<TABLE>
Table of Contents
<CAPTION>
<S> <C>
Letter to Shareholders................. 1
Performance Results.................... 3
Performance Perspective................ 4
Portfolio Management Review............ 5
Portfolio of Investments............... 7
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
Independent Auditors' Report........... 21
</TABLE>
USGF ANR 2/96
Letter to Shareholders
January 24, 1996
Dear Shareholder,
For most investors, it would be hard to surpass the success enjoyed during
1995. The stock and bond markets achieved substantial gains, driven by a
combination of continuing economic growth and low inflation. The strength
of equity and fixed-income securities in 1995 was particularly impressive
because it followed a year in which both markets declined. People who
remained invested during 1995 generally shared in the growth of the markets,
while investors who retreated after 1994's downturn may have missed out on the
double-digit returns.
The rebound in the markets last year reinforces the importance of maintaining a
long-term perspective for your investments. While the environment for stocks
and bonds remains positive, it is unlikely that 1996 will see a repeat
of the markets' strong 1995 performance. However, over the long-term, stocks
have outperformed virtually all other types of investments, and bonds have met
the needs of investors who seek capital preservation and regular income.
[PHOTO]
Dennis J. McDonnell and Don G. Powell
Economic Overview
The U.S. economy grew throughout 1995, though the rate of growth slowed toward
year-end. The gross domestic product (the value of all goods and services
produced in the United States) grew at an annual rate of more than 4.2 percent
in the third quarter of 1995, but slowed to an estimated 2 to 3 percent in the
fourth quarter, with retail and auto sales particularly sluggish. The slower
growth rate eased concerns about a rise in inflation and allowed the Federal
Reserve Board to lower short-term interest rates by a quarter-percentage point
in late December. The reduction in rates during the latter half of 1995 is
expected to help generate moderate economic growth in 1996, just as the Fed's
raising of short-term rates in 1994 helped slow economic growth in 1995.
The cut in short-term rates, combined with modest growth forecasts, was viewed
by the financial markets as a positive event, pushing up both stock and bond
prices. For the year ended December 31, 1995, the Standard & Poor's 500-Stock
Index achieved a total return of 37.45 percent. The yield on 10-year Treasury
notes was 5.57 percent on December 31, compared to 7.83 percent at the beginning
of the year. Because bond prices and yields move in opposite directions, bond
prices rose. Many observers expect the Fed to cut rates further if Congress and
the President are able to reach an agreement on the federal budget, provided
economic conditions justify further easing.
With a low inflation, low interest rate environment, corporate earnings
remained quite strong during the year, helping to push stocks to new highs. The
strongest sectors were technology and finance, as these stocks benefited from
the impact of the Internet, telecommunications deregulation and bank mergers.
U.S. companies with global operations also did well, aided by a declining U.S.
dollar.
Continued on page two
1
Economic Outlook
Looking ahead, we are cautiously optimistic. We expect the economy to grow at
a rate of 2 to 3 percent throughout 1996, with growth stronger in the second
half of the year as the full impact of the Fed's rate cuts take effect. Lower
rates will have the greatest impact on interest-sensitive industries, such as
housing. Although inflation appears to be under control, there probably will be
some cyclical upward pressure in 1996.
The current economic conditions are ideal for stocks, especially those of
smaller companies, because they tend to be affected less by economic cycles. The
outlook for the fixed-income market --- including municipal bonds --is positive,
too. In the near-term, we believe domestic markets will benefit from a stable
U.S. dollar and increased business activity driven in part by a number of
recently announced strategic reorganizations of some of the nation's blue chip
industry leaders.
During recent months, debate over tax reform and the federal deficit has
dominated the agenda in Washington. Now that we are in a presidential election
year, tax reform likely will replace the budget battle as the top issue in
Washington. There has been varied speculation about the impact tax reform could
have on the economy and on various types of investments. We are following the
tax reform debate very closely, and we will keep you updated on this issue
throughout the year. See the winter issue of "Your Portfolio" for a detailed
discussion of tax reform.
On the following pages, you can read about your Fund's performance in 1995, as
well as the portfolio management team's outlook for the Fund in the coming
months. We hope that you will find this information helpful.
Corporate News
As part of our commitment to helping you achieve your investment goals, Van
Kampen American Capital strives to provide shareholders with the best service in
the mutual fund industry. That is why we are especially pleased to have received
the 1995 Quality Tested Service Seal, which is awarded annually by DALBAR, Inc.,
an independent research firm. The Seal, which symbolizes the achievement of the
highest tier of service in the mutual fund industry, was awarded to American
Capital annually from 1990 to 1994 and we are honored that the service provided
by Van Kampen American Capital has achieved the same level of excellence.
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>
<CAPTION>
Performance Results for the Period Ended December 31, 1995
Van Kampen American Capital U.S. Government Fund
A Shares B Shares C Shares
<S> <C> <C> <C>
Total Returns
One-year total return based on NAV<F1>.......... 17.61% 16.78% 16.78%
One-year total return<F2>....................... 12.02% 12.78% 15.78%
Five-year average annual total return<F2>....... 7.15% N/A N/A
Ten-year average annual total return<F2>........ 8.17% N/A N/A
Life-of-Fund average annual total return<F2>.... 10.02% 4.74% 4.20%
Commencement Date............................... 05/31/84 08/24/92 08/13/93
Distribution Rate and Yield
Distribution Rate<F3>........................... 6.88% 6.50% 6.50%
SEC Yield<F4>................................... 6.32% 5.79% 5.79%
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 December 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
Putting Your Fund's Performance in Perspective
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular
intervals. A good starting point is a comparison of your investment holdings
to an applicable benchmark, such as a broad-based market index. Such a
comparison can:
* Illustrate the general market environment in which your investments are being
managed
* Reflect the impact of favorable market trends or difficult market conditions
* Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Merrill Lynch 1 to 10 Year
Treasury Index over time. As a broad-based, unmanaged statistical composite,
this index does not reflect any commissions or fees which would be incurred
by an investor purchasing the securities it represents. Similarly, its
performance does not reflect any sales charges or other costs which would be
applicable to an actively managed portfolio, such as that of the Fund.
[GRAPH]
Growth of a Hypothetical $10,000 Investment
Van Kampen American Capital U.S. Government Fund vs. Merrill Lynch
1 to 10 Year Treasury Index (December 1985 through December 1995)
VKAC U.S. Government Fund Class A
U.S. Merrill
Government Lynch
x 31-Dec-85 9,524.90 10,000.00
31-Jan-86 9,551.60 10,060.00
28-Feb-86 9,851.20 10,303.75
31-Mar-86 10,037.60 10,598.85
30-Apr-86 10,128.10 10,662.45
31-May-86 9,943.20 10,512.85
x 30-Jun-86 10,079.80 10,770.94
31-Jul-86 10,247.70 10,908.06
31-Aug-86 10,474.00 11,156.87
30-Sep-86 10,441.90 11,051.55
31-Oct-86 10,614.40 11,187.37
30-Nov-86 10,841.20 11,299.02
x 31-Dec-86 10,866.40 11,320.15
31-Jan-87 11,050.80 11,417.50
28-Feb-87 11,156.90 11,484.07
31-Mar-87 11,095.80 11,436.52
30-Apr-87 10,601.70 11,248.97
31-May-87 10,546.50 11,238.05
x 30-Jun-87 10,725.50 11,365.72
31-Jul-87 10,717.30 11,386.97
31-Aug-87 10,569.20 11,354.18
30-Sep-87 10,237.40 11,205.10
31-Oct-87 10,696.00 11,557.61
30-Nov-87 10,795.20 11,621.87
x 31-Dec-87 11,023.50 11,731.00
31-Jan-88 11,395.20 12,027.09
29-Feb-88 11,542.10 12,152.41
31-Mar-88 11,377.90 12,099.67
30-Apr-88 11,309.10 12,084.06
31-May-88 11,194.80 12,017.00
x 30-Jun-88 11,514.30 12,212.27
31-Jul-88 11,483.40 12,182.72
31-Aug-88 11,498.20 12,191.86
30-Sep-88 11,802.30 12,403.35
31-Oct-88 12,054.20 12,572.07
30-Nov-88 11,863.70 12,463.07
x 31-Dec-88 11,849.80 12,474.04
31-Jan-89 11,944.20 12,597.28
28-Feb-89 11,862.20 12,544.62
31-Mar-89 11,865.20 12,606.85
30-Apr-89 12,066.80 12,839.44
31-May-89 12,428.80 13,109.71
x 30-Jun-89 12,808.20 13,443.75
31-Jul-89 13,056.40 13,718.54
31-Aug-89 12,890.70 13,527.55
29-Sep-89 12,936.70 13,595.48
31-Oct-89 13,224.80 13,874.60
30-Nov-89 13,367.80 14,010.29
x 31-Dec-89 13,494.10 14,045.46
31-Jan-90 13,359.40 13,965.68
28-Feb-90 13,419.40 14,000.73
31-Mar-90 13,435.10 14,028.04
30-Apr-90 13,333.30 13,979.22
31-May-90 13,695.60 14,274.60
x 30-Jun-90 13,923.00 14,460.60
31-Jul-90 14,133.60 14,667.96
31-Aug-90 14,019.30 14,604.45
30-Sep-90 14,139.10 14,737.79
31-Oct-90 14,288.30 14,942.94
30-Nov-90 14,572.40 15,165.74
x 31-Dec-90 14,791.40 15,380.64
31-Jan-91 14,982.90 15,536.44
28-Feb-91 15,088.10 15,617.85
31-Mar-91 15,194.00 15,702.66
30-Apr-91 15,340.30 15,865.34
31-May-91 15,447.70 15,955.29
x 30-Jun-91 15,455.30 15,972.21
31-Jul-91 15,686.30 16,144.07
31-Aug-91 16,011.10 16,445.64
30-Sep-91 16,328.20 16,725.54
31-Oct-91 16,512.50 16,914.71
30-Nov-91 16,666.90 17,113.12
x 31-Dec-91 17,128.10 17,531.19
31-Jan-92 16,856.30 17,354.30
29-Feb-92 16,988.90 17,420.08
31-Mar-92 16,885.40 17,349.18
30-Apr-92 17,009.10 17,507.75
31-May-92 17,297.70 17,757.23
x 30-Jun-92 17,577.30 18,014.54
31-Jul-92 17,803.50 18,349.07
31-Aug-92 17,975.60 18,560.63
30-Sep-92 18,126.20 18,817.51
31-Oct-92 17,870.30 18,586.05
30-Nov-92 17,874.90 18,503.72
x 31-Dec-92 18,201.40 18,747.60
31-Jan-93 18,533.70 19,097.99
28-Feb-93 18,809.90 19,383.89
31-Mar-93 18,888.50 19,456.58
30-Apr-93 19,003.10 19,610.09
31-May-93 19,023.30 19,551.85
x 30-Jun-93 19,355.00 19,832.61
31-Jul-93 19,435.80 19,873.47
31-Aug-93 19,638.30 20,176.93
30-Sep-93 19,610.20 20,264.10
31-Oct-93 19,668.00 20,299.56
30-Nov-93 19,491.00 20,202.12
x 31-Dec-93 19,649.40 20,280.91
31-Jan-94 19,825.00 20,482.71
28-Feb-94 19,509.40 20,191.65
31-Mar-94 18,835.70 19,908.76
29-Apr-94 18,618.20 19,773.95
31-May-94 18,695.50 19,794.35
x 30-Jun-94 18,630.70 19,808.40
29-Jul-94 19,035.70 20,054.02
31-Aug-94 19,048.90 20,116.99
30-Sep-94 18,656.80 19,955.25
31-Oct-94 18,555.40 19,959.54
30-Nov-94 18,439.90 19,860.04
x 30-Dec-94 18,648.20 19,935.31
31-Jan-95 19,089.30 20,266.04
28-Feb-95 19,629.10 20,653.93
31-Mar-95 19,703.70 20,767.12
28-Apr-95 19,981.40 21,005.52
31-May-95 20,680.10 21,605.86
x 30-Jun-95 20,834.70 21,747.16
31-Jul-95 20,820.50 21,761.52
31-Aug-95 20,991.40 21,939.96
29-Sep-95 21,148.90 22,087.54
31-Oct-95 21,336.20 22,335.66
30-Nov-95 21,626.10 22,614.41
x 29-Dec-95 21,932.40 22,844.62
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions for the period ended December 31,
1995, and includes payment of the maximum sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
4
Portfolio Management Review
Van Kampen American Capital U.S. Government Fund
We recently spoke with the management team of the Van Kampen American Capital
U.S. Government Fund about the key events and economic forces which shaped the
markets during the past fiscal year. The team includes Jack E. Doyle, portfolio
manager, and Peter W. Hegel, executive vice president, fixed-income investments.
The following excerpts reflect their views on the Fund's performance during the
twelve-month period ended December 31, 1995.
Q: After experiencing one of the worst fixed-income markets in history (1994),
we have since experienced a significant market rally and an overall positive
trend in the marketplace. In light of this, how did the Fund benefit from the
strong fixed-income markets we saw in 1995?
A: With the markets as strong as they were, it's not surprising that the Fund
had an excellent year. But what makes it all the more satisfying is the fact
that 1994 was such a difficult year.
The Fund rebounded in 1995 with a total return at net asset value (Class A
shares) of 17.61 percent<F1> over the twelve-month period ended December 31,
1995, which helps to explain why we always encourage shareholders to maintain
a long-term investment perspective. We did not change our philosophy because
we had a down year in 1994, we just positioned the portfolio to align with
our core beliefs and expectations for the long run.
On the income side of the equation, the Fund ended the year with an annualized
dividend of $1.08 per share. With its year-end net asset value of $14.95 per
share---up from $13.70 per share at the end of 1994---that represents a
distribution rate of 6.88 percent<F3> (as of December 31, 1995). Needless to
say, we were quite pleased with those numbers.
If you compare the Fund's performance to the total return of the Merrill Lynch
1- to 10-year Treasury Index, which was 14.55 percent through the twelve months
of 1995, you can see the Fund's relative strength. The Index is a broad-based,
unmanaged index that reflects the general performance of Treasury bonds with
maturities of 1 to 10 years. It does not reflect any commissions or fees that
would be paid by an investor purchasing the securities it represents.
Within its own peer group, the U.S. Mortgage Fund category, as tracked by
Lipper Analytical Services, the Fund was ranked 8 out of 58 funds for the
one-year period, 8 out of 22 funds for the five-year period, and 3 out of 12
funds for the ten-year period ended December 31, 1995.* (Please refer to the
chart on page three for additional Fund performance results.)
Q: You mentioned your "core beliefs and expectations" for the Fund. What role
did these principles play in achieving the Fund's performance?
A: The key was to maintain our disciplined approach and not turn bearish
after struggling through 1994.
We believed that economic conditions justified our expectations for a
favorable investment climate for fixed-income securities.
All indications were that inflation would be held in check. With a low rate of
inflation, continued upward pressure on interest rates would be unlikely, so we
positioned the Fund accordingly. We took a fairly aggressive stance on the
belief that interest rates would decline and provide support for the Fund's net
asset value (as interest rates fall, bond prices rise).
As it turns out, we were right. The Federal Reserve Board lowered the federal
funds rate (a key lending rate) in mid-1995 and again in December. Actually, the
markets were anticipating the Fed's easing and interest rates trended lower
throughout the year, with the rate on long-term Treasury bonds falling by more
than two full percentage points, well ahead of the one-half percentage point cut
in the fed funds rate.
The rate of inflation stayed around 2.6 percent and the economy grew at a low
to moderate pace---an excellent scenario for fixed-income securities. All of
these factors helped make 1995 a very good year for the bond market in general
and for the Fund in particular.
Please see footnotes on page three
5
Q: In terms of managing the Fund, how did you react to these conditions? What
were some of the changes you made to the portfolio during the year?
A: We continued to overweight mortgage-backed securities, maintaining
approximately 90 percent of the Fund's assets in that sector of the market.
That's where we saw the most opportunity for generating income.
Also, we boosted our holdings in longer-term Treasury securities to 7.8
percent of assets from 4.7 percent at the end of the last fiscal year, which
helped us take advantage of the rally in Treasuries.
We also took steps to capture some capital appreciation potential by
increasing our allocation in lower-coupon securities. These securities, such as
FNMA 6.5 percent coupons, can be purchased at a discount to par, providing a
greater potential for appreciation when interest rates decline.
[GRAPH]
Portfolio Holdings by Sector as of December 31, 1995
GNMA 48.3%
FNMA 32.5%
Treasury/Agency 7.8%
REMIC/CMO 7.7%
FHLMC 3.7%
Q: What is your outlook for the Fund and the market in the months ahead?
A: While the fixed-income markets probably won't be quite as good as they were
in 1995, the outlook for 1996 is generally optimistic.
It seems that low inflation is the "center of gravity" for everyone's market
outlook, with the consensus placing the inflation rate at somewhere around 2
percent or even less.
Combine that with an economy that seems destined to grow rather slowly in the
months ahead, and it's likely that we'll see further easing by the Fed. Also, if
you add the possibility of a long-term federal budget plan to eliminate the
federal budget deficit, you've created a highly favorable climate for bond
investing.
To put this in perspective, the last time we had a zero deficit and low
inflation, long-term Treasuries were yielding about 3 percent. They're around 6
percent today. Not that we'll duplicate those conditions, but certainly the
environment we expect is conducive to lower interest rates. And that's good news
for bond investors.
Peter W. Hegel Jack E. Doyle
Executive Vice President Portfolio Manager
Fixed-Income Investments
*Lipper Analytical Services, Inc. calculations are based upon changes in net
asset value with dividends reinvested. Lipper calculations do not include sales
charges and, if they had, results may have been less favorable.
Please see footnotes on page three
6
<TABLE>
<CAPTION>
Portfolio of Investments
December 31, 1995
- -----------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Backed Securities 118.4%
$ 1,162 FHLMC ............................ 10.250% 11/01/09 $ 1,268,438
309 FHLMC ............................ 11.250 09/01/15 341,437
1 FHLMC ............................ 8.000 01/01/19 595
23,000 FHLMC <F3> ....................... 8.000 01/15/21 23,847,320
52,201 FHLMC ............................ 8.500 Various 54,140,939
36,305 FHLMC ............................ 10.000 Various 39,704,088
36,030 FHLMC ............................ 11.000 Various 39,587,711
5,724 FHLMC (Seasoned) ................. 8.500 01/01/16 5,965,388
17,373 FHLMC REMIC #14B PAC <F3> ........ 9.000 12/15/19 18,578,772
44,820 FHLMC REMIC #79C PAC <F3> ........ 8.600 10/15/05 45,706,091
14,248 FHLMC REMIC #89D <F3> ............ 9.000 02/15/21 15,241,722
23,277 FHLMC REMIC #92G PAC <F3> ........ 7.000 11/15/20 23,329,159
13,124 FHLMC REMIC #97G PAC <F3> ........ 9.250 11/15/05 13,694,763
15,061 FHLMC REMIC #106G PAC <F3> ....... 8.250 12/15/20 16,370,102
13,099 FHLMC REMIC #127D PAC <F3> ....... 6.000 05/15/20 13,055,347
10,894 FHLMC REMIC #1350G PAC <F3> ...... 7.500 08/15/19 11,321,154
13,550 FHLMC REMIC #163E PAC <F3> ....... 6.000 01/15/21 13,408,402
30,326 FHLMC REMIC #165K PAC <F3> ....... 6.500 09/15/21 30,554,052
32,376 FHLMC REMIC #181E PAC <F3> ....... 7.000 08/15/21 33,048,450
56 FNMA ............................. 12.500 03/01/15 63,465
2,811 FNMA ............................. 13.000 06/01/15 3,216,514
7,273 FNMA ............................. 8.500 07/01/19 7,626,997
3,521 FNMA ............................. 9.500 05/01/20 3,752,956
740,297 FNMA <F2> ........................ 6.500 Various 732,191,150
516,410 FNMA <F2> ........................ 7.000 Various 520,918,336
42,410 FNMA ............................. 7.500 Various 43,482,788
62,423 FNMA ............................. 8.000 Various 64,820,964
11,890 FNMA ............................. 8.500 Various 12,409,711
7,195 FNMA ............................. 9.000 Various 7,581,236
10,936 FNMA ............................. 10.500 Various 12,080,978
11,426 FNMA ............................. 11.000 Various 12,757,353
2,050 FNMA ............................. 11.500 Various 2,303,995
2,723 FNMA #7- Interest Only <F3> ...... 8.500 04/01/17 637,938
3,760 FNMA #28- Interest Only <F3> ..... 8.500 01/01/18 859,215
11,859 FNMA (Seasoned) .................. 9.000 Various 12,570,039
5,921 FNMA REMIC #89-49C PAC <F3> ...... 8.900 11/25/17 5,941,128
6,346 FNMA REMIC #89-63E <F3> .......... 9.400 06/25/12 6,373,157
8,369 FNMA REMIC #89-85D PAC <F3> ...... 7.600 05/25/18 8,408,265
11,900 FNMA REMIC #89-94G PAC <F3> ...... 7.500 12/25/19 12,298,650
8,993 FNMA REMIC #89-97C <F3> .......... 9.000 01/25/15 9,092,228
18,085 FNMA REMIC #90-12G PAC <F3> ...... 4.500 02/25/20 16,249,553
20,517 FNMA REMIC #90-71H PAC <F3> ...... 8.500 06/25/20 21,923,440
9,650 FNMA REMIC #90-97E PAC <F3> ...... 7.000 08/25/19 9,703,109
15,000 FNMA REMIC #93-4HB PAC <F3> ...... 11.000 01/25/19 17,135,850
4,542 GNMA ............................. 11.500 Various 5,134,163
138,407 GNMA ............................. 7.000 Various 140,135,552
345,938 GNMA ............................. 7.500 Various 356,094,781
317,069 GNMA ............................. 8.000 Various 330,341,281
271 GNMA ............................. 8.000 Various 283,460
67,125 GNMA ............................. 8.500 Various 70,480,727
149 GNMA ............................. 8.500 Various 156,505
</TABLE>
7 See Notes to Financial Statements
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
December 31, 1995
- -------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Backed Securities (Continued)
$ 52,260 GNMA ................................. 9.000% Various $ 55,378,532
777,817 GNMA <F3> ............................ 9.000 Various 827,145,631
73,940 GNMA ................................. 9.500 Various 79,323,054
17,930 GNMA ................................. 10.000 Various 19,734,479
26,261 GNMA ................................. 10.500 Various 29,149,659
2,629 GNMA ................................. 11.000 Various 2,952,084
2,920 GNMA ................................. 12.000 Various 3,332,154
3,033 GNMA ................................. 12.500 Various 3,491,670
1,978 GNMA ................................. 13.000 Various 2,292,059
169,688 GNMA (Seasoned) ...................... 9.000 Various 181,617,463
1,037 GNMA GPM ............................. 12.250 Various 1,187,569
250 GNMA II .............................. 8.500 Various 261,462
9,618 GNMA II .............................. 10.500 Various 10,453,341
5,818 GNMA II .............................. 11.000 Various 6,398,140
2,559 GNMA II .............................. 11.500 Various 2,828,421
2,532 GNMA II .............................. 12.000 Various 2,829,987
1,560 GNMA II .............................. 12.500 Various 1,758,891
---------------
4,076,324,010
---------------
U.S. Treasury Securities 10.0%
15,000 U.S. T- Bonds ........................ 13.125 05/15/01 20,335,950
5,000 U.S. T- Bonds ........................ 13.750 08/15/04 7,755,100
55,000 U.S. T- Bonds <F3> ................... 14.000 11/15/11 91,260,400
40,000 U.S. T- Bonds ........................ 12.000 08/15/13 61,710,000
30,000 U.S. T- Bonds ........................ 7.250 08/15/22 34,750,500
55,000 U.S. T- Bonds ........................ 7.500 11/15/24 66,182,600
50,000 U.S. T- Bonds <F3> ................... 7.625 02/15/25 61,115,000
---------------
343,109,550
---------------
Total Long-Term Investments 128.4%
(Cost $4,282,930,048) <F1>........................................ 4,419,433,560
Liabilities in Excess of Other Assets (28.4%)..................... (976,626,407)
---------------
Net Assets 100%.................................................... $ 3,442,807,153
===============
<FN>
<F1> At December 31, 1995, cost for federal income tax purposes is
$4,282,930,048; the aggregate gross unrealized appreciation is $145,587,976
and the aggregate gross unrealized depreciation is $8,104,437, resulting in
net unrealized appreciation including open option transactions of
$137,483,539.
<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
<TABLE>
Statement of Assets and Liabilities
December 31, 1995
- -------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
Assets:
Investments, at Market Value (Cost $4,282,930,048) (Note 1).......................... $ 4,419,433,560
Cash................................................................................. 686
Receivables:
Investments Sold................................................................... 99,240,746
Interest........................................................................... 32,228,063
Fund Shares Sold................................................................... 1,297,917
Options at Market Value (Net premiums paid of $1,926,233) (Note 5)................... 2,906,260
Other................................................................................ 283,088
-----------------
Total Assets..................................................................... 4,555,390,320
-----------------
Liabilities:
Payables:
Investments Purchased (Note 4)..................................................... 976,512,501
Reverse Repurchase Agreements (Note 4)............................................. 115,954,000
Income Distributions .............................................................. 10,410,975
Fund Shares Repurchased............................................................ 3,335,370
Investment Advisory Fee (Note 2)................................................... 1,475,582
Accrued Expenses..................................................................... 4,894,739
-----------------
Total Liabilities................................................................ 1,112,583,167
-----------------
Net Assets........................................................................... $ 3,442,807,153
=================
Net Assets Consist of:
Paid in Surplus (Note 3)............................................................. $ 3,754,082,146
Net Unrealized Appreciation on Investments........................................... 137,483,539
Accumulated Undistributed Net Investment Income...................................... 4,934,355
Accumulated Net Realized Loss on Investments......................................... (453,692,887)
-----------------
Net Assets........................................................................... $ 3,442,807,153
=================
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$2,962,872,443 and 198,186,689 shares of beneficial interest issued and
outstanding) (Note 3)............................................................ $ 14.95
Maximum sales charge (4.75%* of offering price).................................. .75
-----------------
Maximum offering price to public................................................. $ 15.70
=================
Class B Shares:
Net asset value and offering price per share (Based on net assets of $466,659,324
and 31,218,386 shares of beneficial interest issued and outstanding) (Note 3).... $ 14.95
=================
Class C Shares:
Net asset value and offering price per share (Based on net assets of $13,275,386
and 888,082 shares of beneficial interest issued and outstanding) (Note 3)....... $ 14.95
=================
* On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
9 See Notes to Financial Statements
<TABLE>
Statement of Operations
For the Year Ended December 31, 1995
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
Investment Income:
Interest................................................................................ $ 292,245,019
Fee Income (Note 4)..................................................................... 13,105,469
------------------
Total Income........................................................................ 305,350,488
------------------
Expenses:
Investment Advisory Fee (Note 2)........................................................ 17,475,740
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of
$5,543,018,$4,537,659, $116,637 and $1, respectively) (Note 7) ....................... 10,197,315
Shareholder Services (Note 2) .......................................................... 4,647,943
Custody................................................................................. 2,029,910
Legal (Note 2).......................................................................... 326,992
Trustees Fees and Expenses (Note 2)..................................................... 61,879
Other................................................................................... 1,019,456
------------------
Total Operating Expenses............................................................ 35,759,235
Interest Expense (Note 4)........................................................... 9,371,512
------------------
Total Expenses...................................................................... 45,130,747
Less Expenses Reimbursed............................................................ 13,125
------------------
Net Expenses........................................................................ 45,117,622
------------------
Net Investment Income................................................................... $ 260,232,866
==================
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales................................................................... $ 8,803,856,172
Cost of Securities Sold............................................................... (8,807,627,946)
------------------
Net Realized Loss on Investments (Including realized loss on closed and expired option
transactions of $44,265,301).......................................................... (3,771,774)
------------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period............................................................... (162,461,005)
End of the Period (Including unrealized appreciation on open option transactions of
$980,027)........................................................................... 137,483,539
------------------
Net Unrealized Appreciation on Investments During the Period............................ 299,944,544
------------------
Net Realized and Unrealized Gain on Investments......................................... $ 296,172,770
==================
Net Increase in Net Assets from Operations.............................................. $ 556,405,636
==================
</TABLE>
10 See Notes to Financial Statements
<TABLE>
Statement of Changes in Net Assets
For the Years Ended December 31, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.............................................. $ 260,232,866 $ 300,654,036
Net Realized Loss on Investments................................... (3,771,774) (181,281,942)
Net Unrealized Appreciation/Depreciation on Investments
During the Period.................................................. 299,944,544 (331,730,536)
----------------- -----------------
Change in Net Assets from Operations .............................. 556,405,636 (212,358,442)
Distributions from Net Investment Income*.......................... (256,065,504) (299,974,780)
----------------- -----------------
Net Change in Net Assets from Investment Activities................ 300,340,132 (512,333,222)
----------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold.......................................... 114,233,308 225,736,668
Net Asset Value of Shares Issued Through Dividend Reinvestment..... 125,466,322 146,031,506
Cost of Shares Repurchased......................................... (469,431,118) (625,132,457)
----------------- -----------------
Net Change in Net Assets from Capital Transactions................. (229,731,488) (253,364,283)
----------------- -----------------
Total Increase/Decrease in Net Assets.............................. 70,608,644 (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 $4,934,355 and $766,993, respectively)........................ $ 3,442,807,153 $ 3,372,198,509
================= =================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1995 December 31, 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Distributions from Net Investment Income:
Class A Shares........................... $ (224,639,172) $ (265,263,650)
Class B Shares........................... (30,640,126) (33,862,695)
Class C Shares........................... (786,177) (848,319)
Class D Shares........................... (29) (116)
----------------- -----------------
$ (256,065,504) $ (299,974,780)
================= =================
</TABLE>
11 See Notes to Financial Statements
<TABLE>
<CAPTION>
Financial Highlights
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------------------------------------
Class A Shares 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period...................................... $ 13.698 $ 15.662 $ 15.720 $ 16.130 $ 15.253
--------- ---------- ---------- ---------- ---------
Net Investment Income....................................................... 1.111 1.177 1.286 1.365 1.390
Net Realized and Unrealized Gain/Loss on Investments........................ 1.233 (1.965) (.060) (.407) .897
--------- ---------- ---------- ---------- ---------
Total from Investment Operations.............................................. 2.344 (.788) 1.226 .958 2.287
Less Distributions from and in Excess of Net Investment Income................ 1.092 1.176 1.284 1.368 1.410
--------- ---------- ---------- ---------- ---------
Net Asset Value, End of the Period............................................ $ 14.950 $ 13.698 $ 15.662 $ 15.720 $ 16.130
========= ========== ========== ========== =========
Total Return.................................................................. 17.61% (5.10%) 7.95% 6.27% 15.80%
Net Assets at End of the Period (In millions)................................. $ 2,962.9 $ 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)............................................. 7.68%* 8.13% 8.08% 8.64% 8.97%
Portfolio Turnover (Excluding Dollar Rolls and Forward Transactions).......... 63.18% 43.69% 67.04% 10.94% 26.87%
* The Ratios of Expenses to Average Net Assets and Net Investment Income to
Average Net Assets were not affected by the assumption of certain expenses
by VKAC.
N/A = Prior to 1994, interest expense was immaterial and subsequently netted
against interest
income.
</TABLE>
12 See Notes to Financial Statements
<TABLE>
<CAPTION>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------------------------------------------------
August 24, 1992
Year Ended December 31 (Commencement of
--------------------------------------------- Distribution) to
Class B Shares 1995 1994 1993 December 31, 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period................ $ 13.694 $ 15.643 $ 15.709 $ 15.983
--------- ---------------------- ---------- -----------------
Net Investment Income................................. .991 1.055 1.149 .425
Net Realized and Unrealized Gain/Loss on Investments.. 1.241 (1.964) (.063) (.263)
--------- ---------------------- ---------- -----------------
Total from Investment Operations........................ 2.232 (.909) 1.086 .162
Less Distributions from and in Excess of Net Investment
Income................................................ .978 1.040 1.152 .436
--------- ---------------------- ---------- -----------------
Net Asset Value, End of the Period...................... $ 14.948 $ 13.694 $ 15.643 $ 15.709
========= ====================== ========== =================
Total Return............................................ 16.78% (5.93%) 7.01% 1.64%*
Net Assets at End of the Period (In millions)........... $ 466.7 $ 436.3 $ 474.7 $ 103.1
Ratio of Operating Expenses to Average Net Assets
(Annualized).......................................... 1.75%** 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)................................... 6.85%** 7.29% 7.00% 6.16%
Portfolio Turnover (Excluding Dollar Rolls and
Forward Transactions)................................. 63.18% 43.69% 67.04% 110.94%
*Non-Annualized
**The Ratios of Expenses to Average Net Assets and Net Investment Income
to Average Net Assets were not affected by the assumption of certain
expenses by VKAC.
N/A = Prior to 1994, interest expense was immaterial and subsequently
netted against interest income.
</TABLE>
13 See Notes to Financial Statements
<TABLE>
<CAPTION>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------------------------
August 13, 1993
(Commencement of
Year Ended Year Ended Distribution) to
Class C Shares December 31, 1995 December 31, 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period.................. $ 13.693 $ 15.626 $ 16.000
----------------- ----------------- -----------------
Net Investment Income..................................... .996 1.063 .433
Net Realized and Unrealized Gain/Loss on Investments ..... 1.237 (1.956) (.364)
----------------- ----------------- -----------------
Total from Investment Operations.......................... 2.233 (.893) .069
Less Distributions from and in Excess of Net Investment
Income.................................................... .978 1.040 .443
----------------- ----------------- -----------------
Net Asset Value, End of the Period........................ $ 14.948 $ 13.693 $ 15.626
================= ================= =================
Total Return.............................................. 16.78% (5.86%) .46%*
Net Assets at End of the Period (In millions)............. $ 13.3 $ 11.4 $ 9.6
Ratio of Operating Expenses to Average Net
Assets (Annualized)....................................... 1.75%** 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)........................... 6.86%** 7.29% 6.42%
Portfolio Turnover (Excluding Dollar Rolls and
Forward Transactions)................................... 63.18% 43.69% 67.04%
*Non-Annualized
**The Ratios of Expenses to Average Net Assets and Net Investment Income to
Average Net Assets were not affected by the assumption of certain expenses
by VKAC.
N/A = Prior to 1994, interest expense was immaterial and subsequently netted
against interest income.
</TABLE>
14 See Notes to Financial Statements
Notes to Financial Statements
December 31, 1995
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen American Capital U.S. Government Fund (the "Fund") is organized as a
series of Van Kampen American Capital U.S. Government Trust (the "Trust"), a
Delaware business trust and is registered as a diversified open-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund's investment objective is to provide a high level of current
income, with liquidity and safety of principal. 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. At December 31, 1995, there were no
when issued or delayed delivery purchase commitments.
C. Investment Income and Expenses-Interest income and expenses are recorded on
an accrual basis. Original issue discounts on securities purchased are amortized
over the expected life of each applicable security.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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 against any future realized capital gains.
At December 31, 1995, the Fund had an accumulated capital loss carryforward for
tax purposes of $453,692,887. Of this amount, $157,069,720, $50,594,575,
$6,272,412, $8,800,432, $45,902,032, $181,281,942 and $3,771,774 will expire on
December 31, 1996, 1997, 1998, 2000, 2001, 2002 and 2003, respectively. On
December 31, 1995, $74,101,929 of the Fund's capital loss carryforward expired,
resulting in a permanent book and tax basis difference. Accordingly, this
difference was reclassified from accumulated net realized loss on investments to
Class A share paid in surplus.
15
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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 year ended December 31, 1995, the Fund recognized expenses of
approximately $860,500 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
cash management, legal and certain shareholder services (prior to July 1995) to
the Fund.
In July 1995, the Fund began using ACCESS Investor Services, Inc., an
affiliate of the Adviser, as the transfer agent of the Fund. For the year ended
December 31, 1995, the Fund recognized expenses of approximately $1,720,000,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund has implemented deferred compensation and retirement plans for its
trustees. Under the deferred compensation plan, trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those trustees who are not officers of VKAC. The Fund's liability under the
deferred compensation and retirement plans at December 31, 1995, was
approximately $47,100.
At December 31, 1995, VKAC owned 100 shares of Class C.
16
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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 December 31, 1995, paid in surplus aggregated $3,241,403,229,
$498,757,767 and $13,921,150 for Class A, B and C, respectively. For the year
ended December 31, 1995, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 4,450,487 $ 64,561,951
Class B....................... 3,196,962 46,404,360
Class C....................... 223,253 3,266,997
Class D....................... -0- -0-
------------- -----------------
Total Sales..................... 7,870,702 $ 114,233,308
============= =================
Dividend Reinvestment:
Class A....................... 7,595,317 $ 110,358,313
Class B....................... 1,006,560 14,629,660
Class C....................... 32,914 478,345
Class D....................... -0- 4
------------- -----------------
Total Dividend Reinvestment..... 8,634,791 $ 125,466,322
============= =================
Repurchases:
Class A....................... (27,345,845) $ (396,421,409)
Class B....................... (4,846,397) (70,074,798)
Class C....................... (202,889) (2,933,194)
Class D....................... (114) (1,717)
------------- =================
Total Repurchases............... (32,395,245) $ (469,431,118)
============= =================
</TABLE>
17
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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.
Contingent Deferred
Sales Charge
Year of Redemption Class B Class 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
For the year ended December 31, 1995, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$193,700 and CDSC on the redeemed shares of Classes B and C of approximately
$1,661,200. Sales charges do not represent expenses of the Fund.
18
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, including
principal paydowns and dollar rolls, excluding short-term notes, for the year
ended December 31, 1995, were $8,523,171,213 and $8,807,627,946, 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 December 31,
1995, the Fund had open dollar roll and/or forward transactions with a market
value of $896.0 million and related assets segregated for these open purchases
of $900.7 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 Fund continues to receive principal and inter
est payments on these securities but pays interest to the counter-party based
upon a short-term interest rate. The average daily balance of reverse repurchase
agreements during the period was approximately $158.3 million with an average
interest rate of 5.919%. At December 31, 1995, the interest rate in effect for
reverse repurchase agreements was 5.674%.
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 year ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Contracts Premium
- ------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994..... -0- $ -0-
Options Written and Purchased
(Net)................................ 109,117 (131,629,351)
Options Terminated in Closing
Transactions (Net)................... (75,800) 112,638,675
Options Expired (Net)................ (31,317) 17,064,443
--------- ----------------
Outstanding at December 31, 1995..... 2,000 $ (1,926,233)
========= ================
</TABLE>
19
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
The related futures contracts of the outstanding option transactions as of
December 31, 1995, and the description and market value is as follows:
<TABLE>
<CAPTION>
Exp. Month/ Market Value
Contracts Exercise Price of Options
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Mar 1996 US Treasury Bond
Futures-Purchased Calls...... 2,000 Feb/122 $ 2,906,260
========= =============
</TABLE>
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 .25% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1995, are payments to VKAC of approximately $3,973,200.
20
Independent Auditors' Report
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The Board of Trustees and Shareholders of
Van Kampen American Capital U.S. Government Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital U.S. Government Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1995, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen American Capital U.S. Government Fund as of December 31, 1995, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 30, 1996
21
Funds Distributed by Van Kampen American Capital
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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 adviser 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 American Capital U.S. Government Fund
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Board of Trustees
J. Miles Branagan
Linda Hutton Heagy
Roger Hilsman
R. Craig Kennedy
Dennis J. McDonnell*
Donald C. Miller - Chairman
Jack E. Nelson
Don G. Powell*
Jerome L. Robinson
Fernando Sisto
Wayne W. Whalen*
William Stewart Woodside
Officers
Don G. Powell*
President and Chief Executive Officer
Dennis J. McDonnell*
Executive Vice President
Ronald A. Nyberg*
Vice President and Secretary
Edward C. Wood III*
Vice President and Chief Financial Officer
Curtis W. Morell*
Vice President and Chief Accounting Officer
John L. Sullivan*
Treasurer
Tanya M. Loden*
Controller
William N. Brown*
Peter W. Hegel*
Robert C. Peck, Jr.*
Alan T. Sachtleben*
Paul R. Wolkenberg*
Vice Presidents
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
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., 1996
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 American Capital U.S. Government Fund
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