<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Economic Snapshot................................ 2
Performance Results.............................. 3
Performance in Perspective....................... 4
Portfolio Management Review...................... 5
Glossary of Terms................................ 7
Portfolio Highlights............................. 8
Portfolio of Investments......................... 9
Statement of Assets and Liabilities.............. 14
Statement of Operations.......................... 15
Statement of Changes in Net Assets............... 16
Financial Highlights............................. 17
Notes to Financial Statements.................... 20
Report of Independent Accountants................ 30
</TABLE>
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
<PAGE> 2
LETTER TO SHAREHOLDERS
January 20, 2000
Dear Shareholder:
As we enter a new century--and millennium--it seems appropriate to take a
look back at the progress that's been made over the last 100 years and how the
world of investing has changed over the generations. Although rapid advances in
technology and science have dramatically altered the world that we live in
today, one of the greatest shifts we've seen is the increasing importance of
investing for many Americans.
Once considered primarily for the wealthy, investing in the stock market is
now available to most people. In fact, almost 79 million individuals--who
represent almost half of all U.S. households--own stocks either directly or
through mutual funds. This is even more impressive when considering that just 16
years earlier, only 19 percent of households owned stocks. Another important
shift has been the need for retirement planning beyond a pension plan or Social
Security. The Investment Company Institute, the leading mutual fund industry
association, reports that 77 percent of all mutual fund shareholders earmarked
retirement as their primary financial goal in 1998.
Through all the changes in the investment environment over the past century,
the general principles that have made generations of investors successful remain
the same. Some that have stood the test of time include:
- INVESTING FOR THE LONG-TERM
- BASING INVESTMENT DECISIONS ON SOUND RESEARCH
- BUILDING A DIVERSIFIED PORTFOLIO
- BELIEVING IN THE VALUE OF PROFESSIONAL INVESTMENT ADVICE
While no one can predict the future, at Van Kampen we believe that these
ideas will remain important tenets for investors well into this century. As we
continue to focus on these principles, we hope that our decades of investment
experience can help bring you closer to your financial goals as we welcome the
new millennium.
Sincerely,
<TABLE>
<S> <C>
[/s/ Richard F. Powers, III] [/s/ Dennis J. McDonnell]
Richard F. Powers, III Dennis J. McDonnell
Chairman President
Van Kampen Investment Advisory Van Kampen Investment Advisory
Corp. Corp.
</TABLE>
1
<PAGE> 3
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
The nation's brisk rate of economic growth continued throughout 1999,
bringing the United States to the verge of its longest economic expansion on
record. High levels of consumer spending, a host of new jobs, and increasing
productivity kept the economy strong. Gross domestic product, the primary
measure of economic growth, increased 4.2 percent for the year, including an
impressive annualized rate of 5.7 percent for the third quarter and 5.8 percent
in the fourth quarter.
EMPLOYMENT
The job market remained vibrant throughout the year, with more than 2.7
million U.S. jobs created in 1999. In addition, unemployment dropped to 4.1
percent in October--its lowest rate in three decades. With jobs plentiful and
wages on the rise, most Americans were optimistic about the future. At the end
of the year the consumer confidence index hit its highest level since 1968.
Although wage pressures caused some concerns about the potential erosion of
corporate profits, productivity gains helped keep those concerns muted through
the end of the year.
INFLATION AND INTEREST RATES
Although the Consumer Price Index continued to reflect historically low
inflation--rising only 2.7 percent during 1999--concerns about future increases
in inflation were prevalent throughout the reporting period. The Federal Reserve
Board remained active in guarding against inflation and trying to temper
economic growth. The Fed reversed its three interest-rate cuts from the fall of
1998 by raising rates in June, August, and November 1999.
U.S. GROSS DOMESTIC PRODUCT
Seasonally Adjusted Annualized Rates
Third Quarter 1997 through Fourth Quarter 1999
[BAR GRAPH]
<TABLE>
<S> <C>
97Q3 4.0
97Q4 3.1
98Q1 6.7
98Q2 2.1
98Q3 3.8
98Q4 5.9
99Q1 3.7
99Q2 1.9
99Q3 5.7
99Q4 5.8
</TABLE>
Source: Bureau of Economic Analysis
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1999
VAN KAMPEN U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV(1).... (0.11%) (0.92%) (0.92%)
One-year total return(2)................. (4.85%) (4.66%) (1.85%)
Five-year average annual total
return(2).............................. 5.99% 5.94% 6.18%
Ten-year average annual total
return(2).............................. 6.34% N/A N/A
Life-of-Fund average annual total
return(2).............................. 8.58% 4.48% 3.89%
Commencement date........................ 05/31/84 08/24/92 08/13/93
DISTRIBUTION RATE AND YIELD
Distribution rate(3)..................... 6.17% 5.66% 5.66%
SEC Yield(4)............................. 5.93% 5.33% 5.33%
</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). If the
sales charge was included, total return would be lower.
(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 December 31, 1999.
See the Comparative Performance section of the current prospectus. Past
performance does not guarantee future results. 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 when due, on specific securities in the Fund's portfolio,
not to shares of the Fund. Fund shares when redeemed, may be worth more or less
than their original cost. The value of debt securities will fluctuate with
changes in market conditions and interest rates, which will effect the value of
Fund shares. Securities which are issued by private issuers involve greater risk
than those issued directly by the U.S. Government.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE> 5
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment performance at regular intervals. A
comparison of your Fund's performance to an applicable benchmark can:
- Illustrate the market environment in which your Fund is being managed.
- Reflect the impact of favorable market trends or difficult market
conditions.
- Help you evaluate how your Fund's management team has responded to
opportunities and challenges.
The following graph compares your Fund's performance to that of the Merrill
Lynch 1- to 10-Year Treasury Index over time. This index is a broad-based,
statistical composite that does not include any commissions or fees that would
be paid by an investor purchasing the securities it represents. Such costs would
lower the performance of the index. An investment cannot be made directly in an
index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen U.S. Government Fund vs. the Merrill Lynch 1- to 10-Year
Treasury Index (December 31, 1989, through December 31, 1999)
[INVESTMENT PERFORMANCE CHART]
- ---------------------------
Fund's Total Return
1 Year Avg. Annual = -4.85%
5 Year Avg. Annual = 5.99%
10 Year Avg. Annual = 6.34%
- ---------------------------
<TABLE>
<CAPTION>
MERRILL LYNCH 1- TO 10-YEAR TREASURY
VAN KAMPEN U.S. GOVERNMENT FUND INDEX
------------------------------- ------------------------------------
<S> <C> <C>
Dec 1989 9526.00 10000.00
9431.00 9943.00
9474.00 9968.00
9485.00 9987.00
9413.00 9953.00
9669.00 10163.00
9829.00 10295.00
9978.00 10443.00
9897.00 10398.00
9982.00 10493.00
10087.00 10639.00
10288.00 10798.00
Dec 1990 10442.00 10951.00
10577.00 11062.00
10652.00 11120.00
10726.00 11160.00
10830.00 11296.00
10906.00 11360.00
10911.00 11372.00
11074.00 11494.00
11303.00 11709.00
11527.00 11908.00
11657.00 12043.00
11766.00 12184.00
Dec 1991 12092.00 12482.00
11900.00 12356.00
11994.00 12403.00
11921.00 12352.00
12008.00 12465.00
12212.00 12643.00
12409.00 12826.00
12569.00 13064.00
12690.00 13215.00
12797.00 13398.00
12616.00 13233.00
12619.00 13174.00
Dec 1992 12850.00 13348.00
13084.00 13598.00
13279.00 13801.00
13335.00 13853.00
13416.00 13962.00
13430.00 13921.00
13664.00 14121.00
13721.00 14150.00
13864.00 14366.00
13844.00 14428.00
13885.00 14453.00
13760.00 14384.00
Dec 1993 13872.00 14440.00
13996.00 14584.00
13773.00 14376.00
13297.00 14175.00
13144.00 14079.00
13198.00 14094.00
13153.00 14103.00
13439.00 14278.00
13448.00 14323.00
13171.00 14208.00
13099.00 14211.00
13018.00 14140.00
Dec 1994 13165.00 14194.00
13476.00 14429.00
13857.00 14705.00
13910.00 14785.00
14106.00 14956.00
14599.00 15383.00
14708.00 15484.00
14698.00 15494.00
14819.00 15621.00
14930.00 15726.00
15062.00 15902.00
15267.00 16101.00
Dec 1995 15483.00 16285.00
15566.00 16404.00
15389.00 16220.00
15316.00 16143.00
15221.00 16092.00
15178.00 16083.00
15349.00 16240.00
15411.00 16290.00
15408.00 16308.00
15656.00 16515.00
15982.00 16784.00
16243.00 16990.00
Dec 1996 16118.00 16898.00
16205.00 16961.00
16258.00 16980.00
16071.00 16893.00
16314.00 17082.00
16456.00 17213.00
16622.00 17362.00
16961.00 17688.00
16873.00 17612.00
17065.00 17807.00
17282.00 18014.00
17334.00 18055.00
Dec 1997 17499.00 18209.00
17696.00 18454.00
17701.00 18430.00
17755.00 18491.00
17833.00 18573.00
17948.00 18599.00
18027.00 18829.00
18113.00 18903.00
18248.00 19280.00
18385.00 19735.00
18321.00 19780.00
18433.00 19707.00
Dec 1998 18509.00 19780.00
18622.00 19874.00
18492.00 19569.00
18608.00 19712.00
18658.00 19773.00
18513.00 19641.00
18407.00 19675.00
18260.00 19697.00
18218.00 19735.00
18517.00 19892.00
18588.00 19922.00
18679.00 19934.00
Dec 1999 18488.00 19888.00
</TABLE>
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 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
<PAGE> 6
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN U.S. GOVERNMENT FUND
We recently spoke with representatives of the adviser of the Van Kampen U.S.
Government Fund about the key events and economic forces that shaped the markets
during the Fund's fiscal year. The Fund is managed by Peter W. Hegel, chief
investment officer of fixed-income investments, and portfolio managers Barbara
Downey and Kelly Gilbert.
The following discussion reflects their views on the Fund's performance during
the 12-month period ended December 31, 1999.
Q DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND OPERATED DURING THE
PERIOD.
A During the past 12 months, the U.S. economy continued to grow at a strong
pace, while the global economy was blessed with genuine recovery and
renewed confidence. Low unemployment and increases in commodity prices
heightened fears of rising inflation, which caused the Federal Reserve Board to
increase short-term interest rates on three occasions during the year.
Combined with the uncertainty of the year 2000 issue, the environment was
not kind to U.S. government securities. The rising interest-rate environment
hurt U.S. Treasuries and had a mixed effect on mortgage-backed securities. In
general, mortgage-backed securities profit from rising interest rates, but as
rates continued to increase throughout the year, the growing gap between
interest rates on high- and low-quality securities made mortgage-backed
securities more volatile and less predictable.
Q WHAT STRATEGY DID YOU USE TO MANAGE THE FUND BASED ON THOSE FACTORS?
A In general, the Fund invests substantially in mortgage-backed securities,
with typically 80 percent of the Fund invested in mortgage-backed
securities issued by agencies of the U.S. government and 20 percent of the
Fund invested in U.S. Treasuries. Our strategy is to take advantage of interest
rate fluctuations and we generally attempt to do this by buying mortgage-backed
securities when interest rates rise and buying Treasuries when interest rates
decline.
In anticipation of rising interest rates, the Fund began the period with a
significant position in mortgage-backed securities. This benefited the Fund as
Treasury prices moved lower and fears of mortgage prepayments diminished
allowing mortgages to outperform Treasuries. In April, we increased the Fund's
exposure to Treasuries as year 2000 concerns and interest-rate increases began
to negatively affect the returns of mortgage-backed securities. This move turned
out to be premature and hurt the Fund as mortgages continued to outpace
Treasuries.
Near the end of June, however, the Fund benefited from this slightly
overweighted exposure toward Treasuries as mortgage prices decreased. At this
point, we believed mortgages were inexpensive, so we shifted the Fund's exposure
out of Treasuries and
5
<PAGE> 7
back into mortgage-backed securities. Once again, our move was premature and the
Fund's performance suffered as mortgages lagged in performance through the
summer. Increases in mortgage prepayments during the summer also hurt the Fund's
performance.
In September, the Fund took advantage of a rally in the Treasury market and
the decrease in volatility of mortgages as interest-rate spreads between high-
and low-quality securities tightened. For the remainder of the year the Fund
benefited from its modestly overweighted allocation toward mortgage-backed
securities. For additional Fund portfolio highlights, please refer to page 8.
Q HOW DID THE FUND PERFORM DURING THE 12-MONTH REPORTING PERIOD?
A Considering the difficult interest-rate environment for fixed-income
investments during the past 12 months, the Fund held its ground. For the
12-month period ended December 31, 1999, the Fund's Class A shares at net
asset value generated a total return of -0.11 percent(1). By comparison, the
Merrill Lynch 1- to 10-year Treasury Index generated a total return of 0.55
percent, and the Lehman Brothers Mortgage Index returned 1.86 percent. These
broad-based indices 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. Such costs would lower the performance of the indices. An investment
cannot be made directly in an index. Please refer to the chart and footnotes on
page 3 for additional Fund performance results. Past performance does not
guarantee future results.
Dividends continued to provide shareholders with a stream of current income
during the period. As of December 31, 1999, the Class A share distribution rate
was 6.17 percent(3), based on a monthly dividend of $.0730 and a maximum public
offering price of $14.19 per share on December 31, 1999. In addition, the Fund's
SEC yield was 5.93 percent.
Q WHAT IS YOUR OUTLOOK FOR THE FUND IN THE COMING MONTHS?
A The key issue during the next few months will be the Fed's interest-rate
policy. We will continue to monitor the Fed's actions, and we have
increased the Fund's exposure to mortgage-backed securities to take
advantage of what we believe will be a continued rising interest-rate
environment.
With strong returns in equity markets and relatively low interest rates,
Treasuries have become less attractive. We believe that unless there is a
downturn in the equity market, Treasuries will continue to suffer. However, if
something does scare the equity market, we expect we will shift the Fund's
exposure toward Treasuries because these high-quality securities may become more
appealing to investors. In addition, we believe that we will see decreases in
Treasury supply as the government reduces the deficit and its need to raise
money, which may be favorable for Treasury prices.
6
<PAGE> 8
GLOSSARY OF TERMS
BOND: A debt security issued by a government or corporation that pays a
bondholder a stated rate of interest and repays the principal at the
maturity date.
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank of the United States. Its policy-making
committee, called the Federal Open Market Committee, meets eight times a
year to establish monetary policy and monitor the economic pulse of the
United States.
INFLATION: A persistent and measurable rise in the general level of prices.
Inflation is widely measured by the Consumer Price Index, an economic
indicator that measures the change in the cost of purchased goods and
services.
MORTGAGE-BACKED SECURITIES: Securities backed by pools of similar mortgages.
These securities are generally issued by agencies of the U.S. government,
such as Government National Mortgage Association (GNMA, or "Ginnie Mae") and
Federal Home Loan Mortgage Corporation (FHLMC, or "Freddie Mac").
VOLATILITY: A measure of the fluctuation in the market price of a security. A
security that is volatile has frequent and large swings in price.
YIELD: The annual rate of return on an investment, expressed as a percentage.
7
<PAGE> 9
PORTFOLIO HIGHLIGHTS
VAN KAMPEN U.S. GOVERNMENT FUND
DIVIDEND HISTORY
FOR THE PERIOD ENDED DECEMBER 31, 1999
[BAR GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION PER CLASS A SHARE
------------------------------
<S> <C>
Jan 1999 0.079
Feb 1999 0.079
Mar 1999 0.079
Apr 1999 0.079
May 1999 0.079
Jun 1999 0.079
Jul 1999 0.079
Aug 1999 0.079
Sep 1999 0.073
Oct 1999 0.073
Nov 1999 0.073
Dec 1999 0.073
</TABLE>
The dividend history represents past performance of the Fund and does not
predict the Fund's future distributions.
ASSET ALLOCATION AS A PERCENTAGE OF LONG-TERM INVESTMENTS
[BAR GRAPH]
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
FNMA 45.1 26.8
GNMA 34 48.9
FHLMC 11.9 3
Treasury Securities 6.3 16.2
REMIC/CMO 1.9 5.1
FHLB 0.8 0
</TABLE>
COUPON DISTRIBUTION AS A PERCENTAGE OF LONG-TERM INVESTMENTS
[BAR GRAPH]
<TABLE>
<CAPTION>
5.9 OR LESS 2.7
- ----------- ---
<S> <C>
6-6.9 50.9
7-7.9 25.9
8-8.9 11.2
9-9.9 5.8
10 or more 3.5
</TABLE>
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MORTGAGE BACKED SECURITIES 81.1%
$ 49,769 Federal Home Loan
Mortgage Pools........... 6.000% 09/01/2006 to 10/01/2006 $ 47,918,307
61,404 Federal Home Loan
Mortgage Pools........... 6.500 07/01/2014 to 10/01/2029 59,070,588
18,187 Federal Home Loan
Mortgage Pools........... 8.500 01/01/2016 to 09/01/2019 18,715,610
11,836 Federal Home Loan
Mortgage Pools........... 10.000 12/01/2008 to 09/01/2021 12,704,674
304 Federal Home Loan
Mortgage Pools........... 10.250 11/01/2009 326,597
10,752 Federal Home Loan
Mortgage Pools........... 11.000 12/01/2001 to 01/01/2021 11,800,329
83 Federal Home Loan
Mortgage Pools........... 11.250 09/01/2015 90,570
11,854 Federal Home Loan
Mortgage REMIC
Pools (a)................ 8.250 12/15/2020 12,077,317
3,955 Federal Home Loan
Mortgage REMIC
Pools (a)................ 9.000 02/15/2021 4,162,415
4,177 Federal Home Loan
Mortgage REMIC
Pools (a)................ 9.250 11/15/2005 4,236,464
18,599 Federal National Mortgage
Association Pools
(Principal Only)......... * 02/01/2028 12,083,882
202,042 Federal National Mortgage
Association Pools (a).... 6.000 07/01/2012 to 09/01/2029 186,772,182
21,555 Federal National Mortgage
Association Pools
(Floating Rate).......... 6.223 05/25/2018 21,450,717
255,148 Federal National Mortgage
Association Pools (a).... 6.500 06/01/2022 to 07/01/2029 240,948,093
155,985 Federal National Mortgage
Association Pools (a).... 7.000 09/01/2023 to 08/01/2028 151,115,546
72,950 Federal National Mortgage
Association Pools (a).... 7.500 12/01/2021 to 12/01/2028 72,177,715
20,567 Federal National Mortgage
Association Pools........ 8.000 12/01/2016 to 12/01/2022 20,779,343
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MORTGAGE BACKED SECURITIES (CONTINUED)
$ 25,601 Federal National Mortgage
Association Pools........ 8.500% 08/01/2014 to 06/01/2021 $ 26,403,959
6,788 Federal National Mortgage
Association Pools........ 9.000 03/01/2008 to 02/01/2021 7,093,601
827 Federal National Mortgage
Association Pools........ 9.500 05/01/2020 874,829
3,270 Federal National Mortgage
Association Pools........ 10.500 06/01/2010 to 09/01/2019 3,566,169
2,678 Federal National Mortgage
Association Pools........ 11.000 12/01/2003 to 11/01/2019 2,963,101
811 Federal National Mortgage
Association Pools........ 11.500 12/01/2009 to 01/01/2016 901,512
29 Federal National Mortgage
Association Pools........ 12.500 03/01/2015 33,110
1,098 Federal National Mortgage
Association Pools........ 13.000 06/01/2015 1,244,848
11,090 Federal National Mortgage
Association Pools
(Grantor Trust).......... 7.500 01/19/2039 10,971,916
8,871 Federal National Mortgage
Association REMIC Pools
(Principal Only)......... * 02/25/2023 4,972,926
5,013 Federal National Mortgage
Association REMIC
Pools (a)................ 7.500 12/25/2019 4,947,478
6,354 Federal National Mortgage
Association REMIC
Pools (a)................ 11.000 01/25/2019 6,442,238
49,005 Government National
Mortgage Association
Pools (a)................ 6.000 01/15/2028 to 04/15/2029 44,609,462
24,395 Government National
Mortgage Association
Pools (Floating Rate).... 6.223 09/16/2019 24,374,400
170,113 Government National
Mortgage Association
Pools (a)................ 6.500 04/15/2026 to 06/15/2029 159,866,114
106,965 Government National
Mortgage Association
Pools (a)................ 7.000 08/15/2022 to 08/15/2029 103,402,523
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MORTGAGE BACKED SECURITIES (CONTINUED)
$ 60,576 Government National
Mortgage Association
Pools.................... 7.500% 01/15/2017 to 10/15/2029 $ 59,974,961
111,041 Government National
Mortgage Association
Pools.................... 8.000 12/15/2000 to 08/15/2029 113,423,051
22,187 Government National
Mortgage Association
Pools.................... 8.500 04/15/2006 to 06/15/2023 22,921,708
67,584 Government National
Mortgage Association
Pools.................... 9.000 10/15/2001 to 12/31/2099 71,431,383
20,519 Government National
Mortgage Association
Pools.................... 9.500 06/15/2009 to 11/15/2022 21,959,507
4,904 Government National
Mortgage Association
Pools.................... 10.000 09/15/2015 to 05/15/2019 5,340,323
6,391 Government National
Mortgage Association
Pools.................... 10.500 09/15/2010 to 02/15/2020 6,992,143
1,025 Government National
Mortgage Association
Pools.................... 11.000 03/15/2010 to 12/15/2018 1,134,041
1,283 Government National
Mortgage Association
Pools.................... 11.500 10/15/2010 to 03/15/2018 1,429,353
949 Government National
Mortgage Association
Pools.................... 12.000 07/15/2011 to 08/15/2015 1,070,234
418 Government National
Mortgage Association
Pools.................... 12.250 09/15/2013 to 07/15/2015 475,144
1,087 Government National
Mortgage Association
Pools.................... 12.500 04/15/2010 to 08/15/2015 1,238,396
586 Government National
Mortgage Association
Pools.................... 13.000 01/15/2011 to 06/15/2015 671,558
77 Government National
Mortgage Association II
Pools.................... 8.500 05/20/2002 to 02/20/2017 78,925
2,799 Government National
Mortgage Association II
Pools.................... 10.500 01/20/2014 to 05/20/2019 3,038,463
1,802 Government National
Mortgage Association II
Pools.................... 11.000 07/20/2013 to 08/20/2019 1,975,841
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MORTGAGE BACKED SECURITIES (CONTINUED)
$ 801 Government National
Mortgage Association II
Pools.................... 11.500% 08/20/2013 to 07/20/2019 $ 887,776
1,024 Government National
Mortgage Association II
Pools.................... 12.000 08/20/2013 to 12/20/2015 1,149,125
503 Government National
Mortgage Association II
Pools.................... 12.500 10/20/2013 to 09/20/2015 570,244
--------------
TOTAL MORTGAGE BACK SECURITIES 81.1%........................ 1,594,860,711
--------------
UNITED STATES GOVERNMENT AGENCY OBLIGATIONS 7.2%
15,000 Federal Home Loan
Bank (a)................. 5.875 09/17/2001 14,858,250
22,000 Federal Home Loan
Mortgage Corp. .......... 5.000 01/15/2004 20,580,120
25,000 Federal Home Loan
Mortgage Corp. .......... 6.250 10/15/2002 24,754,500
30,800 Federal Home Loan
Mortgage Corp. .......... 6.780 06/23/2004 30,248,987
25,000 Federal National Mortgage
Association.............. 6.375 06/15/2009 23,823,750
29,000 Federal National Mortgage
Association (a).......... 6.740 08/25/2007 27,859,140
--------------
TOTAL UNITED STATES GOVERNMENT AGENCY OBLIGATIONS............ 142,124,747
--------------
UNITED STATES TREASURY OBLIGATIONS 6.1%
10,000 United States Treasury
Bond..................... 6.375 08/15/2027 9,603,500
40,000 United States Treasury
Bond..................... 7.250 08/15/2022 42,140,800
70,000 United States Treasury
Note..................... 6.000 08/15/2009 68,501,300
--------------
120,245,600
--------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FORWARD PURCHASE COMMITMENTS 2.5%
$ 50,000 Federal National Mortgage
Association January
Forward.................. 7.000% TBA $ 48,359,500
--------------
TOTAL LONG-TERM INVESTMENTS 96.9%
(Cost $1,961,303,735)................................................. 1,905,590,558
SHORT-TERM INVESTMENTS 6.5%
Federal Home Loan Bank Discount Note ($127,166,000 par, yielding
1.521%, 01/03/2000 maturity) (Cost $127,155,403)...................... 127,155,403
--------------
TOTAL INVESTMENTS 103.4%
(Cost $2,088,459,138)................................................. 2,032,745,961
LIABILITIES IN EXCESS OF OTHER ASSETS (3.4%)........................... (66,685,943)
--------------
NET ASSETS 100.0%...................................................... $1,966,060,018
==============
</TABLE>
* Zero coupon bond
(a) Assets segregated as collateral for open forward transactions, futures or
borrowings of the Fund.
TBA--To be announced, maturity date has not been established. Upon settlement
and delivery of the mortgage pools, maturity dates will be assigned.
See Notes to Financial Statements
13
<PAGE> 15
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $2,088,459,138)..................... $2,032,745,961
Cash........................................................ 19,927,054
Receivables:
Investments Sold.......................................... 48,514,226
Interest.................................................. 13,917,299
Fund Shares Sold.......................................... 1,722,189
Variation Margin on Futures............................... 353,687
Fee Income................................................ 81,390
Other....................................................... 306,024
--------------
Total Assets.......................................... 2,117,567,830
--------------
LIABILITIES:
Payables:
Reverse Repurchase Agreements............................. 71,137,500
Investments Purchased..................................... 67,207,676
Income Distributions...................................... 4,489,967
Forward Commitments....................................... 3,192,710
Fund Shares Repurchased................................... 2,451,967
Investment Advisory Fee................................... 877,985
Distributor and Affiliates................................ 694,004
Accrued Expenses............................................ 1,219,597
Trustees' Deferred Compensation and Retirement Plans........ 236,406
--------------
Total Liabilities....................................... 151,507,812
--------------
NET ASSETS.................................................. $1,966,060,018
==============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $2,330,318,893
Accumulated Distributions in Excess of Net Investment
Income.................................................... (1,840,241)
Net Unrealized Depreciation................................. (56,870,655)
Accumulated Net Realized Loss............................... (305,547,979)
--------------
NET ASSETS.................................................. $1,966,060,018
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $1,816,436,756 and 134,355,169 shares of
beneficial interest issued and outstanding)............. $ 13.52
Maximum sales charge (4.75%* of offering price)......... .67
--------------
Maximum offering price to public........................ $ 14.19
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $130,376,064 and 9,657,861 shares of
beneficial interest issued and outstanding)............. $ 13.50
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $19,247,198 and 1,426,215 shares of
beneficial interest issued and outstanding)............. $ 13.50
==============
</TABLE>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
14
<PAGE> 16
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 155,302,339
Fee Income.................................................. 7,500,714
-------------
Total Income............................................ 162,803,053
-------------
EXPENSES:
Investment Advisory Fee..................................... 11,376,989
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $3,848,324, $2,106,569 and $197,849,
respectively)............................................. 6,152,742
Shareholder Services........................................ 2,536,127
Custody..................................................... 426,075
Legal....................................................... 165,070
Trustees' Fees and Related Expenses......................... 88,610
Other....................................................... 1,046,864
-------------
Total Operating Expenses................................ 21,792,477
Less Credits Earned on Cash Balances.................... 146,721
-------------
Net Operating Expenses.................................. 21,650,756
Interest Expense........................................ 1,455,749
-------------
NET INVESTMENT INCOME....................................... $ 139,696,548
=============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ (33,985,701)
Forward Commitments....................................... (13,763,918)
Options................................................... 350,813
Futures................................................... 8,176,960
-------------
Net Realized Loss........................................... (39,221,846)
-------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 48,093,284
-------------
End of the Period:
Investments............................................. (55,713,177)
Forward Commitments..................................... (3,195,249)
Futures................................................. 2,037,771
-------------
(56,870,655)
-------------
Net Unrealized Depreciation During the Period............... (104,963,939)
-------------
NET REALIZED AND UNREALIZED LOSS............................ $(144,185,785)
=============
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $ (4,489,237)
=============
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................... $ 139,696,548 $ 158,890,618
Net Realized Gain/Loss...................... (39,221,846) 13,000,725
Net Unrealized Depreciation During the
Period.................................... (104,963,939) (34,005,601)
-------------- --------------
Change in Net Assets from Operations........ (4,489,237) 137,885,742
-------------- --------------
Distributions from Net Investment Income.... (141,807,974) (166,226,903)
Distributions in Excess of Net Investment
Income.................................... (1,840,241) -0-
-------------- --------------
Total Distributions from and in Excess of
Net Investment income*.................... (143,648,215) (166,226,903)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES................................ (148,137,452) (28,341,161)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................... 652,849,316 227,696,473
Net Asset Value of Shares Issued Through
Dividend Reinvestment..................... 76,741,229 83,888,683
Cost of Shares Repurchased.................. (997,199,101) (539,408,924)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.............................. (267,608,556) (227,823,768)
-------------- --------------
TOTAL DECREASE IN NET ASSETS................ (415,746,008) (256,164,929)
NET ASSETS:
Beginning of the Period..................... 2,381,806,026 2,637,970,955
-------------- --------------
End of the Period (Including accumulated
undistributed net investment income of
$(1,840,241) and $2,111,426,
respectively)............................. $1,966,060,018 $2,381,806,026
============== ==============
*Distributions by Class
- -----------------------------------------------------------------------------------
Distributions from and in Excess of Net
Investment Income:
Class A Shares............................ $ (130,258,197) $ (145,479,133)
Class B Shares............................ (12,244,365) (19,836,275)
Class C Shares............................ (1,145,653) (911,495)
-------------- --------------
$ (143,648,215) $ (166,226,903)
============== ==============
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
Class A Shares 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Period...... $ 14.459 $ 14.624 $ 14.459 $ 14.950 $ 13.698
-------- -------- -------- -------- --------
Net Investment Income........ .899 .941 1.039 1.069 1.111
Net Realized and Unrealized
Gain/Loss.................. (.914) (.127) .158 (.495) 1.233
-------- -------- -------- -------- --------
Total from Investment
Operations................... (.015) .814 1.197 .574 2.344
Less Distributions from and in
Excess of Net Investment
Income....................... .924 .979 1.032 1.065 1.092
-------- -------- -------- -------- --------
Net Asset Value, End of the
Period....................... $ 13.520 $ 14.459 $ 14.624 $ 14.459 $ 14.950
======== ======== ======== ======== ========
Total Return (a)............... (.11%) 5.77% 8.57% 4.10% 17.61%
Net Assets at End of the Period
(In millions)................ $1,817.0 $2,079.6 $2,264.8 $2,560.1 $2,962.9
Ratio of Operating Expenses to
Average Net Assets (b)....... .91% .90% .90% .90% .93%
Ratio of Interest Expense to
Average Net Assets........... .07% .04% .08% .02% .27%
Ratio of Net Investment Income
to Average Net Assets (b).... 6.50% 6.45% 7.26% 7.38% 7.68%
Portfolio Turnover
(Excluding Dollar Rolls and
Forward Commitment
Transactions)................ 112% 82% 104% 64% 63%
</TABLE>
(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) For the year ended 1996, the impact on the Ratios of Expenses and Net
Investment Income to Average Net Assets due to Van Kampen's reimbursement of
certain expenses was less than 0.01%.
See Notes to Financial Statements
17
<PAGE> 19
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
Class B Shares 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................... $14.440 $14.609 $14.447 $14.948 $13.694
------- ------- ------- ------- -------
Net Investment Income........ .750 .816 .916 .947 .991
Net Realized and Unrealized
Gain/Loss.................. (.880) (.121) .162 (.494) 1.241
------- ------- ------- ------- -------
Total from Investment
Operations................... (.130) .695 1.078 .453 2.232
------- ------- ------- ------- -------
Less Distributions from and in
Excess of Net Investment
Income....................... .811 .864 .916 .954 .978
------- ------- ------- ------- -------
Net Asset Value, End of the
Period....................... $13.499 $14.440 $14.609 $14.447 $14.948
======= ======= ======= ======= =======
Total Return (a)............... (.92%) 4.87% 7.71% 3.24% 16.78%
Net Assets at End of the Period
(In millions)................ $ 130.4 $ 284.2 $ 359.0 $ 414.8 $ 466.7
Ratio of Operating Expenses to
Average Net Assets (b)....... 1.71% 1.72% 1.72% 1.73% 1.75%
Ratio of Interest Expense to
Average Net Assets........... .07% .04% .08% .02% .27%
Ratio of Net Investment Income
to Average Net Assets (b).... 5.73% 5.63% 6.44% 6.55% 6.85%
Portfolio Turnover
(Excluding Dollar Rolls and
Forward Commitment
Transactions)................ 112% 82% 104% 64% 63%
</TABLE>
(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) For the year ended 1996, the impact on the Ratios of Expenses and Net
Investment Income to Average Net Assets due to Van Kampen's reimbursement of
certain expenses was less than 0.01%.
See Notes to Financial Statements
18
<PAGE> 20
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
Class C Shares 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................... $14.436 $14.608 $14.448 $14.948 $13.693
------- ------- ------- ------- -------
Net Investment Income........ .784 .822 .910 .943 .996
Net Realized and Unrealized
Gain/Loss.................. (.914) (.130) .166 (.489) 1.237
------- ------- ------- ------- -------
Total from Investment
Operations................... (.130) .692 1.076 .454 2.233
Less Distributions from and in
Excess of Net Investment
Income....................... .811 .864 .916 .954 .978
------- ------- ------- ------- -------
Net Asset Value, End of the
Period....................... $13.495 $14.436 $14.608 $14.448 $14.948
======= ======= ======= ======= =======
Total Return (a)............... (.92%) 4.87% 7.71% 3.24% 16.78%
Net Assets at End of the Period
(In millions)................ $ 19.3 $ 18.0 $ 14.2 $ 14.3 $ 13.3
Ratio of Operating Expenses to
Average Net Assets (b)....... 1.72% 1.72% 1.72% 1.72% 1.75%
Ratio of Interest Expense to
Average Net Assets........... .07% .04% .08% .02% .27%
Ratio of Net Investment Income
to Average Net Assets (b).... 5.66% 5.63% 6.41% 6.55% 6.86%
Portfolio Turnover
(Excluding Dollar Rolls and
Forward Commitment
Transactions)................ 112% 82% 104% 64% 63%
</TABLE>
(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) For the year ended 1996, the impact on the Ratios of Expenses and Net
Investment Income to Average Net Assets due to Van Kampen's reimbursement of
certain expenses was less than 0.01%.
See Notes to Financial Statements
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen U.S. Government Fund (the "Fund") is organized as a series of Van
Kampen 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 indications of value obtained from an independent pricing service. If such
valuations are not available, then estimates are 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 Investment Advisory Corp. (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
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
the value of the underlying security at not less than the repurchase proceeds
due to the Fund.
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 $38.4 million with an average interest rate of
3.81%.
C. INCOME AND EXPENSES--Interest income is recorded on an accrual basis.
Original issue discount is amortized over the expected life of each applicable
security. Income and expenses of the Fund are allocated on a pro rata basis to
each class of shares, except for distribution and service fees and transfer
agency costs which are unique to each class of shares.
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
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
such losses against any future realized capital gains. At December 31, 1999, the
Fund had an accumulated capital loss carryforward for tax purposes of
$303,209,426 which will expire between December 31, 2000 and December 31, 2007.
Of this amount, $910,777 will expire on December 31, 2000. Net realized gains or
losses may differ for financial reporting and tax purposes primarily as a result
of the deferral of losses relating to wash sale transactions and the gains
recognized for tax purposes on open futures contracts at December 31, 1999.
At December 31, 1999, for federal income tax purposes the cost of long- and
short-term investments is $2,088,759,919, the aggregate gross unrealized
appreciation is $14,312,750 and the aggregate gross unrealized depreciation is
$70,326,708, resulting in net unrealized depreciation on long- and short-term
investments of $56,013,958.
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.
F. EXPENSE REDUCTIONS--During the year ended December 31, 1999, the Fund's
custody fee was reduced by $141,721 as a result of credits earned on overnight
cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<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 year ended December 31, 1999, the Fund recognized expenses of
approximately $122,400 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.
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
For the year ended December 31, 1999, the Fund recognized expenses of
approximately $629,900 representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended December 31,
1999, the Fund recognized expenses of approximately $1,997,500. Transfer agency
fees are determined through negotiations with the Fund's Board of Trustees and
are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
3. CAPITAL TRANSACTIONS
At December 31, 1999, capital aggregated $2,123,172,913, $185,648,374 and
$21,497,606 for Classes A, B and C, respectively. For the year ended December
31, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................. 41,019,965 $ 579,248,096
Class B.................................. 2,312,115 32,424,964
Class C.................................. 2,895,380 41,176,256
----------- -------------
Total Sales................................ 46,227,460 $ 652,849,316
=========== =============
Dividend Reinvestment:
Class A.................................. 5,012,768 $ 69,919,838
Class B.................................. 444,278 6,205,393
Class C.................................. 44,258 615,998
----------- -------------
Total Dividend Reinvestment................ 5,501,304 $ 76,741,229
=========== =============
</TABLE>
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Repurchases:
Class A.................................. (55,503,423) $(779,758,069)
Class B.................................. (12,781,310) (178,274,905)
Class C.................................. (2,757,904) (39,166,127)
----------- -------------
Total Repurchases.......................... (71,042,637) $(997,199,101)
=========== =============
</TABLE>
At December 31, 1998, capital aggregated $2,253,763,048, $325,292,922 and
$18,871,479 for Classes A, B and C, respectively. For the year ended December
31, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 12,318,462 $ 178,967,243
Class B.................................... 2,614,449 38,018,032
Class C.................................... 737,549 10,711,198
----------- -------------
Total Sales.................................. 15,670,460 $ 227,696,473
=========== =============
Dividend Reinvestment:
Class A.................................... 5,072,364 $ 73,854,456
Class B.................................... 657,222 9,560,132
Class C.................................... 32,619 474,095
----------- -------------
Total Dividend Reinvestment.................. 5,762,205 $ 83,888,683
=========== =============
Repurchases:
Class A.................................... (28,427,934) $(413,723,630)
Class B.................................... (8,161,261) (118,456,887)
Class C.................................... (497,580) (7,228,407)
----------- -------------
Total Repurchases............................ (37,086,775) $(539,408,924)
=========== =============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares purchased
on or after June 1, 1996, and any dividend reinvestment plan Class B shares
received on such shares, automatically convert to Class A shares eight years
after the end of the calendar month in which the shares are purchased. Class B
shares purchased before June 1, 1996, and any dividend reinvestment plan Class B
shares received on such shares, automatically convert to Class A shares six
years after the end of the calendar month in which the shares are
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
purchased. For the year ended December 31, 1999, 8,143,395 Class B shares
automatically converted to Class A shares and are shown in the above table as
sales of Class A shares and repurchases of Class B shares. Class C shares
purchased before January 1, 1997, and any dividend reinvestment plan C shares
received thereon, automatically convert to Class A shares ten years after the
end of the calendar month in which the shares are purchased. Class C shares
purchased on or after January 1, 1997 do not possess a conversion feature. For
the year ended December 31, 1999, no Class C shares converted to Class A shares.
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.
<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........................................ 1.50% None
Sixth........................................ 1.00% None
Seventh and Thereafter....................... None None
</TABLE>
For the year ended December 31, 1999, Van Kampen, as Distributor for the
Fund, received commissions on sales of the Fund's Class A shares of
approximately $80,900 and CDSC on redeemed shares of approximately $458,600.
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, were $2,372,034,641 and $2,528,247,004, 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.
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
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 a call 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, futures or forward 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 year ended December 31, 1999, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1998.............. -0- $ -0-
Options Written and Purchased (Net)......... 2,000 1,139,438
Options Terminated in Closing Transactions
(Net).................................... (2,000) (1,139,438)
Options Expired (Net)....................... -0- -0-
------ -----------
Outstanding at December 31, 1999.............. -0- $ -0-
====== ===========
</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
notes 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, cash or liquid 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). The risk of loss associated
with a futures contract is in excess of the variation margin reflected on the
Statement of Assets and Liabilities.
26
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
Transactions in futures contracts, each with a par value of $100,000, for
the year ended December 31, 1999, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1998.......................... 1,837
Futures Opened.......................................... 18,025
Futures Closed.......................................... (19,064)
-------
Outstanding at December 31, 1999.......................... 798
=======
</TABLE>
The futures contracts outstanding as of December 31, 1999, and the
descriptions and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C>
Long Contracts:
US Treasury Note Futures, Mar. 2000
(Current Notional Value $98,594 per
contract)................................ 50 $ (136,719)
Short Contracts:
US Treasury Bond Futures, Mar. 2000
(Current Notional Value $93,863 per
contract)................................ 748 2,174,490
--- ----------
798 $2,037,771
=== ==========
</TABLE>
C. FORWARD COMMITMENTS--The Fund trades certain securities under the terms of
forward commitments, as described in Note 1. The change in value of these items
is reflected as a component of unrealized appreciation/depreciation on forward
commitments. The Fund has segregated assets for these open commitments totaling
$461.0 million.
The following forward purchase commitments were outstanding as of December
31, 1999:
<TABLE>
<CAPTION>
UNREALIZED
PAR AMOUNT SETTLEMENT APPRECIATION/
(000) DESCRIPTION DATE CURRENT VALUE DEPRECIATION
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$100,000 FHLMC Gold, 7.50% coupon.... 01/19/00 $ 99,031,000 $(1,234,625)
60,000 FHLMC Gold, 8.00% coupon.... 01/19/00 60,581,400 (299,850)
110,000 FNMA, 7.00% coupon.......... 01/24/00 108,831,800 (839,684)
75,000 FNMA, 7.50% coupon.......... 01/19/00 74,179,500 (797,062)
14,000 GNMA, 7.00% coupon.......... 01/25/00 13,523,160 (24,028)
------------ -----------
$356,146,860 $(3,195,249)
============ ===========
</TABLE>
27
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
D. CLOSED BUT UNSETTLED FORWARD COMMITMENTS--In certain situations, the Fund has
entered into offsetting transactions for outstanding forward commitments prior
to the settlement of the obligation. In doing so, the Fund realizes a gain or
loss on the transaction at the time the forward commitment is closed. Risks may
result as a result of the potential inability of counterparties to meet the
terms of their contracts.
The following closed but unsettled forward transactions were outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
SETTLEMENT NET
DESCRIPTION DATE RECEIVABLE PAYABLE RECEIVABLE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC Gold ($45,000,000 par,
7.50% coupon, 12/01/2099)........... 01/19/00 $44,657,227 $44,654,688 $2,539
</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.
7. 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 year ended December 31,1999, are payments retained by Van Kampen of
approximately $1,847,600.
28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
8. BORROWINGS
In accordance with its investment policies, the Fund may borrow from banks for
temporary purposes and is subject to certain other customary restrictions.
Effective November 30, 1999, the Fund, in conjunction with certain other funds
of Van Kampen, has entered in to a $650,000,000 committed line of credit
facility with a group of banks which expires on November 28, 2000, but is
renewable with the consent of the participating banks. Each Fund is permitted to
utilize the facility in accordance with the restrictions of its prospectus. In
the event the demand for the credit facility meets or exceeds $650 million on a
complex-wide basis, each Fund will be limited to its pro-rata percentage based
on the net assets of each participating fund. Interest on borrowings is charged
under the agreement at a rate of 0.50% above the federal funds rate per annum.
An annual commitment fee of 0.09% per annum is charged on the unused portion of
the credit facility, which each Fund incurs based on its pro-rata percentage of
quarterly net assets. The Fund has not borrowed against the credit facility
during the period.
29
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen U.S. Government Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen U.S. Government Fund (the "Fund"), including the portfolio of
investments, as of December 31, 1999, 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 U.S. Government Fund 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, 1999, 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 U.S. Government Fund as of December 31, 1999, 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 LLP
Chicago, Illinois
February 11, 2000
30
<PAGE> 32
VAN KAMPEN U.S. GOVERNMENT FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
JERRY D. CHOATE
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY, PH.D.
PAUL G. YOVOVICH
RICHARD F. POWERS, III*
President
DENNIS J. MCDONNELL*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
STEPHEN L. BOYD*
PETER W. HEGEL*
MICHAEL H. SANTO*
EDWARD C. WOOD, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN
INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 218256
Kansas City, Missouri 64121-8256
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 LLP
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen Funds Inc., 2000 All rights reserved.
(SM) denotes a service mark of Van Kampen Funds 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. After May 31, 2000, the report, if used with prospective
investors, must be accompanied by a monthly performance update.
31
<PAGE> 33
RESULTS OF SHAREHOLDER VOTES
A Joint Special Meeting of the Shareholders of the Fund was held on December 15,
1999, where shareholders voted on the election of trustees and independent
public accountants.
1) With regard to the election of the following trustees by shareholders:
<TABLE>
<CAPTION>
# OF SHARES
--------------------------
IN FAVOR WITHHELD
- --------------------------------------------------------------------------
<S> <C> <C>
J. Miles Branagan........................... 91,781,994 1,643,032
Jerry D. Choate............................. 91,784,546 1,640,480
Linda Hutton Heagy.......................... 91,817,981 1,607,045
R. Craig Kennedy............................ 91,828,639 1,596,387
Mitchell M. Merin........................... 91,800,240 1,624,786
Jack E. Nelson.............................. 91,806,980 1,618,046
Richard F. Powers, III...................... 91,828,867 1,596,159
Phillip B. Rooney........................... 91,808,982 1,616,044
Fernando Sisto.............................. 91,697,588 1,727,438
Wayne W. Whalen............................. 91,780,682 1,644,345
Suzanne H. Woolsey.......................... 91,793,534 1,631,492
Paul G. Yovovich............................ 91,788,132 1,636,894
</TABLE>
3) With regard to the ratification of KPMG LLP as independent public
accountants for the Fund, 90,748,514 shares voted in the affirmative, 520,246
shares voted against and 2,156,265 shares abstained.
32
<PAGE> 34
YEAR 2000 UPDATE
As we enter the new century, it's "business as usual" for Van Kampen. Thank you
for the confidence you showed in us during the changeover on January 1, 2000,
and for entrusting us with your investment portfolio. We look forward to
continuing to serve your investment needs.
