<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Letter to Shareholders.................................... 1
Performance Results....................................... 3
Portfolio Highlights...................................... 4
Performance in Perspective................................ 5
Portfolio Management Review............................... 6
Portfolio of Investments.................................. 9
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......................... 29
</TABLE>
HYI ANR 10/97
<PAGE>
Letter to Shareholders
September 26, 1997
Dear Shareholder, Picture of
Dennis J. McDonnell and Don G. Powell
As you know, Van Kampen American Capital was acquired by Morgan Stanley Group
Inc., paving the way for the development of a prominent global financial
services company. More recently, Morgan Stanley Group Inc. and Dean Witter,
Discover & Co. agreed to merge. The merger was completed on May 31, 1997,
creating the combined company of Morgan Stanley, Dean Witter, Discover & Co.
Additionally, we are very pleased to announce that Philip N. Duff, formerly the
chief financial officer of Morgan Stanley Group Inc., has joined Van Kampen
American Capital as president and chief executive officer. I will continue as
chairman of the firm. We are confident that the partnership of Van Kampen
American Capital and Morgan Stanley, Dean Witter, Discover & Co. will continue
to work to the benefit of our fund shareholders as we move into the next
century.
On August 4, 1997, the announcement of exchange privileges between Van Kampen
American Capital and Morgan Stanley retail funds opened the door to even greater
investment opportunities. We are particularly pleased to offer an expanded menu
of mutual funds covering virtually every market and continent. In our view, the
rapid appreciation of U.S. stock prices in recent years has created a need for
investors to examine their portfolios carefully to ensure proper diversification
among domestic and foreign investments. The Morgan Stanley retail funds, with
their emphasis on global markets, can be valuable tools for accomplishing this
diversification.
Economic Review
Growth, stability, and confidence continued to characterize the U.S.
economic environment during the reported period. After performing solidly during
the second half of 1996, the economy in the first quarter of 1997 grew at its
fastest pace since 1987. Meanwhile, consumer confidence soared to its highest
reading in 28 years, while unemployment fell to 4.9 percent in August, one of
the lowest levels since 1973.
Despite the robust pace of economic activity, there was little evidence of
troublesome inflation. In fact, wholesale prices fell during each of the first
seven months of 1997, the longest stretch of consecutive monthly declines in 45
years. At the consumer level, prices rose by a mere 2.2 percent during the 12
months through August.
Several factors contributed to maintaining a stable rate of inflation. A
strong rally in the U.S. dollar made imported goods less expensive. At the same
time, continued moderation in the cost of employee benefit packages offset mild
upward pressure on wages. Also, a sharp acceleration in productivity gains
allowed employers to absorb higher worker salaries without raising prices.
Finally, health-care costs were unchanged during July, the first time since 1975
that consumer medical prices did not rise.
In March, the inflationary implications of the nation's low unemployment
rate caused the Federal Reserve Board to raise its target for a key lending rate
by one-quarter of a percentage point, the first hike in short-term interest
rates in two years. Signs that economic growth slowed in the second quarter,
however, led Fed policymakers to leave rates unchanged at subsequent meetings.
1 Continued to page two
<PAGE>
Market Review
Bond yields remained in a relatively narrow range during the reporting period.
For several weeks during the spring, it appeared that economic growth was too
robust and that inflation could reemerge. The Federal Reserve's quarter point
increase in short-term interest rates, as well as worries about inflation,
pushed yields on long-term government bonds up to 7.17 percent in April. When
subsequent data showed the economy to be decelerating during the second quarter,
bond yields gradually fell back to 6.61 percent at the end of August, down about
one-half of a percentage point from one year earlier.
The decline in long-term interest rates helped generate solid returns in the
fixed-income market. The Merrill Lynch Domestic Master Bond Index gained 4.93
percent during the eight months through August, and 10.00 percent during the 12-
month reporting period. This is a market capitalization weighted index including
U.S. government, fixed-coupon domestic investment grade corporate bonds, and
mortgage pass-throughs. Reflecting the strong economy, corporate bonds
outperformed Treasury issues by more than 2 percent during the 12 months ended
in August. High-yield corporate bonds were the best-performing sector of the
fixed-income market, as the healthy economic environment increased investor
confidence in the creditworthiness of lower-rated debt. For example, the Merrill
Lynch High Yield Bond Index returned 14.84 percent over the 12-month reporting
period, compared to 13.14 percent for the Lehman Brothers Long-Term Treasury
Index.
Outlook
We expect the pace of economic activity for the remainder of 1997 to accelerate
modestly from the relatively pedestrian rate that prevailed during the second
quarter. While we do not believe that economic growth will be rapid enough to
reignite inflation, some warning signs are present, including a tight labor
market and high consumer confidence. Additionally, an unusually powerful El Nino
weather pattern developing in the Pacific Ocean has the potential to drive
commodity prices significantly higher in coming months. In this environment, at
least one additional round of monetary tightening by the Federal Reserve remains
a possibility. We anticipate that bond yields will remain within a relatively
narrow range for the remainder of the year.
We are fortunate to be experiencing a rare combination of sustained economic
growth, low inflation, and solid financial-market returns. By most objective
indicators, the U.S. economy is in its best shape in over a generation. We urge
our fund shareholders to use this opportunity to consider how their investments
are currently divided among the three major asset classes of stocks, bonds, and
cash. Uneven moves in the various markets can distort a carefully planned
investment program. We encourage you to review your portfolio with an eye toward
correcting imbalances in the way assets have grown to be allocated.
A discussion with your portfolio management team in this report will provide
details of the key factors and strategies contributing to your Fund's
performance. Once again, we value your continued confidence in your investment
with Van Kampen American Capital.
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 August 31, 1997
Van Kampen American Capital High Income Corporate Bond Fund
Total Returns A Shares B Shares C Shares
<TABLE>
<S> <C> <C> <C>
One-year total return based on NAV/1/ 14.44% 13.58% 13.64%
One-year total return/2/ 9.07% 9.58% 12.64%
Five-year average annual total return/2/ 9.85% 9.86% N/A
Ten-year average annual total return/2/ 7.61% N/A N/A
Life-of-Fund average annual total return/2/ 9.40% 10.34% 8.94%
Commencement date 10/02/78 07/02/92 07/06/93
Distribution Rate and Yield
Distribution Rate/3/ 8.72% 8.41% 8.45%
SEC Yield/4/ 8.18% 7.76% 7.81%
</TABLE>
N/A = Not Applicable
/1/ Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% 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).
/3/ Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
/4/ SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio
should theoretically generate for the 30-day period ending August 31, 1997.
See the Fund 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.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE>
Portfolio Highlights
Van Kampen American Capital High Income Corporate Bond Fund
Top Ten Issuers as of August 31, 1997
<TABLE>
<CAPTION>
Percentage of Fund's
Long-Term Investments
<S> <C>
Indah Kiat International Finance Co. BV............. 1.7%
Vicap S. A., 144A Private Placement................. 1.5%
Venture Holdings, Inc............................... 1.4%
Majestic Star Casino, L.L.C......................... 1.4%
Maxus Energy Corp................................... 1.2%
Interlake Corp. (03/01/02).......................... 1.2%
Mohegan Tribal Gaming Authority of Connecticut...... 1.1%
Exide Electronics Group, Inc........................ 1.1%
Galaxy Telecom L.P.................................. 1.1%
Multicanal Participacoes, Series B.................. 1.1%
</TABLE>
Credit Quality as a Percentage of Corporate Obligations
<TABLE>
<CAPTION>
As of August 31, 1997
<C> <S> <C>
[_] BBB....................... 1.8%
[_] BB........................ 16.8%
[_] B......................... 67.2% [PIE CHART APPEARS HERE]
[_] CCC....................... 5.3%
[_] Non-Rated................. 8.9%
As of February 28, 1997
[_] BBB....................... 1.3%
[_] BB........................ 16.6%
[_] B......................... 67.1% [PIE CHART APPEARS HERE]
[_] CCC....................... 6.2%
[_] D......................... 0.3%
[_] Non-Rated................. 8.5%
</TABLE>
Based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
Top Five Portfolio Sectors as a Percentage of Long-Term Investments
<TABLE>
<CAPTION>
As of August 31, 1997
<S> <C>
Raw Materials/Processing Industries................................... 19.1%
Consumer Services..................................................... 18.6%
Producer Manufacturing................................................ 9.1%
Energy................................................................ 8.7%
Utilities............................................................. 8.3%
As of February 28, 1997
Consumer Services..................................................... 20.6%
Raw Materials/Processing Industries................................... 17.6%
Producer Manufacturing................................................ 10.6%
Energy................................................................ 10.2%
Consumer Distribution................................................. 7.8%
</TABLE>
Duration
As of August 31, 1997 As of February 28, 1997
Duration 3.6 years 4.3 years
4
<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 intervals.
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:
. Illustrate the general market environment in which your investments
are being managed
. Reflect the impact of favorable market trends or difficult market
conditions
. 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 First Boston High Yield Index
and the Lipper High Current Yield Bond Index over time. These indices are
unmanaged statistical composites, and do not reflect any commissions or fees
which would be incurred by an investor purchasing the securities they represent.
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 High Income Corporate Bond Fund vs. First
Boston High Yield Index and the Lipper High Current Yield Bond Index
(August 31, 1987 through August 31, 1997)
[GRAPH APPEARS HERE]
Fund's Total Return
1 Year Avg. Annual = 9.07%
5 Year Avg. Annual = 9.85%
10 Year Avg. Annual = 7.61%
Inception Avg. Annual = 9.40%
<TABLE>
<CAPTION>
VKAC High Income Corporate Bond Fund Lipper High Current Yield Bond Index First Boston High Yield Index
<S> <C> <C> <C>
Aug 1987 $ 9,527 $10,000.00 $10,000.00
Aug 1988 $10,064 $10,549.27 $10,998.59
Aug 1989 $10,145 $11,329.66 $11,986.57
Aug 1990 $ 8,534 $10,292.59 $11,554.31
Aug 1991 $ 9,854 $12,275.73 $14,290.93
Aug 1992 $12,398 $15,243.40 $17,493.30
Aug 1993 $14,283 $17,736.92 $20,253.25
Aug 1994 $14,617 $18,197.56 $20,985.08
Aug 1995 $14,149 $20,302.67 $23,757.22
Aug 1996 $18,193 $22,443.29 $26,167.65
Aug 1997 $20,820 $25,841.22 $30,204.89
</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 (4.75% 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.
5
<PAGE>
Portfolio Management Review
Van Kampen American Capital High Income Corporate Bond Fund
We recently spoke with the management team of the Van Kampen American Capital
High Income Corporate Bond Fund about the key events and economic forces that
shaped the markets during the past fiscal year. The team includes Ellis S.
Bigelow, portfolio manager, and Peter W. Hegel, chief investment officer for
fixed-income investments. The following excerpts reflect their views on the
Fund's performance during the 12-month period ended August 31, 1997.
Q What were some of the key forces at work in the market during the past
fiscal year?
A Volatility overshadowed the bond market during the 12-month period ended
August 31, 1997. The benchmark 10-year Treasury bond's yield, which moves in the
opposite direction of its price, dropped from 6.93 percent on August 31, 1996 to
6.33 percent on August 31, 1997, and was marked by peaks and valleys throughout
the fiscal year. Bond prices fell in the early part of the period as the economy
continued to gain strength, fueling fears of an interest rate hike by the
Federal Reserve Board. When growth slowed to a moderate 2.1 percent rate in the
third quarter of 1996, bond prices resumed their rise.
The scenario shifted again at the beginning of 1997 as economic growth
began to accelerate and bond prices resumed their retreat. A short-lived rally
from year-end 1996 through February 1997 was stunted following the release of
strong economic numbers and the continuing "irrational exuberance" of the stock
market, according to Fed Chairman Alan Greenspan. Investor sentiment was that
the Federal Reserve Board would likely take action and increase the federal
funds rate. In fact, the Fed did raise the federal funds rate in late March by
one-quarter of a percentage point. This increase, the first in nearly two years,
bumped the yield of the 10-year Treasury back up to nearly 7.00 percent.
However, the economy began to show signs of weakening by the end of the second
quarter, which led to the consensus that the Fed would wait to raise rates
further. In the wake of an uneventful Fed meeting in mid-August, the market
rallied as the 10-year Treasury yield slipped from its high of 6.99 percent on
September 5, 1996 to 6.01 percent on July 31, 1997, before backing up to near
6.30 percent at the end of July.
Q What factors contributed to the performance of the high-yield market during
this time?
A Throughout most of the Fund's fiscal year, high-yield corporate bonds
outperformed Treasury securities and investment-grade corporate bonds, supported
by an outstanding technical environment. Growing consumer confidence in
corporate debt gave rise to a large number of new investors entering the high-
yield market, creating positive Fund inflows. At the same time, record levels of
new issuance flooded the market. Under normal conditions, the large supply might
have depressed the market, but this new issuance was met and absorbed by
unusually high demand. As a result, total return of the high-yield market far
exceeded that of most fixed-income markets. Furthermore, the reporting period
was relatively free of any news-making defaults or other negative earnings
trends that might have slowed momentum.
The market experienced a moderate degree of volatility in March of this
year, as investors collectively held their breath and fixed their attention on
potential Fed action. Following the March rate hike, all investment markets
backed up, including the high-yield market. The high-yield market was
6
<PAGE>
also tangentially affected by the fact that a majority of high-yield funds
currently hold a measurable portion in emerging markets, which reacted
negatively to the Fed increase. For a short period of time, the technical
aspects of the high-yield market deteriorated, and net asset values declined.
However, the high-yield market moved in tandem with stocks, recovering more
quickly than other fixed-income investments.
Q What changes did you make to the Fund in light of market
conditions?
A In May, we solicited and received shareholder approval to update the Fund's
investment practices in response to changing market dynamics. The three changes
to investment management were: first, the removal of the ban on investing in
unseasoned issuers, or issuers with less than three years of operating history.
The high-yield marketplace has increasingly attracted the attention of funded
start-up ventures, which have included such high-yielding industry sectors as
telecommunications and cable securities. Second, we are now able to invest more
than 10 percent in any given security, which simplifies trading without
compromising the Fund's diversification. Finally, the limit imposed on
investments issued by overseas corporations has been raised from a maximum 20
percent to an allowable 35 percent. The ability to invest additional assets in
emerging market debt supports our search for total return potential.
The Fund began the period with relatively high coupons and short average
maturity. When the 10-year Treasury rallied over the last several months of the
fiscal year, a defensive shorter duration reduced the Fund's sensitivity to the
overall decline in interest rates, somewhat limiting its potential for
appreciation. We had expected more action from the Fed in the face of continuing
robust economic growth, but inflation remained in check.
We have reduced the Fund's average coupon and increased average maturity by
investing in new bond issues, most with 10-year maturities. The High Income
Corporate Bond Fund, like many of its peers, has enjoyed a very positive inflow
of new money for the last few years. By investing in securities with greater
interest rate sensitivity, we are gradually extending the Fund's duration.
We have underweighted the media and telecommunications sectors and slightly
overweighted the energy sector, which has benefited from stable to increasing
energy prices. A significant tightening of credit spreads within emerging market
debt has triggered excellent performance. A substantial global supply of new
issuance is on the horizon, which will likely feature some attractive investment
opportunities. The Fund's 19 percent international exposure at August 31, 1997
includes emerging markets such as Indonesia, Mexico, Brazil, and Argentina, and
positions in Canada, Australia, and the United Kingdom. Specifically, we had
several holdings in U.K. cable companies, of which a major contingent is
financed by U.S. high-yield debt. For additional Fund portfolio highlights,
please refer to page four.
Q How did the Fund perform during the reporting period?
A The Fund posted a total return of 14.44 percent/1/ (Class A shares at net
asset value) for the 12-month period ended August 31, 1997. By comparison, the
Credit Suisse First Boston High Yield Index returned 15.43 percent for the same
period. This is a broad-based, unmanaged index that reflects the general
performance of a wide range of selected bonds within the high-yield debt
corporate market. It does not reflect any commissions or fees that would be paid
by an investor purchasing the securities it represents.
7
<PAGE>
At the end of the Fund's fiscal year, its duration stood at 3.6 years,
compared to the 4.45 year average duration of the Credit Suisse First Boston
High Yield Index benchmark. Duration is a measure of a portfolio's sensitivity
to changes in interest rates. The longer the duration, the greater the effect
interest rate movements have on net asset value. Funds with shorter durations
typically have performed better in rising rate environments, while funds with
longer durations have tended to perform better when interest rates decline. As
of August 31, 1997, the Fund's monthly dividend was $0.05 per Class A share.
Please refer to the chart on page three for additional Fund performance results.
Q How was the Fund's portfolio structured at the end of its fiscal year?
A As of August 31, approximately 16.8 percent of the Fund's long-term
investments were BB-rated, which is the highest quality rating within the
noninvestment-grade category, and 67.2 percent were B-rated. Because both
categories of bonds tend to generate higher yields than investment-grade bonds,
they usually have performed better than high-quality securities when interest
rates rise. The additional income they generate compensates for some of the
decline in principal value due to rising rates. At the same time, when economic
growth accelerates, prospects for credit upgrades improve.
Compared to its peers, the Fund has held a higher percentage in B-rated
securities. We believe that bonds with a B rating have a favorable risk-reward
ratio over the long run, with less relative volatility and better performance
potential. Yield spreads between B- and BB-rated securities have narrowed over
the 12 months.
With the exception of a 1.8 percent holding in BBB-rates securities, the
remainder of the Fund's long-term assets at the end of the period were rated
below investment grade. Approximately 5.3 percent of assets were rated CCC and
8.9 percent were non-rated.
Q What is your outlook for the market over the coming months?
A Continuing strong technical fundamentals should bolster the high-yield
market as demand for high-yield bonds remains firm. High-yield investments have
enjoyed a near-record level of success over the past few years, but their
performance would be adversely affected by a decline in general economic
conditions. Slower economic growth or a recession would create a more
challenging environment. However, our outlook is for a fairly unrestrictive Fed
policy with well-behaved inflation and continued economic growth.
Because yield spreads are currently very tight, we believe it will be
difficult for the market to continue compressing at the same rate as it has over
the past 12 months. The most likely impetus for widening would be an economic
slowdown or a recession. Given current economic statistics, a recession does not
seem likely in the very near future.
We expect high-yield securities to continue to outperform other fixed-
income investments, with the possible exception of the emerging markets sector.
In line with the Fund's investment changes, we expect to slightly increase the
Fund's non-domestic component and its exposure to unseasoned issuers, and
continue our focus on portfolio diversification.
Peter W. Hegel Ellis S. Bigelow
Chief Investment Officer Portfolio Manager
Fixed Income Investments
8 Please see footnotes on page three
<PAGE>
Portfolio of Investments
August 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Corporate Obligations 85.4%
Consumer Distribution 6.6%
$ 3,800 Big 5 Holdings, Inc............................. 13.625% 09/15/02 $ 4,047,000
4,810 Brylane Capital Corp............................ 10.000 09/01/03 5,122,650
2,500 Cole National Group, Inc........................ 11.250 10/01/01 2,764,000
3,000 Commemorative Brands, Inc....................... 11.000 01/15/07 3,060,000
5,500 Finlay Enterprises, Inc. (a).................... 0/12.000 05/01/05 5,307,500
3,500 Fleming Cos, Inc., 144A Private Placement (b)... 10.625 07/31/07 3,561,250
2,500 Fresh Del Monte Produce (Netherland Antilles)... 10.000 05/01/03 2,625,000
2,000 Loehmann's, Inc................................. 11.875 05/15/03 1,840,000
5,700 Pantry, Inc..................................... 12.000 11/15/00 5,871,000
3,735 Pathmark Stores, Inc............................ 12.625 06/15/02 3,847,050
3,000 Shoppers Food Warehouse Corp.,
144A Private Placement (b)...................... 9.750 06/15/04 3,075,000
2,500 Southern Foods Group L.P.,
144A Private Placement (b)...................... 9.875 09/01/07 2,515,625
2,377 Wickes.......................................... 11.625 12/15/03 2,258,150
-----------
45,894,225
-----------
Consumer Durables 6.2%
4,500 Aetna Industries, Inc........................... 11.875 10/01/06 4,961,250
2,250 Aftermarket Technology Corp., Series B.......... 12.000 08/01/04 2,497,500
5,000 MCII Holdings USA, Inc.,
144A Private Placement (Mexico) (a)(b).......... 0/12.000 11/15/02 4,512,500
3,250 MDC Holdings, Inc............................... 11.125 12/15/03 3,575,000
5,000 Oriole Homes Corp............................... 12.500 01/15/03 5,252,500
4,000 Oxford Automotive, Inc.,
144A Private Placement (b)...................... 10.125 06/15/07 4,095,000
1,750 UDC Homes, Inc.................................. 12.500 05/01/00 1,785,000
2,829 UDC Homes, Inc.................................. 12.500 05/01/00 2,885,580
4,750 United Auto Group Inc.,
144A Private Placement (b)...................... 11.000 07/15/07 4,809,375
9,124 Venture Holdings, Inc........................... 9.750 04/01/04 8,759,040
-----------
43,132,745
-----------
</TABLE>
9 See Notes to Financial Statements
<PAGE>
Portfolio of Investments (Continued)
August 31, 1997
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer Non-Durables 6.6%
$1,000 Anchor Advanced Products, Inc......................... 11.750% 04/01/04 $1,055,000
4,900 Consoltex Group, Inc.................................. 11.000 10/01/03 5,071,500
4,500 Curtice Burns Foods, Inc.............................. 12.250 02/01/05 4,995,000
4,770 Dan River, Inc........................................ 10.125 12/15/03 4,972,725
6,250 Del Monte Corp........................................ 12.250 04/15/07 6,687,500
3,125 Dr. Pepper Bottling Co. (a)........................... 0/11.625 02/15/03 3,117,188
4,250 Drypers Corp.......................................... 10.250 06/15/07 4,239,375
1,500 French Fragrances, Inc................................ 10.375 05/15/07 1,567,500
3,750 Genesco, Inc.......................................... 10.375 02/01/03 3,881,250
3,500 Revlon Worldwide...................................... * 03/15/01 2,485,000
4,000 Signature Brands, Inc................................. 13.000 08/15/02 4,380,000
2,250 Signature Brands, Inc................................. 13.000 08/15/02 2,430,000
1,000 Twin Laboratories, Inc................................ 10.250 05/15/06 1,090,000
----------
45,972,038
----------
Consumer Services 16.8%
1,500 AFC Enterprises, Inc.,
144A Private Placement (b)............................ 10.250 05/15/07 1,545,000
3,000 Alliance Gaming Corp.,
144A Private Placement (b)............................ 10.000 08/01/07 2,932,500
2,250 Americredit Corp...................................... 9.250 02/01/04 2,250,000
42 Australis Media, Ltd. (Australia) (a) (d)............. 1.75/15.75 05/15/03 34,498
4,750 Australis Media, Ltd. (Australia) (a)................. 0/15.750 05/15/03 3,895,000
5,000 Booth Creek Ski Holdings, Inc......................... 12.500 03/15/07 5,100,000
2,750 Busse Broadcasting Corp............................... 11.625 10/15/00 2,928,750
7,250 Capstar Broadcasting Partners,
144A Private Placement (a) (b)........................ 0/12.750 02/01/09 4,803,125
4,610 Casino America, Inc................................... 12.500 08/01/03 4,852,025
5,500 Casino Magic Corp.,
144A Private Placement (b)............................ 13.000 08/15/03 4,743,750
3,000 Citadel Broadcasting Co.,
144A Private Placement (b)............................ 10.250 07/01/07 3,202,500
6,500 Diamond Cable Co. (United Kingdom) (a)................ 0/13.250 09/30/04 5,460,000
1,000 Diamond Cable Commerce PLC
(United Kingdom) (a).................................. 0/10.750 02/15/07 615,000
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Portfolio of Investments (Continued)
August 31, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer Services (Continued)
$3,000 Echostar Communications Corp. (a)...................... 0/12.875% 06/01/04 $ 2,595,000
3,000 FrontierVision Operating Partnership L.P............... 11.000 10/15/06 3,187,500
6,350 Galaxy Telecom L.P..................................... 12.375 10/01/05 6,826,250
3,500 Gray Communications Systems, Inc....................... 10.625 10/01/06 3,753,750
2,000 Grupo Televisa (Mexico)................................ 11.875 05/15/06 2,270,000
6,500 Grupo Televisa (Mexico)................................ * 05/15/08 4,761,250
5,578 Helicon Group L.P. (Variable Rate Coupon).............. 11.000 11/01/03 5,842,955
1,000 Hollywood Theaters, Inc................................ 10.625 08/01/07 1,035,000
6,000 IHF Holdings, Inc. (a)................................. 0/15.000 11/15/04 4,920,000
1,750 International Cabletel, Inc. (a)....................... 0/12.750 04/15/05 1,375,938
3,000 Louisiana Casino Cruises, Inc.......................... 11.500 12/01/98 3,052,500
7,750 Majestic Star Casino L.L.C............................. 12.750 05/15/03 8,525,000
5,500 Mohegan Tribal Gaming Authority of CT.................. 13.500 11/15/02 7,163,749
6,000 Multicanal Participacoes, Series B (Brazil)............ 12.625 06/18/04 6,780,000
4,500 South Carolina International Services, Inc............. 13.000 10/01/05 5,355,000
6,000 Telewest PLC (United Kingdom) (a)...................... 0/11.000 10/01/07 4,425,000
5,000 UIH Australia/Pacific, Inc., Series B (a).............. 0/14.000 05/15/06 3,300,000
------------
117,531,040
------------
Energy 7.6%
2,000 Benton Oil & Gas Co.................................... 11.625 05/01/03 2,150,000
1,000 Chesapeake Energy Corp................................. 8.500 03/15/12 917,500
5,250 Clark R & M Holdings, Inc.............................. * 02/15/00 4,068,750
5,750 Deeptech International................................. 12.000 12/15/00 6,095,000
3,382 Forest Oil Corp........................................ 11.250 09/01/03 3,724,428
1,450 Gerrity Oil & Gas Corp................................. 11.750 07/15/04 1,580,500
3,500 Global Marine, Inc..................................... 12.750 12/15/99 3,626,875
5,500 KCS Energy, Inc........................................ 11.000 01/15/03 5,995,000
5,236 Kelley Oil & Gas Partners Ltd.......................... 7.875 12/15/99 5,131,280
7,230 Maxus Energy Corp...................................... 11.500 11/15/15 7,537,275
6,500 Pacalta Resources Ltd.,
144A Private Placement (Canada) (b).................... 10.750 06/15/04 6,695,000
5,516 Petroleum Heat & Power, Inc............................ 12.250 02/01/05 5,874,540
-----------
53,396,148
-----------
</TABLE>
11 See Notes to Financial Statements
<PAGE>
Portfolio of Investments (Continued)
August 31, 1997
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
=======================================================================================================
<C> <S> <C> <C> <C>
Finance 1.4%
$4,750 Americo Life, Inc....................................... 9.250% 06/01/05 $ 4,856,875
2,968 Chatwins Group, Inc. (Variable Rate Coupon) (c)......... 13.000 05/01/03 3,116,400
1,500 Sig Capital Trust 1, 144A Private Placement (b)......... 9.500 08/15/27 1,492,500
-----------
9,465,775
-----------
Healthcare 0.5%
2,380 Maxxim Medical, Inc.,
144A Private Placement (b).............................. 10.500 08/01/06 2,561,475
1,250 Urohealth Systems, Inc.................................. 12.500 04/01/04 1,212,500
-----------
3,773,975
-----------
Producer Manufacturing 8.2%
3,750 American Builders,
144A Private Placement (b).............................. 10.625 05/15/07 3,890,625
1,000 Burke Inds, Inc.,
144A Private Placement (b).............................. 10.000 08/15/07 1,010,000
5,000 Carpenter W R North America, Inc.,
144A Private Placement (b).............................. 10.625 06/15/07 5,025,000
6,000 Exide Electronics Group, Inc............................ 11.500 03/15/06 6,900,000
3,348 Fairchild Corp.......................................... 13.000 03/01/07 3,481,920
4,950 GS Technologies Operating, Inc.......................... 12.000 09/01/04 5,358,375
5,000 IMO Industries, Inc..................................... 11.750 05/01/06 5,425,000
1,750 Interlake Corp.......................................... 12.000 11/15/01 1,916,250
7,000 Interlake Corp.......................................... 12.125 03/01/02 7,315,000
3,500 International Knife & Saw, Inc.,
144A Private Placement (b).............................. 11.375 11/15/06 3,780,000
3,000 Marcus Cable Co., L.P. (a).............................. 0/14.250 12/15/05 2,437,500
4,667 Terex Corp., Series B................................... 13.250 05/15/02 5,308,712
6,000 Waxman Inds., Inc. (a).................................. 0/12.750 06/01/04 5,205,000
-----------
57,053,382
-----------
Raw Materials/Processing Industries 17.3%
4,500 Acetex (Canada)......................................... 9.750 10/01/03 4,578,750
2,750 Altos Hornos De Mexico S.A.,
144A Private Placement (Mexico) (b)..................... 11.375 04/30/02 2,956,250
2,500 APP International Finance Co. (Netherlands)............. 11.750 10/01/05 2,612,500
</TABLE>
12 See Notes to Financial Statements
<PAGE>
Portfolio of Investments (Continued)
August 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Raw Materials/Processing Industries (Continued)
$ 3,750 Asia Pulp & Paper Finance,
144A Private Placement (Indonesia) (b)............. 12.000% 12/29/49 $ 3,684,375
4,250 Associated Materials, Inc.......................... 11.500 08/15/03 4,526,250
5,500 Crown Paper Co..................................... 11.000 09/01/05 5,802,500
3,000 Dyersburg Corp., 144A Private Placement (b)........ 9.750 09/01/07 3,022,500
5,000 FSW International Finance Co. (Indonesia).......... 12.500 11/01/06 4,675,000
4,250 Gaylord Container Corp............................. 12.750 05/15/05 4,621,875
1,250 Grupo Industrial Durango (Mexico).................. 12.625 08/01/03 1,417,188
5,061 Gulf States Steel.................................. 13.500 04/15/03 5,212,830
2,000 Hydrochem Industrial Services, Inc.,
144A Private Placement (b)......................... 10.375 08/01/07 2,020,000
4,100 ICO, Inc., 144A Private Placement (b).............. 10.375 06/01/07 4,253,750
10,000 Indah Kiat International Finance Co. BV
(Netherlands)...................................... 11.875 06/15/02 10,650,000
4,000 INDSPEC Chemical Corp., Series B (a)............... 0/11.500 12/01/03 3,840,000
5,250 Insilco Corp., 144A Private Placement (b).......... 10.250 08/15/07 5,315,625
1,500 International Cabletel, Inc. (a)................... 0/11.500 02/01/06 1,076,250
3,500 Klabin Fabricadora De Papel,
144A Private Placement (Brazil) (b)................ 11.000 08/12/04 3,692,500
5,750 Mail-Well Envelope Corp............................ 10.500 02/15/04 6,095,000
5,250 National Energy Group, Inc......................... 10.750 11/01/06 5,381,250
2,250 NL Industries, Inc................................. 11.750 10/15/03 2,466,562
3,250 Plastic Specialties & Technologies, Inc............ 11.250 12/01/03 3,510,000
4,525 Printpack, Inc., 144A Private Placement (b)........ 10.625 08/15/06 4,853,062
3,250 Radnor Holdings Corp............................... 10.000 12/01/03 3,355,625
5,000 Riverwood International Corp.,
144A Private Placement (b)......................... 10.625 08/01/07 5,050,000
5,550 United Stationers Supply Co........................ 12.750 05/01/05 6,299,250
9,000 Vicap S.A., 144A Private Placement (Mexico) (b).... 11.375 05/15/07 9,742,500
-----------
120,711,392
-----------
Technology 2.5%
5,791 ComputerVision..................................... 11.375 08/15/99 5,067,125
5,500 Dictaphone Corp.................................... 11.750 08/01/05 4,235,000
13 See Notes to Financial Statements
</TABLE>
<PAGE>
Portfolio of Investments (Continued)
August 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Technology (Continued)
$ 1,000 EV International, Inc.,
144A Private Placement (b)...................... 11.000% 03/15/07 $ 1,045,000
2,000 Intermedia Communications, Inc.,
144A Private Placement (a)(b)................... 0/11.250 07/15/07 1,245,000
3,500 IXC Communications, Inc......................... 12.500 10/01/05 4,007,500
2,000 L 3 Communications Corp.,
144A Private Placement (b)...................... 10.375 05/01/07 2,135,000
------------
17,734,625
------------
Transportation 4.2%
4,500 Atlas Air, Inc., 144A Private Placement (b)..... 10.750 08/01/05 4,595,625
3,500 Greyhound Lines, Inc............................ 11.500 04/15/07 3,753,750
4,250 Moran Transport Co.............................. 11.750 07/15/04 4,749,375
2,500 Sea Containers Ltd. (Bermuda)................... 12.500 12/01/04 2,818,750
2,750 Sea Containers Ltd. (Bermuda)................... 12.500 12/01/04 3,093,750
4,500 Stena AB (Sweden)............................... 10.500 12/15/05 4,916,250
5,500 Trism, Inc...................................... 10.750 12/15/00 5,555,000
------------
29,482,500
------------
Utilities 7.5%
1,750 AES Corp........................................ 10.250 07/15/06 1,903,125
6,000 Brooks Fiber Properties, Inc. (a)............... 0/11.875 11/01/06 4,200,000
3,000 Fonorola, Inc. (Canada)......................... 12.500 08/15/02 3,345,000
568 GST Telecommunications, Inc.,
144A Private Placement (a)(b)................... 0/13.875 12/15/05 482,516
7,544 GST USA, Inc. (a)............................... 0/13.875 12/15/05 4,997,900
2,500 Intermedia Communications of Florida, Inc. (a).. 0/12.500 05/15/06 1,806,250
5,750 Metronet Communications Corp.,
144A Private Placement (Canada) (b)............. 12.000 08/15/07 6,181,250
5,250 Millicom International Cellular SA
(Luxembourg) (a)................................ 0/13.500 06/01/06 3,944,063
4,000 Optel, Inc...................................... 13.000 02/15/05 3,840,000
3,000 Price Communications Cellular (a)............... 0/13.500 08/01/07 1,575,000
2,500 Price Communications Wireless,
144A Private Placement (b)...................... 11.750 07/15/07 2,612,500
500 Pricellular Wireless Corp. (a).................. 0/14.000 11/15/01 537,500
</TABLE>
14 See Notes to Financial Statements
<PAGE>
Portfolio of Investments (Continued)
August 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utilities (Continued)
$ 5,750 Pricellular Wireless Corp. (a).................... 0/12.250% 10/01/03 $ 5,563,125
2,000 Primus Telecommunications......................... 11.750 08/01/04 2,070,000
1,500 PTC International Finance,
144A Private Placement (Netherlands) (a)(b)....... 0/10.750 07/01/07 952,500
3,500 Telesystem International Wireless, Inc.,
144A Private Placement (Canada) (a)(b)............ 0/13.250 06/30/07 2,065,000
5,550 USA Mobile Communications, Inc.................... 14.000 11/01/04 6,174,375
------------
52,250,104
------------
Total Corporate Obligations.................. 596,397,949
------------
Foreign Government Obligations 1.9%
3,000 Republic of Argentina (Argentina)................. 11.000 10/09/06 3,431,250
2,000 Republic of Argentina (Argentina)................. 11.375 01/30/17 2,343,000
3,000 Republic of Venezuela Note (Venezuela)............ 6.750 03/31/20 2,458,125
2,000 United Mexican States Debt (Mexico)............... 11.500 05/15/26 2,374,000
2,000 United Mexican States Debt (Mexico)............... 11.500 05/15/26 2,374,000
------------
Total Foreign Government Obligations......... 12,980,375
------------
15 See Notes to Financial Statements
</TABLE>
<PAGE>
Portfolio of Investments (Continued)
August 31, 1997
<TABLE>
<CAPTION>
========================================================================================================
Description Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C>
Equities 3.1%
American Telecasting, Inc. (1,750 Common Stock Warrants) (c).............................. $ 17,500
Capital Gaming International, Inc. (3,125 Common Stock Warrants) (c)...................... 0
Dairy Mart Convenience Stores (14,998 Common Stock Warrants) (c).......................... 29,996
Exide Electronics Group, Inc. (4,250 Common Stock Warrants) (c)........................... 221,000
FF Holdings Corp. (40,000 Common Shares) (c).............................................. 400
Finlay Enterprises, Inc. (6,333 Common Shares) (c)........................................ 112,411
Kelley Oil & Gas Corp. (50,000 Preferred Shares,10.50% coupon, $25 par) (c)............... 1,237,500
Nextlink Communications, Inc. (32,148 Preferred Shares, 14.00% coupon,
$50 par) (c) (d)........................................................................ 1,864,584
Nextlink Communications, Inc., 144A Private Placement (b) (c)............................. 300
Optel, Inc. (4,000 Common Shares) (c)..................................................... 40
PanAmSat L.P. (7,142 Preferred Shares, 12.75% coupon, $1000 par) (c) (d).................. 8,445,415
Supermarkets General Holdings Corp. (241,101 Preferred Shares,
14.08% coupon, $25 par) (c) (d)......................................................... 5,304,222
Terex Corp. (28,000 Common Stock Rights) (c).............................................. 420,000
Time Warner, Inc. (3,110 Preferred Shares, 10.25% coupon, $1000 par) (c).................. 3,538,179
Total Renal Care Holdings, Inc. (6,000 Common Shares) (c)................................. 274,500
Wright Medical Technology, Inc. (4,118 Common Stock Warrants) (c)......................... 41,176
------------
Total Equities....................................................................... 21,507,223
------------
Total Long-Term Investments 90.4%
(Cost $604,653,034).................................................................. 630,885,547
------------
Repurchase Agreement 6.6%
BA Securities ($45,895,000 par collateralized by U.S. Government Obligations in a
pooled cash account dated 08/29/97, to be sold on 09/02/97 at $45,923,404)................ 45,895,000
------------
Total Investments 97.0%
(Cost $650,548,034).................................................................. 676,780,547
Other Assets in Excess of Liabilities 3.0%................................................ 20,623,858
------------
Net Assets 100.0%......................................................................... $697,404,405
============
</TABLE>
*Zero coupon bond
(a) Security is a "Step-up" bond where the coupon increases or steps up at a
predetermined date.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933.
These securities may only be resold in transactions exempt from
registration which are normally transactions with qualified institutional
buyers.
(c) Non-Income producing security.
(d) Payment-in-kind security.
16
See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
August 31, 1997
<TABLE>
<CAPTION>
=========================================================================================
<S> <C>
Assets:
Total Investments (Cost $650,548,034)................................... $ 676,780,547
Receivables:
Investments Sold...................................................... 22,098,850
Interest.............................................................. 14,371,621
Fund Shares Sold...................................................... 2,151,721
Other................................................................... 10,323
--------------
Total Assets....................................................... 715,413,062
--------------
Liabilities:
Payables:
Investments Purchased................................................. 13,359,934
Income Distributions.................................................. 2,469,731
Fund Shares Repurchased............................................... 1,136,830
Distributor and Affiliates............................................ 461,816
Investment Advisory Fee............................................... 319,161
Custodian Bank........................................................ 85
Accrued Expenses........................................................ 160,530
Trustees Deferred Compensation and Retirement Plans..................... 100,570
--------------
Total Liabilities.................................................. 18,008,657
--------------
Net Assets.............................................................. $ 697,404,405
==============
Net Assets Consist of:
Capital................................................................. $ 892,891,022
Net Unrealized Appreciation............................................. 26,232,513
Accumulated Undistributed Net Investment Income......................... 2,861,864
Accumulated Net Realized Loss........................................... (224,580,994)
--------------
Net Assets.............................................................. $ 697,404,405
==============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share
(Based on net assets of $468,606,618 and 71,561,449 shares of
beneficial interest issued and outstanding)........................ $ 6.55
Maximum sales charge (4.75%* of offering price).................... .33
--------------
Maximum offering price to public................................... $ 6.88
==============
Class B Shares:
Net asset value and offering price per share
(Based on net assets of $198,001,284 and 30,191,498 shares of
beneficial interest issued and outstanding)........................ $ 6.56
==============
Class C Shares:
Net asset value and offering price per share
(Based on net assets of $30,796,503 and 4,717,323 shares of
beneficial interest issued and outstanding)........................ $ 6.53
==============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
17
See Notes to Financial Statements
<PAGE>
Statement of Operations
For the Year Ended August 31, 1997
<TABLE>
<CAPTION>
=========================================================================================================
<S> <C>
Investment Income:
Interest.................................................................................... $62,627,973
Dividends................................................................................... 1,558,788
Other Income................................................................................ 1,046,307
-----------
Total Income........................................................................... 65,233,068
-----------
Expenses:
Investment Advisory Fee..................................................................... 3,377,516
Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of
$1,000,710, $1,538,086 and $220,710, respectively)........................................ 2,759,506
Shareholder Services........................................................................ 1,313,039
Legal....................................................................................... 41,467
Trustees Fees and Expenses.................................................................. 18,376
Custody..................................................................................... 5,414
Other....................................................................................... 605,871
-----------
Total Expenses......................................................................... 8,121,189
Less Expenses Reimbursed............................................................... 6,300
-----------
Net Expenses........................................................................... 8,114,889
-----------
Net Investment Income....................................................................... $57,118,179
===========
Realized and Unrealized Gain/Loss:
Net Realized Gain........................................................................... $10,679,453
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................................................... 11,462,049
End of the Period:
Investments............................................................................ 26,232,513
-----------
Net Unrealized Appreciation During the Period............................................... 14,770,464
-----------
Net Realized and Unrealized Gain............................................................ $25,449,917
===========
Net Increase in Net Assets from Operations.................................................. $82,568,096
===========
</TABLE>
18
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------
For the Years Ended August 31, 1997 and 1996
- ---------------------------------------------------------------------------------------------
Year Ended Year Ended
August 31, 1997 August 31, 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income...................................... $ 57,118,179 $ 50,525,672
Net Realized Gain.......................................... 10,679,453 7,729,045
Net Unrealized Appreciation During the Period.............. 14,770,464 4,212,440
------------- -------------
Change in Net Assets from Operations....................... 82,568,096 62,467,157
------------- -------------
Distributions from Net Investment Income................... (57,118,179) (49,827,208)
Distributions in Excess of Net Investment Income........... (1,583,666) -0-
------------- -------------
Total Distributions from and in Excess of
Net Investment Income*................................ (58,701,845) (49,827,208)
------------- -------------
Net Change in Net Assets from Investment Activities........ 23,866,251 12,639,949
------------- -------------
From Capital Transactions:
Proceeds from Shares Sold.................................. 290,139,308 144,420,520
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................................... 33,996,355 29,841,087
Cost of Shares Repurchased................................. (204,011,022) (150,954,434)
------------- -------------
Net Change in Net Assets from
Capital Transactions..................................... 120,124,641 23,307,173
------------- -------------
Total Increase in Net Assets............................... 143,990,892 35,947,122
Net Assets:
Beginning of the Period.................................... 553,413,513 517,466,391
------------- -------------
End of the Period
(Including accumulated undistributed net investment
income of $2,861,864 and $2,475,568, respectively)....... $ 697,404,405 $ 553,413,513
============= =============
Year Ended Year Ended
*Distributions by Class August 31, 1997 August 31, 1996
- ---------------------------------------------------------------------------------------------
Distributions from and in Excess
of Net Investment Income:
Class A Shares........................................... (43,009,717) (39,328,721)
Class B Shares........................................... (13,729,638) (9,074,232)
Class C Shares........................................... (1,962,490) (1,424,255)
------------- -------------
$ (58,701,845) $ (49,827,208)
============= =============
</TABLE>
19 See Notes to Financial Statements
<PAGE>
Financial Highlights
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
==========================================================================================
Year Ended August 31,
-------------------------------------------
Class A Shares 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period..... $ 6.298 $ 6.15 $ 6.12 $ 6.61 $ 6.40
------- ------- ------- ------- -------
Net Investment Income...................... .604 .607 .55 .63 .64
Net Realized and Unrealized Gain/Loss...... .267 .139 .0515 (.47) .27
------- ------- ------- ------- -------
Total from Investment Operations............. .871 .746 .6015 .16 .91
Less Distributions from and in Excess of
Net Investment Income...................... .621 .598 .5715 .65 .70
------- ------- ------- ------- -------
Net Asset Value, End of the Period........... $ 6.548 $ 6.298 $ 6.15 $ 6.12 $ 6.61
======= ======= ======= ======= =======
Total Return (a)............................. 14.44% 12.66% 10.48% 2.34% 15.20%
Net Assets at End of
the Period (In millions)................... $ 468.6 $ 421.4 $ 411.9 $ 364.2 $ 452.4
Ratio of Expenses to
Average Net Assets (b)..................... 1.08% 1.08% 1.12% 1.10% 1.09%
Ratio of Net Investment Income to
Average Net Assets (b)..................... 9.37% 9.65% 9.23% 9.03% 10.10%
Portfolio Turnover........................... 75% 76% 49% 66% 75%
</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) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to VKAC reimbursement of certain expenses was less than
0.01%.
20 See Notes to Financial Statements
<PAGE>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year Ended August 31,
------------------------------------------
Class B Shares 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period....... $6.310 $ 6.16 $ 6.14 $ 6.63 $ 6.41
------ ------ ------ ------ ------
Net Investment Income........................ .559 .559 .51 .58 .58
Net Realized and Unrealized Gain/Loss........ .262 .141 .0335 (.468) .292
------ ------ ------ ------ ------
Total from Investment Operations............... .821 .700 .5435 .112 .872
Less Distributions from and in Excess of
Net Investment Income........................ .573 .550 .5235 .602 .652
------ ------ ------ ------ ------
Net Asset Value, End of the Period............. $6.558 $6.310 $ 6.16 $ 6.14 $ 6.63
====== ====== ====== ====== ======
Total Return (a)............................... 13.58% 11.78% 9.41% 1.59% 14.49%
Net Assets at End of the Period (In millions).. $198.0 $114.6 $ 89.9 $ 71.0 $ 37.7
Ratio of Expenses to Average Net Assets (b).... 1.86% 1.87% 1.93% 1.90% 1.90%
Ratio of Net Investment Income to Average
Net Assets (b)............................... 8.60% 8.86% 8.42% 8.25% 9.10%
Portfolio Turnover............................. 75% 76% 49% 66% 75%
</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) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to VKAC reimbursement of certain expenses was less than
0.01%.
21 See Notes to Financial Statements
<PAGE>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
===============================================================================
<TABLE>
<CAPTION>
July 6, 1993
Year Ended August 31, (Commencement
---------------------------------- of Distribution) to
Class C Shares 1997 1996 1995 1994 August 31, 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period............. $6.284 $ 6.14 $ 6.11 $ 6.61 $ 6.63
------ ------ ------ ------ ------
Net Investment Income........................... .561 .557 .51 .53 .06
Net Realized and Unrealized Gain/Loss........... .256 .137 .0435 (.428) .0195
------ ------ ------ ------ ------
Total from Investment Operations..................... .817 .694 .5535 .102 .0795
Less Distributions from and in Excess of
Net Investment Income........................... .573 .550 .5235 .602 .0995
------ ------ ------ ------ ------
Net Asset Value, End of the Period................... $6.528 $6.284 $ 6.14 $ 6.11 $ 6.61
====== ====== ====== ====== ======
Total Return (a)..................................... 13.64% 11.66% 9.63% 1.43% 1.20%*
Net Assets at End of the Period
(In millions)................................... $ 30.8 $ 17.5 $ 15.7 $ 13.2 $ 1.0
Ratio of Expenses to
Average Net Assets (b).......................... 1.86% 1.87% 1.93% 1.91% 2.34%
Ratio of Net Investment Income to
Average Net Assets (b).......................... 8.57% 8.86% 8.42% 8.25% 8.05%
Portfolio Turnover................................... 75% 76% 49% 66% 75%
</TABLE>
*Non-Annualized
(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) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to VKAC reimbursement of certain expenses was less than
0.01%.
22 See Notes to Financial Statements
<PAGE>
Notes to Financial Statements
August 31, 1997
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen American Capital High Income Corporate Bond Fund (the "Fund"), a
Delaware business trust, 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 provide maximum current income through
investment in high yielding, high risk fixed-income securities. The Fund
commenced investment operations on October 2, 1978. The Fund commenced
distribution of its Class B and Class C shares on July 2, 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-Fixed income investments and preferred stock are stated at
value using market quotations. Investments in securities listed on a securities
exchange are valued at the sale price as of the close of such securities
exchange. Unlisted securities and listed securities for which the last sales
price is not available are valued at the last reported bid price. 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.
Fund investments include lower-rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal and
interest payments. At the end of the period, debt securities rated below
investment grade and comparable unrated securities represented approximately 98%
of the investment portfolio. At August 31, 1997, approximately 19% of the Fund's
long-term investments were in non-U.S. issuers, no country of which was greater
than 5%.
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 August 31, 1997, there were no
when issued or delayed delivery purchase commitments.
23
<PAGE>
Notes to Financial Statements (Continued)
August 31, 1997
- --------------------------------------------------------------------------------
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 American Capital 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 securities only
upon physical delivery or evidence of book entry transfer to the account of the
custodian bank. The seller is required to maintain the value of the underlying
security at not less than the repurchase proceeds due the Fund.
C. Investment Income-Interest income is recorded on an accrual basis and
dividend income is recorded on the ex-dividend date. Original issue discounts on
debt securities purchased are amortized over the life of the respective
security. Premiums on debt securities are not amortized. Market discounts are
recognized at the time of sale as realized gains for book purposes and ordinary
income for tax purposes.
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.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At August 31, 1997, the Fund had an accumulated capital loss carryforward
for tax purposes of $224,476,411 which expires between August 31, 1998 and
August 31, 2004. Of this amount, $36,374,534 will expire in 1998. 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.
At August 31, 1997, for federal income tax purposes, cost of long- and
short-term investments is $650,652,617, the aggregate gross unrealized
appreciation is $31,524,752 and the aggregate gross unrealized depreciation is
$5,396,822, resulting in net unrealized appreciation of $26,127,930.
E. Distribution of Income and Gains-The Fund declares and pays monthly dividends
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, which are included in ordinary income for tax
purposes.
24
<PAGE>
Notes to Financial Statements (Continued)
August 31, 1997
- --------------------------------------------------------------------------------
Due to inherent differences in the recognition of certain expenses under
generally accepted accounting principles and federal income tax purposes, the
amount of net investment income may differ between book and federal income tax
purposes for a particular period. These differences are temporary in nature, but
may result in book basis distributions in excess of net investment income for
certain periods
Permanent book and tax basis differences relating to the expiration of a
portion of the capital loss carryforward totaling $35,200,902 were reclassified
from net realized gain/loss to capital. Permanent differences relating to the
recognition of expenses associated with the consolidation of the VKAC open-end
fund complex totaling $88,979 were reclassified from accumulated undistributed
net investment income to capital. Permanent differences relating to certain
expenses which are not deductible for tax purposes totaling $4,371 were
reclassified from accumulated undistributed net investment income to capital.
Additionally, permanent differences relating to the recognition of market
discount on bonds totaling $1,876,612 were reclassified from net realized
gain/loss to accumulated undistributed net investment income.
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:
Average Net Assets % Per Annum
- ------------------------------------------------------------------------------
First $150 million................................................ .625 of 1%
Next $150 million................................................. .550 of 1%
Over $300 million................................................. .500 of 1%
Certain legal expenses are paid to 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 August 31, 1997, the Fund recognized expenses of
approximately $98,700 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting
services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended August
31, 1997, the Fund recognized expenses of approximately $943,600, representing
ACCESS' cost of providing transfer agency and shareholder services plus a
profit.
Additionally, for the year ended August 31, 1997, the Fund reimbursed VKAC
approximately $20,100 related to the direct cost of consolidating the VKAC open-
end fund complex. Payment was contingent upon the realization by the Fund of
cost efficiencies resulting from the consolidation.
25
<PAGE>
Notes to Financial Statements (Continued)
August 31, 1997
- -------------------------------------------------------------------------------
Certain officers and trustees of the Fund are also officers and directors
of VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. 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 equal to $2,500. During the year ended
August 31, 1997, VKAC reimbursed the Fund for expenses related to the retirement
plan.
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 August 31, 1997, capital
aggregated $683,246,374, $180,564,075 and $29,080,573 for Class A, B and C
shares, respectively. For the year ended August 31, 1997, transactions were as
follows:
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------------------------
Sales:
<S> <C> <C>
Class A................................... 25,421,874 $ 163,679,383
Class B................................... 16,738,565 108,268,484
Class C................................... 2,815,626 18,191,441
----------- -------------
Total Sales.................................... 44,976,065 $ 290,139,308
=========== =============
Dividend Reinvestment:
Class A................................... 4,028,534 $ 25,967,824
Class B................................... 1,069,455 6,908,909
Class C................................... 174,005 1,119,622
----------- -------------
Total Dividend Reinvestment.................... 5,271,994 $ 33,996,355
=========== =============
Repurchases:
Class A................................... (24,797,705) $(159,884,130)
Class B................................... (5,774,518) (37,359,396)
Class C................................... (1,052,510) (6,767,496)
----------- -------------
Total Repurchases.............................. (31,624,733) $(204,011,022)
=========== =============
</TABLE>
26
<PAGE>
Notes to Financial Statements
August 31, 1997
================================================================================
At August 31, 1996, capital aggregated $677,198,548, $112,766,529 and
$18,095,556 for Class A, B and C shares, respectively. For the year ended August
31, 1996 transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
================================================================================
<S> <C> <C>
Sales:
Class A........................... 13,745,144 $ 86,510,165
Class B........................... 8,018,551 50,487,330
Class C........................... 1,183,788 7,423,025
----------- -------------
Total Sales............................ 22,947,483 $ 144,420,520
=========== =============
Dividend Reinvestment:
Class A........................... 3,888,598 $ 24,355,156
Class B........................... 739,318 4,641,173
Class C........................... 135,209 844,758
----------- -------------
Total Dividend Reinvestment............ 4,763,125 $ 29,841,087
=========== =============
Repurchases:
Class A........................... (17,717,034) $(111,452,236)
Class B........................... (5,181,274 (32,639,566)
Class C........................... (1,095,335) (6,862,632)
----------- -------------
Total Repurchases...................... (23,993,643) $(150,954,434)
=========== =============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). 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. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
27
<PAGE>
Notes to Financial Statements
August 31, 1997
===============================================================================
Contingent Deferred
Sales Charge
-------------------
Year of Redemption Class B Class C
===============================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
First.................................................... 4.00% 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 August 31, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$157,300 and CDSC on redeemed shares of approximately $342,500. 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 $534,530,599 and $435,536,309,
respectively.
5. 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 average net assets and
1.00% each for Class B and Class C average net assets are accrued daily.
Included in these fees for the year ended August 31, 1997, are payments to VKAC
of approximately $1,387,800.
28
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Van Kampen American Capital High Income Corporate Bond 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 American Capital High
Income Corporate Bond Fund (the "Fund") at August 31, 1997, 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 August 31, 1997 by correspondence with the
custodian and the application of alternative procedures for unsettled security
transactions, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
October 10, 1997
29
<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
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
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
Intermediate 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
MORGAN STANLEY
FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
U.S. Real Estate Fund
Value Fund
Worldwide High Income Fund
Ask your investment representative 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 weekdays from 7:00 a.m. to 7:00 p.m.
Central time at 1-800-341-2911 for Van Kampen American Capital funds or for
Morgan Stanley retail funds.
30
<PAGE>
Results of Shareholder Votes
A Special Meeting of Shareholders of the Fund was held on May 28, 1997 where
shareholders voted on a new investment advisory agreement, the election of
Trustees, amendments to the Funds fundamental investment policies and the
ratification of Price Waterhouse LLP as independent public accountants. With
regard to the approval of a new investment advisory agreement between Van Kampen
American Capital Asset Management, Inc. and the Fund, 66,740,228 shares voted
for the proposal, 926,985 shares voted against and 3,454,183 shares abstained.
With regard to the election of J. Miles Branagan as elected trustee of the Fund,
69,939,141 shares voted in his favor and 1,182,255 shares withheld. With regard
to the election of Richard M. DeMartini as elected trustee of the Fund,
69,922,296 shares voted in his favor and 1,199,100 shares withheld. With regard
to the election of Linda Hutton Heagy as elected trustee of the Fund, 69,928,882
shares voted in her favor and 1,192,514 shares withheld. With regard to the
election of R. Craig Kennedy as elected trustee of the Fund, 69,941,922 shares
voted in his favor and 1,179,473 shares withheld. With regard to the election of
Jack E. Nelson as elected trustee of the Fund, 69,889,436 shares voted in his
favor and 1,231,960 shares withheld. With regard to the election of Jerome L.
Robinson as elected trustee of the Fund, 69,907,821 shares voted in his favor
and 1,213,575 shares withheld. With regard to the election of Philip B. Rooney
as elected trustee of the Fund, 69,940,770 shares voted in his favor and
1,180,626 shares withheld. With regard to the election of Fernando Sisto as
elected trustee of the Fund, 69,899,658 shares voted in his favor and 1,221,737
shares withheld. With regard to the election of Wayne W. Whalen as elected
trustee of the Fund, 69,943,806 shares voted in his favor and 1,177,590 shares
withheld. With regard to the approval of an amendment to the Funds fundamental
investment policy regarding unseasoned issuers 52,638,857 shares voted for the
proposal, 2,047,418 shares voted against and 4,026,009 shares abstained. With
regard to the approval of an amendment to the Funds fundamental investment
policy regarding diversification 53,322,746 shares voted for the proposal,
1,545,601 shares voted against and 3,843,938 shares abstained. With regard to
the approval of an amendment to the Funds fundamental investment policy
regarding foreign securities 52,468,581 shares voted for the proposal, 2,168,053
shares voted against and 4,075,650 shares abstained. With regard to the
ratification of Price Waterhouse LLP as independent public accounts for the
Fund, 67,319,045 shares voted for the proposal, 486,903 shares voted against and
3,315,448 shares abstained.
31
<PAGE>
Van Kampen American Capital High Income Corporate Bond Fund
Board of Trustees
J. Miles Branagan
Richard M. DeMartini*
Linda Hutton Heagy
R. Craig Kennedy
Jack E. Nelson
Jerome L. Robinson
Phillip B. Rooney
Fernando Sisto
Wayne W. Whalen* - Chairman
Officers
Dennis J. McDonnell*
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
Peter W. Hegel*
Alan T. Sachtleben*
Paul R. Wolkenberg*
Vice Presidents
Investment Adviser
Van Kampen American Capital
Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Distributor
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Shareholder Servicing Agent
ACCESS 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
Price Waterhouse LLP
200 E. Randolph
Chicago, IL 60601
* "Interested" persons of the Fund, as defined in the
Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1997
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 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 December 31, 1997, the report must be accompanied by
a quarterly performance update, if applicable.
32
