<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Letter to Shareholders ................ 1
Performance Results ................... 3
Portfolio Management Review .......... 4
Portfolio of Investments ............. 6
Statement of Assets and Liabilities ... 9
Statement of Operations .............. 10
Statement of Changes in Net Assets .... 11
Financial Highlights ................. 12
Notes to Financial Statements ......... 15
</TABLE>
USGF SAR 8/95
Letter to Shareholders
August 3, 1995
Dear Shareholder:
The first half of 1995 has been a very positive
one for most investors. Both the fixed-income and
stock markets have made considerable gains for
the period ended June 30, 1995. This year has
been particularly rewarding for investors after
weathering the difficult markets of 1994.
The first six months of 1995 serve as a
reminder of just how quickly markets can move,
and how difficult it can be to predict the timing of
those movements. Moreover, this year reinforces
the importance of maintaining a long-term perspective,
and reaffirms the principle that it is time---not timing
- ---that leads to investment success.
[PHOTO]
Dennis J. McDonnell and Don G. Powell
Economic Overview
Due in large part to the Federal Reserve Board's efforts to tighten monetary
supply in 1994, the economy has slowed significantly this year. Evidence of
this guided slowdown was reflected in gross domestic product for the second
quarter, which grew at an annual rate of 0.5 percent, substantially lower
than its first quarter of 2.7 percent and fourth quarter 1994 rate of 5.1
percent. While other key economic data, including unemployment rates and
housing starts, have shown mixed signs during recent weeks, the general trend
for the first half of the year suggested a "soft landing" scenario.
Subsequently, concern over inflation has subsided, as its annualized rate
has run at a modest pace of 3.2 percent year-to-date.
Financial markets, perceiving the Fed's monetary initiatives had taken hold
without driving the economy into a recession, rallied through the first six
months of the year. With slowing growth, interest rates declined and the value
of fixed-income investments rose. For example, the yield on 30-year Treasury
securities fell from 7.88 percent at the end of December to
6.62 percent at the end of June, while prices on the "long bond" rose 18
percent. Likewise, the yield on the Bond Buyer's Municipal Bond Index fell from
7.28 percent to 6.37 percent during the same period.
Corporate earnings remained quite strong during the first half of the year,
helping push stocks to new highs. The Dow Jones Industrial Average and the S&P
500 Index gained nearly 19 percent during the period. The strongest performance
has been in the science & technology sector of the market---and in big
"capitalization" stocks. As the U.S. dollar plunged against several
international currencies, companies---typically large ones---which had
diversified overseas were able to capture additional earnings, while technology
stocks benefited from booming growth in computers and telecommunications
throughout the world.
(Continued on page two)
1
Economic Outlook
Comfortable with the economy's rate of growth and level of inflation, the Fed
reversed course and lowered short-term interest rates on July 6. We believe the
Fed will move cautiously before easing again, waiting for further signs that the
economy has settled into a slow growth pattern. We anticipate that the economy
will grow at an annual rate between 2 and 3 percent in the second half of the
year and that inflation will run at an annualized rate between 3.3 and
3.5 percent. Based upon a generally slow growth and low inflation outlook, we
believe fixed income markets will continue to make positive gains as interest
rates fall. We look for stocks to perform well, but perhaps not as strongly as
in the first half of the year, as some companies may find it difficult to
maintain their strong earnings momentum.
During recent months, debate over tax reform has dominated the agenda in
Washington. There has been varied speculation about the impact of reform, which
may have caused you to wonder how it might affect your investment goals. At this
point, no one knows for sure what will happen or when it might actually take
place. As various proposals come to the forefront, there may be short-term
market fluctuations, just as we saw during the debate over the U.S. health care
system. We will continue to keep a close watch over any new developments and
evaluate the potential impact that they may have on your investments.
Once again, it is important to remember that financial markets will inevitably
experience highs and lows, but by maintaining a long-term investment
perspective, it may allow you to ride the ups and downs of the markets more
easily as you pursue your investment goals.
On the following pages, you can read about your Fund's performance for the
period, as well as portfolio management's outlook for the Fund in the coming
months. We hope that you will find the information contained in the
question-and-answer section helpful.
Corporate News
Along with your Fund's shareholder report, we are pleased to introduce a new
shareholder publication called Your Portfolio. The purpose of this publication
is to provide you with additional information about your mutual fund investment,
as well as offer helpful insights regarding long-term investment strategies and
trends in the marketplace. The publication will be mailed twice a year with your
June and December shareholder reports. This premier issue focuses on our various
shareholder services and privileges designed to make mutual fund investing
easier for you.
We appreciate your continued confidence in your investment with Van Kampen
American Capital, and we look forward to communicating with you again regarding
the performance of your Fund.
Sincerely,
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
2
<TABLE>
Performance Results for the Period Ended June 30, 1995
Van Kampen Merritt U.S. Government Fund
<CAPTION>
A Shares B Shares C Shares
<S> <C> <C> <C>
Total Returns
Six-month total return based on NAV<F1> ........ 11.72% 11.34% 11.34%
Six-month total return<F2> ..................... 6.42% 7.34% 10.34%
One-year total return<F2> ..................... 6.52% 6.92% 10.16%
Five-year average annual total return<F2> ..... 7.35% N/A N/A
Ten-year average annual total return<F2> ....... 8.76% N/A N/A
Life-of-Fund average annual total return<F2> ... 9.99% 3.54% 2.73%
Commencement Date ............................. 05/31/84 08/24/92 08/13/93
Distribution Rate and Yield
Distribution Rate<F3> .......................... 6.98% 6.60% 6.60%
SEC Yield<F4> .................................. 8.26% 7.84% 7.86%
N/A = Not Applicable
<FN>
<F1>Assumes reinvestment of all distributions for the period and does not include
payment of the maximum sales charge (4.75% for A shares) or contingent deferred
sales charge for early withdrawal (4% for B shares and 1% for C shares).
<F2>Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and 1%
for C shares).
<F3>Distribution rate represents the monthly annualized
distributions of the Fund at the end of the period, and not the earnings of the
Fund.
<F4>SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending June 30, 1995.
See the Fund 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.
</TABLE>
3
Portfolio Management Review
Van Kampen Merritt U.S. Government Fund
The following are excerpts from a recent interview with the management team of
Van Kampen Merritt U.S. Government Fund, including Jack E. Doyle, portfolio
manager, and Peter W. Hegel, executive vice president, Van Kampen American
Capital Investment Advisory Corp.
Q. After the difficult markets of 1994, it must be gratifying to review the
Fund's performance thus far in 1995. What are some of the highlights of the
period covered by this report (the six months through June 30, 1995)?
A. Without a doubt, the markets have rebounded solidly from their poor
performance in 1994 and moved ahead steadily. The Fund's year-to-date total
return through June 30, 1995, stood at 11.72 percent<F1> (Class A shares,
at net asset value).
What we're most proud of, however, is the fact that the Fund was awarded
by Lipper Analytical Services, the #1 ranking for total return among the
eleven funds in the U.S. Mortgage Fund category for the ten-year period
ended June 30, 1995.* That's the kind of long-term performance we've been
striving for all along.
Q. What are the key factors that contributed to the Fund's strong performance
over the first six months of the year?
A. The market's expectations that a slowing economy would prompt the Federal
Reserve Board to begin lowering interest rates resulted in an increase in the
value of fixed income securities in general. To put this move into perspective,
the net asset value of the Fund's Class A shares rose to $14.73 by June 30,
1995, up from $13.70 at the beginning of the year.
During the first quarter of this year, the ongoing rally in the bond market
was being driven by the belief that the Federal Reserve Board's monetary policy
decisions were working toward their desired effect: to foster a "soft landing"
for the economy, with moderate growth and little inflation. But by the second
quarter, the economic figures we were seeing had the markets thinking that we
may have overshot the soft landing and were sliding toward a recession and that
further easing might be imminent.
As it turns out, the Fed did lower short-term interest rates by 25 basis
points early in July, which provided renewed optimism for the bond market. While
that's a positive development, we still need to keep an eye on our ability to
generate earnings from the securities we purchase for the Fund's portfolio as
interest rates change. As you know, lower rates prompted us to adjust the Fund's
monthly dividend to $0.090 per share earlier this year (down from $0.094 per
share), but the Fund's distribution rate---6.98 percent<F3> as of June 30,
1995---remains very competitive in comparison to similar funds. (Please refer to
the chart on page three for additional Fund performance.)
*Source: Lipper Analytical Services. The Fund ranked 9th of 58 funds in the U.S.
Mortgage Fund category for the one-year period ended June 30, 1995; 6th of 21
funds for the five-year period ended June 30, 1995; and 1st of 11 for the
ten-year period ended June 30, 1995. Lipper rankings are based on total return
for the period measured, assuming that all distributions are reinvested and that
Fund shares are purchased without payment of the maximum sales charge of 4.75
percent.
4
Q. In terms of managing the Fund, how did you react to changing market
conditions during the period?
A. In light of the extended bond market rally---which really started in November
of 1994---we have begun to take a more conservative stance, leaning toward a
more defensive portfolio in the event that the market runs out of steam. This
approach involves reducing the Fund's duration and making certain decisions
about the composition of the portfolio.
The Fund's duration (a measure of a bond's sensitivity to a change in interest
rates) went from about 5.8 years at the start of the year to around 5.2 years as
of June 30. In general, the lower the duration, the less a bond's price will
change when interest rates change.
We have maintained our position in GNMA 9s (mortgage-backed securities issued
by the Government National Mortgage Association with a coupon of 9.0 percent).
These securities give us some protection against pre-payment risk because they
have been in the marketplace for some time, despite the fact that rates have
fallen sharply since their issue. If they haven't paid down by now, chances are
good that they will remain in the mortgage pool---and they give us a decent
income stream with that 9 percent coupon.
In general, we have a basic mortgage position, with approximately 90-95
percent of the Fund's assets in mortgage-backed securities. I would characterize
it as a fairly defensive portfolio which should provide us a degree of
resilience if we encounter a declining market.
Q. What is your near-term outlook for the markets?
A. All eyes will continue to be on the Federal Reserve Board as it directs
monetary policy in response to the changing state of our economy. The Fed's
ease in early July was a positive for the market, which now anticipates that
the trend for rates will be lower over the rest of the year. That, of course,
will depend on how the economy behaves. If economic growth resumes at a decent
rate, the Fed would have no reason to lower rates further---unless they see an
unavoidable slowing on the horizon.
We will maintain a somewhat defensive posture, assuming that the market rally
has probably expended much of its momentum over the first six months of the
year. While there is still room to run, we expect to see a more sedate
marketplace for the next quarter or two.
Peter W. Hegel Jack E. Doyle
Executive Vice President Portfolio Manager
Van Kampen American Capital
Investment Advisory Corp.
Please see footnotes on page three.
5
Portfolio of Investments
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
<S> <C> <C> <C> <C>
Mortgage Backed Securities 121.9%
$ 1,302 FHLMC ......................... 10.250% 11/01/09 $ 1,406,348
314 FHLMC ......................... 11.250 09/01/15 345,931
1 FHLMC ......................... 8.000 01/01/19 588
23,000 FHLMC <F3> ................... 8.000 01/15/21 23,695,980
56,226 FHLMC ......................... 8.500 Various 57,683,622
26,443 FHLMC ......................... 10.000 Various 28,591,056
13,900 FHLMC ......................... 10.000 Various 14,920,049
40,631 FHLMC ......................... 11.000 Various 44,693,531
6,414 FHLMC (Seasoned) .............. 8.500 01/01/16 6,612,763
15,061 FHLMC REMIC #106G PAC ........ 8.250 12/15/20 16,032,585
15,122 FHLMC REMIC #127D PAC ........ 6.000 05/15/20 14,877,052
10,894 FHLMC REMIC #1350G PAC ....... 7.500 08/15/19 11,113,623
17,373 FHLMC REMIC #14B PAC .......... 9.000 12/15/19 18,463,241
13,550 FHLMC REMIC #163E PAC ......... 6.000 01/15/21 12,914,776
30,326 FHLMC REMIC #165K PAC <F3> ... 6.500 09/15/21 29,130,852
32,376 FHLMC REMIC #181E PAC <F3> ... 7.000 08/15/21 31,905,577
44,820 FHLMC REMIC #79C PAC <F3> ..... 8.600 10/15/05 46,017,534
15,886 FHLMC REMIC #89D ............. 9.000 02/15/21 17,088,262
23,277 FHLMC REMIC #92G PAC ......... 7.000 11/15/20 23,318,219
13,124 FHLMC REMIC #97G PAC ......... 9.250 11/15/05 13,720,732
57 FNMA .......................... 12.500 03/01/15 64,044
3,237 FNMA .......................... 13.000 06/01/15 3,674,008
8,127 FNMA .......................... 8.500 07/01/19 8,439,751
4,049 FNMA .......................... 9.500 05/01/20 4,256,636
144,268 FNMA .......................... 6.500 Various 138,856,234
1,124,530 FNMA <F2> ..................... 7.000 Various 1,105,885,440
44,311 FNMA .......................... 7.500 Various 44,476,738
66,423 FNMA .......................... 8.000 Various 67,875,412
13,204 FNMA .......................... 8.500 Various 13,628,924
7,927 FNMA .......................... 9.000 Various 8,260,997
11,850 FNMA .......................... 10.500 Various 12,982,538
13,087 FNMA .......................... 11.000 Various 14,498,112
2,164 FNMA .......................... 11.500 Various 2,411,049
4,092 FNMA #28- Interest Only ....... 8.500 01/01/18 932,194
2,999 FNMA #7- Interest Only ....... 8.500 04/01/17 680,495
6 See Notes to Financial Statements
</TABLE>
Portfolio of Investments (Continued)
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
<S> <C> <C> <C> <C>
Mortgage Backed Securities (Continued)
$ 13,244 FNMA (Seasoned) ..................... 9.000% Various $ 13,852,192
10,806 FNMA REMIC #89-49C PAC .............. 8.900 11/25/17 10,882,286
12,659 FNMA REMIC #89-63E .................. 9.400 06/25/12 12,751,209
10,951 FNMA REMIC #89-85D PAC .............. 7.600 05/25/18 11,025,677
11,900 FNMA REMIC #89-94G PAC .............. 7.500 12/25/19 12,104,204
13,434 FNMA REMIC #89-97C .................. 9.000 01/25/15 13,625,017
18,085 FNMA REMIC #90-12G PAC .............. 4.500 02/25/20 15,543,153
670 FNMA REMIC #90-43C .................. 9.500 09/25/18 669,644
20,517 FNMA REMIC #90-71H PAC .............. 8.500 06/25/20 21,653,026
12,119 FNMA REMIC #90-97E PAC ............. 7.000 08/25/19 12,135,196
15,000 FNMA REMIC #93-4HB PAC .............. 11.000 01/25/19 17,368,500
5,075 GNMA ............................... 11.500 Various 5,683,986
144,806 GNMA ............................... 7.000 Various 142,541,303
363,003 GNMA ............................... 7.500 Various 365,151,751
337,557 GNMA ............................... 8.000 Various 345,675,190
295 GNMA ............................... 8.000 Various 302,608
73,092 GNMA ............................... 8.500 Various 76,082,415
153 GNMA ............................... 8.500 Various 159,621
59,440 GNMA ............................... 9.000 Various 62,429,747
859,598 GNMA <F3> ........................... 9.000 Various 906,059,431
82,976 GNMA ............................... 9.500 Various 87,954,039
20,920 GNMA ............................... 10.000 Various 22,776,422
29,568 GNMA ............................... 10.500 Various 32,542,960
2,920 GNMA ............................... 11.000 Various 3,240,926
3,236 GNMA ............................... 12.000 Various 3,660,972
3,460 GNMA ............................... 12.500 Various 3,958,473
2,249 GNMA ............................... 13.000 Various 2,593,530
184,990 GNMA (Seasoned) .................... 9.000 Various 195,913,733
1,109 GNMA GPM ........................... 12.250 Various 1,261,957
275 GNMA II ............................. 8.500 Various 284,454
10,947 GNMA II ............................. 10.500 Various 11,815,291
6,492 GNMA II ............................. 11.000 Various 7,068,204
2,797 GNMA II ............................. 11.500 Various 3,069,166
2,948 GNMA II ............................. 12.000 Various 3,265,285
1,659 GNMA II ............................. 12.500 Various 1,859,062
----------------
$ 4,266,415,523
----------------
7 See Notes to Financial Statements
</TABLE>
Portfolio of Investments (Continued)
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
<S> <C> <C> <C> <C>
U.S. Treasury Securities 7.7%
$ 15,000 U.S. T- Bonds .................. 13.125% 05/15/01 $ 20,180,250
5,000 U.S. T- Bonds .................. 13.750 08/15/04 7,567,250
55,000 U.S. T- Bonds .................. 14.000 11/15/11 87,863,050
40,000 U.S. T- Bonds .................. 12.000 08/15/13 58,962,400
30,000 U.S. T- Bonds .................. 7.250 08/15/22 31,983,300
55,000 U.S. T- Bonds .................. 7.500 11/15/24 60,871,290
-------------
267,427,540
-------------
Total Long-Term Investments 129.6%
(Cost $4,480,767,751) <F1> ............................. 4,533,843,063
Liabilities in Excess of Other Assets (29.6%) ......... (1,034,558,858)
-------------
Net Assets 100% ...................................... $ 3,499,284,205
-------------
-------------
<FN>
<F1> At June 30, 1995, cost for federal income tax purposes is $4,480,767,751;
the aggregate gross unrealized appreciation is $89,155,930 and the
aggregate gross unrealized depreciation is $35,186,991, resulting in net
unrealized appreciation including open option transactions of $53,968,939.
<F2> Securities purchased pursuant to a dollar roll transaction.
<F3> Assets segregated as collateral for dollar roll, reverse repurchase and
open option transactions.
</TABLE>
8 See Notes to Financial Statements
Statement of Assets and Liabilities
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $4,480,767,751) (Note 1) ......................... $ 4,533,843,063
Cash ............................................................................... 1,723
Receivables:
Interest .......................................................................... 36,102,917
Fund Shares Sold .................................................................. 1,117,177
Options at Market Value (Net premiums paid of $2,356,373) (Note 5) ................. 3,250,000
Other .............................................................................. 210,787
---------------
Total Assets ........................................................................ 4,574,525,667
---------------
Liabilities:
Payables:
Investments Purchased ............................................................. 886,644,278
Reverse Repurchase Agreements (Note 4) ........................................... 169,000,000
Income Distributions ............................................................. 10,799,064
Fund Shares Repurchased .......................................................... 3,135,607
Investment Advisory Fee (Note 2) ................................................. 1,465,157
Accrued Expenses .................................................................... 4,197,356
---------------
Total Liabilities ................................................................... 1,075,241,462
---------------
Net Assets .......................................................................... $ 3,499,284,205
---------------
Net Assets Consist of:
Paid in Surplus (Note 3) ............................................................ $ 3,935,864,862
Net Unrealized Appreciation on Investments ......................................... 53,968,939
Accumulated Undistributed Net Investment Income .................................... 5,834,177
Accumulated Net Realized Loss on Investments ........................................ (496,383,773)
---------------
Net Assets .......................................................................... $ 3,499,284,205
---------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $3,026,133,207
and 205,482,659 shares of beneficial interest issued and outstanding) (Note 3) ...... $ 14.73
Maximum sales charge (4.75%* of offering price) ..................................... .73
---------------
Maximum offering price to public .................................................... $ 15.46
---------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $461,630,062 and
31,347,906 shares of beneficial interest issued and outstanding) (Note 3) .......... $ 14.73
---------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $11,520,936 and
782,294 shares of beneficial interest issued and outstanding) (Note 3) ............. $ 14.73
---------------
* On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
9 See Notes to Financial Statements
Statement of Operations
For the Six Months Ended June 20, 1995 (Unaudited)
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest ............................................................................... $ 149,079,037
Fee Income (Note 4) .................................................................... 10,156,250
-----------------
Total Income .......................................................................... 159,235,287
-----------------
Expenses:
Investment Advisory Fee (Note 2) ...................................................... 8,675,947
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $3,109,662,
$2,225,739, $57,016 and $1, respectively) (Note 7) ................................... 5,392,418
Shareholder Services (Note 2) ........................................................ 2,416,019
Custody ............................................................................... 1,002,555
Legal (Note 2) ........................................................................ 173,600
Trustees Fees and Expenses (Note 2) .................................................... 18,979
Other ................................................................................. 224,253
-----------------
Total Operating Expenses .............................................................. 17,903,771
Interest Expense (Note 4) ............................................................. 4,615,653
-----------------
Net Investment Income .................................................................. $ 136,715,863
-----------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales .................................................................... $ 6,533,355,626
Cost of Securities Sold ................................................................ (6,505,716,357)
-----------------
Net Realized Gain on Investments (Including realized loss on closed and
expired option transactions of $19,996,217) ........................................... 27,639,269
-----------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period ............................................................... (162,461,005)
End of the Period (Including unrealized appreciation on
open option transactions of $893,627) ................................................. 53,968,939
-----------------
Net Unrealized Appreciation on Investments During the Period ........................... 216,429,944
-----------------
Net Realized and Unrealized Gain on Investments ........................................ $ 244,069,213
-----------------
Net Increase in Net Assets from Operations ............................................ $ 380,785,076
-----------------
</TABLE>
10 See Notes to Financial Statements
Statement of Changes in Net Assets
<TABLE>
For the Six Months Ended June 30, 1995 and the Year Ended December 31, 1994 (Unaudited)
<CAPTION>
Six Months Ended Year Ended
June 30, 1995 December 31, 1994
------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income ............................................. $ 136,715,863 $ 300,654,036
Net Realized Gain/Loss on Investments ............................. 27,639,269 (181,281,942)
Net Unrealized Appreciation/Depreciation on Investments
During the Period ................................................ 216,429,944 (331,730,536)
---------------- -----------------
Change in Net Assets from Operations ............................. 380,785,076 (212,358,442)
Distributions from Net Investment Income* ......................... (131,648,679) (299,974,780)
---------------- -----------------
Net Change in Net Assets from Investment Activities .............. 249,136,397 (512,333,222)
---------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold ........................................ 50,799,580 225,736,668
Net Asset Value of Shares Issued Through Dividend Reinvestment .... 64,380,306 146,031,506
Cost of Shares Repurchased ........................................ (237,230,587) (625,132,457)
---------------- -----------------
Net Change in Net Assets from Capital Transactions ............... (122,050,701) (253,364,283)
---------------- -----------------
Total Increase/Decrease in Net Assets ............................. 127,085,696 (765,697,505)
Net Assets:
Beginning of the Period .......................................... 3,372,198,509 4,137,896,014
---------------- -----------------
End of the Period (Including undistributed net investment income of
$5,834,177 and $766,993, respectively) ............................ $ 3,499,284,205 $ 3,372,198,509
---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Year Ended
*Distributions by Class June 30, 1995 December 31, 1994
<S> <C> <C>
Distributions from Net Investment Income:
Class A Shares ......................... $ (115,751,892) $ (265,263,650)
Class B Shares ......................... (15,500,134) (33,862,695)
Class C Shares ......................... (396,624) (848,319)
Class D Shares ......................... (29) (116)
----------------- ---------------
$ (131,648,679) $ (299,974,780)
----------------- ---------------
</TABLE>
11 See Notes to Financial Statements
Financial Highlights
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
<TABLE>
Year Ended December 31
<CAPTION>
Six Months Ended
Class A Shares June 30, 1995 1994 1993 1992 1991
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ... $ 13.698 $ 15.662 $ 15.720 $ 16.130 $ 15.253
------------ ---------- ---------- ---------- ----------
Net Investment Income ................. .573 1.177 1.286 1.365 1.390
Net Realized and Unrealized Gain/Loss
on Investments ......................... 1.008 (1.965) (.060) (.407) .897
------------ ---------- ---------- ---------- ----------
Total from Investment Operations ....... 1.581 (.788) 1.226 .958 2.287
Less Distributions from and in Excess
of Net Investment Income .............. .552 1.176 1.284 1.368 1.410
------------ ---------- ---------- ---------- ----------
Net Asset Value, End of Period ......... $ 14.727 $ 13.698 $ 15.662 $ 15.720 $ 16.130
------------ ---------- ---------- ---------- ----------
Total Return (Non-Annualized) .......... 11.72% (5.10%) 7.95% 6.27% 15.80%
Net Assets at End of Period
(In millions) ......................... $ 3,026.1 $ 2,924.4 $ 3,653.6 $ 3,571.7 $ 3,505.9
Ratio of Operating Expenses to
Average Net Assets (Annualized) ....... .93% .92% .87% .77% .68%
Ratio of Interest Expense to Average
Net Assets (Annualized) (Note 4) ....... .27% .08% N/A N/A N/A
Ratio of Net Investment Income to
Average Net Assets (Annualized) ....... 8.05% 8.13% 8.08% 8.64% 8.97%
Portfolio Turnover (Excluding Dollar
Rolls and Forward Transactions) ....... 41.41% 43.69% 67.04% 110.94% 26.87%
</TABLE>
N/A = Prior to 1994, interest expense was immaterial and subsequently
netted against interest income.
12 See Notes to Financial Statements
Financial Highlights (Continued)
<TABLE>
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
<CAPTION>
Six Months Year Year August 24, 1992
Ended Ended Ended (Commencement
June 30, Dec. 31, Dec. 31, of Distribution) to
Class B Shares 1995 1994 1993 December 31, 1992
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................. $ 13.694 $ 15.643 $ 15.709 $ 15.983
--------- --------- --------- -----------------
Net Investment Income ............... .516 1.055 1.149 .425
Net Realized and Unrealized
Gain/Loss on Investments ............ 1.008 (1.964) (.063) (.263)
--------- --------- --------- -----------------
Total from Investment Operations .... 1.524 (.909) 1.086 .162
Less Distributions from and in Excess
of Net Investment Income ............ .492 1.040 1.152 .436
--------- --------- --------- -----------------
Net Asset Value, End of Period ...... $ 14.726 $ 13.694 $ 15.643 $ 15.709
--------- --------- --------- -----------------
Total Return (Non-Annualized) ........ 11.34% (5.93%) 7.01% 1.64%
Net Assets at End of Period
(In millions) ........................ $ 461.6 $ 436.3 $ 474.7 $ 103.1
Ratio of Operating Expenses to
Average Net Assets (Annualized) ...... 1.73% 1.74% 1.73% 1.61%
Ratio of Interest Expense to
Average Net Assets
(Annualized) (Note 4) ............... .27% .09% N/A N/A
Ratio of Net Investment Income to
Average Net Assets (Annualized) ...... 7.24% 7.29% 7.00% 6.16%
Portfolio Turnover (Excluding Dollar
Rolls and Forward Transactions) ...... 41.41% 43.69% 67.04% 110.94%
</TABLE>
N/A = Prior to 1994, interest expense was immaterial and subsequently
netted against interest income.
13 See Notes to Financial Statements
<TABLE>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
<CAPTION>
Six Months Year August 13, 1993
Ended Ended (Commencement
June 30, Dec. 31, of Distribution) to
Class C Shares 1995 1994 December 31, 1993
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $ 13.693 $ 15.626 $ 16.000
--------- --------- -----------------
Net Investment Income ....................... .515 1.063 .433
Net Realized and Unrealized Gain/Loss
on Investments .............................. 1.011 (1.956) (.364)
--------- --------- -----------------
Total from Investment Operations ............. 1.526 (.893) .069
Less Distributions from and in Excess
of Net Investment Income .................... .492 1.040 .443
--------- --------- -----------------
Net Asset Value, End of Period .............. $ 14.727 $ 13.693 $ 15.626
--------- --------- -----------------
Total Return (Non-Annualized) ................ 11.34% (5.86%) .46%
Net Assets at End of Period (In millions) ... $ 11.5 $ 11.4 $ 9.6
Ratio of Operating Expenses to Average Net
Assets (Annualized) ......................... 1.71% 1.74% 1.71%
Ratio of Interest Expense to Average Net
Assets (Annualized) (Note 4) ................. .27% .10% N/A
Ratio of Net Investment Income to
Average Net Assets (Annualized) ............. 7.25% 7.29% 6.42%
Portfolio Turnover (Excluding Dollar Rolls
and Forward Transactions) ................... 41.41% 43.69% 67.04%
</TABLE>
N/A = Prior to 1994, interest expense was immaterial and subsequently
netted against interest income.
14 See Notes to Financial Statements
Notes to Financial Statements
June 30, 1995 (Unaudited)
1. Significant Accounting Policies
Van Kampen Merritt U.S. Government Fund (the "Fund") is organized as a sub-trust
of Van Kampen Merritt U.S. Government Trust (the "Trust"), a Massachusetts
business trust and is registered as a diversified open-end management investment
company under the Investment Company Act of 1940, as amended. The Fund commenced
investment operations on May 31, 1984. The distribution of the Fund's Class B
and Class C shares commenced on August 24, 1992 and August 13, 1993,
respectively. On May 2, 1995, all Class D shareholders redeemed their shares and
the class was eliminated. The Fund will no longer offer Class D shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
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 accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed 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.
C. Investment Income-Interest income is recorded on an accrual basis. Original
issue discounts on securities purchased are amortized 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 loss and offset such losses
15
Notes to Financial Statements (Continued)
June 30, 1995 (Unaudited)
against any future realized capital gains. At December 31, 1994, the Fund had an
accumulated capital loss carryforward for tax purposes of $524,023,042. Of this
amount, $74,101,929, $157,069,720, $50,594,575, $6,272,412, $8,800,432,
$45,902,032 and $181,281,942 will expire on December 31, 1995, 1996, 1997, 1998,
2000, 2001 and 2002, respectively.
E. Distribution of Income and Gains-The Fund declares daily and pays monthly
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, which are included as ordinary income for
tax purposes.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") will provide investment advice
and facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
<S> <C>
First $500 million ... .550 of 1%
Next $500 million ..... .525 of 1%
Next $2 billion ...... .500 of 1%
Next $2 billion ...... .475 of 1%
Next $2 billion ...... .450 of 1%
Next $2 billion ...... .425 of 1%
Thereafter ............ .400 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.
For the six months ended June 30, 1995, the Fund recognized expenses of
approximately $694,200 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
legal and certain shareholder services to the Fund.
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
16
Notes to Financial Statements (Continued)
June 30, 1995 (Unaudited)
of VKAC. The Fund's liability under the deferred compensation and retirement
plans at June 30, 1995, was approximately $21,500.
At June 30, 1995, VKAC owned 105 and 100 shares of Classes B and C,
respectively.
3. Capital Transactions
The Fund has outstanding three classes of common shares, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized. At June 30, 1995, paid in surplus aggregated $3,422,882,975,
$500,620,665 and $12,361,222 for Class A, B and C, respectively. For the six
months ended June 30, 1995, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
Sales:
Class A ...................... 2,039,293 $ 29,025,199
Class B ...................... 1,489,832 21,267,374
Class C ....................... 35,891 507,007
Class D ....................... -0- -0-
------------ ----------------
Total Sales ................... 3,565,016 $ 50,799,580
------------ ----------------
Dividend Reinvestment:
Class A ...................... 3,959,182 $ 56,750,020
Class B ...................... 514,896 7,382,164
Class C ....................... 17,302 248,118
Class D ....................... -0- 4
------------ ----------------
Total Dividend Reinvestment ... 4,491,380 $ 64,380,306
------------ ----------------
Repurchases:
Class A ...................... (14,002,546) $ (199,898,547)
Class B ...................... (2,518,083) (35,827,418)
Class C ....................... (105,703) (1,502,905)
Class D ....................... (114) (1,717)
------------ ----------------
Total Repurchases ............ (16,626,446) $ (237,230,587)
------------ ----------------
</TABLE>
17
Notes to Financial Statements (Continued)
June 30, 1995 (Unaudited)
At December 31, 1994, paid in surplus aggregated $3,537,006,303, $507,798,545,
$13,109,002 and $1,713 for Classes A, B, C and D, respectively. For the year
ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
Sales:
Class A ...................... 7,599,641 $ 112,208,814
Class B ...................... 7,168,455 106,241,984
Class C ....................... 498,458 7,284,166
Class D ....................... 113 1,704
------------ ----------------
Total Sales ................... 15,266,667 $ 225,736,668
------------ ----------------
Dividend Reinvestment:
Class A ...................... 8,956,898 $ 129,070,604
Class B ...................... 1,141,680 16,421,225
Class C ....................... 37,661 539,668
Class D ....................... 1 9
------------ ----------------
Total Dividend Reinvestment ... 10,136,240 $ 146,031,506
------------ ----------------
Repurchases:
Class A ...................... (36,347,230) $ (523,299,211)
Class B ...................... (6,793,189) (97,347,991)
Class C ....................... (317,931) (4,485,255)
Class D ....................... -0- -0-
------------ ----------------
Total Repurchases ............ (43,458,350) $ (625,132,457)
------------ ----------------
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
18
Page: 20
Notes to Financial Statements (Continued)
June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
<S> <C> <C>
First .................... 4.00% 1.00%
Second .................. 3.75% None
Third ................... 3.50% None
Fourth .................. 2.50% None
Fifth .................... 1.50% None
Sixth ................... 1.00% None
Seventh and Thereafter ... None None
</TABLE>
For the six months ended June 30, 1995, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$105,400 and CDSC on the redeemed shares of Classes B and C of approximately
$944,400. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, including
principal paydowns and dollar rolls, excluding short-term notes, for the six
months ended June 30, 1995, were $6,420,096,213 and $6,505,716,357,
respectively.
The Fund utilizes investment techniques called "dollar rolls," "forward
transactions" and reverse repurchase agreements for leverage purposes. In a
dollar roll, the Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase, typically in 30 to 60 days,
substantially similar (same type, coupon and maturity) securities on a specified
future date from the same party at an agreed upon price which is less than the
sales price. The Fund is compensated by the difference between the current sales
price and the forward price for the future purchase.
In a forward transaction, the Fund purchases securities for delivery in the
current month and subsequently agrees to postpone delivery until the next
available delivery date, usually the next month. The Fund receives a fee as
compensation for postponing delivery. Fee income on these transactions is
recognized at the offsetting transaction's trade date for dollar rolls and the
date when settlement is postponed for forward transactions. At June 30, 1995,
the Fund had open dollar roll and/or forward transactions with a market value of
$885.1 million and related assets segregated for these open purchases of $906.1
million.
In a reverse repurchase agreement, the Fund sells securities and agrees to
repurchase them at a mutually agreed upon date and price. During the reverse
repurchase agreement period, the
19
Page: 21
Notes to Financial Statements (Continued)
June 30, 1995 (Unaudited)
Fund continues to receive principal and interest payments on these securities.
The average daily balance of reverse repurchase agreements during the period was
approximately $155.7 million with an average interest rate of 5.89%. At June 30,
1995, the interest rate in effect for reverse repurchase agreements was 6.35%.
5. 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 utilizes option contracts to manage the portfolio's effective
maturity or duration. Options are marked to market each day with the change in
value reflected in the unrealized appreciation/depreciation on investments. Upon
disposition, a realized gain or loss is recognized accordingly, except for
exercised option contracts where the recognition of gain
or loss is postponed until the disposal of the security underlying the option
contract.
An option contract gives the buyer the right, but not the obligation to buy
(call) or sell (put) an underlying item at a fixed exercise price during a
specified period.
Transactions in options for the six months ended June 30, 1995, were as
follows:
<TABLE>
<CAPTION>
Contracts Premium
<S> <C> <C>
Outstanding at December 31, 1994 ... -0- $ -0-
Options Written and
Purchased (Net) .................... 56,617 (34,685,346)
Options Terminated in Closing
Transactions (Net) ................ (22,300) 15,909,287
Options Expired (Net) .............. (30,317) 16,419,686
-------- ---------------
Outstanding at June 30, 1995 ....... 4,000 $ (2,356,373)
-------- ---------------
</TABLE>
The related futures contracts of the outstanding option transactions as of
June 30, 1995, and the descriptions and market values are as follows:
<TABLE>
<CAPTION>
Exp. Month/ Market Value
Contracts Exercise Price of Options
<S> <C> <C> <C>
Aug 1995 US Treasury Bond
Futures-Purchased Calls ... 1,000 Aug/115 $ 625,000
Aug 1995 US Treasury Bond
Futures-Purchased Puts ..... 1,000 Aug/114 1,437,500
Aug 1995 US Treasury Bond
Futures-Purchased Puts ..... 2,000 Aug/112 1,187,500
----- ------------
4,000 $ 3,250,000
----- ------------
</TABLE>
20
Notes to Financial Statements (Continued)
June 30, 1995 (Unaudited)
6. Mortgage Backed Securities
A Mortgage Backed Security (MBS) is a pass-through security created by pooling
mortgages and selling participations in the principal and interest payments
received from borrowers. Most of these securities are guaranteed by federally
sponsored agencies---Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation
(FHLMC).
A Collateralized Mortgage Obligation (CMO) is a bond which is collateralized
by a pool of MBS's. The Fund also invests in REMIC's (Real Estate Mortgage
Investment Conduit) which are simply another form of CMO. These MBS pools are
divided into classes or tranches with each class having its own characteristics.
For instance, a PAC (Planned Amortization Class) is a specific class of
mortgages which over its life will generally have the most stable cash flows and
the lowest prepayment risk. A GPM (Graduated Payment Mortgage) is a negative
amortization mortgage where the payment amount gradually increases over the life
of the mortgage. The early payment amounts are not sufficient to cover the
interest due and, therefore, the unpaid interest is added to the principal, thus
increasing the borrower's mortgage balance.
An Interest Only security is another class of MBS representing ownership in
the cash flows of the interest payments made from a specified pool of MBS. The
cash flow on this instrument decreases as the mortgage principal balance is
repaid by the borrower.
7. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the six
months ended June 30, 1995, are payments to VKAC of approximately $2,342,600.
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
Emerging Growth Fund
Enterprise Fund
Pace Fund
Growth & Income
Balanced Fund
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
Limited 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
Texas Tax Free Income Fund
THE GOVETT FUNDS
Emerging Markets Fund
Global Income Fund
International Equity Fund
Latin America Fund
Pacific Strategy Fund
Smaller Companies 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 direct at 1-800-421-5666 weekdays
from 7:00 a.m. to 7:00 p.m. Central time.
22
Van Kampen Merritt U.S. Government Fund
Board of Trustees
Philip P. Gaughan
R. Craig Kennedy
Dennis J. McDonnell*
Donald C. Miller - Chairman
Jack E. Nelson
Jerome L. Robinson
Wayne W. Whalen*
Officers
Dennis J. McDonnell*
President
Ronald A. Nyberg*
Vice President and Secretary
Edward C. Wood, III*
Vice President and Treasurer
Peter W. Hegel*
Vice President
John L. Sullivan*
Controller
Nicholas Dalmaso*
Scott E. Martin*
Weston B. Wetherell*
Assistant Secretaries
Steven M. Hill*
Assistant Treasurer
Investment Adviser
Van Kampen American Capital
Investment Advisory Corp.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Distributor
Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Transfer Agent (Effective July 10, 1995)
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
333 West Wacker Drive
Chicago, Illinois 60606
Independent Auditors
KPMG Peat Marwick LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
*"Interested'' persons of the Fund, as defined in the Investment Company Act of
1940.
(C)Van Kampen American Capital Distributors, Inc., 1995 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 unless 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.
23
Van Kampen Merritt U.S. Government Fund
This Page Intentionally Left Blank
24
