Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 4
PORTFOLIO AT A GLANCE
CREDIT QUALITY 5
SIX-MONTH DIVIDEND HISTORY 5
TOP FIVE SECTORS 6
NET ASSET VALUE AND COMMON SHARE MARKET PRICE 6
Q&A WITH YOUR PORTFOLIO MANAGERS 7
GLOSSARY OF TERMS 9
BY THE NUMBERS
YOUR FUND'S INVESTMENTS 10
FINANCIAL STATEMENTS 19
NOTES TO FINANCIAL STATEMENTS 24
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES 29
Regardless of the market environment, your investment goals don't go away.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
OVERVIEW
LETTER TO SHAREHOLDERS
January 17, 2003
Dear Shareholder,
During the bull market of the 1990s, many investors ignored what investment risk
really means: the possibility of losing money. Instead, investors came to define
risk as "more reward."
Today, it's clear that for many people, the pendulum has swung to the opposite
extreme. Many are reluctant to enter the market, stick with their long-term
plans, or assume prudent levels of risk. Not knowing what action to take, many
investors are taking none.
Regardless of how you define risk and regardless of the market environment, your
investment goals don't go away. Parents will want to send children to college,
retirees will want to enjoy their golden years, and families will want to
purchase homes. And history bears out that a prudent investment may be one of
the best ways to get there.
How can you reconcile the reality of market risk with the
pursuit of your long-term investment goals? At Van Kampen, we
believe that diversification and asset allocation are the best
strategies for managing the market's ups and downs. That's why
Van Kampen offers a full range of fund choices. We encourage you to work with
your advisor to make sure that you have an asset allocation that's suitable for
you.
As we enter a new year, all of us at Van Kampen remain grateful for the trust
you have placed in us and for the opportunity to help you enjoy life's true
wealth.
Sincerely,
[SIG]
David M. Swanson
Chief Operating Officer
Van Kampen Asset Management Inc.
1
ECONOMIC SNAPSHOT
THE ECONOMY
ECONOMIC DATA RELEASED IN DECEMBER 2002 SEEMED TO SUGGEST THE ECONOMY WAS
EMERGING FROM ITS AUTUMN SOFT SPOT. RETAIL SALES AND INDUSTRIAL PRODUCTION
RECORDED GAINS THAT SURPASSED EXPECTATIONS. BOTH NEW AND EXISTING HOME SALES
CONTINUED TO REMAIN AT HISTORICALLY HIGH LEVELS. EVEN THE BELEAGUERED
MANUFACTURING SECTOR ENJOYED SOME GOOD NEWS: THE INSTITUTE OF SUPPLY MANAGEMENT
REPORTED THAT NEW ORDERS WERE SO ROBUST, THEY REGISTERED THE LARGEST MONTHLY
INCREASE SINCE 1980. EQUALLY ENCOURAGING, INFLATION PRESSURES REMAINED STABLE
THROUGHOUT THE REPORTING PERIOD--DESPITE RISING OIL PRICES.
AGAINST THIS BACKDROP, THE FEDERAL RESERVE MAINTAINED ITS ACCOMMODATIVE MONETARY
POLICY WHICH, AS A RESULT, ALLOWED INTEREST RATES TO CONTINUE HOVERING AT THE
LOWEST LEVELS IN DECADES.
YET, POCKETS OF WEAKNESS PERSISTED. DECEMBER'S JOB LOSSES WERE THE STRONGEST
RECORDED IN RECENT MONTHS, CAUSING INVESTORS TO QUESTION THE SUSTAINABILITY OF
ECONOMIC ACTIVITY MOVING FORWARD.
FURTHER CLOUDING THE ECONOMIC HORIZON, THE DOLLAR MOVED LOWER AS TRADERS AND
INVESTORS QUESTIONED THE NEWLY APPOINTED TREASURY SECRETARY'S COMMITMENT TO A
STRONG DOLLAR. WHILE THE DECLINING DOLLAR SEEMED LIKE ANOTHER DARK CLOUD, A
POSSIBLE SILVER LINING REMAINS: DOLLAR WEAKNESS COULD TRANSLATE INTO IMPROVED
EXPORTS IN 2003, FURTHER SUPPORTING ECONOMIC GROWTH.
2
U.S. GROSS DOMESTIC PRODUCT
SEASONALLY ADJUSTED ANNUALIZED RATES
(December 31, 2000--December 31, 2002)
[BAR GRAPH]
U.S. GROSS DOMESTIC PRODUCT
---------------------------
Dec 00 1.1%
Mar 01 -0.6%
Jun 01 -1.6%
Sep 01 -0.3%
Dec 01 2.7%
Mar 02 5.0%
Jun 02 1.3%
Sep 02 4.0%
Dec 02 0.7%
Source: Bureau of Economic Analysis
INTEREST RATES AND INFLATION
(December 31, 2000--December 31, 2002)
[LINE GRAPH]
INTEREST RATES INFLATION
-------------- ---------
Dec 00 6.50 3.40
5.50 3.70
5.50 3.50
Mar 01 5.00 2.90
4.50 3.30
4.00 3.60
Jun 01 3.75 3.20
3.75 2.70
3.50 2.70
Sep 01 3.00 2.60
2.50 2.10
2.00 1.90
Dec 01 1.75 1.60
1.75 1.10
1.75 1.10
Mar 02 1.75 1.50
1.75 1.60
1.75 1.20
Jun 02 1.75 1.10
1.75 1.50
1.75 1.80
Sep 02 1.75 1.50
1.75 2.00
1.25 2.20
Dec 02 1.25 2.40
Interest rates are represented by the closing midline federal funds target rate
on the last day of each month. Inflation is indicated by the annual percentage
change of the Consumer Price Index for all urban consumers at the end of each
month.
Source: Bloomberg
3
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of December 31, 2002)
------------------------------
NYSE Ticker Symbol - VBF
------------------------------
-----------------------------------------------------------------------
Six-month total return(1) 3.13%
-----------------------------------------------------------------------
One-year total return(1) 2.47%
-----------------------------------------------------------------------
Five-year average annual total return(1) 5.07%
-----------------------------------------------------------------------
Ten-year average annual total return(1) 6.96%
-----------------------------------------------------------------------
Distribution rate as a % of closing common share market
price(2) 6.83%
-----------------------------------------------------------------------
Net asset value $18.98
-----------------------------------------------------------------------
Closing common share market price $18.45
-----------------------------------------------------------------------
Six-month high common share market price (08/20/02) $18.90
-----------------------------------------------------------------------
Six-month low common share market price (10/28/02) $17.38
-----------------------------------------------------------------------
(1) Total return assumes an investment at the common share 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 common share market price at the end of the period
indicated.
(2) Distribution rate represents the annualized distributions of the Fund at the
end of the period and not the earnings of the Fund.
Past performance is no guarantee of future results. Investment return,
common share market price and net asset value will fluctuate and Fund
shares, when sold, may be worth more or less than their original cost. An
investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. As a result of recent market activity,
current performance may vary from the figures shown. For more up-to-date
information, please visit vankampen.com or speak with your financial
advisor.
4
PORTFOLIO AT A GLANCE
CREDIT QUALITY
(as a percentage of long-term investments)
As of December 31, 2002
- AAA/Aaa............ 6.3% [PIE CHART]
- AA/Aa.............. 8.8%
- A/A................ 29.4%
- BBB/Baa............ 53.6%
- BB/Ba.............. 1.8%
- B/B................ 0.1%
As of June 30, 2002
- AAA/Aaa............ 5.9% [PIE CHART]
- AA/Aa.............. 8.0%
- A/A................ 29.3%
- BBB/Baa............ 53.2%
- BB/Ba.............. 2.7%
- B/B................ 0.9%
Based upon the credit quality ratings as issued by Standard & Poor's Credit
Market Services/Moody's Investor Services, respectively. Subject to change
daily.
SIX-MONTH DIVIDEND HISTORY
(for the six months ending December 31, 2002)
[BAR GRAPH]
DIVIDENDS
---------
9/02 $0.315
12/02 $0.315
The dividend history represents dividends that were paid on the fund and is no
guarantee of the fund's future dividends.
5
TOP FIVE SECTORS
(as a percentage of long-term investments)
[BAR GRAPH]
DECEMBER 31, 2002 JUNE 30, 2002
----------------- -------------
Life Insurance 9.4% 8.8%
Captive Finance 8.8% 9.4%
Telecommunications 7.2% 6.3%
Government & Government Agency 6.1% 5.6%
Media-Cable 5.5% 5.1%
Subject to change daily.
NET ASSET VALUE AND COMMON SHARE MARKET PRICE
(based upon quarter-end values--December 1992 through December 2002)
[LINE GRAPH]
NET ASSET VALUE COMMON SHARE MARKET PRICE
--------------- -------------------------
12/92 20.0500 20.2500
20.9400 20.7500
21.3300 20.7500
21.9500 20.8750
12/93 21.2900 20.3750
20.1200 18.0000
19.0700 18.1250
18.7900 17.1250
12/94 18.5900 16.7500
19.3000 18.2500
20.4100 19.1250
20.5700 19.0000
12/95 21.2700 19.6250
20.1800 19.3750
19.9700 18.1250
19.9500 18.7500
12/96 20.3400 18.7500
19.7800 18.7694
20.2800 19.2500
20.7700 19.7500
12/97 20.9100 20.8125
20.9200 20.3750
21.1600 19.6875
21.3500 19.8125
12/98 21.0900 20.0625
20.4000 19.2500
19.5900 17.8750
19.3100 16.3750
12/99 18.9800 15.6875
18.9800 16.0625
18.7000 16.7500
18.9200 17.0625
12/00 19.2900 17.4375
19.5700 18.5000
19.4100 19.1500
19.7000 19.6000
12/01 19.7100 19.2700
19.0800 18.0000
18.8400 18.5000
18.6800 18.5000
12/02 18.9800 18.4500
The solid line above represents the fund's net asset value (NAV), which
indicates overall changes in value among the fund's underlying securities. The
fund's common share market price is represented by the dashed line, which
indicates the price the market is willing to pay for shares of the fund at a
given time. Common share market price is influenced by a range of factors,
including supply and demand and market conditions.
6
Q&A WITH YOUR PORTFOLIO MANAGERS
WE RECENTLY SPOKE WITH THE PORTFOLIO MANAGEMENT TEAM FOR THE VAN KAMPEN BOND
FUND ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED THE MARKETS AND
INFLUENCED THE FUND'S RETURN DURING THE SIX-MONTH PERIOD ENDED DECEMBER 31,
2002. THE FUND IS MANAGED BY THE ADVISER'S TAXABLE FIXED-INCOME TEAM. CURRENT
MEMBERS(1) OF THE TEAM INCLUDE DAVID S. HOROWITZ, EXECUTIVE DIRECTOR AND GORDON
W. LOERY, EXECUTIVE DIRECTOR. THE FOLLOWING DISCUSSION REFLECTS THEIR VIEWS ON
THE FUND'S PERFORMANCE.
(1) Team members may change without notice at any time.
Q WHAT WAS THE MARKET
ENVIRONMENT OF THE PAST SIX MONTHS?
A The U.S. credit markets were
highly volatile during the last six months of 2002. They entered the period
reeling from a series of widely publicized corporate-governance and accounting
scandals that included two of the largest bankruptcies in U.S. history. At the
same time, continued weakness in the U.S. economy led to ongoing disappointments
in corporate profits. This put further pressure on corporate yield spreads,
which reached a high of 217 basis points by the end of September.
The fourth quarter proved to be a somewhat more rewarding time for corporate
bond investors. Like the equity markets, the corporate bond markets began to
rally as investor confidence began to reassert itself. Spreads narrowed
somewhat, though by the end of the period they remained wide by historical
standards.
Q HOW DID THE FUND PERFORM IN
THIS ENVIRONMENT?
A For the six-month period ended
December 31, 2002, the fund generated a total return of 3.13 percent, based on
common share market price. The fund's return reflects a decrease in common share
market price from $18.50 per share on June 30, 2002, to $18.45 per share on
December 31, 2002. The fund's quarterly dividend of $0.3150 per share translates
to a distribution rate of 6.83 percent based on the fund's closing common share
market price on December 31, 2002. Of course, past performance is no guarantee
of future results. Investment return, share price and net asset value will
fluctuate and fund shares, when sold, may be worth more or less than their
original cost. As a result of recent market activity, current performance may
vary from the figures shown. For more up-to-date information, please visit
vankampen.com or speak with your financial advisor.
7
By comparison, the Lehman Brothers BBB Corporate Bond Index posted a total
return of 8.02 percent for the same period. The Lehman Brothers BBB Corporate
Bond Index is a broad-based, unmanaged index, which reflects the performance of
corporate bonds. Its returns do not include any sales charges or fees that would
be paid by an investor purchasing the securities it represents. Such costs would
lower performance. It is not possible to invest directly in an index. For
additional performance results, please refer to the chart and footnotes on page
4.
Q WHAT WERE THE KEY DRIVERS OF
THE FUND'S RELATIVE PERFORMANCE?
A The fund's performance suffered
somewhat from its exposure to underperforming bonds in the utilities sector. We
recognized that the sector was headed for difficulties and began paring the
portfolio's exposure there. We were especially concerned about accounting
irregularities and some of the companies' trading operations. Unfortunately, we
were not able to reduce the fund's holdings in time to protect it from problems
at a few of these companies.
Q WHAT STRATEGIES DID YOU USE TO
MANAGE THE FUND?
A One of our primary strategies was
to align the portfolio in an effort to protect shareholders from continued
volatility in the markets. In keeping with our strategy earlier in the year, we
took actions to maintain the relatively high credit quality of the portfolio in
order to contain the risk of adverse credit events. We also reduced the fund's
duration in order to protect shareholders from potential negative movements in
interest rates.
As mentioned, we also reduced the portfolio's exposure to utilities. In
their stead, we boosted the fund's holdings of financials and food bonds.
Financials are generally strong defensive plays, and our analysts were able to
locate several attractively-priced issues in that sector. Food and
pharmaceuticals are also fairly defensive plays since the demand for their
products exists independent of economic cycles.
Q WHAT IS YOUR OUTLOOK FOR THE
FUND AND THE MARKETS IN THE COMING MONTHS?
A Economically speaking, we expect
2003 to be a more stable year. We do not expect any more wild gyrations in the
economy, and look forward to greater investor confidence on the credit side of
the fixed-income markets. Inflation is likely to remain a non-issue in the U.S.
As a result of these factors, yield spreads between government and
higher-risk sectors are likely to move closer to historic levels over the course
of the year. While it's impossible to say when this will happen, it is also
likely that interest rates will trend moderately upward once the Fed believes
the economy has turned the corner. We will continue to monitor the economy and
the markets closely for opportunities.
8
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
BOND: A debt security issued by a government or corporation that pays the
bondholder a stated rate of interest and repays the principal at the maturity
date.
CREDIT RATING: An evaluation of a bond issuer's credit history and capability of
repaying debt obligations. Standard & Poor's Ratings Group and Moody's Investors
Service are two companies that assign credit ratings. Standard & Poor's ratings
range from a high of AAA to a low of D, Moody's from a high of Aaa to a low of
C.
CREDIT SPREAD: Also called quality spread; the difference in yield between
higher-quality issues (such as Treasury securities) and lower-quality ones.
Normally, lower-quality issues provide higher yields to compensate investors for
their additional credit risk.
VOLATILITY: A measure of the fluctuation in the market price of a security. A
security that is volatile has frequent, large swings in price.
YIELD: The annual rate of return on an investment, expressed as a percentage.
9
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CORPORATE BONDS 91.7%
AEROSPACE & DEFENSE 1.7%
$ 175 Lockheed Martin Corp. .......... 7.750% 05/01/26 $ 213,286
1,000 Lockheed Martin Corp. .......... 8.500 12/01/29 1,345,845
875 Raytheon Co. ................... 8.300 03/01/10 1,041,506
880 United Technologies Corp. ...... 6.100 05/15/12 985,710
------------
3,586,347
------------
AIRLINES 0.7%
381 Continental Airlines, Inc. ..... 6.545 08/02/20 330,992
102 Continental Airlines, Inc. ..... 6.648 03/15/19 89,170
1,180 Continental Airlines, Inc. ..... 6.900 01/02/18 1,033,919
------------
1,454,081
------------
AUTOMOTIVE 4.5%
385 ArvinMeritor, Inc. ............. 6.625 06/15/07 385,125
755 ArvinMeritor, Inc. (a).......... 8.750 03/01/12 798,139
2,000 Daimler Chrysler NA
Holding (a)..................... 7.375 09/15/06 2,203,820
250 Daimler Chrysler NA Holding..... 8.500 01/18/31 308,612
1,070 Dana Corp. ..................... 7.000 03/01/29 759,700
1,110 Dana Corp. (a).................. 9.000 08/15/11 1,076,700
4,810 Ford Motor Co. (a).............. 7.450 07/16/31 4,195,325
------------
9,727,421
------------
BANKING 5.3%
650 Bank One Corp. ................. 7.625 10/15/26 786,277
220 Bank One Corp. ................. 8.000 04/29/27 277,047
2,110 Citigroup, Inc. ................ 5.625 08/27/12 2,222,763
1,240 Citigroup, Inc. ................ 6.000 02/21/12 1,363,189
75 Citigroup, Inc. ................ 6.625 06/15/32 82,157
3,340 J.P. Morgan Chase & Co. ........ 6.750 02/01/11 3,637,006
1,690 MBNA American Bank NA (b)....... 6.500 06/20/06 1,789,524
400 MBNA American Bank NA........... 7.125 11/15/12 419,347
925 Washington Mutual Bank FA....... 5.500 01/15/13 944,848
------------
11,522,158
------------
BEVERAGE 0.2%
495 PepsiAmericas, Inc. ............ 3.875 09/12/07 503,517
------------
See Notes to Financial Statements
10
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
BROKERAGE 3.1%
$1,960 Goldman Sachs Group, Inc. ...... 6.875% 01/15/11 $ 2,191,251
1,000 Goldman Sachs Group, Inc. ...... 7.800 01/28/10 1,165,181
2,000 Lehman Brothers Holdings,
Inc. ........................... 8.500 05/01/07 2,351,778
450 World Financial Prop., 144A--
Private Placement (c)........... 6.910 09/01/13 479,685
492 World Financial Prop., 144A--
Private Placement (c)........... 6.950 09/01/13 525,267
------------
6,713,162
------------
BUILDING MATERIALS 1.2%
750 Centex Corp. (a)................ 7.500 01/15/12 835,525
385 Centex Corp. (a)................ 7.875 02/01/11 434,424
515 Masco Corp. .................... 6.500 08/15/32 531,167
700 Mohawk Industries, Inc. ........ 7.200 04/15/12 787,911
------------
2,589,027
------------
CAPTIVE FINANCE 8.6%
235 Boeing Capital Corp. ........... 5.800 01/15/13 238,459
510 Boeing Capital Corp. ........... 6.100 03/01/11 529,674
265 Boeing Capital Corp. ........... 6.500 02/15/12 283,034
180 Case Credit Corp. (a)........... 6.125 02/15/03 178,841
2,335 Ford Motor Credit Co. (a)....... 7.250 10/25/11 2,272,485
1,870 General Electric Capital
Corp. .......................... 6.750 03/15/32 2,074,410
1,895 General Motors Acceptance
Corp. .......................... 6.875 09/15/11 1,892,864
3,085 General Motors Acceptance
Corp. .......................... 8.000 11/01/31 3,110,535
2,000 Heller Financial, Inc. ......... 6.375 03/15/06 2,218,816
1,555 Household Finance Corp. ........ 6.750 05/15/11 1,660,581
1,000 Household Finance Corp. ........ 7.875 03/01/07 1,118,042
150 Household Finance Corp. ........ 8.000 07/15/10 169,697
2,500 International Lease Finance
Corp. .......................... 8.375 12/15/04 2,731,602
------------
18,479,040
------------
CONGLOMERATES 1.8%
1,275 Cooper Industries, Inc. ........ 5.250 07/01/07 1,331,599
2,445 Honeywell International,
Inc. ........................... 6.125 11/01/11 2,659,940
------------
3,991,539
------------
CONSTRUCTION MACHINERY 0.6%
300 Case Corp. (a).................. 6.250 12/01/03 291,077
1,015 Kennametal, Inc. ............... 7.200 06/15/12 1,078,842
------------
1,369,919
------------
See Notes to Financial Statements
11
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
CONSUMER PRODUCTS 0.6%
$1,270 Monsanto Co. ................... 7.375% 08/15/12 $ 1,371,556
------------
ELECTRIC 3.4%
310 Alliant Energy Resources,
Inc. ........................... 7.000 12/01/11 303,860
625 Cincinnati Gas & Electric
Co. ............................ 5.700 09/15/12 641,844
865 Detroit Edison Co. (a).......... 6.125 10/01/10 954,241
960 Duquesne Light Co. ............. 6.700 04/15/12 1,095,198
585 Exelon Corp. ................... 6.750 05/01/11 641,579
325 Florida Power & Light........... 4.850 02/01/13 332,658
1,323 Niagara Mohawk Power Corp. ..... 7.625 10/01/05 1,467,185
650 PSEG Energy Holdings, Inc. ..... 8.625 02/15/08 543,386
1,290 PSEG Energy Holdings, Inc. ..... 9.125 02/10/04 1,277,499
------------
7,257,450
------------
ENVIRONMENTAL SERVICES 1.8%
830 Republic Services, Inc. ........ 6.750 08/15/11 908,965
1,500 Waste Management, Inc. ......... 7.000 10/15/06 1,598,452
790 Waste Management, Inc. ......... 7.000 07/15/28 783,944
550 Waste Management, Inc. ......... 7.375 08/01/10 602,658
------------
3,894,019
------------
FOOD 2.0%
2,000 ConAgra Foods, Inc. (a)......... 7.500 09/15/05 2,243,084
1,250 Safeway, Inc. .................. 5.800 08/15/12 1,310,410
675 Smithfield Foods, Inc. ......... 8.000 10/15/09 691,875
------------
4,245,369
------------
GAMING 2.5%
1,730 Harrahs Operating Co., Inc. .... 8.000 02/01/11 1,998,333
960 MGM Mirage, Inc. ............... 8.500 09/15/10 1,062,627
180 Park Place Entertainment
Corp. .......................... 7.500 09/01/09 185,410
2,000 Park Place Entertainment
Corp. .......................... 7.950 08/01/03 2,043,322
------------
5,289,692
------------
HEALTHCARE 4.1%
3,205 Aetna, Inc. (a)................. 7.375 03/01/06 3,477,653
640 Amerisourcebergen Corp. (a)..... 8.125 09/01/08 684,800
1,275 Columbia/HCA, Inc. (a).......... 6.910 06/15/05 1,340,465
450 HCA, Inc. ...................... 6.300 10/01/12 454,663
1,945 Tenet Healthcare Corp. ......... 6.875 11/15/31 1,668,637
1,130 UnitedHealth Group, Inc. ....... 5.200 01/17/07 1,197,038
------------
8,823,256
------------
See Notes to Financial Statements
12
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
HOME CONSTRUCTION 1.2%
$2,365 Pulte Homes, Inc., 144A--
Private Placement (c)........... 7.875% 08/01/11 $ 2,628,314
------------
INTEGRATED ENERGY 1.6%
465 Conoco, Inc. ................... 6.950 04/15/29 528,717
1,270 Constellation Energy Group...... 7.600 04/01/32 1,301,929
1,500 Tosco Corp. .................... 8.250 05/15/03 1,532,761
------------
3,363,407
------------
LIFE INSURANCE 9.2%
2,195 Anthem Insurance Cos., Inc.,
144A--Private Placement (c)..... 9.125 04/01/10 2,638,267
855 Cigna Corp. (a)................. 6.375 10/15/11 858,849
1,805 Hartford Life, Inc. ............ 7.375 03/01/31 2,016,477
2,005 Health Net, Inc. ............... 8.375 04/15/11 2,315,280
2,900 John Hancock Co., 144A--Private
Placement (c)................... 7.375 02/15/24 3,032,463
475 John Hancock Financial Services,
Inc. ........................... 5.625 12/01/08 498,627
805 Metropolitan Life Insurance Co.,
144A--Private Placement (c)..... 7.450 11/01/23 848,100
650 Metropolitan Life Insurance Co.,
144A--Private Placement (c)..... 7.800 11/01/25 728,132
105 Metropolitan Life, Inc. ........ 6.125 12/01/11 113,529
585 Nationwide Financial Services,
Inc. ........................... 6.250 11/15/11 611,124
635 Nationwide Mutual Insurance Co.,
144A--Private Placement (c)..... 7.500 02/15/24 636,210
440 Nationwide Mutual Insurance Co.,
144A--Private Placement (c)..... 8.250 12/01/31 463,906
500 New England Mutual, 144A--
Private Placement (c)........... 7.875 02/15/24 559,236
1,070 Prudential Holdings, LLC, 144A--
Private Placement (c)........... 7.245 12/18/23 1,225,086
2,840 Prudential Holdings, LLC, 144A--
Private Placement (c)........... 8.695 12/18/23 3,296,377
------------
19,841,663
------------
LODGING 2.7%
1,055 Hilton Hotels Corp. ............ 7.625 12/01/12 1,067,231
1,215 Hyatt Equities LLC, 144A--
Private Placement (c)........... 6.875 06/15/07 1,211,266
610 Marriott International.......... 8.125 04/01/05 664,069
See Notes to Financial Statements
13
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
LODGING (CONTINUED)
$ 845 Marriott International.......... 7.000% 01/15/08 $ 948,910
590 Starwood Hotels & Resorts,
144A--Private Placement (c)..... 7.375 05/01/07 582,625
1,375 Starwood Hotels & Resorts,
144A--Private Placement (c)..... 7.875 05/01/12 1,368,125
------------
5,842,226
------------
MEDIA--CABLE 5.4%
2,000 Comcast Cable Communications,
Inc. (a)........................ 8.125 05/01/04 2,107,340
855 Comcast Cable Communications,
Inc. (a)........................ 8.375 05/01/07 960,332
1,250 Cox Communications, Inc. ....... 7.125 10/01/12 1,390,898
7,000 TCI Communications, Inc. ....... 9.250 01/15/23 7,186,081
------------
11,644,651
------------
MEDIA--NONCABLE 3.7%
810 AOL Time Warner, Inc. .......... 6.875 05/01/12 857,217
605 AOL Time Warner, Inc. (a)....... 7.625 04/15/31 624,005
555 Belo Corp. ..................... 8.000 11/01/08 636,172
2,500 Clear Channel Commerce,
Inc. (a)........................ 7.250 10/15/27 2,684,413
2,880 News America Holdings, Inc. .... 8.875 04/26/23 3,203,461
------------
8,005,268
------------
METALS 0.5%
1,015 Phelps Dodge Corp. ............. 8.750 06/01/11 1,051,707
------------
NATURAL GAS DISTRIBUTORS 0.3%
695 Consolidated Natural Gas
Co. (a)......................... 6.250 11/01/11 753,446
------------
NONCAPTIVE--CONSUMER FINANCE 1.5%
3,075 American Express Co. (a)........ 5.500 09/12/06 3,324,490
------------
PAPER 1.7%
825 International Paper, Co., 144A--
Private Placement (c)........... 5.850 10/30/12 865,425
995 MeadWestvaco Corp. ............. 6.850 04/01/12 1,105,999
1,615 Weyerhaeuser Co. ............... 6.750 03/15/12 1,763,943
------------
3,735,367
------------
See Notes to Financial Statements
14
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
PROPERTY & CASUALTY 1.4%
$2,000 Farmers Exchange Capital,
144A--Private Placement (c)..... 7.050% 07/15/28 $ 1,312,030
1,815 Farmers Insurance Exchange
Surplus, 144A--Private
Placement (c)................... 8.625 05/01/24 1,363,188
255 Florida Windstorm Underwriting,
144A--Private Placement (c)..... 7.125 02/25/19 291,648
------------
2,966,866
------------
RAILROADS 4.2%
1,000 CSX Corp. (a)................... 6.750 03/15/11 1,118,135
7,000 Union Pacific Corp. ............ 8.350 05/01/25 7,975,499
------------
9,093,634
------------
REAL ESTATE INVESTMENT TRUSTS 2.3%
1,310 EOP Operating LP (a)............ 7.500 04/19/29 1,369,393
495 Istar Financial, Inc. .......... 8.750 08/15/08 527,376
2,125 Simon Property Group LP......... 6.375 11/15/07 2,300,978
110 Simon Property Group LP, 144A--
Private Placement (c)........... 6.350 08/28/12 114,922
585 Vornado Realty.................. 5.625 06/15/07 596,658
------------
4,909,327
------------
REFINING 0.1%
250 Vintage Petroleum, Inc. ........ 7.875 05/15/11 245,000
------------
RETAIL 3.6%
1,440 CVS Corp. (a)................... 5.500 02/15/04 1,494,213
250 CVS Corp. ...................... 5.625 03/15/06 268,687
270 CVS Corp., 144A--Private
Placement (c)................... 3.875 11/01/07 274,385
500 Federated Department Stores,
Inc. (a)........................ 6.300 04/01/09 534,200
1,500 Federated Department Stores,
Inc. (a)........................ 6.625 09/01/08 1,663,520
1,200 Lowe's Cos., Inc. .............. 6.500 03/15/29 1,287,740
490 Lowe's Cos., Inc. .............. 6.875 02/15/28 547,536
820 May Department Stores Co. ...... 5.950 11/01/08 888,169
700 May Department Stores Co. ...... 6.700 09/15/28 715,335
------------
7,673,785
------------
SUPERMARKETS 2.1%
500 Albertson's, Inc. .............. 7.450 08/01/29 553,899
965 Albertson's, Inc. .............. 7.500 02/15/11 1,111,971
See Notes to Financial Statements
15
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
SUPERMARKETS (CONTINUED)
$2,035 Kroger Co. ..................... 7.375% 03/01/05 $ 2,210,061
495 Kroger Co. ..................... 7.500 04/01/31 555,432
------------
4,431,363
------------
TELECOMMUNICATIONS 7.0%
730 Alltel Corp. ................... 7.000 07/01/12 842,788
140 AT&T Corp. ..................... 7.800 11/15/11 153,318
2,220 AT&T Corp. ..................... 8.500 11/15/31 2,455,362
915 AT&T Wireless Services,
Inc. (a)........................ 7.875 03/01/11 921,217
580 AT&T Wireless Services,
Inc. (a)........................ 8.750 03/01/31 570,155
565 British Telecommunications PLC
(United Kingdom)................ 8.875 12/15/30 722,916
5,000 Sprint Corp. ................... 9.500 04/01/03 5,088,610
1,835 Verizon Communications, Inc. ... 6.940 04/15/28 1,932,418
1,250 Verizon Global Funding Corp. ... 6.750 12/01/05 1,382,236
325 Verizon Global Funding Corp. ... 7.750 12/01/30 379,897
590 Verizon New England, Inc. ...... 6.500 09/15/11 652,768
------------
15,101,685
------------
TRANSPORTATION SERVICES 1.1%
120 Hertz Corp. .................... 7.400 03/01/11 113,640
2,285 Hertz Corp. .................... 7.625 06/01/12 2,184,682
------------
2,298,322
------------
TOTAL CORPORATE BONDS 91.7%.............................................. 197,728,074
------------
CONVERTIBLE CORPORATE OBLIGATION 0.1%
TECHNOLOGY 0.1%
325 Solectron Corp. (Convertible
into 3,831 common shares)
LYON............................ * 11/20/20 166,562
------------
GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS 5.9%
1,400 Ontario Province (Canada)....... 7.625 06/22/04 1,513,501
500 Republic of Italy (Italy)....... 5.250 04/05/06 536,879
3,000 Saskatchewan Province
(Canada)........................ 8.000 07/15/04 3,265,776
7,300 United States Treasury Bonds.... 10.750 02/15/03 to 05/15/03 7,532,483
------------
TOTAL GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS....................... 12,848,639
------------
See Notes to Financial Statements
16
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
MARKET
DESCRIPTION SHARES VALUE
EQUITY 0.0%
TELECOMMUNICATIONS 0.0%
McLeodUSA, Inc. (970 Preferred Stock Warrants) (d).......... 970 $ 339
McLeodUSA, Inc. (Preferred Stock) (d)....................... 438 1,796
------------
TOTAL EQUITY....................................................... 2,135
------------
TOTAL LONG-TERM INVESTMENTS 97.7%
(Cost $199,931,213).............................................. 210,745,410
------------
SHORT-TERM INVESTMENTS 0.6%
REPURCHASE AGREEMENT 0.2%
Bank of America Securities ($504,000 par collateralized by U.S.
Government obligations in a pooled cash account, dated 12/31/02,
to be sold on 01/02/03 at $504,034).............................. 504,000
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS 0.4%
United States Treasury Bill ($500,000 par, yielding 1.606%,
03/27/03 maturity) (a)........................................... 498,111
United States Treasury Bill ($250,000 par, yielding 1.710%,
01/16/03 maturity) (a)........................................... 249,822
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS........................... 747,933
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $1,251,933)................................................ 1,251,933
------------
TOTAL INVESTMENTS 98.3%
(Cost $201,183,146).............................................. 211,997,343
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%......................... 3,699,093
------------
NET ASSETS 100.0%.................................................. $215,696,436
============
* Zero coupon bond
(a) Asset segregated as collateral for open futures transactions.
(b) These securities are restricted and may be resold only in transactions
exempt from registration which are normally those transactions with
qualified institutional buyers.
See Notes to Financial Statements
17
YOUR FUND'S INVESTMENTS
December 31, 2002 (Unaudited)
(c) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally those
transactions with qualified institutional buyers.
(d) Non-income producing security.
LYON--Liquid Yield Option Note
See Notes to Financial Statements
18
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
December 31, 2002 (Unaudited)
ASSETS:
Total Investments (Cost $201,183,146)....................... $211,997,343
Cash........................................................ 953
Receivables:
Interest.................................................. 3,850,454
Variation Margin on Futures............................... 92,094
Other....................................................... 42,794
------------
Total Assets............................................ 215,983,638
------------
LIABILITIES:
Payables:
Investment Advisory Fee................................... 88,179
Affiliates................................................ 5,800
Trustees' Deferred Compensation and Retirement Plans........ 120,764
Accrued Expenses............................................ 72,459
------------
Total Liabilities....................................... 287,202
------------
NET ASSETS.................................................. $215,696,436
============
NET ASSET VALUE PER COMMON SHARE ($215,696,436 divided by
11,362,465 shares outstanding)............................ $ 18.98
============
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..................................................... 207,607,803
Net Unrealized Appreciation................................. 9,885,480
Accumulated Undistributed Net Investment Income............. (1,489,717)
Accumulated Net Realized Loss............................... (11,669,595)
------------
NET ASSETS.................................................. $215,696,436
============
See Notes to Financial Statements
19
Statement of Operations
For the Six Months Ended December 31, 2002 (Unaudited)
INVESTMENT INCOME:
Interest.................................................... $ 6,950,087
-----------
EXPENSES:
Investment Advisory Fee..................................... 518,627
Shareholder Services........................................ 46,854
Custody..................................................... 12,018
Trustees' Fees and Related Expenses......................... 10,802
Legal....................................................... 8,245
Other....................................................... 85,363
-----------
Total Expenses.......................................... 681,909
Less Credits Earned on Cash Balances.................... 2
-----------
Net Expenses............................................ 681,907
-----------
NET INVESTMENT INCOME....................................... $ 6,268,180
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $(5,800,071)
Futures................................................... (262,345)
-----------
Net Realized Loss........................................... (6,062,416)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 615,636
-----------
End of the Period:
Investments............................................. 10,814,197
Futures................................................. (928,717)
-----------
9,885,480
-----------
Net Unrealized Appreciation During the Period............... 9,269,844
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 3,207,428
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 9,475,608
===========
See Notes to Financial Statements
20
Statements of Changes in Net Assets
(Unaudited)
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 2002 JUNE 30, 2002
----------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................... $ 6,268,180 $ 14,223,667
Net Realized Loss................................... (6,062,416) (2,592,988)
Net Unrealized Appreciation/Depreciation During the
Period............................................ 9,269,844 (3,734,449)
------------ ------------
Change in Net Assets from Operations................ 9,475,608 7,896,230
Distributions from Net Investment Income............ (7,157,948) (15,054,433)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES........................................ 2,317,660 (7,158,203)
NET ASSETS:
Beginning of the Period............................. 213,378,776 220,536,979
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
($1,489,717) and ($599,949), respectively)........ $215,696,436 $213,378,776
============ ============
See Notes to Financial Statements
21
Financial Highlights
(Unaudited)
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
SIX MONTHS
ENDED
DECEMBER 31, ------------------
2002 2002 (a) 2001
----------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD........... $18.78 $19.41 $18.70
------ ------ ------
Net Investment Income............................ .55 1.26 1.40
Net Realized and Unrealized Gain/Loss............ .28 (.56) .68
------ ------ ------
Total from Investment Operations................... .83 .70 2.08
Less Distributions from Net Investment Income...... .63 1.33 1.37
------ ------ ------
NET ASSET VALUE, END OF THE PERIOD................. $18.98 $18.78 $19.41
====== ====== ======
Common Share Market Price at End of the Period..... $18.45 $18.50 $19.15
Total Return (b)................................... 3.13%* 3.50% 23.10%
Net Assets at End of the Period (In millions)...... $215.7 $213.4 $220.5
Ratio of Operating Expenses to Average Net
Assets........................................... .64% .65% .68%
Ratio of Convertible Note Expenses to Average Net
Assets (c)....................................... -- -- --
Ratio of Net Investment Income to Average Net
Assets........................................... 5.87% 6.39% 7.25%
Portfolio Turnover................................. 27%* 107% 88%
Assuming full dilution of debt: (c)
Net Asset Value, End of the Period............... -- -- --
Number of Shares Outstanding, End of the Period
(000).......................................... -- -- --
* Non-Annualized
(a) As required, effective July 1, 2001, the Fund has adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on fixed income securities. The effect of this change for
the year ended June 30, 2002 was to decrease net investment income per share
by $.04, increase net realized and unrealized gains and losses per share by
$.04 and decrease the ratio of net investment income to average net assets
by .24%. Per share, ratios and supplemental data for periods prior to June
30, 2002 have not been restated to reflect this change in presentation.
(b) Total return based on common share market price assumes an investment at the
common share 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
common share market price at the end of the period indicated.
(c) On January 3, 1995, the Fund paid off its outstanding convertible extendible
note.
22
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
$19.59 $ 21.16 $ 20.26 $19.97 $ 20.41 $ 19.07 $ 21.33 $19.85
------ ------- -------- ------ ------- ------- ------- ------
1.43 1.41 1.48 1.56 1.54 1.52 1.56 1.58
(.93) (1.56) .93 .27 (.44) 1.36 (2.28) 1.55
------ ------- -------- ------ ------- ------- ------- ------
.50 (.15) 2.41 1.83 1.10 2.88 (.72) 3.13
1.39 1.42 1.51 1.54 1.54 1.54 1.54 1.65
------ ------- -------- ------ ------- ------- ------- ------
$18.70 $ 19.59 $ 21.16 $20.26 $ 19.97 $ 20.41 $ 19.07 $21.33
====== ======= ======== ====== ======= ======= ======= ======
$16.75 $17.875 $19.6875 $19.25 $18.125 $19.125 $18.125 $20.75
1.88% -2.45% 10.08% 15.06% 2.61% 14.89% -5.59% 13.76%
$212.4 $ 222.6 $ 240.4 $230.2 $ 226.9 $ 231.9 $ 216.6 $235.6
.64% .66% .65% .68% .67% .68% .68% .71%
-- -- -- -- -- .39% .82% .98%
7.48% 6.79% 7.04% 7.70% 7.47% 7.92% 7.29% 7.65%
71% 10% 27% 8% 11% 8% 2% 19%
-- -- -- -- -- -- $ 19.07 $21.09
-- -- -- -- -- -- 12,411 12,411
See Notes to Financial Statements
23
NOTES TO
FINANCIAL STATEMENTS
December 31, 2002 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen 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 seek interest income while
conserving capital through investing in a diversified portfolio consisting
primarily of high-quality 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 accounting principles
generally accepted in the United States of America 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 or indications of value obtained from an independent pricing service.
Investments in securities listed on a securities exchange are valued at their
sale price as of the close of such securities exchange. Listed securities and
unlisted 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 as noted above, valuations are determined in
accordance with procedures established in good faith by the Board of Trustees.
Futures contracts are valued at the settlement price established each day on the
exchange on which they are traded. Short-term securities with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
market value.
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, 2002, there were no
when-issued or delayed delivery purchase commitments.
The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash
24
NOTES TO
FINANCIAL STATEMENTS
December 31, 2002 (Unaudited)
balances into a pooled cash account along with other investment companies
advised by Van Kampen Asset Management Inc. (the "Adviser") or its affiliates,
the daily aggregate of which is invested in repurchase agreements. Repurchase
agreements are fully collateralized by the underlying debt security. The Fund
will make payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller is required
to maintain the value of the underlying security at not less than the repurchase
proceeds due the Fund.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis and
dividend income is recorded on the ex-dividend date. Premiums are amortized and
discounts are accreted over the expected life of each applicable security.
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, 2002, the Fund had an accumulated capital loss carryforward
for tax purposes of $848,660, which will expire on June 30, 2009.
At December 31, 2002, the cost and related gross unrealized appreciation and
depreciation are as follows:
Cost of investments for tax purposes........................ $202,270,079
============
Gross tax unrealized appreciation........................... $ 11,806,360
Gross tax unrealized depreciation........................... (2,079,096)
------------
Net tax unrealized appreciation on investments.............. $ 9,727,264
============
E. DISTRIBUTION OF INCOME AND GAINS The 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 futures transactions. All
short-term capital gains and a portion of futures gains are included in ordinary
income for tax purposes.
25
NOTES TO
FINANCIAL STATEMENTS
December 31, 2002 (Unaudited)
The tax character of distributions paid during the year ended June 30, 2002
was as follows:
2002
Distributions paid from:
Ordinary income........................................... $15,283,368
Long-term capital gain.................................... -0-
-----------
$15,283,368
===========
As of June 30, 2002, the component of distributable earnings on a tax basis
was as follows:
Undistributed ordinary income............................... $666,671
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses relating to wash sale
transactions.
F. EXPENSE REDUCTIONS During the six months ended December 31, 2002, the Fund's
custody fee was reduced by $2 as a result of credits earned on cash balances.
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 DAILY NET ASSETS % PER ANNUM
First $150 million.......................................... .50%
Next $100 million........................................... .45%
Next $100 million........................................... .40%
Over $350 million........................................... .35%
For the six months ended December 31, 2002, the Fund recognized expenses of
approximately $8,200 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.
Under an Accounting Services agreement, the Adviser provides accounting
services to the Fund. The Adviser allocates cost of such services to each fund.
For the six months ended December 31, 2002, the Fund recognized expenses of
approximately $9,500 representing Van Kampen Investments Inc.'s or its
affiliates'
26
NOTES TO
FINANCIAL STATEMENTS
December 31, 2002 (Unaudited)
(collectively "Van Kampen") cost of providing accounting services to the Fund,
which are reported as part of "Other" expenses on the Statement of Operations.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 upon retirement for a
ten-year period and are based upon each trustee's years of service to the Fund.
The maximum annual benefit per trustee under the plan is $2,500.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $60,352,870 and $55,014,012,
respectively.
4. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio or to generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
taking delivery of a security underlying a futures contract. In this instance,
the recognition of gain or loss is postponed until the disposal of the security
underlying the futures contract. Risks may arise as a result of the potential
inability of the counterparties to meet the terms of their contracts.
During the period, the Fund invested in futures contracts, a type of
derivative. A futures contract is an agreement involving the delivery of a
particular asset on a specified future date at an agreed upon price. The Fund
generally invests in exchange traded futures on U.S. Treasury Bonds and Notes
and typically closes the contract prior to delivery date. Upon entering into
futures contracts, the Fund maintains an amount of cash or liquid securities
with a value equal to a percentage of the contract amount with either a future
commission merchant pursuant to rules and regulations promulgated under the 1940
Act, as amended, or with its custodian in an account in the broker's name. This
amount is known as initial margin. During the period the futures contract is
open, payments are received from or made to the broker based upon changes in the
value of the contract (the
27
NOTES TO
FINANCIAL STATEMENTS
December 31, 2002 (Unaudited)
variation margin). The risk of loss associated with a futures contract is in
excess of the variation margin reflected on the Statement of Assets and
Liabilities.
Transactions in futures contracts for the six months ended December 31,
2002, were as follows:
CONTRACTS
Outstanding at June 30, 2002................................ 403
Futures Opened.............................................. 1,093
Futures Closed.............................................. (1,130)
------
Outstanding at December 31, 2002............................ 366
======
The futures contracts outstanding as of December 31, 2002 and the
descriptions and unrealized appreciation/depreciation are as follows:
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
LONG CONTRACTS:
2-Year U.S. Treasury Note Future, March 2003
(Current Notional Value of $215,188 per contract)....... 10 $ 24,700
SHORT CONTRACTS:
U.S. Treasury Bond Future, March 2003
(Current Notional Value of $112,688 per contract)....... 104 (263,291)
5-Year U.S. Treasury Note Future, March 2003
(Current Notional Value of $113,250 per contract)....... 134 (293,236)
10-Year U.S. Treasury Note Future, March 2003
(Current Notional Value of $115,047 per contract)....... 118 (396,890)
--- ---------
366 $(928,717)
=== =========
28
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
VAN KAMPEN BOND FUND
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
INVESTMENT ADVISER
VAN KAMPEN ASSET MANAGEMENT INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
CUSTODIAN AND SHAREHOLDER SERVICING AGENT
STATE STREET BANK
AND TRUST COMPANY
c/o EquiServe LLP
P.O. Box 43011
Providence, Rhode Island 02940-3011
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT AUDITORS
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
Inquiries about an investor's account should be referred to the Fund's
transfer agent
State Street Bank and Trust Company
c/o EQUISERVE LLP
P.O. Box 43011
Providence, Rhode Island 02940-3011
Telephone: (800) 821-1238
Alaska and Hawaii
Call Collect: (781) 575-2000
Ask for Closed-End Fund Account Services
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
29
Van Kampen
Privacy Notice
The Van Kampen companies and investment products* respect your right to privacy.
We also know that you expect us to conduct and process your business in an
accurate and efficient manner. To do so, we must collect and maintain certain
nonpublic personal information about you. This is information we collect from
you on applications or other forms, and from the transactions you make with us,
our affiliates, or third parties. We may also collect information you provide
when using our web site, and text files (a.k.a. "cookies") may be placed on your
computer to help us to recognize you and to facilitate transactions you
initiate. We do not disclose any nonpublic personal information about you or any
of our former customers to anyone, except as permitted by law. For instance, so
that we may continue to offer you Van Kampen investment products and services
that meet your investing needs, and to effect transactions that you request or
authorize, we may disclose the information we collect to companies that perform
services on our behalf, such as printers and mailers that assist us in the
distribution of investor materials. These companies will use this information
only for the services for which we hired them, and are not permitted to use or
share this information for any other purpose. To protect your nonpublic personal
information internally, we permit access to it only by authorized employees, and
maintain physical, electronic and procedural safeguards to guard your nonpublic
personal information.
* Includes Van Kampen Investments Inc., Van Kampen Investment Advisory Corp.,
Van Kampen Asset Management Inc., Van Kampen Advisors Inc., Van Kampen
Management Inc., Van Kampen Funds Inc., Van Kampen Investor Services Inc., Van
Kampen Trust Company, Van Kampen System Inc. and Van Kampen Exchange Corp., as
well as the many Van Kampen mutual funds and Van Kampen unit investment
trusts.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
[VAN KAMPEN INVESTMENTS LOGO]
Copyright (C)2003 Van Kampen Funds Inc. All rights reserved.
VBF SAR 2/03 Member NASD/SIPC.
9463B03-AS-2/03