<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio Highlights............................. 5
Portfolio Management Review...................... 6
Portfolio of Investments......................... 8
Statement of Assets and Liabilities.............. 10
Statement of Operations.......................... 11
Statement of Changes in Net Assets............... 12
Financial Highlights............................. 13
Notes to Financial Statements.................... 16
</TABLE>
USGF SAR 8/97
<PAGE> 2
LETTER TO SHAREHOLDERS
July 24, 1997
Dear Shareholder,
As you know, Van Kampen American
Capital was acquired by Morgan
Stanley Group Inc., a world leader in
asset management. Earlier this year, [PHOTO]
Morgan Stanley Group Inc. and Dean
Witter, Discover & Co. agreed to
merge. The merger was completed on
May 31, creating the combined company
of Morgan Stanley, Dean Witter, DENNIS J. MCDONNELL AND DON G. POWELL
Discover & Co. Additionally, we are
very pleased to announce that Philip
N. Duff, formerly the chief financial officer of Morgan Stanley Group Inc., has
joined Van Kampen American Capital as president and chief executive officer. I
will continue as chairman of the firm. We are confident that the partnership of
Van Kampen American Capital and Morgan Stanley will continue to work to the
benefit of our fund shareholders.
One of the immediate privileges that we can offer fund shareholders is the
ability to make exchanges between Van Kampen American Capital and Morgan Stanley
retail funds at no charge. In our view, the rapid appreciation of U.S. stock
prices in recent years has created a need for investors to examine their
portfolios carefully to ensure proper diversification among domestic and foreign
investments. The Morgan Stanley retail funds, with their emphasis on global
markets, can be valuable tools for accomplishing this diversification.
We also urge investors to consider how their fund holdings are currently
allocated among the three major asset classes of stocks, bonds, and cash
reserves. Uneven movements in the various markets can distort a carefully
planned investment program. And, with stock prices near record highs, it is
likely that some rebalancing of your portfolio allocations may be necessary.
Once again, the exchangeability feature with the Morgan Stanley retail funds
provides additional choices and opportunities to make the necessary adjustments
to your portfolio's asset allocation.
ECONOMIC OVERVIEW
Growth, stability, and confidence continued to characterize the U.S.
economic environment during the past six months. In the first quarter, the
economy grew at its fastest pace since 1987. Meanwhile, consumer confidence
soared to its highest reading in 27 years, while unemployment fell as low as 4.8
percent, the lowest level since 1973.
Despite the robust pace of economic activity, there was little evidence of
troublesome inflation. Wholesale prices actually fell during each of the first
five months of 1997, the longest stretch of consecutive monthly declines in 45
years. At the consumer level, prices rose by a mere 2.2 percent during the 12
months through May. A strong rally in the U.S.
Continued on page two
1
<PAGE> 3
dollar helped dampen inflationary pressures resulting from the vigorous domestic
economy by making imported goods less expensive. At the same time, continued
moderation in the cost of employee benefit packages offset mild upward pressure
on wages.
In March, the inflationary implications of a tight labor market caused the
Federal Reserve Board to raise its target for a key lending rate by one-quarter
of a percentage point, the first hike in short-term interest rates in two years.
Signs that economic growth slowed markedly in the second quarter, however, led
Fed policymakers to leave rates unchanged at subsequent meetings.
MARKET OVERVIEW
The strong economy and tight labor market combined to put mild upward
pressure on bond yields during the first half of 1997. For several weeks during
the spring, it appeared that economic growth was too robust and that inflation
could reemerge. The Fed's quarter-point increase in short-term interest rates,
as well as worries about inflation, pushed yields on long-term government bonds
up to 7.17 percent in April. When subsequent data showed the economy to be
decelerating during the second quarter, bond yields gradually fell back to 6.78
percent at the end of June, slightly above where they stood at the beginning of
the year.
Reflecting the strong economy, corporate bonds outperformed Treasuries by
about three-quarters of a percentage point over the past six months. Overall,
the Merrill Lynch Domestic Master Bond Index gained about 3.1 percent during the
same period. High-yield corporate bonds were the best-performing sector of the
fixed-income market, as the healthy economic environment increased investor
confidence in the creditworthiness of lower-rated debt.
The rate of bond issuance continued to be moderate as many corporations used
the equity market to raise capital. The relative shortage of new debt issues
contributed to a general narrowing of yield spreads between the various sectors
of the fixed-income market.
OUTLOOK
We expect the pace of economic activity during the remainder of 1997 to
accelerate modestly from the sluggish rate that prevailed during the second
quarter. While we do not believe that economic growth will be rapid enough to
reignite inflation, some warning signs are present, including a tight labor
market and high consumer confidence. In this environment, at least one
additional Federal Reserve interest rate hike remains a possibility. We
anticipate that long-term interest rates will remain within a relatively narrow
range for the remainder of the year.
We are fortunate to be experiencing a rare combination of sustained economic
growth, low inflation, and highly favorable performance in the financial market.
Along with our shareholders, we celebrate the seemingly best of economic times.
Once again, we encourage you to review your portfolio with an eye toward
correcting allocation imbalances.
Continued on page three
2
<PAGE> 4
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. We appreciate
your continued confidence in your investment with Van Kampen American Capital.
Sincerely,
[SIG.]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG.]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
3
<PAGE> 5
PERFORMANCE RESULTS FOR THE PERIOD ENDED JUNE 30, 1997
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
A Shares B Shares C Shares
<S> <C> <C> <C>
TOTAL RETURNS
Six-month total return based on NAV(1)..... 3.12% 2.71% 2.71%
Six-month total return(2).................. (1.77%) (1.27%) 1.72%
One-year total return(2)................... 3.16% 3.44% 6.44%
Five-year average annual total return(2)... 4.99% N/A N/A
Ten-year average annual total return(2).... 7.66% N/A N/A
Life-of-Fund average annual total
return(2)................................ 9.42% 4.77% 4.16%
Commencement date.......................... 05/31/84 08/24/92 08/13/93
DISTRIBUTION RATE AND YIELD
Distribution rate(3)....................... 6.69% 6.22% 6.22%
SEC Yield(4)............................... 6.18% 5.64% 5.64%
</TABLE>
N/A = Not Applicable
(1) 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).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) 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, 1997.
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.
U.S. Government securities are backed by the full faith and credit of the U.S.
Government, its agencies or instrumentalities. The government backing applies
only to the timely payment of principal and interest on specific securities in
the Fund's portfolio, not to the shares of the Fund. Fund shares, when redeemed,
may be worth more or less than their original cost.
Market forecasts provided in this report may not necessarily come to pass.
4
<PAGE> 6
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT FUND
COUPON DISTRIBUTION AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
LONG-TERM IVESTMENTS
<S> <C>
5.9 or less 2.0%
6-6.9 9.0%
7-7.9 28.4%
8-8.9 18.2%
9-9.9 28.4%
10 or more 14.0%
</TABLE>
PORTFOLIO COMPOSITION AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
As of June 30, 1997 As of December 31,1996
<S> <C> <C> <C>
GNMA.............. 53.9% GNMA............. 56.2%
FNMA.............. 27.0% FNMA............. 22.6%
Treasury/Agnecy... 8.2% [PIE CHART] Treasury/Agency.. 11.7% [PIE CHART]
REMIC/CMO......... 6.1% FHLMC............ 4.8%
FHLMC............. 4.8% REMIC/CMO........ 4.7%
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF DECEMBER 31, 1996
<S> <C> <C>
Duration 4.68 years 4.85 years
</TABLE>
5
<PAGE> 7
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 that shaped the
markets during the past six months. The team includes Jack E. Doyle, portfolio
manager, and Peter W. Hegel, chief investment officer for fixed-income
investments. The following excerpts reflect their views on the Fund's
performance during the six-month period ended June 30, 1997.
Q HOW WOULD YOU DESCRIBE THE FIXED-INCOME MARKET THROUGH THE FIRST SIX
MONTHS OF 1997?
A We've seen two very different quarters so far in the bond market--one weak
and one strong. As usual, the primary driver of the market was the
economy, which showed considerable strength in the early going before
tapering off significantly in the second quarter.
The downturn in bond prices at the beginning of the period was actually a
continuation of the sell-off that started in late 1996, when the economy first
began to warm up. Economic growth maintained its upward momentum through the
first quarter of 1997, triggering inflation fears and compelling the Federal
Reserve Board to raise the federal funds rate from 5.25 percent to 5.50 percent
in late March.
Shortly after the Fed's action, the economy started to lose its steam and
inflation became less of a factor. We saw retail sales decline for three
consecutive months for the first time in years. The Producer's Price Index
reached a 45-year low near the end of the period. And second quarter gross
domestic product growth was much weaker than expected. This mild economic
environment eased the pressure on interest rates and propelled the bond market
into an extended rally that ran through much of the second quarter.
Q GIVEN THESE DEVELOPMENTS, HOW DID YOU MANAGE THE FUND?
A Through the first half of the period, we took steps to shorten the Fund's
duration, which should make the portfolio less sensitive to interest rate
increases. As the sell-off dragged through the first quarter, our
defensive positioning of the Fund helped to soften the impact of the market's
decline. When bond prices eventually rebounded in early April, we took the
opportunity to lengthen our duration and take a slightly more aggressive
posture.
We also diversified the Fund's assets across a wide variety of
mortgage-backed securities and U.S. Treasuries. As in years past, we maintained
a portfolio mix of about 90 percent mortgage-backed issues and 10 percent
Treasuries. For additional Fund portfolio highlights, please refer to page five.
6
<PAGE> 8
Q HOW DID THE FUND PERFORM OVER THE REPORTING PERIOD?
A The Fund generated a total return of 3.12 percent(1) (Class A shares at
net asset value) for the six-month period ended June 30, 1997. By
comparison, the Merrill Lynch 1- to 10-year Treasury Index generated a
total return of 2.74 percent, and the Lehman Brothers Mortgage Index returned
3.92 percent. Keep in mind that these are broad-based, unmanaged indices which
reflect general performance of Treasury bonds and mortgage-backed securities,
respectively. Neither index reflects any commissions or fees that would be paid
by an investor purchasing the securities they represent. Please refer to the
chart on page four for additional Fund performance results.
Dividends also remained competitive during the period, providing
shareholders with a healthy stream of current income. As of June 30, 1997, the
Class A share distribution rate was 6.69 percent(3), based on a monthly dividend
of $.0842 per share and a maximum public offering price of $15.11 per share on
June 30, 1997.
Q LOOKING AHEAD, WHAT DO YOU SEE FOR THE FUTURE OF THE FUND?
A We're fairly optimistic about the second half of 1997 for the following
reasons. First, inflation continues to be held well in check. And second,
the days of deficit spending appear to be gone, and the U.S. deficit has
been dramatically reduced. This tandem of low inflation and a declining deficit
should bring about lower interest rates and a bullish environment for the
fixed-income market.
Historically, the Fund has functioned as a mortgage-backed securities
portfolio, with as much as 90 percent or more of the our assets invested in
mortgage issues. If interest rates continue to fall, however, we will see an
increased likelihood of refinancing in the mortgage market. Our response in this
event would be to prudently scale back our mortgage portfolio and increase
Treasury holdings to as much as 20 percent of the Fund's assets.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
Jack E. Doyle
Portfolio Manager
Please see footnotes on page four
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MORTGAGE BACKED SECURITIES 90.1%
$ 4,214 FHLMC (Seasoned)..................... 8.500% 01/01/16 $ 4,370,043
38,203 FHLMC................................ 8.500 02/01/17 39,456,872
8,678 FHLMC................................ 10.000 12/01/08 9,383,293
820 FHLMC (Seasoned)..................... 10.250 11/01/09 877,383
24,685 FHLMC................................ 11.000 07/01/15 27,539,058
137 FHLMC (Seasoned)..................... 11.250 09/01/15 153,751
30,278 FHLMC Gold........................... 6.500 12/01/25 29,091,567
17,020 FHLMC Gold........................... 10.000 06/01/19 18,504,206
27,148 FHLMC REMIC #79C PAC (a)............. 8.600 10/15/05 27,863,666
10,130 FHLMC REMIC #89D (a)................. 9.000 02/15/21 10,706,897
10,069 FHLMC REMIC #97G PAC (a)............. 9.250 11/15/05 10,216,104
15,061 FHLMC REMIC #106G PAC (a)............ 8.250 12/15/20 15,700,339
15,133 FHLMC REMIC #170F PAC (a)............ 8.000 01/15/21 15,423,974
195,504 FNMA................................. 6.500 12/01/23 to 01/01/27 187,668,560
26,241 FNMA (Seasoned)...................... 6.500 04/01/24 to 05/01/24 25,256,594
379,542 FNMA (a)............................. 7.000 12/01/22 to 10/01/25 372,944,422
36,074 FNMA................................. 7.500 12/01/22 36,219,977
51,443 FNMA................................. 8.000 12/01/99 52,600,619
9,080 FNMA................................. 8.500 12/01/99 9,428,859
5,497 FNMA (Seasoned)...................... 8.500 07/01/19 5,772,338
8,603 FNMA (Seasoned)...................... 9.000 05/01/09 9,153,640
5,419 FNMA................................. 9.000 12/01/20 5,715,839
2,382 FNMA (Seasoned)...................... 9.500 05/01/20 2,570,680
7,656 FNMA................................. 10.500 08/01/16 8,462,449
7,746 FNMA................................. 11.000 05/01/17 8,716,194
1,523 FNMA................................. 11.500 11/01/09 1,727,572
47 FNMA (Seasoned)...................... 12.500 03/01/15 54,498
1,912 FNMA (Seasoned)...................... 13.000 06/01/15 2,208,169
1,765 FNMA REMIC #89-85D PAC (a)........... 7.600 05/25/18 1,770,254
11,900 FNMA REMIC #89-94G PAC (a)........... 7.500 12/25/19 11,932,130
18,085 FNMA REMIC #90-12G PAC (a)........... 4.500 02/25/20 15,729,429
15,000 FNMA REMIC #93-4HB PAC (a)........... 11.000 01/25/19 16,717,800
77,184 FNMA REMIC #96-50NH (Principal
Only)................................ * 04/25/24 38,615,930
340,158 GNMA................................. 7.500 12/15/22 to 11/15/25 342,586,178
259,847 GNMA................................. 8.000 11/15/21 to 07/15/22 267,307,625
51,899 GNMA................................. 8.500 02/15/17 to 06/15/23 53,943,440
181,093 GNMA (Seasoned) (a).................. 9.000 05/15/16 194,448,760
447,552 GNMA (a)............................. 9.000 06/15/16 to 08/15/18 478,297,264
51,638 GNMA................................. 9.500 08/15/13 55,671,644
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MORTGAGE BACKED SECURITIES
(CONTINUED)
$ 11,963 GNMA................................. 10.000% 08/15/16 $ 13,125,720
17,366 GNMA................................. 10.500 02/15/17 19,264,978
2,013 GNMA................................. 11.000 11/15/15 2,257,150
3,065 GNMA................................. 11.500 06/15/15 3,493,547
2,146 GNMA................................. 12.000 12/15/15 2,468,733
2,069 GNMA................................. 12.500 12/15/14 2,401,229
1,250 GNMA................................. 13.000 05/15/15 1,464,312
767 GNMA GPM............................. 12.250 05/15/15 886,514
193 GNMA II.............................. 8.500 05/20/02 201,175
6,532 GNMA II.............................. 10.500 02/20/19 7,123,401
3,959 GNMA II.............................. 11.000 10/20/13 4,385,944
1,689 GNMA II.............................. 11.500 09/20/13 1,892,786
1,725 GNMA II.............................. 12.000 12/20/13 1,961,526
947 GNMA II.............................. 12.500 09/20/13 1,086,553
--------------
2,476,821,585
--------------
U.S. TREASURY SECURITIES 8.0%
43,500 U.S. T-Bonds......................... 10.375 11/15/12 55,243,695
40,000 U.S. T-Bonds......................... 12.000 08/15/13 56,331,200
15,000 U.S. T-Bonds......................... 13.125 05/15/01 18,477,900
5,000 U.S. T-Bonds......................... 13.750 08/15/04 7,038,050
55,000 U.S. T-Bonds......................... 14.000 11/15/11 82,893,250
--------------
219,984,095
--------------
TOTAL LONG-TERM INVESTMENTS 98.1%
(Cost $2,662,498,701)........................................................ 2,696,805,680
REPURCHASE AGREEMENT 1.1%
UBS Securities (U.S. T-Note, $30,327,000 par, 9.125% coupon, due 05/15/09,
dated 06/30/97, to be sold on 07/01/97 at $30,331,970)....................... 30,327,000
--------------
TOTAL INVESTMENTS 99.2%
(Cost $2,692,825,701)........................................................ 2,727,132,680
OTHER ASSETS IN EXCESS OF LIABILITIES 0.8%.................................... 22,066,341
--------------
NET ASSETS 100.0%............................................................. $2,749,199,021
--------------
</TABLE>
*Zero coupon bond
(a) All or a portion of these assets segregated as collateral for forward
purchase commitments and dollar roll transactions.
See Notes to Financial Statements
9
<PAGE> 11
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $2,692,825,701)..................... $2,727,132,680
Receivables:
Interest.................................................. 22,267,148
Investments Sold.......................................... 2,886,980
Variation Margin on Futures............................... 393,750
Fund Shares Sold.......................................... 376,461
Forward Commitments......................................... 11,607,025
Options at Market Value (Net premiums paid of $641,000)..... 718,760
Other....................................................... 245,076
--------------
Total Assets.......................................... 2,765,627,880
--------------
LIABILITIES:
Payables:
Income Distributions...................................... 8,080,877
Fund Shares Repurchased................................... 4,154,037
Distributor and Affiliates................................ 1,669,599
Investment Advisory Fee................................... 1,166,671
Investments Purchased..................................... 641,000
Custodian Bank............................................ 4,551
Accrued Expenses............................................ 596,004
Deferred Compensation and Retirement Plans.................. 116,120
--------------
Total Liabilities....................................... 16,428,859
--------------
NET ASSETS.................................................. $2,749,199,021
==============
NET ASSETS CONSIST OF:
Capital..................................................... $3,031,014,896
Net Unrealized Appreciation................................. 35,740,202
Accumulated Undistributed Net Investment Income............. 7,256,888
Accumulated Net Realized Loss............................... (324,812,965)
--------------
NET ASSETS.................................................. $2,749,199,021
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $2,360,581,906 and 164,015,708 shares of
beneficial interest issued and outstanding)............. $ 14.39
Maximum sales charge (4.75%* of offering price)......... .72
--------------
Maximum offering price to public........................ $ 15.11
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $376,137,111 and 26,157,693 shares of
beneficial interest issued and outstanding)............. $ 14.38
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $12,480,004 and 867,881 shares of
beneficial interest issued and outstanding)............. $ 14.38
==============
</TABLE>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
10
<PAGE> 12
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $113,553,619
Fee Income.................................................. 7,663,477
------------
Total Income............................................ 121,217,096
------------
EXPENSES:
Investment Advisory Fee..................................... 7,260,449
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $2,193,091, $1,948,575 and $69,975,
respectively)............................................. 4,211,641
Shareholder Services........................................ 1,985,011
Custody..................................................... 339,576
Legal....................................................... 109,330
Trustees Fees and Expenses.................................. 20,293
Other....................................................... 379,397
------------
Total Operating Expenses................................ 14,305,697
Interest Expense........................................ 1,355,378
------------
Total Expenses.......................................... 15,661,075
------------
NET INVESTMENT INCOME....................................... $105,556,021
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ (9,408,528)
Forward Commitments....................................... (6,721,875)
Options................................................... (8,767,335)
Futures................................................... (1,707,083)
------------
Net Realized Loss........................................... (26,604,821)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 28,985,828
------------
End of the Period:
Investments............................................. 34,306,979
Forward Commitments..................................... 2,974,213
Options................................................. 77,760
Futures................................................. (1,618,750)
------------
35,740,202
------------
Net Unrealized Appreciation During the Period............... 6,754,374
------------
NET REALIZED AND UNREALIZED LOSS............................ $(19,850,447)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 85,705,574
============
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1997 and
the Year Ended December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 105,556,021 $ 230,846,413
Net Realized Loss..................................... (26,604,821) (5,772,435)
Net Unrealized Appreciation/Depreciation During the
Period.............................................. 6,754,374 (108,497,712)
-------------- --------------
Change in Net Assets from Operations.................. 85,705,574 116,576,266
-------------- --------------
Distributions from Net Investment Income:
Class A Shares...................................... (87,386,891) (200,823,586)
Class B Shares...................................... (12,465,361) (28,928,534)
Class C Shares...................................... (447,797) (959,879)
-------------- --------------
Total Distributions............................... (100,300,049) (230,711,999)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... (14,594,475) (114,135,733)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................. 33,283,319 93,779,511
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................ 49,365,021 113,310,139
Cost of Shares Repurchased............................ (308,035,954) (546,579,960)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.... (225,387,614) (339,490,310)
-------------- --------------
TOTAL DECREASE IN NET ASSETS.......................... (239,982,089) (453,626,043)
NET ASSETS:
Beginning of the Period............................... 2,989,181,110 3,442,807,153
-------------- --------------
End of the Period (Including accumulated undistributed
net investment income of $7,256,888 and $6,188,375,
respectively)....................................... $2,749,199,021 $2,989,181,110
============== ==============
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, -----------------------------------------
Class A Shares 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $ 14.459 $ 14.950 $ 13.698 $ 15.662 $ 15.720
-------- -------- -------- -------- --------
Net Investment Income............. .542 1.069 1.111 1.177 1.286
Net Realized and Unrealized
Gain/Loss....................... (.097) (.495) 1.233 (1.965) (.060)
-------- -------- -------- -------- --------
Total from Investment Operations.... .445 .574 2.344 (.788) 1.226
Less Distributions from and in
Excess of Net Investment Income... .512 1.065 1.092 1.176 1.284
-------- -------- -------- -------- --------
Net Asset Value, End of the
Period............................ $ 14.392 $ 14.459 $ 14.950 $ 13.698 $ 15.662
======== ======== ======== ======== ========
Total Return (a).................... 3.12%* 4.10% 17.61% (5.10%) 7.95%
Net Assets at End of the Period (In
millions)......................... $2,360.6 $2,560.1 $2,962.9 $2,924.4 $3,653.6
Ratio of Operating Expenses to
Average Net Assets (b)............ .89% .90% .93% .92% .87%
Ratio of Interest Expense to Average
Net Assets........................ .10% .02% .27% .08% N/A
Ratio of Net Investment Income to
Average Net Assets (b)............ 7.58% 7.38% 7.68% 8.13% 8.08%
Portfolio Turnover (Excluding Dollar
Rolls and Forward Commitment
Transactions)..................... 54%* 59% 63% 44% 67%
</TABLE>
* Non-annualized
(a) Total Return is based upon Net Asset Value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to VKAC's reimbursement of certain expenses was less than
0.01%.
N/A = Prior to 1994, interest expense was immaterial and subsequently netted
against interest income.
See Notes to Financial Statements
13
<PAGE> 15
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, -------------------------------------
Class B Shares 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $14.447 $14.948 $13.694 $15.643 $15.709
------- ------- ------- ------- -------
Net Investment Income............... .481 .947 .991 1.055 1.149
Net Realized and Unrealized
Gain/Loss......................... (.094) (.494) 1.241 (1.964) (.063)
------- ------- ------- ------- -------
Total from Investment Operations...... .387 .453 2.232 (.909) 1.086
Less Distributions from and in Excess
of Net Investment Income............ .454 .954 .978 1.040 1.152
------- ------- ------- ------- -------
Net Asset Value, End of the Period.... $14.380 $14.447 $14.948 $13.694 $15.643
======= ======= ======= ======= =======
Total Return (a)...................... 2.71%* 3.24% 16.78% (5.93%) 7.01%
Net Assets at End of the Period (In
millions)........................... $ 376.1 $ 414.8 $ 466.7 $ 436.3 $ 474.7
Ratio of Operating Expenses to Average
Net Assets (b)...................... 1.72% 1.73% 1.75% 1.74% 1.73%
Ratio of Interest Expense to Average
Net Assets.......................... .10% .02% .27% .09% N/A
Ratio of Net Investment Income to
Average Net Assets (b).............. 6.75% 6.55% 6.85% 7.29% 7.00%
Portfolio Turnover (Excluding Dollar
Rolls and Forward Commitment
Transactions)....................... 54%* 59% 63% 44% 67%
</TABLE>
* Non-Annualized
(a) Total Return is based upon Net Asset Value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to VKAC's reimbursement of certain expenses was less than
0.01%.
N/A = Prior to 1994, interest expense was immaterial and subsequently netted
against interest income.
See Notes to Financial Statements
14
<PAGE> 16
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months August 13, 1993
Ended Year Ended December 31, (Commencement of
June 30, --------------------------- Distribution) to
Class C Shares 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................. $14.448 $14.948 $13.693 $15.626 $16.000
------- ------- ------- ------- -------
Net Investment Income....... .487 .943 .996 1.063 .433
Net Realized and Unrealized
Gain/Loss................. (.101) (.489) 1.237 (1.956) (.364)
------- ------- ------- ------- -------
Total from Investment
Operations.................. .386 .454 2.233 (.893) .069
Less Distributions from and in
Excess of Net Investment
Income...................... .454 .954 .978 1.040 .443
------- ------- ------- ------- -------
Net Asset Value, End of the
Period...................... $14.380 $14.448 $14.948 $13.693 $15.626
======= ======= ======= ======= =======
Total Return (a).............. 2.71%* 3.24% 16.78% (5.86%) .46%*
Net Assets at End of the
Period (In millions)........ $ 12.5 $ 14.3 $ 13.3 $ 11.4 $ 9.6
Ratio of Operating Expenses to
Average Net Assets (b)...... 1.72% 1.72% 1.75% 1.74% 1.71%
Ratio of Interest Expense to
Average Net Assets.......... .10% .02% .27% .10% N/A
Ratio of Net Investment Income
to Average Net Assets (b)... 6.76% 6.55% 6.86% 7.29% 6.42%
Portfolio Turnover (Excluding
Dollar Rolls and Forward
Commitment Transactions).... 54%* 59% 63% 44% 67%
</TABLE>
* Non-Annualized
(a) Total Return is based upon Net Asset Value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to VKAC's reimbursement of certain expenses was less than
0.01%.
N/A = Prior to 1994, interest expense was immaterial and subsequently netted
against interest income.
See Notes to Financial Statements
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
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.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments are stated at value using market quotations
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 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen American Capital Investment Advisory, Inc. (the
"Adviser") or its affiliates, the daily aggregate of which is invested in
repurchase agreements. Repurchase agreements are fully collateralized by the
underlying debt security. The Fund will make payment for such securities only
upon physical delivery or evidence of book entry transfer to the account of the
custodian bank. The seller is required to maintain the value of the underlying
security at not less than the repurchase proceeds due the Fund.
16
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Fund trades certain securities under the terms of forward commitments,
whereby the settlement for payment and delivery occurs at a specified future
date. Forward commitments are privately negotiated transactions between the Fund
and dealers. Upon executing a forward commitment and during the period of
obligation, the Fund maintains collateral of cash or securities in a segregated
account with its custodian in an amount sufficient to relieve the obligation. If
the intent of the Fund is to accept delivery of a security traded under a
forward purchase commitment, the commitment is recorded as a long-term purchase.
For forward purchase commitments for which security settlement is not intended
by the Fund, changes in the value of the commitment are recognized by marking
the commitment to market on a daily basis. During the term of the commitment,
the Fund may resell the forward commitment and enter into a new forward
commitment, the effect of which is to extend the settlement date. In connection
with this extension, the Fund receives a fee, which is included in fee income on
the date of the extension. In addition, the Fund may occasionally close such
forward commitments prior to delivery.
The Fund may also invest in reverse repurchase agreements. 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 interest 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 $50.0 million with an average interest rate of
5.47%. At June 30,1997, there were no reverse repurchase agreements outstanding.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Original
issue discount is 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 against any future realized capital gains.
At December 31, 1996, the Fund had an accumulated capital loss carryforward for
tax purposes of $302,395,602 which will expire between December 31, 1997 and
December 31, 2004. Of this amount, $50,594,574 will expire on December 31, 1997.
17
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
At June 30, 1997, for federal income tax purposes the cost of long- and
short-term investments is $2,692,825,701; the aggregate gross unrealized
appreciation is $57,601,998 and the aggregate gross unrealized depreciation is
$21,861,796, resulting in net unrealized appreciation including open options and
futures transactions, and forward commitments of $35,740,202.
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.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
have been identified and appropriately reclassified. Permanent book and tax
differences relating to the recognition of net realized losses on paydowns of
mortgage pool obligations totaling $4,187,459 were reclassified from accumulated
net realized gain/loss to accumulated undistributed net investment income.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<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>
For the six months ended June 30, 1997, the Fund recognized expenses of
approximately $79,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the six months ended June 30, 1997, the Fund recognized expenses of
approximately $113,700 representing Van Kampen American Capital Distributors,
Inc.'s or
18
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
its affiliates' (collectively "VKAC") cost of providing accounting, cash
management and legal services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the six months ended
June 30, 1997, the Fund recognized expenses of approximately $1,380,500,
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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per Trustee under the plan is equal to $2,500.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C, each with a par value of $.01 per share. There are an unlimited
number of shares of each class authorized.
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
At June 30, 1997, capital aggregated $2,591,261,194, $426,081,252 and
$13,672,450 for Classes A, B and C, respectively. For the six months ended June
30, 1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................... 1,587,461 $ 22,789,401
Class B................................... 630,971 9,042,301
Class C................................... 101,192 1,451,617
----------- -------------
Total Sales................................. 2,319,624 $ 33,283,319
=========== =============
Dividend Reinvestment:
Class A................................... 3,014,010 $ 43,219,619
Class B................................... 412,036 5,903,680
Class C................................... 16,874 241,722
----------- -------------
Total Dividend Reinvestment................. 3,442,920 $ 49,365,021
=========== =============
Repurchases:
Class A................................... (17,647,583) $(253,036,010)
Class B................................... (3,595,549) (51,508,653)
Class C................................... (243,394) (3,491,291)
----------- -------------
Total Repurchases........................... (21,486,526) $(308,035,954)
=========== =============
</TABLE>
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $2,778,288,184, $462,643,924 and
$15,470,402 for Classes A, B and C, respectively. For the year ended December
31, 1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................... 3,306,701 $ 47,964,099
Class B................................... 2,702,553 39,213,360
Class C................................... 454,440 6,602,052
----------- -------------
Total Sales................................. 6,463,694 $ 93,779,511
=========== =============
Dividend Reinvestment:
Class A................................... 6,852,774 $ 98,957,199
Class B................................... 956,499 13,802,832
Class C................................... 38,150 550,108
----------- -------------
Total Dividend Reinvestment................. 7,847,423 $ 113,310,139
=========== =============
Repurchases:
Class A................................... (31,284,344) $(451,949,019)
Class B................................... (6,167,203) (89,031,089)
Class C................................... (387,463) (5,599,852)
----------- -------------
Total Repurchases........................... (37,839,010) $(546,579,960)
=========== =============
</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.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALE 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........................................... 1.00% None
Sixth........................................... 1.00% None
Seventh and Thereafter.......................... None None
</TABLE>
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
For the six months ended June 30, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$46,400 and CDSC on redeemed shares of approximately $711,600. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales on investments,
including principal paydowns, excluding forward commitment transactions and
short-term investments, for the six months ended June 30, 1997, were
$1,523,129,768 and $1,723,687,607, respectively.
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 has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising an option contract or taking
delivery of a security underlying a futures contract or forward commitment. In
these instances the recognition of gain or loss is postponed until the disposal
of the security underlying the option or futures contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. OPTION CONTRACTS--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, 1997, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1996............... -0- $ -0-
Options Written and Purchased (Net)............ 70,950 (33,495,970)
Options Terminated in Closing Transactions
(Net)........................................ (54,250) 29,445,525
Options Expired (Net).......................... (14,700) 3,409,445
------- ------------
Outstanding at June 30, 1997................... 2,000 $ (641,000)
======= ============
</TABLE>
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The related futures contracts of the outstanding option transactions as of
June 30, 1997, and the description and market value are as follows:
<TABLE>
<CAPTION>
EXPIRATION MONTH/ MARKET VALUE
CONTRACTS EXERCISE PRICE OF OPTIONS
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond
Futures-Purchased Puts Aug 1997
(Par value of $100,000 per
contract)...................... 2,000 Jul/110 $718,760
----- --------
</TABLE>
B. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in exchange traded futures on U.S. Treasury Bonds and
typically closes the contract prior to the delivery date.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
Transactions in futures contracts for the six months ended June 30, 1997,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996........................... -0-
Futures Opened............................................. 11,045
Futures Closed............................................. (10,345)
------
Outstanding at June 30, 1997............................... 700
======
</TABLE>
The futures contracts outstanding as of June 30, 1997, and the description
and unrealized depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- ----------------------------------------------------------------------------
<S> <C> <C>
Short Contracts-U.S. Treasury Long Bond Futures
Sept 1997 (Current Notional Value of $111,063
per contract)............................... 700 $1,618,750
=== ==========
</TABLE>
6. FORWARD COMMITMENTS
The Fund trades certain securities under the terms of forward commitments, as
described in Note 1. The following forward purchase commitments were outstanding
as of June 30, 1997. The change in value of these items is reflected as a
component of unrealized
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
appreciation/depreciation on forwards commitments. The Fund has segregated
assets for these open commitments totaling $887.4 million.
<TABLE>
<CAPTION>
Par Amount Unrealized
(000) Description Expiration Current Value Appreciation
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$450,000 FNMA, 8.00% coupon 11/13/97 $460,125,000 $ 382,813
210,000 FNMA, 8.50% coupon 11/13/97 218,072,400 197,400
100,000 GNMA, 7.50% coupon 07/21/97 100,519,000 2,394,000
------------ ----------
$778,716,400 $2,974,213
============ ==========
</TABLE>
At June 30, 1997, the Fund had realized gains on closed but unsettled
forward commitments of $8,632,812.
7. 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.
8. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (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 net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the six months ended June 30, 1997, are payments to VKAC of approximately
$1,604,100.
24
<PAGE> 26
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
GLOBAL AND
INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Intermediate Term Municipal Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
MORGAN STANLEY FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
U.S. Real Estate Fund
Value Fund
Worldwide High Income Fund
Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us weekdays from 7:00 a.m. to 7:00
p.m. Central time at 1-800-341-2911 for Van Kampen American Capital funds or
Morgan Stanley retail funds.
25
<PAGE> 27
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
JEROME L. ROBINSON
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
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., 1997 All rights reserved.
SM denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors 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. At December 31, 1997, the report must be accompanied by a
quarterly performance update, if applicable.
26
<PAGE> 28
RESULTS OF SHAREHOLDER VOTES
A Special Meeting of Shareholders of the Fund was held on May 28, 1997 where
shareholders voted on a new investment advisory agreement, the election of
Trustees and the ratification of KPMG Peat Marwick LLP as independent public
accountants. With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Fund,
107,904,158 shares voted for the proposal, 2,023,787 shares voted against and
6,134,229 shares abstained. With regard to the election of J. Miles Branagan as
elected trustee of the Fund, 113,370,163 shares voted in his favor and 2,692,011
shares withheld. With regard to the election of Richard M. DeMartini as elected
trustee of the Fund, 113,403,427 shares voted in his favor and 2,658,747 shares
withheld. With regard to the election of Linda Hutton Heagy as elected trustee
of the Fund, 113,344,120 shares voted in her favor and 2,718,054 shares
withheld. With regard to the election of R. Craig Kennedy as elected trustee of
the Fund, 113,418,477 shares voted in his favor and 2,643,697 shares withheld.
With regard to the election of Jack E. Nelson as elected trustee of the Fund,
113,420,169 shares voted in his favor and 2,642,005 shares withheld. With regard
to the election of Don G. Powell as elected trustee of the Fund, 113,442,115
shares voted in his favor and 2,620,059 shares withheld. With regard to the
election of Jerome L. Robinson as elected trustee of the Fund, 113,346,883
shares voted in his favor and 2,715,290 shares withheld. With regard to the
election of Phillip B. Rooney as elected trustee of the Fund, 113,397,573 shares
voted in his favor and 2,664,601 shares withheld. With regard to the election of
Fernando Sisto as elected trustee of the Fund, 113,335,869 shares voted in his
favor and 2,726,305 shares withheld. With regard to the election of Wayne W.
Whalen as elected trustee of the Fund, 113,436,068 shares voted in his favor and
2,626,106 shares withheld. With regard to the ratification of KPMG Peat Marwick
LLP as independent public accountants for the Fund, 109,651,335 shares voted for
the proposal, 1,137,458 shares voted against and 5,273,381 shares abstained.
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VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT FUND
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