3,312,000
*30 Microsoft Corp......................................... 2,632,500
39 Motorola, Inc.......................................... 2,223,000
*33 Newbridge Networks Corp................................ 1,365,375
64 Perkin-Elmer Corp...................................... 2,416,000
40 Xerox Corp............................................. 5,480,000
------------
47,136,375
------------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
TRANSPORTATION 0.5%
57 Union Pacific Corp.................................... $ 3,762,000
------------
UTILITIES 8.0%
75 Ameritech Corp........................................ 4,425,000
120 AT&T Corp............................................. 7,770,000
85 Cincinnati Bell, Inc.................................. 2,953,750
150 CMS Energy Group...................................... 4,481,250
110 Duke Power Co......................................... 5,211,250
156 Frontier Corp......................................... 4,680,000
100 General Public Utilities Corp......................... 3,400,000
208 MCI Communications Corp............................... 5,434,000
140 NIPSCO Industries, Inc................................ 5,355,000
240 Pacificorp............................................ 5,100,000
143 Peco Energy Co........................................ 4,307,875
105 Public Service Enterprise Group....................... 3,215,625
51 Southern New England Telecommunications Corp.......... 2,027,250
100 U S West Communications Group......................... 3,575,000
*100 U S West Media Group.................................. 1,900,000
------------
63,836,000
------------
TOTAL DOMESTIC COMMON STOCK (Cost $365,843,306)..... 445,754,165
------------
FOREIGN COMMON STOCK 5.5%
*85 Adidas, ADS........................................... 2,279,062
124 Astra, AB, Series A, ADR.............................. 4,929,000
38 British Petroleum Co., ADR............................ 3,880,750
31 Canadian National Railway............................. 462,000
135 Canadian Pacific, Ltd................................. 2,446,875
*47 GCR Holdings, Ltd..................................... 1,046,250
156 National Power, ADR................................... 1,443,000
49 Nokia Corp., ADS...................................... 1,904,875
129 PowerGen, PLC, ADR.................................... 1,693,125
75 Royal Dutch Petroleum Co., ADR........................ 10,584,375
149 Telefonos de Mexico, S.A., ADR........................ 4,749,375
70 Teva Pharmaceutical, Ltd., ADR........................ 3,246,250
72 Total, S.A., ADR...................................... 2,448,000
37 Zeneca Group, PLC, ADR................................ 2,159,875
------------
TOTAL FOREIGN COMMON STOCK (Cost $39,424,429)....... 43,272,812
------------
</TABLE>
See Notes to Financial Statements
10
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK 3.9%
136 Browning-Ferris Industries, Inc., ACES, 7.25%,... $ 4,267,000
70 Corning Glassworks, MIPS, 6.00%,................. 3,526,250
85 Delta Air Lines, Inc., $3.50..................... 5,046,875
145 James River Corp., DECS, $1.55,.................. 3,389,375
50 SCI Finance NV, LLC, 6.25%....................... 3,700,000
110 Time Warner, Inc., PERCS, $1.24,................. 3,437,500
104 Williams Companies, Inc., $3.50.................. 7,683,000
------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost 31,050,000
$28,532,604).....................................
------------
</TABLE>
<TABLE>
<CAPTION>
Par
Amount
(000)
- ---------
<C> <S> <C> <C> <C>
NON-CONVERTIBLE CORPORATE
OBLIGATIONS 11.0%
CONSUMER DISTRIBUTION 0.6%
$ 4,000 May Department Stores Co.............. 8.375% 08/01/24 4,504,960
-----------
CONSUMER DURABLES 0.8%
3,000 Ford Motor Co......................... 9.000 09/15/01 3,428,100
3,000 General Motors Corp................... 7.000 06/15/03 3,156,600
-----------
6,584,700
-----------
CONSUMER SERVICES 1.6%
5,000 Cox Communications, Inc............... 7.250 11/15/15 5,206,500
3,000 Hertz Corp............................ 7.000 04/15/01 3,142,800
2,000 Tele-Communications, Inc.............. 9.800 02/01/12 2,399,600
1,500 Time Warner Entertainment Co.......... 9.625 05/01/02 1,741,845
-----------
12,490,745
-----------
ENERGY 3.4%
5,000 Enron Corp............................ 9.125 04/01/03 5,832,500
4,000 Occidental Petroleum Corp............. 10.125 11/15/01 4,788,800
6,000 Sonat, Inc............................ 6.875 06/01/05 6,295,200
1,500 Texaco Capital, Inc................... 8.250 10/01/06 1,759,950
5,500 Texas Eastern Transport Corp.......... 8.250 10/15/04 6,244,975
2,000 Western Atlas, Inc.................... 7.875 06/15/04 2,213,800
-----------
27,135,225
-----------
FINANCE 0.3%
2,000 General Electric Capital Corp......... 8.900 09/15/04 2,392,200
-----------
PRODUCER MANUFACTURING 0.2%
1,500 Reliance Electric Co.................. 6.800 04/15/03 1,572,750
-----------
RAW MATERIALS/PROCESSING
INDUSTRIES 2.9%
5,000 Carter Holt Harvey, Ltd............... 8.875 12/01/04 5,874,800
5,000 Crown Cork & Seal Co.................. 8.375 01/15/05 5,712,000
5,000 Georgia Pacific Corp.................. 9.500 05/15/22 5,845,750
5,000 James River Corp...................... 8.375 11/15/01 5,537,150
-----------
22,969,700
-----------
</TABLE>
See Notes to Financial Statements
11
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TECHNOLOGY 0.5%
$ 4,000 Philips Electronics, NV.............. 7.750% 04/15/04 $ 4,393,880
------------
TRANSPORTATION 0.4%
3,000 Union Pacific Corp................... 7.600 05/01/05 3,277,650
------------
UTILITIES 0.3%
2,500 MCI Communications Corp.............. 7.125 01/20/00 2,626,300
------------
TOTAL NON-CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $81,708,465).................................... 87,948,110
------------
DOMESTIC CONVERTIBLE CORPORATE
OBLIGATIONS 7.8%
CONSUMER DISTRIBUTION 0.4%
3,300 Federated Department Stores, Inc..... 5.000 10/01/03 3,341,250
------------
CONSUMER NON-DURABLES 1.2%
8,000 Grand Metropolitan................... 6.500 01/31/00 9,280,000
------------
CONSUMER SERVICES 1.7%
17,000 ADT Operations, Inc.................. (1) 07/06/10 8,075,000
1,074 Time Warner, Inc..................... 8.750 01/10/15 1,113,088
9,700 Time Warner, Inc..................... (1) 06/22/13 3,977,000
------------
13,165,088
------------
ENERGY 0.3%
2,710 Ensearch Corp........................ 6.375 04/01/02 2,655,800
------------
FINANCE 1.1%
1,100 American Travellers Corp............. 6.500 10/01/05 1,520,750
6,600 Equitable Companies, Inc............. 6.125 12/15/24 7,491,000
------------
9,011,750
------------
HEALTH CARE 0.7%
4,000 United Technologies Corp., PEN....... (2) 09/08/97 5,215,000
------------
RAW MATERIALS/PROCESSING
INDUSTRIES 0.7%
3,100 Albany International Co.............. 5.250 03/15/02 2,759,000
7,500 RPM, Inc............................. (1) 09/30/12 3,220,313
------------
5,979,313
------------
TECHNOLOGY 1.2%
40 American Express Co., DECKS.......... 6.250 10/15/96 2,194,035
50 Salomon, Inc., ELKS.................. 6.500 02/01/97 3,232,395
2,500 3Com Corp............................ 10.250 11/01/01 3,887,500
------------
9,313,930
------------
UTILITIES 0.5%
11,000 U.S. Cellular Corp................... (1) 06/15/15 3,850,000
------------
TOTAL DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $54,322,282).................................... 61,812,131
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS 2.9%
$ 5,000 Aegon NV............................................ 4.750% 11/01/04 $ 7,825,000
1,700 Ciba-Geigy Corp..................................... 6.250 03/15/16 1,708,500
8,000 News America Holdings............................... (1) 03/11/13 3,720,000
18,500 Roche Holdings, Inc................................. (1) 04/20/10 8,209,375
2,090 Sandoz, Ltd......................................... 2.000 10/06/02 1,982,888
------------
TOTAL FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $18,824,499)........................................................ 23,445,763
------------
UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS 4.8%
1,000 Federal Farm Credit Banks........................... 9.000 03/07/97 1,043,680
30,000 United States Treasury Bonds........................ 7.875 02/15/21 36,923,400
------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS
(Cost $35,310,156)....................................................... 37,967,080
------------
SHORT-TERM INVESTMENTS 9.0%
COMMERCIAL PAPER 5.7%
20,295 Associates Corp. of North America................... 6.004 01/02/96 20,281,470
**25,230 General Electric Capital Corp....................... 5.854 01/02/96 25,213,600
------------
45,495,070
------------
REPURCHASE AGREEMENT 1.6%
12,555 Lehman Government Securities, Inc., dated 12/29/95
(collateralized by U.S. Government obligations in a
pooled cash account) repurchase proceeds
$12,563,196......................................... 5.875 01/02/96 12,555,000
------------
UNITED STATES GOVERNMENT OBLIGATIONS 1.7%
**14,000 United States Treasury Bills........................ 5.441 to 02/15/96 to
5.578 04/18/96 13,819,947
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $71,861,996)........................... 71,870,017
------------
TOTAL INVESTMENTS (Cost $695,827,737) 100.8%....................................... 803,120,078
OTHER ASSETS AND LIABILITIES, NET (0.8%)........................................... (6,055,502)
------------
NET ASSETS 100%.................................................................... $797,064,576
------------
</TABLE>
ACES-Automatically convertible equity security
ELKS-Equity linked security, traded in shares
DECKS-Debt exchangeable for MIPS-Monthly income paying security
common stock PEN-Pharmaceutical exchange note
DECS-Dividend enhanced convertible stock
PERCS-Preferred equity redeemable cumulative
* Non-income producing stock
security
** Securities with a market value of $31.8 million were placed as collateral
for futures contracts (see Note 1B)
(1) Liquid yield option
note, zero coupon
(2) Zero coupon
13
See Notes to Financial Statements
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $695,827,737)................ $803,120,078
Cash............................................................ 33,151
Dividends and interest receivable............................... 4,522,355
Receivable for Fund shares sold................................. 2,192,915
Receivable for investments sold................................. 1,766,181
Receivable for broker-variation margin.......................... 35,700
Other assets.................................................... 49,576
------------
Total Assets................................................... 811,719,956
------------
LIABILITIES
Payable for Fund shares purchased............................... 8,535,980
Payable for investments purchased............................... 2,722,955
Dividends payable............................................... 2,045,361
Due to Distributor.............................................. 661,137
Due to Adviser.................................................. 260,895
Due to shareholder service agent................................ 154,000
Deferred Trustees' compensation................................. 49,829
Accrued expenses................................................ 225,223
------------
Total Liabilities.............................................. 14,655,380
------------
NET ASSETS, equivalent to $6.31 per share for Class A and $6.30
per share for Class B and C shares............................. $797,064,576
------------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 55,458,931 Class A,
64,941,985 Class B, and 6,074,199
Class C shares outstanding..................................... $ 1,264,751
Capital surplus................................................. 680,692,507
Undistributed net realized gain on securities................... 7,516,630
Net unrealized appreciation (depreciation) of securities
Investments.................................................... 107,292,341
Futures contracts.............................................. (524,008)
Undistributed net investment income............................. 822,355
------------
NET ASSETS...................................................... $797,064,576
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest......................................................... $ 15,597,136
Dividends........................................................ 12,266,253
------------
Investment income............................................... 27,863,389
------------
EXPENSES
Management fees.................................................. 2,603,866
Shareholder service agent's fees and expenses.................... 1,588,953
Accounting services.............................................. 108,597
Service fees--Class A............................................ 601,850
Distribution and service fees--Class B........................... 3,125,732
Distribution and service fees--Class C........................... 318,679
Trustees' fees and expenses...................................... 25,854
Audit fees....................................................... 41,503
Custodian fees................................................... 33,793
Legal fees....................................................... 8,083
Reports to shareholders.......................................... 119,149
Registration and filing fees..................................... 158,575
State franchise taxes............................................ 65,833
Miscellaneous.................................................... 21,890
------------
Total expenses.................................................. 8,822,357
------------
NET INVESTMENT INCOME............................................ 19,041,032
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities
Investments..................................................... 40,048,629
Futures contracts............................................... 7,636,912
Net unrealized appreciation (depreciation) of securities during
the period
Investments..................................................... 108,545,531
Futures contracts............................................... (700,687)
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES................... 155,530,385
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................. $174,571,417
------------
</TABLE>
See Notes to Financial Statements
15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period.................... $509,399,385 $312,995,062
------------ ------------
OPERATIONS
Net investment income............................. 19,041,032 13,791,828
Net realized gain on securities................... 47,685,541 4,024,901
Net unrealized appreciation (depreciation) of
securities during the period..................... 107,844,844 (27,909,442)
------------ ------------
Increase (decrease) in net assets resulting from
operations........................................ 174,571,417 (10,092,713)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A........................................... (9,417,089) (7,565,034)
Class B........................................... (8,073,838) (5,449,845)
Class C........................................... (805,374) (616,081)
------------ ------------
(18,296,301) (13,630,960)
------------ ------------
Net realized gain on securities
Class A........................................... (17,024,616) (3,994,687)
Class B........................................... (19,392,670) (3,771,623)
Class C........................................... (1,831,288) (421,966)
------------ ------------
(38,248,574) (8,188,276)
------------ ------------
Excess of book-basis net investment income (see
Note 1F)
Class A........................................... -- --
Class B........................................... -- (203,788)
Class C........................................... -- (26,526)
------------ ------------
-- (230,314)
------------ ------------
Total distributions.............................. (56,544,875) (22,049,550)
------------ ------------
NET EQUALIZATION CREDITS (SEE NOTE 1G)............. -- 818,258
------------ ------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A........................................... 100,960,071 94,769,448
Class B........................................... 127,455,590 158,314,454
Class C........................................... 12,700,237 22,343,775
------------ ------------
241,115,898 275,427,677
------------ ------------
Proceeds from shares issued for distributions
reinvested
Class A........................................... 22,648,505 9,530,860
Class B........................................... 25,073,357 8,619,248
Class C........................................... 2,071,625 853,040
------------ ------------
49,793,487 19,003,148
------------ ------------
Cost of shares redeemed
Class A........................................... (69,303,217) (35,662,551)
Class B........................................... (42,499,849) (26,416,978)
Class C........................................... (9,467,670) (4,622,968)
------------ ------------
(121,270,736) (66,702,497)
------------ ------------
Increase in net assets resulting from capital
transactions..................................... 169,638,649 227,728,328
------------ ------------
INCREASE IN NET ASSETS............................. 287,665,191 196,404,323
------------ ------------
NET ASSETS, end of period (including undistributed
net investment income of $822,355 and accumulated
net investment loss of $8,642, respectively)..... $797,064,576 $509,399,385
------------ ------------
</TABLE>
See Notes to Financial Statements
16
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------
Year Ended December 31
--------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period... $ 5.16 $ 5.55 $ 5.15 $ 4.83 $ 4.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .25 .27 .25 .255 .26
Expenses.............................. (.05) (.06) (.06) (.05) (.045)
------ ------ ------ ------ ------
Net investment income.................. .20 .21 .19 .205 .215
Net realized and unrealized gain (loss)
on securities......................... 1.458 (.317) .6055 .31 .83
------ ------ ------ ------ ------
Total from investment operations....... 1.658 (.107) .7955 .515 1.045
------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income................. (.188) (.1855) (.168) (.195) (.215)
Net realized gain on securities....... (.32) (.0975) (.2275) -- --
------ ------ ------ ------ ------
Total distributions.................... (.508) (.283) (.3955) (.195) (.215)
------ ------ ------ ------ ------
Net asset value, end of period......... $ 6.31 $ 5.16 $ 5.55 $ 5.15 $ 4.83
------ ------ ------ ------ ------
TOTAL RETURN (/1/)..................... 32.57% (1.98%) 16.00% 10.72% 26.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)... $349.9 $240.5 $187.6 $123.8 $103.1
Average net assets (millions).......... $292.4 $214.4 $152.1 $109.6 $ 93.7
Ratios to average net assets
Expenses.............................. .95% 1.02% 1.06% 1.01% 1.02%
Net investment income................. 3.43% 3.60% 3.33% 3.95% 4.88%
Portfolio turnover rate................ 92% 92% 101% 74% 80%
</TABLE>
(1) Total return does not consider the effect of sales charges.
See Notes to Financial Statements
17
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------
May 1,
1992(/1/)
Year Ended December 31 through
---------------------------- December 31,
1995 1994 1993(/2/) 1992(/2/)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of peri-
od................................ $ 5.16 $ 5.55 $ 5.15 $ 4.83
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income................. .25 .21 .24 .16
Expenses.......................... (.10) (.08) (.10) (.06)
------- ------- ------- ------
Net investment income.............. .15 .13 .14 .10
Net realized and unrealized gain
(loss) on securities.............. 1.458 (.277) .6155 .337
------- ------- ------- ------
Total from investment operations... 1.608 (.147) .7555 .437
------- ------- ------- ------
LESS DISTRIBUTIONS FROM
Net investment income............. (.148) (.13) (.128) (.117)
Excess of book-basis net invest-
ment income (see Note 1F)........ -- (.0155) -- --
Net realized gain on securities... (.32) (.0975) (.2275) --
------- ------- ------- ------
Total distributions................ (.468) (.243) (.3555) (.117)
------- ------- ------- ------
Net asset value, end of period..... $ 6.30 $ 5.16 $ 5.55 $ 5.15
------- ------- ------- ------
TOTAL RETURN (/3/)................. 31.51% (2.70%) 14.94% 9.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (mil-
lions)............................ $ 408.9 $ 242.0 $ 115.4 $ 13.3
Average net assets (millions)...... $ 312.6 $ 192.9 $ 56.2 $ 4.4
Ratios to average net assets
(annualized)
Expenses.......................... 1.75% 1.82% 1.89% 1.87%
Net investment income............. 2.62% 2.82% 2.45% 3.06%
Portfolio turnover rate............ 92% 92% 101% 74%
</TABLE>
(1) Commencement of offering of sales.
(2) Based on average month-end shares outstanding.
(3) Total return for a period of less than one full year is not annualized and
does not consider the effect of sales charges.
See Notes to Financial Statements
18
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------
July 6,
Year Ended 1993(/1/)
December 31 through
---------------- December 31,
1995 1994 1993(/2/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 5.16 $ 5.55 $ 5.37
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................ .25 .23 .11
Expenses..................................... (.10) (.09) (.05)
------- ------- ------
Net investment income......................... .15 .14 .06
Net realized and unrealized gain (loss) on
securities................................... 1.458 (.287) .379
------- ------- ------
Total from investment operations.............. 1.608 (.147) .439
------- ------- ------
LESS DISTRIBUTIONS FROM
Net investment income........................ (.148) (.14) (.064)
Excess of book-basis net investment income
(see Note 1F)............................... -- (.0055) --
Net realized gain on securities.............. (.32) (.0975) (.195)
------- ------- ------
Total distributions........................... (.468) (.243) (.259)
------- ------- ------
Net asset value, end of period................ $ 6.30 $ 5.16 $ 5.55
------- ------- ------
TOTAL RETURN (/3/)............................ 31.51% (2.70%) 8.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).......... $ 38.3 $ 26.9 $ 10.0
Average net assets (millions)................. $ 31.9 $ 21.8 $ 3.4
Ratios to average net assets (annualized)
Expenses..................................... 1.76% 1.82% 1.98%
Net investment income........................ 2.63% 2.83% 2.27%
Portfolio turnover rate....................... 92% 92% 101%
</TABLE>
(1) Commencement of offering of sales.
(2) Based on average month-end shares outstanding.
(3) Total return for a period of less than one full year is not annualized and
does not consider the effect of sales charges.
See Notes to Financial Statements
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Equity Income Fund (the "Fund", formerly American
Capital Equity Income Fund, Inc.) is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment com-
pany. The Fund seeking as its primary objective, the highest possible income
consistent with safety of principal by investing primarily in income producing
equity and debt securities issued by a wide range of companies in many differ-
ent industries.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The prepa-
ration of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts reported. Actual amounts may differ from the estimates.
A. INVESTMENT VALUATIONS-Securities, listed or traded on a national securities
exchange are valued at the last sale price. Unlisted securities and listed se-
curities 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 invest-
ments 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 strate-
gies to manage the market risk of the Fund's investments. The purchase of a
futures contract increases the impact on net asset value of changes in the mar-
ket price of investments. There is a risk that the market movement of such in-
struments 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 ac-
count 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 ac-
count in the name of the broker, the funds agent in acquiring the futures posi-
tion. 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 secu-
rities acquired through delivery under a contract is adjusted by the unrealized
gain or loss on the contract.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
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 in-
vest independently in repurchase agreements, or transfer uninvested cash bal-
ances into a pooled cash account along with other investment companies advised
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 re-
quired 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 be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der 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 transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments 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 accor-
dance 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 re-
demptions 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.
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.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
H. DEBT DISCOUNT AND PREMIUM-The Fund accounts for discounts and premiums on
the same basis as is used for federal income tax reporting. Accordingly, orig-
inal issue debt discounts are amortized over the life of the security. Premi-
ums 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 allo-
cated among investment companies advised by the Adviser. For the period, these
charges included $15,383 as the Fund's share of the employee costs attribut-
able 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.
ACCESS Investor 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 period, the fees for these services aggregated $1,360,426.
The Fund was advised that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $313,394 and $188,336, respectively, as
their portion of the commissions charged on sales of Fund shares during the
period.
Under the Distribution Plans, each class of shares pays up to .25% per annum
of its average net assets to reimburse the Distributor for expenses and serv-
ice fees incurred. The Class B 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 and Class C shares may exceed the amounts reimbursed
to the Distributor by the Fund. At the end of the period, the unreimbursed ex-
penses incurred by the Distributor under the Class B and Class C plans aggre-
gated approximately $12.4 million and $205,000, 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 re-
newal of the plans, future Fund reimbursements of distribution fees.
Legal fees of $8,056 during the period were for services rendered by former
counsel of the Fund, O'Melveny & Myers. A former trustee was of counsel to
that firm.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Certain officers and directors of the Fund are officers and trustees of the
Adviser, the Distributor, the Retail Dealer, and the shareholder service
agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $674,263,396 and $539,686,337,
respectively.
For federal income tax purposes, the identified cost of investments owned at
the end of the period was $696,397,497. Net unrealized appreciation of invest-
ments aggregated $106,722,581, gross unrealized appreciation of investments
aggregated $112,562,445, and gross unrealized depreciation of investments ag-
gregated $5,839,864.
At the end of the period, the Fund held 102 long Standard & Poor's 500 Index
futures contracts expiring in March 1996. The market value of such contracts
was $31,540,950, and the unrealized depreciation was $524,008.
NOTE 4--TRUSTEE COMPENSATION
Fund trustees who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,416 plus a fee of $40 per day for Board and Com-
mittee meetings attended. During the period, such fees aggregated $24,144.
The trustees 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. Each trustee 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 ba-
sis (the Class B and Class C shares). All classes of shares have the same
rights, except that Class B 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 to each class of shares based upon the relative proportion of
net assets of each class. Class B and Class C shares automatically convert to
Class A shares six years and ten years after purchase, respectively, subject
to certain conditions.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The Fund has an unlimited number of shares of $.01 par value beneficial in-
terest authorized. Transactions in shares of beneficial interest were as fol-
lows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A.............................................. 16,719,414 17,663,518
Class B.............................................. 21,177,056 29,471,357
Class C.............................................. 2,124,439 4,133,514
----------- -----------
40,020,909 51,268,389
----------- -----------
Shares issued for distributions reinvested
Class A.............................................. 3,676,431 1,805,958
Class B.............................................. 4,062,779 1,635,157
Class C.............................................. 336,096 161,557
----------- -----------
8,075,306 3,602,672
----------- -----------
Shares redeemed
Class A.............................................. (11,541,742) (6,664,087)
Class B.............................................. (7,228,073) (4,963,223)
Class C.............................................. (1,610,373) (871,369)
----------- -----------
(20,380,188) (12,498,679)
----------- -----------
Increase in shares outstanding........................ 27,716,027 42,372,382
----------- -----------
</TABLE>
NOTE 6--FUND REORGANIZATION
On July 21, 1995, the shareholders approved the reorganization of the Fund to
a Delaware Business Trust and the election of fourteen trustees. On August 18,
1995, the reorganization became effective.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of Van Kampen American Capital Equity In-
come Fund at December 31, 1995, the results of its operations, the changes in
its net assets and financial highlights for each of the fiscal periods present-
ed, in conformity with generally accepted accounting principles. These finan-
cial statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibil-
ity is to express an opinion on these financial statements based on our audits.
We conducted our audits of these financial statements in accordance with gener-
ally accepted auditing standards which require that we plan and perform the au-
dit 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 man-
agement, and evaluating the overall financial statement presentation. We be-
lieve that our audits, which included confirmation of securities at December
31, 1995 by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
January 31, 1996
25
<PAGE>
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
GLOBAL AND INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Emerging Growth Fund
Enterprise Fund
Pace Fund
Growth & Income
Balanced Fund
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Limited Term Municipal Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
Texas Tax Free Income Fund
THE GOVETT FUNDS
Emerging Markets Fund
Global Income Fund
International Equity Fund
Latin America Fund
Pacific Strategy Fund
Smaller Companies Fund
Ask your investment adviser for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us direct at 1-800-421-5666 weekdays
from 7:00 a.m. to 7:00 p.m. Central time.
26
<PAGE>
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
LINDA HUTTON HEAGY
ROGER HILSMAN
R. CRAIG KENNEDY
DENNIS J. MCDONNELL
DONALD C. MILLER
JACK E. NELSON
DON G. POWELL
JEROME L. ROBINSON
FERNANDO SISTO*
WAYNE W. WHALEN
WILLIAM S. WOODSIDE
*Chairman of the Board
OFFICERS
DON G. POWELL
President and Chief Executive Officer
DENNIS J. MCDONNELL
Executive Vice President
RONALD A. NYBERG
Vice President and Secretary
EDWARD C. WOOD, III
Vice President and Chief Financial Officer
CURTIS W. MORELL
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN
Treasurer
TANYA M. LODEN
Controller
WILLIAM N. BROWN
PETER W. HEGEL
ROBERT C. PECK, JR.
ALAN T. SACHTLEBEN
PAUL R. WOLKENBERG
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.,
Houston, Texas 77056
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICE AGENT
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256,
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK AND TRUST CO.
225 Franklin Street,
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, Illinois 60806
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
1201 Louisiana
Houston, Texas 77002
(C) Van Kampen American Capital Distributors, Inc., 1996
All rights reserved.
SM denotes a service mark of
Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of
the Fund. It is not authorized for distribution to prospective investors un-
less 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 prospec-
tive investors after 03/31/96, this annual report must be accompanied by a Van
Kampen American Capital Equity Income Fund performance data update for the
most recent quarter.
27
<PAGE>
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
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