<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 6
Portfolio of Investments......................... 7
Statement of Assets and Liabilities.............. 11
Statement of Operations.......................... 12
Statement of Changes in Net Assets............... 13
Financial Highlights............................. 14
Notes to Financial Statements.................... 16
Dividend Reinvestment Plan....................... 19
</TABLE>
VLT SAR 8/97
<PAGE> 2
LETTER TO SHAREHOLDERS
August 4, 1997
Dear Shareholder,
As you know, Van Kampen American
Capital was acquired by Morgan
Stanley Group Inc., a world leader in
asset management. On February 5, [PHOTO]
1997, Morgan Stanley Group Inc. and
Dean Witter, Discover & Co. agreed to
merge; the merger was completed on
May 31, creating the combined company DENNIS J. MCDONNELL AND DON G. POWELL
of Morgan Stanley, Dean Witter,
Discover & Co. This preeminent global
financial services firm boasts a
market capitalization of $21 billion and leading market positions in securities,
asset management, and credit services. Additionally, I am very pleased to
announce that Philip N. Duff, formerly the chief financial officer of Morgan
Stanley, has joined Van Kampen American Capital as president and chief executive
officer. I will continue as chairman of the firm.
As the financial industry continues to witness unprecedented consolidations
and new partnerships, we believe that those firms who are leaders in all facets
of their business will be able to offer investors the greatest opportunities and
services as we move into the next century. We are confident that these changes
will continue to work to the benefit of our fund shareholders as we move into
the next century.
Another change that we believe will benefit shareholders is the elimination
of the Trust's June 1, 2001, termination date. Without a fixed maturity date,
the Trust will be able to hold onto its long-term assets more easily and
maintain its ability to generate relatively high dividends. As a result of this
change, the Limited Term High Income Trust has been renamed High Income Trust
II. The New York Stock Exchange symbol (VLT) will remain the same.
ECONOMIC REVIEW
Bond prices were volatile during the six months ended June 30. Initially,
prices fell as the economy rebounded, culminating at a 4.9 percent pace in GDP
in the first quarter. This strength, coupled with warnings by Federal Reserve
Board chairman Alan Greenspan that tighter monetary policy might be appropriate,
reignited fears of a rate hike. Then, on March 25, the Fed raised short-term
rates a modest one-quarter percentage point, a hike that market participants
viewed as the first of many. As a result, the 30-year Treasury bond's yield,
which moves in the opposite direction of its price, jumped above 7 percent for
the first time in six months.
By the end of April, the bond market turned its attention to a succession of
positive news about inflation and signs that economic growth had moderated. This
view was reinforced by the Fed's decision not to raise rates again when its
policymakers met in May. The yield on the 30-year Treasury bond stood at 6.79
percent by the end of June,
Continued on page two
1
<PAGE> 3
up slightly from 6.64 percent at the end of December, but down sharply from the
7.17 percent high reached in mid April.
High-yield corporate bonds outperformed Treasury securities and
investment-grade corporate bonds throughout the first half of 1997. A vigorous
economy and decline in the number of corporate bond defaults contributed to
their strong performance. In addition, heavy cash flows from retail and
institutional investors into high yield mutual funds more than offset the
potentially negative effects of a surge in supply. When interest rates rose in
March, the higher level of income generated by these bonds helped offset the
decline in their principal value. Within the noninvestment-grade sector,
higher-yielding B-rated and CCC-rated bonds outperformed BB-rated bonds.
FUND STRATEGY
We maintained a portfolio heavily weighted in noninvestment-grade U.S.
corporate bonds. As of June 30, approximately 35 percent of the Trust's
long-term investments were BB-rated, which is the highest quality rating within
the non-investment-grade category, and 55 percent were B-rated. Because both
categories of bonds tend to pay higher yields than investment-grade bonds, they
usually have outperformed 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. These bonds also tend to perform well when economic
growth accelerates, because this improves prospects for their credit quality.
We maintain a relatively large number of BB-rated holdings, despite their
lower yield levels as compared to B-rated issues. Because the Trust is exposed
to additional market rate risk due to its leveraged structure, we believe its
holdings should be relatively defensive. Using leverage, the Trust borrows
short-term funds to purchase long-term securities, thereby providing
above-market levels of dividend income to common shareholders. It should be
noted, however, that a rise in short-term rates would have an unfavorable effect
on the dividend-paying ability of the common shares and could negatively impact
the share price.
Approximately 2 percent of the Trust's long-term investments were rated A to
AAA or comprised of cash-equivalent securities, 5 percent were BBB-rated, the
lowest rating in the investment-grade category, and 3 percent were non-rated.
The relatively large position in short-term investments on June 30 was a result
of tender offers and calls by issuers who chose to retire high-yielding debt.
Most of the tenders and calls occurred in May, when about 15 percent of the
Trust's gross assets were retired prematurely. Companies were able to retire
bonds early because, within a favorable economic environment, they had access to
other less expensive financing options, such as bank loans and new stock
issuance. Looking ahead, we hope to reinvest the Trust's cash in
noninvestment-grade bonds similar to those currently held in the portfolio.
Continued on page three
2
<PAGE> 4
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality
as of June 30, 1997*
<TABLE>
<S> <C>
A.............. 1.7%
BBB............ 5.2%
BB............. 35.0%
B.............. 54.8%
Non-Rated...... 3.3%
</TABLE>
* As a Percentage of Long-Term Investments
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's.
During the six months ended June 30, trading was limited because market
conditions offered few opportunities to add value over existing holdings. The
average yield of bonds in the portfolio was higher than market yields, and the
difference between the yields of B-rated and BB-rated securities was narrow
compared to historical spreads. As a result, there often was not enough reward
to justify the additional credit risk of purchasing securities rated B or lower.
Purchases were selectively chosen by our research team and focused on bonds
with the potential to outperform other securities. Purchases included Aetna
Industries, a small auto-parts manufacturer, and CapStar Broadcasting, a radio
broadcast company. Sales focused on bonds whose issuers experienced earnings
shortfalls, including Speedy Muffler King and Loehmann's Corp. Both bonds were
sold at premium prices.
The Trust's portfolio remains well-diversified in its industry weightings.
Among its leading sectors are telecommunications, oil and gas drilling and
servicing, and printing and publishing.
As of June 30, the average duration of the Trust, which is a measure of its
sensitivity to changing interest rates, was 2.72 years, and the average maturity
of its assets was 5.50 years. Our goal is to lengthen the duration and maturity
of the Trust gradually over time to in order to seek to enhance its
income-earning ability. The elimination of the Trust's June 1, 2001 termination
date, which was approved by its Board of Directors in February following
shareholder approval in October, allows us the opportunity to accomplish that
goal.
<TABLE>
<CAPTION>
TOP 5 PORTFOLIO INDUSTRY HOLDINGS BY SECTOR*
AS OF JUNE 30, 1997
<S> <C>
Electric/Telecommunications................... 18.3%
Oil and Gas................................... 12.0%
Printing/Publishing........................... 7.4%
Buildings/Real Estate......................... 5.9%
Conglomerate and Manufacturing................ 5.5%
</TABLE>
*As a Percentage of Long-Term Investments
Continued on page four
3
<PAGE> 5
PERFORMANCE SUMMARY
For the six-month period ended June 30, 1997, the Trust generated a total
return of 10.03 percent(1). This reflects a gain in market price per common
share from $9.3750 on December 31, 1996, to $9.8125 on June 30, 1997, plus
reinvestment of dividends totaling $.4800 per common share. Based upon the
monthly dividend of $.0800 per share and the closing common stock price on June
30, 1997, the Trust generated a distribution rate of 9.78 percent(3). The
Trust's preferred share costs increased moderately due to the rise in short-term
interest rates.
[DIVIDEND HISTORY GRAPH]
Six-month Dividend History
For the Period Ended June 30, 1997
<TABLE>
<CAPTION>
Distribution per Common Share
<S> <C>
Jan 1997............................. $.08
Feb 1997............................. $.08
Mar 1997............................. $.08
Apr 1997............................. $.08
May 1997............................. $.08
Jun 1997............................. $.08
</TABLE>
The dividend history represents past performance of the Trust and does
not predict the Trust's FUTURE distributions.
OUTLOOK
We continue to see strength in the economy, but we do not believe that the
4.9 percent growth pace of the first quarter will be repeated in the final
quarters of this year. While labor productivity and manufacturing remained
strong in the second quarter, retail sales fell, and the unemployment rate,
which had slipped below 5.0 percent in April and May, edged up to that level in
June.
We expect that growth will accelerate again during the second half of the
year because the economy's strong underlying fundamentals remain intact,
including consumer confidence, job growth, and moderate inflation. As a result,
we believe the Federal Reserve may not raise rates again before year end. Given
this outlook, we expect the yield on the 30-year Treasury bond will range
between 6.25 and 6.75 percent for the remainder of the year.
We believe that the Trust's heavy weighting of relatively high quality
noninvestment-grade bonds and its relatively short average maturity should aid
in helping to limit future volatility stemming from changing market conditions.
In addition, the Trust is well-diversified among different securities and
different market sectors. We do not anticipate
Continued on page five
4
<PAGE> 6
making any major adjustments to the portfolio until market fundamentals shift
substantially, and we will monitor the economy as well as Fed policy in order to
recognize signs of fundamental change. In addition, we will seek a balance
between the Trust's total return and its dividend income, and look to add value
through security selection. Thank you for your continued confidence in Van
Kampen American Capital and your Trust's team of managers.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
5
<PAGE> 7
PERFORMANCE RESULTS FOR THE PERIOD ENDED JUNE 30, 1997
VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II
(NYSE TICKER SYMBOL--VLT)
<TABLE>
<CAPTION>
COMMON SHARE TOTAL RETURNS
<S> <C>
Six-month total return on market price(1)................... 10.03%
Six-month total return based on NAV(2)...................... 6.09%
DISTRIBUTION RATE
Distribution rate as a % of closing common stock
price(3)................................................. 9.78%
SHARE VALUATIONS
Net asset value............................................. $ 8.32
Closing common stock price.................................. $9.8125
One year high common stock price (06/30/97)................. $ 9.875
One year low common stock price (04/28/97).................. $ 9.000
Preferred share rate(4)..................................... 5.400%
</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 Trust'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 monthly annualized distributions of the
Trust at the end of the period and not the earnings of the Trust.
(4) See "Notes to Financial Statements" footnote #4, for more information
concerning Preferred Share reset periods.
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS
AEROSPACE & DEFENSE 2.7%
$ 550 Dyncorp, Inc., 144A Private Placement (b)...... 9.500% 03/01/07 $ 555,500
1,950 Sequa Corp..................................... 9.625 10/15/99 2,008,500
450 Sequa Corp..................................... 9.375 12/15/03 462,375
------------
3,026,375
------------
AUTOMOBILE 1.7%
700 Aetna Industries, Inc. ........................ 11.875 10/01/06 764,750
500 Collins & Aikman Products Co. ................. 11.500 04/15/06 567,500
500 Exide Corp. ................................... 10.750 12/15/02 527,500
------------
1,859,750
------------
BUILDINGS & REAL ESTATE 4.8%
1,900 American Standard, Inc. ....................... 10.875 05/15/99 2,023,500
400 Clark Material Handling........................ 10.750 11/15/06 421,000
1,600 Doman Industries Ltd........................... 8.750 03/15/04 1,552,000
1,300 Johns Manville International Group, Inc........ 10.875 12/15/04 1,449,500
------------
5,446,000
------------
CHEMICAL 2.2%
1,694 ISP Holdings, Inc. ............................ 9.750 02/15/02 1,795,640
700 Pioneer Amers Acquisition Corp., 144A Private
Placement (b) ................................. 9.250 06/15/07 693,000
------------
2,488,640
------------
CONTAINERS, PACKAGING & GLASS 1.7%
400 Owens Illinois, Inc............................ 9.750 08/15/04 421,000
700 S.D. Warren Co................................. 12.000 12/15/04 784,000
675 Sweetheart Cup, Inc. .......................... 9.625 09/01/00 685,125
------------
1,890,125
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING 3.8%
850 Communications & Power Industries, Inc......... 12.000 08/01/05 943,500
1,500 Newflo Corp. .................................. 13.250 11/15/02 1,620,000
1,650 Talley Manufacturing & Technology, Inc......... 10.750 10/15/03 1,732,500
------------
4,296,000
------------
ECOLOGICAL 0.2%
200 Norcal Waste Systems, Inc...................... 13.250 11/15/05 226,000
------------
ELECTRONICS 3.9%
1,500 Advanced Micro Devices, Inc. .................. 11.000 08/01/03 1,665,000
1,850 Bell & Howell Co. (a).......................... 0/11.500 03/01/05 1,480,000
1,150 Exide Electronics Group, Inc. (Including 1,000
common stock warrants)......................... 11.500 03/15/06 1,244,000
------------
4,389,000
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE 4.3%
$2,450 American Annuity Group, Inc. .................. 11.125% 02/01/03 $ 2,597,000
500 Americredit Corp. ............................. 9.250 02/01/04 497,500
1,000 Contifinancial Corp. .......................... 8.375 08/15/03 1,025,000
650 Trizec Finance................................. 10.875 10/15/05 731,250
------------
4,850,750
------------
GROCERY 1.4%
640 Pantry, Inc. .................................. 12.000 11/15/00 660,800
900 Pathmark Stores, Inc. ......................... 9.625 05/01/03 870,750
------------
1,531,550
------------
HEALTHCARE 3.1%
1,000 Merit Behavioral Care Corp. ................... 11.500 11/15/05 1,110,000
1,100 Tenet Healthcare Corp. ........................ 8.625 12/01/03 1,144,000
700 Tenet Healthcare Corp. ........................ 10.125 03/01/05 766,500
525 Urohealth Systems, Inc. (Including 525 Common
Stock Warrants), 144A Private Placement (b).... 12.500 04/01/04 517,125
------------
3,537,625
------------
HOTEL, MOTEL, INNS & GAMING 4.3%
1,500 Argosy Gaming Co............................... 13.250 06/01/04 1,447,500
800 Coast Hotels & Casinos, Inc. .................. 13.000 12/15/02 894,000
950 Grand Casino, Inc. ............................ 10.125 12/01/03 992,750
1,500 Trump Atlantic City Associates................. 11.250 05/01/06 1,470,000
------------
4,804,250
------------
LEISURE 3.2%
700 Cobblestone Golf Group, Inc. .................. 11.500 06/01/03 735,000
1,650 Selmer, Inc. .................................. 11.000 05/15/05 1,823,250
1,000 Viacom International, Inc. .................... 10.250 09/15/01 1,085,000
------------
3,643,250
------------
MACHINERY 0.2%
150 Terex Corp. ................................... 13.250 05/15/02 168,750
------------
MINING, STEEL, IRON & NON-PRECIOUS METAL 3.9%
750 Algoma Steel, Inc. ............................ 12.375 07/15/05 834,375
1,550 Armco, Inc. ................................... 11.375 10/15/99 1,604,250
700 Carbide/Graphite Group, Inc. .................. 11.500 09/01/03 766,500
130 Inland Steel Co................................ 12.000 12/01/98 138,775
1,050 WCI Steel, Inc. ............................... 10.000 12/01/04 1,089,375
------------
4,433,275
------------
OIL & GAS 9.8%
1,150 Clark R & M Holdings, Inc. .................... * 02/15/00 874,000
900 Dawson Production Services, Inc. .............. 9.375 02/01/07 918,000
600 Falcon Drilling................................ 9.750 01/15/01 622,500
1,400 Giant Industries, Inc. ........................ 9.750 11/15/03 1,442,000
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OIL & GAS (CONTINUED)
$2,850 Global Marine, Inc. ........................... 12.750% 12/15/99 $ 2,992,500
1,500 KCS Energy, Inc. .............................. 11.000 01/15/03 1,623,750
350 Parker Drilling Co. ........................... 9.750 11/15/06 368,375
1,550 Petroleum Heat & Power, Inc. .................. 12.250 02/01/05 1,627,500
575 Pride Petroleum Services, Inc. ................ 9.375 05/01/07 600,875
------------
11,069,500
------------
PERSONAL & NON-DURABLE 3.0%
1,150 Revlon Consumer Products Corp. ................ 9.375 04/01/01 1,184,500
450 Revlon Consumer Products Corp. ................ 10.875 07/15/10 457,875
1,510 Samsonite Corp. ............................... 11.125 07/15/05 1,706,300
------------
3,348,675
------------
PRINTING, PUBLISHING & BROADCASTING 9.9%
300 Cablevision Systems Corp. ..................... 10.750 04/01/04 309,750
450 Cablevision Systems Corp. ..................... 9.875 05/15/06 479,250
1,050 Cablevision Systems Corp. ..................... 10.500 05/15/16 1,144,500
900 Capstar Radio Broadcasting, 144A Private
Placement (b).................................. 9.250 07/01/07 870,750
1,450 Century Communications Corp. .................. 8.875 01/15/07 1,421,000
550 Comcast Corp. ................................. 9.375 05/15/05 578,875
400 Comcast Corp. ................................. 9.125 10/15/06 418,000
650 EZ Communications, Inc. ....................... 9.750 12/01/05 689,000
500 Heritage Media Services........................ 11.000 06/15/02 527,500
850 International Cabletel, Inc. (a)............... 0/12.750 04/15/05 654,500
400 International Cabletel, Inc. (a)............... 0/11.500 02/01/06 276,000
450 Katz Media Corp. .............................. 10.500 01/15/07 443,250
2,150 SCI Television, Inc. .......................... 11.000 06/30/05 2,262,875
800 Young Broadcasting, Inc. ...................... 11.750 11/15/04 888,000
200 Young Broadcasting, Inc. ...................... 10.125 02/15/05 209,500
------------
11,172,750
------------
RETAIL 3.5%
450 Cole National Group, Inc. ..................... 11.250 10/01/01 493,875
1,050 Cole National Group, Inc. ..................... 9.875 12/31/06 1,105,125
500 Hosiery Corp. America, Inc. (Including 500
common stock warrants)......................... 13.750 08/01/02 585,000
1,600 Waban, Inc..................................... 11.000 05/15/04 1,804,000
------------
3,988,000
------------
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS 7.3%
$ 550 Centennial Cellular Corp. ..................... 8.875% 11/01/01 $ 544,500
450 Centennial Cellular Corp. ..................... 10.125 05/15/05 469,125
350 Echostar Communications Corp. (a).............. 0/12.875 06/01/04 294,000
350 Gray Communications Systems, Inc. ............. 10.625 10/01/06 371,000
400 Intermedia Communications of Florida, Inc.
(Including 400 common stock warrants).......... 13.500 06/01/05 504,000
450 Intermedia Communications of
Florida, Inc. (a).............................. 0/12.500 05/15/06 315,000
1,400 IXC Communications, Inc. ...................... 12.500 10/01/05 1,599,500
1,500 Panamsat L.P. ................................. 9.750 08/01/00 1,575,000
850 Pricellular Wireless Corp. (a)................. 0/12.250 10/01/03 796,875
850 Pricellular Wireless Corp. .................... 10.750 11/01/04 888,250
1,100 Teleport Communications Group (a).............. 0/11.125 07/01/07 794,750
------------
8,152,000
------------
TEXTILES 2.2%
1,250 Anvil Knitwear, Inc., 144A Private
Placement (b).................................. 10.875 03/15/07 1,265,625
1,100 Dan River, Inc. ............................... 10.125 12/15/03 1,171,500
------------
2,437,125
------------
TRANSPORTATION 1.2%
1,300 U.S. Air, Inc. ................................ 8.625 09/01/98 1,313,000
------------
UTILITIES 3.9%
1,700 AES Corp. ..................................... 10.250 07/15/06 1,861,500
1,200 El Paso Electric Co. .......................... 8.250 02/01/03 1,251,000
1,250 National Energy Group, Inc. ................... 10.750 11/01/06 1,293,750
------------
4,406,250
------------
TOTAL LONG-TERM INVESTMENTS 82.2%
(Cost $89,940,610).......................................................... 92,478,640
REPURCHASE AGREEMENT 15.0%
J.P. Morgan Securities, (U.S. Treasury Note, $13,668,000 par, 8.875% coupon,
due 02/15/19, dated 06/30/97, to be sold on 07/01/97 at $16,852,762).......... 16,850,000
------------
TOTAL INVESTMENTS 97.2%
(Cost $106,790,610)......................................................... 109,328,640
OTHER ASSETS IN EXCESS OF LIABILITIES 2.8%................................... 3,106,984
------------
NET ASSETS 100.0%............................................................ $112,435,624
============
</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.
See Notes to Financial Statements
10
<PAGE> 12
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments, including repurchase agreements of
$16,850,000 (Cost $106,790,610)........................... $109,328,640
Cash........................................................ 7,417
Receivables:
Interest.................................................. 2,025,255
Investments Sold.......................................... 1,458,263
Other....................................................... 1,130
------------
Total Assets.......................................... 112,820,705
------------
LIABILITIES:
Payables:
Income Distributions - Common and Preferred Shares........ 143,872
Investment Advisory Fee................................... 69,381
Affiliates................................................ 17,357
Accrued Expenses............................................ 82,079
Deferred Compensation and Retirement Plans.................. 72,392
------------
Total Liabilities..................................... 385,081
------------
NET ASSETS.................................................. $112,435,624
============
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, 100,000,000 shares
authorized, 900 outstanding with liquidation preference of
$50,000 per share)........................................ $ 45,000,000
------------
Common Shares ($.01 par value with an unlimited number of
shares authorized, 8,109,000 shares
issued and outstanding)................................... 81,090
Paid in Surplus............................................. 84,279,775
Net Unrealized Appreciation................................. 2,538,030
Accumulated Undistributed Net Investment Income............. 1,197,868
Accumulated Net Realized Loss............................... (20,661,139)
------------
Net Assets Applicable to Common Shares................ 67,435,624
------------
NET ASSETS.................................................. $112,435,624
============
NET ASSET VALUE PER COMMON SHARE ($67,435,624 divided by
8,109,000 shares outstanding)............................. $ 8.32
============
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $5,373,193
Other....................................................... 80,051
----------
Total Income.......................................... 5,453,244
----------
EXPENSES:
Investment Advisory Fee..................................... 416,338
Preferred Share Maintenance................................. 59,852
Shareholder Services........................................ 24,610
Custody..................................................... 19,977
Trustees Fees and Expenses.................................. 15,034
Legal....................................................... 5,975
Other....................................................... 76,965
----------
Total Expenses........................................ 618,751
----------
NET INVESTMENT INCOME....................................... $4,834,493
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 895,896
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 3,159,381
End of the Period......................................... 2,538,030
----------
Net Unrealized Depreciation During the Period............... (621,351)
----------
NET REALIZED AND UNREALIZED GAIN............................ $ 274,545
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $5,109,038
==========
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1997 and
the Year Ended December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................. $ 4,834,493 $ 9,960,331
Net Realized Gain...................................... 895,896 1,318,205
Net Unrealized Appreciation/Depreciation During the
Period............................................... (621,351) 415,545
------------ ------------
Change in Net Assets from Operations................... 5,109,038 11,694,081
------------ ------------
Distributions from Net Investment Income:
Common Shares........................................ (3,891,801) (7,783,848)
Preferred Shares..................................... (1,145,388) (2,368,052)
------------ ------------
Total Distributions.................................... (5,037,189) (10,151,900)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.... 71,849 1,542,181
NET ASSETS:
Beginning of the Period................................ 112,363,775 110,821,594
------------ ------------
End of the Period (Including accumulated undistributed
net investment income of $1,197,868 and $1,400,564,
respectively)........................................ $112,435,624 $112,363,775
============ ============
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
June 30, --------------------------
1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period (a)..... $8.307 $8.117 $7.320 $8.982
------- ------ ------ --------
Net Investment Income.......................... .596 1.228 1.273 1.283
Net Realized and Unrealized Gain/Loss.......... .034 .214 .806 (1.530)
------- ------ ------ --------
Total from Investment Operations................. .630 1.442 2.079 (.247)
------- ------ ------ --------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders.................. .480 .960 .960 1.180
Common Share Equivalent of Distributions Paid
to Preferred Shareholders.................. .141 .292 .322 .235
Return of Capital Paid to Common
Shareholders................................. -0- -0- -0- -0-
------- ------ ------ --------
Total Distributions.............................. .621 1.252 1.282 1.415
------- ------ ------ --------
Net Asset Value, End of the Period............... $8.316 $8.307 $8.117 $7.320
======= ====== ====== ========
Market Price Per Share at End of the Period...... $9.8125 $9.375 $8.750 $7.500
Total Investment Return at Market Price (b)...... 10.03%* 18.91% 30.33% (12.94%)
Total Return at Net Asset Value (c).............. 6.09%* 15.15% 25.19% (5.70%)
Net Assets at End of the Period (In millions).... $112.4 $112.4 $110.8 $104.4
Ratio of Expenses to Average Net Assets
Applicable to Common Shares.................... 1.86% 1.89% 1.96% 1.97%
Ratio of Expenses to Average Net Assets.......... 1.11% 1.12% 1.15% 1.17%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d)......... 11.11% 11.58% 12.09% 12.87%
Portfolio Turnover............................... 46%* 94% 124% 125%
</TABLE>
(a) Net Asset Value at April 28, 1989 of $11.160 is adjusted for common and
preferred share offering costs of $.395 per share. Net asset value at
December 31, 1991 of $7.619 is adjusted for redemption costs associated with
the 9.5% cumulative preferred shares and offering costs associated with the
auction preferred shares of $.332 per share.
(b) 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 Trust's dividend reinvestment plan.
(c) Total Return at Net Asset Value (NAV) reflects the change in value of the
Trust's assets with reinvestment of dividends based upon NAV.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
* Non-Annualized
N/A = Not Applicable
14
<PAGE> 16
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 28, 1989
(Commencement
Year Ended December 31, of Investment
- ---------------------------------------- Operations) to
1993 1992 1991 1990 December 31, 1989
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
$7.916 $7.287 $5.884 $9.307 $10.765
------ ------ ------ ------ -------
1.422 1.691 1.512 1.908 1.283
1.021 .415 1.686 (3.410) (1.461)
------ ------ ------ ------ -------
2.443 2.106 3.198 (1.502) (0.178)
------ ------ ------ ------ -------
1.200 .975 .920 1.238 .909
.177 .502 .543 .666 .371
-0- -0- -0- .017 -0-
------ ------ ------ ------ -------
1.377 1.477 1.463 1.921 1.280
------ ------ ------ ------ -------
$8.982 $7.916 $7.619 $5.884 $ 9.307
====== ====== ====== ====== =======
$9.750 $9.375 $7.500 $5.250 $9.000
17.01% 39.58% 62.27% (30.57%) (18.34%)*
30.08% 16.92% 46.26% (24.92%) (15.21%)*
$117.8 $109.2 $108.2 $94.1 $135.5
1.72% 1.73% 2.73% 2.12% 1.57%
1.05% 1.02% 1.52% 1.11% N/A
14.41% 14.49% 13.59% 15.99% 12.91%
140% 145% 97% 65% 31%*
</TABLE>
See Notes to Financial Statements.
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital High Income Trust II (the "Trust," formerly known as
Van Kampen American Capital Limited Term High Income Trust) is registered as a
diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The Trust's investment objective is to provide
high current income, consistent with preservation of capital, by investing in a
portfolio of medium or lower grade fixed-income securities, or non-rated
securities of comparable quality. The Trust commenced investment operations on
April 28, 1989.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments are stated at value using market quotations,
prices provided by market makers or estimates obtained from yield data relating
to instruments or securities with similar characteristics 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
Trust 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 Trust 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 June 30, 1997, there were no when
issued or delayed delivery purchase commitments.
The Trust may invest in repurchase agreements, which are short-term
investments in which the Trust acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
Repurchase agreements are fully collateralized by the underlying debt security.
The Trust 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 Trust.
16
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Bond
discounts are amortized over the expected life of each applicable security.
D. FEDERAL INCOME TAXES--It is the Trust'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 Trust 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 December 31, 1996, the Trust had an accumulated capital loss
carryforward for tax purposes of $21,549,013 which expires between December 31,
1998 and December 31, 2003, respectively.
At June 30, 1997, for federal income tax purposes, cost for long- and
short-term investments is $106,790,610, the aggregate gross unrealized
appreciation is $2,752,695 and the aggregate gross unrealized depreciation is
$214,665, resulting in net unrealized appreciation of $2,538,030.
E. DISTRIBUTION OF INCOME AND GAINS--The Trust declares and pays dividends from
net investment income to common shareholders monthly. Net realized gains, if
any, are distributed annually to common shareholders. Distributions from net
realized gains for book purposes may include short-term capital gains, which are
included in ordinary income for tax purposes.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly of .75% of the average net assets of the Trust.
For the six months ended June 30, 1997, the Fund recognized expenses of
approximately $2,300 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the six months ended June 30, 1997, the Trust recognized expenses of
approximately $23,700 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
legal and certain shareholder services to the Trust.
17
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Certain officers and trustees of the Trust are also officers and directors
of VKAC. The Trust does not compensate its officers or trustees who are officers
of VKAC.
The Trust 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 Trust. The maximum annual
benefit per trustee under the plan is equal to the trustees' annual retainer
fee, which is currently $2,500.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments were $47,125,831 and $63,563,160, respectively.
4. AUCTION PREFERRED SHARES
The Trust has outstanding 900 shares of Auction Preferred Shares ("APS").
Dividends are cumulative and the rate is currently reset every 28 days through
an auction process. The rate in effect on June 30, 1996, was 5.400%. During the
year ended December 31, 1996, the rates ranged from 4.50% to 5.45%.
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.
The APS are redeemable at the option of the Trust in whole or in part at a
price of $50,000 per share plus accumulated and unpaid dividends. The Trust is
subject to certain asset coverage tests, and the APS are subject to mandatory
redemption if the tests are not met.
18
<PAGE> 20
DIVIDEND REINVESTMENT PLAN
The Trust offers a Dividend Reinvestment Plan (the "Plan") pursuant to which
Common Shareholders who are participants in the Plan may have all distributions
of dividends and capital gains distributions automatically reinvested in Common
Shares of the Trust. All Common Shareholders are deemed to be participants in
the Plan unless they specifically elect not to participate. Common Shareholders
who elect not to participate in the Plan will receive all distributions of
dividends and capital gains in cash paid by check mailed directly to the Common
Shareholder by the Trust's dividend disbursing agent.
HOW THE PLAN WORKS
State Street Bank and Trust Company, as your Plan Agent, serves as agent for the
Common Shareholders in administering the Plan. After the Trust declares a
dividend or determines to make a capital gains distribution, the Plan Agent
will, as agent for the participants, receive the cash payment and use it to buy
Common Shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. The Trust will not issue any new Common Shares
in connection with the Plan. All reinvestments are in full and fractional Common
Shares, carried to three decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid subsequent to written
notice of the change sent to all Common Shareholders of the Trust at least 90
days before the record date for the dividend or distribution. The Plan also may
be amended or terminated by the Plan Agent, with the written consent of the
Trust, by providing at least 90 days written notice to all Participants in the
Plan.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
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 gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
All Common Shareholders of the Trust are deemed to be participants in the Plan
unless they specifically elect not to participate. You may withdraw from the
Plan at any time by calling 1-800-341-2929 or by writing State Street Bank and
Trust Company. If you withdraw, you will receive, without charge, a share
certificate issued in your name for all full Common Shares credited to your
account under the Plan, and a cash payment will be made for any fractional
Common Share credited to your account under the Plan. You may again elect to
participate in the Plan at any time by calling 1-800-341-2929 or writing to the
Trust at:
2800 Post Oak Blvd., Houston, TX 77056, Attn: Closed-End Funds
19
<PAGE> 21
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.
20
<PAGE> 22
VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*--Chairman
THEODORE A. MYERS
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
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*
Vice President
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
CUSTODIAN AND
TRANSFER AGENT
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
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, 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.
RESULTS OF SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on June 28, 1997, where
shareholders voted on a new investment advisory agreement, the election of
Trustees and the selection of independent public accountants. With regard to the
approval of a new investment advisory agreement between Van Kampen American
Capital Investment Advisory Corp. and the Trust, 6,224,172 shares voted for the
proposal, 163,850 shares voted against, 155,172 shares abstained and 0 shares
represented broker non-votes. With regard to the election of Rod Dammeyer as
elected trustee by the preferred shareholders of the Trust 704 shares voted in
his favor, 0 shares withheld. With regard to the election of Wayne W. Whalen as
elected trustee by the common shareholders of the Trust, 6,382,181 shares voted
in his favor, 160,308 shares withheld. The other trustees of the Fund whose
terms did not expire in 1997 are Dennis J. McDonnell, Theodore A. Myers, Hugo
Sonnenschein, David C. Arch and Howard J Kerr. With regard to the ratification
of KPMG Peat Marwick LLP as independent public accountants for the Trust,
6,410,591 shares voted in favor of the proposal, 42,589 shares voted against,
90,013 shares abstained and 0 shares represented broker non-votes.
21
