<PAGE>
Van Kampen American Capital
BOND FUND
Semi-Annual Report
December 31, 1997
-----A Wealth of Knowledge . A Knowledge of Wealth-----
VAN KAMPEN AMERICAN CAPITAL
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Letter to Shareholders......................................... 1
Performance Results............................................ 4
Portfolio of Investments....................................... 5
Statement of Assets and Liabilities............................ 9
Statement of Operations........................................ 10
Statement of Changes in Net Assets............................. 11
Financial Highlights........................................... 12
Notes to Financial Statements.................................. 14
Dividend Reinvestment Plan..................................... 17
</TABLE>
ACB SAR 2/98
<PAGE>
Letter to Shareholders
February 5, 1998
Dear Shareholder,
The new year ushers in what promises to be an exciting and challenging time
for investors. The Taxpayer Relief Act of 1997 signed into law by President
Clinton in August creates many new opportunities for you and your family to take
a more active role in achieving your long-term financial goals.
Most Americans will benefit from the bill's $95 billion in tax cuts over
five years. The so-called "Kiddie Credit" gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses with the new Education IRA. The bill also
cuts capital gains tax rates for the first time in over a decade and loosens
restrictions on tax-deductible IRA contributions. Perhaps the most exciting
feature of all is the new Roth IRA, which allows investment earnings to grow
tax-free, not just tax-deferred.
This year more than ever, it might be important for you to work with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. With the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
Economic Review
The bond market rallied during the second half of 1997 as fears of rising
inflation dissipated, easing concerns that the Federal Reserve Board might raise
interest rates. Despite strong economic growth, there was little evidence of
inflation; consumer and wholesale prices rose only slightly during the second
half of the year.
In addition to a favorable inflation scenario, bonds benefited from an
improved supply-and-demand balance. The supply of new Treasury securities
declined as the federal budget deficit dropped to its lowest level in 23 years.
At the same time, the demand for Treasury issues among U.S. investors increased
amid growing concerns that the stock market rally was nearing an end. The seven-
percent slump in the Dow Jones Industrial Average on October 27 reinforced the
benefit of owning bonds for diversification. Foreign investors continued to be
heavy purchasers of U.S. Treasury bonds throughout the year. As a result of
these bullish factors, the yield on the 30-year Treasury fell to 5.92 percent at
year-end, down from 6.79 percent at mid-year.
During the six months ended December 31, investment-grade corporate bonds
moved in the same direction as Treasuries, but did not gain as strongly. After
the financial crisis in Southeast Asia broke over the summer, the demand for
corporate securities did not keep pace with the surge in supply. Investors
favored U.S. Treasury bonds over corporate bonds because of their greater
liquidity and potential to preserve capital.
[PHOTO]
Dennis J. McDonnell and Don G. Powell
1
Continued on page two
<PAGE>
Fund Strategy
In managing the Fund, we maintained a diversified portfolio that was
heavily weighted in investment-grade corporate bonds. Within that category, we
emphasized bonds rated BBB, the lowest investment-grade rating assigned by
Standard & Poor's Rating Group. These bonds tend to have higher yields than
other investment-grade securities as well as a greater potential to appreciate
in price, due to credit upgrades.
As of December 31, 58.0 percent of Fund's long-term investments were rated
BBB, 27.8 percent were rated A, and 7.4 percent were rated AA or AAA. In
addition, 6.8 percent were non-investment grade (rated BB or below. During the
six-month reporting period, the portfolio's percentage of non-investment grade
bonds declined slightly as a result of credit upgrades.
The mixture of credit quality represented in the Fund's portfolio is
designed to help balance its potential price volatility in response to changing
interest rates. Bonds rated BBB and below tend to perform better when rates are
rising and have the potential to provide additional income. During periods of
falling rates, bonds rated A or higher tend to perform better because they are
more interest-rate sensitive.
Portfolio turnover was low during the reporting period because there were
few opportunities to add value over existing holdings. The average yield on
bonds in the portfolio remained substantially above average market yields, and
spreads between the yields of BBB-rated bonds and A-rated bonds continued to be
tight. As a result, there was little incentive to replace many bonds in the
portfolio.
Trading activity emphasized enhancing the call protection of the Fund and
its potential price appreciation. Purchases favored a diversified mix of long-
term bonds that were not callable for several years and were priced at
reasonable levels. These purchases were financed with proceeds from the sales of
bonds whose credit outlooks had deteriorated and from proceeds of a call on the
Fund's $6 million position in Cleveland Electric Illuminating.
Opportunities for purchases increased during the latter part of the
reporting period, when ripple effects from the Asian crisis spilled over into
the general bond market. When selecting new bonds, we try to identify securities
that we believe will outperform within a particular sector and that can be
purchased at an attractive price. We believe this selective approach, which is
supported by our research, provides significant added value to the portfolio.
We increased the number of individual holdings and added some investment-
grade foreign bonds, which tend to pay higher yields than many U.S. corporate
securities. Looking ahead, we hope to further diversify assets by adding more
individual issues.
During the reporting period, the duration of the Fund remained stable.
Duration, which is expressed in years, is a measure of a portfolio's sensitivity
to changes in interest rates. Long-duration portfolios tend to perform better
when interest rates are falling; short-duration portfolios tend to outperform
when rates are rising. When rates fall, as they did throughout most of the
reporting period, the duration of bonds tend to fall because many begin to trade
to their call dates rather than maturity dates. We purchased long-duration bonds
during the reporting period in order to help offset this decline in the duration
of portfolio holdings. As of December 31, the duration of the Fund stood at 5.8
years, compared with 6.0 years for the benchmark, the Lehman Brothers Corporate
Bond Index.
The Fund's largest sector exposures continue to be utilities, consumer
services, transportation, and processing industries. Its portion of utility
bonds, however, declined during the reporting period, due to the Cleveland
Electric Illuminating call.
2
Continued on page three
<PAGE>
<TABLE>
<CAPTION>
Holdings by Sector as of December 31, 1997*
<S> <C> <C> <C>
Utilities.............................. 31% Finance................... 4%
Consumer Services...................... 17% Producer Manufacturing.... 4%
Raw Materials/Processing Industries.... 12% Health Care............... 3%
Transportation......................... 11% Consumer Non-Durables..... 2%
Energy................................. 8% Consumer Durables......... 1%
Government............................. 7%
* As a percentage of long-term investments
</TABLE>
Performance Summary
For the six-month period ended December 31, 1997, the Fund generated a
total return of 12.26 percent/1/ at market price and 7.04 percent/2/ at net
asset value. For the same period, the Lehman Brothers Corporate Bond Index
returned 6.95 percent. Keep in mind that this index is a broad-based unmanaged
index that reflects the general performance of corporate bonds. It does not
reflect any commissions or fees that would be paid by an investor purchasing the
securities it represents.
The Fund's return reflects an increase in market price per common share on
the New York Stock Exchange from $19.250 on June 30, 1997 to $20.8125 on
December 31, 1997, which includes reinvestment of dividends totaling $0.770 per
share. Please refer to the chart on page four for additional Fund performance
results.
Economic Outlook
We expect the economy to remain strong going into 1998, although its growth
rate is likely to slow from current levels. The financial crisis in Southeast
Asia is anticipated to curb U.S. exports to the region, which in turn, could
trim the earnings of many U.S. companies and reduce the overall U.S. growth
rate. As a result, we believe there is little chance that the Fed will raise
interest rates in the near term. We expect the yield for the 30-year Treasury
bond to remain at current levels in the coming months, possibly declining
further later in 1998.
We believe the Fund's emphasis on high-quality investment-grade bonds and
its relatively short average maturity will help to limit any potential price
volatility due to changing market conditions. We do not expect to make any major
changes to the portfolio unless market conditions shift dramatically. We will
continue to seek a balance between the Fund's total return and its dividend
income, and look to add value through our investment strategies and bond
selection. Thank you for your continued confidence and trust in 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.
3
<PAGE>
Performance Results for the Period Ended December 31, 1997
Van Kampen American Capital Bond Fund
NYSE Ticker Symbol -- ACB
<TABLE>
<CAPTION>
<S> <C>
Common Share Total Returns
Six-month total return based on market price/1/..................... 12.26%
Six-month total return based on NAV/2/.............................. 7.04%
Distribution Rate
Distribution rate as a % of closing common stock price/3/........... 7.40%
Share Valuations
Net asset value..................................................... $ 20.91
Closing common stock price.......................................... $20.8125
Six-month high common stock price (12/31/97)........................ $20.8125
Six-month low common stock price (09/19/97)......................... $ 19.375
</TABLE>
1 Total 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.
2 Total 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.
3 Distribution 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, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Corporate Bonds 89.1%
Consumer Distribution 0.3%
$ 750 Dimon, Inc...................................... 8.875% 06/01/06 $ 808,950
Consumer Durables 0.8% -----------
750 Brunswick Corp.................................. 7.125 08/01/27 774,150
1,000 Chrysler Corp................................... 7.450 03/01/27 1,076,590
-----------
1,850,740
-----------
Consumer Non-Durables 2.0%
4,000 Coca Cola Enterprises, Inc...................... 8.500 02/01/12 4,741,200
-----------
Consumer Services 16.3%
1,250 Belo A H Corp................................... 7.125 06/01/07 1,300,375
1,250 Cablevision Systems Corp........................ 7.875 12/15/07 1,284,375
2,500 Clear Channel Commerce, Inc..................... 7.250 10/15/27 2,549,500
2,500 Columbia Pictures Entertainment, Inc............ 9.875 02/01/98 2,512,750
2,000 Comcast Cable Communications.................... 8.125 05/01/04 2,179,200
3,000 Cox Communications, Inc......................... 7.250 11/15/15 3,151,200
5,000 Harcourt General, Inc........................... 9.500 03/15/00 5,323,000
1,750 Harcourt General, Inc........................... 8.875 06/01/22 2,138,850
1,000 Harcourt General, Inc........................... 7.200 08/01/27 1,018,500
1,000 News America Holdings, Inc...................... 8.875 04/26/23 1,186,300
100 Premier Parks, Inc.............................. 9.750 01/15/07 106,750
3,500 Royal Caribbean Cruises......................... 7.500 10/15/07 3,592,750
11,000 Tele Communications, Inc........................ 9.250 01/15/23 12,292,500
-----------
38,636,050
-----------
Energy 7.7%
7,400 Ashland Oil, Inc................................ 8.800 11/15/12 8,841,520
750 Barrett Resources Corp.......................... 7.550 02/01/07 748,125
5,025 PDV America, Inc................................ 7.875 08/01/03 5,219,467
1,500 Petroliam Nasional Berhad,
144A Private Placement (a)...................... 7.625 10/15/26 1,356,750
1,000 Transcontinental Gas Pipe Line Corp............. 7.250 12/01/26 1,046,400
1,000 Union Oil Co.................................... 9.125 02/15/06 1,186,300
-----------
18,398,562
-----------
</TABLE>
5 See Notes to Financial Statements
<PAGE>
Portfolio of Investments (Continued)
December 31, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Finance 4.0%
$1,000 Americredit Corp............................ 9.250% 02/01/04 $ 991,250
3,188 First PV Funding Corp....................... 10.300 01/15/14 3,356,246
4,500 Hutchinson Whampoa Finance,
144A Private Placement (a).................. 7.500 08/01/27 4,097,475
1,000 Royal Bank Scotland Group................... 6.375 02/01/11 977,140
----------
9,422,111
----------
Healthcare 2.8%
2,300 Aetna Services, Inc......................... 7.125 08/15/06 2,375,325
1,000 Allegiance Corp............................. 7.800 10/15/16 1,085,000
500 Manor Care, Inc............................. 7.500 06/15/06 519,200
1,500 Tenet Healthcare Corp....................... 10.125 03/01/05 1,638,750
1,000 Tenet Healthcare Corp....................... 8.625 01/15/07 1,033,000
----------
6,651,275
----------
Producer Manufacturing 3.6%
250 American Builders........................... 10.625 05/15/07 259,688
4,400 ITT Corp.................................... 6.750 11/15/05 4,383,280
1,000 ITT Corp.................................... 7.375 11/15/15 976,200
162 Rayovac Corp................................ 10.250 11/01/06 176,783
2,500 Rubbermaid, Inc............................. 6.600 11/15/06 2,552,250
250 US Can Corp................................. 10.125 10/15/06 264,063
----------
8,612,264
----------
Raw Materials/Processing Industries 11.7%
2,000 Bowater, Inc................................ 9.375 12/15/21 2,588,800
1,000 Crown Cork & Seal, Inc...................... 8.000 04/15/23 1,061,600
5,000 Federal Paper Board, Inc.................... 8.875 07/01/12 6,017,000
9,500 Georgia Pacific Corp........................ 9.500 02/15/18 9,943,650
4,000 IMC Global, Inc............................. 6.875 07/15/07 4,080,920
3,100 Owens Corning Fiberglass Corp............... 9.375 06/01/12 3,809,280
250 Pride Petroleum Services, Inc............... 9.375 05/01/07 269,575
----------
27,770,825
----------
Technology 0.3%
750 Raytheon Co................................. 7.200 08/15/27 790,725
----------
</TABLE>
6 See Notes to Financial Statements
<PAGE>
Portfolio of Investments (Continued)
December 31, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Transportation 11.1%
$3,000 AMR Corp.................................... 9.500% 05/15/01 $ 3,307,800
4,250 CSX Corp.................................... 8.625 05/15/22 5,130,600
2,500 Kansas City Southern Industries, Inc........ 7.875 07/01/02 2,641,000
7,000 Union Pacific Corp.......................... 8.350 05/01/25 7,674,800
6,000 United Airlines, Inc........................ 10.020 03/22/14 7,573,800
-------------
26,328,000
-------------
Utilities 28.5%
5,000 A T & T Corp................................ 8.625 12/01/31 5,574,500
1,000 AES Corp.................................... 10.250 07/15/06 1,081,250
3,000 Arizona Public Service Co................... 9.500 04/15/21 3,378,900
3,500 Arizona Public Service Co................... 8.750 01/15/24 3,872,400
2,000 Arizona Public Service Co................... 8.000 02/01/25 2,123,200
1,000 Commonwealth Edison Co...................... 8.625 02/01/22 1,106,900
7,000 Consumers Energy Co......................... 8.750 02/15/98 7,037,100
5,000 GTE North, Inc.............................. 8.500 12/15/31 5,514,500
3,000 Gulf States Utilities Co.................... 8.940 01/01/22 3,253,200
4,000 Long Island Lighting Co..................... 9.750 05/01/21 4,174,400
3,000 Long Island Lighting Co..................... 9.000 11/01/22 3,366,000
4,150 Montana Power Co............................ 8.950 02/01/22 4,751,750
7,000 Public Service Co. Colorado................. 8.750 03/01/22 7,845,250
2,000 Southern California Gas Co.................. 8.750 10/01/21 2,197,000
2,500 Texas Utilities Electric Co................. 8.875 02/01/22 2,783,750
5,000 United Telecommunications Kansas............ 9.500 04/01/03 5,724,500
500 UtiliCorp United, Inc....................... 6.700 10/15/06 512,150
3,000 UtiliCorp United, Inc....................... 9.000 11/15/21 3,374,400
-------------
67,671,150
-------------
Total Corporate Bonds....................... 211,681,852
-------------
Government and Government Agency Obligations 6.3%
10 Federal Home Loan Mortgage Corp., Pool...... 7.375 01/01/03 9,475
1 Government National Mortgage Assn., Pool.... 10.000 10/15/16 1,356
8 Government National Mortgage Assn., Pool.... 10.000 07/15/20 8,306
4,000 Newfoundland Province Canada................ 9.000 10/15/21 5,059,200
</TABLE>
7
See Notes to Financial Statements
<PAGE>
Portfolio of Investments (Continued)
December 31, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government and Government Agency Obligations (Continued)
$ 5,500 Saskatchewan Province Canada............. 8.000% 02/01/13 $ 6,369,000
3,500 U.S. Treasury Note....................... 5.750 10/31/02 3,503,815
------------
Total Government and Government Agency Obligations 14,951,152
------------
Preferred Stock 2.2%
Commonwealth Edison Co. (44,830 preferred shares, 8.38% coupon).............. 4,494,208
Time Warner, Inc. (594 preferred shares, 10.25% coupon)...................... 667,507
------------
Total Preferred Stock.................................................... 5,161,715
------------
Total Long-Term Investments 97.6%
(Cost $210,240,518).................................................... 231,794,719
Repurchase Agreement 0.3%
BA Securities ($845,000 par collaterized by U.S. Government obligations
in a pooled cash account, dated 12/31/97, to be sold on 01/02/98 at $845,305)
(Cost $845,000).......................................................... 845,000
------------
Total Investments 97.9%
(Cost $211,085,518)...................................................... 232,639,719
Other Assets in Excess of Liabilities 2.1%................................... 4,904,741
------------
Net Assets 100.0%............................................................ $237,544,460
============
</TABLE>
(a) 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.
The following table summarizes the long-term debt security portfolio composition
at December 31, 1997, based upon the highest quality ratings as determined by
Standard & Poor's or Moody's.
Portfolio Composition by Credit Quality
AAA........................... 1.5%
AA............................ 5.9
A............................. 27.8
BBB........................... 58.0
BB............................ 6.4
B............................. 0.4
------
100.0%
======
8 See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1997 (Unaudited)
=========================================================================
<TABLE>
<CAPTION>
<S> <C>
Assets:
Total Investments (Cost $211,085,518)..................... $ 232,639,719
Cash...................................................... 3,129
Receivables:
Interest................................................ 5,132,757
Investments Sold........................................ 105,000
Dividends............................................... 93,919
Other..................................................... 87,587
-------------
Total Assets......................................... 238,062,111
-------------
Liabilities:
Payables:
Income Distributions.................................... 288,771
Investment Advisory Fee................................. 97,588
Affiliates.............................................. 10,597
Accrued Expenses.......................................... 20,242
Trustees' Deferred Compensation and Retirement Plans...... 100,453
-------------
Total Liabilities.................................... 517,651
-------------
Net Assets................................................ $ 237,544,460
=============
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................................................... 235,011,011
Net Unrealized Appreciation............................... 21,554,201
Accumulated Undistributed Net Investment Income........... 256,455
Accumulated Net Realized Loss............................. (30,639,672)
-------------
Net Assets................................................ $ 237,544,460
=============
Net Asset Value Per Common Share
($237,544,460 divided by 11,362,465 shares outstanding). $ 20.91
=============
</TABLE>
9
See Notes to Financial Statements
<PAGE>
Statement of Operations
For the Six Months Ended December 31, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Interest....................................... $ 9,114,879
Dividends...................................... 220,092
-----------
Total Income.............................. 9,334,971
-----------
Expenses:
Investment Advisory Fee........................ 574,970
Shareholder Services........................... 65,177
Custody........................................ 11,492
Trustees' Fees and Expenses.................... 10,933
Legal.......................................... 7,056
Other.......................................... 95,978
-----------
Total Expenses............................ 765,606
-----------
Net Investment Income.......................... $ 8,569,365
===========
Realized and Unrealized Gain/Loss:
Net Realized Gain.............................. $ 501,668
Unrealized Appreciation/Depreciation:
Beginning of the Period................... 14,528,694
End of the Period......................... 21,554,201
-----------
Net Unrealized Appreciation During the Period.. 7,025,507
-----------
Net Realized and Unrealized Gain............... $ 7,527,175
===========
Net Increase in Net Assets from Operations..... $16,096,540
-----------
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
For the Six Months ended December 31, 1997 and
the Year Ended June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1997 June 30, 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income................................ $ 8,569,365 $ 17,675,549
Net Realized Gain.................................... 501,668 228,318
Net Unrealized Appreciation During the Period........ 7,025,507 2,897,006
------------ ------------
Change in Net Assets from Operations................. 16,096,540 20,800,873
Distributions from Net Investment Income............. (8,749,495) (17,499,005)
------------ ------------
Net Change in Net Assets from
Investment Activities.............................. 7,347,045 3,301,868
Net Assets:
Beginning of the Period.............................. 230,197,415 226,895,547
------------ ------------
End of the Period
(Including accumulated undistributed net investment
income of $256,455 and $436,585, respectively)..... $237,544,460 $230,197,415
============ ============
</TABLE>
11 See Notes to Financial Statements
<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, 1997 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Period.................................. $ 20.259 $ 19.97 $ 20.41 $ 19.07
-------- ------- ------- -------
Net Investment Income.................................... .754 1.556 1.54 1.52
Net Realized and Unrealized Gain/Loss.................... .663 .273 (.44) 1.36
-------- ------- ------- -------
Total from Investment Operations........................... 1.417 1.829 1.10 2.88
Less Distributions from Net Investment Income.............. .770 1.540 1.54 1.54
-------- ------- ------- -------
Net Asset Value, End of the Period......................... $ 20.906 $20.259 $ 19.97 $ 20.41
======== ======= ======= =======
Market Price Per Share at End of the Period................ $20.8125 $19.250 $18.125 $19.125
Total Investment Return at Market Price (a) (d)............ 12.26%* 15.06% 2.61% 14.89%
Total Return at Net Asset Value (b) (d).................... 7.04%* 9.46% 5.94% 16.54%
Net Assets at End of the Period (In millions) (d).......... $ 237.5 $ 230.2 $ 226.9 $ 231.9
Ratio of Operating Expenses to
Average Net Assets...................................... .64% .68% .67% .68%
Ratio of Convertible Note Expenses to Average
Net Assets (c).......................................... -- -- -- .39%
Ratio of Net Investment Income to Average
Net Assets.............................................. 7.18% 7.70% 7.47% 7.92%
Portfolio Turnover......................................... 10% 8% 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
12
<PAGE>
<TABLE>
<CAPTION>
===================================================================
Year Ended June 30,
- -------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 21.33 $ 19.85 $ 18.68 $ 18.72 $ 20.34 $ 21.49
------- ------- ------- ------- ------- -------
1.56 1.575 1.735 1.76 2.07 1.90
(2.28) 1.55 1.115 (.03) (1.615) (.85)
------- ------- ------- ------- ------- -------
(.72) 3.125 2.85 1.73 .455 1.05
1.54 1.645 1.68 1.77 2.075 2.20
------- ------- ------- ------- ------- -------
$ 19.07 $ 21.33 $ 19.85 $ 18.68 $ 18.72 $ 20.34
======= ======= ======= ======= ======= =======
$18.125 $20.750 $19.750 $18.375 $16.500 $20.250
(5.59%) 13.76% 17.12% -- -- --
(3.37%) 16.35% 15.79% -- -- --
$ 216.6 $ 235.6 $ 218.5 -- -- --
.68% .71% .71% .72% .71% .71%
.82% .98% 1.05% 1.09% 1.55% 1.90%
7.29% 7.65% 8.90% 9.42% 10.65% 9.03%
2% 19% 39% 18% 14% 13%
$ 19.07 $ 21.09 $ 19.78 $ 18.74 $ 18.78 $ 20.17
12,411 12,411 12,372 12,304 12,304 12,746
</TABLE>
13 See Notes to Financial Statements
<PAGE>
Notes to Financial Statements
December 31, 1997 (Unaudited)
===============================================================================
1. Significant Accounting Policies
Van Kampen American Capital Bond Fund (the "Fund") is registered as a
diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to provide
current income 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
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 are stated at value using market
quotations. Investments in securities listed on a securities exchange are valued
at their sale price as of the close of such securities exchange. Unlisted
securities and listed securities for which the last sales price is not available
are valued at the mean of the bid and asked prices. For those securities where
quotations or prices are not available, valuations are determined in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1997, there were no
when issued or delayed delivery purchase-commitments.
The Fund may invest in repurchase agreements, which are short-term investments
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 "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
14
<PAGE>
Notes to Financial Statements (Continued)
December 31, 1997 (Unaudited)
================================================================================
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 discount is
amortized over the expected life of each applicable security. Premiums on debt
securities are not amortized.
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 these losses against any future realized capital
gains. At June 30, 1997, the Fund had an accumulated capital loss carryforward
for tax purposes of $31,141,340 which will expire between June 30, 1998 and June
30, 2000. Of this amount, $26,984,856 will expire on June 30, 1998.
At December 31, 1997, for federal income tax purposes, cost of long-and
short-term investments is $211,085,518; the aggregate gross unrealized
appreciation is $21,774,568 and the aggregate gross unrealized depreciation is
$220,367, resulting in net unrealized appreciation of $21,554,201.
E. Distribution of Income and Gains--Fund declares and pays quarterly
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 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.
15
<PAGE>
Notes to Financial Statements (Continued)
December 31, 1997 (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:
Average Net Assets % Per Annum
=========================================================================
First $150 million........................................... .50 of 1%
Next $100 million............................................ .45 of 1%
Next $100 million............................................ .40 of 1%
Over $350 million............................................ .35 of 1%
For the six months ended December 31, 1997, the Fund recognized expenses of
approximately $15,400 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 Trustees 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 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 Trustees 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 calendar years
preceding retirement. Trustees with more than five but less than ten years of
service at retirement will receive a prorated reduced benefit. Under the Plan,
for the Trustees 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 calendar year.
At the Annual Meeting of Shareholders held on December 18, 1997, seven new
trustees and one incumbent trustee were elected to replace the seven trustees
that resigned, with the effective date of their resignation being December 31,
1997. In connection with their resignation from services as trustee of the Fund,
each resigning trustee will receive the vested portion of their retirement
benefits under the Fund's retirement plan. In addition, in recognition of their
years of service, VKAC will pay each resigning trustee an amount equal to the
non-vested portion of their retirement benefits. These retirement benefits are
being paid in lieu of receiving benefit payments over a ten-year period and will
not be paid to a resigning trustee who is an affiliated person of the Adviser.
3. Investment Transactions
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $24,410,750 and $22,734,983,
respectively.
16
<PAGE>
Dividend Reinvestment Plan
The Fund pays distributions in cash, but if you own more than 100 shares in your
own name, you may elect to participate in the Fund's dividend reinvestment plan
(the "Plan"). Under the Plan, shares will be issued by the Fund at net asset
value on a date determined by the Board of Trustees between the record and
payable dates on each distribution; however, if the market price, including
brokerage commissions, is less than the net asset value, the amount of the
distribution will be paid to the Plan Agent, which will buy such shares as are
available at prices below the net asset value. (If the market price is not
significantly less than the net asset value, it is possible that open market
purchases of shares may increase the market price so that such price plus
brokerage commissions would equal or exceed the net asset value of such shares).
If Plan Agent cannot buy the necessary shares at less than net asset value
before the distribution date, the balance of the distribution will be made in
authorized but unissued shares of the Fund at net asset value. The cost per
share will be the average cost, including brokerage commissions, of all shares
purchased. Since all shares purchased from the Fund are at net asset value,
there will be no dilution, and no brokerage commissions are charged on such
shares.
You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gain distributions does not relieve you of any income tax
which may be payable (or required to be withheld) on dividends or distributions.
You may begin or discontinue participation in the Plan at any time by written
notice to the address below. If you withdraw from the Plan, you may rejoin at
any time if you own the required 100 shares. Elections and terminations will be
effective for distributions declared after receipt. If you withdraw from the
Plan, a certificate for the whole shares and a check for the fractional shares,
if any, credited to your Plan account will be sent as soon as practicable after
receipt of your election to withdraw. Except for brokerage commissions, if any,
which are borne by Plan participants, all costs of the Plan are borne by the
Fund. The Fund reserves the right to amend or terminate the Plan on 30 days'
written notice prior to the record date of the distribution for which such
amendment or termination is effective.
Record stockholders should address all notices, correspondence, questions or
other communications about the Plan to:
Boston EquiServe LP
P.O Box 8200
Boston, MA 02266-8200
1-800-341-2929
If your shares are not held directly in your name, you should contact your
brokerage firm, bank or other nominee for more information and to see if your
nominee will participate in the Plan on your behalf. If you participate through
your broker and choose to move your account to another broker, you will need to
re-enroll in the Plan through your new broker.
17
<PAGE>
Funds Distributed by Van Kampen American Capital
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International/Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
VKAC MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAc High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term
Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales charges,
risks, and expenses. Please read it carefully before you invest or send money.
To view a current Van Kampen American Capital or Morgan Stanley fund prospectus
or to receive additional fund information, choose from one of the following:
. visit our web site at www.vkac.com--to view prospectuses, select
Investors' Place, then Download a Prospectus
. call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
. e-mail us by visiting www.vkac.com and selecting Investors' Place
18
<PAGE>
Van Kampen American Capital Bond Fund
Board of Trustees
David C. Arch
Rod Dammeyer
Howard J Kerr
Dennis J. McDonnell*--Chairman
Steven Muller
Theodore A. Myers
Hugo F. Sonnenschein
Wayne W. Whalen
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 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
Custodian
State Street Bank and Trust Co.
225 Franklin Street
Boston, Massachusetts 02105
Shareholder Servicing Agent
Boston EquiServe LP
P.O. Box 8200
Boston, Massachusetts 02266-8200
Legal Counsel
Sullivan & Worcester LLP
1025 Connecticut Ave, NW
Washington, DC 20036
Independent Accountants
Ernst & Young LLP
1221 McKinney Suite 2400
Houston, Texas 77010
=========================================
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 Account Services
=========================================
* "Interested" persons of the Fund, as defined in the
Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1998
All rights reserved.
/SM/ denotes a service mark of Van Kampen American Capital
Distributors, Inc.
19
<PAGE>
Results of Shareholder Votes
An Annual Meeting of Shareholders of the Fund was held on December 18,
1997, where shareholders voted on the election of Trustees and independent
public accountants.
1) With regard to the election of the following trustees:
<TABLE>
<CAPTION>
# of Shares
------------------------
In Favor Against
=======================================================================
<S> <C> <C> <C>
David C. Arch..................... 7,668,524 76,987
Rod Dammeyer...................... 7,669,244 76,268
Howard J Kerr..................... 7,668,564 76,947
Dennis J. McDonnell............... 7,668,675 76,836
Steven Muller..................... 7,664,415 81,097
Theodore A. Myers................. 7,664,859 80,652
Hugo F. Sonnenschein.............. 7,669,454 76,058
Wayne W. Whalen................... 7,669,738 75,774
</TABLE>
2) With regard to the ratification of Ernst & Young LLP as independent
accountants for the Fund, 7,629,477 shares voted in favor of the proposal,
35,089 shares voted against and 89,945 shares abstained.
20
<PAGE>
Bulk Rate
U.S. Postage
PAID
VAN KAMPEN
AMERICAN CAPITAL
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
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<NUMBER> 11
<NAME> Bond Fund
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 211,085,518
<INVESTMENTS-AT-VALUE> 232,639,719
<RECEIVABLES> 5,331,676
<ASSETS-OTHER> 87,587
<OTHER-ITEMS-ASSETS> 3,129
<TOTAL-ASSETS> 238,062,111
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 517,651
<TOTAL-LIABILITIES> 517,651
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 246,373,476
<SHARES-COMMON-STOCK> 11,362,465
<SHARES-COMMON-PRIOR> 11,362,465
<ACCUMULATED-NII-CURRENT> 256,455
<OVERDISTRIBUTION-NII> 0
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<NET-ASSETS> 237,544,460
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<NET-INVESTMENT-INCOME> 8,569,365
<REALIZED-GAINS-CURRENT> 501,668
<APPREC-INCREASE-CURRENT> 7,025,507
<NET-CHANGE-FROM-OPS> 16,096,540
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,749,495)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
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<GROSS-ADVISORY-FEES> 574,970
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<GROSS-EXPENSE> 765,606
<AVERAGE-NET-ASSETS> 236,832,168
<PER-SHARE-NAV-BEGIN> 20.259
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</TABLE>
