<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders...................... 1
Performance Results......................... 4
Portfolio of Investments.................... 5
Statement of Assets and Liabilities......... 8
Statement of Operations..................... 9
Statement of Changes in Net Assets.......... 9
Financial Highlights........................ 10
Notes to Financial Statements............... 12
</TABLE>
ACB SAR 2/97
<PAGE>
LETTER TO SHAREHOLDERS
[PHOTO OF DENNIS J. MCDONNELL AND DON G. POWELL]
February 10, 1997
Dear Shareholder,
For many bond fund investors, the second half of 1996 produced a myriad of
experiences. Bond prices fell early in the third quarter due to fears of an
overheating economy, then recovered strongly in the fourth quarter. A strong
employment report in early July and again in September fueled fears that the
Federal Reserve Board would raise interest rates in an effort to control
economic growth.
By late October that view was discounted. Economic growth (real gross domestic
product, adjusted for inflation) had slowed to 2.0 percent in the third quarter,
significantly lower than the 4.7 percent rate recorded in the second quarter.
Employment costs fell, and the Fed refrained from tightening credit. By year
end, the yield on the 30-year Treasury bond had dropped from above 7.0 percent
in July and September to approximately 6.6 percent.
PORTFOLIO STRATEGY
The Van Kampen American Capital Bond Fund seeks to invest at least 80 per-
cent of its assets in investment-grade corporate bonds. During periods of ris-
ing interest rates, these higher-grade securities typically have not performed
as well as lower-grade debt. High yield bonds tend to outperform because a
growing economy often improves their credit prospects, and their higher coupon
payments act as a buffer against rising interest rates. Conversely, during pe-
riods of falling interest rates, higher-grade securities have usually
outperformed lower-grade bonds.
In response to interest rate volatility during the six-month period, the
Fund's portfolio duration was shortened slightly from 5.9 years as of June 30,
1996 to 5.7 years as of December 31, 1996. Duration, which is expressed in
years, is a measure of a bond's price sensitivity to changes in interest
rates. The longer the duration of the Fund, the greater the effect of changes
in interest rate movements on the Fund's net asset value. This shorter dura-
tion should help reduce the portfolio's volatility to interest rate changes
going forward. At the same time, we will continue to purchase lower-grade se-
curities in order to seek to enhance its yield potential.
We decreased positions in railroad and hotel bonds during the period in or-
der to take profits and reduced the Fund's exposure to callable issues (bonds
anticipated to be redeemed prior to their stated maturity). The proceeds of
these sales were reinvested in health care, energy, and consumer products se-
curities. Among the bonds added to the portfolio were Allegiance Corp. and
Aetna, Inc., which have strong franchises in the health care industry;
Rubbermaid, Inc., a well-known consumer products company; and the Transco Con-
tinental Gas Pipe Line Corp., a natural gas pipeline company with a history of
predictable cash flows.
1
Continued on page two
<PAGE>
Our largest sector exposure is electric utilities, followed by consumer serv-
ices and transportation. We believe utility bond yields remain attractive, as
deregulation of the industry is proceeding at a comfortable pace.
We continue to see value in lower rated, higher yielding securities. This al-
lows our credit research group to add significant value in security selection.
Currently, over half of the portfolio is BBB-rated, and this position has added
to the higher yielding and lower volatility characteristics of the portfolio.
We can invest up to 20 percent of the Fund's assets in corporate high yield
securities. At year end, 18 percent of its assets were invested in this sector,
and the high yield component drove successful investment performance. Going
forward, our strategy is to add to the high yield sector selectively, continue
to diversify holdings, and keep duration close to its current length.
[PIE CHART APPEARS HERE]
HOLDINGS BY SECTOR AS A PERCENTAGE OF
LONG-TERM INVESTMENTS AS OF DECEMBER 31, 1996
UTILITIES 35%
TRANSPORTATION 12%
CONSUMER SERVICES 11%
RAW MATERIALS/PROCESSING INDUSTRIES 11%
PRODUCER MANUFACTURING 8%
ENERGY 7%
GOVERNMENT 5%
OTHER 11%
PERFORMANCE SUMMARY
For the six-month period ended December 31, 1996, the Bond Fund generated a
total return at market price of 7.70 percent/1/. For the same period, the Leh-
man Brothers Corporate Bond Index returned 5.49 percent. Keep in mind that this
index is a broad-based, unmanaged index that reflects the general performance
of corporate bonds and does not reflect any commissions or fees that would be
paid by an investor purchasing the securities it represents.
The Fund's return reflects the change in market price per share on the New
York Stock Exchange from $18.125 on June 30, 1996 to $18.750 on December 31,
1996, and dividends totaling $.77 per share.
ECONOMIC OUTLOOK
We believe that the economy will grow at a modest pace in 1997, near 2.5 per-
cent. Although economic growth could be accompanied by short-term market fluc-
tuation, we do not believe it will be strong enough to reignite inflation.
Price pressures are well-contained and should remain so.
Continued on page three
2
<PAGE>
This view was reinforced by the November elections--the combination of a Dem-
ocratic president and a Republican Congress should help restrain potential
spending increases and large tax cuts, and therefore keep the budget deficit
under control. The stock market is another factor that will influence the per-
formance of the bond market this year. If stocks suffer a protracted setback,
the demand for bonds, including corporate securities, could increase. We also
anticipate continued strong demand for U.S. bonds by overseas investors.
Overall, our expectation is that most fixed-income products will have rela-
tively uneventful performance during the year. While we expect the Trust to
provide steady dividend income, we do not look for significant fluctuations in
share price.
CORPORATE NEWS
As you may be aware, shareholders approved the acquisition of VK/AC Holding,
Inc. by Morgan Stanley Group Inc. We believe this acquisition will further help
investors achieve their long-term goals. Morgan Stanley's strong global pres-
ence and commitment to superior investment performance complement our broad
range of investment products, money management capability, and high level of
service. Thank you for your continued confidence in your investment with Van
Kampen American Capital.
Sincerely,
[LOGO OF DON G. POWELL] [LOGO OF 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.
3
<PAGE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1996
VAN KAMPEN AMERICAN CAPITAL BOND FUND
NYSE TICKER SYMBOL -- ACB
<TABLE>
<S> <C>
COMMON SHARE TOTAL RETURNS
Six-month total return based on market price/1/....................... 7.70%
Six-month total return based on NAV/2/................................ 5.81%
DISTRIBUTION RATE
Distribution rate as a % of closing common stock price/3/............. 8.21%
SHARE VALUATIONS
Net asset value....................................................... $ 20.34
Closing common stock price............................................ $18.750
Six-month high common stock price (12/10/96).......................... $19.500
Six-month low common stock price (09/11/96)........................... $17.750
</TABLE>
1Total return based on market price assumes an investment at the market price
at the beginning of the period indicated, reinvestment of all distributions
for the period in accordance with the Fund's dividend reinvestment plan, and
sale of all shares at the closing stock price at the end of the period
indicated.
2Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
3Distribution rate represents the quarterly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Fund shares,
when sold, may be worth more or less than their original cost.
4
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS 90.8%
CONSUMER DISTRIBUTION 0.3%
$ 750 Dimon, Inc............................ 8.875% 06/01/06 $ 790,875
------------
CONSUMER NON-DURABLES 2.0%
4,000 Coca Cola Enterprises, Inc............ 8.500 02/01/12 4,516,000
------------
CONSUMER SERVICES 10.8%
2,500 Columbia Pictures Entertainment, Inc.. 9.875 02/01/98 2,602,750
3,000 Cox Communications, Inc............... 7.250 11/15/15 2,945,400
5,000 Harcourt General, Inc................. 9.500 03/15/00 5,398,500
1,750 Harcourt General, Inc................. 8.875 06/01/22 2,018,975
1,000 News America Holdings, Inc............ 8.875 04/26/23 1,080,300
11,000 Tele Communications, Inc.............. 9.250 01/15/23 10,896,600
------------
24,942,525
------------
ENERGY 6.7%
7,400 Ashland Oil Co........................ 8.800 11/15/12 8,405,660
5,025 PDV America, Inc...................... 7.875 08/01/03 5,025,503
1,000 Transcontinental Gas Pipe Line Corp... 7.250 12/01/26 989,300
1,000 Union Oil Co. California.............. 9.125 02/15/06 1,144,050
------------
15,564,513
------------
FINANCE 2.0%
3,383 First PV Funding Corp................. 10.300 01/15/14 3,615,581
1,000 Royal Bank Scotland Group............. 6.375 02/01/11 930,200
------------
4,545,781
------------
HEALTH CARE 3.8%
2,300 Aetna, Inc............................ 7.125 08/15/06 2,328,865
1,000 Allegiance Corp....................... 7.800 10/15/16 1,028,200
500 Manor Care, Inc....................... 7.500 06/15/06 516,400
3,000 Ornda Healthcorp...................... 12.250 05/15/02 3,202,500
1,500 Tenet Healthcare Corp................. 10.125 03/01/05 1,661,250
------------
8,737,215
------------
PRODUCER MANUFACTURING 8.2%
10,000 Deere John Capital Corp............... 9.625 11/01/98 10,617,000
4,400 ITT Corp.............................. 6.750 11/15/05 4,259,640
1,000 ITT Corp.............................. 7.375 11/15/15 973,800
250 Rayovac Corp., 144A Private Placement
(b)................................... 10.250 11/01/06 256,875
2,500 Rubbermaid, Inc....................... 6.600 11/15/06 2,471,000
250 United States Can Corp., 144A Private
Placement (b)......................... 10.125 10/15/06 264,375
------------
18,842,690
------------
</TABLE>
See Notes to Financial Statements
5
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RAW MATERIALS/PROCESSING
INDUSTRIES 10.5%
$2,000 Bowater Inc............................ 9.375% 12/15/21 $ 2,396,600
1,000 Crown Cork & Seal Inc.................. 8.000 04/15/23 1,018,400
5,000 Federal Paper Board, Inc............... 8.875 07/01/12 5,745,000
9,500 Georgia Pacific Corp................... 9.500 02/15/18 9,985,450
1,500 James River Corp....................... 8.375 11/15/01 1,596,990
3,100 Owens Corning Fiberglas Corp........... 9.375 06/01/12 3,622,040
------------
24,364,480
------------
TECHNOLOGY 2.3%
5,000 Unisys Corp............................ 15.000 07/01/97 5,275,000
------------
TRANSPORTATION 11.9%
3,000 AMR Corp. Delaware..................... 9.500 05/15/01 3,310,500
4,250 CSX Corp............................... 8.625 05/15/22 4,811,425
2,500 Kansas City Southern Industries, Inc... 7.875 07/01/02 2,628,250
9,000 Union Pacific Corp..................... 8.350 05/01/25 9,453,600
6,000 United Air Lines....................... 10.020 03/22/14 7,266,000
------------
27,469,775
------------
UTILITIES 32.3%
5,000 A T & T Corp........................... 8.625 12/01/31 5,426,500
1,000 AES Corp............................... 10.250 07/15/06 1,080,000
3,000 Arizona Public Service Co.............. 9.500 04/15/21 3,337,800
3,500 Arizona Public Service Co.............. 8.750 01/15/24 3,822,000
2,000 Arizona Public Service Co.............. 8.000 02/01/25 2,033,400
6,200 Cleveland Electric Illuminating Co..... 10.000 06/01/20 6,558,980
1,000 Commonwealth Edison Co................. 8.625 02/01/22 1,040,900
7,000 Consumers Power Co..................... 8.750 02/15/98 7,199,500
5,000 GTE North, Inc......................... 8.500 12/15/31 5,379,000
3,000 Gulf States Utilities Co............... 8.940 01/01/22 3,261,750
4,000 Long Island Lighting Co................ 9.750 05/01/21 4,185,600
3,000 Long Island Lighting Co................ 9.000 11/01/22 3,196,500
4,150 Montana Power Co....................... 8.950 02/01/22 4,521,010
7,000 Public Service Co. Colorado............ 8.750 03/01/22 7,598,500
2,000 Southern California Gas Co............. 8.750 10/01/21 2,181,400
2,500 Texas Utilities Electric Co............ 8.875 02/01/22 2,704,500
1,500 United Illuminating Co................. 10.240 01/02/20 1,623,000
5,000 United Telecommunications Kansas....... 9.500 04/01/03 5,680,500
500 UtiliCorp United, Inc.................. 6.700 10/15/06 505,650
3,000 UtiliCorp United, Inc.................. 9.000 11/15/21 3,323,700
------------
74,660,190
------------
TOTAL CORPORATE BONDS................................... 220,391,868
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS 4.6%
$ 14 Federal Home Loan Mortgage Corp., Pool.. 7.375% 12/01/02 $ 13,615
2 Government National Mortgage
Association, Pool....................... 10.000 10/15/16 1,856
11 Government National Mortgage
Association, Pool....................... 10.000 07/15/20 11,653
4,000 Newfoundland Province Canada............ 9.000 10/15/21 4,664,000
5,500 Saskatchewan Province Canada............ 8.000 02/01/13 5,991,700
------------
10,682,824
------------
EQUITIES 2.2%
Commonwealth Edison Co. (44,830 preferred shares).......... 4,483,000
Time Warner, Inc. (537 preferred shares)................... 584,452
------------
5,067,452
------------
TOTAL LONG-TERM INVESTMENTS 97.6%
(Cost $209,791,971) (a)................................... 225,459,320
REPURCHASE AGREEMENT 0.3%
BA Securities ($780,000 par collaterized by U.S.
Government obligations in a pooled cash account, dated
12/31/96, to be sold on 01/02/97 at $780,300)............. 780,000
OTHER ASSETS IN EXCESS OF LIABILITIES 2.1%................. 4,887,939
------------
NET ASSETS 100.0%.......................................... $231,127,259
------------
</TABLE>
(a) At December 31, 1996, cost for federal income tax purposes is
$209,791,971; the aggregate gross unrealized appreciation is $16,125,164
and the aggregate gross unrealized depreciation is $457,815, resulting in
net unrealized appreciation of $15,667,349.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
The following table summarizes the long-term debt security portfolio
composition at December 31, 1996, based upon quality ratings issued by
Standard & Poor's. For securities not rated by Standard & Poor's, the Moody's
rating is used.
PORTFOLIO COMPOSITION BY CREDIT QUALITY
<TABLE>
<S> <C>
AA............... 8.0%
A................ 18.7
BBB.............. 57.8
BB............... 7.9
B................ 7.6
-----
100.0%
-----
</TABLE>
See Notes to Financial Statements
7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $209,791,971) (Note
1).............................................................. $225,459,320
Short-Term Investments (Note 1)................................. 780,000
Cash............................................................ 2,389
Receivables:
Interest....................................................... 5,230,754
Dividends...................................................... 93,919
Other........................................................... 10,551
------------
Total Assets.................................................. 231,576,933
------------
LIABILITIES:
Payables:
Income Distributions........................................... 291,320
Investment Advisory Fee (Note 2)............................... 93,300
Affiliates (Note 2)............................................ 3,000
Accrued Expenses................................................ 48,305
Retirement Plan (Note 2)........................................ 13,749
------------
Total Liabilities.............................................. 449,674
------------
NET ASSETS...................................................... $231,127,259
------------
NET ASSETS CONSIST OF:
Common Shares ($1.00 par value with 15,000,000 shares
authorized,
11,362,465 shares issued and outstanding)..................... $ 11,362,465
Capital......................................................... 235,011,268
Net Unrealized Appreciation on Securities....................... 15,667,349
Accumulated Undistributed Net Investment Income................. 352,729
Accumulated Net Realized Loss on Securities..................... (31,266,552)
------------
NET ASSETS...................................................... $231,127,259
------------
NET ASSET VALUE PER COMMON SHARE ($231,127,259 divided
by 11,362,465 shares outstanding)............................. $ 20.34
------------
</TABLE>
See Notes to Financial Statements
8
<PAGE>
STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................... $ 9,449,906
Dividends.......................................................... 214,676
-----------
Total Income...................................................... 9,664,582
-----------
EXPENSES:
Investment Advisory Fee (Note 2)................................... 554,300
Shareholder Services............................................... 70,375
Trustees Fees and Expenses (Note 2)................................ 26,004
Legal (Note 2)..................................................... 14,507
Other ............................................................. 167,312
-----------
Total Expenses.................................................... 832,498
-----------
NET INVESTMENT INCOME.............................................. $ 8,832,084
-----------
REALIZED AND UNREALIZED GAIN ON SECURITIES:
Net Realized Gain/Loss on Securities:
Investments....................................................... $ 128,054
Futures........................................................... (13,941)
-----------
114,113
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period........................................... 11,631,688
End of the Period:
Investments....................................................... 15,667,349
-----------
Net Unrealized Appreciation on Securities During the Period........ 4,035,661
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES..................... $ 4,149,774
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $12,981,858
-----------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended December 31, 1996 and the Year Ended June 30, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1996 June 30, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income........................ $ 8,832,084 $ 17,463,773
Net Realized Gain on Securities.............. 114,113 997,239
Net Unrealized Appreciation/Depreciation on
Securities During the Period................ 4,035,661 (6,005,192)
------------ ------------
Change in Net Assets from Operations......... 12,981,858 12,455,820
Distributions from Net Investment Income..... (8,750,146) (17,499,350)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES................................... 4,231,712 (5,043,530)
NET ASSETS:
Beginning of the Period...................... 226,895,547 231,939,077
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$352,729 and $257,548, respectively)........ $231,127,259 $226,895,547
------------ ------------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Fund outstanding throughout the periods indicated. (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
December 31, ----------------
1996 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of the Period........................ $19.97 $20.41 $19.07
------- ------- -------
Net Investment Income.......................... .777 1.54 1.52
Net Realized and Unrealized Gain/Loss on
Securities.................................... .364 (.44) 1.36
------- ------- -------
Total from Investment Operations................ 1.141 1.10 2.88
Less Distributions from Net Investment Income... .770 1.54 1.54
------- ------- -------
Net Asset Value, End of the Period.............. $20.341 $19.97 $20.41
------- ------- -------
Market Price Per Share at End of the Period..... $18.750 $18.125 $19.125
Total Investment Return at Market Price (a) (d). 7.70%* 2.61% 14.89%
Total Return at Net Asset Value (b) (d)......... 5.81%* 5.94% 16.54%
Net Assets at End of the Period (In millions)... $231.1 $226.9 $231.9
Ratio of Operating Expenses to Average Net
Assets......................................... .72% .67% .68%
Ratio of Convertible Note Expenses to Average
Net Assets (c)................................. -- -- .39%
Ratio of Net Investment Income to Average Net
Assets......................................... 7.69% 7.47% 7.92%
Portfolio Turnover.............................. 4%* 11% 8%
Assuming full dilution of debt (c):
Net Asset Value, End of the Period............. -- -- --
Number of Shares Outstanding, End of the Period
(000)......................................... -- -- --
</TABLE>
(a) Total investment return at market price reflects the change in market
value of the common shares for the period indicated with reinvestment of
dividends in accordance with the Fund's dividend reinvestment plan.
(b) Total return at net asset value (NAV) reflects the change in value of the
Fund's assets with reinvestment of dividends based upon NAV.
(c) On January 3, 1995, the Fund paid off its outstanding convertible
extendible note.
(d) Prior to fiscal year end 1992, this item was not a required disclosure.
*Non-Annualized
10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
- ---------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
$21.33 $19.85 $18.68 $18.72 $20.34 $21.49 $21.87
<S> <C> <C> <C> <C> <C> <C>
- --- --- --- --- --- --- ---
<CAPTION>
1.56 1.575 1.735 1.76 2.07 1.90 1.95
(2.28) 1.55 1.115 (.03) (1.615) (.85) (.13)
<S> <C> <C> <C> <C> <C> <C>
- --- --- --- --- --- --- ---
<CAPTION>
(.72) 3.125 2.85 1.73 .455 1.05 1.82
1.54 1.645 1.68 1.77 2.075 2.20 2.20
<S> <C> <C> <C> <C> <C> <C>
- --- --- --- --- --- --- ---
<CAPTION>
$19.07 $21.33 $19.85 $18.68 $18.72 $20.34 $21.49
<S> <C> <C> <C> <C> <C> <C>
- --- --- --- --- --- --- ---
<CAPTION>
$18.125 $20.750 $20.375 $20.125 $16.750 $17.500 $20.125
(5.59%) 13.76% 17.12% -- -- -- --
(3.37%) 15.35% 15.79% -- -- -- --
$216.6 $235.6 $218.5 $204.4 $204.8 $220.8 $232.0
.68% .71% .71% .72% .71% .71% .70%
.82% .98% 1.05% 1.09% 1.55% 1.90% 1.95%
7.29% 7.65% 8.90% 9.42% 10.65% 9.03% 9.22%
2% 19% 39% 18% 14% 13% 41%
$19.07 $21.09 $19.78 $18.74 $18.78 $20.17 $21.15
12,411 12,411 12,372 12,304 12,304 12,746 12,701
</TABLE>
See Notes to Financial Statements
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 (Unaudited)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Bond Fund (the "Fund") is registered as a diversi-
fied closed-end management investment company under the Investment Company Act
of 1940, as amended. The Fund's investment objective is to provide current in-
come with preservation of capital through investing primarily in a diversified
portfolio of debt securities.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The prep-
aration of financial statements in conformity with generally accepted account-
ing principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of con-
tingent 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 are stated at value using mar-
ket quotations. Investments in securities listed on a securities exchange are
valued at their sale price as of the close of such securities exchange. Un-
listed securities and listed securities for which the last sales price is not
available are valued at the mean of the bid and asked prices. For those secu-
rities where quotations or prices are not available, valuations are determined
in accordance with procedures established in good faith by the Board of Trust-
ees. Short-term securities with remaining maturities of 60 or less days 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 de-
livery" basis, with settlement to occur at a later date. The value of the se-
curity 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, 1996,
there were no when issued or delayed delivery purchase commitments.
The Fund may invest in repurchase agreements, which are short-term invest-
ments whereby 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
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 (Unaudited)
- -------------------------------------------------------------------------------
"Adviser") or its affiliates, the daily aggregate of which is invested in re-
purchase agreements. Repurchase agreements are fully collateralized by the un-
derlying 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 under-
lying security at not less than the repurchase proceeds due the Fund.
C. INVESTMENT INCOME-Interest income is recorded on an accrual basis and divi-
dend income is recorded on the ex-dividend date. Original issue discount is
amortized over the expected life of each applicable 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 require-
ments of the Internal Revenue Code applicable to regulated investment compa-
nies 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 these losses against any future realized capi-
tal gains. At June 30, 1996, the Fund had an accumulated capital loss
carryforward for tax purposes of approximately $31.4 million which will expire
between June 30, 1999 and June 30, 2000. Net realized loss differs for finan-
cial and tax reporting purposes primarily as a result of gains or losses rec-
ognized for tax purposes on open futures positions.
E. DISTRIBUTION OF INCOME AND GAINS-The Fund declares and pays dividends from
net investment income to shareholders quarterly. Net realized gains, if any,
are distributed annually. Distributions from net realized gains for book pur-
poses 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.
Due to inherent differences in the recognition of income, expenses and real-
ized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis report-
ing for the current fiscal year have been identified and appropriately reclas-
sified. Permanent differences related to the recognition of gains and losses
on paydowns of mortgage-backed securities totaling $13,243 were reclassified
from accumulated net realized gain/loss on securities to accumulated undis-
tributed net investment income.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 (Unaudited)
- -------------------------------------------------------------------------------
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 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>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.
For the six months ended December 31, 1996, the Fund recognized expenses of
approximately $21,100 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting
services to the Fund. These services are provided by VKAC at cost.
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 Directors of the Fund instituted a Retirement Plan effective April 1,
1996. The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. For the current Directors not affiliated with the Adviser,
the annual retirement benefit payable per year for a ten-year period is based
upon the highest total annual compensation received in any of the three calen-
dar years preceding retirement. Directors with more than five but less than
ten years of service at retirement will receive a prorated reduced benefit.
Under the Plan, for the Directors retiring with the effectiveness of the Plan,
the annual retirement benefit payable per year for a ten-year period is equal
to 75% of the total compensation received from the Fund during the 1995 calen-
dar year.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $10,042,001 and $9,473,378, re-
spectively.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 (Unaudited)
- -------------------------------------------------------------------------------
4. 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 manage the Fund's maturity and duration. 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 on securities. Upon disposition, a realized gain or
loss is recognized accordingly, except in instances where the Fund accepts de-
livery of a security underlying a futures contract. In these situations, the
recognition of gain or loss is postponed until the disposal of this underlying
security.
During the period, the Fund invested in futures contracts, a type of deriva-
tive. A futures contract is an agreement involving the delivery of a particu-
lar asset on a specified future date at an agreed upon price. The Fund
generally invests in exchange traded futures contracts on U.S. Treasury Bonds
and typically closes the contract prior to the delivery date. These contracts
are generally used to manage the portfolio's effective maturity and duration.
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).
Transactions in futures contracts, each with a par value of $100,000, for
the six months ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- --------------------------------------------------------------------------------
<S> <C>
Outstanding at June 30, 1996......................................... 20
Futures Opened....................................................... 0
Futures Closed....................................................... (20)
---
Outstanding at December 31, 1996..................................... 0
---
</TABLE>
15
<PAGE>
RESULTS OF SHAREHOLDER VOTES
An Annual Meeting of Shareholders of the Fund was held on October 29, 1996,
where shareholders voted on a new investment advisory agreement, the reorgani-
zation and conversion of the Fund to a Delaware business trust, the election
of trustees and the ratification of Ernst & Young LLP as independent auditors.
With regard to the approval of a new investment advisory agreement between Van
Kampen American Capital Asset Management, Inc. and the Fund, 8,960,610 shares
voted for the proposal, 154,718 shares voted against, 250,549 shares abstained
and 140,948 shares represented broker non-votes. With regard to the reorgani-
zation and conversion of the Fund to a Delaware business trust, 6,178,979
shares voted for the proposal, 169,953 shares voted against the proposal,
276,356 shares abstained and 2,881,538 shares represented broker non-votes.
With regard to the election of Stephen R. Gross as elected trustee by the com-
mon shareholders of the Fund 9,350,607 shares voted in his favor, 156,218
shares withheld. With regard to the election of Alan G. Merten, Ph.D. as
elected trustee by the common shareholders of the Fund 9,348,042 shares voted
in his favor, 158,783 shares withheld. With regard to the election of F. Rob-
ert Paulsen, Ph.D. as elected trustee by the common shareholders of the Fund
9,343,187 shares voted in his favor, 163,638 shares withheld. With regard to
the election of Don G. Powell as elected trustee by the common shareholders of
the Fund 9,347,263 shares voted in his favor, 159,562 shares withheld. The
other trustees of the Fund whose terms did not expire in 1996 are Donald M.
Carlton, Ph.D., A. Benton Cocanougher, Ph.D., Steven Muller, Ph.D., R. Richard
Pettit, Ph.D. and Alan B. Shepard, Jr. With regard to the ratification of
Ernst & Young LLP as independent auditors for the Fund, 9,304,828 shares voted
in favor of the proposal, 50,058 shares voted against and 151,938 shares ab-
stained.
16
<PAGE>
VAN KAMPEN AMERICAN CAPITAL BOND FUND
BOARD OF TRUSTEES
DONALD M. CARLTON
A. BENTON COCANOUGHER
STEPHEN R. GROSS
ALAN G. MERTEN
STEVEN MULLER
F. ROBERT PAULSEN
R. RICHARDSON PETTIT
DON G. POWELL* -- Chairman
ALAN B. SHEPARD, JR.
OFFICERS
DON G. POWELL*
President
DENNIS J. MCDONNELL*
Executive Vice President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER HEGEL*
ALAN SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
One Parkview Plaza Oakbrook Terrace, Illinois 60181
CUSTODIAN
STATE STREET BANK AND TRUST CO.
225 Franklin Street Boston, Massachusetts 02105
SHAREHOLDER SERVICING AGENT
BOSTON EQUISERVE
P.O. Box 8200
Boston, Massachusetts 02266-8200
INDEPENDENT ACCOUNTANTS
ERNST & YOUNG LLP
1221 McKinney Suite 2400
Houston, Texas 77010
*" 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.
SMdenotes a service mark of Van Kampen American Capital Distributors, Inc.
- -------------------------------
INQUIRIES ABOUT AN INVESTOR'S
ACCOUNT SHOULD BE REFERRED
TO THE FUND'S TRANSFER AGENT
BOSTON EQUISERVE
P.O. BOX 8200
BOSTON, MASSACHUSETTS 02266-
8200
TELEPHONE: (800) 341-2929
ALASKA AND HAWAII
CALL COLLECT: (713) 993-0500
ASK FOR CLOSED-END FUND AC-
COUNT SERVICES
- -------------------------------
17
