AMERICAN CAPITAL FEDERAL MORTGAGE TRUST, N14EL24, 1995-05-31

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
N14EL24, 1995-05-31

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 31, 1995

1933 ACT REGISTRATION NO. 33-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM N-14

REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 /X/

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. / /

---------------------

AMERICAN CAPITAL
FEDERAL MORTGAGE TRUST
(Exact Name of Registrant as Specified in Charter)

2800 POST OAK BOULEVARD, HOUSTON, TEXAS 77056
(Address of Principal Executive Offices)

TELEPHONE NUMBER: (713) 993-0500

------------------------

<TABLE>
<S> <C>
RONALD A. NYBERG, ESQ. COPY TO:
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST GEORGE M. BARTLETT, ESQ.
ONE PARKVIEW PLAZA O'MELVENY & MYERS
OAKBROOK TERRACE, ILLINOIS 60181 400 SOUTH HOPE STREET
(NAME AND ADDRESS OF AGENTS FOR SERVICE) LOS ANGELES, CALIFORNIA 90071
</TABLE>

------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

PURSUANT TO THE PROVISIONS OF RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940, THE REGISTRANT HAS PREVIOUSLY ELECTED TO REGISTER AN INDEFINITE NUMBER OF
SHARES AND WILL FILE A RULE 24F-2 NOTICE WITH THE COMMISSION FOR ITS FISCAL YEAR
ENDING DECEMBER 31, 1995 ON OR BEFORE FEBRUARY 28, 1995. THEREFORE, NO FILING
FEE IS DUE AT THIS TIME.

================================================================================

<PAGE> 2

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

Cross-reference sheet pursuant to rule 481(a) of Regulation C
under the Securities Act of 1933

<TABLE>
<CAPTION>
FORM N-14 ITEM NO. PROXY STATEMENT/PROSPECTUS CAPTION*
- ----------------------------------------- -----------------------------------------------------
<S> <C> <C>
PART A INFORMATION REQUIRED IN THE PROSPECTUS
Item 1. Beginning of Registration
Statement and Outside Front
Cover Page of Prospectus...... Outside front cover page of Proxy
Statement/Prospectus
Item 2. Beginning and Outside Back
Cover Page of Proxy
Statement/Prospectus.......... Table of Contents
Item 3. Fee Table, Synopsis
Information and Risk
Factors....................... Summary; Risk Factors; Fee Comparisons
Item 4. Information about the
Transaction................... Summary; The Proposed Reorganization
Item 5. Information about the
Registrant.................... Outside front cover page of Proxy
Statement/Prospectus; Summary; The Proposed
Reorganization; Other Information; Prospectus and
Statement of Additional Information of the American
Capital Federal Mortgage Trust (incorporated by
reference)
Item 6. Information about the Company
Being Acquired................ Prospectus and Statement of Additional Information of
Van Kampen Merritt Adjustable Rate U.S. Government
Fund (incorporated by reference)
Item 7. Voting Information............ Voting Information and Requirements
Item 8. Interest of Certain Persons
and Experts................... Summary; Reasons for the Proposed Reorganization;
Legal Matters
Item 9. Additional Information
Required for Reoffering by
Persons Deemed to be
Underwriters.................. Not applicable

PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page.................... Cover Page
Item 11. Table of Contents............. Table of Contents
Item 12. Additional Information about
the Registrant................ Incorporation of Documents by Reference
Item 13. Additional Information about
the Company Being Acquired.... Incorporation of Documents by Reference
Item 14. Financial Statements.......... Financial Statements
</TABLE>

PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under
the appropriate item, so numbered, in Part C of this
Registration Statement.

- ---------------
* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 3

DEAR VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
SHAREHOLDER:

Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") for the Van Kampen American Capital Adjustable Rate U.S. Government
Fund (the "VK Fund"). The Reorganization calls for VK Fund shareholders to
become shareholders of the Van Kampen American Capital Federal Mortgage Trust
(the "AC Fund"), a mutual fund which pursues a substantially similar investment
objective.

The enclosed materials include a combined Proxy Statement/Prospectus
containing information you need to make an informed decision. However, we
thought it would also be helpful for you to have, at the start, answers to some
of the important questions you might have about the proposed reorganization. We
hope you find these explanations useful as you review your materials before
voting. For more detailed information about the reorganization plan, please
refer to the combined Proxy Statement/Prospectus.

HOW WILL THE REORGANIZATION AFFECT ME?

Assuming shareholders of the VK Fund approve the Reorganization, the assets
and liabilities of the VK Fund will be combined with those of the AC Fund and
you will become a shareholder of the AC Fund. You will receive shares of the AC
Fund approximately equal in value at the time of issuance to the shares of the
VK Fund that you hold immediately prior to the Reorganization. Class A
shareholders of the VK Fund will receive Class A Shares of the AC Fund; Class B
shareholders of the VK Fund will receive Class B Shares of the AC Fund; and
Class C shareholders of the VK Fund will receive Class C Shares of the AC Fund.

WHY IS THE REORGANIZATION BEING RECOMMENDED?

As we reported to you earlier, the parent company of Van Kampen American
Capital Asset Management, Inc. ("AC Adviser"), the investment adviser to the AC
Fund, was acquired in December 1994 by Van Kampen American Capital, Inc.
("VKAC"), and was subsequently merged into VKAC. VKAC, through its wholly owned
subsidiaries, distributes and manages the Van Kampen American Capital funds. AC
Adviser is an affiliate of Van Kampen American Capital Investment Advisory Corp.
("VK Adviser"), the investment adviser to the VK Fund. The primary purposes of
the proposed Reorganization are to seek to achieve future economies of scale and
eliminate certain costs associated with operating the VK Fund and the AC Fund
separately. The Reorganization will result in combining the assets and
liabilities of the VK Fund with the assets and liabilities of the AC Fund and
consolidating their operations.

The Reorganization is intended to provide various benefits to shareholders
of the VK Fund who become shareholders of the AC Fund (as well as to existing
and future investors in the AC Fund). For example, higher net asset levels would
enable the AC Fund to spread fixed and relatively fixed costs, such as
accounting, legal and printing expenses, over a larger asset base, thereby
reducing per share expense levels. Higher net asset levels also may benefit
portfolio management by permitting larger individual portfolio investment that
may result in reduced transaction costs and/or more favorable pricing and by
providing the opportunity for greater portfolio diversity. These benefits, in
turn, should have a favorable effect on the relative performance of the AC Fund.

The consummation of the Reorganization is subject to the satisfaction of a
number of conditions (including approval by the VK Fund's shareholders), which
are summarized below in "The Proposed Reorganization -- Terms of the Agreement"
section of the accompanying combined Proxy Statement/Prospectus. These
conditions are stated in the Agreement which is attached as Exhibit A to the
combined Proxy Statement/Prospectus.
<PAGE> 4

WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?

No. The full value of your shares of the VK Fund will be exchanged for
shares of the corresponding class of the AC Fund without any sales load,
commission or other transactional fee being imposed. As more fully discussed in
the combined Proxy Statement/Prospectus, the holding period for shareholders
acquiring Class B or C shares of the AC Fund in the Reorganization subject to a
contingent deferred sales charge will be measured from the time (i) the holder
purchased Class B or C shares of the VK Fund or (ii) purchased Class B or C
shares of any other Van Kampen American Capital open-end fund and subsequently
exchanged into Class B or C shares of the VK Fund. The AC Fund will bear the
costs associated with the Reorganization, such as printing and mailing costs and
other expenses associated with the Special Meeting.

HOW WILL THE FEES PAID BY THE AC FUND COMPARE TO THOSE PAYABLE BY THE VK FUND?

It is anticipated that, on a per share basis, the total of the various fees
and expenses incurred by the AC Fund will be less, upon completion of the
Reorganization, than the total of such fees and expenses applicable to the VK
Fund. The fees and expenses actually paid to date by the VK Fund have been less
than the total of such fees and expenses applicable to the VK Fund as a result
of voluntary fee waivers and expense reimbursements made by the VK Adviser.
However, if the Reorganization is not consummated, the VK Adviser does not
currently intend to continue such voluntary fee waivers and expense
reimbursements.

WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE AC FUND? WHAT HAPPENS TO MY
ACCOUNT IF THE REORGANIZATION IS APPROVED?

If the Reorganization is approved, your interest in Class A, B or C shares
of the VK Fund will automatically be converted into the same class of shares of
the AC Fund and we will send you written confirmation that this change has taken
place. You will receive the same class of shares of the AC Fund approximately
equal in value to your Class A, B or C shares of the VK Fund. No certificates
for AC Fund Shares will be issued in connection with the Reorganization,
although such certificates will be available upon request. If you currently hold
certificates representing your shares in the VK Fund, it is not necessary to
surrender such certificates.

WHO WILL ADVISE THE AC FUND AND PROVIDE OTHER SERVICES?

The AC Adviser provides advisory services to the AC Fund under an
arrangement that is substantially similar to that currently in effect between
the VK Fund and the VK Adviser. The contractual advisory fees payable by the AC
Fund are no higher than the contractual advisory fees applicable to the VK Fund.
Van Kampen American Capital Distributors, Inc. serves as distributor of shares
of both the AC Fund and the VK Fund. In addition, State Street Bank & Trust
Company, 225 Franklin Street, P.O. Box 1713, Boston, Massachusetts 02105-1713 is
the custodian of both the AC Fund and the VK Fund. ACCESS Investor Services,
Inc., P.O. Box 418256, Kansas City, Missouri 64141-9256 serves as the transfer
agent for both the AC Fund and the VK Fund.

WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?

the shares of the AC Fund in connection with the Reorganization. Additionally,
the VK Fund would not recognize any gain or loss as a result of the transfer of
all of its assets and liabilities solely in exchange for the shares of the AC
Fund or as a result of its liquidation. The AC Fund expects that it will not
recognize any gain or loss as a result of the Reorganization, that it will take
a carryover basis in the assets acquired from the VK Fund and that its holding
period of such assets will include the period during which the assets were held
by the VK Fund. See "The Proposed Reorganization -- Federal Income Tax
Consequences" in the combined Proxy Statement/Prospectus.

WHAT IF I REDEEM MY VK FUND SHARES BEFORE THE REORGANIZATION TAKES PLACE?

If you choose to redeem your shares of the VK Fund before the
Reorganization takes place, the redemption will be treated as a normal sale of
shares and will be a taxable transaction, unless your account is not subject to
taxation, such as an individual retirement account or other tax-qualified
retirement plan.

We hope these answers help to clarify the Reorganization proposal for you.
If you still have questions, do not hesitate to call us at 1-800-341-2911.
Please give this matter your prompt attention. We need to receive your proxy
before the shareholder meeting scheduled for September 8, 1995. If shareholders
approve the Reorganization, it is expected to take effect on [ ], 1995.

Thank you for your investment in Van Kampen American Capital Adjustable
Rate U.S. Government Fund.

Very truly yours,

Van Kampen American Capital Adjustable
Rate U.S. Government Fund

Dennis J. McDonnell
President, Chief Executive Officer and
Trustee
<PAGE> 6

VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE
U.S. GOVERNMENT FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 341-2911

NOTICE OF SPECIAL MEETING
SEPTEMBER 8, 1995

A Special Meeting of Shareholders of the Van Kampen American Capital
Adjustable Rate U.S. Government Fund (the "VK Fund") will be held at the
[Transco Tower Auditorium, Level 2, 2800 Post Oak Boulevard, Houston, Texas
77056,] on September 8, 1995 at [ p.m.] (the "Special Meeting"), for the
following purposes:

(1) To approve a plan of reorganization pursuant to which the VK Fund
would transfer all of its assets and liabilities to the Van Kampen American
Capital Federal Mortgage Trust (the "AC Fund") in exchange for
corresponding Class A, B and C shares of beneficial interest of the AC
Fund, the VK Fund would distribute such Class A, B and C shares of the AC
Fund to holders of Class A, B and C shares of the VK Fund, respectively,
and the VK Fund would be dissolved.

(2) To transact such other business as may properly come before the
Special Meeting.

Shareholders of record as of the close of business on [ ], 1995
are entitled to vote at the Special Meeting or any adjournment thereof.

For the Board of Trustees,

Ronald A. Nyberg
Vice President and Secretary

July , 1995

---------------------

PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.

---------------------
<PAGE> 7

VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND

PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

This Proxy Statement/Prospectus is being furnished to shareholders of the
Van Kampen American Capital Adjustable Rate U.S. Government Fund (the "VK
Fund"), a series of Van Kampen American Capital Trust, a Delaware business trust
(the "VKAC Trust"), and relates to the Special Meeting of Shareholders of the VK
Fund (the "Special Meeting") called for the purpose of approving the proposed
reorganization of the VK Fund (the "Reorganization") which would result in
shareholders of the VK Fund in effect exchanging their VK Fund shares for shares
of the Van Kampen American Capital Federal Mortgage Trust, a Delaware business
trust (the "AC Fund"). The Reorganization would be accomplished as follows: (1)
the AC Fund would acquire all the then existing assets and liabilities of the VK
Fund in exchange for Class A, B and C shares of beneficial interest of the AC
Fund (the "Shares"); (2) the VK Fund would distribute the Shares to the VK
Fund's shareholders holding the same respective class of shares; and (3) the VK
Fund would dissolve and all shares of the VK Fund would be cancelled.

The AC Fund is an open-end, diversified management investment company which
is authorized to issue an unlimited number of shares of beneficial interest, par
value $.01 per share. The investment objective of the AC Fund is to seek high
current return and relative safety of capital which is substantially similar to
that of the VK Fund. (See "Summary -- Comparisons of the AC Fund and VK Fund"
below.) There can be no assurance that the AC Fund will achieve its investment
objective. The address and principal executive office of the VK Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, telephone no. (708) 684-6000
or (800) 225-2222. The address and principal executive office of the AC Fund is
2800 Post Oak Boulevard, Houston, Texas 77056, telephone no. (800) 421-5666. The
enclosed proxy and this Proxy Statement/ Prospectus are first being sent to VK
Fund shareholders on or about [ ], 1995.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------

This Proxy Statement/Prospectus contains information shareholders of the VK
Fund should know before voting on the Reorganization and constitutes an offering
of Class A, B and C Shares of the AC Fund only. Please read it carefully and
retain it for future reference. A Statement of Additional Information dated May
1, 1995 relating to this Proxy Statement/Prospectus (the "Reorganization SAI")
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. A Prospectus (the "AC Fund Prospectus") and
Statement of Additional Information containing additional information about the
AC Fund, each dated May 1, 1995, have been filed with the SEC and are
incorporated herein by reference. A copy of the AC Fund Prospectus accompanies
this Proxy Statement/Prospectus. A Prospectus and Statement of Additional
Information containing additional information about the VK Fund, each dated
<PAGE> 8

[ ], 1995, have been filed with the SEC and are incorporated herein by
reference. Copies of any of the foregoing may be obtained without charge by
calling or writing to the VK Fund at the telephone number or address shown
above. If you wish to request the Reorganization SAI, please ask for the
"Reorganization SAI."

No person has been authorized to give any information or make any
representation not contained in this Proxy Statement/Prospectus and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
------------------------

The AC Fund is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as
amended (the "Act"), and in accordance therewith files reports and other
information with the SEC. Such reports, other information and proxy statements
filed by the AC Fund can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and at its Regional Office at 500 West Madison Street, Chicago, Illinois.
Copies of such material can also be obtained from the SEC's Public Reference
Branch, Office of Consumer Affairs and Information Services, Washington, D.C.
20549, at prescribed rates.

The date of this Proxy Statement/Prospectus is [July ], 1995.

2
<PAGE> 9

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION.................................. 4

A. SUMMARY............................................................................ 4
The Reorganization................................................................. 4
Comparisons of the AC Fund and the VK Fund......................................... 5
Investment Objectives and Policies............................................... 6
Advisory and Other Fees.......................................................... 8
Distribution, Purchase, Redemption and Exchange of Shares........................ 9
Federal Income Tax Consequences.................................................... 12
Reasons For The Proposed Reorganization............................................ 13
B. RISK FACTORS....................................................................... 15
Nature of Investment............................................................... 15
Changes in Certain Investment Practices............................................ 15

C. INFORMATION ABOUT THE FUNDS........................................................ 16

D. THE PROPOSED REORGANIZATION........................................................ 16
Terms of the Agreement............................................................. 16
Description of Securities to be Issued............................................. 17
Shares of Beneficial Interest.................................................... 17
Voting Rights of Shareholders.................................................... 17
Continuation of Shareholder Accounts and Plans; Share Certificates................. 18
Federal Income Tax Consequences.................................................... 18
Capitalization..................................................................... 20
Comparative Performance Information................................................ 20
Ratification of Investment Objective, Policies and Restrictions of the AC Fund..... 21
Legal Matters...................................................................... 21
Expenses........................................................................... 21

E. RECOMMENDATIONS OF VK BOARD........................................................ 21

OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING.................................. 22

OTHER INFORMATION....................................................................... 22
A. SHAREHOLDINGS OF THE VK FUND AND THE AC FUND....................................... 22
B. SHAREHOLDER PROPOSALS.............................................................. 22

VOTING INFORMATION AND REQUIREMENTS..................................................... 22
</TABLE>

3
<PAGE> 10

APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION

A. SUMMARY

The following is a summary of, and is qualified by reference to, the more
complete information contained in this Proxy Statement/Prospectus, including the
Agreement and Plan of Reorganization by and between the AC Fund and the VK Fund
attached hereto as Exhibit A (the "Agreement"), the prospectus of the VK Fund
dated [ ], 1995 (the "VK Fund Prospectus") incorporated herein by
reference, and the prospectus of the AC Fund dated July 31, 1995 (the "AC Fund
Prospectus") incorporated herein by reference and accompanying this Proxy
Statement/ Prospectus. This Proxy Statement/Prospectus constitutes an offering
of Class A, B and C Shares of the AC Fund only.

THE REORGANIZATION

On April 6-7, 1995, the Board of Trustees of the VK Fund (the "VK Board")
approved the Agreement. The Agreement provides that the VK Fund will transfer
all of its assets and liabilities to the AC Fund in exchange for Class A, B and
C Shares of the AC Fund. At the Closing (as defined herein), the AC Fund will
issue Shares of the AC Fund to the VK Fund which AC Fund Shares will have an
aggregate net asset value approximately equal in amount to the net asset value
of the VK Fund net assets as of the Closing. The Agreement provides that the VK
Fund will dissolve pursuant to a plan of liquidation and dissolution to be
adopted by the VK Board following the Closing, and as part of such dissolution,
will distribute to each shareholder of the VK Fund Shares of the respective
class of the AC Fund approximately equal in value to their existing shares in
the VK Fund. All members of the VK Board who are not affiliated with VK Adviser
were elected as trustees of the AC Fund on July 21, 1995.

The VK Board has unanimously determined that the Reorganization is in the
best interests of the shareholders of each class of shares of the VK Fund.
Similarly, the Board of Trustees of the AC Fund (the "AC Board") has unanimously
determined that the Reorganization is in the best interests of the AC Fund and
that the interests of each class of shares of existing shareholders of the AC
Fund will not be diluted as a result of the Reorganization. Management of the
respective funds believes that the proposed Reorganization of the VK Fund into
the AC Fund should allow the AC Fund to achieve future economies of scale and to
eliminate certain costs of operating the VK Fund and the AC Fund separately.

The AC Fund has agreed to pay all of the costs of soliciting approval of
the Reorganization by the VK Fund's shareholders and related costs of the
Reorganization, including expenses incurred by the VK Fund. Accordingly,
shareholders of the AC Fund after the Reorganization will bear a pro rata
portion of such expenses.

The VK Board is asking shareholders of the VK Fund to approve the
Reorganization at the Special Meeting to be held on September 8, 1995. If
shareholders of the VK Fund approve the Reorganization, it is expected that the
Closing will be on [ ], 1995, but it may be at a different time, as
described herein.

THE VK BOARD RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATION. APPROVAL OF
THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A MAJORITY OF
THE OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND
REQUIREMENTS."

4
<PAGE> 11

COMPARISONS OF THE AC FUND AND THE VK FUND

The principal changes which would result from the Reorganization are listed
below:

(1) The holders of Class A, B and C shares of the VK Fund would become
shareholders of the same class of Shares, respectively, of the AC Fund.
The VK Fund and the AC Fund have substantially similar investment
objectives and follow similar investment strategies. Both funds invest
principally in a diversified portfolio of securities that are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
("U.S. Government Securities") and both portfolios consist primarily of
mortgage related securities. The VK Fund may borrow money from banks or
enter into reverse repurchase agreements and dollar rolls in an amount
up to 33 1/3% of the VK Fund's total assets and may invest up to 35% of
its total assets in fixed rate U.S. government securities, income
securities that are not U.S. government securities, including not more
than 10% of its total assets in foreign securities. In contrast, the AC
Fund may not borrow in excess of 5% of its total assets and shall only
do so as a temporary measure for extraordinary or emergency purposes.
The AC Fund may invest up to 35% of its assets in mortgage-related
securities not guaranteed by an agency or instrumentality of the U.S.
Government, mortgage-backed securities, asset-backed securities and
U.S. Government Securities and does not invest in foreign securities.
The VK Fund may hold up to 15% of its total assets in illiquid
securities while the AC Fund limits holdings of illiquid securities to
10% of its total assets.

(2) The AC Fund is managed by Van Kampen American Capital Asset Management,
Inc. ("AC Adviser"), an affiliate of the VK Fund's adviser, Van Kampen
American Capital Investment Advisory Corp. ("VK Adviser"). The advisory
fee for the AC Fund is a monthly fee computed on average daily net
assets at an annual rate of 0.50% on the first $1 billion of net
assets; 0.475% on the next $1 billion of net assets; 0.45% on the next
$1 billion of net assets; 0.40% on the next $1 billion of net assets;
and 0.35% on net assets over $4 billion. The advisory fee for the VK
Fund is a monthly fee computed on average daily net assets at an annual
rate of 0.60% on the first $500 million of net assets; 0.550% on the
next $500 million of net assets; 0.500 % on the next $2 billion of net
assets; 0.475% on the next $2 billion of net assets; 0.450% on the next
$2 billion of net assets; 0.425% on the next $2 billion of net assets
and 0.400% on net assets over $9 billion. As of March 31, 1995, the AC
Fund's net assets were approximately $66.1 million. As of March 31,
1995, the VK Fund's net assets were approximately $28.8 million.

(3) The VK Fund offers three classes of shares. Similarly, the AC Fund has
three classes of shares, but currently offers only Class A and C shares
for purchase. Class B shares of the AC Fund are not currently offered
for purchase other than for dividend and capital gain reinvestments or
exchanges by current Class B shareholders of other Van Kampen American
Capital funds. Class A shares of the VK Fund and the AC Fund are
subject to an initial sales load of 3.25%. However, the initial sales
charge applicable to Class A shares of the AC Fund will be waived for
Class A Shares acquired in the Reorganization. Any subsequent purchases
of Class A shares of the AC Fund will be subject to a sales charge of
up to 3.25%. Class B shares of the VK Fund and the AC Fund do not incur
a sales charge when they are purchased, but generally are subject to a
contingent deferred sales charge of 3.00% if redeemed within the first
year after purchase, which charge is reduced to zero over a three year
period in the case of the VK Fund and a four year period in the case of
the AC Fund. However, Class B Shares of the AC Fund acquired in the
Reorganization will remain subject to the contingent deferred sales
charge applicable to Class B shares of the VK Fund. Subsequent to the
Reorganization, holders of Class B shares of the former VK Fund will be
subject to the same Class B share

5
<PAGE> 12

purchase limitations of the AC Fund (i.e. Class B shares of the
AC Fund are not offered for purchase other than for dividend and
capital gain reinvestments or exchanges by Class B shareholders of
other Van Kampen American Capital funds). Class C shares of the VK
Fund and the AC Fund do not incur a sales charge when they are
purchased, but are subject to a contingent deferred sales charge of
1.00% if redeemed within the first year after purchase.

(4) Both the VK Fund and the AC Fund have adopted distribution plans (the
"Distribution Plans") pursuant to Rule 12b-1 under the Act and have
adopted service agreements or plans (the "Service Plans"). Both the AC
Fund and the VK Fund can charge up to 0.75% of their respective average
daily net assets attributable to Class B and C shares for reimbursement
of certain distribution-related expenses. In addition, both the VK Fund
and the AC Fund can charge up to 0.25% of their respective average
daily net assets attributable to Class A, B and C shares for the
provision of ongoing services to shareholders. Class B shares of both
the VK Fund and the AC Fund automatically convert to Class A shares six
years after the end of the calendar month in which the shareholder's
order to purchase a Class B share was accepted. Unlike Class C shares
of the VK Fund, Class C shares of the AC Fund automatically convert to
Class A shares after ten years. Accordingly, Class C shares acquired in
the Reorganization will not automatically convert to Class A shares
after ten years, but will remain Class C shares. However, Class C
shares of the AC Fund purchased subsequently will automatically convert
to Class A shares after ten years.

Certain other comparisons between the VK Fund and the AC Fund are discussed
below.

INVESTMENT OBJECTIVES AND POLICIES

The AC Fund and the VK Fund have substantially similar investment
objectives and also share similar investment practices, but there are also
certain differences in their investment policies, practices and restrictions.
The investment objectives of the AC Fund are to seek to provide investors with a
high current return and relative safety of capital. The VK Fund's investment
objective is to seek a high level of current income consistent with a relatively
stable net asset value.

Under normal market conditions, the VK Fund invests at least 65% of its
portfolio in U.S. Government Securities which have interest rates which reset at
periodic intervals. Under normal market conditions, substantially all of the
U.S. Government Securities in which the VK Fund invests consist of adjustable
rate mortgage-backed securities ("ARMS") or other securities collateralized by
or representing an interest in mortgages and which have interest rates which
reset at periodic intervals. Up to 35% of the VK Fund's assets may be invested
in fixed rate U.S. Government Securities, in adjustable rate or fixed rate
securities that are not U.S. Government Securities, corporate or other debt
obligations, including not more than 10% of its total assets in foreign
securities.

Securities purchased by the VK Fund ordinarily will be U.S. Government
Securities or will be rated at least Aa by Moody's Investors Services, Inc.
("Moody's") or AA by Standard & Poor's Ratings Group ("S&P") or comparably rated
by another nationally recognized rating agency or, if unrated, determined to be
of comparable quality by the VK Adviser. The VK Fund may, however, invest up to
10% of its total assets in securities rated A by Moody's or S&P. The VK Fund may
also engage in hedging and risk management transactions, sell call options,
invest in restricted or illiquid securities, make forward commitments, enter
into repurchase agreements, reverse repurchase agreements and dollar rolls,
invest in Eurodollar instruments, lend its portfolio securities and enter into
foreign currency transactions.

6
<PAGE> 13

The AC Fund invests primarily in mortgage-related U.S. Government
Securities. Under normal circumstances, at least 65% of the total assets of the
AC Fund are invested in such securities. The AC Fund may invest up to 35% of its
assets in mortgage-related securities which are not U.S. Government Securities,
mortgage-backed securities, asset-backed securities and U.S. Government
Securities. The AC Fund may purchase or write options and engage in transactions
involving interest rate futures contracts and options on such contracts. The AC
Fund may also purchase or sell debt securities on a forward commitment basis and
enter into interest rate swaps and may purchase or sell interest rate caps,
floors and collars. For temporary defensive purposes, the entire portfolio of
the AC Fund may be invested in U.S. Government Securities, its agencies and
instrumentalities and repurchase agreements secured by such obligations.

The AC Fund is not limited as to the maturities of the securities in which
it may invest and the market value of the debt securities owned by the AC Fund
will fluctuate depending upon market factors and with prevailing interest rate
levels and therefore the net asset value of the AC Fund will fluctuate. In order
to reduce fluctuation in net asset value, the AC Fund's current operating policy
is to maintain a portfolio duration within a range of six months to five years.
The AC Fund does not invest in foreign securities.

The VK Fund is authorized to borrow money from banks or enter into reverse
repurchase agreements and dollar rolls in an amount up to 33 1/3% of its total
assets. In contrast, the AC Fund may not borrow except as a temporary measure
for extraordinary or emergency purposes, and then only up to 5% of its total
assets.

The VK Fund may invest up to 15% percent of its total assets in securities
deemed to be illiquid, securities the disposition of which is subject to
substantial legal or contractual restrictions on resale and securities that are
not readily marketable. The AC Fund is limited to 10% of its total assets
invested in illiquid securities.

The AC Fund may not engage in short sales of securities, unless at the time
of the sale it owns an equal amount of such securities. The VK Fund may not sell
any securities "short", except in connection with hedging or risk management
transactions. Each of the AC Fund and the VK Fund may lend portfolio securities
to broker-dealers and other financial institutions provided the loans are
secured by collateral at least equal to the market value of the securities
loaned. The AC Fund may lend up to 10% of its net assets, while the VK Fund has
no specific limit.

The AC Fund is managed by the AC Adviser while the VK Fund is managed by
the VK Adviser. The VK Adviser and the AC Adviser are wholly owned subsidiaries
of Van Kampen American Capital, Inc. ("VKAC"), which has been developing
investment strategies and products for individuals, business and institutions
since 1974. The VK Adviser and the AC Adviser are the primary investment
advisers to the Van Kampen American Capital funds. As of March 31, 1995, the VK
Adviser, the AC Adviser and their affiliates managed or supervised approximately
$51.7 billion of assets, including assets of 65 open-end investment companies
and 38 closed-end investment companies. The business address of VKAC Asset
Management is 2800 Post Oak Boulevard, Houston, Texas 77056. VKAC Asset
Management and its investment advisory agreement with the VK Fund are more fully
described in the AC Fund Prospectus and Statement of Additional Information.

7
<PAGE> 14

ADVISORY AND OTHER FEES

The VK Fund pays the VK Adviser a monthly fee based on its average daily
net asset value at the annual rates of 0.600% of the first $500 million; 0.550%
of the next $500 million of net assets; 0.500% on the next $2 billion of net
assets; 0.475% on the next $2 billion of net assets; 0.450% on the next $2
billion of net assets; 0.425% on the next $2 billion of net assets and 0.400% on
the net assets over $9 billion. However, such fee has historically been reduced
to zero as a result of voluntary fee waivers and expense reimbursement by the VK
Adviser. In addition, the VK Fund bears most expenses associated with its
operations and the issuance and repurchase or redemption of its securities,
except for the compensation of trustees affiliated with VKAC, and officers of
the VK Fund who are interested persons of VKAC or its subsidiaries. The total
operating expenses for the VK Fund for the period ended December 31, 1994 were
0.71%, 1.45% and 1.46% with respect to Class A, B and C shares, respectively,
after giving effect to voluntary expense reimbursement by the VK Adviser. Absent
such voluntary expense reimbursement, such total operating expenses would have
been 1.62%, 2.36% and 2.37% for Class A, B and C shares, respectively. However,
if the Reorganization is not consummated, the VK Adviser does not currently
intend to continue the aforementioned voluntary fee waivers and expense
reimbursements.

The AC Fund pays the AC Adviser a monthly fee based on its average daily
net asset value at the annual rates of 0.50% of the first $1 billion; 0.475% of
the next $1 billion of net assets; 0.45% on the next $1 billion; 0.40% on the
next $1 billion and 0.35% on net assets over $4 billion. Similar to the VK Fund,
the AC Fund also bears most expenses associated with its operation and the
issuance and repurchase or redemption of its securities, except for the
compensation of trustees affiliated with VKAC, and officers of the AC Fund who
are interested persons of VKAC or its subsidiaries. The total operating expenses
for the AC Fund for the period ended December 31, 1994 were 1.15%, 1.91% and
1.90% with respect to Class A, B and C shares, respectively, after giving effect
to voluntary fee waivers by AC Adviser. Absent such voluntary fee waivers, such
total operating expenses would have been 1.31%, 2.08% and 2.07% for Class A, B
and C shares, respectively. For a complete description of the VK Fund's advisory
services, see the respective sections in the VK Fund's Prospectus and Statement
of Additional Information entitled "Investment Advisory Services" and
"Investment Advisory and Other Services -- Investment Advisory Agreement." For a
complete description of the AC Fund's advisory services, see the respective
sections in the AC Fund's Prospectus and Statement of Additional Information
entitled "The Fund and its Management" and "Investment Advisory Agreement."

In addition, the AC Fund has adopted the Distribution Plan with respect to
each class of shares pursuant to Rule 12b-1 under the Act and has adopted the
Service Plan with respect to each class of its shares. The Distribution Plan and
the Service Plan provide that the AC Fund can charge up to 0.25%, 1.00% and
1.00% of the AC Fund's average daily net assets attributable to its Class A, B
and C shares, respectively, for reimbursement of certain distribution-related
expenses and for the provision of ongoing services to shareholders. The
Distribution Plan and the Service Plan are being implemented through an
agreement with Van Kampen American Capital Distributors, Inc. ("VKAC
Distributors"), the distributor of each class of the AC Fund's shares,
sub-agreements between VKAC Distributors and members of the National Association
of Securities Dealers, Inc. (the "NASD") who are acting as securities dealers
and NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the AC Fund and banks who are acting as brokers for
their customers that may provide their customers or clients certain services or
assistance. For a complete description of these arrangements with respect to the
AC Fund, see the respective sections in the AC Fund's Prospectus and Statement
of Additional Information entitled "Distribution Plans." For a complete
description of these arrangements with respect to the VK Fund, see the
respective sections in the VK Fund's Prospectus entitled "The Distribution and
Service Plans."

8
<PAGE> 15

DISTRIBUTION, PURCHASE, REDEMPTION AND EXCHANGE OF SHARES

Generally, Class A shares of the VK Fund and the AC Fund are sold at net
asset value applicable at the time of such sale, plus a sales charge of up to
3.25% of the offering price (which percentage is reduced on investments of
$25,000 or more), and are redeemable at their net asset value applicable at the
time of redemption. Purchases of Class A shares of the VK Fund or the AC Fund in
amounts of $1,000,000 or more are not subject to an initial sales charge but a
contingent deferred sales charge of 1% may be imposed on certain redemptions
made within one year of purchase. Class A shares of the AC Fund acquired in the
Reorganization will not be subject to a sales charge.

Generally, Class B shares do not incur a sales charge when they are
purchased, but generally are subject to a contingent deferred sales charge if
redeemed within a specified period of time from the date of purchase. Class B
shares of the VK Fund are subject to a contingent deferred sales charge equal to
3.00% of the lesser of the then current net asset value or the original purchase
price on Class B shares redeemed during the first year after purchase, which
charge is reduced to zero over a three year period. Class B shares of the AC
Fund are subject to a contingent deferred sales charge equal to 3.00% of the
lesser of the then current net asset value or the original purchase price on
Class B shares redeemed during the first year after purchase, which charge is
reduced to zero over a four year period. However, Class B Shares of the AC Fund
acquired in the Reorganization will remain subject to the contingent deferred
sales charge applicable to Class B shares of the VK Fund.

Generally, Class C shares do not incur a sales charge if redeemed after the
first year of purchase. Both Class C shares of the VK Fund and the AC Fund are
subject to a contingent deferred sales charge equal to 1.00% of the lesser of
the then current net asset value or the original purchase price on such shares
redeemed during the first year after purchase and do not incur a sales charge if
redeemed after the first year from the date of purchase. See "Fee Comparisons"
below.

With respect to fixed income securities, the VK Fund and the AC Fund use
different pricing methodologies in calculating net asset value per share, each
of which is widely used and generally accepted in the mutual fund industry. In
determining net asset value per share, the VK Fund generally values fixed income
portfolio securities once daily by using prices equal to the mean of the last
reported bid and ask price of such securities as of 5:00 p.m. eastern time. When
calculating the net assets of the VK Fund in accordance with this pricing
methodology, the net asset value per share would have been $ on July
, 1995. The AC Fund, however, generally computes net asset value per share
by valuing fixed income securities using the last reported bid price. When
calculating the net assets of the VK Fund in accordance with this pricing
methodology, the net asset value per share was $ on July , 1995.
In connection with the Reorganization, the net assets of the VK Fund will be
calculated using the current pricing methodology of the AC Fund.

The minimum initial investment with respect to each class of shares in the
VK Fund and the AC Fund is $500, although Class A Shares of the AC Fund acquired
in connection with the Reorganization will not be subject to the minimum
investment limitation. The minimum subsequent investment in the VK Fund and the
AC Fund is $25. For a complete description of these arrangements with respect to
the AC Fund, see the respective sections in the AC Fund's Prospectus and
Statement of Additional Information entitled "Purchase of Shares" and "Purchase
and Redemption of Shares."

Shares of either the VK Fund or the AC Fund may be purchased by check, by
electronic transfer or by bank wire and also offer exchange privileges [among
all] other Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors.

9
<PAGE> 16

Shares of the AC Fund and the VK Fund properly presented for redemption may
be redeemed or exchanged at the next determined net asset value per share
(subject to any applicable deferred sales charge). Shares of either the VK Fund
or the AC Fund may be redeemed or exchanged by mail or by special redemption
privileges (telephone exchange, telephone redemption by check, or electronic
transfer). If a shareholder of either fund attempts to redeem shares within a
short time after they have been purchased by check, the respective funds may
delay payment of the redemption proceeds until such funds can verify that
payment for the purchase of the shares has been (or will be) received. No
further purchases of the shares of the VK Fund may be made after the date on
which the shareholders of the VK Fund approve the Reorganization, and the stock
transfer books of the VK Fund will be permanently closed as of the date of
Closing. Only redemption requests and transfer instructions received in proper
form by the close of business on the day prior to the date of Closing will be
fulfilled by the VK Fund. Redemption requests or transfer instructions received
by the VK Fund after that date will be treated by the VK Fund as requests for
the redemption or instructions for transfer of the shares of the AC Fund
credited to the accounts of the shareholders of the VK Fund. Redemption requests
or transfer instructions received by the VK Fund after the close of business on
the day prior to the date of Closing will be forwarded to the AC Fund. For a
complete description of these redemption arrangements, see the section in the VK
Fund's Prospectus entitled "Redemption of Shares," and the respective sections
in the AC Fund's Prospectus and Statement of Additional Information entitled
"Redemption of Shares" and "Purchase and Redemption of Shares."

10
<PAGE> 17

The differences in the distribution, purchase and redemption procedures and
fee structure of the Shares of the AC Fund and the shares of the VK Fund are
highlighted in the table below.

FEE COMPARISONS

<TABLE>
<CAPTION>
CLASS A SHARES(1) AC FUND** VK FUND* PRO FORMA
- ----------------------------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)................. 3.25%(4) 3.25%(4) 3.25%
Maximum Deferred Sales Charge (as a percentage of the
lower of the original purchase price or redemption
proceeds)........................................... None None None
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees....................................... 0.50%(6) 0.60%(5) 0.50%
Rule 12b-1 Fees....................................... 0.24% 0.30%(7) 0.24%
Other Expenses........................................ 0.57% 0.72%(5) 0.39%
Total Fund Operating Expenses (before waivers and
reimbursements)..................................... 1.31%(6) 1.62%(5) 1.13%
Total Fund Operating Expenses (after waivers and
reimbursements)..................................... 1.15% 0.71% 1.13%
CLASS B SHARES(2)
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)................. None None None
Maximum Deferred Sales Charge (as a percentage of the
lower of the original purchase price or redemption
proceeds)........................................... 3.00% 3.00% 3.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees....................................... 0.50%(6) 0.60%(5) 0.50%
Rule 12b-1 Fees....................................... 1.00% 1.00% 1.00%
Other Expenses........................................ 0.58% 0.76%(5) 0.39%
Total Fund Operating Expenses (before waivers and
reimbursements)..................................... 2.08%(6) 2.36%(5) 1.89%
Total Fund Operating Expenses (after waivers and
reimbursements)..................................... 1.91% 1.45% 1.89%
CLASS C SHARES(3)
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS C SHARES
Maximum Sales Load Imposed on Purchase of a Share (as
a percentage of Offering Price)..................... None None None
Maximum Deferred Sales Charge (as a percentage of the
lower of the original purchase price or redemption
proceeds)........................................... 1.00% 1.00% 1.00%
</TABLE>

11
<PAGE> 18

<TABLE>
<CAPTION>
CLASS C SHARES(3) AC FUND** VK FUND* PRO FORMA
- ----------------------------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES FOR CLASS C SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees............................................ 0.50%(6) 0.60%(5) 0.50%
Rule 12b-1 Fees............................................ 1.00% 1.00% 1.00%
Other Expenses............................................. 0.57% 0.77%(5) 0.39%
Total Fund Operating Expenses (before waivers
and reimbursements)...................................... 2.07%(6) 2.37%(5) 1.89%
Total Fund Operating Expenses (after waivers
and reimbursements)...................................... 1.90% 1.46% 1.89%
</TABLE>

- -------------------------
(1) Class A Shares of the AC Fund received pursuant to the Reorganization will
not be subject to a sales charge.

(2) Class B Shares of the VK Fund and the AC Fund are subject to a contingent
deferred sales charge equal to 3.00% of the lesser of the then current net
asset value or the original purchase price on Class B Shares redeemed during
the first year after purchase, which charge is reduced to zero in the case
of the VK Fund, over a three year period as follows: Year 1 -- 3%, Year
2 -- 2%, Year 3 -- 1% and Year 4 -- 0%; and in the case of the AC Fund, over
a four year period as follows: Year 1 -- 3%; Year 2 -- 3%; Year 3 -- 2%,
Year 4 -- 1% and Year 5 -- 0%.

(3) Class C shares of the VK Fund and the AC Fund are subject to a contingent
deferred sales charge equal to 1.00% of the then current net asset value on
the original purchase price for Class C shares redeemed during the first
year after purchase.

(4) Effective May 1, 1995, the maximum sales load for both funds is 3.25% (as a
percentage of initial offering price).

(5) Before voluntary expense waiver. After application of the expense waiver,
management fees would be zero for each class of shares, other expenses
would be 0.41%, 0.45% and 0.46% for Class A, B and C shares, respectively,
and total fund operating expenses would be 0.71%, 1.45% and 1.46% for Class
A, B and C shares, respectively.

(6) Before voluntary expense waiver. After application of the expense waiver,
management fees would be 0.34%, 0.33% and 0.33% for Class A, B and C
shares, respectively, and total fund operating expenses would be 1.15%,
1.91% and 1.90% for Class A, B and C shares, respectively.

(7) In connection with the reorganization, the 12b-1 fee for the VK Fund will be
reduced from 0.30% to 0.25%.

* For the semi-annual period ended December 31, 1994 on an annualized basis.

** For the fiscal year ended December 31, 1994.

FEDERAL INCOME TAX CONSEQUENCES

The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general a shareholder of
the VK Fund will recognize no gain or loss upon the receipt of solely the shares
of the AC Fund pursuant to the Reorganization. Additionally, the VK Fund would
not recognize any gain or loss as a result of the exchange of all of its assets
for the shares of the AC Fund or as a result of its liquidation. The AC Fund
expects that it will not recognize any gain or loss as a result of the
Reorganization, that it will take a carryover basis in the assets acquired from
the VK Fund and that its holding period of such

12
<PAGE> 19

assets will include the period during which the assets were held by the VK Fund.
See "The Proposed Reorganization -- Federal Income Tax Consequences."

The above information is only a summary of more complete information
contained in this Proxy Statement/Prospectus and the related Statement of
Additional Information.

REASONS FOR THE PROPOSED REORGANIZATION

On December 20, 1994, The Van Kampen Merritt Companies, Inc. acquired from
The Travelers Inc. all of the outstanding capital stock of American Capital
Management & Research, Inc., the parent company of the AC Adviser. Immediately
after the acquisition, American Capital Management & Research, Inc. was merged
into The Van Kampen Merritt Companies, Inc. and the combined entity was renamed
Van Kampen American Capital, Inc. ("VKAC"). The VK Adviser and the AC Adviser
currently are each wholly-owned subsidiaries of VKAC.

On February 10, 1995, the VK Board and the AC Board held a joint meeting to
discuss with management ("Management") of the VK Adviser and the AC Adviser the
costs and potential benefits to shareholders of, among other things, (i)
combining certain funds advised by the VK Adviser and the AC Adviser, including
the VK Fund and the AC Fund in order to achieve certain economies of scale and
efficiencies, (ii) permitting exchangeability of shares between funds advised by
the VK Adviser and the AC Adviser, (iii) selecting a common transfer agent to
facilitate exchangeability and enhance shareholder services, and (iv)
consolidating the VK Board and the AC Board into a combined board of trustees
(collectively, the "Consolidation").

The VK Board and the AC Board created a joint committee (the "Joint
Committee") to consider the possible costs and benefits to shareholders
associated with the proposed Consolidation, including the combination of the VK
Fund and the AC Fund. The Joint Committee held meetings on February 20, 1995,
March 27, 1995 and April 3, 1995 to consider issues relating to the
Consolidation, review information requested from and provided by Management and
review information requested from and provided by third-party analytical
services.

The VK Board and the AC Board held joint meetings on March 14, 1995 and
April 6-7, 1995 to review the findings and recommendations of the Joint
Committee. The VK Board approved each element of the Consolidation, including
the combination of the VK Fund and the AC Fund, on April 7, 1995, subject to
approval of the Consolidation by the AC Board. The AC Board met May 11, 1995,
and unanimously approved each element of the Consolidation, including the
combination of the VK Fund and the AC Fund. Each of the VK Board and the AC
Board also approved submitting the necessary proposals to the respective
shareholders of the VK Fund and the AC Fund to effect the Consolidation.

At separate shareholder meetings held on July 21, 1995, shareholders of the
VK Fund and the AC Fund approved the reorganization of the VK Fund and the AC
Fund into Delaware business trusts (or series thereof) and the combination of
the VK Board and the AC Board. Shareholders of the VK Fund are now being asked
to approve its consolidation with the AC Fund in order to (i) eliminate the
duplication of services that currently exists as a result of the separate
operations of the funds, (ii) achieve economies of scale by combining the assets
of the funds and (iii) potentially reduce transaction costs and obtain greater
portfolio diversity.

In connection with approving the combination of the AC Fund with the VK
Fund, the VK Board considered the costs from the separate operations of the AC
Fund and the VK Fund in light of their substantially similar investment
objectives, policies and restrictions. The VK Board also considered the

13
<PAGE> 20

potential expense savings, economies of scale, reduced per-share expenses and
benefits to the portfolio management process that could result from combining
the assets and operations of the AC Fund and the VK Fund. In this regard, the VK
Board reviewed information provided by the AC Adviser, VK Adviser and VKAC
Distributors, relating to the anticipated cost savings to the shareholders of
the AC Fund and the VK Fund as a result of the Reorganization.

In particular, the VK Board considered the probability that the elimination
of duplicative operations and the increase in asset levels of the AC Fund after
the Reorganization would result in the following benefits for investors,
although there can, of course, be no assurances in this regard:

(1) ELIMINATION OF SEPARATE OPERATIONS. Consolidating the VK Fund and
the AC Fund should eliminate the duplication of services that
currently exists as a result of their separate operations. For
example, currently the VK Fund and the AC Fund are managed
separately by different affiliated investment advisers.
Consolidating the separate operations of the VK Fund with those of
the AC Fund should promote more efficient operations on a more
cost-effective basis.

(2) ACHIEVEMENT OF REDUCED PER SHARE EXPENSES AND ECONOMIES OF
SCALE. Combining the assets of the VK Fund with the assets of the AC
Fund also should lead to reduced expenses, on a per share basis, by
allowing fixed and relatively fixed costs, such as accounting, legal
and printing expenses, to be spread over a larger asset base. An
increase in the net asset levels of the AC Fund also could result in
achieving future economies of scale, which should also reduce per
share expenses. Any significant reductions in expenses on a per
share basis should, in turn, have a favorable effect on the relative
total return of the AC Fund.

(3) BENEFITS TO THE PORTFOLIO MANAGEMENT PROCESS. Higher net asset
levels also should enable the AC Fund to purchase larger individual
portfolio investments that may result in reduced transaction costs
and/or other more favorable pricing and provide the opportunity for
greater portfolio diversity.

In determining whether to recommend approval of the Reorganization to
shareholders of the VK Fund, the VK Board considered a number of factors,
including, but not limited to: (1) capabilities and resources of AC Adviser and
other service providers to the AC Fund in the areas of marketing, investment and
shareholder services; (2) expenses and advisory fees applicable to the VK Fund
and the AC Fund and the estimated expense ratios of the AC Fund after the
Reorganization; (3) the comparative investment performance of the VK Fund and
the AC Fund, as well as the performance of the AC Fund compared to its peers;
(4) the terms and conditions of the Agreement and whether the Reorganization
would result in dilution of VK Fund shareholder interests; (5) the advantages of
eliminating the competition and duplication of effort inherent in marketing two
funds having similar investment objectives, in addition to the economies of
scale realized through the combination of the two funds; (6) the compatibility
of the funds' service features available to shareholders, including the
retention of applicable holding periods and exchange privileges; (7) the costs
estimated to be incurred by the respective funds as a result of the
Reorganization; and (8) the anticipated tax consequences of the Reorganization.
Based upon these, as well as other factors, the VK Board unanimously determined
that the Reorganization is in the best interests of the shareholders of the VK
Fund.

14
<PAGE> 21

B. RISK FACTORS

NATURE OF INVESTMENT

Each of VK Fund and the AC Fund invest primarily in securities that are
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The VK Fund invests in securities that have interest rates
which reset at periodic intervals. The AC Fund currently has an operating policy
of maintaining a portfolio duration within a range of six months to five years.
Investment in either of the VK Fund or the AC Fund may not be appropriate for
all investors.

Unlike the AC Fund, the VK Fund may invest up to 35% of its total assets in
corporate or other debt obligations, including not more than 10% of its total
assets in foreign securities. Securities purchased by the VK Fund will be U.S.
Government Securities or will be rated at least Aa by Moody's or AA by S&P (or
comparably rated by another nationally recognized rating agency), or if unrated,
determined to be of comparable quality by the VK Adviser, however, the VK Fund
may invest up to 10% of its total assets in securities rated A by Moody's or
S&P. The AC Fund may invest up to 35% of its total assets in mortgage-related
securities not guaranteed by the U.S. Government or its agencies or
instrumentalities, mortgage-backed securities, asset-backed securities and U.S.
Government Securities. The AC Fund intends to invest in these types of debt
securities only if they are rated at the time of purchase in the two highest
grades by a nationally-recognized rating agency (which would include S&P and
Moody's).

The VK Fund, unlike the AC Fund, may borrow money from banks (other than as
a temporary measure for extraordinary or emergency purposes) or enter into
reverse repurchase agreements and dollar rolls in an amount up to 33 1/3% of the
VK Fund's total assets. Such borrowing creates an opportunity for increased net
income but at the same time creates special risk considerations such as changes
in the net asset value of the VK Fund's Shares and in the yield on its
portfolio. In addition, borrowing will create interest expenses for the VK Fund
which can exceed the income from the assets retained.

The VK Fund may invest up to 15% of its total assets in illiquid
securities, securities the disposition of which is subject to substantial legal
or contractual restrictions on resale and securities that are not readily
marketable. The AC Fund is limited to up to 10% of its total assets in illiquid
securities. For a complete description of the difference in the funds'
investment objectives and policies, see "Summary -- Investment Objectives and
Policies," the respective section in the AC Fund's Prospectus and Statement of
Additional Information entitled "Investment Objective and Policies" and the
respective section in the VK Fund's Prospectus and Statement of Additional
Information entitled "Investment Objective and Policies."

CHANGES IN CERTAIN INVESTMENT PRACTICES

Both the AC Fund and the VK Fund may engage in certain options and
financial futures transactions. However, the VK Fund has greater levels of
flexibility in pursuing its investment objectives through practices such as the
ability to engage in reverse repurchase agreements as well as by investing in
corporate debt and foreign securities. Such transactions involve different
risks. For a complete description of the VK Fund's investment practices, see the
section in the VK Fund's Prospectus entitled "Investment Practices" and
"Investment Objective and Policies" and the section of the AC Fund's Statement
of Additional Information entitled "Additional Investment Considerations."

15
<PAGE> 22

C. INFORMATION ABOUT THE FUNDS

AC Fund. Information about the AC Fund is included in its current
Prospectus dated [ ], which accompanies this Proxy
Statement/Prospectus. Additional information about the AC Fund is included in
its Statement of Additional Information dated the same date as the AC Fund
Prospectus. Copies of the AC Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666. The AC Fund files proxy
material, reports and other information with the SEC. These reports can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates.

VK Fund. Information about the VK Fund is included in its current
Prospectus dated [ ]. Additional information about the VK Fund is
included in its current Statement of Additional Information dated the same date
as the VK Fund Prospectus. Copies of the VK Fund's Statement of Additional
Information may be obtained without charge by calling (800) 225-2222 ext. 5504.
The VK Fund files proxy material, reports and other information with the SEC.
These reports can be inspected and copied at the Public Reference Facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
of such material can also be obtained from the Public Reference Branch, Office
of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549 at prescribed rates.

AC Fund, as a Delaware business trust, and the VK Fund as a series of the
VKAC Trust, a Delaware business trust, are governed by their respective
Agreements and Declarations of Trust (each, a "Declaration"), their respective
Bylaws and applicable Delaware law.

D. THE PROPOSED REORGANIZATION

The material features of the Agreement are summarized below. This summary
does not purport to be complete and is subject in all respects to the provisions
of, and is qualified in its entirety by reference to, the Agreement, a copy of
which is attached hereto as Exhibit A. The affirmative vote of a majority of the
outstanding shares entitled to vote is required to approve the Agreement at a
meeting of shareholders at which a quorum is present.

TERMS OF THE AGREEMENT

Pursuant to the Agreement, the AC Fund will acquire all of the assets and
liabilities of the VK Fund on the Closing Date in exchange for Class A, B and C
Shares, respectively, of the AC Fund.

Subject to VK Fund shareholder approval of the Reorganization, the closing
(the "Closing") will occur within 15 business days after the later of the
receipt of all necessary regulatory approvals and the final adjournment of the
Special Meeting or such later date as soon as practicable thereafter as the VK
Fund and the AC Fund may mutually agree.

On the date of Closing, the VK Fund will transfer to the AC Fund all of the
assets and liabilities of the VK Fund. The AC Fund will in turn transfer to the
VK Fund a number of Class A, B and C Shares, respectively, of the AC Fund equal
in value to the value of the net assets of the VK Fund transferred to the AC
Fund as of the date of Closing, as determined in accordance with the valuation
method described in the AC Fund's then current prospectus.

16
<PAGE> 23

The VK Fund expects to distribute the Class A, B and C Shares,
respectively, of the AC Fund to the shareholders of the VK Fund promptly after
the Closing and then dissolve pursuant to a plan of liquidation and dissolution
adopted by the VK Board.

The VK Fund and the AC Fund have made certain representations and
warranties to each other regarding their capitalization, status and conduct of
business.

Unless waived in accordance with the Agreement, the obligations of the
parties to the Agreement are conditioned upon, among other things:

1. the approval of the Reorganization by the VK Fund's shareholders;

2. the absence of any legal, administrative or other proceedings seeking to
restrain or otherwise prohibit the transactions contemplated by the
Agreement;

3. the receipt of all necessary approvals, registrations and exemptions
under federal and state securities laws;

4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the agreements;

5. the effectiveness under applicable law of the registration statement of
the AC Fund of which this Proxy Statement/Prospectus forms a part and
obtaining of any approvals or exemptions considered necessary by the
parties; and

6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.

The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the VK
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse effect on the interests of VK Fund's shareholders.
The Agreement may also be terminated by the non-breaching party if there has
been a material misrepresentation, material breach of any representation or
warranty, material breach of contract or failure of any condition to Closing.

The VK Board recommends that you vote for approval of the Agreement, as it
believes the Reorganization is in the best interests of the VK Fund's
shareholders and that the interests of the VK Fund's existing shareholders will
not be diluted as a result of consummation of the proposed Reorganization.

DESCRIPTION OF SECURITIES TO BE ISSUED

SHARES OF BENEFICIAL INTEREST

Beneficial interests in the AC Fund being offered hereby are represented by
transferable Class A, B and C Shares, par value $.01 per share. The AC Fund's
Declaration of Trust permits the trustees, as they deem necessary or desirable,
to issue an unlimited number of shares, which may be divided into an unlimited
number of portfolios or series.

VOTING RIGHTS OF SHAREHOLDERS

Holders of shares of the AC Fund are entitled to one vote per share on
matters as to which they are entitled to vote; however, separate votes generally
are taken by each series on matters affecting an individual series. The AC Fund
Declaration and the VK Fund Declaration are substantially identical, except that
the VK

17
<PAGE> 24

Fund Declaration permits the VK Board or shareholders to remove a trustee with
or without cause by the act of two-thirds of such trustees or shareholders,
respectively. The Declaration of the AC Fund permits (i) the AC Fund to remove a
trustee with cause by the act of two-thirds of the trustees and (ii)
shareholders holding a majority of the shares of each series outstanding to
remove a trustee with or without cause. The AC Fund Declaration also requires
the approval of 80% of the trustees in office or a majority vote of the shares
of each series then outstanding to amend these provisions.

Each of the AC Fund and the VK Fund operates as a diversified, open-end
management investment company registered with the SEC under the Act. Therefore,
in addition to the specific voting rights described above, shareholders of the
AC Fund, as well as shareholders of the VK Fund, are entitled, under current
law, to vote with respect to certain other matters, including changes in
fundamental investment policies and restrictions and the ratification of the
selection of independent auditors. Moreover, under the Act, shareholders owning
not less than 10% of the outstanding shares of the AC Fund or the VK Fund may
request that the respective board of trustees call a shareholders' meeting for
the purpose of voting upon the removal of trustee(s).

CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES

If the Reorganization is approved, the VK Fund will establish an account
for each AC Fund shareholder containing the appropriate number of Shares of the
VK Fund. The shareholder services and shareholder programs of the VK Fund and
the AC Fund have already been substantially conformed as part of the
Consolidation. Shareholders of the AC Fund who are accumulating AC Fund shares
under the dividend reinvestment plan, or who are receiving payment under the
systematic withdrawal plan with respect to AC Fund shares, will retain the same
rights and privileges after the Reorganization in connection with the VK Fund
Class A, B and C Shares, respectively, received in the Reorganization through
substantially similar plans maintained by the VK Fund. In the case of shares of
the AC Fund held in IRA accounts, the corresponding Shares of the VK Fund will
be credited to a new IRA account maintained in the name of the shareholder by
Van Kampen American Capital Trust Company, an affiliate of VKAC that acts as the
custodian of IRA accounts for VKAC Distributors-sponsored open-end management
mutual funds. Such IRA investors will be sent appropriate documents to confirm
Van Kampen American Capital Trust Company's custodianship.

It will not be necessary for shareholders of the AC Fund to whom
certificates have been issued to surrender their certificates. Upon liquidation
of the AC Fund, such certificates will become null and void.

FEDERAL INCOME TAX CONSEQUENCES

The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the VK Fund and
shareholders of the AC Fund. It is based upon Code, legislative history,
Treasury regulations, judicial authorities, published positions of the Internal
Revenue Service (the "Service") and other relevant authorities, all as in effect
on the date hereof and all of which are subject to change or different
interpretations (possibly on a retroactive basis). This summary is limited to
shareholders who hold their VK Fund shares as capital assets. No advance rulings
have been or will be sought from the Service regarding any matter discussed in
this Proxy Statement/Prospectus. Accordingly, no assurances can be given that
the Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisors to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws.

18
<PAGE> 25

The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code. It is a condition to closing that
the AC Fund and the VK Fund receive an opinion from Skadden, Arps, Slate,
Meagher & Flom to the effect that, for federal income tax purposes:

1. The acquisition and assumption by the AC Fund of the assets and the
liabilities of the VK Fund in exchange solely for Class A, B and C
Shares of the AC Fund will qualify as a tax-free reorganization within
the meaning of Section 368(a)(1)(C) of the Code.

2. No gain or loss will be recognized by the VK Fund or the AC Fund upon
the transfer to the AC Fund of the assets and the liabilities of the VK
Fund in exchange solely for the Class A, B and C Shares of the AC Fund.

3. The AC Fund's basis of the VK Fund assets received in the Reorganization
will, in each instance, equal the basis of such assets in the bonds of
the VK Fund immediately prior to the transfer, and the AC Fund's holding
period of such assets will, in each instance, include the period during
which the assets were held by the VK Fund.

4. No gain or loss will be recognized by the shareholders of the VK Fund
upon the exchange of their shares of the VK Fund for the Class A, B or C
Shares, respectively, of the AC Fund.

5. The tax basis of the Class A, B and C Shares of the AC Fund received by
the shareholders of the VK Fund will be the same as the tax basis of the
shares of the VK Fund surrendered in exchange therefor.

6. The holding period of the Class A, B and C Shares of the AC Fund
received by the shareholders of the VK Fund will include the holding
period of the shares of the VK Fund surrendered in exchange therefor.

In rendering its opinion, Skadden, Arps, Slate, Meagher & Flom may rely
upon certain representations of the management of the VK Fund and the AC Fund
and assume that the Reorganization will be consummated as described in the
Agreement and that redemptions of shares of the VK Fund occurring prior to the
Closing will consist solely of redemptions in the ordinary course of business.

The AC Fund intends to be taxed under the rules applicable to regulated
investment companies as defined in Section 851 of the Code, which are the same
rules currently applicable to the VK Fund and its shareholders.

19
<PAGE> 26

CAPITALIZATION

The following table sets forth the capitalization of the VK Fund and the AC
Fund as of March 31, 1995 and the pro forma combined capitalization of both as
if the Reorganization had occurred on that date. These numbers may differ at the
time of Closing.

CAPITALIZATION TABLE AS OF MARCH 31, 1995

<TABLE>
<CAPTION>
AC FUND VK FUND PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Net assets
Class A Shares...................................... $43,933,809 $ 5,768,618 $49,648,347
Class B Shares...................................... 16,049,037 20,239,539 36,249,056
Class C Shares...................................... 6,135,260 2,839,127 8,963,987
----------- ----------- -----------
Total............................................ $66,118,106 $28,847,284 $94,861,390
=========== =========== ===========
Net asset value per share
Class A Shares...................................... $ 12.10 $ 9.31 $ 12.09
Class B Shares...................................... 12.11 9.32 12.10
Class C Shares...................................... 12.10 9.31 12.09
Shares outstanding
Class A Shares...................................... 3,631,251 619,631 4,108,043
Class B Shares...................................... 1,324,729 2,172,425 2,995,353
Class C Shares...................................... 507,055 304,967 741,698
----------- ----------- -----------
Total............................................ 5,463,035 3,097,023 7,845,094
=========== =========== ===========
Shares authorized
Class A Shares...................................... Unlimited Unlimited Unlimited
Class B Shares...................................... Unlimited Unlimited Unlimited
Class C Shares...................................... Unlimited Unlimited Unlimited
</TABLE>

COMPARATIVE PERFORMANCE INFORMATION

The average annual total return for the VK Fund for the one-year period
ended March 31, 1995 and for the period beginning August 28, 1992 (the date
Class A and B shares of the VK Fund were first offered for sale to the public)
through March 31, 1995 were (0.37)% and 2.29%, in respect of its Class A shares;
(1.01)% and 2.46%, in respect of its Class B shares; and for the one-year period
ended March 31, 1995 and for the period beginning August 13, 1993 (the date the
Class C shares of the VK Fund were first offered for sale to the public) through
March 31, 1995 were .84% and 1.19%, in respect of its Class C shares. The
average annual total return for Class A shares of the AC Fund for the one-year,
three-year, five-year periods ended March 31, 1995 and for the period beginning
June 16, 1986 (the date Class A shares of the AC Fund were first offered for
sale to the public) through March 31, 1995 were 1.09%, 2.09%, 5.29% and 5.51%,
respectively. The average annual total return for Class B shares of the AC Fund
for the one-year and three-year periods ended March 31, 1995, and for the period
beginning November 15, 1991 (the date Class B shares of the AC Fund were first
offered for sale to the public) through March 31, 1995, were (0.32)%, 1.50% and
2.01%, respectively. The average annual total return for Class C shares of the
AC Fund for the one-year period ended March 31, 1995 and for the period
beginning May 10, 1993 (the date Class C shares of the AC Fund were first

20
<PAGE> 27

offered for sale to the public) through March 31, 1995 were 1.75% and 1.53%,
respectively. The total return figures include the effect of the maximum sales
charge applicable to purchases and sales of Shares of both the AC Fund and the
VK Fund, which is not being charged to Class A shareholders of the VK Fund in
connection with the Reorganization.

The total return figures above assume reinvestment of all dividends and
distributions. They are not necessarily indicative of future results. The
performance of a Fund is a result of conditions in the securities markets,
portfolio management and operating expenses. Although information such as that
shown above is useful in reviewing a Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.

RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE AC
FUND

Approval of the Reorganization will constitute the ratification by VK Fund
shareholders of the investment objectives, policies and restrictions of the AC
Fund. For a discussion of the investment objective, policies and restrictions of
the AC Fund, see "Summary -- Comparisons of the VK Fund and AC Fund" and the
Prospectus of the AC Fund accompanying this Proxy Statement/Prospectus. Approval
of the Reorganization will constitute approval of amendments to any of the
fundamental investment restrictions of the VK Fund that might otherwise be
interpreted as impeding the Reorganization, but solely for the purpose of and to
the extent necessary for, consummation of the Reorganization.

LEGAL MATTERS

Certain legal matters concerning the issuance of Class A, B and C Shares of
the AC Fund will be passed on by O'Melveny & Myers, 400 South Hope Street, Los
Angeles, California 90071, counsel to the AC Fund. Lawrence J. Sheehan, a former
partner of, and currently of counsel to said firm, is a Trustee of the AC Fund.
On July 21, 1995, Mr. Sheehan was elected as a Trustee of the VK Fund.

Certain legal matters concerning the federal income tax consequences of the
Reorganization will be passed upon by Skadden, Arps, Slate, Meagher & Flom, 333
West Wacker Drive, Chicago, Illinois 60606 which serves as counsel to the VK
Fund. Wayne W. Whalen, a partner of Skadden, Arps, Slate, Meagher & Flom, is a
Trustee of the VK Fund. On July 21, 1995, Mr. Whalen was elected as a Trustee of
the AC Fund.

EXPENSES

The expenses of the Reorganization, including expenses incurred by the VK
Fund will be borne by the AC Fund after the Reorganization. Accordingly, the AC
Fund and its shareholders after the Reorganization will bear such expenses of
the Reorganization. The VK Board has determined that the arrangements regarding
the payment of expenses and other charges relating to the Reorganization are
fair and equitable.

E. RECOMMENDATIONS OF VK BOARD

The VK Board has unanimously approved the Agreement and has determined that
participation in the Reorganization is in the best interests of the shareholders
of the VK Fund. THE VK BOARD RECOMMENDS VOTING FOR APPROVAL OF THE PROPOSED
REORGANIZATION.

21
<PAGE> 28

OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING

It is not anticipated that any action will be asked of the shareholders of
the VK Fund other than as indicated above, but if other matters are properly
brought before the Special Meeting, it is intended that the persons named in the
proxy will vote in accordance with their judgment.

OTHER INFORMATION

A. SHAREHOLDINGS OF THE VK FUND AND THE AC FUND

At the close of business on [ ], 1995, the record date (the
"Record Date") for the Special Meeting, there were [ ] Class A shares,
[ ] Class B shares and [ ] Class C shares, respectively, of the VK
Fund outstanding and entitled to vote at the meeting. As of the Record Date, the
following persons owned of record or beneficially [5% or more of the VK Fund's
Class A shares;]

[To the knowledge of the VK Fund as of the date the following persons owned
of record or beneficially 5% or more of the VK Fund's Class B shares; . At the
close of business on [ ], 1995, there were shares, respectively of
the AC Fund outstanding. As of that date, no person was known by the AC Fund to
own of record or "beneficially" five percent or more of the outstanding shares
of the AC Fund as determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended.]

[To the knowledge of the VK Fund as of the date the following persons owned
of record or beneficially 5% or more of the VK Fund's Class C Shares;]

The amount of the AC Fund shares owned by the trustees and officers of the
AC Fund as a group as of [ ], 1995 was [ ] Class A shares
[ ] Class B shares and [ ] Class C shares, respectively, or [ ]%
of Class A and [ ]% of Class B of the VK Fund's outstanding shares. No
trustee or officer of the AC Fund owned in excess of 1% of the AC Fund shares as
of such date. The amount of the AC Fund shares owned by the trustees and
officers of the AC Fund as a group as of [ ], 1995 was [ ]
shares. No trustee or officer of the AC Fund owned in excess of 1% of the AC
Fund shares.

B. SHAREHOLDER PROPOSALS

As a general matter, the AC Fund does not intend to hold future regular
annual or special meetings of shareholders unless required by the Act. Any
shareholder who wishes to submit proposals for consideration at a meeting of
shareholders of the VK Fund should send such proposal to the VK Fund at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. To be considered for
presentation at a shareholders' meeting rules promulgated by the SEC require
that, among other things, a shareholder's proposal must be received at the
offices of the VK Fund a reasonable time before a solicitation is made. Timely
submission of a proposal does not necessarily mean that such proposal will be
included.

VOTING INFORMATION AND REQUIREMENTS

Each valid proxy given by a shareholder of the AC Fund will be voted by the
persons named in the proxy in accordance with the designation on such proxy on
the Reorganization proposal and as the persons named in the proxy may determine
on such other business as may come before the Special Meeting on which
shareholders are entitled to vote. If no designation is made, the proxy will be
voted by the persons named in the proxy as recommended by the AC Board "FOR"
approval of the Reorganization.

22
<PAGE> 29

Shareholders who execute proxies may revoke them at any time before they
are voted by filing with the Fund a written notice of revocation, by delivering
a duly executed proxy bearing a later date, or by attending the Meeting and
voting in person.

The giving of a proxy will not affect your right to vote in person if you
attend the Meeting and wish to do so.

The presence in person or by proxy of the holders of a majority of the
outstanding shares entitled to vote is required to constitute a quorum at the
Special Meeting. Approval of the Reorganization will require the favorable vote
of the holders of a majority of the outstanding shares of the AC Fund entitled
to vote at the Special Meeting at which a quorum is constituted. Shares not
voted with respect to a proposal due to an abstention or broker non-vote will be
deemed votes not cast with respect to such proposal, but such shares will be
deemed present for quorum purposes.

In the event that sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Meeting, the persons named in the proxy
may propose and vote in favor of one or more adjournments of the Meeting to
permit further solicitation of proxies. If sufficient shares were present to
constitute a quorum, but insufficient votes had been cast in favor of the
Reorganization to approve it, proxies would be voted in favor of adjournment
only if the AC Board determined that adjournment and additional solicitation was
reasonable and in the best interest of the shareholders of the AC Fund, taking
into account the nature of the proposal, the percentage of the votes actually
cast, the percentage of negative votes, the nature of any further solicitation
that might be made and the information provided to shareholders about the
reasons for additional solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Meeting to be adjourned.

Proxies of shareholders of the AC Fund are solicited by the AC Board. The
cost of solicitation will be paid by the VK Fund after the Reorganization.
Additional solicitation may be made by mail, personal interview, telephone,
facsimile and telegraph by personnel of the AC Fund or AC Adviser who will not
be additionally compensated therefor.

[ ], 1995

PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.

23
<PAGE> 30

VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

2800 Post Oak Boulevard
Houston, TX 77056
(800) 421-5666

------------------------------

Statement of Additional Information
Dated [ ], 1995

------------------------------

This Statement of Additional Information provides information about the Van
Kampen American Capital Federal Mortgage Trust ("AC Fund") an open-end
management investment company, in addition to information contained in the Proxy
Statement/Prospectus of the AC Fund, dated [ ], 1995, which also
serves as the Proxy Statement of the Van Kampen American Capital Trust and its
series, the Van Kampen American Capital Adjustable Rate U.S. Government Fund
(the "VK Fund") in connection with the issuance of Class A, B and C Shares of
the AC Fund series to shareholders of the VK Fund. This Statement of Additional
Information is not a prospectus. It should be read in conjunction with the Proxy
Statement/Prospectus, into which it has been incorporated by reference and which
may be obtained by contacting the AC Fund located at 2800 Post Oak Boulevard,
Houston, TX 77056, telephone no. (713) 993-0500 or (800) 421-5666.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the VK Fund.................................. 2
Additional Information About the AC Fund................................ 2
Additional Information About the VK Fund................................ 2
Financial Statements.................................................... 2
Pro Forma Financial Statements.......................................... 2
</TABLE>

The AC Fund will provide, without charge, upon the written or oral request
of any person to whom this Statement of Additional Information is delivered, a
copy of any and all documents that have been incorporated by reference in the
registration statement of which this Statement of Additional Information is a
part.

1
<PAGE> 31

PROPOSED REORGANIZATION OF THE VK FUND

The shareholders of the VK Fund are being asked to approve an acquisition
of all the assets and liabilities of the VK Fund in exchange for Class A, B and
C Shares of the AC Fund (the "Reorganization").

For detailed information about the Reorganization, shareholders should
refer to the Proxy Statement/Prospectus.

ADDITIONAL INFORMATION ABOUT THE AC FUND

Incorporated herein by reference to the Statement of Additional Information
of the AC Fund, dated [ ], 1995, attached as Appendix A to this
Statement of Additional Information.

ADDITIONAL INFORMATION ABOUT THE VK FUND

Incorporated herein by reference to the Statement of Additional Information
of the VK Fund, dated [ ], 1995, attached as Appendix B to this
Statement of Additional Information.

FINANCIAL STATEMENTS

Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the AC Fund for fiscal year ended December 31,
1994, attached as Appendix C to this Statement of Additional Information, (ii)
the audited financial statements of the VK Fund for fiscal year ended June 30,
1994, attached as Appendix D to this Statement of Additional Information and
(iii) the unaudited semi-annual financial statements of the VK Fund for the six
months ended December 31, 1994, attached as Appendix E to this Statement of
Additional Information.

The unaudited semi-annual financial statements of the VK Fund reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature.

PRO FORMA FINANCIAL STATEMENTS

Set forth below are unaudited pro forma financial statements of the AC Fund
giving effect to the Reorganization which include (i) Pro Forma Condensed
Statement of Assets and Liabilities at December 31, 1994; (ii) Pro Forma
Condensed Statement of Operations for the twelve months ended December 31, 1994;
and (iii) Pro Forma Portfolio of Investments at December 31, 1994.

2
<PAGE> 32

VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST AND
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND

PRO FORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
AC VK PRO FORMA
FUND FUND ADJUSTMENTS PRO FORMA
----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Investments at market value (Cost
$73,543,751, $34,613,565 and $108,157,316,
respectively)(2).......................... $72,637,521 $33,195,172 $ 0 $105,832,693
Other Assets and Liabilities (Net)(3)....... (7,204,502) 173,538 (104,000) (7,134,964)
----------- ----------- --------- ------------
Net Assets.................................. $65,433,019 $33,368,710 $(104,000) $ 98,697,729
=========== =========== ========= ============
NET ASSETS WERE COMPRISED OF:
Capital(3).................................. $82,675,171 $35,473,115 $(104,000) $118,044,286
Accumulated net realized loss on
securities................................ (16,372,918) (715,827) 0 (17,088,745)
Net unrealized depreciation of securities... (918,740) (1,418,393) 0 (2,337,133)
Undistributed net investment income......... 49,506 29,815 0 79,321
----------- ----------- --------- ------------
Net Assets.................................. $65,433,019 $33,368,710 $(104,000) $ 98,697,729
=========== =========== ========= ============
Class A:
Net asset value and redemption price per
share.................................. $11.90 $9.18 $11.89
Maximum sales charge (2.25%, 3.00% and
2.25% of offering price,
respectively).......................... 0.27 0.28 0.27
----------- ----------- ------------
Maximum offering price to public.......... $12.17 $9.46 $12.16
=========== =========== ============
Class B:
Net asset value and offering price per
share.................................. $11.91 $9.19 $11.90
=========== =========== ============
Class C:
Net asset value and offering price per
share.................................. $11.90 $9.18 $11.89
=========== =========== ============
Shares of Beneficial Interest
Class A..................................... 3,465,620 710,220 4,013,933
Class B..................................... 1,541,528 2,492,656 3,464,683
Class C..................................... 491,408 429,040 822,614
</TABLE>

- ---------------

(1) Pro Forma statements give effect to the proposed exchange of stock for
assets with AC Fund as the surviving entity.
(2) U.S. Agency and Government obligations and related forward commitments are
valued at the last reported bid price on December 31, 1994 in the case of
AC Fund and at the mean between the most recent bid and asked prices in the
case of VK Fund. Immediately prior to the reorganization, the investments
of VK Fund will be valued on the same basis as the investments of AC Fund.
Such change in valuation method would have decreased the total net assets
of VK Fund on December 31, 1994 by approximately $73,000 or $0.02 per
share.
(3) In connection with the transaction, the combined AC Fund will incur
non-recurring costs associated with the merger of approximately $104,000 or
$0.013 per share.

3
<PAGE> 33

VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND

PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA
AC FUND VK FUND ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME............................ $ 4,960,588 $ 2,005,841 $ 0 $ 6,966,429
----------- ----------- ----------- -----------
EXPENSES
Management fees.............................. 420,713 218,455 (38,668)(a) 600,500
Service fees -- Class A...................... 132,613 19,626 (3,239)(a) 149,000
Distribution and service fees -- Class B..... 222,471 250,293 472,764
Distribution and service fees -- Class C..... 76,165 38,054 114,219
Other expenses............................... 479,852 262,623 (132,617)(b) 609,858
----------- ----------- ----------- -----------
Total expenses............................. 1,331,814 789,051 (174,524) 1,946,341
Less fees deferred and expenses
reimbursed.............................. (140,000) (406,965) 546,965 0
----------- ----------- ----------- -----------
Net Expenses............................... 1,191,814 382,086 372,441 1,946,341
----------- ----------- ----------- -----------
Net investment income...................... $ 3,768,774 $ 1,623,755 $(372,441) $ 5,020,088
========== ========== ========= ==========
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities.............. $(2,511,545) $ (617,736) $ 0 $(3,129,281)
Net unrealized depreciation during the
year....................................... (1,405,244) (1,219,958) 0 (2,625,202)
----------- ----------- ----------- -----------
Net realized and unrealized loss on
securities.............................. (3,916,789) (1,837,694) 0 (5,754,483)
----------- ----------- ----------- -----------
Net Decrease in net assets resulting from
operations.............................. $ (148,015) $ (213,939) $(372,441) $ (734,395)
========== ========== ========= ==========
Average net assets (millions) -- Class A $ 54.3 $ 7.5 $ 61.8
Class B 22.2 24.8 47.0
Class C 7.6 3.7 11.3
----------- ----------- -----------
$ 84.1 $ 36.0 $ 120.1
========== ========== ==========
</TABLE>

- ---------------

(a) Adjustment to reflect approved reduction of certain expenses.
(b) Adjustment to reflect elimination of duplicative expenses.

4
<PAGE> 34

VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND

PRO FORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT DESCRIPTION VALUE
- ---------- ----------- -----------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES 46.78%
Federal Home Loan Mortgage Corp.
$ 247,899 5.38% Pool, 11/1/17............................................................ $ 250,225
3,754,317 5.47% Pool, 7/1/24............................................................. 3,702,095
1,723,000 5.635% Pool, 3/1/18............................................................ 1,703,658
1,266,000 6.095% Pool 10/1/23............................................................ 1,239,309
3,884,792 6.11% Pool, 6/1/24............................................................. 3,873,876
1,316,779 6.13% Pool, 8/1/20............................................................. 1,318,425
275,279 6.14% Pool, 5/1/19............................................................. 272,441
348,447 6.28% Pool, 3/1/16............................................................. 345,071
2,834,000 6.522% Pool, 8/1/20............................................................ 2,854,220
882,000 6.625% Pool, 7/1/14............................................................ 871,541
872,000 7.29% Pool, 7/1/22............................................................. 878,405
310,407 7.50% Pool, 9/1/18............................................................. 307,399
194,402 8.35% Pool, 2/1/18............................................................. 191,183
Federal National Mortgage Association
1,789,000 4.371% Pool, 1/1/24............................................................ 1,777,357
1,833,000 5.124% Pool, 2/1/21............................................................ 1,779,585
614,000 5.19% Pool, 11/1/26............................................................ 593,819
490,000 5.289% Pool, 3/1/29............................................................ 474,098
933,709 5.38% Pool, 2/1/15............................................................. 910,366
499,130 5.84% Pool, 10/1/19............................................................ 443,516
2,021,664 6.86% Pool, 12/1/24............................................................ 1,980,604
1,606,000 8.896% Pool, 10/1/23........................................................... 1,581,831
3,500,000 6.25% Pool, 1/1/25............................................................. 3,456,250
1,642,000 6.347% Pool, 3/1/19............................................................ 1,629,226
934,491 6.47% Pool, 8/1/19............................................................. 941,500
3,825,693 6.64% Pool, 9/1/19............................................................. 3,838,853
899,000 6.741% Pool, 3/1/19............................................................ 906,915
1,742,000 6.809% Pool, 1/1/16............................................................ 1,762,037
2,345,000 7.013% Pool, 11/1/18........................................................... 2,347,593
2,229,000 7.161% Pool, 10/1/22........................................................... 2,234,043
Government National Mortgage Association
1,753,000 6.75% Pool, 6/20/23............................................................ 1,704,097
-----------
46,169,538
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS 30.83%
Federal Home Loan Mortgage Corp.
2,531,962 5.00%, 6/15/99 (PAC)........................................................... 2,486,082
3,911,926 5.88%, 4/15/20................................................................. 3,892,366
2,897,537 6.18%, 2/15/16................................................................. 2,897,537
5,000,000 6.50%, 8/15/97 (PAC)........................................................... 4,932,050
Federal National Mortgage Association
3,237,300 4.75%, 1/25/05 (PAC)........................................................... 3,160,414
3,136,000 5.50%, 3/25/03 (PAC)........................................................... 2,909,612
940,233 6.05%, 2/25/16................................................................. 935,532
848,015 6.08%, 3/25/22................................................................. 839,798
7,684,628 6.33%, 6/25/18 to 2/25/21...................................................... 7,665,878
737,092 6.75%, 8/25/20................................................................. 712,215
-----------
30,431,484
-----------
</TABLE>

5
<PAGE> 35

VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND

PRO FORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION MARKET VALUE
- ---------- ----------- ------------
<S> <C> <C>
FIXED RATE MORTGAGE BACKED SECURITIES 4.51%
Federal National Mortgage Association
$ 909,615 9.50% Pools, 7/1/11 to 8/1/21..................................... $ 934,630
780,884 10.00% Pool, 5/1/21............................................... 819,194
Government National Mortgage Association
220,366 8.50% Pools, 12/15/16 to 1/15/17.................................. 216,441
514,513 9.50% Pools, 3/15/16 to 1/15/19................................... 530,710
956,921 10.00% Pools, 4/15/16 to 4/15/19.................................. 1,005,963
494,314 10.50% Pools, 5/15/13 to 2/15/18.................................. 527,833
381,751 11.00% Pool, 11/15/18............................................. 413,363
------------
4,448,134
------------
UNITED STATES TREASURY OBLIGATIONS 7.20%
United States Treasury Notes
3,500,000 7.50%, 12/31/96..................................................... 3,487,435
3,500,000 8.875%, 2/15/99..................................................... 3,621,415
------------
7,108,850
------------
ASSET BACKED SECURITIES 8.41%
4,000,000 ITT, 5.58%, 2/15/01................................................. 3,998,760
3,447,388 Premier Auto. 4.95%, 2/2/99......................................... 3,323,489
955,000 Nomura Asset Securities Corporation 7.265%, 7/7/03.................. 978,875
------------
8,301,124
------------
MORTGAGE BACKED SECURITIES 3.87%
793,000 AFC Mortgage #93-4B2A1, 6.936%, 12/25/23............................ 793,905
954,000 Citicorp Mortgage Securities Inc. #94-11A2, 6.25%, 8/25/24.......... 911,300
1,808,000 DLJ Mortgage Acceptance Corporation #94-Q1, 4.883%, 3/25/24......... 1,743,292
6,808,000 Salomon Brothers Mortgage Securities VII Inc. -- Interest Only
2.283%, 2/25/24..................................................... 370,180
------------
3,818,677
------------
CORPORATE SECURITIES 1.37%
1,200,000 Greenwich Capital Acceptance Inc. 6.594%, 7/25/22................... 1,171,500
4,300,000 Greenwich Capital Acceptance Inc. -- Interest Only, 2.514%
10/25/22............................................................ 180,623
------------
1,352,123
------------
SHORT-TERM INVESTMENTS AT AMORTIZED COST 4.26%
1,000,000 Mexican Tesobonos 7.07%, 1/12/95.................................... 997,763
1,770,000 Repurchase Agreement, J.P. Morgan Securities, U.S. T-Notes, dated
12/30/94, 3.875%, due 9/30/95 to be sold on 1/3/95 at $1,710,998.... 1,710,000
</TABLE>

6
<PAGE> 36

VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND

PRO FORMA PORTFOLIO OF INVESTMENTS--CONTINUED
DECEMBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION MARKET VALUE
- ---------- ----------- ------------
<S> <C> <C>
$1,495,000 Repurchase Agreement, Salomon Brothers, Inc. dated 12/30/94, 5.75%,
due 1/3/95 repurchase proceeds $1,495,955........................... $ 1,495,000
------------
4,202,763
------------
Total Investments 107.23%........................................... 105,832,693
Other Assets and Securities, net (7.23)%............................ (7,134,964)
------------
NET ASSETS 100.00%.................................................. $ 98,697,729
============
</TABLE>

7
<PAGE> 37

APPENDIX A

VAN KAMPEN AMERICAN CAPITAL
FEDERAL MORTGAGE TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED , 1995

[TO COME]

A-1
<PAGE> 38

APPENDIX B

VAN KAMPEN AMERICAN CAPITAL
ADJUSTABLE RATE U.S. GOVERNMENT FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED , 1995

[TO COME]

B-1
<PAGE> 39

APPENDIX C

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

INVESTMENT PORTFOLIO
DECEMBER 31, 1994

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ----------- -----------
<S> <C> <C>
U.S. Agency and Government Obligations 97.5%
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES 33.3%
Federal Home Loan Mortgage Corp.
$ 247,899 5.38% Pool, 11/1/17................................................. $ 250,225
*3,754,317 5.47% Pool, 7/1/24.................................................. 3,702,095
3,884,792 6.11% Pool, 6/1/24.................................................. 3,873,876
1,316,779 6.13% Pool, 8/1/20.................................................. 1,318,425
275,279 6.14% Pool, 5/1/19.................................................. 272,441
348,447 6.28% Pool, 3/1/16.................................................. 345,071
310,407 7.50% Pool, 9/1/18.................................................. 307,399
194,402 8.35% Pool, 2/1/18.................................................. 191,183
Federal National Mortgage Association
933,709 5.83% Pool, 2/1/15.................................................. 910,366
449,130 5.84% Pool, 10/1/19................................................. 443,516
2,021,664 5.86% Pool, 12/1/24................................................. 1,980,604
3,500,000 6.25% Pool, 1/1/25.................................................. 3,456,250
934,491 6.47% Pool, 8/1/19.................................................. 941,500
3,825,693 6.64% Pool, 9/1/19.................................................. 3,838,853
-----------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost $22,343,917)............................................. 21,831,804
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS 46.5%
Federal Home Loan Mortgage Corp.
2,531,962 5.00%, 5/15/99 (PAC)................................................ 2,486,082
3,911,926 5.88%, 4/15/20...................................................... 3,892,366
2,897,537 6.18%, 2/15/16...................................................... 2,897,537
5,000,000 6.50%, 6/15/97 (PAC)................................................ 4,932,050
Federal National Mortgage Association
3,237,300 4.75%, 1/25/05 (PAC)................................................ 3,160,414
*3,136,000 5.50%, 3/25/03 (PAC)................................................ 2,909,612
940,233 6.05%, 2/25/16...................................................... 935,532
848,015 6.08%, 3/25/22...................................................... 839,798
7,684,628 6.33%, 6/25/18 to 2/25/21........................................... 7,665,878
737,092 6.75%, 8/25/20...................................................... 712,215
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $30,824,257)............................................. 30,431,484
-----------
</TABLE>

C-1
<PAGE> 40

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
INVESTMENT PORTFOLIO--CONTINUED
DECEMBER 31, 1994

<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ----------- -----------
<C> <S> <C>
FIXED-RATE MORTGAGE-BACKED SECURITIES 6.8%
Federal National Mortgage Association
$ *909,615 9.50% Pools, 7/1/11 to 8/1/21....................................... $ 934,630
*780,884 10.00% Pool, 5/1/21................................................. 819,194
Government National Mortgage Association
220,366 8.50% Pools, 12/15/16 to 1/15/17.................................... 216,441
514,313 9.50% Pools, 3/15/16 to 1/15/19..................................... 530,710
956,921 10.00% Pools, 4/15/16 to 4/15/19.................................... 1,005,963
494,314 10.50% Pools, 5/15/13 to 2/15/18.................................... 527,833
381,751 11.00% Pool, 11/15/18............................................... 413,363
-----------
TOTAL FIXED-RATE MORTGAGE-BACKED SECURITIES
(Cost $4,370,127).............................................. 4,448,134
-----------
UNITED STATES TREASURY OBLIGATIONS 10.9%
United States Treasury Notes
3,500,000 7.50%, 12/31/96..................................................... 3,487,435
3,500,000 8.875%, 2/15/99..................................................... 3,621,415
-----------
TOTAL UNITED STATES TREASURY OBLIGATIONS
(Cost $7,131,578).............................................. 7,108,850
-----------
TOTAL UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS
(Cost $64,669,879)............................................. 63,820,272
-----------
Asset Backed Securities 11.2%
4,000,000 ITT, 5.58%, 2/15/01................................................. 3,998,760
3,447,388 Premier Auto, 4.95%, 2/2/99......................................... 3,323,489
-----------
TOTAL ASSET BACKED SECURITIES (Cost $7,378,872)..................... 7,322,249
-----------
Repurchase Agreement 2.3%
1,495,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%, due 1/3/95
(Collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $1,495,955 (Cost $1,495,000)......... 1,495,000
-----------
TOTAL INVESTMENTS (Cost $73,543,751) 111.0%........................ 72,637,521
Other assets and liabilities, net (11.0%).......................... (7,204,502)
-----------
NET ASSETS 100%..................................................... $65,433,019
==========
</TABLE>

* Securities with a market value of approximately $7.4 million were placed as
collateral for forward commitments (see Note 1B).
PAC-Planned Amortization Class

See Notes to Financial Statements.

C-2
<PAGE> 41

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994

<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $73,543,751)............................. $ 72,637,521
Cash........................................................................ 1,698
Interest receivable......................................................... 444,370
Receivable for Fund shares sold............................................. 8,978
Other assets................................................................ 7,647
------------
Total Assets........................................................... 73,100,214
------------
LIABILITIES
Investments purchased....................................................... 7,026,257
Payable for Fund shares redeemed............................................ 355,460
Dividends payable........................................................... 110,981
Due to Distributor.......................................................... 58,424
Due to Adviser.............................................................. 28,515
Due to shareholder service agent............................................ 16,830
Unrealized depreciation of forward purchase commitment...................... 12,510
Accrued expenses and other liabilities...................................... 58,218
------------
Total Liabilities...................................................... 7,667,195
------------
Net Assets, equivalent to $11.90 per share for Class A shares, $11.91 per
share for Class B shares and $11.90 per share for Class C shares......... $ 65,433,019
===========
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 3,465,620 Class A, 1,541,528 Class B
and 491,408 Class C shares outstanding................................... $ 54,986
Capital surplus............................................................. 82,620,185
Accumulated net realized loss on securities................................. (16,372,918)
Net unrealized depreciation of securities
Investments.............................................................. (906,230)
Forward purchase commitments............................................. (12,510)
Undistributed net investment income......................................... 49,506
------------
NET ASSETS at December 31, 1994............................................... $ 65,433,019
===========
</TABLE>

See Notes to Financial Statements.

C-3
<PAGE> 42

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest....................................................................... $ 4,960,588
-----------
EXPENSES
Management fees (net of waiver of $140,000--see Note 2)........................ 280,713
Service fees--Class A.......................................................... 132,613
Distribution and service fees--Class B......................................... 222,471
Distribution and service fees--Class C......................................... 76,165
Shareholder services agent's fees and expenses................................. 191,813
Registration and filing fees................................................... 111,736
Accounting services............................................................ 75,309
Reports to shareholders........................................................ 36,115
Audit fees..................................................................... 34,522
Trustees' fees and expenses.................................................... 11,185
Legal fees..................................................................... 7,084
Custodian fees................................................................. 3,565
Miscellaneous.................................................................. 8,523
-----------
Total expenses............................................................... 1,191,814
-----------
Net investment income........................................................ 3,768,774
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities
Investments.................................................................. (2,162,092)
Forward commitments.......................................................... (349,453)
Net unrealized appreciation (depreciation) during the year
Investments.................................................................. (1,409,115)
Forward commitments.......................................................... 3,871
-----------
Net realized and unrealized loss on securities............................... (3,916,789)
-----------
Decrease in net assets resulting from operations............................. $ (148,015)
==========
</TABLE>

See Notes to Financial Statements.

C-4
<PAGE> 43

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of year.................................... $ 98,293,251 $142,091,079
------------ ------------
Operations
Net investment income.......................................... 3,768,774 6,362,397
Net realized loss on securities (net of reimbursement--see Note
2).......................................................... (2,511,545) (1,880,081)
Net unrealized depreciation of securities during the year...... (1,405,244) (868,537)
------------ ------------
Increase (decrease) in net assets resulting from operations.... (148,015) 3,613,779
------------ ------------
Dividends to shareholders from net investment income
Class A........................................................ (2,394,001) (4,123,348)
Class B........................................................ (806,734) (1,347,132)
Class C........................................................ (276,067) (91,349)
------------ ------------
(3,476,802) (5,561,829)
------------ ------------
Net equalization debits.......................................... (169,962) (620,002)
------------ ------------
Fund shares transactions
Proceeds from shares sold
Class A..................................................... 19,201,023 32,894,798
Class B..................................................... 4,104,254 5,703,339
Class C..................................................... 5,694,179 7,970,180
------------ ------------
28,999,456 46,568,317
------------ ------------
Proceeds from shares issued for dividends reinvested
Class A..................................................... 1,576,391 2,898,790
Class B..................................................... 547,208 863,542
Class C..................................................... 122,460 46,435
------------ ------------
2,246,059 3,808,767
------------ ------------
Cost of shares redeemed
Class A..................................................... (41,385,868) (73,362,626)
Class B..................................................... (12,217,467) (17,349,831)
Class C..................................................... (6,707,633) (894,403)
------------ ------------
(60,310,968) (91,606,860)
------------ ------------
Decrease in net assets resulting from Fund shares
transactions.............................................. (29,065,453) (41,229,776)
------------ ------------
Decrease in Net Assets........................................... (32,860,232) (43,797,828)
------------ ------------
NET ASSETS, end of year.......................................... $ 65,433,019 $ 98,293,251
=========== ===========
</TABLE>

See Notes to Financial Statements.

C-5
<PAGE> 44

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

NOTES TO FINANCIAL STATEMENTS

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES

American Capital Federal Mortgage Trust (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.

A. Investment Valuations

U.S. Agency and Government obligations and related forward commitments are
valued at the last reported bid price. Listed options are valued at the last
reported sale price on the exchange on which such option is traded, or, if no
sales are reported, at the mean between the last reported bid and asked prices.
Securities for which market quotations are not readily available are valued at a
fair value under a method approved by the Board of Trustees.

Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are valued based
on market quotations, until the remaining days to maturity becomes less than 61
days. From such time, until maturity, such investments are valued at amortized
cost.

B. Forward Commitments

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. Transactions in forward commitments are utilized in strategies to
manage the market risk of the Fund's investments. Investing in such instruments
increases the impact on net asset value of changes in the market price of
investments. Forward commitments have a risk of loss due to nonperformance of
counterparties. There is also a risk that the market movement of such
instruments may not be in the direction forecasted. 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
and for forward sale commitments, 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 period of the commitment, the
Fund may either resell or repurchase the forward commitment and enter into a new
forward commitment, the effect of which is to extend the settlement date. In
addition, the Fund may occasionally close such forward commitments prior to
delivery. Gains or losses are realized upon the ultimate closing or cash
settlement of forward commitments. Note 3--Investment activity contains
additional information.

C. Repurchase Agreements

A repurchase agreement is a short-term investment 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

C-6
<PAGE> 45

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

NOTES TO FINANCIAL STATEMENTS--CONTINUED

account along with other investment companies advised or subadvised by the Van
Kampen American Capital Asset Management, Inc. (the "Adviser"), the daily
aggregate of which is invested in repurchase agreements. Repurchase agreements
are 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.

D. Federal Income Taxes

No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the Internal
Revenue Code, and intends to maintain this qualification by annually
distributing all of its taxable net investment income and taxable net realized
capital gains to its shareholders. It is anticipated that no distributions of
capital gains will be made until tax basis capital loss carryforwards expire or
are offset by net realized capital gains.

E. Investment Transactions and Related Investment Income

Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Interest income is accrued daily.

F. Dividends and Distributions

The Fund declares dividends on each business day. Dividends and
distributions are recorded on the record dates. The Fund distributes tax basis
earnings in accordance with the minimum distribution requirements of the
Internal Revenue Code, which may differ from generally accepted accounting
principles. Such dividends or distributions may exceed financial statement
earnings.

G. Equalization

At December 31, 1994, the Fund discontinued the accounting practice of
equalization, which it had used since its inception. Equalization is a practice
whereby a portion of the proceeds from sales and costs of redemptions of Fund
shares, equivalent on a per-share basis to the amount of the undistributed net
investment income, is charged or credited to undistributed net investment
income.

The balance of equalization included in undistributed net investment income
at the date of change, which was $311,791, was reclassified to capital surplus.
Such reclassification had no effect on net assets, results of operations, or net
asset value per share of the Fund.

H. Debt Discount and Premium

For financial reporting purposes, debt discounts and premiums are accounted
for on the same basis as is followed for federal income tax reporting.
Accordingly, original issue discounts on debt securities purchased are amortized
over the life of the security. Premiums on debt securities are not amortized.
Market discounts are recognized at the time of sale as realized gains for book
purposes and ordinary income for tax purposes.

C-7
<PAGE> 46

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

NOTES TO FINANCIAL STATEMENTS--CONTINUED

NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES

The Adviser serves as investment manager of the Fund. Management fees are
paid monthly, based on the average daily net assets of the Fund at an annual
rate of .50% of the first $1 billion, .475% of the next $1 billion, .45% of the
next $1 billion, .40% of the next $1 billion and .35% of the amount in excess of
$4 billion. From time to time, the Adviser may elect to waive a portion of its
management fee. The waiver is voluntary and may be discontinued at any time
without prior notice.

Accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or subadvised by the Adviser.
For the year ended December 31, 1994, these charges included $6,936 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.

Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended December 31, 1994, the fees
for such services aggregated $150,547.

The Fund was advised that Van Kampen American Capital Distributor, Inc.
(the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $2,321 and $6,301, respectively, as their
portion of the commissions charged on sales of Fund shares during the year.

Under the Distribution Plans, each class of shares pays up to .25% per
annum of its average net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to .75%
per annum of their average net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At December 31, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B and Class C plans aggregated
approximately $1.1 million and $130,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent deferred
sales charges from share redemptions or, subject to the annual renewal of the
plans, future Fund reimbursements of distribution fees.

Legal fees of $7,034 were for services rendered by O'Melveny & Myers,
counsel for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a
Director of the Fund.

Certain officers and trustees of the Fund are officers and trustees or
directors of the Adviser, the Distributor, the Retail Dealer and the shareholder
service agent.

During 1993, certain securities held by the Fund were mispriced. The
Adviser reimbursed the Fund approximately $6.9 million to eliminate any loss to
shareholders incurred during the year of mispricing of such securities. The
reimbursement has been recorded as a reduction of the realized loss recognized
on the sale of the related securities. Without the reimbursement, the Adviser
estimates that the total return for the year ended December 31, 1993 would have
been lower by approximately 6.25 percentage points.

C-8
<PAGE> 47

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

NOTES TO FINANCIAL STATEMENTS--CONTINUED

NOTE 3--INVESTMENT ACTIVITY

During the year, the cost of purchases and proceeds from sales of
investments, excluding short-term investments and forward commitments, were
$129,178,297 and $151,188,189, respectively.

The identified cost of investments owned at December 31, 1994 was the same
for federal income tax and financial reporting purposes. Net unrealized
depreciation of investments aggregated $906,230, gross unrealized appreciation
of investments aggregated $108,819 and gross unrealized depreciation of
investments aggregated $1,015,049.

The net realized capital loss carryforward of approximately $15.4 million
for federal income tax purposes at December 31, 1994 may be utilized to offset
future capital gains until expiration in 1995 through 2002, of which
approximately 21% will expire in 1995. Additionally, approximately $900,000 in
realized losses are being deferred for tax purposes to the 1995 fiscal year.

At December 31, 1994, the Fund held the following forward purchase
commitment settling January 1995.

<TABLE>
<CAPTION>
VALUE AT
PRINCIPAL DECEMBER 31, UNREALIZED
AMOUNT SECURITY 1994 DEPRECIATION
- ---------- ------------------------------------------- ------------ ------------
<S> <C> <C> <C>
$4,000,000
Federal National Mortgage Association,
8.00% Pools................................ $3,831,240 $ 12,510
========== ========
</TABLE>

NOTE 4--TRUSTEE COMPENSATION

Trustees who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $810 plus a fee of $20 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the Fund
at an annual rate of $310. During the year, such fees aggregated $9,556.

The Trustees may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At December 31, 1994, the liability for the Plan aggregated
$16,118. Each trustee covered under the Plan elects to be credited with an
earning component on amounts deferred equal to the income earned by the Fund on
its short-term investments or equal to the total return of the Fund.

NOTE 5--CAPITAL

The Fund offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of distribution fees and certain other class specific expenses. Realized
and unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets or paid shares of each class. Class B shares
and Class C shares automatically convert to Class A shares six years and

C-9
<PAGE> 48

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

NOTES TO FINANCIAL STATEMENTS--CONTINUED

ten years after purchase, respectively, subject to certain conditions. The Fund
has suspended sales of Class B shares to the public, and these shares are now
available only to a limited group of investors.

The Fund has an unlimited number of shares of $.01 par value beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Shares sold
Class A............................................................ 1,589,204 2,652,339
Class B............................................................ 340,243 454,922
Class C............................................................ 469,667 636,387
---------- ----------
2,399,114 3,743,648
---------- ----------
Shares issued for dividends reinvested
Class A............................................................ 130,048 230,580
Class B............................................................ 45,121 68,673
Class C............................................................ 10,116 3,723
---------- ----------
185,285 302,976
---------- ----------
Shares redeemed
Class A............................................................ (3,431,958) (5,915,573)
Class B............................................................ (1,010,900) (1,391,506)
Class C............................................................ (556,549) (71,936)
---------- ----------
(4,999,407) (7,379,015)
---------- ----------
Decrease in shares outstanding....................................... (2,415,008) (3,332,391)
========= =========
</TABLE>

C-10
<PAGE> 49

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

FINANCIAL HIGHLIGHTS

Selected data for a share of beneficial interest outstanding throughout
each of the periods indicated.

<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
YEAR ENDED DECEMBER 31
-----------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year..... $12.42 $12.63 $ 12.99 $12.85 $12.88
-------- -------- --------- -------- --------
INCOME FROM OPERATIONS
Investment income...................... .62 .64 .93 1.15 1.32
Expenses............................... (.14) (.11) (.14) (.17) (.173)
Expense waiver(2)...................... .02 .01 .025 .025 --
-------- -------- --------- -------- --------
Net investment income.................. .50 .54 .815 1.005 1.147
Net realized and unrealized gains or
losses on securities................. (.4817) (.1485)(1) (.417) .206 (.004)
-------- -------- --------- -------- --------
Total from investment operations....... .0183 .3915 .398 1.211 1.143
-------- -------- --------- -------- --------
DIVIDENDS FROM NET INVESTMENT INCOME... (.5383) (.6015) (.758) (1.071) (1.173)
-------- -------- --------- -------- --------
Net asset value, end of year........... $11.90 $12.42 $ 12.63 $12.99 $12.85
======== ======== ========= ======== ========
TOTAL RETURN(3)........................ .16% 3.15% (1) 3.15% 9.78% 9.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)..... $41.2 $64.3 $103.7 $95.8 $32.3
Average net assets (millions).......... $54.3 $85.7 $112.7 $47.5 $33.4
Ratios to average net assets(2)
Expenses............................. 1.15% 1.03% 0.91% 1.16% 1.38%
Expenses, without waiver............. 1.31% 1.15% 1.12% 1.36% --
Net investment income................ 4.75% 5.49% 6.36% 7.96% 9.11%
Net investment income, without
waiver............................ 4.58% 5.37% 6.15% 7.66% --
Portfolio turnover rate................ 161% 102% 254% 293% 341%
</TABLE>

- -------------------------
(1) Net of reimbursement--see Note 2.

(2) See Note 2.

(3) Total return does not consider the effect of sales charges.

See Notes to Financial Statements.

C-11
<PAGE> 50

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

FINANCIAL HIGHLIGHTS--CONTINUED

Selected data for a share of beneficial interest outstanding throughout
each of the periods indicated.

<TABLE>
<CAPTION>
CLASS B CLASS C
--------------------------------------------------- ----------------------------
NOVEMBER 5 MAY 10,
1991(2) YEAR 1993(2)
YEAR ENDED DECEMBER 31 THROUGH ENDED THROUGH
----------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991(3) 1994 1993(3)
-------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period...................... $12.43 $12.64 $12.99 $12.99 $12.41 $12.60
-------- -------- -------- ------------ ------------ ------------
INCOME FROM OPERATIONS
Investment income............. .62 .67 .935 .12 .67 .44
Expenses...................... (.22) (.20) (.24) (.03) (.24) (.14)
Expense waiver(6)............. .02 .01 .03 .02 .02 .02
-------- -------- -------- ------------ ------------ ------------
Net investment income......... .42 .48 .725 .11 .45 .32
Net realized and unrealized
gains or losses on
securities.................. (.4977) (.1845)(1) (.413) .036 (.5177) (.1914)(1)
-------- -------- -------- ------------ ------------ ------------
Total from investment
operations.................. (.0777) .2955 .312 .146 (.0677) .1286
-------- -------- -------- ------------ ------------ ------------
DIVIDENDS FROM NET INVESTMENT
INCOME...................... (.4423) (.5055) (.662) (.146) (.4423) (.3186)
-------- -------- -------- ------------ ------------ ------------
Net asset value, end of
period...................... $11.91 $12.43 $12.64 $12.99 $11.90 $12.41
========= ========= ========= ============ ============ ============
TOTAL RETURN(4)............... (.62% ) 2.37% (1) 2.46% 1.13% (.55% ) 1.03% (1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions).................. $18.4 $26.9 $38.4 $ 9.4 $ 5.8 $ 7.1
Average net assets
(millions).................. $22.2 $33.3 $32.3 $ 4.1 $ 7.6 $ 4.0
Ratios to average net
assets(6)
Expenses.................... 1.91% 1.79% 1.60% .59% (5) 1.90% 1.47% (5)
Expenses, without waiver.... 2.08% 1.91% 1.81% 1.84% (5) 2.07% 1.64% (5)
Net investment income....... 3.99% 4.70% 5.44% 5.73% (5) 3.98% 3.79% (5)
Net investment income,
without waiver............ 3.82% 4.58% 5.23% 4.48% (5) 3.81% 3.62% (5)
Portfolio turnover rate....... 161% 102% 254% 293% 161% 102%
</TABLE>

- -------------------------
(1) Net of reimbursement--see Note 2.

(2) Commencement of offering of sales.

(3) Based on average month-end shares outstanding.

(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.

(5) Annualized.

(6) See Note 2.

See Notes to Financial Statements.

C-12
<PAGE> 51

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST

In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Federal Mortgage
Trust at December 31, 1994, and the results of its operations, the changes in
its net assets and the selected per share data and ratios for each of the fiscal
periods presented, in conformity with generally accepted accounting principles.
These financial statements and selected per share data and ratios (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Houston, Texas
February 16, 1995

C-13
<PAGE> 52

Appendix D

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Portfolio of Investments
June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities 87.0%
$ 938 AFC Mortgage................................................... 5.735% 03/25/25 $ 945,076
1,949 DLJ Mortgage Acceptance Corporation............................ 3.945 03/25/24 1,931,543
953 Federal Home Loan Mortgage Corporation......................... 4.625 07/01/14 954,012
1,855 Federal Home Loan Mortgage Corporation......................... 5.634 03/01/18 1,904,730
3,071 Federal Home Loan Mortgage Corporation......................... 5.569 08/01/20 3,158,327
1,000 Federal Home Loan Mortgage Corporation......................... 5.507 07/01/22 1,020,161
1,372 Federal Home Loan Mortgage Corporation......................... 4.105 10/01/23 1,369,590
2,732 Federal Home Loan Mortgage Corporation......................... 3.733 01/01/24 2,697,822
1,848 Federal National Mortgage Association.......................... 5.493 01/01/16 1,914,516
2,815 Federal National Mortgage Association.......................... 5.445 11/01/18 2,905,691
1,943 Federal National Mortgage Association.......................... 5.323 03/01/19 1,996,782
1,034 Federal National Mortgage Association.......................... 5.593 03/01/19 1,063,721
1,849 Federal National Mortgage Association.......................... 5.124 02/01/21 1,830,494
2,504 Federal National Mortgage Association.......................... 5.586 10/01/22 2,509,816
1,794 Federal National Mortgage Association.......................... 4.245 10/01/23 1,818,427
1,954 Federal National Mortgage Association.......................... 3.386 01/01/24 1,917,684
702 Federal National Mortgage Association.......................... 4.960 11/01/26 706,116
556 Federal National Mortgage Association.......................... 4.937 03/01/29 550,329
262 Federal National Mortgage Association Interest Only............ 7.000 02/25/98 656
1,792 Federal National Mortgage Association Interest Only............ 5.206 12/25/08 164,666
1,843 Government National Mortgage Association....................... 6.000 06/20/23 1,840,678
7,359 Salomon Brothers Mortgage Securities VII Inc Interest Only..... 2.290 03/25/24 478,354
-----------
33,679,191
-----------
Corporate Securities 3.9%
1,200 Greenwich Capital Acceptance Inc............................... 6.087 07/25/22 1,218,000
5,059 Greenwich Capital Acceptance Inc Interest Only................. 2.528 10/25/22 303,562
-----------
1,521,562
-----------
Total Long-Term Investments 90.9%
(Cost $36,080,306) <F1>........................................................................................... 35,200,753
Repurchase Agreement 8.6%
UBS Securities, U S. T-Note, $3,225,000 par, 9.50% coupon,
due 11/15/95, dated 06/30/94, to be sold on 07/01/94 at $3,351,391................................................ 3,351,000

Other Assets in Excess of Liabilities 0.5%......................................................................... 184,077
-----------
Net Assets 100%.................................................................................................... $38,735,830
===========

<FN>
<F1> At June 30,1994, cost for federal income tax purposes is $36,080,306;
the aggregate gross unrealized appreciation is $33,022 and the aggregate
gross unrealized depreciation is $912,575, resulting in net unrealized
depreciation of $879,553.
</FN>
</TABLE>

See Notes to Financial Statements

D-1

<PAGE> 53

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1994
- -------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at Market Value (Cost $36,080,306) (Note 1)................................. $ 35,200,753
Short-Term Investments (Note 1).......................................................... 3,351,000
Cash..................................................................................... 730
Receivables:
Interest................................................................................ 254,896
Investments Sold........................................................................ 121,663
Fund Shares Sold........................................................................ 8,705
Unamortized Organizational Expenses (Note 1)............................................. 25,276
Other.................................................................................... 485
-----------------
Total Assets............................................................................ 38,963,508
-----------------
Liabilities:
Payables:
Fund Shares Repurchased................................................................. 145,827
Income Distributions.................................................................... 42,635
Accrued Expenses......................................................................... 39,216
-----------------
Total Liabilities....................................................................... 227,678
-----------------
Net Assets............................................................................... $ 38,735,830
=================
Net Assets Consist of:
Paid in Surplus.......................................................................... $ 40,008,122
Accumulated Undistributed Net Investment Income.......................................... 1,893
Accumulated Net Realized Loss on Investments............................................. (394,632)
Net Unrealized Depreciation on Investments............................................... (879,553)
-----------------
Net Assets............................................................................... $ 38,735,830
=================
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (based on net assets of $7,079,499 and
753,223 shares of beneficial interest issued and outstanding) (Note 3)...... ....... $ 9.40
Maximum sales charge (3.00%* of offering price)..................................... .29
-----------------
Maximum offering price to public........................................................ $ 9.69
=================
Class B Shares:
Net asset value and offering price per share (based on net assets of $27,621,738 and
2,937,451 shares of beneficial interest issued and outstanding) (Note 3)............ $ 9.40
=================
Class C Shares:
Net asset value and offering price per share (based on net assets of $4,034,593 and
429,090 shares of beneficial interest issued and outstanding) (Note 3).............. $ 9.40
=================
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

D-2
<PAGE> 54

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Statement of Operations
For the Year Ended June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<S> <C>
Investment Income:
Interest......................................................................... $ 1,646,183
--------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$21,250, $207,242 and $22,482, respectively) (Note 5).......................... 250,974
Investment Advisory Fee (Note 2)................................................. 183,973
Shareholder Services............................................................. 59,481
Custody.......................................................................... 51,910
Legal (Note 2)................................................................... 19,290
Trustees Fees and Expenses (Note 2).............................................. 16,300
Amortization of Organizational Expenses (Note 1)................................. 7,997
Other............................................................................ 72,345
--------------
Total Expenses.................................................................. 662,270
Less Fees Waived and Expenses Reimbursed ($183,973 and $133,330, respectively).. 317,303
--------------
Net Expenses.................................................................... 344,967
--------------
Net Investment Income............................................................ $ 1,301,216
==============
Realized and Unrealized Gain/Loss on Investments:

Realized Gain/Loss on Investments:
Proceeds from Sales............................................................. $ 23,282,526
Cost of Securities Sold......................................................... (23,645,200)
--------------
Net Realized Loss on Investments................................................. (362,674)
--------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................... 106,224
End of the Period............................................................... (879,553)
--------------
Net Unrealized Depreciation on Investments During the Period..................... (985,777)
--------------
Net Realized and Unrealized Loss on Investments.................................. $ (1,348,451)
==============
Net Decrease in Net Assets from Operations....................................... $ (47,235)
==============
</TABLE>

See Notes to Financial Statements

D-3

<PAGE> 55
Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Year Ended June 30, 1994 and the Period August 28, 1992
(Commencement of Investment Operations) through June 30, 1993
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Period Ended
June 30, 1994 June 30, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.......................................................... $ 1,301,216 $ 645,443
Net Realized Loss on Investments............................................... (362,674) (30,385)
Net Unrealized Appreciation/Depreciation on Investments During the Period...... (985,777) 106,224
------------ ------------
Change in Net Assets from Operations........................................... (47,235) 721,282
------------ ------------
Distributions from Net Investment Income:
Class A Shares................................................................ (384,334) (225,135)
Class B Shares................................................................ (879,036) (366,571)
Class C Shares................................................................ (91,263) -0-
------------ ------------
Total Distributions........................................................... (1,354,633) (591,706)
------------ ------------
Net Change in Net Assets from Investment Activities............................ (1,401,868) 129,576
------------ ------------
From Capital Transactions (Note 3):

Proceeds from Shares Sold...................................................... 35,960,141 27,153,714
Net Asset Value of Shares Issued Through Dividend Reinvestment................. 959,832 427,880
Cost of Shares Repurchased..................................................... (15,553,274) (8,950,841)
------------ ------------
Net Change in Net Assets from Capital Transactions............................. 21,366,699 18,630,753
------------ ------------
Total Increase in Net Assets................................................... 19,964,831 18,760,329
------------ ------------
Net Assets:

Beginning of the Period........................................................ 18,770,999 10,670
------------ ------------
End of the Period (Including undistributed net investment income
of $1,893 and $53,737, respectively).......................................... $ 38,735,830 $ 18,770,999
============ ============
</TABLE>

See Notes to Financial Statements

D-4

<PAGE> 56

VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND

FINANCIAL HIGHLIGHTS

The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
AUGUST 28, 1992
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS)
JUNE 30, 1994 TO JUNE 30, 1993
------------- ----------------------
<S> <C> <C>
CLASS A SHARES
Net Asset Value, Beginning of Period........................... $ 9.793 $9.700
------- ------
Net Investment Income........................................ .452 .451
Net Realized and Unrealized Gain/Loss on Investments......... (.360) .049
------- ------
Total from Investment Operations............................... .092 .500
Less: Distributions from Net Investment Income................. .486 .407
------- ------
Net Asset Value, End of Period................................. $ 9.399 $9.793
======= ======
Total Return*.................................................. .97% 6.30%
Net Assets at End of Period (in millions)...................... $ 7.1 $ 4.7
Ratio of Expenses to Average Net Assets* (annualized).......... .61% .95%
Ratio of Net Investment Income to Average Net Assets*
(annualized)................................................. 4.73% 5.29%
Portfolio Turnover............................................. 81.70% 76.62%
*If certain expenses had not been assumed by the investment
adviser, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets (annualized)........... 1.62% 1.86%
Ratio of Net Investment Income to Average Net Assets
(annualized)................................................. 3.72% 4.37%
</TABLE>

See Notes to Financial Statements

D-5
<PAGE> 57

VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND

FINANCIAL HIGHLIGHTS--CONTINUED

The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
AUGUST 28, 1992
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS)
JUNE 30, 1994 TO JUNE 30, 1993
------------- ----------------------
<S> <C> <C>
CLASS B SHARES
Net Asset Value, Beginning of Period........................... $ 9.799 $9.700
------- ------
Net Investment Income........................................ .391 .378
Net Realized and Unrealized Gain/Loss on Investments......... (.370) .076
------- ------
Total from Investment Operations............................... .021 .454
Less: Distributions from Net Investment Income................. .417 .355
------- ------
Net Asset Value, End of Period................................. $ 9.403 $9.799
======= ======
Total Return*.................................................. .15% 5.76%
Net Assets at End of Period (in millions)...................... $ 27.6 $ 14.1
Ratio of Expenses to Average Net Assets* (annualized).......... 1.31% 1.63%
Ratio of Net Investment Income to Average Net Assets*
(annualized)................................................. 4.14% 4.78%
Portfolio Turnover............................................. 81.70% 76.62%
* If certain expenses had not been assumed by the investment
adviser, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets (annualized)........... 2.36% 2.55%
Ratio of Net Investment Income to Average Net Assets
(annualized)................................................. 3.09% 3.86%
</TABLE>

See Notes to Financial Statements

D-6
<PAGE> 58

VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND

FINANCIAL HIGHLIGHTS--CONTINUED

The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the periods indicated.

<TABLE>
<CAPTION>
AUGUST 13, 1993
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
TO JUNE 30, 1994
----------------------
<S> <C>
CLASS C SHARES
Net Asset Value, Beginning of Period..................................... $9.790
------
Net Investment Income.................................................. .366
Net Realized and Unrealized Loss on Investments........................ (.387)
------
Total from Investment Operations......................................... (.021)
Less: Distributions from Net Investment Income........................... .366
------
Net Asset Value, End of Period........................................... $9.403
======
Total Return* (annualized)............................................... (.30%)
Net Assets at End of Period (in millions)................................ $ 4.0
Ratio of Expenses to Average Net Assets* (annualized).................... 1.31%
Ratio of Net Investment Income to Average Net Asset* (annualized)........ 4.05%
Portfolio Turnover....................................................... 81.70%
* If certain expenses had not been assumed by the investment adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets (annualized)..................... 2.37%
Ratio of Net Investment Income to Average Net Assets (annualized)........ 2.98%
</TABLE>

See Notes to Financial Statements

D-7
<PAGE> 59

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1994
- -------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") was
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, as of May 28, 1992, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on August
28, 1992 with two classes of common shares, Class A and Class B shares. The
distribution of the Fund's Class C shares, which were initially introduced as
Class D shares and subsequently renamed Class C shares on March 7, 1994,
commenced on August 13, 1993.

The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.

A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost.

B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may purchase and sell securities on a "when issued" and "delayed
delivery" basis, with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund will maintain, in a segregated account with its custodian, assets having
an aggregate value at least equal to the amount of the when issued or delayed
delivery purchase commitment until payment is made. At June 30, 1994, there
were no when issued or delayed delivery purchase commitments.

C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.

D. Organizational Expenses-The Fund will reimburse Van Kampen Merritt Inc.
("Van Kampen Merritt") for costs incurred in connection with the Fund's
organization in the amount of $40,000.

These costs are being amortized on a straight line basis over the 60 month
period ending August 28, 1997. Van Kampen Merritt Investment Advisory Corp.
(the "Adviser") has agreed that in the event any of the initial shares of the
Fund originally purchased by Van Kampen Merritt are redeemed during the
amortization period, the Fund will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.

E. Federal Income Taxes-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.

The Fund intends to utilize provisions of the federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At June 30, 1994, the Fund had an accumulated capital
loss carry forward for tax purposes of $61,584. Of this amount, $12,348 and
$49,236 will expire on June 30, 2001, and 2002, respectively. Net realized gains
or losses may differ for financial and tax reporting purposes primarily as a
result of post October 31 losses which are not recognized for tax purposes until
the first day of the following fiscal year.

F. 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. During the current period, the Fund adopted Statement of
Position 93-2 "Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies." Accordingly, permanent book and tax basis differences relating to
shareholder distributions totaling $1,573 have been reclassified from
accumulated net realized gain/loss on investments to accumulated undistributed
net investment income. Net investment income, net realized gain/loss, and net
assets were not affected by this change.

D-8
<PAGE> 60

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
- -------------------------------------------------------------------------

G. Options and Futures Transactions-Premiums received from call options written
are recorded as deferred credits. The position is marked to market daily with
any difference between the options' current market value and premiums received
recorded as an unrealized gain or loss. If the options are not exercised,
premiums received are realized as a gain at expiration date. If the position is
closed prior to expiration, a gain or loss is realized based on premiums
received less the cost of the closing transaction. When options are exercised,
premiums received are added to the proceeds from the sale of the underlying
securities and a gain or loss is realized accordingly. These same principles
apply to the sale of put options.

Put and call options purchased are accounted for in the same manner as
portfolio securities. The cost of securities acquired through the exercise of
call options is increased by premiums paid. The proceeds from securities sold
through the exercise of put options are decreased by premiums paid.

Futures contracts are marked to market daily with fluctuations in value
settled daily in cash through a margin account. Gains or losses are realized at
the time the position is closed out or the contract expires.

2. Investment Advisory Agreement and Other Transactions with Affiliates

Under the terms of the Fund's Investment Advisory Agreement, the Adviser
will provide facilities and investment advice to the Fund for an annual fee
payable monthly as follows:

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ----------------------------------------------------------------
<S> <C>
First $500 million................................... .600 of 1%
Next $500 million.................................... .550 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%
Over $9 billion...................................... .400 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.

For the year ended June 30, 1994, the Fund recognized expenses of
approximately $17,600, representing Van Kampen Merritt's or the Adviser's cost
of providing accounting, legal, portfolio pricing and certain shareholder
services to the Fund.

Certain officers and trustees of the Fund are also officers and directors of the
Adviser and Van Kampen Merritt. The Fund does not compensate its officers or
trustees who are officers of the Adviser or Van Kampen Merritt.

At June 30, 1994, Van Kampen Merritt owned 20,850, 103 and 100 shares of
beneficial interest of Classes A, B and C, respectively.

3. Capital Transactions

The Fund has outstanding three classes of capital stock, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized. At June 30, 1994, paid in surplus aggregated $7,394,589, $28,451,556
and $4,161,977 for Classes A, B and C, respectively. For the year ended June
30, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
Sales:
Class A......................... 902,396 $ 8,731,126
Class B......................... 2,364,040 22,736,081
Class C......................... 464,005 4,492,934
----------- -------------
Total Sales..................... 3,730,441 $ 35,960,141
=========== =============
Dividend Reinvestment:
Class A......................... 26,263 $ 252,576
Class B......................... 64,882 623,837
Class C......................... 8,729 83,419
----------- -------------
Total Dividend Reinvestment..... 99,874 $ 959,832
=========== =============
Repurchases:
Class A......................... (656,490) $ (6,285,280)
Class B......................... (926,283) (8,853,618)
Class C......................... (43,644) (414,376)
----------- -------------
Total Repurchases...............(1,626,417) $(15,553,274)
=========== =============
</TABLE>

D-9
<PAGE> 61

At June 30, 1993, paid in surplus aggregated $4,696,167 and $13,945,256 for
Classes A and B, respectively. For the period ended June 30, 1993, transactions
were as follows:

Shares Value
- ----------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 1,212,488 $ 11,769,304
Class B....................... 1,582,925 15,384,410
----------- -------------
Total Sales.................... 2,795,413 $ 27,153,714
=========== =============
Dividend Reinvestment:
Class A....................... 18,325 $ 177,867
Class B....................... 25,646 250,013
----------- -------------
Total Dividend Reinvestment.... 43,971 $ 427,880
=========== =============
Repurchases:
Class A....................... (749,759) $ (7,260,704)
Class B....................... (173,759) (1,690,137)
----------- -------------
Total Repurchases.............. (923,518) $ (8,950,841)
=========== =============
</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 for Class B and
Class C shares will be imposed on most redemptions made within three 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 Class C shares bear the expense of their
respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.

Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
- ---------------------------------------------------------------
<S> <C> <C>
First...................................... 3.00% 1.00%
Second..................................... 2.00% None
Third...................................... 1.00% None
Fourth and Thereafter...................... None None
</TABLE>

For the year ended June 30, 1994, Van Kampen Merritt, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of $22 and
CDSC on the redeemed shares of Classes B and C of approximately $91,000. Sales
charges do not represent expenses of the Fund.

4. Investment Transactions

Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended June 30, 1994, were $41,367,854 and
$23,485,307, respectively.

5. Distribution and Service Plans

The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.

Annual fees under the Plans of up to .30% for Class A shares and 1.00% each
for Class B and Class C shares are accrued daily. Included in these fees for the
year ended June 30, 1994, are payments to Van Kampen Merritt of approximately
$183,000.

D-10

<PAGE> 62

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Independent Auditors' Report
- -------------------------------------------------------------------------

The Board of Trustees and Shareholders of
Van Kampen Merritt Adjustable Rate U.S. Government Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund"), including the
portfolio of investments, as of June 30,1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year then ended and for the period from August 28,1992 (commencement of
investment operations) through June 30,1993, and the financial highlights for
each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
June 30,1994, by correspondence with the custodian. 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 Merritt Adjustable Rate U.S. Government Fund as of June
30,1994, the results of its operations for the year then ended, the changes in
its net assets for the year then ended and for the period from August 28,1992
(commencement of investment operations) through June 30,1993, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
August 4, 1994

D-11
<PAGE> 63

Appendix E

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Portfolio of Investments
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Securities 2.9%
$ 955 Nomura Asset Securities Corporation .............................. 7.265% 7/07/03 $ 978,875
------------
Mortgage-Backed Securities 84.4%
793 AFC Mortgage #93-4B2A1 ........................................... 6.936 12/25/23 793,905
954 Citicorp Mortgage Securities Inc #94-11A2 ........................ 6.250 8/25/24 911,300
1,808 DLJ Mortgage Acceptance Corporation #94-Q1 ....................... 4.883 3/25/24 1,743,292
882 Federal Home Loan Mortgage Corporation ........................... 6.625 7/01/14 871,541
1,723 Federal Home Loan Mortgage Corporation ........................... 5.635 3/01/18 1,703,658
2,834 Federal Home Loan Mortgage Corporation ........................... 6.522 8/01/20 2,854,220
872 Federal Home Loan Mortgage Corporation ........................... 7.290 7/01/22 878,405
1,266 Federal Home Loan Mortgage Corporation ........................... 6.095 10/01/23 1,239,309
1,742 Federal National Mortgage Association ............................ 6.809 1/01/16 1,762,037
2,345 Federal National Mortgage Association ............................ 7.013 11/01/18 2,347,593
1,642 Federal National Mortgage Association ............................ 6.347 3/01/19 1,629,226
899 Federal National Mortgage Association ............................ 6.741 3/01/19 906,915
1,833 Federal National Mortgage Association ............................ 5.124 2/01/21 1,779,585
2,229 Federal National Mortgage Association ............................ 7.161 10/01/22 2,234,043
1,606 Federal National Mortgage Association ............................ 5.896 10/01/23 1,581,831
1,789 Federal National Mortgage Association ............................ 4.371 1/01/24 1,777,357
614 Federal National Mortgage Association ............................ 5.190 11/01/26 593,819
490 Federal National Mortgage Association ............................ 5.289 3/01/29 474,098
1,753 Government National Mortgage Association ......................... 6.750 6/20/23 1,704,097
6,808 Salomon Brothers Mortgage Securities VII Inc - Interest Only ..... 2.283 2/25/24 370,180
------------
28,156,411
------------
Corporate Securities 4.1%
1,200 Greenwich Capital Acceptance Inc ................................. 6.594 7/25/22 1,171,500
4,300 Greenwich Capital Acceptance Inc - Interest Only ................ 2.514 10/25/22 180,623
------------
1,352,123
------------
Total Long-Term Investments 91.4%
(Cost $31,905,802) <F1> ................................................................... 30,487,409
-------------
Short-Term Investments at Amortized Cost 8.1%
Mexican Tesobonos ($1,000,000 par, yielding 7.07%, maturing 01/12/95) ................... 997,763
Repurchase Agreement, J.P. Morgan Securities, U.S. T-Note, $1,770,000 par, 3.875% coupon,
due 09/30/95, dated 12/30/94, to be sold on 01/03/95 at $1,710,998 ...................... 1,710,000
-------------
Total Short-Term Investments at Amortized Cost ............................................ 2,707,763
Other Assets in Excess of Liabilities 0.5% ................................................ 173,538
-------------
Net Assets 100% ........................................................................... $ 33,368,710
=============
<FN>
<F1> At December 31, 1994, cost for federal income tax purposes is $31,905,802;
the aggregate gross unrealized appreciation is $-0- and the aggregate gross
unrealized depreciation is $1,418,393, resulting in net unrealized depreciation
of $1,418,393.
</FN>

</TABLE>

See Notes to Financial Statements

E-1
<PAGE> 64

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Statement of Assets and Liabilities
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $31,905,802) <F1>................................. $ 30,487,409
Short-Term Investments <F1>.......................................................... 2,707,763
Cash................................................................................. 821
Receivables:
Interest............................................................................. 392,441
Fund Shares Sold..................................................................... 5,189
Unamortized Organizational Expenses <F1>............................................. 21,245
Other ............................................................................... 119
-------------
Total Assets ........................................................................ 33,614,987
-------------
Liabilities:
Payables:
Fund Shares Repurchased.............................................................. 107,791
Income Distributions ................................................................ 33,872
Accrued Expenses..................................................................... 104,614
-------------
Total Liabilities.................................................................... 246,277
-------------
Net Assets........................................................................... $ 33,368,710
=============
Net Assets Consist of:
Paid in Surplus <F3> ................................................................ $ 35,473,115
Accumulated Undistributed Net Investment Income...................................... 29,815
Accumulated Net Realized Loss on Investments ........................................ (715,827)
Net Unrealized Depreciation on Investments........................................... (1,418,393)
-------------
Net Assets........................................................................... $ 33,368,710
=============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $6,522,682 and
710,220 shares of beneficial interest issued and outstanding) <F3>................... $ 9.18
Maximum sales charge (3.00%* of offering price)...................................... .28
-------------
Maximum offering price to public .................................................... $ 9.46
=============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $22,906,032 and
2,492,656 shares of beneficial interest issued and outstanding) <F3> ................ $ 9.19
=============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,939,996 and
429,040 shares of beneficial interest issued and outstanding) <F3>................... $ 9.18
=============
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>

See Notes to Financial Statements

E-2
<PAGE> 65

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Statement of Operations
For the Six Months Ended December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest......................................................................................... $ 1,068,395
------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $9,221, $128,534 and
$20,402, respectively) <F6> .................................................................. 158,157
Investment Advisory Fee <F2> .................................................................... 110,360
Shareholder Services ............................................................................ 40,065
Custody ......................................................................................... 29,555
Trustees Fees and Expenses <F2>.................................................................. 18,200
Legal <F2>....................................................................................... 8,960
Amortization of Organizational Expenses <F1>..................................................... 4,032
Other ........................................................................................... 34,638
------------
Total Expenses................................................................................... 403,967
Less Fees Deferred and Expenses Reimbursed ($110,360 and $55,180, respectively).................. 165,540
------------
Net Expenses..................................................................................... 238,427
------------
Net Investment Income ........................................................................... $ 829,968
============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.............................................................................. $ 5,888,524
Cost of Securities Sold.......................................................................... (6,209,719)
------------
Net Realized Loss on Investments ................................................................ (321,195)
------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.......................................................................... (879,553)
End of the Period ............................................................................... (1,418,393)
------------
Net Unrealized Depreciation on Investments During the Period..................................... (538,840)
------------
Net Realized and Unrealized Loss on Investments.................................................. $ (860,035)
============
Net Decrease in Net Assets from Operations....................................................... $ (30,067)
============
</TABLE>

See Notes to Financial Statements

E-3
<PAGE> 66

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Statement of Changes in Net Assets
For the Six Months Ended December 31, 1994
and the Year Ended June 30, 1994 (Unaudited)

<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1994 June 30, 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income ............................................. $ 829,968 $ 1,301,126
Net Realized Loss on Investments .................................. (321,195) (362,674)
Net Unrealized Depreciation on Investments During the Period....... (538,840) (985,777)
------------- -------------
Change in Net Assets from Operations ............................. (30,067) (47,235)
------------- -------------
Distributions from Net Investment Income:
Class A Shares..................................................... (174,010) (384,334)
Class B Shares..................................................... (541,377) (879,036)
Class C Shares..................................................... (86,659) (91,263)
------------- -------------
Total Distributions................................................ (802,046) (1,354,633)
------------- -------------
Net Change in Net Assets from Investment Activities................ (832,113) (1,401,868)
------------- -------------
From Capital Transactions <F3>:
Proceeds from Shares Sold.......................................... 5,151,481 35,960,141
Net Asset Value of Shares Issued Through Dividend Reinvestment .... 558,565 959,832
Cost of Shares Repurchased ........................................ (10,245,053) (15,553,274)
------------- -------------
Net Change in Net Assets from Capital Transactions................. (4,535,007) 21,366,699
------------- -------------
Total Increase/Decrease in Net Assets ............................. (5,367,120) 19,964,831
Net Assets:
Beginning of the Period............................................ 38,735,830 18,770,999
------------- -------------
End of the Period (Including undistributed net investment income of
$29,815 and $1,893, respectively).................................. $ 33,368,710 $ 38,735,830
============= =============
</TABLE>

See Notes to Financial Statements

E-4

<PAGE> 67

VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND

FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)

<TABLE>
<CAPTION>
CLASS A SHARES
-------------------------------------------
AUGUST 28, 1992
(COMMENCEMENT
SIX MONTHS YEAR OF INVESTMENT
ENDED ENDED OPERATIONS) TO
DECEMBER 31, JUNE 30, JUNE 30,
1994 1994 1993
------------ -------- ---------------
<S> <C> <C> <C>
Net asset value, beginning of period...................... $9.399 $ 9.793 $ 9.700
------ -------- -------
Net investment income..................................... .241 .452 .451
Net realized and unrealized gain/loss on investments...... (.223) (.360) .049
------ -------- -------
Total from investment operations.......................... .018 .092 .500
Less distributions from net investment income............. .233 .486 .407
------ -------- -------
Net asset value, end of period............................ $9.184 $ 9.399 $ 9.793
====== ======== =======
Total return* (non-annualized)............................ .14% .97% 5.22%
Net assets at end of period (in millions)................. $6.5 $ 7.1 $ 4.7
Ratio of expenses to average net assets* (annualized)..... .71% .61% .95%
Ratio of net investment income to average net assets*
(annualized)............................................ 5.17% 4.73% 5.29%
Portfolio turnover........................................ 5.94% 81.70% 76.62%
</TABLE>

- -------------------------
* If certain expenses had not been assumed by the Adviser, total return would
have been lower and the ratios would have been as follows:

<TABLE>
<S> <C> <C> <C>
Ratio of expenses to average net assets (annualized)...... 1.62% 1.62% 1.86%
Ratio of net investment income to average net assets
(annualized)............................................ 4.26% 3.72% 4.37%
</TABLE>

See Notes to Financial Statements

E-5
<PAGE> 68

VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND

FINANCIAL HIGHLIGHTS--CONTINUED

The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)

<TABLE>
<CAPTION>
CLASS B SHARES
----------------------------------------------
AUGUST 28, 1992
(COMMENCEMENT
SIX MONTHS YEAR OF INVESTMENT
ENDED ENDED OPERATIONS) TO
DECEMBER 31, JUNE 30, JUNE 30,
1994 1994 1993
------------ -------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period................. $ 9.403 $ 9.799 $ 9.700
-------- -------- --------
Net investment income................................ .209 .391 .378
Net realized and unrealized gain/loss on
investments........................................ (.226) (.370) .076
-------- -------- --------
Total from investment operations..................... (.017) .021 .454
Less distributions from net investment income........ .197 .417 .355
-------- -------- --------
Net asset value, end of period....................... $ 9.189 $ 9.403 $ 9.799
======== ======== ========
Total return* (non-annualized)....................... (.14%) .15% 4.78%
Net assets at end of period (in millions)............ $ 22.9 $ 27.6 $ 14.1
Ratio of expenses to average net assets*
(annualized)....................................... 1.45% 1.31% 1.63%
Ratio of net investment income to average net assets*
(annualized)....................................... 4.42% 4.14% 4.78%
Portfolio Turnover................................... 5.94% 81.70% 76.62%
</TABLE>

- -------------------------
* If certain expenses had not been assumed by the Adviser, total return would
have been lower and the ratios would have been as follows:

<TABLE>
<S> <C> <C> <C>
Ratio of expenses to average net assets
(annualized)....................................... 2.36% 2.36% 2.55%
Ratio of net investment income to average net assets
(annualized)....................................... 3.51% 3.09% 3.86%
</TABLE>

See Notes to Financial Statements

E-6
<PAGE> 69

VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND

FINANCIAL HIGHLIGHTS--CONTINUED

The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)

<TABLE>
<CAPTION>
CLASS C SHARES
--------------------------------
AUGUST 13, 1993
SIX MONTHS (COMMENCEMENT OF
ENDED DISTRIBUTION) TO
DECEMBER 31, JUNE 30,
1994 1994
------------ ----------------
<S> <C> <C>
Net asset value, beginning of period............................ $9.403 $9.790
------ ------
Net investment income........................................... .185 .366
Net realized and unrealized loss on investments................. (.208) (.387)
------ ------
Total from investment operations................................ (.023) (.021)
Less distributions from net investment income................... .197 .366
------ ------
Net asset value, end of period.................................. $9.183 $9.403
====== ======
Total return* (non-annualized).................................. (.25%) (.27%)
Net assets at end of period (in millions)....................... $3.9 $4.0
Ratio of expenses to average net assets* (annualized)........... 1.46% 1.31%
Ratio of net investment income to average net assets*
(annualized).................................................. 4.38% 4.05%
Portfolio turnover.............................................. 5.94% 81.70%
</TABLE>

- -------------------------
* If certain expenses had not been assumed by the Adviser, total return would
have been lower and the ratios would have been as follows:

<TABLE>
<S> <C> <C>
Ratio of expenses to average net assets (annualized)............ 2.37% 2.37%
Ratio of net investment income to average net assets
(annualized).................................................. 3.47% 2.98%
</TABLE>

See Notes to Financial Statements

E-7
<PAGE> 70
Van Kampen Merritt Adjustable Rate U.S. Government Fund

Notes to Financial Statements
December 31, 1994 (Unaudited)

1. Significant Accounting Policies
Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") was
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, as of May 28, 1992, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on August 28,
1992, with two classes of common shares, Class A and Class B shares. The Fund
commenced the distribution of Class C shares on August 13, 1993.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitment until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.

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. Organizational Expenses-The Fund has reimbursed
Van Kampen American Capital Distributors, Inc. or its affiliates ("VKAC") for
costs incurred in connection with the Fund's organization in the amount of
$40,000. These costs are being amortized on a straight line basis over the 60
month period ending August 28, 1997. Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") has agreed that in the event any of the initial
shares of the Fund originally purchased by VKAC are redeemed during the
amortization period, the Fund will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.

E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.

The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At June 30, 1994, the Fund had an accumulated capital loss carryforward
for tax purposes of $61,584. Of this amount, $12,348 and $49,236 will expire on
June 30, 2001, and 2002, respectively. Net realized gains or losses may differ
for financial and tax reporting purposes primarily as a result of post October
31 losses which are not recognized for tax purposes until the first day of the
following fiscal year.

F. 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.

2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide facilities and investment advice to the Fund for an annual fee payable
monthly as follows:

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- -----------------------------------
<S> <C>
First $500 million ... .600 of 1%
Next $500 million .... .550 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%
Over $9 billion....... .400 of 1%
</TABLE>

E-8
<PAGE> 71

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.

For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $16,100, representing VKAC's cost of providing accounting, legal,
portfolio pricing and certain shareholder services to the Fund.

Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC.

The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.

At December 31, 1994, VKAC owned 10,050, 103 and 100 shares of beneficial
interest of Classes A, B and C, respectively.

3. Capital Transactions
The Fund has outstanding three classes of capital stock, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized. At December 31, 1994, paid in surplus aggregated $6,997,376,
$24,312,356 and $4,163,383 for Classes A, B and C, respectively. For the six
months ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 77,270 $ 721,562
Class B....................... 353,120 3,297,140
Class C....................... 121,041 1,132,779
--------- ------------
Total Sales................... 551,431 $ 5,151,481
========= ============
Dividend Reinvestment:
Class A....................... 14,012 $ 130,363
Class B....................... 39,002 362,968
Class C....................... 7,010 65,234
--------- ------------
Total Dividend Reinvestment... 60,024 $ 558,565
========= ============
Repurchases:
Class A....................... (134,285) $ (1,249,138)
Class B....................... (836,917) (7,799,308)
Class C....................... (128,101) (1,196,607)
--------- ------------
Total Repurchases ............ (1,099,303) $(10,245,053)
========= ============

</TABLE>

At June 30, 1994, paid in surplus aggregated $7,394,589, $28,451,556 and
$4,161,977 for Classes A, B and C, respectively. For the period ended June 30,
1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ....................... 902,396 $ 8,731,126
Class B ....................... 2,364,040 22,736,081
Class C ....................... 464,005 4,492,934
--------- -------------
Total Sales ................... 3,730,441 $ 35,960,141
========= ============
Dividend Reinvestment:
Class A ....................... 26,263 $ 252,576
Class B ....................... 64,882 623,837
Class C ....................... 8,729 83,419
--------- -------------
Total Dividend Reinvestment ... 99,874 $ 959,832
========= ============
Repurchases:
Class A ....................... (656,490) $ (6,285,280)
Class B ....................... (926,283) (8,853,618)
Class C ....................... (43,644) (414,376)
--------- -------------
Total Repurchases.............. (1,626,417) $ (15,553,274)
========= ============
</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 for Class B and
Class C shares will be imposed on most redemptions made within three 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 Class 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
Sales Charge

Year of Redemption Class B Class C
- ------------------------------------------
<S> <C> <C>
First ................. 3.00% 1.00%
Second ................. 2.00% None
Third .................. 1.00% None
Fourth and Thereafter .. None None
</TABLE>

For the six months ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of $10 and CDSC
on the redeemed shares of Classes B and C of approximately $76,300. Sales
charges do not represent expenses of the Fund.

E-9
<PAGE> 72
Van Kampen Merritt Adjustable Rate U.S. Government Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended December 31, 1994, were $2,015,000
and $6,209,719, respectively.

5. Mortgage and Asset 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).
An Interest Only security is another class of MBS representing ownership in the
cash flows of the interest payments made from a specified pool of MBS. The cash
flow on this instrument decreases as the mortgage principal balance is repaid by
the borrower.
Asset Backed Securities are similar to MBS but made up of pools of
other assets, such as credit card receivables, which are grouped together for
investment purposes. Payments of principal and interest on these securities are
made from the cash flows from the group of assets.

6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.

Annual fees under the Plans of up to .30% for Class A shares and 1.00% each for
Class B and Class C shares are accrued daily. Included in these fees for the
six months ended December 31, 1994, are payments to VKAC of approximately
$111,600.

E-10

<PAGE> 73

PART C: OTHER INFORMATION

ITEM 15. INDEMNIFICATION

The AC Fund's trustees and officers are covered by an Errors and Omissions
Policy. The investment advisory agreement between the AC Fund and the AC Adviser
provides that, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of the obligations or duties under the
investment advisory agreement on the part of the AC Adviser. The AC Adviser
shall not be liable to the AC Fund or to any shareholder for any act or omission
in the course of or connected in any way with rendering services or for any
losses that may be sustained in the purchase, holding or sale of any security.
The distribution agreement provides that the AC Fund shall indemnify VKAC
Distributors and certain persons related thereto for any loss or liability
arising from any alleged misstatement of a material fact (or alleged omission to
state a material fact) contained in, among other things, registration statements
or prospectuses except to the extent the misstated fact or omission was made in
reliance upon information provided by or on behalf of VKAC Distributors.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to trustees,
directors, officers and controlling persons of the AC Fund, the AC Adviser and
VKAC Distributors pursuant to the foregoing provisions or otherwise, the AC Fund
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the AC Fund of expenses incurred or paid
by a trustee, director, officer, or controlling person of the AC Fund and the
principal underwriter in connection with the successful defense of any action,
suit or proceeding) is asserted against the AC Fund by such trustee, director,
officer or controlling person or VKAC Distributors in connection with the shares
being registered, the AC Fund will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

ITEM 16. EXHIBITS

(1) Agreement and Declaration of Trust -- AC Fund+

(2) Bylaws -- AC Fund+

(4) Form of Agreement and Plan of Reorganization*

(5) Specimen Share Certificate for Class A, B and C Shares of the AC
Fund+

(6) Form of Investment Advisory Agreement, as amended -- AC Fund+

(7) (a) Form of Underwriting Agreement+

(b) Form of Selling Agreement+

(9) (a) Form of Custodian Agreement -- AC Fund+

(b) Form of Transfer Agency Agreement -- AC Fund+

(10) (a) Form of Distribution Plan Pursuant to Rule 12b-1+
(i) Class A Plan of Distribution+
(ii) Class B Plan of Distribution+
(iii) Class C Plan of Distribution+

(b) Form of Servicing Agreement with Brokers+

(11) Form of Opinion of O'Melveny & Myers+

(12) Form of Opinion of Skadden, Arps, Slate, Meagher & Flom+

C-1
<PAGE> 74

(13) (a) Form of Support Service Agreement+

(b) Fund Pricing Agreement+

(14) (a) Consent of Price Waterhouse LLP*

(b) Consent of KPMG Peat Marwick LLP*

(16) Powers of Attorney*

(17) (a) Copy of 24f-2 Election of AC Fund+

(b) Form of proxy card*

(27) (a) Financial Data Schedule for AC Fund*

(b) Financial Data Schedule for VK Fund*
- ------------------------

* Filed herewith.

+ To be filed by pre-effective amendment.

C-2
<PAGE> 75

ITEM 17. UNDERTAKINGS.

(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.

(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.

C-3
<PAGE> 76

SIGNATURES

As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant in the City of Houston and State of
Texas, on the 23rd day of May, 1995.

AMERICAN CAPITAL FEDERAL
MORTGAGE TRUST

By /s/ NORI L. GABERT

------------------------------------
Nori L. Gabert
Secretary

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ FERNANDO SISTO Chairman of the Board
- -----------------------------------------------
Fernando Sisto

/s/ J. MILES BRANAGAN Director
- -----------------------------------------------
J. Miles Branagan

/s/ RICHARD E. CARUSO Director
- -----------------------------------------------
Richard E. Caruso

/s/ ROGER HILSMAN Director
- -----------------------------------------------
Roger Hilsman

/s/ DON G. POWELL President and Director
- -----------------------------------------------
Don G. Powell

/s/ DAVID REES Director
- -----------------------------------------------
David Rees

/s/ LAWRENCE J. SHEEHAN Director
- -----------------------------------------------
Lawrence J. Sheehan

/s/ WILLIAM S. WOODSIDE Director
- -----------------------------------------------
William S. Woodside

/s/ CURTIS W. MORELL Vice President and Treasurer
- -----------------------------------------------
Curtis W. Morell
</TABLE>

- -------------------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney, filed herewith.

/s/ RONALD A. NYBERG
- -----------------------------------------------
Ronald A. Nyberg
Attorney-in-fact

C-4
<PAGE> 77

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
FORM N-14

EXHIBIT INDEX

<TABLE>
<CAPTION>
PAGE
DESCRIPTION NUMBER
----------- ------
<S> <C> <C>
(1) Agreement and Declaration of Trust -- AC Fund+
(2) Bylaws -- AC Fund+
(4) Form of Agreement and Plan of Reorganization*
(5) Specimen Share Certificate for Class A, B and C Shares of the AC Fund+
(6) Form of Investment Advisory Agreement -- AC Fund+
(7) (a) Form of Underwriting Agreement+
(b) Form of Selling Agreement+
(c) Form of Selling Group Agreement+
(9) (a) Form of Custodian Agreement -- AC Fund+
(b) Form of Transfer Agency Agreement -- AC Fund+
(10) (a) Form of Distribution Plan Pursuant to Rule 12b-1
(i) Class A Plan of Distribution+
(ii) Class B Plan of Distribution+
(iii) Class C Plan of Distribution+
(b) Form of Servicing Agreement with Brokers+
(c) Form of Servicing Agreement with Financial Institutions+
(11) Form of Opinion of O'Melveny & Myers+
(12) Form of Opinion of Skadden, Arps, Slate, Meagher & Flom+
(13) (a) Form of Support Service Agreement+
(b) Form of Fund Pricing Agreement+
(c) Form of Accounting Service Agreement+
(14) (a) Consent of Price Waterhouse LLP*
(b) Consent of KPMG Peat Marwick LLP*
(16) Powers of Attorney*
(17) (a) Copy of 24f-2 Election of Registrant+
(b) Form of proxy card*
(27) (a) Financial Data Schedule for AC Fund*
(b) Financial Data Schedule for VK Fund*
</TABLE>

- ---------------
+ To be filed by amendment.
* Filed herewith.

<PAGE> 1
EXHIBIT 4

AGREEMENT AND PLAN OF REORGANIZATION

This Agreement and Plan of Reorganization (the "Agreement") is made as
of July ____, 1995, by and between the American Capital Federal Mortgage Trust,
a Delaware business trust formed under the laws of the State of Delaware (the
"AC Fund") and the Van Kampen Merritt Trust, a Delaware business trust created
under the laws of the State of Delaware (the "VKM Trust") on behalf of its
series, the Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "VKM
Fund").

W I T N E S S E T H:

WHEREAS, on December 20, 1994, (the "AC Acquisition Date") The Van
Kampen Merritt Companies, Inc. ("TVKMC") acquired all of the issued and
outstanding shares of American Capital Management & Research, Inc. ("American
Capital") and subsequently changed its name to Van Kampen American Capital,
Inc.;

WHEREAS, American Capital and TVKMC, through their affiliated
companies, sponsor and manage a number of registered investment companies; and

WHEREAS, Van Kampen American Capital Distributors, Inc., successor by
merger between Van Kampen Merritt Inc. and American Capital Marketing, Inc.,
acts as the sponsor and principal underwriter for both the AC Fund and the VKM
Fund;

WHEREAS, the VKM Trust was organized as a Massachusetts business
trust, and subsequently reorganized as a Delaware business trust, pursuant to
an Agreement and Declaration of Trust (the "Declaration of Trust") dated [July
____, 1995] pursuant to which it is authorized to issue an unlimited number of
shares of beneficial interest with par value of $0.01 per share, which at
present have been divided into different series, each series constituting a
separate and distinct sub-trust of the VKM Trust, including the VKM Fund;

WHEREAS, Van Kampen American Capital Investment Advisory Corp.
(formerly, Van Kampen Merritt Investment Advisory Corp.) ("Advisory Corp.")
provides investment advisory and administrative services to the VKM Fund;

WHEREAS, the AC Fund was organized as a Massachusetts business trust,
and subsequently reorganized as a Delaware business trust, pursuant to an
Agreement and Declaration of Trust dated [July ___, 1995], pursuant to which it
is authorized to issue an unlimited number of shares of beneficial interest
with par value of $0.01 per share;

WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly,
American Capital Asset Management, Inc.) ("VKAC Asset Management") provides
investment advisory and administrative services to the AC Fund;

WHEREAS, the Board of Trustees of the VKM Trust and the AC Fund have
determined that entering into this Agreement for the AC Fund to acquire the
assets and liabilities of the VKM Fund is in the best interests of the
shareholders of each respective fund; and

1
<PAGE> 2

WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code");

NOW, THEREFORE, in consideration of the mutual promises contained
herein, and intending to be legally bound hereby, the parties hereto agree as
follows:

1. PLAN OF TRANSACTION.

A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent
set forth in Sections 7 and 8 hereof, the VKM Trust will convey, transfer and
deliver to the AC Fund at the closing, provided for in Section 2 hereof, all of
the existing assets of the VKM Fund (including accrued interest to the Closing
Date) consisting of nondefaulted, liquid, primarily mortgage-related securities
issued or guaranteed by an agency or instrumentality of the U.S. Government,
due bills, cash and other marketable securities acceptable to the AC Fund as
more fully set forth on Schedule 1 hereto, and as amended from time to time
prior to the Closing Date (as defined below), free and clear of all liens,
encumbrances and claims whatsoever (the assets so transferred collectively
being referred to as the "Assets").

B. CONSIDERATION. In consideration thereof, the AC Fund agrees that
on the Closing Date the AC Fund will (i) deliver to the VKM Trust full and
fractional Class A, Class B and Class C Shares of beneficial interest of the AC
Fund having a net asset value per share calculated as provided in Section 3A
hereof, in an amount equal to the aggregate dollar value of the Assets net of
the Liabilities determined pursuant to Section 3A of this Agreement
(collectively, the "AC Fund Shares") and (ii) assume all of the VKM Fund's
liabilities described in Schedule 3E hereof (the "Liabilities"). All AC Fund
Shares delivered to the VKM Trust in exchange for such Assets shall be
delivered at net asset value without sales load, commission or other
transactional fee being imposed.

2. CLOSING OF THE TRANSACTION.

CLOSING DATE. The closing shall occur within fifteen (15) business
days after the later of receipt of all necessary regulatory approvals and the
final adjournment of the meeting of shareholders of the VKM Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the AC Fund shall deliver to the VKM Trust the AC Fund
Shares in proportion and amounts equal to the total net asset values
represented by the Class A, Class B and Class C Shares then outstanding in the
VKM Fund and the VKM Trust thereafter shall, in order to effect the
distribution of such shares to the VKM Fund stockholders, instruct the AC Fund
to register the pro rata interest in the AC Fund Shares (in full and fractional
shares) of each of the holders of record of shares of the VKM Fund in
accordance with their holdings of either Class A, Class B or Class C Shares and
shall provide as part of such instruction a complete and updated list of such
holders (including addresses and taxpayer identification numbers), and the AC
Fund agrees promptly to comply with said instruction. The AC Fund shall have
no obligation to inquire as to the validity, propriety or correctness of such
instruction, but shall assume that such instruction is valid, proper and
correct.

3. PROCEDURE FOR REORGANIZATION.

A. VALUATION. The value of the Assets and Liabilities of the VKM Fund
to be transferred and assumed, respectively, by the AC Fund shall be computed
as of the Closing Date, in the manner set forth in the most recent Prospectus
and Statement of Additional Information of the AC Fund (collectively, the "AC
Fund Prospectus"), copies of which have been delivered to the VKM Trust.

B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State
Street Bank and Trust Company, 225 Franklin Street, Post Office Box 1713,
Boston, Massachusetts 02105-1713, as custodian for the AC Fund (the
"Custodian") for the benefit of the AC Fund, duly endorsed in proper form for
transfer in such condition as to constitute a good delivery thereof, free and
clear of all liens, encumbrances and claims whatsoever, in accordance with the
custom of brokers, and shall be

2
<PAGE> 3

accompanied by all necessary state stock transfer stamps, the cost of which
shall be borne by the VKM Fund.

C. FAILURE TO DELIVER SECURITIES. If the VKM Trust is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the VKM
Fund's securities for the reason that any of such securities purchased by the
AC Fund have not yet been delivered to it by the VKM Fund's broker or brokers,
then, in lieu of such delivery, the VKM Trust shall deliver to the Custodian,
with respect to said securities, executed copies of an agreement of assignment
and due bills executed on behalf of said broker or brokers, together with such
other documents as may be required by the AC Fund or Custodian, including
brokers' confirmation slips.

D. SHAREHOLDER ACCOUNTS. The AC Fund, in order to assist the VKM
Trust in the distribution of the AC Fund Shares to VKM Fund shareholders after
delivery of the AC Fund Shares to the VKM Trust, will establish pursuant to the
request of the VKM Trust an open account with the AC Fund for each shareholder
of the VKM Fund and, upon request by the VKM Trust, shall transfer to such
account the exact number of full and fractional shares of the AC Fund then held
by the VKM Trust specified in the instruction provided pursuant to Section 2
hereof. The AC Fund is not required to issue certificates representing AC Fund
Shares unless requested to do so by a shareholder. Upon liquidation or
dissolution of the VKM Fund, certificates representing shares of stock of the
VKM Fund shall become null and void.

E. LIABILITIES. The Liabilities shall include all of VKM Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date
and whether or not specifically referred to in this Agreement.

F. EXPENSES. In the event that the transactions contemplated herein
are consummated the AC Fund agrees to pay (i) for the reasonable outside
expenses for the transactions contemplated herein; including, but not by way of
limitation, the preparation of the AC Fund's Registration Statement on Form
N-14 (the "Registration Statement") and the solicitation of VKM Fund
shareholder proxies; (ii) VKM Trust's counsel's reasonable attorney's fees,
which fees shall be payable pursuant to receipt of an itemized statement, and
(iii) the cost of rendering the tax opinion, more fully referenced in Section
7F below. In the event that the transactions contemplated herein are not
consummated for any reason, then all reasonable outside expenses incurred to
the date of termination of this Agreement shall be borne by VKAC Asset
Management.

G. DISSOLUTION. As soon as practicable after the Closing Date but in
no event later than one year after the Closing Date, the VKM Trust shall
voluntarily dissolve and completely liquidate the VKM Fund, by taking, in
accordance with the Delaware Business Trust Law and Federal securities laws,
all steps as shall be necessary and proper to effect a complete liquidation and
dissolution of the VKM Fund. Immediately after the Closing Date, the stock
transfer books relating to the VKM Fund shall be closed and no transfer of
shares shall thereafter be made on such books.

4. VKM TRUST'S REPRESENTATIONS AND WARRANTIES.

VKM Trust, on behalf of the VKM Fund, hereby represents and warrants
to the AC Fund and agrees with the AC Fund, which representations and
warranties are true and correct on the date hereof that:

A. ORGANIZATION. The VKM Trust is a Delaware Business Trust duly
formed and in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of Delaware. The VKM Fund is a
separate series of the VKM Trust duly designated in accordance with the
applicable provisions of the Declaration of Trust. The VKM Trust and the VKM
Fund are qualified to do business in all jurisdictions in which they are
required to be so qualified, except jurisdictions in which the failure to so
qualify would not have a material adverse effect on either the VKM Trust or VKM
Fund.

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<PAGE> 4

The VKM Trust has all material federal, state and local authorization necessary
to own on behalf of the VKM Fund all of the properties and assets allocated to
the VKM Fund and to carry on its business and the business of the VKM Fund as
now being conducted, except authorizations which the failure to so obtain would
not have a material adverse effect on the VKM Trust or the VKM Fund.

B. REGISTRATION. The VKM Fund is registered under the Investment
Company Act of 1940 (the "1940 Act") as an open-end, diversified management
company and such registration has not been revoked or rescinded. VKM Trust is
in compliance in all material respects with the 1940 Act and the rules and
regulations thereunder with respect to its activities and those undertaken on
behalf of the VKM Fund. All of the outstanding shares of beneficial interest
of the VKM Fund (subject to the matters set forth in the Opinion of Counsel
dated [ ], from Skadden, Arps, Slate, Meagher & Flom, to the VKM
Trust, a copy of which is contained in the VKM Trust's registration statement
on form N1-A, a copy of which opinion letter has been tendered to the AC Fund)
have been duly authorized and are validly issued, fully paid and non-assessable
and not subject to pre-emptive or dissenters' rights.

C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the VKM Fund audited as of and for the
year ended June 30, 1994, and, as soon as reasonably available, the same for
the year ended June 30, 1995, true and complete copies of which have been
heretofore or will be furnished to the AC Fund, fairly represent the financial
condition and the results of operations of the VKM Fund as of and for their
respective dates and periods in conformity with generally accepted accounting
principles applied on a consistent basis during the periods involved.

D. FINANCIAL STATEMENTS. The VKM Trust shall furnish to the AC Fund
(i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the VKM Fund for the period ended June 30, 1995; and (ii) within five (5)
business days after the Closing Date an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments and the results of the VKM Fund's
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and the results of its operations
and changes in financial position for the periods then ended; and such
financial statements shall be certified by the Treasurer of the VKM Trust as
complying with the requirements hereof.

E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will
be, no contingent liabilities of the VKM Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the VKM Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the VKM Trust or the VKM Fund which would, if adversely determined,
materially affect the VKM Fund's financial condition. All Liabilities were
incurred by the VKM Fund in the ordinary course of its business.

F. MATERIAL AGREEMENTS. The VKM Trust is in compliance as to the VKM
Fund with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting its operations or its assets; and except as
referred to in the VKM Fund's Prospectus and Statement of Additional
Information, there are no material agreements outstanding relating to the VKM
Fund to which the VKM Trust is a party.

G. STATEMENT OF EARNINGS. As promptly as practicable, but in any
case no later than 30 calendar days after the Closing Date, KPMG Peat Marwick
L.L.P., auditors for the VKM Trust, shall furnish the AC Fund with a statement
of the earnings and profits of the VKM Fund within the meaning of the Code as
of the Closing Date.

H. RESTRICTED SECURITIES. None of the securities comprising the
assets of the VKM Fund at the date hereof are, or on the Closing Date or any
subsequent delivery date will be, "restricted securities"

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<PAGE> 5

under the Securities Act of 1933, (the "Securities Act") or the rules and
regulations of the Securities and Exchange Commission (the "SEC") thereunder,
or will be securities for which market quotations are not readily available for
purposes of Section 2(a)(41) under the 1940 Act.

I. TAX RETURNS. At the date hereof and on the Closing Date, all
Federal and other tax returns and reports of the VKM Fund required by law to
have been filed by such dates shall have been filed, and all Federal and other
taxes shown thereon shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of VKM Trust's knowledge no
such return is currently under audit and no assessment has been asserted with
respect to any such return.

J. CORPORATE AUTHORITY. The VKM Trust has the necessary power under
its Declaration of Trust to enter into this Agreement and to consummate the
transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein
have been duly authorized by the VKM Trust's Board of Trustees, and except for
obtaining approval of the holders of the shares of beneficial interest of the
VKM Fund, no other corporate acts or proceedings by the VKM Trust or the VKM
Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by
VKM Trust and constitutes a legal, valid and binding obligation of VKM Trust
enforceable in accordance with its terms.

K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the VKM Trust does not and will not (i)
result in a material violation any provision of the Declaration of Trust of the
VKM Trust, as amended, or the Designation of Series, as amended, of the VKM
Fund, (ii) result in a material violation any statute, law, judgment, writ,
decree, order, regulation or rule of any court or governmental authority
applicable to VKM Trust, (iii) result in a material violation or breach of, or
constitute a default under any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument or obligation to which the VKM Trust
is subject, or (iv) result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the VKM Trust. Except as set forth
in Schedule 2 to this Agreement, (i) no consent, approval, authorization, order
or filing with or notice to any court or governmental authority or agency is
required for the consummation by the VKM Trust of the transactions contemplated
by this Agreement and (ii) no consent of or notice to any third party or entity
is required for the consummation by the VKM Trust of the transactions
contemplated by this Agreement.

L. ABSENCE OF CHANGES. From the date of this Agreement through the
Closing Date, there shall not have been:

(1) any change in the business, results of operations, assets,
or financial condition or the manner of conducting the business of the VKM
Fund, other than changes in the ordinary course of its business, or any pending
or threatened litigation, which has had or may have an adverse material effect
on such business, results of operations, assets or financial condition;

(2) issued any option to purchase or other right to acquire
shares of the VKM Fund granted by the VKM Trust to any person other than
subscriptions to purchase shares at net asset value in accordance with terms in
the prospectus for the VKM Fund;

(3) any entering into, amendment or termination of any
contract or agreement with respect to the VKM Fund by the VKM Trust, except as
otherwise contemplated by this Agreement;

(4) any indebtedness incurred, other than in the ordinary
course of business, by the VKM Fund for borrowed money or any commitment to
borrow money entered into by the VKM Fund or the VKM Trust on behalf of the VKM
Fund;

(5) any amendment of the Declaration of Trust of the VKM
Trust or of the Declaration of Sub-Trust of the VKM Fund; or

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<PAGE> 6

(6) any grant or imposition of any lien, claim, charge or
encumbrance (other than encumbrances arising in the ordinary course of business
with respect to covered options) upon any asset of the VKM Fund other than a
lien for taxes not yet due and payable.

M. TITLE. On the Closing Date, the VKM Fund will have good and
marketable title to the Assets, free and clear of all liens, mortgages,
pledges, encumbrances, charges, claims and equities whatsoever, other than a
lien for taxes not yet due and payable and full right, power and authority to
sell, assign, transfer and delivery such Assets; upon delivery of such Assets,
the AC Fund will receive good and marketable title to such Assets, free and
clear of all liens, mortgages, pledges, encumbrances, charges, claims and
equities other than a lien for taxes not yet due and payable.

N. PROXY STATEMENT. The VKM Trust's Proxy Statement, at the time of
delivery by the VKM Trust to its shareholders in connection with a special
meeting of shareholders to approve this transaction, and the VKM Trust's
Prospectus and Statement of Additional Information with respect to the VKM Fund
on the forms incorporated by reference into such Proxy Statement and as of
their respective dates (collectively, the "VKM Trust's Proxy
Statement/Prospectus"), and at the time the Registration Statement becomes
effective, the Registration Statement insofar as it relates to the VKM Trust
and the VKM Fund and each of them at all times subsequent thereto and including
the Closing Date, as amended or as supplemented if it shall have been amended
or supplemented, conform and will conform, in all material respects, to the
applicable requirements of the applicable Federal and state securities laws and
the rules and regulations of the SEC thereunder, and do not and will not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
except that no representations or warranties in this Section 4N apply to
statements or omissions made in reliance upon and in conformity with written
information concerning the AC Fund or their affiliates furnished to VKM Trust
by the AC Fund.

O. BROKERS. There are no brokers or finders fees payable by VKM Trust
or VKM Fund in connection with the transactions provided for herein.

P. TAX QUALIFICATION. The VKM Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of
its taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.

Q. FAIR MARKET VALUE. The fair market value on a going concern basis
of the Assets will equal or exceed the Liabilities to be assumed by the AC Fund
and those to which the Assets are subject.

5. THE AC FUND'S REPRESENTATIONS AND WARRANTIES.

The AC Fund, hereby represents and warrants to the VKM Trust and
agrees with the VKM Trust, which representations and warranties are true and
correct on the date hereof that:

A. ORGANIZATION. The AC Fund is a Delaware Business Trust duly
formed, and in good standing under the laws of the State of Delaware and is
duly authorized to transact business in the State of Delaware. The AC Fund is
qualified to do business in all jurisdictions in which it is required to be so
qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on the AC Fund. The AC Fund has all material
federal, state and local authorization necessary to own all of its properties
and assets and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have
a material adverse effect on the AC Fund.

B. REGISTRATION. The AC Fund is registered under the 1940 Act as an
open-end, non-diversified management company and; such registration has not
been revoked or rescinded. The AC Fund is in compliance in all material
respects with the 1940 Act and the rules and regulations thereunder. All of
the outstanding shares of beneficial interest of the AC Fund have been duly

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<PAGE> 7

authorized and are validly issued, fully paid and non-assessable and not
subject to pre-emptive dissenters rights.

C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the AC Fund audited as of and for the
year ended December 31, 1994, true and complete copies of which have been
heretofore furnished to the VKM Trust fairly represent the financial condition
and the results of operations of the AC Fund as of and for their respective
dates and periods in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved.

D. FINANCIAL STATEMENTS. The AC Fund shall furnish to the VKM Trust
(i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the AC Fund for the period ended July 31, 1995, and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments of the AC Fund and the results of its
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a
consistent basis during the period involved and fairly present the financial
position of the AC Fund as at the dates thereof and the results of its
operations and changes in financial position for the periods then ended; and
such financial statements shall be certified by the Treasurer of the AC Fund as
complying with the requirements hereof.

E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
AC Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D and there are no legal, administrative, or other proceedings
pending or, to its knowledge, threatened against the AC Fund which would, if
adversely determined, materially affect the AC Fund's financial condition.

F. MATERIAL AGREEMENTS. The AC Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in the
AC Fund's Prospectus and Statement of Additional Information, there are no
material agreements outstanding to which the AC Fund is a party.

G. TAX RETURNS. At the date hereof and on the Closing Date, all
Federal and other tax returns and reports of the AC Fund required by laws to
have been filed by such dates shall have been filed, and all Federal and other
taxes shall have been paid so far as due, or provision shall have been made for
the payment thereof, and to the best of the AC Fund's knowledge no such return
is currently under audit and no assessment has been asserted with respect to
any such return.

H. CORPORATE AUTHORITY. The AC Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein.
The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein have been duly authorized by the AC
Fund's Board of Trustees, no other corporate acts or proceedings by the AC Fund
are necessary to authorize this Agreement and the transactions contemplated
herein. This Agreement has been duly executed and delivered by the AC Fund and
constitutes a valid and binding obligation of the AC Fund enforceable in
accordance with its terms.

I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the AC Fund does not and will not (i) violate
any provision of the Declaration of Trust of the AC Fund, or any amendment
thereto, (ii) violate any statute, law, judgment, writ, decree, order,
regulation or rule of any court or governmental authority applicable to the AC
Fund or (iii) result in a violation or breach of, or constitute a default
under, or result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the AC Fund pursuant to any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
or obligation to which the AC Fund is subject. Except as set forth in Schedule
6 to this Agreement, (i) no consent, approval, authorization,

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<PAGE> 8

order of filing with notice to any court or governmental authority or agency is
required for the consummation by the AC Fund of the transactions contemplated
by this Agreement and (ii) no consent of or notice to any third party or entity
is required for the consummation by the AC Fund of the transactions
contemplated by this Agreement.

J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or
other proceedings pending or, to its knowledge, threatened against the AC Fund
which would materially affect its financial condition.

K. SHARES OF THE AC FUND: REGISTRATION. The AC Fund Shares to be
issued pursuant to Section 1 hereof will be duly registered under the
Securities Act and all applicable state securities laws.

L. SHARES OF THE AC FUND: AUTHORIZATION. The shares of beneficial
interest of the AC Fund to be issued pursuant to Section 1 hereof have been
duly authorized and, when issued in accordance with this Agreement, will be
validly issued and fully paid and non-assessable by the AC Fund and conform in
all material respects to the description thereof contained in the AC Fund's
Prospectus furnished to the VKM Trust.

M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the
AC Fund, other than changes in the ordinary course of its business, which has
had an adverse material effect on such business, results of operations, assets
or financial condition.

N. REGISTRATION STATEMENT. The Registration Statement and the
Prospectus contained therein filed on Form N-14, the ("Registration
Statement"), as of the effective date of the Registration Statement, and at all
times subsequent thereto and including the Closing Date, as amended or as
supplemented if they shall have been amended or supplemented, will conform, in
all material respects, to the applicable requirements of the applicable Federal
securities laws and the rules and regulations of the SEC thereunder, and will
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representations or warranties in this Section apply
to statements or omissions made in reliance upon and in conformity with
written information concerning the VKM Trust or the VKM Fund furnished to the
AC Fund by the VKM Trust.

O. TAX QUALIFICATION. The AC Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of
its taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years. For purposes of this
Section, any reference to the AC Fund shall include its predecessors, a
Massachusetts business trust organized and designated on August 9, 1985, and
subsequently reorganized by merger with and into the AC Fund.

6. COVENANTS.

During the period from the date of this Agreement and continuing until the
Closing Date the VKM Trust and AC Fund each agrees that (except as expressly
contemplated or permitted by this Agreement):

A. OTHER ACTIONS. The VKM Fund shall operate only in the ordinary
course of business consistent with prior practice. No party shall take any
action that would, or reasonably would be expected to, result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect.

B. GOVERNMENT FILINGS; CONSENTS. The VKM Trust and the AC Fund shall
file all reports required to be filed by the VKM Trust and the AC Fund with the
SEC between the date of this Agreement the Closing Date and shall deliver to
the other party copies of all such reports promptly after the same are filed.
Except where prohibited by applicable statutes and regulations, each party
shall promptly provide the other (or its counsel) with copies of all other
filings made by such party with any state, local

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<PAGE> 9

or federal government agency or entity in connection with this Agreement or the
transactions contemplated hereby. Each of the VKM Trust and the AC Fund shall
use all reasonable efforts to obtain all consents, approvals, and
authorizations required in connection with the consummation of the transactions
contemplated by this Agreement and to make all necessary filings with the
Secretary of State of the State of Delaware.

C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY
STATEMENT/PROSPECTUS. In connection with the Registration Statement and the
VKM Fund's Proxy Statement/Prospectus, each party hereto will cooperate with
the other and furnish to the other the information relating to the VKM Trust,
VKM Fund or the AC Fund, as the case may be, required by the Securities Act or
the Exchange Act and the rules and regulations thereunder, as the case may be,
to be set forth in the Registration Statement or the Proxy
Statement/Prospectus, as the case may be. The VKM Trust shall promptly prepare
and file with the SEC the Proxy Statement/Prospectus and the AC Fund shall
promptly prepare and file with the SEC the Registration Statement, in which the
Proxy Statement/Prospectus will be included as a prospectus. In connection
with the Registration Statement, insofar as it relates to the VKM Trust and its
affiliated persons, the AC Fund shall only include such information as is
approved by the VKM Trust for use in the Registration Statement. The AC Fund
shall not amend or supplement any such information regarding the VKM Trust and
such affiliates without the prior written consent of the VKM Trust which
consent shall not be unreasonably withheld. The AC Fund shall promptly notify
and provide the VKM Trust with copies of all amendments or supplements filed
with respect to the Registration Statement. The AC Fund shall use all
reasonable efforts to have the Registration Statement declared effective under
the Securities Act as promptly as practicable after such filing. The AC Fund
shall also take any action (other than qualifying to do business in any
jurisdiction in which it is now not so qualified) required to be taken under
any applicable state securities laws in connection with the issuance of the AC
Fund's shares of beneficial interest in the transactions contemplated by this
Agreement, and the AC Fund shall furnish all information concerning the VKM
Fund and the holders of the AC Fund's shares of beneficial interest as may be
reasonably requested in connection with any such action.

D. ACCESS TO INFORMATION. During the period prior to the Closing
Date, the VKM Trust shall make available to the AC Fund a copy of each report,
schedule, registration statement and other document (the "Documents") filed or
received by it during such period pursuant to the requirements of Federal or
state securities laws or Federal or state banking laws (other than Documents
which such party is not permitted to disclose under applicable law or which are
not relevant to the VKM Fund). During the period prior to the Closing Date,
the AC Fund shall make available to the VKM Fund each Document pertaining to
the transactions contemplated hereby filed or received by it during such period
pursuant to Federal or state securities laws or Federal or state banking laws
(other than Documents which such party is not permitted to disclose under
applicable law).

E. SHAREHOLDERS MEETING. The VKM Trust shall call a meeting of the
VKM Fund shareholders to be held as promptly as practicable for the purpose of
voting upon the approval of this Agreement and the transactions contemplated
herein, and shall furnish a copy of the Proxy Statement/Prospectus and form of
proxy to each shareholder of the VKM Fund as of the record date for such
meeting of shareholders. The VKM Trust's Board of Trustees shall recommend to
the VKM Fund shareholders approval of this Agreement and the transactions
contemplated herein, subject to fiduciary obligations under applicable law.

F. COORDINATION OF PORTFOLIOS. The VKM Trust and AC Fund covenant and
agree to coordinate the respective portfolios of the VKM Fund and AC Fund from
the date of the Agreement up to and including the Closing Date in order that at
Closing, when the Assets are added to the AC Fund's portfolio, the resulting
portfolio will meet the AC Fund's investment objective, policies and
restrictions, as set forth in the AC Fund's prospectus and Statement of
Additional Information, copies of which have been delivered to VKM Trust.

G. DISTRIBUTION OF THE SHARES. At Closing the VKM Trust covenants
that it shall cause to be distributed the AC Fund Shares in the proper pro rata
amount for the benefit of the VKM Fund's

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<PAGE> 10

shareholders and such that neither the VKM Trust nor the VKM Fund shall
continue to hold amounts of said shares so as to cause a violation of Section
12(d)(1) of the Investment Company Act. The VKM Trust covenants further that,
pursuant to Section 3G, it shall liquidate and dissolve the VKM Fund as
promptly as practicable after the Closing Date. The VKM Trust covenants to use
all reasonable efforts to cooperate with the AC Fund and the AC Fund's transfer
agent in the distribution of said shares.

H. BROKERS OR FINDERS. Except as disclosed in writing to the other
party prior to the date hereof, each of the VKM Trust and the AC Fund
represents that no agent, broker, investment banker, financial advisor or other
firm or person is or will be entitled to any broker's or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and each party shall hold the other harmless
from and against any all claims, liabilities or obligations with respect to any
such fees, commissions or expenses asserted by any person to be due or payable
in connection with any of the transactions contemplated by this Agreement on
the basis of any act or statement alleged to have been made by such first party
or its affiliate.

I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date
any further action is necessary or desirable in order to carry out the purposes
of this Agreement (including, without limitation, the execution of any
documents, agreements or certificates or any other additional actions
reasonably requested with respect to the non-assumption of the liabilities and
obligations of the VKM Fund by the AC Fund), the proper officers and trustees
of each party to this Agreement shall take all such necessary action.

J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the VKM Trust and the AC Fund will consult with
each other before issuing any press releases or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
herein and shall not issue any press release or make any public statement prior
to such consultation, except as may be required by law or the rules of any
national securities exchange on which such party's securities are traded.

K. TAX STATUS OF REORGANIZATION. The intention of the parties is that
the transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the VKM Trust, the VKM Fund nor the AC Fund shall
take any action, or cause any action to be taken (including, without
limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to
the Closing Date, the VKM Trust, the VKM Fund and the AC Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
Skadden, Arps, Slate, Meagher & Flom, counsel to the AC Fund, to render the tax
opinion required herein.

L. DECLARATION OF DIVIDEND. At or immediately prior to the
Closing Date, the VKM Fund shall declare and pay to its stockholders a dividend
or other distribution in an amount large enough so that it will have
distributed in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.

7. CONDITIONS TO OBLIGATIONS OF THE VKM TRUST

The obligations of the VKM Trust hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the VKM Trust, of the following conditions:

A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the shares of beneficial interest of the VKM Fund
present in person or by proxy at a meeting of said shareholders in which a
quorum is constituted.

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<PAGE> 11

B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the AC Fund contained herein shall be true in
all material respects as of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition, results
of operations, business properties or assets of the AC Fund and the VKM Trust
shall have received a certificate of the President or Vice President of the AC
Fund satisfactory in form and substance to the VKM Trust so stating. The AC
Fund shall have performed and complied in all material respects with all
agreements, obligations and covenants required by this Agreement to be so
performed or complied with by it on or prior to the Closing Date.

C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.

D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.

E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the transactions contemplated by
this Agreement shall be in effect, nor shall any proceeding by any state, local
or federal government agency or entity asking any of the foregoing be pending.
There shall not have been any action taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the consummation of the
transactions contemplated by this Agreement illegal or which has a material
adverse affect on the business operations of the AC Fund.

F. TAX OPINION. The VKM Trust shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust, dated as of
the Closing Date, addressed to the VKM Trust, that the consummation of the
transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Internal Revenue Code of
1986, as amended, substantially in the form attached as Annex A.

G. OPINION OF COUNSEL. The VKM Trust shall have received the opinion
of O'Melveny & Myers, counsel for AC Fund, dated as of the Closing Date,
addressed to the VKM Trust and VKM Fund, substantially in the form attached as
Annex B to the effect that: (i) the AC Fund is duly formed and in good
standing as a trust under the laws of the State of Delaware; (ii) the AC Fund
is registered as an open-end, diversified management company under the
Securities Act of 1933 and the 1940 Act; (iii) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized and approved by all requisite action of the AC Fund and
this Agreement has been duly executed and delivered by the AC Fund and
(assuming the Agreement is a valid and binding obligation of the other parties
thereto) is a valid and binding obligation of the AC Fund; (iv) neither the
execution or delivery by the AC Fund of this Agreement nor the consummation by
the AC Fund of the transactions contemplated thereby contravene the AC Fund's
Declaration of Trust or, to the best of their knowledge, violate any provision
of any statute, or any published regulation or any judgment or order disclosed
to us by the AC Fund as being applicable to the AC Fund; (v) to the best of
their knowledge based solely on the certificate of an appropriate officer of
the AC Fund attached hereto, there is no pending, or threatened litigation
which would have the effect of prohibiting any material business practice or
the acquisition of any material property or the conduct of any material
business of the AC Fund or might have a material adverse effect on the value of
any assets of the AC Fund; (vi) the AC Fund's Shares have been duly authorized
and upon issuance thereof in accordance with this Agreement will be validly
issued, fully paid and non-assessable; (vii) except as to financial statements
and schedules and other financial and statistical data included or incorporated
by reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions thereof
pertaining to the AC Fund comply as to form in all material respects with their
requirements of the Securities Act, the Securities Exchange Act and the 1940
Act and the rules and regulations of the Commission thereunder and no

11
<PAGE> 12

facts have come to counsel's attention which cause them to believe that as of
the effectiveness of the portions of the Registration Statement applicable to
the AC Fund, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (viii)
to the best of their knowledge and information and subject to the
qualifications set forth below, the execution and delivery by the AC Fund of
the Agreement and the consummation of the transactions therein contemplated do
not require, under the laws of the States of Texas or Delaware, or the federal
laws of the United States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or governmental agency or
body (except such as have been obtained under the Securities Act, the 1940 Act
or the rules and regulations thereunder.) Counsel need express no opinion,
however, as to any such consent, approval, authorization, registration,
qualification, order or filing (a) which may be required as a result of the
involvement of other parties to the Agreement in the transactions contemplated
by the Agreement because of their legal or regulatory status or because of any
other facts specifically pertaining to them; (b) the absence of which does not
deprive the VKM Trust or VKM Fund of any material benefit under such
agreements; of (c) which can be readily obtained without significant delay or
expense to the VKM Trust or VKM Fund, without loss to the VKM Trust or VKM Fund
of any material benefit under the Agreement and without any material adverse
effect on them during the period such consent, approval authorization,
registration, qualification or order was obtained. The foregoing opinion
relates only to consents, approvals, authorizations, registrations,
qualifications, orders or fillings under (a) laws which are specifically
referred to in this opinion, (b) laws of the States of Texas and Delaware and
the United States of America which, in our experience, are normally applicable
to transactions of the type provided for in the Agreement and (c) court orders
and judgments disclosed to us by the AC Fund in connection with the opinion.
In addition, although counsel need not specifically considered the possible
applicability to the AC Fund of any other laws, orders or judgments, nothing
has come to their attention in connection with our representations of the AC
Fund in this transaction that has caused them to conclude that any other
consent, approval, authorization, registration, qualification, order or filing
is required.

H. OFFICER CERTIFICATES. The VKM Trust shall have received a
certificate of an authorized officer of the AC Fund, dated as of the Closing
Date, certifying that the representations and warranties set forth in Section 5
are true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees shall be furnished to the VKM
Trust.

8. CONDITIONS TO OBLIGATIONS OF THE AC FUND

The obligations of the AC Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the AC Fund of the following conditions:

B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the VKM Trust contained herein shall be true
in all material respects of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition, results
of operations, business, properties or assets of the VKM Fund since June 30,
1994 and the AC Fund shall have received a certificate of the Chairman or
President of VKM Trust satisfactory in form and substance to the AC Fund so
stating. The VKM Trust and the VKM Fund shall have performed and complied in
all material respects with all agreements, obligations and covenants required
by this Agreement to be so performed or complied with by them on or prior to
the Closing Date.

C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.

12
<PAGE> 13

D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.

E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity seeking any of the foregoing be pending. There
shall not be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the consummation of the
transactions contemplated by this Agreement illegal.

F. TAX OPINION. The AC Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust, dated as of
the Closing Date, addressed to the AC Fund, that the consummation of the
transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Internal Revenue Code of
1986 substantially in the form attached as Annex A.

G. OPINION OF COUNSEL. The AC Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust, dated as of
the Closing Date, addressed to the AC Fund substantially in the form attached
hereto as Annex C to the effect that: (i) the VKM Trust is duly formed and in
good standing as a business trust under the laws of the State of Delaware; (ii)
the Board of Trustees of the VKM Trust has duly designated the VKM Fund as a
series of the VKM Trust pursuant to the terms of the Declaration of Trust of
the VKM Trust; (iii) the VKM Fund is registered as an open-end, diversified
management company under the Securities Act of 1933 and the 1940 Act; (iv) this
Agreement and the reorganization provided for herein and the execution of this
Agreement have been duly authorized and approved by all requisite action of VKM
Trust and this Agreement has been duly executed and delivered by the VKM Trust
and (assuming the Agreement is a valid and binding obligation of the other
parties thereto) is a valid and binding obligation of the VKM Trust; (v)
neither the execution or delivery by the VKM Trust of this Agreement nor the
consummation by the VKM Trust or VKM Fund of the transactions contemplated
thereby contravene the VKM Trust's Declaration of Trust, or, to the best of
their knowledge, violate any provision of any statute or any published
regulation or any judgment or order disclosed to us by the VKM Trust as being
applicable to the VKM Trust or the VKM Fund; (vi) to the best of their
knowledge based solely on the certificate of an appropriate officer of the VKM
Trust attached hereto, there is no pending or threatened litigation which would
have the effect of prohibiting any material business practice or the
acquisition of any material property or the conduct of any material business of
the VKM Fund or might have a material adverse effect on the value of any assets
of the VKM Fund; (vii) except as to financial statements and schedules and
other financial and statistical data included or incorporated by reference
therein and subject to usual and customary qualifications with respect to Rule
10b-5 type opinions, as of the effective date of the Registration Statement
filed pursuant to the Agreement, the portions thereof pertaining to VKM Trust
and the VKM Fund comply as to form in all material respects with the
requirements of the Securities Act, the Securities Exchange Act and the 1940
Act and the rules and regulations of the Commission thereunder and no facts
have come to counsel's attention which would cause them to believe that as of
the effectiveness of the portions of the Registration Statement applicable to
VKM Trust and VKM Fund, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading;
and (viii) to the best of their knowledge and information and subject to the
qualifications set forth below, the execution and delivery by the VKM Trust of
the Agreement and the consummation of the transactions therein contemplated do
not require, under the laws of the States of Delaware or Illinois or the
federal laws of the United States, the consent, approval, authorization,
registration, qualification or order of, or filing with, any court or
governmental agency or body (except such as have been obtained under the
Securities Act, the 1940 Act or the rules and regulations thereunder.) Counsel
need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing (a) which may be
required as a result of the involvement of other parties to the Agreement in
the transactions contemplated by the Agreement because of their legal or
regulatory status or because of any other facts specifically pertaining to
them; (b) the absence of which does not deprive the AC Fund of any material
benefit under the Agreement; or (c) which can be readily obtained without
significant delay or expense to the AC Fund, without loss to the

13
<PAGE> 14

AC Fund of any material benefit under the Agreement and without any material
adverse effect on you during the period such consent, approval, authorization,
registration, qualification or order was obtained. The foregoing opinion
relates only to consents, approvals, authorizations, registrations,
qualifications, orders or filings under (a) laws which are specifically
referred to in this opinion, (b) laws of the States of Delaware and Illinois
and the United States of America which, in our experience, are normally
applicable to transactions of the type provided for in the Agreement and (c)
court orders and judgments disclosed to us by the VKM Trust in connection with
this opinion. In addition, although counsel need not specifically considered
the possible applicability to the VKM Trust of any other laws, orders or
judgments, nothing has come to their attention in connection with our
representation of the VKM Trust in this transaction that has caused them to
conclude that any other consent, approval, authorization, registration,
qualification, order or filing is required.

H. VKM TRUST'S LIABILITIES. Except as otherwise provided for herein,
the VKM Trust shall use reasonable efforts, consistent with its ordinary
operating procedures, to have repaid in full any indebtedness for borrowed
money for the account of the VKM Fund and have discharged or reserved for all
of the VKM Fund's known debts, liabilities and obligations including expenses,
costs and charges whether absolute or contingent, accrued or unaccrued.

I. THE ASSETS. The Assets, as set forth in Schedule 1, as amended,
shall consist solely of nondefaulted, liquid, primarily mortgage-related
securities issued or guaranteed by an agency or instrumentality of the U.S.
Government, cash and other marketable securities which are in conformity with
the VKM Fund's investment objective, policy and restrictions as set forth in
the AC Fund's prospectus and statement of additional information, copies of
which have been delivered to the VKM Trust.

J. SHAREHOLDER LIST. The VKM Trust shall have delivered to the AC
Fund an updated list of all shareholders of the VKM Fund, as reported by VKM
Trust's transfer agent, as of one (1) business day prior to the Closing Date
with each shareholder's respective holdings in the VKM Fund, taxpayer
identification numbers, Form W-9 and last known address.

K. OFFICER CERTIFICATES. The AC Fund shall have received a
certificate of an authorized officer of VKM Trust, dated as of the Closing
Date, certifying that the representations and warranties set forth in Section 4
are true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees and shareholders shall be
furnished to the VKM Trust.

9. AMENDMENT, WAIVER AND TERMINATION.

(A) The parties hereto may, by agreement in writing
authorized by their respective Boards of Trustees or Directors, as the case may
be, amend this Agreement at any time before or after approval thereof by the
shareholders of the VKM Fund; provided, however, that (i) after such VKM Fund
shareholder approval, no amendment shall be made by the parties hereto which
substantially changes the terms of Sections 1, 2 and 3 hereof without obtaining
VKM Fund's shareholder approval thereof.

(B) At any time prior to the Closing Date, either of the
parties may by written instrument signed by it (i) waive any inaccuracies in
the representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any waiver on the part of any party of any such right, power or
privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.

(C) This Agreement may be terminated, and the transactions
contemplated herein may be abandoned at any time prior to the Closing Date:

14
<PAGE> 15

(i) by the mutual consents of the Board of Trustees
of the VKM Trust and the AC Fund;

(ii) by the VKM Trust, if the AC Fund breaches in
any material respect any of its representations, warranties, covenants or
agreements contained in this Agreement; or

(iii) by the AC Fund, if the VKM Trust breaches in
any material respect any of its representations, warranties, covenants or
agreements contained in this Agreement; or

(iv) by either the VKM Trust or the AC Fund, if the
Closing has not occurred on or prior to September 30, 1995 (provided that the
rights to terminate this Agreement pursuant to this subsection (C) (iv) shall
not be available to any party whose failure to fulfill any of its obligations
under this Agreement has been the cause of or resulted in the failure of the
Closing to occur on or before such date); or

(v) by the AC Fund in the event that: (a) all
the conditions precedent to the VKM Trust's obligation to close, as set forth
in Section 7 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the AC Fund gives the VKM Trust written
assurance of its intent to close irrespective of the satisfaction or
non-satisfaction of all conditions precedent to the AC Fund's obligation to
close, as set forth in Section 8 of this Agreement; and (c) the VKM Trust then
fails or refuses to close within the earlier of five (5) business days or
September 30, 1995; or

(vi) by the VKM Trust in the event that: (a) all the
conditions precedent to the AC Fund's obligation to close, as set forth in
Section 8 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the VKM Trust gives the AC Fund written
assurance of its intent to close irrespective of the satisfaction or
non-satisfaction of all the conditions precedent to the VKM Trust's obligation
to close, as set forth in Section 7 of this Agreement; and (c) the AC Fund then
fails or refuses to close within the earlier of five (5) business days or
September 30, 1995.

10. REMEDIES

In the event of termination of this Agreement by either or both of the VKM
Trust and AC Fund pursuant to Section 9(C), written notice thereof shall
forthwith be given by the terminating party to the other party hereto, and this
Agreement shall therefore terminate and become void and have no effect, and the
transactions contemplated herein and thereby shall be abandoned, without
further action by the parties hereto.

11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.

(A) SURVIVAL. The representations and warranties included or
provided for herein, or in the Schedules or other instruments delivered or to
be delivered pursuant hereto, shall survive the Closing Date for a three year
period except that any representation or warranty with respect to taxes shall
survive for the expiration of the statutory period of limitations for
assessments of tax deficiencies as the same may be extended from time to time
by the taxpayer. The covenants and agreements included or provided for herein
shall survive and be continuing obligations in accordance with their terms.
The period for which a representation, warranty, covenant or agreement survives
shall be referred to hereinafter as the "Survival Period." Notwithstanding
anything set forth in the immediately preceding sentence, the VKM Trust's and
the AC Fund's right to seek indemnity pursuant to this Agreement shall survive
for a period of ninety (90) days beyond the expiration of the Survival Period
of the representation, warranty, covenant or agreement upon which indemnity is
sought. In no event shall the VKM Trust or the AC Fund be obligated to
indemnify the other if indemnity is not sought within ninety (90) days of the
expiration of the applicable Survival Period.

15
<PAGE> 16

(B) INDEMNIFICATION. The VKM Trust shall indemnify and defend the AC
Fund, their officers, trustees, agents and persons controlled by or controlling
any of them and hold them harmless, from and against any and all losses,
damages, liabilities, claims, demands, judgments, settlements, deficiencies,
taxes, assessments, charges, costs and expenses of any nature whatsoever
(including reasonable attorneys' fees) including amounts paid in satisfaction
of judgments, in compromise or as fines and penalties, and counsel fees
reasonably incurred by such indemnitee in connection with the defense or
disposition of any claim, action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in which
such indemnitee may be or may have been involved as a party or otherwise or
with which such indemnitee may be or may have been threatened, (collectively,
the "Losses") resulting from or arising out of any of the following:

(i) all debts, liabilities and obligations of the VKM Trust
of any nature, whether accrued, absolute, contingent or otherwise, including
liabilities or obligations relating to the Assets (whether or not disclosed to
the AC Fund and whether or not known by the VKM Trust); and
(ii) taxes of any kind in respect of the VKM Fund whether
imposed on the VKM Fund or on any shareholder of the VKM Fund.

(C) REPRESENTATIONS AND WARRANTIES. In addition to the indemnities
provided in Section 11(B) above, each party (an "Indemnitor") shall indemnify
and hold the other and its officers, directors, agents and persons controlled
by or controlling any of them (each an "Indemnified Party") harmless from and
against any Losses arising out of or related to any claim of a breach of any
representation, warranty or covenant made herein by the Indemnitor; provided,
however, that no Indemnified Party shall be indemnified hereunder against any
Losses arising directly from such Indemnified Party's (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties
involved in the conduct of such Indemnified Party's position.

(D) INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its
best efforts to minimize any liabilities, damages, deficiencies, claims,
judgments, assessments, costs and expenses in respect of which indemnity may be
sought hereunder. The Indemnified Party shall given written notice to
Indemnitor within the earlier of ten (10) days of receipt of written notice to
Indemnitor or thirty (30) days from discovery by Indemnified Party of any
matters which may give rise to a claim for indemnification or reimbursement
under this Agreement. The failure to give such notice shall not affect the
right of Indemnified Party to indemnity hereunder unless such failure has
materially and adversely affected the rights of the Indemnitor; provided that
in any event such notice shall have been given prior to the expiration of the
Survival Period. At any time after ten (10) days from the giving of such
notice, Indemnified Party may, at its option, resist, settle or otherwise
compromise, or pay such claim unless it shall have received notice from
Indemnitor that Indemnitor intends, at Indemnitor's sole cost and expense, to
assume the defense of any such matter, in which case Indemnified Party shall
have the right, at no cost or expense to Indemnitor, to participate in such
defense. If Indemnitor does not assume the defense of such matter, and in any
event until Indemnitor states in writing that it will assume the defense,
Indemnitor shall pay all costs of Indemnified Party arising out of the defense
until the defense is assumed; provided, however, that Indemnified Party shall
consult with Indemnitor and obtain Indemnitor's consent to any payment or
settlement of any such claim. Indemnitor shall keep Indemnified Party fully
apprised at all times as to the status of the defense. If Indemnitor does not
assume the defense, Indemnified Party shall keep Indemnitor apprised at all
times as to the status of the defense. Following indemnification as provided
for hereunder, Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations relating to the
matter for which indemnification has been made.

12. SURVIVAL

The provisions set forth in Sections 10, 11 and 16 hereof shall
survive the termination of this Agreement for any cause whatsoever.

16
<PAGE> 17

13. NOTICES.

All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the VKM Trust shall be addressed to
the VKM Trust c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel
or at such other address and to the attention of such other person as the VKM
Trust may designate by written notice to the AC Fund. Notice to AC Fund shall
be addressed to the AC Fund c/o Van Kampen American Capital Asset Management,
Inc., 2800 Post Oak Boulevard, Houston, Texas 77056, Attention: General
Counsel, with a copy to George M. Bartlett, O'Melveny & Myers, 400 South Hope
Street, Los Angeles, California 900710-2899, or at such other address as AC
Fund may designate by written notice to the VKM Trust. Any notice shall be
deemed to have been served or given as of the date such notice is delivered
personally or mailed.

14. SUCCESSORS AND ASSIGNS.

This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other parties.

15. BOOKS AND RECORDS.

The VKM Trust and the AC Fund agree that copies of the books and
records of the VKM Fund relating to the Assets including, but not limited to
all files, records, written materials; e.g., closing transcripts, surveillance
files and credit reports shall be delivered by the VKM Trust to the AC Fund at
the Closing Date. In addition to, and without limiting the foregoing, the VKM
Trust and the AC Fund agree to take such action as my be necessary in order
that the AC Fund shall have reasonable access to such other books and records
as may be reasonably requested, all for three years after the Closing Date for
the three tax years ending December 31, 1992, December 31, 1993 and December
31, 1994 namely, general ledger, journal entries, voucher registers;
distribution journal; payroll register; monthly balance owing report; income
tax returns; tax depreciation schedules; and investment tax credit basis
schedules.

16. GENERAL.

This Agreement supersedes all prior agreements between the parties
(written or oral), is intended as a complete and exclusive statement of the
terms of the Agreement between the parties and may not be amended, modified or
changed or terminated orally. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been executed by the
VKM Trust and the AC Fund and delivered to each of the parties hereto. The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. This
Agreement is for the sole benefit of the parties thereto, and nothing in this
Agreement, expressed or implied, is intended to confer upon any other person
any rights or remedies under or by reason of this Agreement. This Agreement
shall be governed by and construed in accordance with the laws of the State of
Illinois without regard to principles of conflicts or choice of law.

17
<PAGE> 18

17. LIMITATION OF LIABILITY.

Copies of the Declarations of Trust of the VKM Trust and the AC Fund
are on file with the Secretary of State of the State of Delaware, and notice,
is hereby given and the parties hereto acknowledge and agree that this
instrument is executed on behalf of the Trustees of the VKM Trust and the AC
Fund, respectively, as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or shareholders of
the VKM Trust or the AC Fund individually but binding only upon the assets and
property of this VKM Trust or the AC Fund as the case may be.

IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be executed and delivered by their duly authorized officers as of the day and
year first written above.

AMERICAN CAPITAL FEDERAL MORTGAGE TRUST, a
Delaware business trust

By:__________________________________

Title:_______________________________

Attest:_______________________

Title:________________________

VAN KAMPEN MERRITT TRUST, a Delaware
business trust

By:__________________________________

Title:_______________________________

Attest:_______________________

Title:________________________

18
<PAGE> 19
SCHEDULE 1 [LIST OF MARKETABLE SECURITIES] [AS AMENDED AT CLOSING]
<PAGE> 20
SCHEDULE 2 [VKM TRUST CONSENTS]
<PAGE> 21
ANNEX A [TAX FREE OPINION: SKADDEN, ARPS, SLATE, MEAGHER & FLOM]
<PAGE> 22

ANNEX B [OPINION OF COUNSEL - O'MELVENY & MYERS FOR THE AC FUND]
<PAGE> 23

ANNEX C [OPINION OF COUNSEL - SKADDEN, ARPS, SLATE, MEAGHER & FLOM FOR
THE VKM TRUST]

<PAGE> 1

EXHIBIT 14(a)

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of the registration statement on Form N-14 (the "Registration
Statement") of our report dated February 16, 1995, relating to the financial
statements and financial highlights of American Capital Federal Mortgage Trust,
which appears in such Statement of Additional Information.

Price Waterhouse LLP

PRICE WATERHOUSE LLP

Houston, Texas
May 30, 1995

<PAGE> 1
EXHIBIT 14(b)

CONSENT OF INDEPENDENT AUDITORS

The Board of Trustees and Shareholders
Van Kampen Merritt Adjustable Rate U.S. Government Fund:

We consent to the use of our report included herein.

KPMG Peat Marwick LLP

Chicago, Illinois
May 30, 1995

<PAGE> 1

EXHIBIT 16

POWER OF ATTORNEY

The undersigned, being officers and trustees of American Capital Federal
Mortgage Trust, a Massachusetts business trust (the "Trust"), do hereby, in the
capacities shown below, individually appoint Ronald A. Nyberg of Oakbrook
Terrace, Illinois, as the agent and attorney-in-fact with full power of
substitution and resubstitution, for each of the undersigned, to execute and
deliver, for and on behalf of the undersigned, the Registration Statement on
Form N-14 ("Registration Statement") to be filed with the Securities and
Exchange Commission on or about May 24, 1995, pursuant to the provisions of the
Securities Act of 1933, and any and all amendments to the Registration Statement
which may be filed by the Trust with the Securities and Exchange Commission.

This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute one
instrument.

Dated: May 19, 1995

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------------- -------
<S> <C> <C>
/s/ FERNANDO SISTO Trustee 5/22/95
- ---------------------------------------------
Fernando Sisto

/s/ DON G. POWELL President (Chief Executive Officer) 5/22/95
- --------------------------------------------- and Trustee
Don G. Powell

/s/ J. MILES BRANAGAN Trustee 5/22/95
- ---------------------------------------------
J. Miles Branagan

/s/ RICHARD E. CARUSO Trustee 5/22/95
- ---------------------------------------------
Richard E. Caruso

/s/ ROGER HILSMAN Trustee 5/22/95
- ---------------------------------------------
Roger Hilsman

/s/ DAVID REES Trustee 5/22/95
- ---------------------------------------------
David Rees

/s/ LAWRENCE J. SHEEHAN Trustee 5/22/95
- ---------------------------------------------
Lawrence J. Sheehan

/s/ WILLIAM S. WOODSIDE Trustee 5/22/95
- ---------------------------------------------
William S. Woodside

/s/ CURTIS W. MORELL Vice President and Treasurer 5/22/95
- --------------------------------------------- (Chief Financial and Accounting
Curtis W. Morell Officer)
</TABLE>

<PAGE> 1

EXHIBIT 17(B)

PROXY

VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND

SPECIAL MEETING OF SHAREHOLDERS

[ ], 1995

THIS PROXY IS BEING SOLICITED ON BEHALF OF THE VAN KAMPEN AMERICAN CAPITAL
ADJUSTABLE RATE U.S. GOVERNMENT FUND, A SERIES OF THE VAN KAMPEN AMERICAN
CAPITAL TRUST.

The undersigned holder of shares of beneficial interest of the Van Kampen
American Capital Adjustable Rate U.S. Government Fund (the "VK Fund"), a series
of the Van Kampen American Capital Trust, hereby appoint [Dennis J. McDonnell]
and [Ronald A. Nyberg], and each of them, with full power of substitution and
revocation, as proxies to represent the undersigned at the Special Meeting of
Shareholders to be held at the [Transco Tower Auditorium, Level 2, 2800 Post Oak
Boulevard, Houston, Texas 77056] on [day], September 8, 1995 at [TIME]], and any
and all adjournments thereof (the "Special Meeting"), and thereat to vote all
shares of beneficial interest which the undersigned would be entitled to vote,
with all powers the undersigned would possess if personally present, in
accordance with the following instructions:

<TABLE>
<S> <C> <C>
1. FOR AGAINST ABSTAIN
------ ------ ------ The proposal to approve the Reorganization pursuant to
which the VK Fund would transfer substantially all of its
------ ------ ------ assets to the Van Kampen American Capital Federal
Mortgage Trust ("AC Fund") in exchange for shares of the
AC Fund which shares would be distributed to each
shareholder of the VK Fund and the VK Fund would be
dissolved, as more fully described in the Proxy
Statement/ Prospectus.
2. FOR AGAINST ABSTAIN
------ ------ ------ To act upon any and all other business which may come
before the Special Meeting or any adjournment thereof.
------ ------ ------
</TABLE>

If more than one of the proxies, or their substitutes, are present at the
Special Meeting or any adjournment thereof, they jointly (or, if only one
is present and voting then that one) shall have authority and may exercise
all powers granted hereby. This Proxy, when properly executed, will be
voted in accordance with the instructions marked hereon by the undersigned.
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE
PROPOSALS DESCRIBED ABOVE AND IN THE DISCRETION OF THE PROXIES UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.

Account No. No. of Shares Class of Shares Proxy No.

The undersigned hereby acknowledges receipt of the accompanying Notice of
Special Meeting and Proxy Statement for the Special Meeting to be held on
[ ], 1995.

Dated
------------------------ , 1995

- ------------------------------------------------

- ------------------------------------------------
Signature(s)

Please sign exactly as your name or names appear on this Proxy. When signing as
attorney, trustee, executor, administrator, custodian, guardian or corporate
officer, please give full title. If shares are held jointly, each holder should
sign.

<ARTICLE> 6
<CIK> 0000783743
<NAME> AC FMT - A
<SERIES>
<NUMBER> 1
<NAME> CLASS A SHARES
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 73544
<INVESTMENTS-AT-VALUE> 72638
<RECEIVABLES> 453
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 73100
<PAYABLE-FOR-SECURITIES> 7026
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 641
<TOTAL-LIABILITIES> 7667
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 82620
<SHARES-COMMON-STOCK> 3466
<SHARES-COMMON-PRIOR> 5178
<ACCUMULATED-NII-CURRENT> 50
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (16373)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (919)
<NET-ASSETS> 65433
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4961
<OTHER-INCOME> 0
<EXPENSES-NET> 1192
<NET-INVESTMENT-INCOME> 3769
<REALIZED-GAINS-CURRENT> (2512)
<APPREC-INCREASE-CURRENT> (1405)
<NET-CHANGE-FROM-OPS> (148)
<EQUALIZATION> (170)
<DISTRIBUTIONS-OF-INCOME> 2394
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1589
<NUMBER-OF-SHARES-REDEEMED> 3432
<SHARES-REINVESTED> 130
<NET-CHANGE-IN-ASSETS> (32860)
<ACCUMULATED-NII-PRIOR> (136)
<ACCUMULATED-GAINS-PRIOR> (14110)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 608
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1663
<AVERAGE-NET-ASSETS> 54300
<PER-SHARE-NAV-BEGIN> 12.42
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> (0.482)
<PER-SHARE-DIVIDEND> 0.538
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.90
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000783743
<NAME> AC FMT - B
<SERIES>
<NUMBER> 2
<NAME> CLASS B SHARES
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1542
<SHARES-COMMON-PRIOR> 2167
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 807
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 340
<NUMBER-OF-SHARES-REDEEMED> 1011
<SHARES-REINVESTED> 45
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 22200
<PER-SHARE-NAV-BEGIN> 12.43
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> (0.498)
<PER-SHARE-DIVIDEND> 0.442
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.91
<EXPENSE-RATIO> 1.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<CIK> 0000783743
<NAME> AC FMT - C
<SERIES>
<NUMBER> 3
<NAME> CLASS C SHARES
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 491
<SHARES-COMMON-PRIOR> 568
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 276
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 470
<NUMBER-OF-SHARES-REDEEMED> 557
<SHARES-REINVESTED> 10
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 7600
<PER-SHARE-NAV-BEGIN> 12.41
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> (0.518)
<PER-SHARE-DIVIDEND> 0.442
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.90
<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> ADJUSTABLE RATE U.S. GOVERNMENT FUND

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 31,905,802<F1>
<INVESTMENTS-AT-VALUE> 33,195,172<F1>
<RECEIVABLES> 397,630<F1>
<ASSETS-OTHER> 21,245<F1>
<OTHER-ITEMS-ASSETS> 940<F1>
<TOTAL-ASSETS> 33,614,987<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 246,277<F1>
<TOTAL-LIABILITIES> 246,277<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 6,997,376
<SHARES-COMMON-STOCK> 710,220
<SHARES-COMMON-PRIOR> 753,223
<ACCUMULATED-NII-CURRENT> 29,815<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (715,827)<F1>
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,418,393)<F1>
<NET-ASSETS> 6,522,682
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,068,395<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 238,427<F1>
<NET-INVESTMENT-INCOME> 829,968<F1>
<REALIZED-GAINS-CURRENT> (321,195)<F1>
<APPREC-INCREASE-CURRENT> (538,840)<F1>
<NET-CHANGE-FROM-OPS> (30,067)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (174,010)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 77,270
<NUMBER-OF-SHARES-REDEEMED> (134,285)
<SHARES-REINVESTED> 14,012
<NET-CHANGE-IN-ASSETS> (556,817)
<ACCUMULATED-NII-PRIOR> 1,893<F1>
<ACCUMULATED-GAINS-PRIOR> (394,632)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 110,360<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 403,967<F1>
<AVERAGE-NET-ASSETS> 6,921,814
<PER-SHARE-NAV-BEGIN> 9.399
<PER-SHARE-NII> .241
<PER-SHARE-GAIN-APPREC> (.223)
<PER-SHARE-DIVIDEND> (.233)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.184
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> ADJUSTABLE RATE U.S. GOVERNMENT FUND

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 31,905,802<F1>
<INVESTMENTS-AT-VALUE> 33,195,172<F1>
<RECEIVABLES> 397,630
<ASSETS-OTHER> 21,245<F1>
<OTHER-ITEMS-ASSETS> 940<F1>
<TOTAL-ASSETS> 33,614,987<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 246,277<F1>
<TOTAL-LIABILITIES> 246,277<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 24,312,356
<SHARES-COMMON-STOCK> 2,492,656
<SHARES-COMMON-PRIOR> 2,937,451
<ACCUMULATED-NII-CURRENT> 29,815<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (715,827)<F1>
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,418,393)<F1>
<NET-ASSETS> 22,906,032
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,068,395<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 238,427<F1>
<NET-INVESTMENT-INCOME> 829,968<F1>
<REALIZED-GAINS-CURRENT> (321,195)<F1>
<APPREC-INCREASE-CURRENT> (538,840)<F1>
<NET-CHANGE-FROM-OPS> (30,067)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (541,377)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 353,120
<NUMBER-OF-SHARES-REDEEMED> (836,917)
<SHARES-REINVESTED> 39,002
<NET-CHANGE-IN-ASSETS> (4,715,706)
<ACCUMULATED-NII-PRIOR> 1,893<F1>
<ACCUMULATED-GAINS-PRIOR> (394,632)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 110,360<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 403,967<F1>
<AVERAGE-NET-ASSETS> 25,443,963<F1>
<PER-SHARE-NAV-BEGIN> 9.403
<PER-SHARE-NII> .209
<PER-SHARE-GAIN-APPREC> (.226)
<PER-SHARE-DIVIDEND> (.197)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.189
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 033
<NAME> ADJUSTABLE RATE U.S. GOVERNMENT FUND

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 31,905,802<F1>
<INVESTMENTS-AT-VALUE> 33,195,172<F1>
<RECEIVABLES> 397,630<F1>
<ASSETS-OTHER> 21,245<F1>
<OTHER-ITEMS-ASSETS> 940<F1>
<TOTAL-ASSETS> 33,614,987<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 246,277<F1>
<TOTAL-LIABILITIES> 246,277<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 4,163,383
<SHARES-COMMON-STOCK> 429,040
<SHARES-COMMON-PRIOR> 429,090
<ACCUMULATED-NII-CURRENT> 29,815<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (715,827)<F1>
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,418,393)<F1>
<NET-ASSETS> 3,939,996
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,068,395<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 238,427<F1>
<NET-INVESTMENT-INCOME> 829,968<F1>
<REALIZED-GAINS-CURRENT> (321,195)<F1>
<APPREC-INCREASE-CURRENT> (538,840)<F1>
<NET-CHANGE-FROM-OPS> (30,067)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (86,659)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 121,041
<NUMBER-OF-SHARES-REDEEMED> (128,101)
<SHARES-REINVESTED> 7,010
<NET-CHANGE-IN-ASSETS> (94,597)
<ACCUMULATED-NII-PRIOR> 1,893<F1>
<ACCUMULATED-GAINS-PRIOR> (394,632)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 110,360<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 403,967<F1>
<AVERAGE-NET-ASSETS> 4,035,008
<PER-SHARE-NAV-BEGIN> 9.403
<PER-SHARE-NII> .185
<PER-SHARE-GAIN-APPREC> (.208)
<PER-SHARE-DIVIDEND> (.197)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.183
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>