<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders......................... 1
Performance Results............................ 3
Performance in Perspective..................... 4
Glossary of Terms.............................. 5
Portfolio Management Review.................... 6
Portfolio Highlights........................... 9
Portfolio of Investments....................... 10
Statement of Assets and Liabilities............ 17
Statement of Operations........................ 18
Statement of Changes in Net Assets............. 19
Financial Highlights........................... 20
Notes to Financial Statements.................. 23
Report of Independent Accountants.............. 31
</TABLE>
EQI ANR 2/99
<PAGE> 2
LETTER TO SHAREHOLDERS
January 20, 1999
Dear Shareholder,
The past decade has been a remarkable time for investors. Together, we've
witnessed one of the greatest bull markets in investment history, unprecedented
growth in mutual fund investing, and a surge in personal retirement planning.
The coming millennium promises to hold even more opportunities.
To lead us into this new era of investing, Richard F. Powers III has joined
Van Kampen as Chairman and Chief Executive Officer. He comes to us from our
parent company, Morgan Stanley Dean Witter & Co., where he served as Executive
Vice President and Director of Marketing. He brings 27 years of experience in
the financial services industry, including an extensive background in product
management, strategic planning and brand development.
Although former Chairman Don G. Powell retired on January 1, he will remain
active in the industry and the community. Mr. Powell plans to continue his
service as a member of the board of directors of the Investment Company
Institute, the leading mutual fund industry association, and he will remain a
trustee of your fund.
ECONOMIC OVERVIEW
Despite a stormy year in the global economy, the United States ended 1998
with only a moderate slowdown in growth. The nation's gross domestic product, a
measure of economic health, grew 3.9 percent during the year, matching 1997's
growth rate and indicating that our nation's economy remains strong. A
continuation of low inflation--only a 1.6 percent increase in the consumer price
index over the last 12 months--also helped sustain the domestic economy and kept
inflation-adjusted interest rates attractive.
Although the year ended on a positive note, the economic environment was
quite unsettled in the third quarter, with the Asian financial crisis
contributing to slowing corporate profits in the United States. Given the
uncertainty surrounding emerging market nations and the near-collapse of a major
U.S. hedge fund, the stock and bond markets experienced significant volatility
during this period. With instability as a backdrop, American and foreign
investors alike pursued a flight to quality--seeking the relative safety of
large-company stocks and government bonds.
In the last few months of the year the global financial situation improved
in conjunction with the Federal Reserve's interest rate decreases. In response
to declining corporate profits and mounting international concerns, the Fed
lowered interest rates three times, with 0.25 percent cuts in September,
October, and November. These rate cuts, coupled with a wave of corporate mergers
and cost-cutting measures, lent the support needed to keep the economy growing.
Dozens of foreign central banks also reduced interest rates in an effort to
stimulate their economies. These actions gave a boost to investor confidence and
encouraged a return to a more diversified range of investments in the last few
months of the year.
Continued on page 2
1
<PAGE> 3
MARKET REVIEW
Despite bouts of volatility, the stock market experienced impressive returns
during 1998. Large-company stocks were responsible for much of this as investors
favored the perceived stability of established, high-quality companies. The Dow
Jones Industrial Average rose more than 16 percent during the year and hit a
record high of 9374 in November before falling back to more moderate levels.
Technology companies generally fared well during the year, with the
technology-heavy Nasdaq composite index up almost 40 percent for the year. On
the other hand, commodity-based stocks--especially those of oil
companies--suffered from declining commodity prices. Small-company stocks also
significantly underperformed the rest of the market, with the Russell 2000 index
actually losing 3.45 percent during the 12-month period.
OUTLOOK
Our outlook for the domestic economy is positive, and we anticipate
continued low inflation and healthy economic growth. However, the aftereffects
of the global economic slowdown may continue to put pressure on corporate
earnings in the first half of the year. Internationally, we anticipate that low
interest rates and declining inflation will lead to improvements in troubled
areas such as Asia and Latin America. With the successful launch of the euro,
the new European transnational currency, we believe that many foreign markets
will become increasingly attractive in 1999.
In the long term, we are optimistic that the stock market will continue its
record growth, although we could experience additional volatility in the months
ahead if concerns about high stock valuations and increasing earnings pressure
become more pronounced. Combined with growing questions about corporate and
government reactions to the Year 2000 computer problem, we could see an
increasingly cautious market by mid-year.
Additional details about your fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to share with you the progress of your
investment.
Sincerely,
[SIG.]
Richard F. Powers III
Chairman
Van Kampen Asset Management Inc.
[SIG.]
Dennis J. McDonnell
President
Van Kampen Asset Management Inc.
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1998
VAN KAMPEN EQUITY INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV(1).... 16.99% 16.17% 16.17%
One-year total return(2)................. 10.29% 11.17% 15.17%
Five-year average annual total
return(2)................................ 15.49% 15.81% 15.98%
Ten-year average annual total
return(2)................................ 14.52% N/A N/A
Life-of-Fund average annual total
return(2)................................ 11.46% 15.63% 16.13%
Commencement date........................ 08/03/60 05/01/92 07/06/93
</TABLE>
N/A = Not Applicable
(1)Assumes 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).
(2)Standardized 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 and C shares).
See the Prior Performance section of the current prospectus. An investment
should be made with an understanding of the risks that an investment in equity
securities entails. These include the risk that the financial condition of the
issuers of the securities in the portfolio, or the condition of the stock market
in general, may worsen and therefore, the value of Fund shares may decline. Past
performance does not guarantee future results. Investment return and net asset
value will fluctuate with market conditions. Market volatility may have
adversely affected fund performance since December 31, 1998. Fund shares, when
redeemed, may be worth more or less than their original cost.
The medium-grade debt securities in which the Fund may invest are subject to
greater market risks and less assurance as to the ability of the issuer to meet
principal and interest obligations than higher-rated securities. Debt securities
rated in lower categories are considered high-risk securities; the rating
agencies consider them speculative, and payment of interest and principal is not
considered well-assured.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE> 5
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment performance at regular intervals. A
comparison of your Fund's performance to an applicable benchmark can:
- Illustrate the market environment in which your Fund is being managed.
- Reflect the impact of favorable market trends or difficult market
conditions.
- Help you evaluate how your Fund's management team has responded to
opportunities and challenges.
The following graph 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 indexes are broad-based, statistical composites that do not include any
commissions that would be paid by an investor purchasing the securities they
represent.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen Equity Income Fund vs. the Standard & Poor's 500-Stock Index and
the Lipper Equity Income Fund Index (December 31, 1988 through December 31,
1998)
[GRAPH]
<TABLE>
<CAPTION>
VAN KAMPEN EQUITY INCOME STANDARD & POOR'S 500- LIPPER EQUITY INCOME FUND
FUND STOCK INDEX INDEX
<S> <C> <C> <C>
Dec 1988 9426.00 10000.00 10000.00
9904.00 10711.00 10485.00
9665.00 10401.00 10379.00
9894.00 10708.00 10600.00
10211.00 11244.00 10993.00
10479.00 11639.00 11379.00
10516.00 11651.00 11411.00
11161.00 12680.00 12092.00
11285.00 12877.00 12255.00
11549.00 12896.00 12265.00
11247.00 12572.00 11970.00
11348.00 12780.00 12128.00
Dec 1989 11475.00 13159.00 12264.00
10937.00 12253.00 11683.00
11065.00 12358.00 11793.00
11281.00 12761.00 11907.00
10995.00 12418.00 11576.00
11775.00 13560.00 12261.00
11812.00 13560.00 12221.00
11652.00 13489.00 12150.00
10827.00 12217.00 11358.00
10370.00 11705.00 10911.00
10289.00 11627.00 10805.00
10721.00 12324.00 11386.00
Dec 1990 10938.00 12749.00 11637.00
11266.00 13278.00 12032.00
11813.00 14172.00 12736.00
12060.00 14594.00 12966.00
12087.00 14599.00 13045.00
12475.00 15162.00 13508.00
12085.00 14562.00 13053.00
12588.00 15216.00 13548.00
12924.00 15515.00 13851.00
12925.00 15340.00 13863.00
13151.00 15522.00 14079.00
12840.00 14840.00 13657.00
Dec 1991 13855.00 16617.00 14742.00
13769.00 16286.00 14695.00
13999.00 16442.00 14884.00
13769.00 16199.00 14686.00
14030.00 16651.00 15070.00
14233.00 16667.00 15224.00
14087.00 16507.00 15094.00
14556.00 17157.00 15604.00
14438.00 16745.00 15409.00
14614.00 17027.00 15531.00
14673.00 17063.00 15496.00
15058.00 17580.00 15872.00
Dec 1992 15341.00 17881.00 16178.00
15699.00 18007.00 16439.00
15937.00 18196.00 16773.00
16341.00 18659.00 17287.00
16069.00 18185.00 17147.00
16281.00 18598.00 17409.00
16531.00 18748.00 17597.00
16684.00 18648.00 17739.00
17233.00 19290.00 18338.00
17392.00 19230.00 18353.00
17607.00 19603.00 18578.00
17331.00 19350.00 18250.00
Dec 1993 17796.00 19675.00 18579.00
18341.00 20314.00 19159.00
17860.00 19704.00 18684.00
17175.00 18935.00 17937.00
17337.00 19153.00 18172.00
17435.00 19391.00 18379.00
17112.00 19016.00 18110.00
17571.00 19615.00 18621.00
18096.00 20353.00 19240.00
17772.00 19946.00 18876.00
17904.00 20362.00 18978.00
17310.00 19558.00 18268.00
Dec 1994 17443.00 19942.00 18409.00
17950.00 20426.00 18738.00
18524.00 21163.00 19341.00
18913.00 21878.00 19797.00
19356.00 22490.00 20272.00
20072.00 23306.00 20893.00
20455.00 23959.00 21170.00
21107.00 24721.00 21751.00
21210.00 24713.00 22018.00
21800.00 25858.00 22704.00
21627.00 25729.00 22382.00
22595.00 26785.00 23325.00
Dec 1995 23128.00 27409.00 23901.00
23568.00 28303.00 24447.00
23605.00 28500.00 24625.00
23935.00 28879.00 24935.00
23935.00 29267.00 25163.00
24344.00 29936.00 25535.00
24363.00 30172.00 25573.00
23428.00 28791.00 24736.00
24064.00 29333.00 25295.00
24906.00 31097.00 26225.00
25432.00 31910.00 26845.00
27012.00 34251.00 28379.00
Dec 1996 26725.00 33686.00 28196.00
27677.00 35752.00 29228.00
27954.00 35964.00 29630.00
27137.00 34595.00 28671.00
28028.00 36616.00 29524.00
29648.00 38761.00 31225.00
30641.00 40622.00 32405.00
32838.00 43795.00 34357.00
31454.00 41279.00 33258.00
32899.00 43660.00 34945.00
32081.00 42154.00 33920.00
32695.00 44034.00 35044.00
Dec 1997 33174.00 44909.00 35853.00
33357.00 45365.00 35914.00
35098.00 48560.00 37851.00
36760.00 51160.00 39570.00
36992.00 51624.00 39532.00
36899.00 50652.00 38974.00
37484.00 52844.00 39292.00
37017.00 52230.00 38280.00
33516.00 44615.00 33663.00
34520.00 47598.00 35394.00
36208.00 51419.00 37488.00
37756.00 54460.00 39074.00
Dec 1998 38811.00 57717.00 40075.00
- --------------------------------
Fund's Total Return
1 Year Avg. Annual = 10.29%
5 Year Avg. Annual = 15.49%
10 Year Avg. Annual = 14.52%
Inception Avg. Annual = 11.46%
- --------------------------------
</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, and includes payment of the maximum
sales charge (5.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
4
<PAGE> 6
GLOSSARY OF TERMS
BLUE-CHIP STOCKS: Stocks of large, well-known companies that have a long record
of growth. Examples of blue-chip stocks include General Motors,
International Business Machines (IBM), Coca-Cola, and General Electric.
DOW JONES INDUSTRIAL AVERAGE: The oldest and most widely recognized stock market
average, which reflects the performance of 30 actively traded stocks of
well-established, blue-chip companies.
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank system of the United States. Its
policy-making committee, called the Federal Open Market Committee, meets
eight times a year to establish monetary policy and monitor the economic
pulse of the United States.
GROWTH INVESTING: An investment strategy that seeks to identify stocks that tend
to offer greater-than-average earnings growth. Growth stocks typically trade
at higher prices than value stocks, due to their higher expected earnings
growth.
MARKET CAPITALIZATION: The size of a company, as measured by the value of its
issued and outstanding stock. The definition used by Morningstar, an
independent mutual fund rating service, places companies in one of three
flexible categories that grow or shrink along with the market. According to
Morningstar, as of December 31, 1998,
- Large caps have market capitalizations greater than $8.4 billion
- Mid caps have market capitalizations between $1.3 and $8.4 billion
- Small caps have market capitalizations less than $1.3 billion
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from the total assets in its portfolio and dividing
this amount by the number of shares outstanding. The NAV does not include
any initial or contingent deferred sales charge.
P/E RATIO: The price-to-earnings ratio shows the "multiple" of earnings at which
a stock is selling. The P/E ratio is calculated by dividing a stock's
current price by its current earnings per share. A high multiple means that
investors are optimistic about future growth and have bid up the stock's
price.
VALUATION: The estimated or determined worth of a stock, based on financial
measures such as the stock's current price relative to earnings, revenue,
book value, and cash flow.
VALUE INVESTING: A strategy that seeks to identify stocks that are sound
investments but are temporarily out of favor in the marketplace. As a
result, they trade at prices below the value that value investors believe
they are actually worth.
5
<PAGE> 7
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN EQUITY INCOME FUND
We recently spoke with the management team of the Van Kampen Equity Income Fund
about the key events and economic forces that shaped the markets during the
fiscal year ended December 31, 1998. The team is led by James A. Gilligan,
portfolio manager; Scott Carroll, portfolio comanager; and Stephen L. Boyd,
chief investment officer for equity investments. The following excerpts reflect
their views on the Fund's performance during this time.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND OPERATED
DURING THE REPORTING PERIOD?
A The majority of the period was dominated by global instability.
Domino-effect currency devaluations in Asia, Eastern Europe, Russia, and
Latin America precipitated several months of market volatility during the
third quarter as investors fled risk-sensitive securities and embraced the
relative safety of U.S. Treasuries. The Dow Jones Industrial Average plummeted
approximately 1000 points in the third quarter of 1998 as investor confidence in
the global economy was shaken.
In September, the Federal Reserve Board implemented its first rate cut in
two years. Investors, recognizing that the U.S. economy remained fundamentally
sound despite global uncertainty, returned to the stock market with enthusiasm.
Two more rate cuts by the Fed and ongoing rate decreases in Europe enabled the
Dow to rebound close to the highs it reached in July as 1998 drew to a close.
Q AGAINST THIS BACKDROP, WHAT TYPE OF COMPANIES PERFORMED ESPECIALLY WELL?
A As has been true for the past several years, large-capitalization stocks
generally outperformed mid- and small-capitalization stocks during the
year. This trend reflected investors' preference for established companies
with more stable earnings prospects. However, mid- and small-cap stocks waged a
comeback at the end of the period, as blue-chip companies such as Coca-Cola and
Gillette posted earnings disappointments. In certain sectors such as technology
and health care, small-cap companies won the performance race against their
larger cousins, but this wasn't enough for small caps to catch up across the
broad market.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO'S ASSET ALLOCATIONS DURING THE
REPORTING PERIOD?
A One of our most significant changes during the year was the reallocation
of a portion of the Fund's assets into the portfolio's fixed-income
component. In late September, we moved about five percent of the Fund's
assets out of U.S. Treasuries and into convertible bonds and convertible
preferred securities. The third-quarter market correction made the risk-reward
profile much more favorable for convertible securities. In many cases, we were
able to add securities with yields above that of Treasuries and with more
significant equity exposure. Some of the companies we added to the portfolio
6
<PAGE> 8
through convertible securities included Total Renal Care, a kidney dialysis
services company; Monsanto, a pharmaceutical and agricultural products company;
and U.S. Filter, a global provider of water treatment systems and products.
Q HOW DID YOU MANAGE THE EQUITY PORTION OF THE PORTFOLIO?
A With the additional weighting in convertibles, we increased our exposure
to equity-sensitive securities. We also added a few names in the consumer
area that we found attractive. These included Whitman, a bottling company,
and SYSCO, a food-services distribution company.
One of the portfolio's largest holdings in the consumer non-durables
sector was Philip Morris Cos., Inc. During the reporting period, the company
reported a positive return and an improved outlook in light of a $206 billion
settlement of state lawsuits, which was unveiled in November. Of course, past
performance is no guarantee of comparable future results.
We reduced the Fund's exposure to the financial sector during the period
because we became concerned about the ability of a number of emerging markets to
satisfy their debt obligations to U.S. lenders. As a result, we eliminated
positions in NationsBank, Bank of Boston, and Dresdner Bank. On the buy side, we
added regional banks such as PNC to the portfolio. Although PNC underperformed
the sector during the past few years, the company began to show signs of
improving its return on assets after selling credit card portfolios that had
provided low returns.
Q TELL US ABOUT SOME OF THE OTHER MAJOR SECTORS AND HOLDINGS REPRESENTED IN
THE PORTFOLIO.
A One of the Fund's largest sectors during the period was health
care--which, happily, was one of the better-performing sectors in the
portfolio. In a market that was battered by volatility, health-care stocks
boasted relatively predictable earnings and were largely isolated from events in
emerging markets. We increased the Fund's exposure to HMOs by adding Aetna and
United HealthCare to the portfolio. We believe that, after a long period of
underperformance, HMO stocks should outperform the market as customer rate
increases outweigh projected cost increases. At the same time, we eliminated
PacifiCare Health Systems from the portfolio. Although it is also an HMO, this
company is primarily a Medicare service provider, and it did not experience the
same level of rate increases because of government-mandated pricing.
We maintained our positions in large pharmaceutical stocks, which
continued to perform very well during the period. In particular, Pharmacia &
Upjohn benefited after receiving approval for and distributing a new urinary
incontinence product.
In addition to health care, we favored the technology sector during the
period. As we discussed in your last report, this sector had been one of the
portfolio's most troubled performers earlier in the year due to lingering
problems in Asia and supply-and-demand imbalances. However, technology stocks
soared during the second half of the year. Our patience was rewarded as several
stocks--such as Micron Technology, Texas Instruments, and Xilinx--doubled their
returns from the lows they reached in the third quarter. One of
7
<PAGE> 9
our largest holdings, International Business Machines (IBM), which started the
year at nearly $100 per share, continued to turn in outstanding performance and
finished the year above $180 per share.
We continue to be pleased with developments in the utility industry.
Telephone stocks in general turned in strong performances, buoyed by increased
merger-and-acquisition activity. Electric stocks presented something of a mixed
bag; one success was Northeast Utilities, which appreciated in anticipation of
restarting one of the company's nuclear plants. For additional portfolio
highlights, please refer to page 9.
Q SO, HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund achieved a total return of 16.99 percent(1) (Class A shares at
net asset value) for the 12-month period ended December 31, 1998. By
comparison, the Standard & Poor's 500-Stock Index returned 28.52 percent,
and the Lipper Equity Income Fund Index produced a total return of 11.78 percent
for the same period. The S&P 500-Stock Index is a broad-based index that
reflects the general performance of the stock market, and the Lipper Equity
Income Fund Index reflects the average performance of the largest equity income
funds. These indices are statistical composites that do not reflect any
commissions or sales charges that would be paid by an investor purchasing the
securities or investments they represent. Please refer to the chart on page 3
for additional Fund performance results.
Q WHAT DO YOU SEE HAPPENING IN THE MARKET OVER THE COMING MONTHS?
A Although the U.S. economy is still growing and experiencing low inflation,
we don't believe the full impact of global economic difficulties has been
felt yet on U.S. companies. As the new year rolls on, we expect to see
more evidence that companies have been negatively affected by economic weakness
abroad. In the near term, this will likely result in continued volatility for
the stock market. Over the long term, we believe that investors will continue to
seek companies with strong fundamentals, consistent track records, promising
growth prospects, and attractive valuations. We feel that the Equity Income
Fund, with its emphasis on such companies, should be well positioned in this
environment.
[SIG.]
James A. Gilligan
Portfolio Manager
[SIG.]
Scott Carroll
Portfolio Comanager
[SIG.]
Stephen L. Boyd
Chief Investment Officer
Equity Investments
Please see footnotes on page 3
8
<PAGE> 10
PORTFOLIO HIGHLIGHTS
VAN KAMPEN EQUITY INCOME FUND
PORTFOLIO HOLDINGS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
TOP TEN HOLDINGS PERCENTAGE OF
AS OF THESE INVESTMENTS
DECEMBER 31, 1998 TWELVE MONTHS AGO
<S> <C> <C>
United States Treasury Notes...... 9.8% ................... 7.2%
Aegon NV.......................... 2.2% ................... 1.1%
Philip Morris Cos., Inc. ......... 2.2% ................... 1.8%
International Business Machines
Corp. .......................... 2.1% ................... 1.7%
U.S. WEST Communications Group.... 1.9% ................... 1.3%
Consolidated Edison, Inc. ........ 1.6% ................... 0.9%
BellSouth Corp. .................. 1.5% ................... 1.3%
Equitable Cos., Inc. ............. 1.5% ................... 1.1%
Roche Holdings, Inc. ............. 1.4% ................... 1.6%
Chase Manhattan Corp. ............ 1.4% ................... 1.7%
</TABLE>
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
<S> <C> <C> <C>
Utilities..................... 15% Finance....................... 18%
Health Care................... 14% Utilities..................... 12%
Finance....................... 14% Technology.................... 10%
Technology.................... 12% Health Care................... 10%
Energy........................ 8% Energy........................ 10%
</TABLE>
ASSET ALLOCATION AS A PERCENTAGE OF TOTAL INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
<S> <C>
Stocks...................... 68%
Bonds....................... 8%
Convertibles................ 10% [PIE CHART]
United States Obligations... 9%
Cash Equivalents............ 5%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
<S> <C>
Stocks...................... 68%
Bonds....................... 9%
Convertibles................ 8% [PIE CHART]
United States Obligations... 7%
Cash Equivalents............ 8%
</TABLE>
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS 67.9%
CONSUMER DISTRIBUTION 1.8%
Federated Department Stores, Inc. (a)....................... 337,400 $ 14,697,988
Gap, Inc. .................................................. 261,675 14,719,219
SYSCO Corp.................................................. 248,600 6,820,963
--------------
36,238,170
--------------
CONSUMER DURABLES 0.4%
Black & Decker Corp. ....................................... 143,600 8,050,575
--------------
CONSUMER NON-DURABLES 7.1%
Anheuser-Busch Cos., Inc.................................... 198,600 13,033,125
Benckiser NV, Class B -- ADR (Netherlands) (a).............. 155,200 9,913,400
Colgate-Palmolive Co........................................ 161,830 15,029,961
Hershey Foods Corp.......................................... 206,400 12,835,500
Philip Morris Cos., Inc..................................... 792,000 42,371,988
Ralston Purina Group........................................ 524,600 16,983,925
Tommy Hilfiger Corp. (a).................................... 212,700 12,762,000
Unilever NV-ADR (Netherlands)............................... 138,200 11,461,963
Whitman Corp................................................ 456,100 11,573,538
--------------
145,965,400
--------------
CONSUMER SERVICES 1.2%
H & R Block, Inc............................................ 269,900 12,145,500
News Corp., 144A -- Convertible Preferred (b)............... 83,000 7,283,250
Sinclair Broadcasting Group -- Convertible Preferred........ 82,000 4,120,500
--------------
23,549,250
--------------
ENERGY 6.6%
Atlantic Richfield Co....................................... 348,000 22,707,000
Coastal Corp................................................ 615,700 21,511,019
El Paso Energy Corp......................................... 414,000 14,412,375
Exxon Corp.................................................. 171,500 12,540,938
Mobil Corp.................................................. 227,750 19,842,719
Texaco, Inc................................................. 410,410 21,700,429
Valero Energy Corp.......................................... 290,700 6,177,375
YPF Sociedad Anonima, Class D -- ADR (Argentina)............ 554,200 15,482,963
--------------
134,374,818
--------------
FINANCE 10.6%
Aetna, Inc.................................................. 166,800 13,114,650
Allstate Corp............................................... 152,010 5,871,386
American General Corp....................................... 293,000 22,854,000
Arden Realty Group, Inc..................................... 344,500 7,988,094
Bank of Tokyo-Mitsubishi, Ltd. -- ADR (Japan)............... 982,400 10,315,200
Chase Manhattan Corp........................................ 394,600 26,857,463
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (CONTINUED)
Citigroup, Inc.............................................. 275,500 $ 13,637,250
Equitable Cos., Inc......................................... 502,000 29,053,250
Exel Ltd., Class A.......................................... 146,600 10,995,000
First Union Corp............................................ 282,000 17,149,125
Fleet Financial Group, Inc.................................. 343,400 15,345,688
PLC Capital Trust II, PRIDES -- Convertible Preferred....... 130,000 8,482,500
PNC Bank Corp............................................... 302,100 16,351,163
Washington Mutual, Inc...................................... 328,560 12,546,885
WBK Trust, STRYPES -- Convertible Preferred................. 201,000 6,344,063
--------------
216,905,717
--------------
HEALTHCARE 10.7%
Alza Corp. (a).............................................. 154,000 8,046,500
American Home Products Corp................................. 452,600 25,487,038
Beckman Coulter, Inc........................................ 260,900 14,153,825
Columbia/HCA Healthcare Corp................................ 330,500 8,179,875
IMS Health, Inc............................................. 123,900 9,346,706
Laboratory Corp. -- Convertible Preferred................... 300,000 12,600,000
Merck & Co., Inc............................................ 127,600 18,844,925
Mylan Laboratories, Inc..................................... 482,200 15,189,300
Pharmacia & Upjohn, Inc..................................... 464,300 26,290,988
Rhodia, SA -- ADR (France) (a).............................. 417,200 6,258,000
Rhone-Poulenc, SA, Class A -- ADR (France).................. 492,500 24,748,125
Rhone-Poulenc, SA, Warrants -- ADR (France) (a)............. 248,000 930,000
St. Jude Medical, Inc....................................... 313,700 8,685,569
Teva Pharmaceutical Industries Ltd. -- ADR (Israel)......... 238,000 9,683,625
United HealthCare Corp...................................... 452,600 19,490,088
Watson Pharmaceuticals, Inc. (a)............................ 186,000 11,694,750
--------------
219,629,314
--------------
PRODUCER MANUFACTURING 2.7%
Allied Signal, Inc.......................................... 160,000 7,090,000
Ingersol Rand Co............................................ 394,400 18,512,150
Philips Electronics NV -- ADR (Netherlands)................. 103,000 6,971,813
Waste Management, Inc....................................... 491,047 22,895,066
--------------
55,469,029
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 3.8%
Boise Cascade Corp.......................................... 303,700 9,414,700
Crown Cork & Seal Co., Inc.................................. 395,000 12,170,938
Fort James Corp............................................. 104,480 4,179,200
Fresenius Med Care Holdings, Inc., Class D -- Preferred 12,000 360
(a).......................................................
Imperial Chemical Industries Plc. -- ADR (United Kingdom)... 273,500 9,555,406
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES (CONTINUED)
Monsanto Co................................................. 171,000 $ 8,122,500
Monsanto Co., ACES -- Convertible Preferred................. 360,800 17,679,200
Raychem Corp................................................ 517,100 16,708,794
--------------
77,831,098
--------------
TECHNOLOGY 10.0%
Adobe Systems, Inc.......................................... 431,000 20,149,250
BMC Software, Inc. (a)...................................... 85,000 3,787,813
Compaq Computer Corp........................................ 177,000 7,422,938
Electronic Data Systems Corp................................ 255,600 12,843,900
First Data Corp............................................. 251,100 7,956,731
International Business Machines Corp........................ 222,800 41,162,300
Micron Technology, Inc...................................... 223,110 11,280,999
Microsoft Corp. -- Convertible Preferred.................... 85,000 8,308,750
Motorola, Inc............................................... 100,000 6,106,250
Oracle Corp. (a)............................................ 296,000 12,765,000
Quantum Corp. (a)........................................... 584,400 12,418,500
Texas Instruments, Inc...................................... 192,700 16,487,894
Unisys Corp. -- Convertible Preferred....................... 200,000 11,750,000
Xerox Corp.................................................. 160,800 18,974,400
Xilinx, Inc. (a)............................................ 202,300 13,174,788
--------------
204,589,513
--------------
UTILITIES 13.0%
BEC Energy.................................................. 517,500 21,314,531
BellSouth Corp.............................................. 587,400 29,296,575
Consolidated Edison, Inc.................................... 576,800 30,498,300
DQE, Inc.................................................... 5,000 219,688
Edison International........................................ 629,600 17,550,100
GPU, Inc.................................................... 495,300 21,886,069
GTE Corp.................................................... 280,600 18,922,963
Illinova Corp............................................... 218,100 5,452,500
Niagara Mohawk Power Corp................................... 1,212,800 19,556,400
Northeast Utilities......................................... 1,581,401 25,302,416
PECO Energy Co.............................................. 145,600 6,060,600
SBC Communications, Inc..................................... 137,500 7,373,438
Sprint Corp................................................. 178,300 14,999,488
U.S. WEST Communications Group.............................. 576,500 37,256,313
Washington Water Power Co. -- Convertible Preferred......... 537,000 10,404,375
--------------
266,093,756
--------------
TOTAL COMMON AND PREFERRED STOCKS 67.9%............................... 1,388,696,640
--------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE OBLIGATIONS 7.5%
CONSUMER DISTRIBUTION 0.3%
$ 6,000 Gruma SA De Cv (Mexico), 144A (b).............. 7.625% 10/15/07 $ 5,356,200
--------------
CONSUMER DURABLES 0.5%
3,000 Ford Motor Co.................................. 7.250 10/01/08 3,353,910
3,000 Ford Motor Co. Delaware Note................... 9.000 09/15/01 3,271,350
3,000 General Motors Corp............................ 7.000 06/15/03 3,172,620
--------------
9,797,880
--------------
CONSUMER SERVICES 1.0%
10,000 Clear Channel Communications................... 6.625 06/15/08 10,185,100
10,000 Cox Communications, Inc........................ 7.250 11/15/15 11,060,000
--------------
21,245,100
--------------
ENERGY 1.0%
5,000 Enron Corp..................................... 9.125 04/01/03 5,531,950
4,000 Occidental Petroleum Corp...................... 10.125 11/15/01 4,373,480
2,500 Texaco Capital, Inc............................ 8.250 10/01/06 2,933,875
5,500 Texas Eastern Transmission Corp. .............. 8.250 10/15/04 6,222,095
2,000 Western Atlas, Inc. ........................... 7.875 06/15/04 2,209,200
--------------
21,270,600
--------------
FINANCE 0.1%
2,000 General Electric Capital Corp.................. 8.900 09/15/04 2,330,940
--------------
PRODUCER MANUFACTURING 0.4%
1,500 Reliance Electric Co........................... 6.800 04/15/03 1,586,370
6,000 USA Waste Services, Inc........................ 7.000 07/15/28 6,219,000
--------------
7,805,370
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 1.4%
5,000 Crown Cork & Seal Finance Plc.................. 7.000 12/15/06 5,115,800
5,000 Crown Cork & Seal, Inc......................... 8.375 01/15/05 5,465,400
5,000 Georgia Pacific Corp........................... 9.500 05/15/22 5,729,900
10,000 ICI North America, Inc......................... 8.875 11/15/06 12,016,300
--------------
28,327,400
--------------
RETAIL 0.2%
4,000 May Department Stores Co....................... 8.375 08/01/24 4,608,360
--------------
TECHNOLOGY 0.7%
4,000 Philips Electronics NV-ADR (Netherlands)....... 7.750 04/15/04 4,366,120
10,000 Raytheon Co.................................... 6.750 08/15/07 10,615,400
--------------
14,981,520
--------------
TRANSPORTATION 0.3%
5,000 Norfolk Southern Corp.......................... 7.350 05/15/07 5,504,775
--------------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UTILITIES 1.6%
$ 5,000 360 Communications Co.......................... 7.125% 03/01/03 $ 5,320,850
10,000 Century Telephone Enterprises, Inc............. 6.300 01/15/08 10,363,850
4,000 Compania De Telocomunicaciones (Chile)......... 7.625 07/15/06 3,871,680
1,000 Tennessee Valley Authority, Series G........... 8.625 11/15/29 1,087,785
10,000 Worldcom, Inc.................................. 7.750 04/01/07 11,295,750
--------------
31,939,915
--------------
TOTAL CORPORATE OBLIGATIONS 7.5%.................................. 153,168,060
--------------
CONVERTIBLE CORPORATE OBLIGATIONS 10.5%
CONSUMER DURABLES 1.2%
26,000 Deutsche Bank Finance (Netherlands), 144A
(Convertible into 135,226 DaimlerChrysler AG
common shares) (b)............................. * 02/12/17 14,885,000
185 Newell Financial Trust, 144A (Convertible into
182,503 common shares) (a) (b)................. 5.250 12/01/27 9,851,250
--------------
24,736,250
--------------
CONSUMER SERVICES 0.4%
3,500 ADT Operations, Inc., LYON (Convertible into
95,116 Tyco International Ltd. common
shares)........................................ * 07/06/10 7,188,125
--------------
FINANCE 2.4%
5,000 Aegon NV, 144A (Convertible into 1,800,000
common shares) (b)............................. 4.750 11/01/04 43,650,000
STRYPES Merrill Lynch & Co., Inc., 94,500 shares
(Convertible into Cox Communications, Inc.
common shares)................................. 6.000 06/01/99 5,398,313
--------------
49,048,313
--------------
HEALTHCARE 2.8%
20,000 Alza Corp., LYON (Convertible into 259,740
common shares)................................. * 07/14/14 13,700,000
43,500 Roche Holdings, Inc., LYON (Convertible into
206,347 common shares)......................... * 04/20/10 28,111,875
14,246 Total Renal Care, 144A (Convertible into
434,197 common shares) (b)..................... 7.000 05/15/09 15,492,525
--------------
57,304,400
--------------
PHARMACEUTICALS 0.9%
20,000 Dura Pharmaceuticals (Convertible into 394,984
common shares)................................. 3.500 07/15/02 14,700,000
2,090 Sandoz, Ltd., 144A (Convertible into 1,958
common shares) (b)............................. 2.000 10/06/02 3,903,075
--------------
18,603,075
--------------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PRODUCER MANUFACTURING 1.3%
$20,000 U.S. Filter Corp. (Convertible into 506,328
common shares)................................. 4.500% 12/15/01 $ 18,725,000
8,000 WMX Technologies, Inc. (Convertible into
151,252 Waste Management, Inc. common
shares)........................................ 2.000 01/24/05 7,830,000
--------------
26,555,000
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 0.5%
18,401 APP Finance VII, 144A (Convertible into
1,071,188 common shares) (b)................... 3.500 04/30/03 10,534,573
--------------
10,534,573
--------------
TECHNOLOGY 1.0%
24,000 Hewlett Packard Co., LYON, 144A (Convertible
into 130,320 common shares) (b)................ * 10/14/17 13,350,000
12,000 Hewlett Packard Co., LYON (Convertible into
65,160 common shares).......................... * 10/14/17 6,675,000
--------------
20,025,000
--------------
TOTAL CONVERTIBLE CORPORATE OBLIGATIONS 10.5%..................... 213,994,736
--------------
UNITED STATES OBLIGATIONS 9.3%
12,000 United States Treasury Notes................... 6.375 07/15/99 12,116,160
130,000 United States Treasury Notes (c)............... 6.250 10/31/01 135,595,200
38,000 United States Treasury Notes................... 6.875 05/15/06 42,956,340
--------------
TOTAL UNITED STATES OBLIGATIONS.................................... 190,667,700
--------------
TOTAL LONG-TERM INVESTMENTS 95.2%
(Cost $1,570,088,976)...................................................... 1,946,527,136
--------------
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Market Value
- ----------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS 5.2%
COMMERCIAL PAPER 1.2%
General Electric Capital Corp. ($24,235,000 par, yielding
5.003%, 01/04/99 maturity)................................
$ 24,221,536
--------------
UNITED STATES AGENCIES 4.0%
Federal Home Loan Mortgage Discount Notes
($20,000,000 par, yielding 4.956%, 04/09/99 maturity).....
19,736,000
Federal Home Loan Mortgage Discount Notes
($20,000,000 par, yielding 5.045%, 03/11/99 maturity).....
19,812,000
Federal Home Loan Mortgage Discount Notes
($25,000,000 par, yielding 5.046%, 03/05/99 maturity).....
24,785,000
Federal Home Loan Mortgage Discount Notes
($18,190,000 par, yielding 5.075%, 02/17/99 maturity).....
18,070,547
--------------
TOTAL UNITED STATES AGENCIES..............................
82,403,547
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $106,617,400).......................................
106,625,083
--------------
TOTAL INVESTMENTS 100.4%
(Cost $1,676,706,376).....................................
2,053,152,219
LIABILITIES IN EXCESS OF OTHER ASSETS (0.4%)...............
(8,510,526)
--------------
NET ASSETS 100.0%..........................................
$2,044,641,693
==============
</TABLE>
*Zero coupon bond
(a) Non-income producing security as this security currently does not declare
dividends or pay interest.
(b) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be resold only in
transactions exempt from registration which are normally those transactions
with qualified institutional buyers.
(c) Assets segregated as collateral for open futures transactions.
LYON -- Liquid yield option note.
PRIDES -- Preferred redeemable interest dividend equity security, traded in
shares.
STRYPES -- Structured yield product exchangeable for stock, traded in shares.
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $1,676,706,376)..................... $2,053,152,219
Cash........................................................ 18,503
Receivables:
Fund Shares Sold.......................................... 6,639,980
Interest.................................................. 5,468,748
Dividends................................................. 1,660,722
Variation Margin on Futures............................... 136,850
Other....................................................... 48,818
--------------
Total Assets.......................................... 2,067,125,840
--------------
LIABILITIES:
Payables:
Fund Shares Repurchased................................... 17,642,707
Distributor and Affiliates................................ 2,327,572
Investments Purchased..................................... 879,147
Investment Advisory Fee................................... 626,063
Income Distributions...................................... 531,152
Accrued Expenses............................................ 289,415
Trustees' Deferred Compensation and Retirement Plans........ 188,091
--------------
Total Liabilities..................................... 22,484,147
--------------
NET ASSETS.................................................. $2,044,641,693
==============
NET ASSETS CONSIST OF:
Capital..................................................... $1,646,782,277
Net Unrealized Appreciation................................. 378,269,769
Accumulated Net Realized Gain............................... 18,064,329
Accumulated Undistributed Net Investment Income............. 1,525,318
--------------
NET ASSETS.................................................. $2,044,641,693
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $808,454,528 and 103,389,230 shares of
beneficial interest issued and outstanding)........... $ 7.82
Maximum sales charge (5.75%* of offering price)......... .48
--------------
Maximum offering price to public........................ $ 8.30
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $1,140,042,881 and 146,793,491 shares of
beneficial interest issued and outstanding)........... $ 7.77
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $96,144,284 and 12,377,821 shares of
beneficial interest issued and outstanding)........... $ 7.77
==============
</TABLE>
*On sales of $50,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
17
<PAGE> 19
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 36,284,890
Dividends................................................... 22,536,245
------------
Total Income............................................ 58,821,135
------------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,739,846, $10,399,790 and $853,421,
respectively)............................................. 12,993,057
Investment Advisory Fee..................................... 6,877,625
Shareholder Services........................................ 3,201,480
Custody..................................................... 103,474
Legal....................................................... 72,012
Trustees' Fees and Expenses................................. 43,145
Other....................................................... 1,123,726
------------
Total Expenses.......................................... 24,414,519
------------
NET INVESTMENT INCOME....................................... $ 34,406,616
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $107,209,364
Futures................................................... 5,217,669
------------
Net Realized Gain........................................... 112,427,033
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 245,432,645
------------
End of the Period:
Investments............................................... 376,445,843
Futures................................................... 1,823,926
------------
378,269,769
------------
Net Unrealized Appreciation During the Period............... 132,837,124
------------
NET REALIZED AND UNREALIZED GAIN............................ $245,264,157
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $279,670,773
============
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 34,406,616 $ 23,048,492
Net Realized Gain..................................... 112,427,033 184,609,912
Net Unrealized Appreciation During the Period......... 132,837,124 85,825,819
-------------- --------------
Change in Net Assets from Operations.................. 279,670,773 293,484,223
-------------- --------------
Distributions from Net Investment Income.............. (34,947,222) (24,018,109)
Distributions in Excess of Net Investment Income...... -0- (2,400,068)
-------------- --------------
Distributions from and in Excess of Net Investment
Income*............................................. (34,947,222) (26,418,177)
Distributions from Net Realized Gain*................. (110,554,644) (181,941,214)
-------------- --------------
Total Distributions................................... (145,501,866) (208,359,391)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... 134,168,907 85,124,832
-------------- --------------
FROM CAPITAL TRANSACTIONS
Proceeds from Shares Sold............................. 1,143,314,008 436,926,312
Value Received from Shares Issued in Merger........... -0- 21,732,117
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................ 132,142,154 188,548,998
Cost of Shares Repurchased............................ (987,638,702) (269,846,748)
-------------- --------------
Net Change in Net Assets from Capital Transactions.... 287,817,460 377,360,679
-------------- --------------
TOTAL INCREASE IN NET ASSETS.......................... 421,986,367 462,485,511
NET ASSETS:
Beginning of the Period............................... 1,622,655,326 1,160,169,815
-------------- --------------
End of the Period (Including accumulated undistributed
net investment income of $1,525,318 and $2,065,924
respectively)....................................... $2,044,641,693 $1,622,655,326
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net
Investment Income:
Class A Shares.......................... $(16,719,601) $(12,849,167)
Class B Shares.......................... (16,833,408) (12,509,687)
Class C Shares.......................... (1,394,213) (1,059,323)
------------- -------------
$(34,947,222) $(26,418,177)
============= =============
Distributions from Net Realized Gain:
Class A Shares.......................... $(43,282,677) $(71,711,304)
Class B Shares.......................... (62,071,749) (101,660,017)
Class C Shares.......................... (5,200,218) (8,569,893)
------------- -------------
($110,554,644) ($181,941,214)
============= =============
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
Class A Shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $7.242 $6.740 $ 6.31 $ 5.16 $ 5.55
------ ------ ------ ------ ------
Net Investment Income.................. .174 .152 .158 .20 .21
Net Realized and Unrealized
Gain/Loss............................ 1.030 1.435 .796 1.458 (.317)
------ ------ ------ ------ ------
Total from Investment Operations......... 1.204 1.587 .954 1.658 (.107)
------ ------ ------ ------ ------
Less:
Distributions from and in Excess of Net
Investment Income.................... .175 .168 .156 .188 .1855
Distributions from Net Realized Gain... .451 .917 .368 .32 .0975
------ ------ ------ ------ ------
Total Distributions...................... .626 1.085 .524 .508 .283
------ ------ ------ ------ ------
Net Asset Value, End of the Period....... $7.820 $7.242 $6.740 $ 6.31 $ 5.16
====== ====== ====== ====== ======
Total Return (a)......................... 16.99% 24.13% 15.55% 32.57% (1.98%)
Net Assets at End of the Period (In
millions).............................. $808.5 $638.1 $471.8 $349.9 $240.5
Ratio of Expenses to Average Net Assets
(b).................................... .85% .86% .97% .95% 1.02%
Ratio of Net Investment Income to Average
Net Assets (b)......................... 2.31% 2.09% 2.50% 3.43% 3.60%
Portfolio Turnover....................... 61% 86% 99% 92% 92%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1994 through 1996, the impact on the Ratios
of Expenses and Net Investment Income to Average Net Assets due to Van
Kampen's reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
20
<PAGE> 22
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
Class B Shares 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.... $ 7.203 $ 6.713 $ 6.30 $ 5.16 $ 5.55
-------- ------- ------- ------- -------
Net Investment Income....................... .118 .100 .113 .15 .13
Net Realized and Unrealized Gain/Loss....... 1.019 1.423 .784 1.458 (.277)
-------- ------- ------- ------- -------
Total from Investment Operations............ 1.137 1.523 .897 1.608 (.147)
-------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income....................... .123 .116 .116 .148 .1455
Distributions from Net Realized Gain...... .451 .917 .368 .32 .0975
-------- ------- ------- ------- -------
Total Distributions......................... .574 1.033 .484 .468 .243
-------- ------- ------- ------- -------
Net Asset Value, End of the Period.......... $ 7.766 $ 7.203 $ 6.713 $ 6.30 $ 5.16
======== ======= ======= ======= =======
Total Return (a)............................ 16.17% 23.23% 14.56% 31.51% (2.70%)
Net Assets at End of the Period (In
millions)................................. $1,140.0 $ 908.7 $ 633.3 $ 408.9 $ 242.0
Ratio of Expenses to Average Net Assets
(b)....................................... 1.62% 1.64% 1.74% 1.75% 1.82%
Ratio of Net Investment Income to Average
Net Assets (b)............................ 1.55% 1.32% 1.74% 2.62% 2.82%
Portfolio Turnover.......................... 61% 86% 99% 92% 92%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1994 through 1996, the impact on the Ratios
of Expenses and Net Investment Income to Average Net Assets due to Van
Kampen's reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
21
<PAGE> 23
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
Class C Shares 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.... $7.204 $6.713 $ 6.30 $ 5.16 $ 5.55
------ ------ ------ ------ -------
Net Investment Income....................... .117 .100 .113 .15 .14
Net Realized and Unrealized Gain/Loss....... 1.020 1.424 .784 1.458 (.287)
------ ------ ------ ------ -------
Total from Investment Operations............ 1.137 1.524 .897 1.608 (.147)
------ ------ ------ ------ -------
Less:
Distributions from and in Excess of Net
Investment Income....................... .123 .116 .116 .148 .1455
Distributions from Net Realized Gain...... .451 .917 .368 .32 .0975
------ ------ ------ ------ -------
Total Distributions......................... .574 1.033 .484 .468 .243
------ ------ ------ ------ -------
Net Asset Value, End of the Period.......... $7.767 $7.204 $6.713 $ 6.30 $ 5.16
====== ====== ====== ====== =======
Total Return (a)............................ 16.17% 23.23% 14.56% 31.51% (2.70%)
Net Assets at End of the Period (In
millions)................................. $ 96.1 $ 75.8 $ 55.2 $ 38.3 $ 26.9
Ratio of Expenses to Average Net Assets
(b)....................................... 1.62% 1.64% 1.74% 1.76% 1.82%
Ratio of Net Investment Income to Average
Net Assets (b)............................ 1.55% 1.32% 1.73% 2.63% 2.83%
Portfolio Turnover.......................... 61% 86% 99% 92% 92%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1994 through 1996, the impact on the Ratios
of Expenses and Net Investment Income to Average Net Assets due to Van
Kampen's reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Equity Income Fund (the "Fund") is organized as a Delaware business
trust, and is registered as a diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective is to seek the highest possible income consistent with safety of
principal by investing primarily in income-producing equity instruments and
other debt securities issued by a wide group of companies in many different
industries. The Fund commenced investment operations on August 3, 1960. The
distribution of the Fund's Class B and Class C shares commenced on May 1, 1992
and July 6, 1993, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments in securities listed on a securities exchange
are valued at their sale price as of the close of such securities exchange.
Unlisted securities and listed securities for which the last sale price is not
available are valued at the mean of the bid and asked prices. Fixed income
investments are stated at value using market quotations or indications of value
obtained from an independent pricing service. For those securities where
quotations or prices are not available, valuations are determined in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1998, there were no
when issued or delayed delivery purchase commitments.
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen Asset Management Inc. (the "Adviser") or its
affiliates, the daily aggregate of which is invested in repurchase agreements.
Repurchase agreements are fully collateralized by the underlying debt security.
The Fund will make payment for such security 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. INCOME AND EXPENSES--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Discounts are amortized over
the expected life of each applicable security. Premiums on debt securities are
not amortized. Expenses of the Fund are allocated on a pro rata basis to each
class of shares, except for distribution and service fees and transfer agency
costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
At December 31, 1998, for federal income tax purposes, cost of long- and
short-term investments is $1,679,036,296, the aggregate gross unrealized
appreciation is $415,270,963 and the aggregate gross unrealized depreciation is
$41,155,040, resulting in net unrealized appreciation on long- and short-term
investments of $374,115,923.
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses for tax purposes
resulting from wash sales and the mark to market of open futures contracts at
December 31, 1998.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares and pays dividends
quarterly from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains and gains on option and futures
transactions. All short-term capital gains and a portion of option and futures
gains are included in ordinary income for tax purposes.
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
For federal income tax purposes, the following is furnished with respect to
the distributions paid by the Fund during its taxable year ended December 31,
1998. The Fund designated and paid $106,506,788 as a 20% rate gain distribution.
In January 1999, the Fund provided tax information to shareholders for the 1998
calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- ---------------------------------------------------------------------
<S> <C>
First $150 million.................................... .50 of 1%
Next $100 million..................................... .45 of 1%
Next $100 million..................................... .40 of 1%
Over $350 million..................................... .35 of 1%
</TABLE>
For the year ended December 31, 1998, the Fund recognized expenses of
approximately $72,000 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1998, the Fund recognized expenses of
approximately $423,600 representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting services to the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent for the Fund. For the year ended December 31,
1998, the Fund recognized expenses of approximately $2,489,800. Beginning in
1998, the transfer agency fees are determined through negotiations with the
Fund's Board of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
At December 31, 1998, Van Kampen owned 223 shares of Class A and 224 shares
each of Classes B and C, respectively.
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C, each with a par value of $.01 per share. There are an unlimited
number of shares of each class authorized.
At December 31, 1998, capital aggregated $624,072,653, $943,694,748 and
$79,014,876 for Classes A, B, and C, respectively. For the year ended December
31, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................. 108,360,203 $ 836,859,216
Class B.................................. 36,029,610 276,860,624
Class C.................................. 3,865,558 29,594,168
------------ --------------
Total Sales................................ 148,255,371 $1,143,314,008
============ ==============
Dividend Reinvestment:
Class A.................................. 7,130,348 $ 54,671,876
Class B.................................. 9,437,571 71,897,500
Class C.................................. 731,441 5,572,778
------------ --------------
Total Dividend Reinvestment................ 17,299,360 $ 132,142,154
============ ==============
Repurchases:
Class A.................................. (100,205,548) $ (776,904,382)
Class B.................................. (24,828,078) (189,850,088)
Class C.................................. (2,747,855) (20,884,232)
------------ --------------
Total Repurchases.......................... (127,781,481) $ (987,638,702)
============ ==============
</TABLE>
26
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $509,445,943, $784,786,712 and
$64,732,162 for Classes A, B, and C, respectively. For the year ended December
31, 1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 25,583,186 $ 191,217,108
Class B.................................... 29,915,227 221,594,137
Class C.................................... 3,239,213 24,115,067
----------- -------------
Total Sales.................................. 58,737,626 $ 436,926,312
=========== =============
Shares Issued in Merger:
Class A.................................... 1,531,079 $ 10,227,602
Class B.................................... 1,542,761 10,259,360
Class C.................................... 187,242 1,245,155
----------- -------------
Total Shares Issued in Merger................ 3,261,082 $ 21,732,117
=========== =============
Dividend Reinvestment:
Class A.................................... 10,787,829 $ 77,160,579
Class B.................................... 14,561,001 103,558,871
Class C.................................... 1,100,953 7,829,548
----------- -------------
Total Dividend Reinvestment.................. 26,449,783 $ 188,548,998
=========== =============
Repurchases:
Class A.................................... (19,786,873) $(147,745,099)
Class B.................................... (14,197,582) (105,642,498)
Class C.................................... (2,216,230) (16,459,151)
----------- -------------
Total Repurchases............................ (36,200,685) $(269,846,748)
=========== =============
</TABLE>
On April 4, 1997, the Fund acquired all of the assets and liabilities of the Van
Kampen American Capital Balanced Fund (the "Balanced Fund"), through a tax free
reorganization approved by the Balanced Fund shareholders on March 27, 1997. The
Fund issued 1,531,079, 1,542,761 and 187,242 shares of Classes A, B and C in
exchange for 685,634, 687,703 and 83,476 shares, representing net assets of
$21,732,117, including $249,434 of accumulated depreciation of investments.
Prior to the acquisition, the Fund's net assets were $1,212,920,035. Combined
net assets on the day of the acquisition were $1,234,652,152.
27
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. The CDSC will be imposed on most redemptions made within five years of
the purchase for Class B and one year of the purchase for Class C as detailed in
the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
-----------------------
YEAR OF REDEMPTION CLASS B CLASS C
- -------------------------------------------------------------------------
<S> <C> <C>
First............................................ 5.00% 1.00%
Second........................................... 4.00% None
Third............................................ 3.00% None
Fourth........................................... 2.50% None
Fifth............................................ 1.50% None
Sixth and Thereafter............................. None None
</TABLE>
For the year ended December 31, 1998, Van Kampen, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of
approximately $1,031,600 and CDSC on redeemed shares of approximately
$2,437,600. Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $1,248,372,470 and $1,031,813,396,
respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio or to generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
exercising a call option contract or taking delivery of a security underlying a
futures contract. In these instances, the recognition of gain or loss is
postponed until the disposal of the security underlying the option or futures
contract.
28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. OPTION CONTRACTS--An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to provide the return of an index without purchasing all of the securities
underlying the index or as a substitute for purchasing or selling specific
securities.
B. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in stock index futures. These contracts are generally
used to provide the return of an index without purchasing all of the securities
underlying the index or to manage the Fund's overall exposure to the equity
markets. Upon entering into futures contracts, the Fund maintains, in a
segregated account with its custodian, securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin). The risk of loss associated
with a futures contract is in excess of the variation margin reflected on the
Statement of Assets and Liabilities.
Transactions in futures contracts for the year ended December 31, 1998, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1997............................ 134
Futures Opened.............................................. 1,101
Futures Closed.............................................. (1,074)
------
Outstanding at December 31, 1998............................ 161
======
</TABLE>
The futures contracts outstanding at December 31, 1998, and the description
and unrealized appreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C>
Long Contracts--March 1999 S&P 500 Index Futures
(Current Notional Value of $311,375 per
contract)..................................... 161 $1,823,926
=== ==========
</TABLE>
29
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1998, are payments retained by Van Kampen of
approximately $7,436,000.
30
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Van Kampen 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
material respects, the financial position of Van Kampen Equity Income Fund (the
"Fund") at December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for each of the periods presented,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 3, 1999
31
<PAGE> 33
YEAR 2000 READINESS DISCLOSURE
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's investment adviser and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Fund's
investment adviser is taking steps that it believes are reasonably designed to
address the Year 2000 Problem with respect to computer systems that it uses and
to obtain reasonable assurances that comparable steps are being taken by the
Fund's other major service providers. At this time, there can be no assurances
that these steps will be sufficient to avoid any adverse impact to the Fund. In
addition, the Year 2000 Problem may adversely affect the markets and the issuers
of securities in which the Fund may invest that, in turn, may adversely affect
the net asset value of the Fund. Improperly functioning trading systems may
result in settlement problems and liquidity issues. In addition, corporate and
governmental data processing errors may result in production problems for
individual companies or issuers and overall economic uncertainty. Earnings of
individual issuers will be affected by remediation costs, which may be
substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected. The
statements above are subject to the Year 2000 Information and Readiness
Disclosure Act, which may limit the legal rights regarding the use of such
statements in the case of dispute.
32
<PAGE> 34
VAN KAMPEN EQUITY INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
PAUL G. YOVOVICH
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and Chief
Financial Officer
CURTIS W. MORRELL*
Vice President and Chief Accounting Officer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
PAUL R. WOLKENBERG*
EDWARD C. WOOD, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN
ASSET MANAGEMENT INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR
SERVICES INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Drive
Chicago, Illinois 60601
TAX NOTICE TO CORPORATE SHAREHOLDERS
For 1998, 51.56% of the dividends taxable as
ordinary income qualified for the 70%
dividends received deduction for corporations.
* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen Funds Inc., 1999 All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
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. After June 30, 1999, the report, if used with prospective
investors, must be accompanied by a quarterly performance update, if applicable.
33
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> EQUITY INCOME CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 1,676,706,376<F1>
<INVESTMENTS-AT-VALUE> 2,053,152,219<F1>
<RECEIVABLES> 13,906,300<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 67,321<F1>
<TOTAL-ASSETS> 2,067,125,840<F1>
<PAYABLE-FOR-SECURITIES> 879,147<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 21,605,000<F1>
<TOTAL-LIABILITIES> 22,484,147<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 624,072,653
<SHARES-COMMON-STOCK> 103,389,230
<SHARES-COMMON-PRIOR> 88,104,227
<ACCUMULATED-NII-CURRENT> 1,525,318<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 18,064,329<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 378,269,769<F1>
<NET-ASSETS> 808,454,528
<DIVIDEND-INCOME> 22,536,245<F1>
<INTEREST-INCOME> 36,284,890<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (24,414,519)<F1>
<NET-INVESTMENT-INCOME> 34,406,616<F1>
<REALIZED-GAINS-CURRENT> 112,427,033<F1>
<APPREC-INCREASE-CURRENT> 132,837,124<F1>
<NET-CHANGE-FROM-OPS> 279,670,773<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (16,719,601)
<DISTRIBUTIONS-OF-GAINS> (43,282,677)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 108,360,203
<NUMBER-OF-SHARES-REDEEMED> (100,205,548)
<SHARES-REINVESTED> 7,130,348
<NET-CHANGE-IN-ASSETS> 170,362,415
<ACCUMULATED-NII-PRIOR> 2,065,924<F1>
<ACCUMULATED-GAINS-PRIOR> 16,191,940<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 6,877,625<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 24,414,519<F1>
<AVERAGE-NET-ASSETS> 733,663,823
<PER-SHARE-NAV-BEGIN> 7.242
<PER-SHARE-NII> 0.174
<PER-SHARE-GAIN-APPREC> 1.030
<PER-SHARE-DIVIDEND> (0.175)
<PER-SHARE-DISTRIBUTIONS> (0.451)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 7.820
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite
basis and not on a class basis
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> EQUITY INCOME CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 1,676,706,376<F1>
<INVESTMENTS-AT-VALUE> 2,053,152,219<F1>
<RECEIVABLES> 13,906,300<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 67,321<F1>
<TOTAL-ASSETS> 2,067,125,840<F1>
<PAYABLE-FOR-SECURITIES> 879,147<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 21,605,000<F1>
<TOTAL-LIABILITIES> 22,484,147<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 943,694,748
<SHARES-COMMON-STOCK> 146,793,491
<SHARES-COMMON-PRIOR> 126,154,388
<ACCUMULATED-NII-CURRENT> 1,525,318<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 18,064,329<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 378,269,769<F1>
<NET-ASSETS> 1,140,042,881
<DIVIDEND-INCOME> 22,536,245<F1>
<INTEREST-INCOME> 36,284,890<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (24,414,519)<F1>
<NET-INVESTMENT-INCOME> 34,406,616<F1>
<REALIZED-GAINS-CURRENT> 112,427,033<F1>
<APPREC-INCREASE-CURRENT> 132,837,124<F1>
<NET-CHANGE-FROM-OPS> 279,670,773<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (16,833,408)
<DISTRIBUTIONS-OF-GAINS> (62,071,749)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 36,029,610
<NUMBER-OF-SHARES-REDEEMED> (24,828,078)
<SHARES-REINVESTED> 9,437,571
<NET-CHANGE-IN-ASSETS> 231,327,827
<ACCUMULATED-NII-PRIOR> 2,065,924<F1>
<ACCUMULATED-GAINS-PRIOR> 16,191,940<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 6,877,625<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 24,414,519<F1>
<AVERAGE-NET-ASSETS> 1,040,661,916
<PER-SHARE-NAV-BEGIN> 7.203
<PER-SHARE-NII> 0.118
<PER-SHARE-GAIN-APPREC> 1.019
<PER-SHARE-DIVIDEND> (0.123)
<PER-SHARE-DISTRIBUTIONS> (0.451)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 7.766
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> EQUITY INCOME CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 1,676,706,376<F1>
<INVESTMENTS-AT-VALUE> 2,053,152,219<F1>
<RECEIVABLES> 13,906,300<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 67,321<F1>
<TOTAL-ASSETS> 2,067,125,840<F1>
<PAYABLE-FOR-SECURITIES> 879,147<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 21,605,000<F1>
<TOTAL-LIABILITIES> 22,484,147<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,014,876
<SHARES-COMMON-STOCK> 12,377,821
<SHARES-COMMON-PRIOR> 10,528,677
<ACCUMULATED-NII-CURRENT> 1,525,318<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 18,064,329<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 378,269,769<F1>
<NET-ASSETS> 96,144,284
<DIVIDEND-INCOME> 22,536,245<F1>
<INTEREST-INCOME> 36,284,890<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (24,414,519)<F1>
<NET-INVESTMENT-INCOME> 34,406,616<F1>
<REALIZED-GAINS-CURRENT> 112,427,033<F1>
<APPREC-INCREASE-CURRENT> 132,837,124<F1>
<NET-CHANGE-FROM-OPS> 279,670,773<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,394,213)
<DISTRIBUTIONS-OF-GAINS> (5,200,218)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,865,558
<NUMBER-OF-SHARES-REDEEMED> (2,747,855)
<SHARES-REINVESTED> 731,441
<NET-CHANGE-IN-ASSETS> 20,296,125
<ACCUMULATED-NII-PRIOR> 2,065,924<F1>
<ACCUMULATED-GAINS-PRIOR> 16,191,940<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 6,877,625<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 24,414,519<F1>
<AVERAGE-NET-ASSETS> 85,399,596
<PER-SHARE-NAV-BEGIN> 7.204
<PER-SHARE-NII> 0.117
<PER-SHARE-GAIN-APPREC> 1.020
<PER-SHARE-DIVIDEND> (0.123)
<PER-SHARE-DISTRIBUTIONS> (0.451)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 7.767
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
