<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders...................... 1
Performance Results......................... 3
Portfolio Management Review................. 4
Portfolio of Investments.................... 6
Statement of Assets and Liabilities......... 7
Statement of Operations..................... 8
Statement of Changes in Net Assets.......... 9
Financial Highlights........................ 10
Notes to Financial Statements............... 11
</TABLE>
TARG SAR 4/97
<PAGE>
LETTER TO SHAREHOLDERS
[PHOTO OF DENNIS J. MCDONNELL AND DON G. POWELL APPEARS HERE]
DENNIS J. MCDONNELL AND DON G. POWELL
March 27, 1997
Dear Shareholder,
As mentioned in your previous report, VK/AC Holding, Inc., the parent company
of Van Kampen American Capital, Inc., was acquired by Morgan Stanley Group Inc.,
a world leader in asset management and investment banking. The transaction was
completed in October, and we look forward to exploring the opportunities it
creates for investors. As part of the acquisition, Van Kampen American Capital
became the distributor of Morgan Stanley retail funds on January 2, 1997.
More recently, on February 5, 1997, it was announced that Morgan Stanley
Group Inc. and Dean Witter, Discover & Co. agreed to merge. A proxy will be
mailed to you at the end of April that explains the transaction and asks for
your vote of approval. The combined company will be a preeminent global finan-
cial services firm, with leading market positions in securities, asset manage-
ment and credit services. As the financial industry continues to witness
unprecedented consolidations and new partnerships, we believe those firms that
want to offer investors the greatest opportunities and services in the next
century must be market leaders in all facets of their business.
ECONOMIC REVIEW
During the six-month reporting period, inflation remained low and the pace
of economic growth moderated. Early in 1996, various indicators pointed to an
overly robust rate of economic activity. Despite seeming evidence of infla-
tion, the Federal Reserve Board held short-term interest rates steady, and
events over the reporting period proved the wisdom of this stable monetary
policy. Economic growth slowed, commodity prices receded, and inflation re-
mained benign. Wholesale prices fell by 0.3 percent and 0.4 percent during
January and February 1997, respectively, and the producer price index, which
excludes food and energy sectors, rose only 0.5 percent over the 12 months
ended in February.
Other indicators signaled generally moderate economic growth as well. Hous-
ing starts and existing home sales fell slightly over the reporting period,
while industrial production and consumer confidence rose sharply. Unemployment
remained low at 5.3 percent, leading to the reemergence of mild upward pres-
sure on wages. Inflationary implications of higher labor costs were offset by
reports that the nation's businesses operated at only 83.3 percent of capacity
in February--well below the level usually associated with production bottle-
necks and price hikes.
Continued on page two
1
<PAGE>
MARKET REVIEW
Fixed-income markets benefited from receding inflationary expectations over
the past six months. At the height of investor concerns about inflation in Ju-
ly, the yield on the Treasury's benchmark 30-year bond reached 7.2 percent, up
from just 5.95 percent at the beginning of the year. Then, as the economy
slowed and the Federal Reserve held short-term rates steady, long-term yields
gradually fell to 6.64 percent by year-end. Renewed signs of economic vitality
pushed the yield on 30-year Treasury bonds back to 6.80 percent by the end of
the period.
Compared to 1995, when most sectors of the taxable fixed-income market gener-
ated double-digit gains, 1996 was a year of lackluster performance. The Lehman
Brothers Aggregate Bond Index returned 4.16 percent for the 12-month period
ended December 31, 1996, with short- and intermediate-term bonds outperforming
long-term issues. Lower-rated corporate bonds also outperformed other fixed-in-
come investments, as investors felt comfortable enough to stretch for yield
given the overall strength of the economy. For the year, 30-year Treasury bonds
lost approximately one percent on a total-return basis. Treasury-bond losses
might have been larger, but heavy foreign buying, especially among Japanese in-
vestors, helped control losses.
OUTLOOK
We expect that renewed momentum in the U.S. economy will lead to a series of
modest interest-rate hikes by the Federal Reserve. While we do not believe that
the threat of inflation is a serious concern, some warning signs are present,
including strong job growth, high consumer confidence, and a mild upturn in em-
ployment costs. In this environment, a moderate rise in interest rates is like-
ly.
In addition to the possibility of higher domestic rates, the risk of external
shocks to the fixed-income market is growing. Monetary policy has been unusu-
ally accommodative in many foreign countries. If these economies catch fire in
1997, the resulting demand for capital could divert buying power from the U.S.
credit market. Since foreign investors have become the marginal buyers of Amer-
ican bonds, we believe that increased competition for the global fixed-income
dollar could also exert mild downward pressure on bond prices over the year.
Additional details about your Fund, including a question and answer section
with your portfolio management team, is provided in this report. We appreciate
your continued confidence in your investment with Van Kampen American Capital.
Sincerely,
/s/ Don G. Powell /s/ Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.
2
<PAGE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED FEBRUARY 28, 1997
VAN KAMPEN AMERICAN CAPITAL GOVERNMENT TARGET FUND
TOTAL RETURNS
<TABLE>
<S> <C>
Six-month total return based on NAV/1/............................... 2.20%
Six-month total return/2/............................................ (0.89%)
One-year total return/2/............................................. (0.15%)
Five-year average annual total return/2/............................. 4.36%
Life-of-Fund average annual total return/2/.......................... 6.10%
Commencement Date.................................................... 09/11/90
</TABLE>
/1/Assumes reinvestment of all distributions for the period.
/2/Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge of 3.00% when the Fund
was offered for sale.
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth
more or less than their original cost.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE>
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL GOVERNMENT TARGET FUND
We recently spoke with the management team of the Van Kampen American Capital
Government Target Fund about the key events and economic forces that shaped
the markets during the first half of the Fund's fiscal year. The team includes
John R. Reynoldson, portfolio manager, and Peter W. Hegel, chief investment
officer for fixed-income investments. The following excerpts reflect their
views on the Fund's performance during the six-month period ended February 28,
1997.
Q WHAT APPROACH HAVE YOU TAKEN TO MANAGING THE FUND AS IT NEARS ITS MATU-
RITY DATE?
A With approximately nine months remaining until the Fund matures and its
assets are distributed to shareholders, our goal is to maintain a compet-
itive level of current income within the context of a relatively short-term
portfolio. We continue to structure the portfolio to seek a slightly higher
return than what is available from other short-term vehicles with a comparable
maturity.
As a result, the Fund's performance is very much linked to the ebb and flow
of short-term interest rates.
Q WHAT HAPPENED TO INTEREST RATES OVER THE PAST SIX MONTHS?
A The first three months of the reporting period, September through Novem-
ber 1996, were generally bullish. Bond prices moved in an upward trend as
market participants concluded that the economy's weakness would convince the
Federal Reserve Board to keep short-term interest rates stable--or possibly
pave the way for lower rates. This sentiment was reflected in the direction of
interest rates across the board; the rate on two-year Treasury securities, for
example, fell to 5.6 percent at the end of November, down from 6.3 percent
just three months earlier.
In December, however, indications that the economy was gaining momentum
spurred fears that accelerating economic growth would push inflation higher,
and that the Fed would respond by raising short-term interest rates. By the
end of February, the rate on the two-year Treasury had climbed to approxi-
mately 6.1 percent.
Q HOW DID THE FUND PERFORM WITHIN THIS MARKET ENVIRONMENT?
A Based on its decrease in net asset value from $15.34 per share on August
31, 1996 to $14.81 per share on February 28, 1997, the Fund generated a
total return of 2.20 percent/1/ for the six months ended February 28, 1997. In
comparison, the Lehman Brothers Short U.S. Government Index posted a total
return of 3.83 percent for the same period. This is a broad-based index that
measures the performance of all U.S. government agency and Treasury securities
with maturities of one to five years. Keep in mind that this unmanaged index
does not reflect any commissions or fees that would be paid by an investor
purchasing the securities it represents.
4
<PAGE>
Since its September 11, 1990 inception, the Fund has achieved an average an-
nual total return of 6.60 percent/1/, based on net asset value. Please refer to
the chart on page three for additional Fund performance results.
Q HOW DID YOU POSITION THE FUND'S PORTFOLIO IN LIGHT OF
CURRENT CONDITIONS?
A We don't have a great deal of flexibility in managing the Fund because of
its short-term nature, so our focus has been on maintaining the credit
quality of the portfolio and the integrity of the Fund's net asset value.
In doing so, we limit our investments to short-term Government Agency obliga-
tions and other short-term investments of high quality, while remaining open to
opportunities to bolster the Fund's income stream with mortgage-backed securi-
ties issued by federal agencies, such as the Federal National Mortgage Associa-
tion (FNMA).
[PIE CHARTS APPEAR HERE]
Portfolio Composition by Sector*
as of February 28, 1997
FNMA 15-year Security 28.6%
FNMA Discount Notes 55.9%
Repurchase Agreement 15.5%
as of August 31, 1996
FNMA 15-year Security 48.8%
FHLB Discount Notes 21.9%
Repurchase Agreement 16.8%
FHLMC Discount Notes 12.5%
*As a percentage of total investments
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A Certainly, this portfolio will be less sensitive to interest rate fluctua-
tions than a longer-term alternative, but we remain cautious. We will keep
a close watch on economic indicators that might suggest the return of domestic
inflationary pressures and other factors, such as accelerating global economic
growth rates, that could have a negative impact on bond prices.
We have adopted a conservative perspective, and are fully aware that interest
rates have more room to rise than to fall. As a result, the portfolio has been,
and will continue to be, positioned in a defensive manner. Our strategy is to
maintain a portfolio duration that does not exceed the time remaining until the
Fund's liquidation.
/s/ Peter W. Hegel
Peter W. Hegel /s/ John R. Reynoldson
Chief Investment Officer John R. Reynoldson
Fixed Income Investments Portfolio Manager
Please see footnotes on page three
5
<PAGE>
PORTFOLIO OF INVESTMENTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- --------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS 28.7%
$3,952 Federal National
Mortgage Association 15
Year DWARF Pools (Cost
$3,870,778) (a)......... 8.000% 05/01/07 to 12/01/10 $ 4,062,207
-----------
SHORT-TERM INVESTMENTS 71.5%
REPURCHASE
AGREEMENT 15.5%
2,195 SBC Capital Markets, Inc. (Collateralized by U.S.
Government Obligations in a pooled cash account,
dated 02/28/97, to be sold on 03/03/97 at
$2,195,979).......................................... 2,195,000
-----------
U.S. GOVERNMENT AGENCY
OBLIGATIONS 56.0%
2,000 Federal National Mortgage Association Discount Note
(Yielding 5.343%, 03/12/97 maturity)................. 1,996,513
2,000 Federal National Mortgage Association Discount Note
(Yielding 5.340%, 03/17/97 maturity)................. 1,995,023
4,000 Federal National Mortgage Association Discount Note
(Yielding 5.378%, 06/16/97 maturity)................. 3,937,480
-----------
7,929,016
-----------
TOTAL INVESTMENTS
(Cost $13,994,194) (a)..................................... 14,186,223
LIABILITIES IN EXCESS OF OTHER ASSETS (0.2%)................ (33,200)
-----------
NET ASSETS 100.0%........................................... $14,153,023
-----------
</TABLE>
(a) At February 28, 1997, cost for federal income tax purposes is $13,994,194;
the aggregate gross unrealized appreciation is $192,029, and the aggregate
gross unrealized depreciation is $0, resulting in net unrealized apprecia-
tion of $192,029.
See Notes to Financial Statements
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $3,870,778) (Note
1)............................................................... $ 4,062,207
Short-Term Investments (Cost $7,928,416) (Note 1)................ 7,929,016
Repurchase Agreement (Note 1).................................... 2,195,000
Cash............................................................. 5,257
Interest Receivable.............................................. 26,349
Other............................................................ 29
-----------
Total Assets.................................................... 14,217,858
-----------
LIABILITIES:
Payables:
Fund Shares Repurchased......................................... 17,238
Distributor and Affiliates (Notes 2 and 6)...................... 10,318
Investment Advisory Fee (Note 2)................................ 4,913
Accrued Expenses................................................. 21,957
Deferred Compensation and Retirement Plans (Note 2).............. 10,409
-----------
Total Liabilities............................................... 64,835
-----------
NET ASSETS....................................................... $14,153,023
-----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................. $15,735,634
Net Unrealized Appreciation on Investments....................... 192,029
Accumulated Undistributed Net Investment Income.................. 101,496
Accumulated Net Realized Loss on Investments..................... (1,876,136)
-----------
NET ASSETS (Equivalent to $14.81 per share based upon 955,924
shares of beneficial interest outstanding)...................... $14,153,023
-----------
</TABLE>
See Notes to Financial Statements
7
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended February 28, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.............................................................. $469,814
--------
EXPENSES:
Investment Advisory Fee (Note 2)...................................... 37,261
Distribution (12b-1) and Service Fees (Note 6)........................ 19,079
Audit................................................................. 17,164
Printing.............................................................. 12,589
Shareholder Services (Note 2)......................................... 6,744
Custody............................................................... 6,186
Trustees Fees and Expenses (Note 2)................................... 2,712
Legal (Note 2)........................................................ 757
Other ................................................................ 31,497
--------
Total Expenses....................................................... 133,989
Less Fees Waived (Note 2)............................................ 3,223
--------
Net Expenses......................................................... 130,766
--------
NET INVESTMENT INCOME................................................. $339,048
--------
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Net Realized Gain on Investments...................................... $142,399
--------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.............................................. 275,562
End of the Period.................................................... 192,029
--------
Net Unrealized Depreciation on Investments During the Period.......... (83,533)
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS....................... $ 58,866
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS............................ $397,914
--------
</TABLE>
See Notes to Financial Statements
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended February 28, 1997 and
the Year Ended August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
February 28, 1997 August 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income...................... $ 339,048 $ 848,146
Net Realized Gain/Loss on Investments...... 142,399 (168,441)
Net Unrealized Depreciation on Investments
During the Period......................... (83,533) (186,417)
----------- -----------
Change in Net Assets from Operations....... 397,914 493,288
Distributions from Net Investment Income... (924,791) (887,820)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES................................. (526,877) (394,532)
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Net Asset Value of Shares Issued Through
Dividend Reinvestment...................... 893,347 873,599
Cost of Shares Repurchased................. (2,107,214) (1,694,706)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................... (1,213,867) (821,107)
----------- -----------
TOTAL DECREASE IN NET ASSETS............... (1,740,744) (1,215,639)
NET ASSETS:
Beginning of the Period.................... 15,893,767 17,109,406
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$101,496 and $687,239, respectively)...... $14,153,023 $15,893,767
----------- -----------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
Six Months Ended ---------------------------------
February 28, 1997 1996 1995 1994 1993(a)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Period
(b)...................... $15.339 $15.712 $15.510 $16.744 $19.020
------- ------- ------- ------- -------
Net Investment Income.... .316 .814 .741 .852 .954
Net Realized and
Unrealized Gain/Loss on
Investments............. .024 (.400) .050 (1.099) .168
------- ------- ------- ------- -------
Total from Investment
Operations............... .340 .414 .791 (.247) 1.122
------- ------- ------- ------- -------
Less:
Distributions from Net
Investment Income...... .873 .787 .589 .740 1.133
Distributions from and
in Excess of Net
Realized Gain on
Investments (Note 1)... -0- -0- -0- .247 2.265
------- ------- ------- ------- -------
Total Distributions...... .873 .787 .589 .987 3.398
------- ------- ------- ------- -------
Net Asset Value, End of
the Period............... $14.806 $15.339 $15.712 $15.510 $16.744
------- ------- ------- ------- -------
Total Return* (c)........ 2.20%** 3.07% 5.40% (1.64%) 6.87%
Net Assets at End of the
Period (In millions)..... $14.2 $15.9 $17.1 $18.0 $23.0
Ratio of Expenses to
Average Net Assets*...... 1.71% 1.64% 1.56% 1.58% 1.62%
Ratio of Net Investment
Income to Average Net
Assets*................. 4.44% 5.02% 4.63% 4.91% 5.62%
Portfolio Turnover....... 0%** 52% 51% 82% 283%
*If certain expenses had not been waived by VKAC, Total Return would
have been lower and the ratios would have been as follows (Note 2):
Ratio of Expenses to
Average Net Assets....... 1.76% 1.69% 1.61% 1.63% 1.63%
Ratio of Net Investment
Income to Average Net
Assets.................. 4.40% 4.97% 4.58% 4.86% 5.60%
</TABLE>
**Non-Annualized
(a) Based on average month-end shares outstanding.
(b) Computations with regard to per share information have been adjusted to
reflect reverse share splits. (Note 4)
(c) Total Return is based upon net asset value which does not include payment
of the maximum sales charge.
See Notes to Financial Statements
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 (Unaudited)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Government Target Fund (the "Fund") is organized
as a Delaware business trust and is registered as a diversified open-end man-
agement investment company under the Investment Company Act of 1940, as amend-
ed. The Fund's investment objective is to provide the highest rate of return
consistent with safety and liquidity by investing at least 80% of its assets
in obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The Fund commenced investment operations on September 11,
1990 and plans to liquidate on December 16, 1997, and distribute the proceeds
pro rata to shareholders.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The prep-
aration of financial statements in conformity with generally accepted account-
ing principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of con-
tingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
A. SECURITY VALUATION-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accor-
dance 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 de-
livery" basis, with settlement to occur at a later date. The value of the se-
curity so purchased is subject to market fluctuations during this period. The
Fund will maintain, in a segregated account with its custodian, assets having
an aggregate value at least equal to the amount of the when issued or delayed
delivery purchase commitments until payment is made. At February 28, 1997,
there were no when issued or delayed delivery purchase commitments.
The Fund may invest in repurchase agreements which are short-term invest-
ments in which the Fund acquires ownership of a debt security and the seller
agrees to repurchase the security at a future time and specified price. The
Fund may invest independently in repurchase agreements, or transfer uninvested
cash balances into a pooled cash account along with other investment companies
advised by Van Kampen American Capital Asset Management, Inc. (the "Adviser")
or
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
- -------------------------------------------------------------------------------
its affiliates, the daily aggregate of which is invested in repurchase agree-
ments. Repurchase agreements are collateralized by the underlying debt securi-
ties. The Fund will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of the custodian
bank. The seller is required to maintain the value of the underlying security
at not less than the repurchase proceeds due the Fund.
C. INVESTMENT INCOME-Interest income is recorded on an accrual basis. Premiums
on debt securities are not amortized. Original issue discount is amortized
over the life of each applicable security. Market discounts are recognized at
the time of sale as realized gain for book purposes and ordinary income for
tax purposes.
D. FEDERAL INCOME TAXES-It is the Fund's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated investment compa-
nies and to distribute substantially all of its taxable income, if any, 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 loss and offset such losses against any future realized capital
gains. At August 31, 1996, the Fund had an accumulated capital loss
carryforward for tax purposes of $1,809,169 which will expire between August
31, 2002 and August 31, 2004, which is subsequent to the Fund's planned liqui-
dation date. Net realized gains or losses may differ for financial and tax re-
porting purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year.
E. DISTRIBUTION OF INCOME AND GAINS-The Fund declares and pays dividends annu-
ally from net investment income and, if any, net realized gains. 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 Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly based on the average daily net assets of the Fund at the annual rate
of .50%. The Adviser has voluntarily agreed to waive all management fees in
excess of .45% of the Fund's average daily net assets.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
- -------------------------------------------------------------------------------
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom (Il-
linois), counsel to the Fund, of which a trustee of the Fund is an affiliated
person.
For the six months ended February 28, 1997, the Fund recognized expenses of
approximately $5,500 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting
services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the six months
ended February 28, 1997, the Fund recognized expenses of approximately $6,700,
representing ACCESS' cost of providing transfer agency and shareholder serv-
ices plus a profit.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC.
The Fund has implemented deferred compensation and retirement plans for its
trustees. Under the deferred compensation plan, trustees may elect to defer
all or a portion of their compensation to a later date. The retirement plan
covers those trustees who are not officers of VKAC.
3. CAPITAL TRANSACTIONS
The Fund is authorized to issue an unlimited number of shares of beneficial
interest with a par value of $.01 per share. At February 28, 1997, the Fund
was not accepting subscriptions from new investors.
At February 28, 1997 and August 31, 1996, capital aggregated $15,735,634 and
$16,949,501, respectively. For the periods indicated, transactions were as
follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
February 28, 1997 August 31, 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Beginning Shares 1,101,770 1,221,264
--------- ---------
Dividend Reinvestment 64,782 64,542
Reverse Share Splits (Note 4) (66,542) (65,536)
Repurchases (144,086) (118,500)
--------- ---------
Net Decrease in Shares Outstanding (145,846) (119,494)
--------- ---------
Ending Shares 955,924 1,101,770
--------- ---------
</TABLE>
4. REVERSE SHARE SPLITS
The Fund, at the discretion of the Board of Trustees, intends to declare a re-
verse share split immediately after the payment of each annual dividend and
any other distribution. The purpose is to maintain in the account of each
shareholder who reinvests dividends and distributions the
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
- -------------------------------------------------------------------------------
same number of shares as immediately preceding the dividend or distribution.
The effect of this reverse share split is intended to exactly offset the
shares issued for reinvestment. Although the dividends and distributions are
taxable to shareholders, a reverse share split will not result in a gain or
loss for federal income tax purposes. On December 16, 1996, the shares of the
Fund were split .9405 of a share for each 1 share outstanding.
5. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of government
securities, including paydowns on mortgage-backed securities and excluding
short-term investments, were $0 and $3,781,800, respectively.
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 and a service plan (col-
lectively the "Plans"). The Plans govern payments for the distribution of the
Fund's shares, ongoing shareholder services and maintenance of shareholder ac-
counts.
Annual fees under the Plans of up to .25% of average daily net assets of the
Fund are accrued daily. Included in these fees for the six months ended Febru-
ary 28, 1997, are payments to VKAC of approximately $5,700.
14
<PAGE>
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
GLOBAL AND INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Intermediate Term Municipal Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
MORGAN STANLEY FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
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
1-800-282-4404 for Morgan Stanley retail funds.
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<PAGE>
RESULTS OF SHAREHOLDER VOTES
A Special Meeting of Shareholders of the Fund was held on October 25, 1996
where shareholders voted on a new investment advisory agreement, changes to
investment policies and the ratification of Price Waterhouse LLP as indepen-
dent public accountants. With regard to the approval of a new investment advi-
sory agreement between Van Kampen American Capital Asset Management, Inc. and
the Fund, 904,511 shares voted for the proposal, 23,294 shares voted against
and 19,515 shares abstained. With regard to the approval of certain changes to
the Fund's fundamental investment policies with respect to investment in other
investment companies, 886,569 shares voted for the proposal, 25,949 shares
voted against and 16,798 shares abstained. With regard to the ratification of
Price Waterhouse LLP as independent public accountants for the Fund, 924,578
shares voted for the proposal, 5,341 shares voted against and 17,401 shares
abstained.
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<PAGE>
VAN KAMPEN AMERICAN CAPITAL GOVERNMENT TARGET FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
DENNIS J. MCDONNELL*
JACK E. NELSON
JEROME L. ROBINSON
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
1201 Louisiana
Houston, Texas 77002
*"Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1997
All rights reserved.
(SM)denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of
the Fund. It is not authorized for distribution to prospective investors un-
less it has been preceded or is accompanied by an effective prospectus of the
Fund which contains additional information on how to purchase shares, the
sales charge, and other pertinent data. After June 30, 1997, the report must
be accompanied by a quarterly performance update, if applicable.
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