<PAGE> 1
- September 1996 -
IMPORTANT NOTICE
TO VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND SHAREHOLDERS
QUESTIONS
& ANSWERS
Although we recommend that you read the complete Prospectus/Proxy Statement,
for your convenience, we have provided a brief overview of the issues to be
voted on.
Q Why is a shareholder meeting being held?
A You are being asked to vote on a reorganization (the "Reorganization")
of Van Kampen American Capital Texas Tax Free Income Fund (the "Texas Fund")
into Van Kampen American Capital Municipal Income Fund (the "Municipal Fund"),
a fund that pursues a similar investment objective. In the event the
Reorganization is not approved, you are being asked in a second proposal to
approve a new investment advisory agreement for the Texas Fund.
Q How will the Reorganization affect me?
A Assuming shareholders of the Texas Fund approve the Reorganization, the
assets and liabilities of the Texas Fund will be combined with those of the
Municipal Fund, and you will become a shareholder of the Municipal Fund. You
will receive shares of the Municipal Fund approximately equal in value at the
time of issuance to your shares of the Texas Fund. Holders of Class A shares of
the Texas Fund will receive Class A shares of the Municipal Fund; holders of
Class B shares of the Texas Fund will receive Class B shares of the Municipal
Fund; and holders of Class C shares of the Texas Fund will receive Class C
shares of the Municipal Fund.
Q Why is the Reorganization being recommended?
A The purpose of the proposed Reorganization is to permit the
shareholders of the Texas Fund to (i) enjoy the lower operating expenses
enjoyed by shareholders of the Municipal Fund as a result of the Municipal
Fund's larger net asset size and the economies of scale associated with the
Reorganization, (ii) eliminate the duplication of services and expenses that
currently exists as a result of the separate operations of the funds and (iii)
obtain greater portfolio diversity and potentially lower portfolio transaction
costs.
Q Who advises the Municipal Fund and provides other services?
A Van Kampen American Capital Investment Advisory Corp. (the "Municipal
Adviser") provides advisory services to the Municipal Fund under an arrangement
that is substantially similar to that currently in effect between the
<PAGE> 2
Texas Fund and Van Kampen American Capital Asset Management, Inc. (the "Texas
Adviser"). The contractual advisory fees payable by the Municipal Fund are less
than the contractual advisory fees applicable to the Texas Fund.
Both the Municipal Adviser and the Texas Adviser are wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"). Van Kampen American
Capital Distributors, Inc. serves as distributor of shares of both the
Municipal Fund and the Texas Fund. In addition, State Street Bank & Trust
Company serves as the custodian of both the Municipal Fund and the Texas Fund.
ACCESS Investor Services, Inc. serves as the transfer agent for both the
Municipal Fund and the Texas Fund.
Q How do advisory and other operating fees paid by the Municipal Fund
compare to those payable by the Texas Fund?
A Management of the funds anticipates that, as a result of the
Reorganization, shareholders of the Texas Fund would be subject to lower
investment advisory fees and lower total operating expenses as a percentage
of net assets.
Q Will I have to pay any sales load, commission or other transaction fee
in connection with the Reorganization?
A You will pay no sales loads or commissions in connection with the
Reorganization. As more fully discussed in the combined Prospectus/Proxy
Statement, the holding period with respect to the contingent deferred sales
charge applicable to Class B shares or Class C shares of the Municipal Fund
acquired in the Reorganization will be measured from the earlier of the time
(i) the holder purchased such Class B shares or Class C shares from the Texas
Fund or (ii) the holder purchased Class B shares or Class C shares of any other
Van Kampen American Capital open-end fund and subsequently exchanged them for
shares of the Texas Fund.
Shareholders of the Texas Fund are the primary beneficiaries of the
Reorganization. Accordingly, if the Reorganization is completed, the Texas Fund
will bear the costs associated with the Reorganization. If the Reorganization
is not completed, VKAC will bear the costs associated with the Reorganization.
See "SUMMARY -- The Reorganization" in the Prospectus/Proxy Statement.
Q What will I have to do to open an account in the Municipal Fund? What
happens to my account if the Reorganization is approved?
A If the Reorganization is approved, your interest in shares of the Texas
Fund automatically will be converted into shares of the Municipal Fund, and we
will send you written confirmation that this change has taken place. You will
receive the same class of shares of the Municipal Fund approximately equal in
value to your class of shares of the Texas Fund. No certificates for Municipal
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 of the Texas
<PAGE> 3
Fund, it is not necessary to return such certificates.
Q Will I have to pay any federal taxes as a result of the Reorganization?
A The Reorganization is intended to qualify as a "reorganization" within
the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986. If the
Reorganization so qualifies, in general, a shareholder of the Texas Fund will
recognize no gain or loss upon the receipt solely of the shares of the
Municipal Fund in connection with the Reorganization. Additionally, the Texas
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 Municipal
Fund or as a result of its liquidation.
Q What if I redeem or exchange my shares of the Texas Fund before the
Reorganization takes place?
A If you choose to redeem or exchange your shares of the Texas Fund
before the Reorganization takes place, the redemption or exchange will be
treated as a normal redemption or exchange of shares and generally 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.
Q What if the Reorganization is not consummated?
A In addition to the proposal seeking Reorganization of the Texas Fund,
the Prospectus/Proxy Statement contains a proposal seeking approval of a new
investment advisory agreement for the Texas Fund in the event the
Reorganization is not consummated.
VK/AC Holding, Inc., the indirect corporate parent of the Municipal Adviser and
Texas Adviser, has entered into a merger agreement with Morgan Stanley Group
Inc. ("Morgan Stanley") and certain of Morgan Stanley's affiliates. Pursuant to
the merger agreement, the advisers will become indirect subsidiaries of Morgan
Stanley. In the event the Reorganization is not consummated, the Texas Fund's
shareholders need to consider a new investment advisory agreement to take
effect following the merger as required by the federal securities laws. If the
Reorganization is not consummated and the new advisory agreement is approved,
the Texas Adviser would continue to provide the Texas Fund with investment
advisory and management services following the merger. The new investment
advisory agreement will be substantially identical to the current investment
advisory agreement, except for the dates of execution, effectiveness and
termination. The Texas Adviser will bear the costs associated with approval of
the new advisory agreement including the costs associated with the new advisory
agreement proposal at the shareholder meeting.
Q Where do I call for further information?
A Please call Investor Services at 1-800-421-5666 (TDD users call
1-800-772-8889) weekdays from 7:00 a.m. to 7:00 p.m. Central time.
<PAGE> 4
ABOUT THE PROXY CARD
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
APPROVAL OF REORGANIZATION -- mark "For," "Against" or "Abstain"
APPROVAL OF NEW ADVISORY AGREEMENT -- mark "For," "Against" or "Abstain"
OTHER BUSINESS -- mark "For," "Against" or "Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
PROXY
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
SPECIAL MEETING OF SHAREHOLDERS
SAMPLE
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
1. The proposal to approve the Agreement FOR [ ] AGAINST [ ] ABSTAIN [ ]
and Plan of Reorganization XXXXXXXX.
2. The proposal to approve a new FOR [ ] AGAINST [ ] ABSTAIN [ ]
investment advisory agreement XXXXXXX
XXXXXXX.
3. To act upon any and all other business
XXXXXXXX.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<PAGE> 5
DEAR VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND SHAREHOLDER:
Enclosed is a proxy asking you to vote on the reorganization of your Texas
Fund into the Van Kampen American Capital Municipal Income Fund, a mutual fund
that pursues a similar investment objective. Upon shareholder approval, you
would become a shareholder of the Municipal Fund.
The enclosed Prospectus/Proxy Statement contains information you will need to
make an informed decision. For your convenience, we also have provided a brief
question and answer section, which we hope you will find useful as you review
your materials before voting. For more detailed information about the
reorganization, please refer to the Prospectus/Proxy Statement.
In the event the reorganization is not approved, you are being asked in a
second proposal to approve a new advisory agreement as more fully explained in
the Prospectus/Proxy Statement.
The proposals have been approved by the Trustees of the Texas Fund, who
recommend you vote "FOR" each proposal. Please give this matter your prompt
attention. We will need to receive your proxy card before the shareholder
meeting scheduled for October 15, 1996. YOUR IMMEDIATE RESPONSE WILL HELP SAVE
ON THE COSTS OF ADDITIONAL SOLICITATIONS. We look forward to your participation,
and we thank you for your continued confidence in Van Kampen American Capital.
PLEASE SIGN AND RETURN YOUR PROXY CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
Sincerely,
Dennis J. McDonnell
President
<PAGE> 6
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
NOTICE OF SPECIAL MEETING
OCTOBER 15, 1996
A Special Meeting of shareholders of Van Kampen American Capital Texas Tax
Free Income Fund (the "Texas Fund") will be held at the offices of Van Kampen
American Capital, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on
October 15, 1996 at 2:00 p.m. (the "Special Meeting"), for the following
purposes:
(1) To approve an Agreement and Plan of Reorganization pursuant to which the
Texas Fund would (i) transfer all of its assets to the Van Kampen American
Capital Municipal Income Fund (the "Municipal Fund") in exchange solely for
Class A, B and C shares of beneficial interest of the Municipal Fund and the
Municipal Fund's assumption of the liabilities of the Texas Fund, (ii)
distribute such shares of the Municipal Fund to the holders of shares of the
Texas Fund and (iii) be dissolved.
(2) In the event the proposed reorganization is not consummated, to approve
a new investment advisory agreement for the Texas Fund.
(3) To transact such other business as may properly come before the Special
Meeting.
Shareholders of record as of the close of business on July 19, 1996 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
Ronald A. Nyberg
Secretary
September 12, 1996
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 7
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
This Prospectus/Proxy Statement is being furnished to shareholders of the Van
Kampen American Capital Texas Tax Free Income Fund (the "Texas Fund") and
relates to the special meeting of shareholders of the Texas Fund to be held at
the offices of Van Kampen American Capital, Inc., One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 on October 15, 1996 at 2:00 p.m. and at any and all
adjournments thereof (the "Special Meeting"). Shareholders of record as of the
close of business on July 19, 1996 are entitled to vote at the Special Meeting
or any adjournment thereof. The primary purpose of the Special Meeting is to
approve or disapprove the proposed reorganization of the Texas Fund (the
"Reorganization") into the Van Kampen American Capital Municipal Income Fund
(the "Municipal Fund"). The Reorganization would result in shareholders of the
Texas Fund in effect exchanging their Class A, B and C shares of the Texas Fund
for corresponding Class A, B and C shares of the Municipal Fund. The purpose of
the Reorganization is to permit the shareholders of the Texas Fund to (i) enjoy
the lower operating expenses enjoyed by shareholders of the Municipal Fund as a
result of the Municipal Fund's larger net asset size and the economies of scale
associated therewith, (ii) eliminate the duplication of services and expenses
that currently exists as a result of the separate operations of the funds and
(iii) obtain greater portfolio diversity and potentially lower portfolio
transaction costs. A secondary purpose of the Special Meeting is to approve or
disapprove a new investment advisory agreement for the Texas Fund which will
take effect only in the event the Reorganization is not consummated.
The Municipal Fund is an open-end, diversified management investment company
organized as a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust (the "Tax Free Trust"). The investment objective of the
Municipal Fund is to provide investors with a high level of current income
exempt from federal income tax consistent with preservation of capital, which is
similar to that of the Texas Fund. There can be no assurance that the Municipal
Fund will achieve its investment objective. The address, principal executive
office and telephone number of both the Municipal Fund and the Texas Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, (630) 684-6000 or (800)
421-5666. The enclosed proxy and this Prospectus/Proxy Statement are first being
sent to Texas Fund shareholders on or about September 13, 1996.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS/ PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<PAGE> 8
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the Texas Fund should know before voting on the Reorganization
(in effect, investing in Class A, B or C shares of the Municipal Fund) and
constitutes an offering of Class A, B and C shares of beneficial interest, par
value $.01 per share, of the Municipal Fund only. Please read it carefully and
retain it for future reference. A Statement of Additional Information dated
September 12, 1996, relating to this Prospectus/Proxy Statement (the
"Reorganization SAI") has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated herein by reference. A Prospectus (the
"Municipal Fund Prospectus") and Statement of Additional Information containing
additional information about the Municipal Fund, each dated April 29, 1996, have
been filed with the SEC and are incorporated herein by reference. A copy of the
Municipal Fund Prospectus accompanies this Prospectus/Proxy Statement. A
Prospectus (the "Texas Fund Prospectus") and Statement of Additional Information
containing additional information about the Texas Fund, each dated January 30,
1996, have been filed with the SEC and are incorporated herein by reference.
Copies of the foregoing may be obtained without charge by calling or writing the
Texas Fund at the telephone number or address shown above. If you wish to
request the Reorganization SAI, please ask for the "Reorganization SAI." IN
ADDITION, EACH OF THE MUNICIPAL FUND AND THE TEXAS FUND WILL FURNISH, WITHOUT
CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT AND THE MOST RECENT SEMI-ANNUAL
REPORT SUCCEEDING THE ANNUAL REPORT TO A SHAREHOLDER UPON REQUEST. IF APPROVED
BY SHAREHOLDERS AT THE SPECIAL MEETING, IT IS CURRENTLY ANTICIPATED THAT THE
REORGANIZATION WILL BE COMPLETED BEFORE THE ANNUAL REPORT FOR THE TEXAS FUND'S
FISCAL YEAR ENDED SEPTEMBER 30, 1996 IS PREPARED AND AVAILABLE FOR DISTRIBUTION.
IN ORDER TO SAVE PRINTING AND POSTAGE EXPENSES, IN THE EVENT THE REORGANIZATION
IS COMPLETED BEFORE THE TEXAS FUND'S NEXT ANNUAL REPORT IS AVAILABLE, SUCH
REPORT WILL ONLY BE DISTRIBUTED TO A SHAREHOLDER UPON REQUEST. ANY SUCH REQUEST
SHOULD BE DIRECTED TO THE VAN KAMPEN AMERICAN CAPITAL FUNDS BY CALLING (800)
421-5666 OR BY WRITING THE RESPECTIVE FUND AT ONE PARKVIEW PLAZA, OAKBROOK
TERRACE, ILLINOIS 60181.
---------------------
No person has been authorized to give any information or make any
representation not contained in this Prospectus/Proxy Statement and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Prospectus/Proxy Statement 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 Tax Free Trust on behalf of the Municipal Fund and the Texas Fund are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and the Investment Company Act of 1940, as amended (the "1940
Act"), and in accordance therewith file reports and other information with the
SEC. Such reports, other information and proxy statements filed by the Tax Free
Trust on behalf of the Municipal Fund and the Texas 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. In addition,
the SEC maintains a Web site (http://www.sec.gov) that contains reports, other
information and proxy statements filed by the Tax Free Trust on behalf of the
Municipal Fund and the Texas Fund, each of which files such information
electronically with the SEC through the SEC's Electronic Data Gathering,
Analysis and Retrieval system (EDGAR).
The date of this Prospectus/Proxy Statement is September 12, 1996.
2
<PAGE> 9
- ------------------------------------------------------------------------------
PROPOSAL 1: APPROVAL OF PROPOSED REORGANIZATION
- ------------------------------------------------------------------------------
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/Proxy Statement and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Prospectus/Proxy Statement, the Board of
Trustees of the Texas Fund (the "Texas Board") believes the proposed
Reorganization (as defined herein) is in the best interests of shareholders of
the Texas Fund. As a result of the Reorganization, shareholders of the Texas
Fund would acquire an interest in a more broadly diversified portfolio of
tax-exempt municipal securities and would be subject to lower contractual
investment advisory fees and lower total operating expenses as a percentage of
net assets.
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with (i) the Texas Fund Prospectus incorporated herein by reference and
(ii) the Municipal Fund Prospectus incorporated herein by reference and
accompanying this Prospectus/Proxy Statement. This Prospectus/Proxy Statement
constitutes an offering of Class A, B and C shares of the Municipal Fund only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the
Texas Fund in connection with the proposed combination of the Texas Fund with
and into the Municipal Fund pursuant to the terms and conditions of the
Agreement and Plan of Reorganization between the Texas Fund and the Tax Free
Trust, on behalf of the Municipal Fund (the "Agreement"). The Agreement provides
that the Texas Fund would (i) transfer all of its assets to the Municipal Fund
in exchange solely for Class A, B and C shares of the Municipal Fund and the
Municipal Fund's assumption of the liabilities of the Texas Fund, (ii) dissolve
pursuant to a plan of liquidation and dissolution to be adopted by the Texas
Board promptly following the Closing (as defined herein) and (iii) as part of
such dissolution, distribute to each shareholder of the Texas Fund shares of the
respective class of shares of the Municipal Fund approximately equal in value to
their existing shares of the Texas Fund (collectively, the "Reorganization").
The Texas Board has unanimously determined that the Reorganization is in the
best interests of shareholders of each class of shares of the Texas Fund and
that the interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the Municipal Fund (the
"Municipal Board"), has unanimously determined that the Reorganization is in the
best interests of the Municipal Fund and that the interests of each class of
shares of existing
3
<PAGE> 10
shareholders of the Municipal Fund will not be diluted as a result of the
Reorganization. The Texas Board and the Municipal Board approved the
Reorganization and the Agreement on January 26, 1996.
If the Reorganization is completed, the Texas Fund, as the primary beneficiary
of the Reorganization, will pay all of the expenses associated with the
Reorganization, including expenses incurred by the Municipal Fund. Payment of
such expenses will reduce the amount of Class A, B or C shares of the Municipal
Fund received by shareholders of the Texas Fund on a pro rata basis. If the
Reorganization is not completed, Van Kampen American Capital, Inc. ("VKAC"), the
parent corporation of Van Kampen American Capital Asset Management, Inc. (the
"Texas Adviser") and Van Kampen American Capital Investment Advisory Corp. (the
"Municipal Adviser"), will bear all of the costs associated with seeking the
proposed Reorganization. The Texas Board has determined that the arrangements
regarding the payment of expenses and other charges relating to the
Reorganization are fair and equitable. See "THE PROPOSED REORGANIZATION--
Expenses" below. In addition, whether or not the Reorganization is completed,
the Texas Adviser will bear the costs associated with seeking approval of the
new investment advisory agreement described in proposal 2 herein.
The Texas Board is asking shareholders of the Texas Fund to approve the
Reorganization at the Special Meeting to be held on October 15, 1996. If
shareholders of the Texas Fund approve the Reorganization, it is expected that
the Closing will be on October 18, 1996, but it may be at a different time as
described herein.
THE TEXAS 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" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
The Texas Board believes that the proposed Reorganization would be in the best
interests of the shareholders of the Texas Fund because it would permit the
shareholders of the Texas Fund to (i) enjoy the lower operating expenses enjoyed
by shareholders of the Municipal Fund as a result of the Municipal Fund's larger
net asset size and the economies of scale associated therewith, (ii) eliminate
the duplication of services and expenses that currently exists as a result of
the separate operations of the funds, and (iii) obtain greater portfolio
diversity and potentially lower portfolio transaction costs.
In determining whether to recommend approval of the Reorganization to
shareholders of the Texas Fund, the Texas Board considered a number of factors,
4
<PAGE> 11
including, but not limited to: (i) the capabilities and resources of the
Municipal Adviser and other service providers to the Municipal Fund in the areas
of marketing, investment and shareholder services; (ii) the expenses and
advisory fees applicable to the Texas Fund and the Municipal Fund before the
Reorganization and the estimated expense ratios of the Municipal Fund after the
Reorganization; (iii) the comparative investment performance of the Texas Fund
and the Municipal Fund; (iv) the terms and conditions of the Agreement and
whether the Reorganization would result in dilution of Texas Fund shareholder
interests; (v) the economies of scale potentially realized through the
combination of the two funds; (vi) the compatibility of the funds' service
features available to shareholders, including the retention of applicable
holding periods and exchange privileges; (vii) the costs estimated to be
incurred by the respective funds as a result of the Reorganization; (viii) the
diminished probability of the State of Texas adopting a state income tax and the
future growth prospects of the Texas Fund; and (ix) the anticipated tax
consequences of the Reorganization.
In this regard, the Texas Board reviewed information provided by the Texas
Adviser, the Municipal Adviser and VKAC, relating to the anticipated cost
savings to the shareholders of the Texas Fund as a result of the Reorganization.
The Texas Board considered the probability that the elimination of duplicative
operations and the increase in asset levels of the combined fund after the
Reorganization would result in the following potential benefits for shareholders
of the Texas Fund, although there can, of course, be no assurances in this
regard:
(1) Achievement of Reduced Per Share Expenses and Economies of Scale.
Combining the net assets of the Texas Fund with the assets of the
Municipal Fund should lead to reduced total operating expenses for
shareholders of the Texas Fund, 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. The Municipal Fund also
pays lower investment advisory fees than the Texas Fund when no expense
reimbursements are in effect. Any significant reductions in expenses on a
per share basis should, in turn, have a favorable effect on the relative
total return to shareholders of the Texas Fund. Management anticipates
that the reorganization would have no or only a de minimis effect upon
current shareholders of the Municipal Fund.
(2) Elimination of Separate Operations. Consolidating the Texas Fund and the
Municipal Fund should eliminate the duplication of services and expenses
that currently exists as a result of their separate operations. For
example, the Texas Fund and the Municipal Fund currently are managed
separately by different affiliated investment entities. Consolidating the
separate operations of the Texas Fund with those of the Municipal Fund
should promote more efficient operations on a more cost-effective basis.
(3) Benefits to the Portfolio Management Process. The larger net asset size
of the Municipal Fund generally permits it to purchase larger individual
5
<PAGE> 12
portfolio investments that may result in reduced transaction costs or more
favorable pricing and provide the opportunity for greater portfolio
diversity.
Based upon these and other factors, the Texas Board determined that the
Reorganization is in the best interests of the shareholders of the Texas Fund.
COMPARISON OF THE MUNICIPAL FUND AND THE TEXAS FUND
INVESTMENT OBJECTIVES. The Municipal Fund and the Texas Fund have similar
investment objectives. The investment objective of the Municipal Fund is to
provide a high level of current income exempt from federal income tax,
consistent with preservation of capital. The investment objective of the Texas
Fund is to provide as high a level of interest income exempt from federal income
tax and Texas state income tax, if any, as is consistent with the Texas Fund's
investment policies. The primary difference between the two investment
objectives is that the Texas Fund seeks income exempt from Texas state income
tax, but the Municipal Fund does not. Currently, however, Texas has no personal
or corporate income tax.
INVESTMENT POLICIES. The Municipal Fund and the Texas Fund have similar
investment policies insofar as each fund seeks to achieve its investment
objective under normal market conditions by investing at least 80% of its assets
in a portfolio of tax exempt municipal securities, all or substantially all of
which are rated, at the time of investment, BBB or higher by Standard & Poor's
Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's"). The Municipal Fund may invest up to 20% of its total assets in tax
exempt municipal securities rated below investment grade (but not lower than B-
by S&P or B3 by Moody's). The Texas Fund may invest up to 20% of its assets in
such securities. As the table below indicates, the holdings of the Municipal
Fund and the Texas Fund have similar credit quality, although a larger
percentage of the Municipal Fund's holdings have the highest credit rating of
S&P and Moody's.
A comparison of the credit quality of the respective portfolios of the
Municipal Fund and the Texas Fund, as of June 30, 1996, is set forth in the
table below.
CREDIT QUALITY
(AS OF JUNE 30, 1996)
<TABLE>
<CAPTION>
MUNICIPAL FUND TEXAS FUND
--------------------------------- ---------------------------------
RATED UNRATED AT RATED UNRATED AT
CREDIT RATING SECURITIES COMPARABLE QUALITY SECURITIES COMPARABLE QUALITY
- -------------------- ---------- ------------------ ---------- ------------------
<S> <C> <C> <C> <C>
Aaa/AAA............. 35.7 3.2 29.3 --
Aa/AA............... 9.1 -- 15.5 --
A/A................. 11.9 1.1 19.9 --
Baa/BBB............. 19.7 5.0 22.4 12.3
Ba/BB............... 1.5 7.2 0.6 --
B/B................. 0.3 4.6 -- --
Caa/CCC............. -- 0.7 -- --
Ca/CC............... -- -- -- --
C/C................. -- -- -- --
----- ---- - ---- - -----
TOTAL....... 78.2% 21.8% 87.7% 12.3%
===== ===== ===== =====
</TABLE>
6
<PAGE> 13
The Texas Fund and the Municipal Fund have different policies with respect to
diversification. The Texas Fund is a non-diversified investment company. The
Municipal Fund is a diversified investment company. A non-diversified investment
company such as the Texas Fund may invest a higher percentage of its assets in
relatively fewer issuers than a diversified investment company such as the
Municipal Fund.
The Texas Fund and the Municipal Fund also have different policies with
respect to concentration. The Texas Fund ordinarily invests at least 65% of its
total assets in securities issued by the State of Texas, its political
subdivisions, agencies and instrumentalities ("Texas Securities"). The Municipal
Fund does not invest more than 25% of its total assets in securities of issuers
located in any one state or in any one industry.
The Municipal Fund may invest a substantial portion of its assets in
securities that are subject to the alternative minimum tax, while the Texas Fund
may only invest up to 20% of its assets in such securities. The Municipal Fund
may not be a suitable investment for shareholders of the Texas Fund subject to
the alternative minimum tax.
Each of the Texas Fund and the Municipal Fund has the ability to utilize
options and futures. Unlike the Texas Fund, the Municipal Fund also may engage
in interest rate transactions such as swaps, caps, floors or collars. Interest
rate swaps involve the exchange by the Municipal Fund and another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of a cap entitles the purchaser to receive payments on
a notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values. The Municipal Fund uses these transactions as
hedges and not as speculative investments and will not sell interest rate caps
or floors where it does not own securities or other instruments providing the
income stream the Municipal Fund may be obligated to pay.
The Municipal Fund may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters, whose rates vary
inversely with market rates of interest, or range or capped floaters, whose
rates are subject to periodic lifetime caps. Such municipal securities may, by
their terms, have economic characteristics comparable to, among other things, a
swap, cap, floor or collar transaction for a period of time prior to the
municipal security's stated maturity. The Texas Fund does not invest in such
securities.
7
<PAGE> 14
INVESTMENT ADVISERS. The Municipal Fund is managed by the Municipal Adviser.
The Texas Fund is managed by the Texas Adviser. The Municipal Adviser and Texas
Adviser are both wholly-owned subsidiaries of VKAC. The Municipal Adviser and
Texas Adviser are the principal investment advisers to the Van Kampen American
Capital funds. VKAC is a diversified asset management company with more than two
million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $50 billion under management or
supervision. VKAC's more than 40 open-end and 38 closed-end funds and more than
2,800 unit investment trusts are professionally distributed by leading financial
advisers nationwide.
ADVISORY AND OTHER FEES. Advisory fees and total operating expenses of the
Municipal Fund generally are lower than those of the Texas Fund. The Municipal
Fund pays the Municipal Adviser a monthly fee based on its average daily net
asset value at the annual rates of 0.50% of the first $500 million of average
net assets and 0.45% of average net assets in excess of $500 million. As of June
30, 1996, the Municipal Fund's net assets were approximately $1,014.9 million
and the effective advisory fee on such assets was 0.475%. The Adviser and VKAC
are not waiving or assuming any fees or expenses of the Municipal Fund, except
that the Trustees of the Municipal Fund have imposed a cap on their Trustees
fees. For a complete description of the Municipal Fund's advisory services, see
the sections of the Municipal Fund Prospectus and Statement of Additional
Information entitled "Investment Advisory Services" and "Investment Advisory and
Other Services -- Investment Advisory Agreement", respectively.
The Texas Fund pays the Texas Adviser a monthly fee based on its average daily
net asset value at the annual rate of 0.60% of the first $300 million of average
net assets; 0.55% of the next $300 million of average net assets; and 0.50% of
average net assets in excess of $600 million. As of June 30, 1996, the Texas
Fund's net assets were approximately $17.0 million and the effective advisory
fee on such assets was 0.08% (after expense reimbursement) and 0.60% (assuming
no expense reimbursement). For a complete description of the Texas Fund's
advisory services, see the sections of the Texas Fund Prospectus and Statement
of Additional Information entitled "Investment Advisory Services" and
"Investment Advisory Agreement", respectively.
The total operating expenses of the Municipal Fund for the six month period
ended June 30, 1996 (on an annualized basis) were 0.91%, 1.67% and 1.67% of the
average daily net assets attributable to Class A, B and C shares, respectively.
The expense ratios were not affected by the assumption of expenses by the
Municipal Adviser. The total operating expenses (after expense reimbursement) of
the Texas Fund for the six month period ended March 31, 1996 (on an annualized
basis) were 1.36%, 2.04% and 2.07% of average daily net assets with respect to
Class A, B and C shares, respectively. In the absence of expense reimbursement,
total operating expenses of the Texas Fund would have been 1.93%, 2.61% and
2.64% of average
8
<PAGE> 15
daily net assets with respect to Class A, B and C shares, respectively. There
can be no assurance that the Texas Adviser will continue to reimburse expenses
of the Texas Fund if the Reorganization is not completed.
Both the Municipal Fund and the Texas Fund have adopted similar distribution
plans (the "Distribution Plans") pursuant to Rule 12b-1 under the 1940 Act and
have adopted similar service agreements or plans (the "Service Plans"). Both the
Municipal Fund and the Texas Fund can pay 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 Municipal Fund
and the Texas Fund can pay up to 0.25% of the 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 the Municipal Fund and the Texas
Fund automatically convert to Class A shares after eight years. Class C shares
of the Municipal Fund and the Texas Fund automatically convert to Class A shares
after ten years. The distributor of both the Texas Fund's shares and the
Municipal Fund's shares is Van Kampen American Capital Distributors, Inc. ("VKAC
Distributors"). For a complete description of these arrangements with respect to
the Municipal Fund, see the section of the Municipal Fund Prospectus entitled
"The Distribution and Service Plans." For a complete description of these
arrangements with respect to the Texas Fund, see the sections of the Texas Fund
Prospectus and Statement of Additional Information entitled "Distribution
Plans."
The table below sets forth (i) the fees and expenses paid by the Municipal
Fund during the six month period ended June 30, 1996 (on an annualized basis),
(ii) fees and expenses paid by the Texas Fund during the six month period ended
March 31, 1996 (on an annualized basis) and (iii) pro forma expenses for the
combined fund.
9
<PAGE> 16
EXPENSE COMPARISON TABLE
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------ ------------------
MUNICIPAL TEXAS MUNICIPAL TEXAS
FUND(1) FUND(2) PRO FORMA FUND(1) FUND(2)
--------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a percentage of
Offering Price)....................................................... 4.75%(3) 4.75% 4.75%(3) None None
Maximum Deferred Sales Charge (as a percentage of the lower of the
original purchase price or redemption proceeds)....................... None None None 4.00%(5) 4.00%(6)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................................ 0.47% 0.03% (4) 0.47% 0.47% 0.03%(4)
Rule 12b-1 Fees........................................................ 0.25% 0.23% 0.25% 1.00% 1.00%
Other Expenses......................................................... 0.19% 1.10% 0.19% 0.20% 1.01%
Total Fund Operating Expenses.......................................... 0.91% 1.36% (4) 0.91% 1.67% 2.04%(4)
Expense Example of Total Operating Expenses Assuming Redemption at the
End of the Period(8)
One Year.............................................................. $ 56 $ 61 $ 56 $ 57 $ 61
Three Years........................................................... $ 75 $ 89 $ 75 $ 88 $ 94
Five Years............................................................ $ 95 $ 118 $ 95 $ 106 $ 125
Ten Years............................................................. $ 154 $ 203 $ 154 $ 177 $ 219
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period(8)
One Year.............................................................. $ 56 $ 61 $ 56 $ 17 $ 21
Three Years........................................................... $ 75 $ 89 $ 75 $ 53 $ 64
Five Years............................................................ $ 95 $ 118 $ 95 $ 91 $ 110
Ten Years............................................................. $ 154 $ 203 $ 154 $ 177 $ 219
- ---------------
Footnotes on following page.
<CAPTION>
CLASS C SHARES
-------------------------------
MUNICIPAL TEXAS
PRO FORMA FUND(1) FUND(2) PRO FORMA
--------- --------- ------ ---------
<S> <C<C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a percentage of
Offering Price)....................................................... None None None None
Maximum Deferred Sales Charge (as a percentage of the lower of the
original purchase price or redemption proceeds)....................... 4.00%(5) 1.00%(7) 1.00%(7) 1.00%(7)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................................ 0.47% 0.47% 0.03%(4) 0.47%
Rule 12b-1 Fees........................................................ 1.00% 1.00% 1.00% 1.00%
Other Expenses......................................................... 0.20% 0.20% 1.04% 0.20%
Total Fund Operating Expenses.......................................... 1.67% 1.67% 2.07%(4) 1.67%
Expense Example of Total Operating Expenses Assuming Redemption at the
End of the Period(8)
One Year.............................................................. $ 57 $ 27 $ 31 $ 27
Three Years........................................................... $ 88 $ 53 $ 65 $ 53
Five Years............................................................ $ 106 $ 91 $ 111 $ 91
Ten Years............................................................. $ 177 $ 198 $ 240 $ 198
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period(8)
One Year.............................................................. $ 17 $ 17 $ 21 $ 17
Three Years........................................................... $ 53 $ 53 $ 65 $ 53
Five Years............................................................ $ 91 $ 91 $ 111 $ 91
Ten Years............................................................. $ 177 $ 198 $ 240 $ 198
- ---------------
Footnotes on following page.
</TABLE>
10
<PAGE> 17
(1) For the six month period ended June 30, 1996, on an annualized basis.
(2) For the six month period ended March 31, 1996, on an annualized basis.
(3) Class A shares of the Municipal Fund received pursuant to the
Reorganization will not be subject to a sales charge upon purchase.
(4) After expense reimbursement. In the absence of expense reimbursement,
Management Fees for the Texas Fund would have been 0.60% with respect to
Class A, B and C shares and Total Fund Operating Expenses for the Texas
Fund would have been 1.93%, 2.61% and 2.64% with respect to Class A, B and
C shares, respectively.
(5) Class B Shares of the Municipal Fund are subject to a contingent deferred
sales charge equal to 4.00% 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 after a six year
period as follows: Year 1 -- 4.00%; Year 2 -- 3.75%; Year 3 -- 3.50%; Year
4 -- 2.50%; Year 5 -- 1.50%; Year 6 -- 1.00%; and Year 7 -- 0.00%. However,
Class B Shares of the Municipal Fund acquired in the Reorganization will be
subject to the contingent deferred sales charge schedule applicable to
Class B shares of the Texas Fund. See Note 6.
(6) Class B shares of the Texas Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B shares redeemed during the two years
after purchase, which charge is reduced to zero after a five year period as
follows: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year
4 -- 2.50%; Year 5 -- 1.50%; and Year 6 -- 0.00%.
(7) Class C shares 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 Class C shares redeemed during the first year after
purchase, which charge is reduced to zero thereafter.
(8) The expense examples reflect what an investor would pay on a $1,000
investment, assuming a 5% annual return with either redemption or no
redemption at the end of each time period as noted in the above table. The
Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization.
11
<PAGE> 18
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. Both the
Municipal Fund and the Texas Fund offer three classes of shares. The Class A
shares of both the Municipal Fund and the Texas Fund are subject to an initial
sales charge of up to 4.75%. The initial sales charge applicable to Class A
shares of the Municipal Fund will be waived for Class A shares acquired in the
Reorganization. Any subsequent purchases of Class A shares of the Municipal Fund
after the Reorganization will be subject to an initial sales charge of up to
4.75%, excluding Class A shares purchased through the dividend reinvestment
plan. Purchases of Class A shares of the Municipal Fund or the Texas Fund in
amounts of $1,000,000 or more are not subject to an initial sales charge, but a
contingent deferred sales charge of 1.00% may be imposed on certain redemptions
made within the first year after purchase.
The Class B shares of both the Municipal Fund and the Texas Fund do not incur
a sales charge when they are purchased, but generally are subject to a
contingent deferred sales charge of 4.00% if redeemed within the two years after
purchase, which charge is reduced to zero after a six year period in the case of
the Municipal Fund and over a five year period in the case of the Texas Fund.
Class B shares of the Municipal Fund acquired in the Reorganization will remain
subject to the contingent deferred sales charge schedule applicable to Class B
shares of the Texas Fund.
The Class C shares of both the Municipal Fund and the Texas Fund do not incur
a sales charge when purchased, but are subject to a contingent deferred sales
charge of 1.00% if redeemed within the first year after purchase.
No contingent deferred sales charge will be imposed on Class B shares or Class
C shares of the Texas Fund in connection with the Reorganization.
Shares of the Texas Fund and the Municipal Fund may be purchased by check, by
electronic transfer, by bank wire and by exchange from certain other Van Kampen
American Capital open-end mutual funds distributed by VKAC Distributors. For a
complete description regarding purchase of shares and exchange of shares of the
Municipal Fund, see the sections of the Municipal Fund Prospectus entitled
"Purchase of Shares" and "Shareholder Services--Exchange Privilege." For a
complete description regarding purchase of shares and exchange of shares of the
Texas Fund, see the sections of the Texas Fund Prospectus entitled "Purchase of
Shares" and "Shareholder Services--Shareholder Services Applicable to All
Classes--Exchange Privilege" and sections of the Texas Fund Statement of
Additional Information entitled "Purchase and Redemption of Shares" and
"Exchange Privilege."
With respect to fixed income securities, the Municipal Fund and the Texas Fund
use different pricing methodologies and different pricing services for
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 Municipal Fund
12
<PAGE> 19
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 as obtained from its pricing service. When calculating
the net asset value per share of the Texas Fund in accordance with this pricing
methodology and pricing service, the net asset value per share would have been
$10.04, $10.03 and $10.04 on August 30, 1996 for Classes A, B and C shares,
respectively. The Texas Fund, however, generally computes net asset value per
share by valuing fixed income securities using the last reported bid price as
obtained from its pricing service. When calculating the net asset value per
share of the Texas Fund in accordance with this pricing methodology and pricing
service, the net asset value per share was $10.06, $10.05 and $10.06 on August
30, 1996 for Classes A, B and C shares, respectively. In connection with the
Reorganization, the net assets of the Texas Fund will be calculated using the
current pricing methodology and pricing service of the Municipal Fund. For this
reason, the value of the Municipal Fund shares received in connection with the
Reorganization may be approximately equal in value to the shares of the Texas
Fund held immediately prior to the Reorganization rather than identical in
value.
Shares of the Municipal Fund and the Texas 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 Texas Fund or the Municipal 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 fund may delay payment of the redemption proceeds until such fund can
verify that payment for the purchase of the shares has been (or will be)
received. No further purchases of the shares of the Texas Fund may be made after
the date on which the shareholders of the Texas Fund approve the Reorganization,
and the stock transfer books of the Texas 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 Texas Fund. Redemption requests or transfer
instructions received by the Texas Fund after that date will be treated by the
Texas Fund as requests for the redemption or instructions for transfer of the
shares of the Municipal Fund credited to the accounts of the shareholders of the
Texas Fund. Redemption requests or transfer instructions received by the Texas
Fund after the close of business on the day prior to the date of Closing will be
forwarded to the Municipal Fund. For a complete description of the redemption
arrangements for the Municipal Fund, see the section of the Municipal Fund
Prospectus entitled "Redemption of Shares," and the sections of the Texas Fund
Prospectus and Statement of Additional Information entitled "Redemption of
Shares" and "Purchase and Redemption of Shares", respectively.
13
<PAGE> 20
CAPITALIZATION. The following table sets forth the capitalization of the Texas
Fund and the Municipal Fund as of June 30, 1996 and the pro forma capitalization
of the combined fund as if the Reorganization had occurred on that date. These
numbers may differ at the time of Closing.
CAPITALIZATION TABLE AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
MUNICIPAL FUND TEXAS FUND PRO FORMA(1)
-------------- ----------- --------------
<S> <C> <C> <C>
NET ASSETS
Class A shares.......... $ 797,875,746 $ 9,518,063 $ 807,324,425
Class B shares.......... 205,420,999 6,818,778 212,190,034
Class C shares.......... 11,653,115 805,881 12,453,123
-------------- ----------- --------------
Total............ $1,014,949,860 $17,142,722 $1,031,967,582
============== =========== ==============
NET ASSET VALUE PER SHARE
Class A shares.......... $ 14.99 $ 10.06 $ 14.99
Class B shares.......... 14.99 10.05 14.99
Class C shares.......... 14.98 10.06 14.98
SHARES OUTSTANDING
Class A shares.......... 53,222,966 946,444 53,853,298
Class B shares.......... 13,702,658 678,522 14,154,228
Class C shares.......... 777,915 80,107 831,320
-------------- ----------- --------------
Total............ 67,703,539 1,705,073 68,838,846
============== =========== ==============
SHARES AUTHORIZED
Class A shares.......... Unlimited Unlimited Unlimited
Class B shares.......... Unlimited Unlimited Unlimited
Class C shares.......... Unlimited Unlimited Unlimited
</TABLE>
- ---------------
(1) The Pro Forma balances reflect the $125,000 of estimated costs associated
with the Reorganization which will be paid by the Texas Fund prior to
Closing.
PERFORMANCE INFORMATION. The average annual total returns for the Texas Fund
for the one-year and three-year periods ended June 30, 1996, and for the period
beginning March 2, 1992 (the date Class A shares of the Texas Fund were first
offered for sale to the public) through June 30, 1996 were 1.66%, 3.69% and
6.11% with respect to its Class A shares; for the one-year and three-year
periods ended June 30, 1996 and for the period beginning July 27, 1992 (the date
Class B shares of the Texas Fund were first offered for sale to the public)
through June 30, 1996 were 1.92%, 3.67% and 4.86% with respect to its Class B
shares; and for the one-year period ended June 30, 1996 and for the period
beginning August 30, 1993 (the date Class C shares of the Texas Fund were first
offered for sale to the public) through June 30, 1996 were 4.91% and 4.20% with
respect to its Class C shares.
14
<PAGE> 21
The average annual total returns for Municipal Fund for the one-year,
three-year and five-year periods ended June 30, 1996 and for the period
beginning August 1, 1990 (the date Class A shares of the Municipal Fund were
first offered for sale to the public) through June 30, 1996 were 1.18%, 2.25%,
6.36% and 6.75% with respect to its Class A shares; for the one-year and
three-year periods ended June 30, 1996 and for the period beginning August 24,
1992 (the date Class B shares of the Municipal Fund were first offered for sale
to the public) through June 30, 1996 were 1.46%, 2.15% and 4.23% with respect to
its Class B shares; for the one-year period ended June 30, 1996 and for the
period beginning August 13, 1993 (the date Class C shares of the Municipal Fund
were first offered to the public) through June 30, 1996 were 4.40% and 2.90%
with respect to its Class C shares.
The foregoing returns include the effect of the maximum sales charge
applicable to sales of shares of both the Municipal Fund and the Texas Fund. The
foregoing returns assume reinvestment of all dividends and distributions. Such
returns are not necessarily indicative of future results. The performance of an
investment company is the 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.
Management's discussion of the Municipal Fund's performance as of December 31,
1995 and management's discussion of the Texas Fund's performance as of September
30, 1995 are attached hereto as Exhibit A.
B. RISK FACTORS
SIMILARITY OF RISKS
The investment objectives of the Municipal Fund and the Texas Fund are similar
insofar as they each invest at least 80% of their assets in tax exempt municipal
securities. Each of the Municipal Fund and the Texas Fund also engages in
certain common investment practices such as the purchase and sale of futures and
options. To the extent that the investment objectives and policies of the
Municipal Fund and the Texas Fund are similar, the risks associated with an
investment in the funds are similar.
Investment in either of the Municipal Fund or the Texas Fund may not be
appropriate for all investors. Neither fund is intended to be a complete
investment program, and investors should consider their long-term investment
goals and financial needs when making an investment decision with respect to the
funds. An investment in either fund is intended to be a long-term investment and
should not be used as a trading vehicle.
15
<PAGE> 22
DIFFERENCES IN RISKS
The Municipal Fund and the Texas Fund engage in some dissimilar investment
practices. To the extent that the investment practices of the funds differ, the
risks associated with an investment in the Municipal Fund are different from the
risks associated with an investment in the Texas Fund. For a complete
description of the risks of an investment in the Municipal Fund, see the
sections of the Municipal Fund Prospectus entitled "Investment Objective and
Policies," "Municipal Securities," "Investment Practices" and "Special
Considerations Regarding the Fund." For a complete description of the Texas
Fund's investment practices, see the section in the Texas Fund Prospectus
entitled "Investment Practices" and "Investment Objective and Policies" and the
section of the Texas Fund's Statement of Additional Information entitled
"Additional Investment Considerations."
DIVERSIFICATION. The Texas Fund is a non-diversified investment company. The
Municipal Fund is a diversified investment company. A non-diversified investment
company such as the Texas Fund generally is more susceptible to economic,
political or regulatory events that adversely affect an issuer in which such
fund invests than a diversified investment company such as the Municipal Fund. A
diversified investment company such as the Municipal Fund, however, is less
likely to benefit from economic, political or regulatory events that
beneficially affect issuers in which it invests because it generally invests a
smaller percentage of its assets in each issuer in which it invests.
CONCENTRATION. The Texas Fund invests at least 65% of its assets in Texas
Securities. The Municipal Fund does not concentrate its investments in the
securities of issuers located in Texas or in any one other state. An investment
company such as the Texas Fund that concentrates its investments in any one
industry or in issuers located in any one state generally is more susceptible to
economic, political or regulatory events that adversely affect the industry or
state in which such company has concentrated its investments than an investment
company that does not concentrate its investments in any one industry or state.
The Municipal Fund, however, is less likely to benefit from economic, political
or regulatory events that beneficially affect issuers of Texas Securities or
issuers located in any one other state because it does not concentrate its
investments in issuers of Texas Securities or issuers located in any one other
state.
LOWER GRADE MUNICIPAL SECURITIES. The Municipal Fund may invest up to 20% of
its total assets in lower grade municipal securities and the Texas Fund may
invest up to 20% of its assets in lower grade municipal securities. Such lower
rated securities commonly are referred to as "junk bonds" and are regarded by
Moody's and S&P as predominantly speculative with respect to the capacity to pay
interest or repay principal in accordance with their terms. Such securities may
be less liquid, more volatile and have less publicly available information as
compared to higher grade income securities.
16
<PAGE> 23
SWAPS, CAPS AND FLOORS. The Municipal Fund may engage in interest rate
transactions such as swaps, caps, floors or collars in which the Texas Fund does
not engage. The Municipal Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the counterparty to the transaction, combined with
any credit enhancements, is rated at least "A" by S&P or Moody's or has an
equivalent equity rating from a nationally recognized statistical ratings
organization or is determined to be of equivalent credit quality by the
Municipal Adviser. If there is a default by such counterparty, the Municipal
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
DERIVATIVE VARIABLE RATE SECURITIES. The Municipal Fund may invest up to 15%
of its total assets in derivative variable rate securities such as inverse
floaters, whose rates vary inversely with market rates of interest or range or
capped floaters, whose rates are subject to periodic or lifetime caps. The Texas
Fund does not invest in such securities. The value of securities whose rates
vary inversely with market rates of interest generally will fluctuate in
response to changes in market rates of interest to a greater extent than the
value of an equal principal amount of a fixed rate municipal security having
similar credit quality, redemption provisions and maturity.
C. 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 attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the Municipal Fund or the Texas Fund at (800) 421-5666 and
asking for the "Reorganization SAI".
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the Municipal Fund series of the Tax Free Trust
would acquire all of the assets and the liabilities of the Texas Fund on the
date of the Closing in consideration for Class A, B and C shares of the
Municipal Fund.
Subject to Texas Fund shareholders approving 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
17
<PAGE> 24
or such later date as soon as practicable thereafter as the Municipal Fund and
the Texas Fund may mutually agree.
On the date of Closing, the Texas Fund will transfer to the Municipal Fund all
of the assets and liabilities of the Texas Fund. The Tax Free Trust will in turn
transfer to the Texas Fund a number of Class A, B and C shares of the Municipal
Fund approximately equal in value to the value of the net assets of the Texas
Fund transferred to the Municipal Fund as of the date of Closing, as determined
in accordance with the valuation method described in the Municipal Fund's then
current prospectus. In order to minimize any potential for undesirable federal
income and excise tax consequences in connection with the Reorganization, the
Municipal Fund and the Texas Fund may distribute on or before the Closing all or
substantially all of their respective undistributed net investment income
(including net capital gains) as of such date.
The Texas Fund expects to distribute the Class A, B and C shares of the
Municipal Fund to the shareholders of the Texas Fund promptly after the Closing
and then dissolve pursuant to a plan of dissolution adopted by the Texas Board.
The Texas Fund and the Tax Free Trust have made certain standard
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 Texas Fund's shareholders;
2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and exemptions
under federal and state 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 Agreement;
5. the effectiveness under applicable law of the registration statement of
the Municipal Fund of which this Prospectus/Proxy Statement forms a part
and the absence of any stop orders under the Securities Act of 1933, as
amended, pertaining thereto; and
6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
18
<PAGE> 25
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 Texas
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse affect on the interests of Texas Fund
shareholders. The Agreement also may 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 Texas Board recommends that you vote to approve the Reorganization, as it
believes the Reorganization is in the best interests of the Texas Fund's
shareholders and that the interests of the Texas 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 Municipal Fund
being offered hereby are represented by transferable Class A, B and C shares,
par value $0.01 per share. The Declaration of Trust of the Tax Free Trust
permits the trustees, as they deem necessary or desirable, to create one or more
separate investment portfolios and to issue a separate series of shares for each
portfolio and, subject to compliance with the 1940 Act, to further sub-divide
the shares of a series into one or more classes of shares for such portfolio.
VOTING RIGHTS OF SHAREHOLDERS. Holders of shares of the Municipal 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 Declaration of Trust of the Tax Free Trust and the
Declaration of Trust of the Texas Fund are substantially similar.
Each of the Municipal Fund and the Texas Fund operates as an open-end
management investment company registered with the SEC under the 1940 Act.
Therefore, in addition to the specific voting rights described above,
shareholders of the Municipal Fund, as well as shareholders of the Texas 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 1940
Act, shareholders owning not less than 10% of the outstanding shares of the
Texas Fund or Municipal 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 Municipal Fund will establish an
account for each Texas Fund shareholder containing the appropriate number of
shares of the Municipal Fund. The shareholder services and shareholder programs
of the
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Municipal Fund and the Texas Fund are substantially identical. Shareholders of
the Texas Fund who are accumulating Texas Fund shares under the dividend
reinvestment plan, or who are receiving payment under the systematic withdrawal
plan with respect to Texas Fund shares, will retain the same rights and
privileges after the Reorganization in connection with the Municipal Fund Class
A, B or C shares received in the Reorganization through substantially similar
plans maintained by the Municipal Fund. Van Kampen American Capital Trust
Company will continue to serve as custodian for the assets of Texas Fund
shareholders held in IRA accounts after the Reorganization. Such IRA investors
will be sent appropriate documentation to confirm Van Kampen American Capital
Trust Company's custodianship.
It will not be necessary for shareholders of the Texas Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the Texas 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 Texas Fund and
shareholders of the Municipal Fund. The discussion set forth below is for
general information only and may not apply to a holder subject to special
treatment under the Internal Revenue Code of 1986, as amended (the "Code"), such
as a holder that is a bank, an insurance company, a dealer in securities, a
tax-exempt organization or that acquired its Class A, B and C shares of the
Texas Fund pursuant to the exercise of employee stock options or otherwise as
compensation. It is based upon the 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 Texas Fund shares as capital assets. No advance rulings have been or
will be sought from the Service regarding any matter discussed in this
Prospectus/Proxy Statement. 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 advisers 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 and possible changes to the tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
Tax Free Trust and the Texas Fund receive an opinion from Skadden, Arps, Slate,
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Meagher & Flom ("Skadden Arps") substantially to the effect that for federal
income tax purposes:
1. The acquisition by the Municipal Fund of the assets of the Texas Fund in
exchange solely for Class A, B and C shares of the Municipal Fund and the
assumption by the Municipal Fund of the liabilities of the Texas Fund
will qualify as a tax-free reorganization within the meaning of Section
368(a)(1) of the Code.
2. No gain or loss will be recognized by the Texas Fund or the Municipal
Fund upon the transfer to the Municipal Fund of the assets of the Texas
Fund in exchange solely for the Class A, B and C shares of the Municipal
Fund and the assumption by the Municipal Fund of the liabilities of the
Texas Fund.
3. The Municipal Fund's basis in the Texas Fund assets received in the
Reorganization will, in each instance, equal the basis of such assets in
the hands of the Texas Fund immediately prior to the transfer, and the
Municipal Fund's holding period of such assets will, in each instance,
include the period during which the assets were held by the Texas Fund.
4. No gain or loss will be recognized by the shareholders of the Texas Fund
upon the exchange of their shares of the Texas Fund for the Class A, B or
C shares of the Municipal Fund.
5. The aggregate tax basis in the Class A, B and C shares of the Municipal
Fund received by the shareholders of the Texas Fund will be the same as
the aggregate tax basis of the shares of the Texas Fund surrendered in
exchange therefor.
6. The holding period of the Class A, B and C shares of the Municipal Fund
received by the shareholders of the Texas Fund will include the holding
period of the shares of the Texas Fund surrendered in exchange therefor
if such surrendered shares of the Texas Fund are held as capital assets
by such shareholder.
In rendering its opinion, Skadden Arps may rely upon certain representations
of the management of the Texas Fund and the Tax Free Trust and assume that the
Reorganization will be consummated as described in the Agreement and that
redemptions of shares of the Texas Fund occurring prior to the Closing will
consist solely of redemptions in the ordinary course of business.
The Municipal 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 Texas Fund and its shareholders.
EXPENSES
If the Reorganization is completed, the Texas Fund, as primary beneficiary of
the Reorganization, will pay all of the costs associated with the
Reorganization.
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Management of the Texas Fund estimates that Reorganization expenses will equal
approximately $125,000, or approximately $0.08 per share of the Texas Fund,
based on the Texas Fund's shares outstanding as of August 30, 1996. As part of
the Reorganization, the Texas Fund will write-off the remaining unamortized
organizational expenses of approximately $1,400 which will be reimbursed by the
Texas Adviser. For the six months ended March 31, 1996, the Texas Adviser waived
advisory expenses in an amount equal to 0.57% of the Texas Fund's net assets.
Based on the Texas Fund's total operating expenses as of such date and after
giving effect to such expense reimbursements, management of the Texas Fund
estimates that the Reorganization will reduce expenses applicable to
shareholders of Class A, B and C shares of the Texas Fund by approximately
0.45%, 0.37% and 0.40% of net assets, respectively, and that such savings will
permit shareholders of the Texas Fund to recoup estimated Reorganization
expenses in approximately 21 months following the Reorganization.
There can be no assurance, however, that the Texas Adviser will continue to
reimburse expenses of the Texas Fund if the Reorganization is not approved.
Based on the Texas Fund's total operating expenses as of March 31, 1996 and
without giving effect to expense reimbursements in effect as of such date,
management of the Texas Fund estimates that the Reorganization will reduce
expenses applicable to shareholders of Class A, B and C shares of the Texas Fund
by approximately 1.02%, 0.94% and 0.97% of net assets, respectively, and that
such savings will permit shareholders of the Texas Fund to recoup estimated
Reorganization expenses in approximately 9 months following the Reorganization.
The Texas Board has determined that the foregoing arrangement with respect to
expenses is fair and reasonable in light of the relative benefits of the
Reorganization and that such expenses would not be dilutive to shareholders of
the Texas Fund.
As noted above, shareholders of the Fund may redeem their shares or exchange
their shares for shares of other Van Kampen American Capital mutual funds at any
time prior to the closing of the Reorganization. See "Distribution, Purchase,
Valuation, Redemption and Exchange of Shares" above. Redemptions and exchanges
of shares generally are taxable transactions, unless your account is not subject
to taxation, such as an individual retirement account or other tax-qualified
retirement plan. Shareholders should consult with their own tax advisers
regarding potential transactions.
If the Reorganization is not completed, VKAC will bear the costs associated
with seeking the proposed Reorganization. In addition, whether or not the
Reorganization is completed, the Texas Adviser will bear the costs associated
with seeking approval of the new investment advisory agreement described in
proposal 2 herein.
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RATIFICATION OF INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND
RESTRICTIONS OF THE MUNICIPAL FUND
Approval of the Reorganization will constitute the ratification by Texas Fund
shareholders of the investment objective, investment policies and restrictions,
distribution plan and advisory agreement (see proposal 2 below) of the Municipal
Fund. Approval of the Reorganization will constitute approval of amendments to
any of the fundamental investment restrictions of the Texas 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 federal income tax consequences of the
Reorganization and issuance of Class A, B and C shares of the Municipal Fund
will be passed on by Skadden Arps, 333 West Wacker Drive, Chicago, Illinois
60606, which serves as counsel to the Municipal Fund. Wayne W. Whalen, a partner
of Skadden Arps, is a Trustee of the Tax Free Trust and the Texas Fund.
D. RECOMMENDATION OF THE TEXAS BOARD
The Texas Board has approved the Agreement and has determined that
participation in the Reorganization is in the best interests of shareholders of
each class of shares of the Texas Fund. THE TEXAS BOARD RECOMMENDS VOTING "FOR"
THE PROPOSED REORGANIZATION.
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PROPOSAL 2: APPROVAL OF NEW ADVISORY AGREEMENT
- ------------------------------------------------------------------------------
The Municipal Adviser and Texas Adviser (sometimes collectively referred to
herein as the "Advisers" or individually as an "Adviser") are indirect
subsidiaries of VK/AC Holding, Inc. ("VKAC Holding"). VKAC Holding has entered
into a merger agreement, dated as of June 21, 1996 (the "Merger Agreement"),
with Morgan Stanley Group Inc. ("Morgan Stanley"), MSAM Holdings II, Inc. and
MSAM Acquisition Inc. Pursuant to the Merger Agreement, the Advisers will become
indirect subsidiaries of Morgan Stanley. At shareholder meetings currently
scheduled in October 1996, the shareholders of each of the Van Kampen American
Capital funds (excluding the Texas Fund) will consider a new investment advisory
agreement to take effect following the merger. The shareholders vote on a new
investment advisory agreement is required under the 1940 Act as a result of
Morgan Stanley's contemplated acquisition of the Advisers. Each fund's new
investment advisory agreement will be substantially identical to such fund's
current investment advisory agreement, except for the dates of execution,
effectiveness and termination.
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In the event the Reorganization discussed in proposal 1 is approved by
shareholders of the Texas Fund, shareholders of the Texas Fund will become
shareholders of the Municipal Fund on or about October 18, 1996. Shareholders of
record of the Municipal Fund as of August 27, 1996 will consider the new
advisory agreement with respect to the Municipal Fund at the October 1996
meeting. Shareholders of the Texas Fund would not be entitled to consider the
new advisory agreement for the Municipal Fund, because they would become
shareholders of the Municipal Fund after the record date, and this proposal 2
would be moot.
In the event the Reorganization discussed in proposal 1 is not approved by
shareholders of the Texas Fund, shareholders of the Texas Fund would be required
by the federal securities laws to consider and vote on a new investment advisory
agreement to take effect after Morgan Stanley's contemplated acquisition of the
Texas Adviser. In order to avoid the expense of preparing, printing and mailing
an additional proxy statement in connection with the new advisory agreement,
shareholders of the Texas Fund are being asked herein to consider a New Advisory
Agreement (as defined below) for the Texas Fund to take effect following Morgan
Stanley's contemplated acquisition of the Texas Adviser, if the Reorganization
of the Texas Fund in to the Municipal Fund is not approved. The Texas Adviser
will bear the costs associated with approval of the New Advisory Agreement,
including the costs associated with preparing and incorporating this proposal 2
herein. The information presented herein is substantially similar to the
information presented in the proxy statements for the other Van Kampen American
Capital funds, including the Municipal Fund, as it relates to considering a new
advisory agreement.
A. THE TEXAS ADVISER
The Texas Adviser is a wholly-owned subsidiary of VKAC, which is a wholly-
owned subsidiary of VKAC Holding, which in turn is controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York based private investment firm. The General Partner of C&D L.P. is
Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, approximately 6% of the common stock of VKAC Holding
and have the right to acquire, upon the exercise of options (whether or not
vested), approximately an additional 12% of the common stock of VKAC Holding.
Currently, and after giving effect to the exercise of such options, no officer
or trustee of the Texas Fund owns or would own 5% or more of the common stock of
VKAC Holding. The addresses of VKAC Holding, VKAC and the Texas Adviser are One
Parkview
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Plaza, Oakbrook Terrace, Illinois 60181 and 2800 Post Oak Blvd., Houston, Texas
77056.
Prior to December 1994, the Texas Adviser provided investment advisory
services to the Texas Fund under the name "American Capital Asset Management,
Inc."
B. INFORMATION CONCERNING MORGAN STANLEY
Morgan Stanley and various of its directly or indirectly owned subsidiaries,
including Morgan Stanley & Co. Incorporated ("Morgan Stanley & Co."), a
registered broker-dealer and investment adviser, and Morgan Stanley
International, are engaged in a wide range of financial services. Their
principal businesses include securities underwriting, distribution and trading;
merger, acquisition, restructuring and other corporate finance advisory
activities; merchant banking; stock brokerage and research services; asset
management; trading of futures, options, foreign exchange, commodities and swaps
(involving foreign exchange, commodities, indices and interest rates); real
estate advice, financing and investing; and global custody, securities clearance
services and securities lending. Morgan Stanley Asset Management Inc. also is a
wholly-owned subsidiary of Morgan Stanley. As of June 30, 1996, Morgan Stanley
Asset Management Inc., together with its affiliated investment advisory
companies, had approximately $103.5 billion of assets under management and
fiduciary advice.
C. THE ACQUISITION
Pursuant to the Merger Agreement, MSAM Acquisition Inc. will be merged with
and into VKAC Holding and VKAC Holding will be the surviving corporation (the
"Acquisition"). Following the Acquisition, VKAC Holding and the Texas Adviser
will be indirect subsidiaries of Morgan Stanley.
The Texas Adviser anticipates that the consummation of the Acquisition will
occur by the end of November 1996 provided that a number of conditions set forth
in the Merger Agreement are met or waived. The conditions require, among other
things, that as of the closing the shareholders of certain investment companies
(including the Van Kampen American Capital funds) and investors in certain
accounts advised by the Advisers and their affiliates, which investment
companies and accounts have aggregate assets in excess of a specified minimum
amount, have approved new investment advisory agreements or consented to the
assignment of existing investment advisory agreements. At the closing, MSAM
Acquisition Inc. will pay approximately $740 million (based on VKAC's long-term
debt outstanding as of July 31, 1996) in cash to the stockholders of VKAC
Holding (excluding certain management stockholders), and to persons owning
options to purchase stock of VKAC Holding, subject to certain purchase price
adjustments set forth in the Merger Agreement. As of July 31, 1996, VKAC had
long-term debt outstanding of approximately $410 million. To the extent that
pre-tax income of VKAC prior to the closing of the Acquisition permits the
repayment of its long-term debt, the
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purchase price for the equity interests in VKAC Holding will be increased by the
amount of the long-term debt repaid. The purchase price also is subject to
certain adjustments based, among other things, on assets under management of
VKAC and its subsidiaries at the time of closing. The Texas Adviser also
contemplates that, as part of the Acquisition, certain officers and directors of
VKAC Holding and its affiliates will contribute to MSAM Holdings II, Inc. their
existing shares of common stock of VKAC Holding in exchange for approximately
$25 million of shares of preferred stock of MSAM Holdings II, Inc. which, in
turn, will be exchangeable into common stock, par value $1.00 per share, of
Morgan Stanley at specified times over a four year period. Such shares of
preferred stock will represent, in the aggregate, 5% of the combined voting
power in MSAM Holdings II, Inc., the remainder of which will be indirectly owned
by Morgan Stanley.
VKAC Holding will engage in certain preparatory transactions prior to the
Acquisition, including the distribution to stockholders of VKAC Holding of (i)
all of VKAC Holding's investment in McCarthy, Crisanti & Maffei, Inc., a wholly-
owned subsidiary engaged in the business of distributing research and financial
information, (ii) all of VKAC Holding's investment in Hansberger Global
Investors, Inc. ("HGI"), a company in which VKAC Holding made a minority
investment in May 1996, and (iii) certain related cash amounts.
There is no financing condition to the closing of the Acquisition. VKAC has
been advised by Morgan Stanley that as of August 30, 1996, no determination has
been made whether any additional indebtedness will be incurred by Morgan Stanley
and its affiliates or VKAC and its affiliates in connection with the
Acquisition. In addition, the disposition of VKAC's outstanding long-term
indebtedness (including its bank loans and senior notes) in connection with the
Acquisition has not yet been determined.
The operating revenue of VKAC and its subsidiaries for the fiscal year ended
December 31, 1995, less expenses for the same period, was more than adequate to
service VKAC's outstanding debt. VKAC prepaid $80 million of its long-term debt
in 1995, and has continued to make debt prepayments during 1996. VKAC Holding
and VKAC believe, based on the earnings experience of VKAC, the Texas Adviser
and their affiliates, that after the Acquisition the operating revenue of VKAC
and its subsidiaries should be more than sufficient to service their debt and
that VKAC and its subsidiaries should be able to conduct their respective
operations as now conducted and as proposed to be conducted.
The Merger Agreement does not contemplate any changes, other than changes in
the ordinary course of business, in the management or operation of the Texas
Adviser relating to the Texas Fund, the personnel managing the Texas Fund or
other services or business activities of the Texas Fund (or relating to the
management or operation of the other Van Kampen American Capital funds advised
by the Advisers). The Acquisition is not expected to result in material changes
in the business, corporate structure or composition of the senior management or
personnel
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of the Texas Adviser, or in the manner in which the Texas Adviser renders
services to the Texas Fund. Morgan Stanley has agreed in the Merger Agreement
that, for a period of two years from the date of the Acquisition, it will cause
the Texas Adviser to provide compensation and employee benefits which are
substantially comparable in the aggregate to those presently provided. The Texas
Adviser does not anticipate that the Acquisition or any ancillary transactions
will cause a reduction in the quality of services now provided to the Texas
Fund, or have any adverse effect on the Texas Adviser's ability to fulfill its
obligations under the New Advisory Agreement or to operate its businesses in a
manner consistent with past business practices.
Certain officers of the Texas Adviser, including Dennis J. McDonnell, who also
is a member of the Texas Board, and Don G. Powell, who was a member of the Texas
Board prior to August 1996, previously entered into employment agreements with
VKAC Holding which expire from between 1997 and 2000. Certain officers of the
Texas Adviser also previously entered into retention agreements with VKAC
Holding, which will remain in place for two years following the consummation of
the Acquisition. The Merger Agreement contemplates that Morgan Stanley will, and
will cause VKAC Holding to, honor such employment and retention agreements. The
employment agreements and retention agreements are intended to assure that the
services of the officers are available to the Texas Adviser (and thus to the
Texas Fund) for a remaining term of two to four years. As described above,
certain officers and employees of VKAC and the Texas Adviser, including Messrs.
McDonnell and Powell, are expected to contribute their existing shares of common
stock of VKAC Holding to MSAM Holdings II, Inc. in exchange for approximately
$25 million shares of preferred stock in MSAM Holdings II, Inc. which, in turn,
will be exchangeable into common stock, par value $1.00 per share, of Morgan
Stanley at specified times over a four year period. Such shares of preferred
stock will represent, in the aggregate, 5% of the combined voting power in MSAM
Holdings II, Inc.
D. THE ADVISORY AGREEMENTS
Consummation of the Acquisition may constitute an "assignment" (as defined in
the 1940 Act) of the investment advisory agreement currently in effect between
the Texas Fund and the Texas Adviser (the "Current Advisory Agreement"). As
required by the 1940 Act, the Current Advisory Agreement provides for its
automatic termination in the event of an assignment. See "The Current Advisory
Agreement" below.
In anticipation of the Acquisition and in order for the Texas Adviser to
continue to serve as investment adviser to the Texas Fund after consummation of
the Acquisition, a new investment advisory agreement (the "New Advisory
Agreement") between the Texas Fund and the Texas Adviser must be approved (i) by
a majority of the Trustees of the Texas Fund who are not parties to the New
Advisory
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Agreement or interested persons of any such party ("Disinterested Trustees") and
(ii) by holders of a majority of the outstanding voting securities (within the
meaning of the 1940 Act) of the Texas Fund. See "The New Advisory Agreement"
below.
THE CURRENT ADVISORY AGREEMENT. The Texas Adviser has acted as investment
adviser and manager for the Texas Fund since the commencement of its investment
operations on March 2, 1992. The Current Advisory Agreement for the Texas Fund
was last approved by a majority of the Trustees, including a majority of the
Disinterested Trustees, voting in person at a meeting called for that purpose on
May 10, 1995, to continue the Current Advisory Agreement for a period of two
years. The Current Advisory Agreement was last approved by shareholders of the
Texas Fund at a meeting held on December 16, 1994 relating to the acquisition of
the Texas Adviser's corporate parent by The Van Kampen Merritt Companies, Inc.
The Current Advisory Agreement provides that the Texas Adviser will supply
investment research and portfolio management, including the selection of
securities for the Texas Fund to purchase, hold or sell and the selection of
brokers through whom the Texas Fund's portfolio transactions are executed. The
Texas Adviser also administers the business affairs of the Texas Fund, furnishes
offices, necessary facilities and equipment, provides administrative services,
and permits its officers and employees to serve without compensation as Trustees
and officers of the Texas Fund if duly elected to such positions.
The Current Advisory Agreement provides that the Texas Adviser shall not be
liable for any error of judgment or of law, or for any loss suffered by the
Texas Fund in connection with the matters to which the Current Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties under the Current
Advisory Agreement.
The fees payable to the Texas Adviser by the Texas Fund are reduced by any
commissions, tender solicitation and other fees, brokerage or similar payments
received by the Texas Adviser or any other direct or indirect majority-owned
subsidiary of VKAC Holding in connection with the purchase or sale of portfolio
investments of the Texas Fund, less expenses incurred by the Texas Adviser in
connection with such activities.
The Texas Adviser's activities are subject to the review and supervision of
the Texas Board to which the Texas Adviser renders periodic reports with respect
to the Texas Fund's investment activities. The Current Advisory Agreement may be
terminated by either party, at any time, without penalty, upon 60 days written
notice, and automatically terminates in the event of its assignment. The Current
Advisory Agreement also terminates if either the Texas Fund or the Texas Adviser
goes into liquidation or a receiver is appointed with respect to their assets or
if either party breaches the Current Advisory Agreement and fails to remedy the
breach within 30 days of receiving notice thereof from the other party.
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<PAGE> 35
The net assets of the Texas Fund as of July 31, 1996, as well as other
investment companies sponsored by VKAC and advised by either of the Advisers,
and other investment companies for which either of the Advisers act as
sub-adviser, and the rates of compensation to the respective Adviser are set
forth at Exhibit B hereto.
The Texas Fund pays all other expenses incurred in its operation including,
but not limited to, direct charges relating to the purchase and sale of its
portfolio securities, interest charges, fees and expenses of outside legal
counsel and independent auditors, taxes and governmental fees, costs of share
certificates and any other expenses (including clerical expenses) of issuance,
sale or repurchase of its shares, expenses in connection with its dividend
reinvestment plan, membership fees in trade associations, expenses of
registering and qualifying its shares for sale under federal and state
securities laws, expenses of printing and distribution, expenses of filing
reports and other documents filed with governmental agencies, expenses of annual
and special meetings of the trustees and shareholders, fees and disbursements of
the transfer agents, custodians and sub-custodians, expenses of disbursing
dividends and distributions, fees, expenses and out-of-pocket costs of the
trustees who are not affiliated with the Texas Adviser, insurance premiums,
indemnification and other expenses not expressly provided for in the Current
Advisory Agreement, and any extraordinary expenses of a nonrecurring nature. The
Texas Fund also compensates the Texas Adviser, VKAC, VKAC Distributors and
ACCESS (defined below) for certain non-advisory services provided pursuant to
agreements discussed below under "Other Information -- D. The Non-Advisory
Agreements".
The foregoing summary of the Current Advisory Agreement between the Texas Fund
and the Texas Adviser is qualified by reference to the form of New Advisory
Agreement attached to this Proxy Statement as Exhibit C, which has been marked
to show changes from such Current Advisory Agreement.
THE NEW ADVISORY AGREEMENT. The Texas Board approved a proposed New Advisory
Agreement between the Texas Fund and the Texas Adviser on July 25, 1996, the
form of which is attached hereto as Exhibit C. The form of the proposed New
Advisory Agreement is substantially identical to the Current Advisory Agreement
between the Texas Fund and the Texas Adviser, except for the dates of execution,
effectiveness and termination.
The investment advisory fee as a percentage of net assets payable by the Texas
Fund will be the same under the New Advisory Agreement as under the Current
Advisory Agreement. If the investment advisory fee under the New Advisory
Agreement had been in effect for the Texas Fund's most recently completed fiscal
year, the contractual advisory fees due to the Texas Adviser would have been
identical to those due under the Current Advisory Agreement.
The Texas Board, along with the Boards of Trustees of each of the other Van
Kampen American Capital funds, held a joint meeting on July 25, 1996, at which
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<PAGE> 36
meeting the Trustees, including the Disinterested Trustees, concluded that if
the Acquisition occurs, entry by each respective fund into a new advisory
agreement would be in the best interest of each fund and the shareholders of
each fund, including the Texas Fund. The Texas Board, including the
Disinterested Trustees, unanimously approved the New Advisory Agreement for the
Texas Fund and each of the other Van Kampen American Capital funds and
recommended each such agreement for approval by the shareholders of the
respective fund. The New Advisory Agreement would take effect upon the later to
occur of (i) the obtaining of shareholder approval or (ii) the closing of the
Acquisition. The New Advisory Agreement will continue in effect until May 30,
1997 and thereafter for successive annual periods as long as such continuance is
approved in accordance with the 1940 Act.
In evaluating the New Advisory Agreement, the Texas Board took into account
that the Texas Fund's Current Advisory Agreement and its proposed New Advisory
Agreement, including the terms relating to the services to be provided
thereunder by the Texas Adviser and the fees and expenses payable by the Texas
Fund, are substantially identical, except for the dates of execution,
effectiveness and termination. The Trustees also considered other possible
benefits to the Advisers and Morgan Stanley that may result from entering into
the new advisory agreements, including the continued use, to the extent
permitted by law, of Morgan Stanley & Co. and its affiliates for brokerage
services and the possible retention of Morgan Stanley Asset Management Inc. as
subadviser by certain Van Kampen American Capital funds.
The Texas Board also considered the terms of the Merger Agreement and the
possible effects of the Acquisition upon VKAC's and the Texas Adviser's
organization and upon the ability of the Texas Adviser to provide advisory
services to the Texas Fund. The Texas Board considered the skills and
capabilities of the Texas Adviser and the representations of Morgan Stanley that
no material change was planned in the current management or facilities of the
Texas Adviser (or the Municipal Adviser). In this regard, representatives of
Morgan Stanley met with the Texas Board, along with the Boards of Trustees of
each of the other Van Kampen American Capital funds, at the joint board meeting
at which time such representatives described the resources available to VKAC and
the Advisers, after giving effect to the Acquisition, to secure for each fund
quality investment research, investment advice and other client services. The
Texas Board considered the financial resources of Morgan Stanley and Morgan
Stanley's representation to the Texas Board that it will provide sufficient
capital to support the operations of the Texas Adviser. The Texas Board also
considered the reputation, expertise and resources of Morgan Stanley and its
affiliates in domestic and international financial markets. The Texas Board
considered the continued employment of members of senior management of the Texas
Adviser and VKAC pursuant to employment and retention agreements and the
incentives provided to such members and other key
30
<PAGE> 37
employees of the Texas Adviser and VKAC, to be important to help to assure
continuity of the personnel primarily responsible for maintaining the quality of
investment advisory and other services for the Texas Fund.
The Texas Board considered the effects on the Texas Fund of the Texas Adviser
becoming an affiliated person of Morgan Stanley. Following the Acquisition, the
1940 Act will prohibit or impose certain conditions on the ability of the Texas
Fund and other Van Kampen American Capital funds to engage in certain
transactions with Morgan Stanley and its affiliates. For example, absent
exemption relief the funds will be prohibited from purchasing securities from
Morgan Stanley & Co., a wholly-owned broker-dealer subsidiary of Morgan Stanley,
in transactions in which Morgan Stanley & Co. acts as a principal, and the funds
will have to satisfy certain conditions in order to engage in securities
transactions in which Morgan Stanley & Co. acts as a broker or to purchase
securities in an underwritten offering in which Morgan Stanley & Co. is acting
as an underwriter. In this connection, management of the Texas Adviser
represented to the Texas Board that they do not believe these prohibitions or
conditions will have a material effect on the management or performance of the
Texas Fund.
The Texas Board was advised that Section 15(f) of the 1940 Act is applicable
to the Acquisition. Section 15(f) of the 1940 Act permits in the context of a
change in control of an investment adviser to a registered investment company,
the receipt by such investment adviser, or any of its affiliated persons, of an
amount of benefit in connection with such sale, as long as two conditions are
satisfied. First, an "unfair burden" must not be imposed on the investment
company for which the investment adviser acts in such capacity as a result of
the sale of such interest, or any express or implied terms, conditions or
understandings applicable thereto. The term "unfair burden," as defined in the
1940 Act, includes any arrangement during the two-year period after the
transaction whereby the investment adviser (or predecessor or successor
adviser), or any interested person of any such adviser, receives or is entitled
to receive any compensation, directly or indirectly, from the investment company
or its security holders (other than fees for bona fide investment advisory and
other services), or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than ordinary fees for bona fide principal underwriting services).
Management of the Texas Fund is aware of no circumstances arising from the
Acquisition, preparatory transactions to the Acquisition or any potential
financing that might result in the imposition of an "unfair burden" on the Texas
Fund. Moreover, Morgan Stanley has agreed in the Merger Agreement that, upon
consummation of the Acquisition, it will take no action which would have the
effect, directly or indirectly, of violating any of the provisions of Section
15(f) of the 1940 Act in respect of the Acquisition. In this regard, the Merger
Agreement provides that Morgan Stanley will use its reasonable best efforts to
assure that
31
<PAGE> 38
(i) no "unfair burden" will be imposed on any fund as a result of the
transactions contemplated by the Merger Agreement and (ii) except as provided in
the Merger Agreement, the investment advisory fees paid by the funds will not be
increased for a period of two years from the closing of the Acquisition and
that, during such period, advisory fee waivers shall not be permitted to expire
except in accordance with their terms. An Adviser may permit a voluntary fee
waiver unilaterally adopted by it to expire at any time and no assurance can be
given that voluntary waivers will not be permitted to expire during the two year
period. During the two year period following the Acquisition, the Advisers do
not intend to change their policies with respect to the circumstances under
which any voluntary fee waivers may be permitted to expire. Following the
Acquisition, to the extent permitted by applicable law, VKAC anticipates that
the funds will continue to use Morgan Stanley & Co. and its affiliates for
brokerage services.
The second condition of Section 15(f) is that during the three-year period
immediately following a transaction to which Section 15(f) is applicable, at
least 75% of the subject investment company's board of trustees must not be
"interested persons" (as defined in the 1940 Act) of the investment company's
investment adviser or predecessor adviser. The current composition of the Texas
Board of the Texas Fund would be in compliance with such condition subsequent to
the Acquisition.
Based upon its review, the Texas Board concluded that the New Advisory
Agreement is in the best interest of the Texas Fund and the Texas Fund's
shareholders. Accordingly, after consideration of the above factors, and such
other factors and information that it deemed relevant, the Texas Board,
including the Disinterested Trustees, unanimously approved the New Advisory
Agreement and voted to recommend its approval to the shareholders of the Texas
Fund.
In the event that shareholders of the Texas Fund do not approve the New
Advisory Agreement and the Acquisition is consummated, the Texas Board would
seek to obtain for the Texas Fund interim investment advisory services at the
lesser of cost or the current fee rate either from the Texas Adviser or from
another advisory organization. Thereafter, the Texas Board would either
negotiate a new investment advisory agreement with an advisory organization
selected by the Texas Board or make appropriate arrangements, in either event
subject to approval of the shareholders of the Texas Fund. In the event the
Acquisition is not consummated, the Texas Adviser would continue to serve as
investment adviser of the Texas Fund pursuant to the terms of the Current
Advisory Agreement.
E. SHAREHOLDER APPROVAL AND BOARD RECOMMENDATION
To become effective, the New Advisory Agreement for the Texas Fund must be
approved by "vote of a majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Texas Fund. The vote of a majority of the
outstanding voting
32
<PAGE> 39
securities means the lesser of the vote of (i) 67% or more of the shares of the
Texas Fund entitled to vote thereon present at the Special Meeting if the
holders of more than 50% of such outstanding shares are present in person or
represented by proxy; or (ii) more than 50% of such outstanding shares of the
Texas Fund entitled to vote thereon. The New Advisory Agreement for the Texas
Fund was approved by the Texas Board after consideration of all factors which
they determined to be relevant to their deliberations, including those discussed
above. The Texas Board also determined to submit the New Advisory Agreement for
the Texas Fund for consideration by the shareholders of the Texas Fund. THE
TEXAS BOARD RECOMMENDS VOTING "FOR" THE NEW ADVISORY AGREEMENT.
- ------------------------------------------------------------------------------
OTHER INFORMATION
- ------------------------------------------------------------------------------
A. SHAREHOLDERS OF THE TEXAS FUND,
THE MUNICIPAL FUND AND VKAC
At the close of business on July 19, 1996, the record date with respect to the
Special Meeting, there were 916,669 Class A shares, 676,142 Class B shares and
80,336 Class C shares, respectively, of the Texas Fund. As of such date, the
trustees and officers of the Texas Fund as a group own less than 1% of the
outstanding shares of the Texas Fund. As of such date, no person was known by
the Texas Fund to own beneficially or of record as much as 5% of the Class A
shares of the Texas Fund except for: Meyer Levy, 4912 W. Parker Rd., Plano, TX
75093-3317 who owned 110,439 or 12.05% of the Class A shares. As of such date,
no person was known by the Texas Fund to own beneficially or of record as much
as 5% of the Class B shares or Class C shares of the Texas Fund.
At the close of business on July 19, 1996, there were 52,652,401 Class A
shares, 13,673,895 Class B shares and 763,156 Class C shares, respectively, of
the Municipal Fund. As of such date, the trustees and officers of the Municipal
Fund as a group own less than 1% of the shares of the Municipal Fund. As of such
date, no person was known by the Municipal Fund to own beneficially or of record
as much as 5% of the Class A shares or Class B shares of the Municipal Fund. As
of such date, no person was known by the Municipal Fund to own beneficially or
of record as much as 5% of the Class C shares of the Municipal Fund except as
follows: Hill & Wilkinson Inc., 11969 Plano Rd Ste 190, Dallas, TX 75243-5440,
5.34%.
33
<PAGE> 40
B. SHAREHOLDER PROPOSALS
As a general matter, the Municipal Fund does not intend to hold future regular
annual or special meetings of its shareholders unless required by the 1940 Act.
In the event the Reorganization is not consummated, the Texas Fund does not
intend to hold future regular annual or special meetings of its shareholders
unless required by the 1940 Act. Any shareholder who wishes to submit proposals
for consideration at a meeting of shareholders of the Municipal Fund or the
Texas Fund should send such proposal to the respective 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 fund a
reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included.
C. ADDITIONAL INFORMATION REGARDING THE ADVISERS
The following table sets forth certain information concerning the principal
executive officers and directors of each of the Advisers.
DIRECTORS AND OFFICERS OF THE ADVISERS
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
- ------------------------- -----------------------------------------------------
<S> <C>
Don G. Powell............ President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VKAC Holding and VKAC and Chairman, Chief Executive
Houston, TX 77056 Officer and a Director of VKAC Distributors, the
Advisers, Van Kampen American Capital Management,
Inc. and Van Kampen American Capital Advisors, Inc.
Chairman, President and a Director of Van Kampen
American Capital Exchange Corporation, American
Capital Contractual Services, Inc., Van Kampen
Merritt Equity Holdings Corp., and American Capital
Shareholders Corporation. Chairman and a Director of
ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen
Merritt Equity Advisors Corp., McCarthy, Crisanti &
Maffei, Inc., and Van Kampen American Capital Trust
Company. Chairman, President and a Director of Van
Kampen American Capital Services, Inc. President,
Chief Executive Officer and a Trustee/Director of
certain open-end investment companies and closed-end
investment advised by the Texas Adviser. Prior to
July 1996, Chairman and Director of VSM Inc. and VCJ
Inc. Prior to July 1996, President, Chief Executive
Officer and a Trustee/Director of certain open-end
investment companies and certain closed-end
investment companies advised by the Advisers.
</TABLE>
34
<PAGE> 41
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
- ------------------------- -----------------------------------------------------
<S> <C>
Dennis J. McDonnell...... President, Chief Operating Officer and a Director of
One Parkview Plaza Advisers, Van Kampen American Capital Advisors, Inc.
Oakbrook Terrace, IL and Van Kampen American Capital Management, Inc.
60181 Executive Vice President and a Director of VKAC
Holding and VKAC. President and Director of Van
Kampen Merritt Equity Advisors Corp. Director of Van
Kampen Merritt Equity Holdings Corp. and McCarthy,
Crisanti & Maffei, S.A. Chief Executive Officer and
Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and a Director of MCM Asia Pacific Company,
Limited. President and Trustee/Director of open-end
investment companies and closed-end investment
companies advised by the Advisers. Prior to July
1996, President, Chief Operating Officer and Director
of VSM Inc. and VCJ Inc. Prior to December, 1991,
Senior Vice President of Van Kampen Merritt, Inc.
Ronald A. Nyberg......... Executive Vice President, General Counsel and
One Parkview Plaza Secretary of VKAC Holding and VKAC. Executive Vice
Oakbrook Terrace, IL President, General Counsel and a Director of the VKAC
60181 Distributors, the Advisers, Van Kampen American
Capital Management, Inc., Van Kampen Merritt Equity
Advisors Corp., and Van Kampen Merritt Equity
Holdings Corp. Executive Vice President, General
Counsel and Assistant Secretary of Van Kampen
American Capital Advisors, Inc., American Capital
Contractual Services, Inc., Van Kampen American
Capital Exchange Corporation, ACCESS Investor
Services, Inc., Van Kampen American Capital Services,
Inc. and American Capital Shareholders Corporation.
Executive Vice President, General Counsel, Assistant
Secretary and Director of Van Kampen American Capital
Trust Company. General Counsel of McCarthy, Crisanti
& Maffei, Inc. Vice President and Secretary of
open-end investment companies and closed-end
investment companies advised by the Advisers.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company
Institute. Prior to July 1996, Executive Vice
President and General Counsel of VSM Inc., and
Executive Vice President, General Counsel and
Director of VCJ Inc.
</TABLE>
35
<PAGE> 42
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
- ------------------------- -----------------------------------------------------
<S> <C>
William R. Rybak......... Executive Vice President and Chief Financial Officer
One Parkview Plaza of VKAC Holding and VKAC since February 1993, and
Oakbrook Terrace, IL Treasurer of VKAC Holding through December 1993.
60181 Executive Vice President, Chief Financial Officer and
a Director of the VKAC Distributors, the Advisers,
and Van Kampen American Capital Management, Inc.
Executive Vice President, Chief Financial Officer,
Treasurer and a Director of Van Kampen Merritt Equity
Advisors Corp. Executive Vice President and Chief
Financial Officer of the Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital Trust
Company, ACCESS Investor Services, Inc., and American
Capital Contractual Services, Inc. Executive Vice
President, Chief Financial Officer and Treasurer of
American Capital Shareholders Corporation, Van Kampen
American Capital Services, Inc. and Van Kampen
Merritt Equity Holdings Corp. Chief Financial Officer
and Treasurer of McCarthy, Crisanti & Maffei, Inc.
Chairman of the Board of Hinsdale Financial Corp., a
savings and loan holding company. Prior to July 1996,
Executive Vice President, Chief Financial Officer and
a Director of VCJ Inc., and Executive Vice President
and Chief Financial Officer of VSM Inc.
Peter W. Hegel........... Executive Vice President of the Municipal Adviser,
One Parkview Plaza Van Kampen American Capital Advisors, Inc., Van
Oakbrook Terrace, IL Kampen American Capital Management, Inc. Executive
60181 Vice President and Director of the Texas Adviser.
Director of McCarthy, Crisanti & Maffei, Inc. Vice
President of open-end investment companies and
closed-end investment companies advised by the
Advisers. Prior to July 1996, Director of VSM Inc.
Robert C. Peck, Jr. ..... Executive Vice President of the Municipal Adviser and
2800 Post Oak Blvd. Van Kampen American Capital Management, Inc.
Houston, TX 77056 Executive Vice President and Director of the Texas
Adviser and Van Kampen American Capital Advisors,
Inc. Vice President of open-end investment companies
advised by the Advisers.
Alan T. Sachtleben....... Executive Vice President of the Municipal Adviser and
One Parkview Plaza Van Kampen American Capital Management, Inc.
Oakbrook Terrace, IL Executive Vice President and a Director of the Texas
60181 Adviser and Van Kampen American Capital Advisors,
Inc. Vice President of open-end investment companies
advised by the Advisers.
</TABLE>
36
<PAGE> 43
The following table sets forth the trustees and officers of the Funds who are
also officers of the Advisers.
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE FUNDS
- ------------------------------------- ---------------------------------------------
<S> <C>
Dennis J. McDonnell.................. Trustee and President
William N. Brown..................... Vice President
Peter W. Hegel....................... Vice President
Curtis W. Morell..................... Vice President and Chief Accounting Officer
Ronald A. Nyberg..................... Vice President and Secretary
Robert C. Peck, Jr................... Vice President
Alan T. Sachtleben................... Vice President
Paul R. Wolkenberg................... Vice President
Edward C. Wood III................... Vice President and Chief Financial Officer
John L. Sullivan..................... Treasurer
Tanya M. Loden....................... Controller
Nicholas Dalmaso..................... Assistant Secretary
Huey P. Falgout, Jr.................. Assistant Secretary
Scott E. Martin...................... Assistant Secretary
Weston B. Wetherell.................. Assistant Secretary
Steven M. Hill....................... Assistant Treasurer
Robert Sullivan...................... Assistant Controller
</TABLE>
The officers of the Funds serve for one year or until their respective
successors are chosen and qualified. The Funds' officers receive no compensation
from the Funds but are all officers of the Advisers, VKAC Distributors, VKAC or
their affiliates and receive compensation in such capacities.
D. THE NON-ADVISORY AGREEMENTS
The Texas Fund, consistent with other Van Kampen American Capital funds
advised by the Texas Adviser, has entered into certain other agreements with the
Texas Adviser, VKAC Distributors, the distributor of the shares and an affiliate
of the Texas Adviser, ACCESS Investor Services, Inc., the transfer agent for
each Van Kampen American Capital fund ("ACCESS"), and an affiliate of the Texas
Adviser, or VKAC, as the case may be. These agreements are not terminated by the
change of control and do not need to be voted on by the shareholders of the
Texas Fund at this Special Meeting. These agreements include a fund accounting
agreement, a transfer agency agreement, a distribution agreement, distribution
plan and service plan. For a complete description of these agreements see the
Texas Fund Prospectus and Statement of Additional Information. The address of
VKAC Distributors is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
- ------------------------------------------------------------------------------
VOTING INFORMATION AND REQUIREMENTS
- ------------------------------------------------------------------------------
Holders of shares of the Texas Fund are entitled to one vote per share on
matters as to which they are entitled to vote. The Texas Fund does not utilize
cumulative voting.
37
<PAGE> 44
Each valid proxy given by a shareholder of the Texas Fund will be voted by the
persons named in the proxy in accordance with the instructions marked thereon
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 Texas Board "FOR" approval of the Reorganization and
"FOR" approval of the New Advisory Agreement. Abstentions do not count as votes
"FOR" a proposal and are treated as votes "AGAINST". Broker non-votes (i.e.,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owner or other person entitled to vote shares
on a particular matter with respect to which the broker or nominees do not have
discretionary power) do not count as votes "FOR" or "AGAINST" a proposal and are
disregarded in determining the "votes cast" when the voting requirement for the
proposal is based on achieving a percentage of the voting securities entitled to
vote present in person or by proxy at the meeting. Broker non-votes do not count
as votes "FOR" and are treated as votes "AGAINST" when the voting requirement
for the proposal is based on achieving a percentage of the outstanding voting
securities entitled to vote. A majority of the outstanding shares entitled to
vote on a proposal must be present in person or by proxy to have a quorum to
conduct business at the Special Meeting. Abstentions and broker non-votes will
be deemed present for quorum purposes.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Texas Fund a written notice of revocation, by
delivering a duly executed proxy bearing a later date, or by attending the
Special Meeting and voting in person. The giving of a proxy will not affect your
right to vote in person if you attend the Special Meeting and wish to do so.
It is not anticipated that any action will be asked of the shareholders of the
Texas 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.
APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF THE TEXAS FUND ENTITLED TO VOTE.
APPROVAL OF THE NEW ADVISORY AGREEMENT WILL REQUIRE THE FAVORABLE "VOTE OF A
MAJORITY OF THE OUTSTANDING VOTING SECURITIES" WHICH IS DEFINED UNDER THE 1940
ACT AS THE LESSER OF (I) 67% OR MORE OF THE VOTING SECURITIES ENTITLED TO VOTE
THEREON PRESENT IN PERSON OR BY PROXY AT THE SPECIAL MEETING, IF THE HOLDERS OF
MORE THAN 50% OF THE OUTSTANDING VOTING SECURITIES ENTITLED TO VOTE THEREON ARE
PRESENT IN PERSON OR REPRESENTED BY PROXY, OR (II) MORE THAN 50% OF THE
OUTSTANDING VOTING SECURITIES ENTITLED TO VOTE THEREON.
In the event that sufficient votes in favor of a proposal are not received by
the scheduled time of the Special Meeting, the persons named in the proxy may
38
<PAGE> 45
propose and vote in favor of one or more adjournments of the Special 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 a proposal
to approve it, proxies would be voted in favor of adjournment only if the Texas
Board determined that adjournment and additional solicitation was reasonable and
in the best interest of the shareholders of the Texas 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 Special Meeting to be adjourned.
Proxies of shareholders of the Texas Fund are solicited by the Texas Board. In
order to obtain the necessary quorum at the Special Meeting, additional
solicitation may be made by mail, telephone, telegraph or personal interview by
representatives of the Texas Adviser, the Municipal Adviser or VKAC, or by
dealers or their representatives. In addition, such solicitation servicing may
also be provided by Applied Mailing Systems, a solicitation firm located in
Boston, Massachusetts, at a cost estimated to be approximately $900, plus
reasonable expenses.
September 12, 1996
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
39
<PAGE> 46
EXHIBIT A
MANAGEMENT'S DISCUSSION OF
MUNICIPAL FUND AND TEXAS FUND PERFORMANCE
Management's Discussion of Municipal Fund Performance as of the Annual Report
dated December 31, 1995.
LETTER TO SHAREHOLDERS
January 24, 1996
Dear Shareholder,
For most investors, it would be hard to surpass the success enjoyed during
1995. The stock and bond markets achieved substantial gains, driven by a
combination of continuing economic growth and low inflation. The strength of
equity and fixed-income securities in 1995 was particularly impressive because
it followed a year in which both markets declined. People who remained invested
during 1995 generally shared in the growth of the markets, while investors who
retreated after 1994's downturn may have missed out on the double-digit returns.
The rebound in the markets last year reinforces the importance of maintaining
a long-term perspective for your investments. While the environment for stocks
and bonds remains positive, it is unlikely that 1996 will see a repeat of the
markets' strong 1995 performance. However, over the long-term, stocks have
outperformed virtually all other types of investments, and bonds have met the
needs of investors who seek capital preservation and regular income.
ECONOMIC OVERVIEW
The U.S. economy grew throughout 1995, though the rate of growth slowed toward
year-end. The gross domestic product (the value of all goods and services
produced in the United States) grew at an annual rate of more than 4.2 percent
in the third quarter of 1995, but slowed to an estimated 2 to 3 percent in the
fourth quarter, with retail and auto sales particularly sluggish. The slower
growth rate eased concerns about a rise in inflation and allowed the Federal
Reserve Board to lower short-term interest rates by a quarter-percentage point
in late December. The reduction in rates during the latter half of 1995 is
expected to help generate moderate economic growth in 1996, just as the Fed's
raising of short-term rates in 1994 helped slow economic growth in 1995.
The cut in short-term rates, combined with modest growth forecasts, was viewed
by the financial markets as a positive event, pushing up both stock and bond
prices.
A-1
<PAGE> 47
For the year ended December 31, 1995, the Standard & Poor's 500-Stock Index
achieved a total return of 37.45 percent. The yield on 10-year Treasury notes
was 5.57 percent on December 31, compared to 7.83 percent at the beginning of
the year. Because bond prices and yields move in opposite directions, bond
prices rose. Many observers expect the Fed to cut rates further if Congress and
the President are able to reach an agreement on the federal budget, provided
economic conditions justify further easing.
With a low inflation, low interest rate environment, corporate earnings
remained quite strong during the year, helping to push stocks to new highs. The
strongest sectors were technology and finance, as these stocks benefited from
the impact of the Internet, telecommunications deregulation and bank mergers.
U.S. companies with global operations also did well, aided by a declining U.S.
dollar.
ECONOMIC OUTLOOK
Looking ahead, we are cautiously optimistic. We expect the economy to grow at
a rate of 2 to 3 percent throughout 1996, with growth stronger in the second
half of the year as the full impact of the Fed's rate cuts take effect. Lower
rates will have the greatest impact on interest-sensitive industries, such as
housing. Although inflation appears to be under control, there probably will be
some cyclical upward pressure in 1996.
The current economic conditions are ideal for stocks, especially those of
smaller companies, because they tend to be affected less by economic cycles. The
outlook for the fixed-income market--including municipal bonds--is positive,
too. In the near-term, we believe domestic markets will benefit from a stable
U.S. dollar and increased business activity driven in part by a number of
recently announced strategic reorganizations of some of the nation's blue chip
industry leaders.
During recent months, debate over tax reform and the federal deficit has
dominated the agenda in Washington. Now that we are in a presidential election
year, tax reform likely will replace the budget battle as the top issue in
Washington. There has been varied speculation about the impact tax reform could
have on the economy and on various types of investments. We are following the
tax reform debate very closely, and we will keep you updated on this issue
throughout the year. See the winter issue of Your Portfolio for a detailed
discussion of tax reform.
On the following pages, you can read about your Fund's performance in 1995, as
well as the portfolio management team's outlook for the Fund in the coming
months. We hope that you will find this information helpful.
CORPORATE NEWS
As part of our commitment to helping you achieve your investment goals, Van
Kampen American Capital strives to provide shareholders with the best service in
A-2
<PAGE> 48
the mutual fund industry. That is why we are especially pleased to have received
the 1995 Quality Tested Service Seal, which is awarded annually by DALBAR, Inc.,
an independent research firm. The Seal, which symbolizes the achievement of the
highest tier of service in the mutual fund industry, was awarded to American
Capital annually from 1990 to 1994 and we are honored that the service provided
by Van Kampen American Capital has achieved the same level of excellence.
Sincerely,
<TABLE>
<S> <C>
/s/ Don G. Powell /s/ Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chief Executive Officer President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
</TABLE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1995
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)...................... 15.61% 14.74% 14.74%
One-year total return(2)...... 10.12% 10.74% 13.74%
Five-year average annual total
return(2)................... 7.66% N/A N/A
Life-of-Fund average annual
total return(2)............. 7.55% 5.12% 3.99%
Commencement date............. 08/01/90 08/24/92 08/13/93
Distribution Rates and Yield
Distribution rate(3).......... 5.40% 4.94% 4.94%
Taxable-equivalent
distribution rate(4)........ 8.44% 7.72% 7.72%
SEC Yield(5).................. 4.61% 4.08% 4.08%
</TABLE>
- ---------------
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and
1% for C shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (4.75% for A shares)
or contingent deferred sales charge for early withdrawal (4% for B shares
and 1% for C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
A-3
<PAGE> 49
(4) Taxable-equivalent calculations reflect a federal income tax rate of 36%.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio
should theoretically generate for the 30-day period ending December 30,
1995. Had certain expenses of the Fund not been assumed by VKAC, the SEC
Yield would have been 4.60%, 4.07% and 4.07% for Classes A, B and C,
respectively, and total returns would have been lower.
A portion of the interest income may be subject to the alternative minimum tax
(AMT).
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments
are being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
A-4
<PAGE> 50
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Municipal Income Fund vs. Lehman Brothers Municipal
Bond Index (August 1990 through December 1995)
<TABLE>
<CAPTION>
Lehman Bros.
Measurement Period VKAC Municipal Municipal Bond
(Fiscal Year Covered) Income Fund Index
<S> <C> <C>
Aug 1990 9526 10000
Dec 1990 9771 10286
Dec 1991 11137 11536
Dec 1992 12216 12554
Dec 1993 13706 14095
Dec 1994 12832 13366
Dec 1995 14836 15700
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions for the period ended December 31,
1995, and includes payment of the maximum sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
A-5
<PAGE> 51
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Municipal Income Fund about the key events and economic forces which shaped the
markets during the past fiscal year. The team includes David C. Johnson,
portfolio manager, and Peter W. Hegel, executive vice president for fixed-income
investments. The following excerpts reflect their views on the Fund's
performance during the twelve-month period ended December 31, 1995.
Q WHAT WERE SOME OF THE IMPORTANT EVENTS OR MARKET CONDITIONS
THAT HAD AN IMPACT ON THE FUND'S PERFORMANCE DURING 1995?
A The bond market in general was quite strong in 1995, and
municipal securities, of course, participated in the year's
rally. Clearly, the environment for investing in fixed-income
securities was extremely favorable across the board.
Inflation continued to remain in check, with rates hovering around the 2
percent range, while the economy grew at a fairly steady but modest pace. As a
result, the Federal Reserve Board lowered its key lending rate (the federal
funds rate) by one quarter percentage point in July of 1995 and again, by
one-quarter of a percentage point, in December. Naturally, bond prices were
driven higher as rates trended downward over the course of the year (bond prices
go up when rates go down, and vice versa).
Another factor that had been priced into the municipal market late in the year
was the expectation that a federal budget agreement was inevitable. The market
anticipated a positive budget compromise, and reacted accordingly. Even though
the possibility of tax reform weighed on the market to some extent, the belief
that progress on the federal budget deficit would be made helped to bolster
municipal bonds, especially at the longer end of the maturity spectrum.
Q HOW WAS THE FUND POSITIONED TO TAKE ADVANTAGE OF MARKET
CONDITIONS?
Van Kampen American Capital Municipal Bond Fund was merged into
A the Van Kampen American Capital Municipal Income Fund earlier
this year. The merger of the two Funds went smoothly and did not
significantly change the structure of the portfolio.
In response to market challenges, the Fund maintained its portfolio and sought
to remain well diversified by sector concentration and rating distribution. As
of December 31, 1995, approximately 40 percent of total assets were rated AAA by
Standard & Poor's Ratings Group (their highest rating), while 20 percent were
non-rated securities.
Our strong internal credit research team includes six analysts who focus on
the high-yield sector, to help find the highest relative value available in the
market on
A-6
<PAGE> 52
lower-rated or non-rated issues. From a sector concentration perspective, the
Fund has exposure to eighteen different sectors--the largest being health care
(20.6 percent as of December 31, 1995). We have analysts dedicated to
researching the health care industry, and our proprietary research database
contains detailed financial information on hundreds of hospitals and health care
facilities across the nation.
PORTFOLIO COMPOSITION AS OF DECEMBER 31, 1995
Tax District 5.2% Health Care 20.6%
Higher Education 5.2% Other* 19.6%
Retail/Electric/Gas/Telephone 5.3% Industrial Revenue 10.5%
Wholesale Electric 6.0%
Water & Sewer 6.5%
General Purpose 6.9%
Transportation 7.0%
Single Family Housing 7.2%
*Other represents 8 sectors, each of which are less than 4%
Q HOW WELL DID THE FUND PERFORM UNDER THESE CONDITIONS?
The Fund responded well to the market over the previous year,
A and turned in a solid performance. The Fund's Class A share net
asset value increased over the course of 1995, closing the year at
$15.55 per share, up from $14.26 per share at the beginning of the year. Over
the twelve-month period ended December 31, 1995, Class A share total return at
net asset value, was 15.61 percent(1), compared to the total return of the
Lehman Brothers Municipal Bond Index, a broad-based, unmanaged index, which was
17.46 percent for the same period.
The Fund's Class A share distribution rate stood at 5.40 percent(3) as of
December 31, 1995, representing an attractive level of tax-exempt income. For an
investor in the 36 percent federal income tax bracket, that's the equivalent of
earning 8.44 percent(4) on a taxable investment. (Please refer to the chart on
page three for additional Fund performance results.)
Q WHAT IS YOUR OUTLOOK FOR THE FUND AND THE MARKET IN THE MONTHS
AHEAD?
A We're confident that the investment environment will remain
positive for fixed-income securities in the near-term.
Inflation appears to be under
control and the economy shows no signs of overheating.
A-7
<PAGE> 53
We anticipate the Fed will continue its accommodative monetary policy and
reduce the fed funds rate further during the first half of 1996. Based on the
historically high level of real interest rates (market rates less the inflation
rate), there seems to be room for short-term interest rates to trend lower,
which is a good sign for long-term rates as well.
We expect the supply of new municipal issues to be somewhat low in 1996, but
refunding activity should be high as the lower interest rate environment makes
it more attractive for municipalities to retire their higher-yielding
outstanding issues.
In general, conditions appear positive for the continuation of a favorable
environment in which to invest in fixed-income securities.
<TABLE>
<S> <C>
/s/ Peter W. Hegel /s/ David C. Johnson
Peter W. Hegel David C. Johnson
Executive Vice President Portfolio Manager
Fixed Income Investments
</TABLE>
Please see footnotes on page A-3.
A-8
<PAGE> 54
Management's Discussion of Texas Fund Performance as of the Annual Report
dated September 30, 1995.
LETTER TO SHAREHOLDERS
November 7, 1995
Dear Shareholder:
The first nine months of 1995 have been very positive for most investors. Both
the fixed-income and stock markets have made considerable gains during the
period ended September 30, 1995.
This year serves as a reminder of just how quickly markets can move and how
difficult it can be to predict the timing of those movements. Moreover, this
year reinforces the importance of maintaining a long-term perspective and
reaffirms the principle that it is time--not timing--that leads to investment
success.
ECONOMIC OVERVIEW
Due in large part to the Federal Reserve Board's efforts to tighten monetary
supply in 1994, the economy has slowed significantly this year. Despite a
stronger-than-expected third quarter growth rate of 4.2 percent, economic growth
during the first half of the year was substantially lower than its fourth
quarter 1994 rate of 5.1 percent. And, while other key economic data, including
unemployment rates and housing starts, have shown mixed signs during recent
months, the general economic trends for the year continue to support a "soft
landing" scenario.
Comfortable with the economy's rate of growth and level of inflation, the Fed
reversed its trend of raising interest rates and lowered short-term rates by a
quarter percent on July 6. Financial markets, perceiving that the Fed's monetary
initiatives had taken hold without driving the economy into a recession, rallied
through much of the year. With slowing growth, interest rates declined and the
value of many fixed-income investments rose (bond yields and prices move in
opposite directions). For example, the yield on 30-year Treasury securities fell
from 7.88 percent at the end of December 1994 to 6.50 percent at the end of
September 1995, while its price rose more than 16 percent. Likewise, the yield
on the Bond Buyer's Municipal Bond Index fell from 7.28 percent at the end of
December to 6.23 percent at the end of September. Although municipal bond yields
have declined, they are still offering competitive yields, particularly to those
investors in higher tax brackets.
ECONOMIC OUTLOOK
We believe the Fed will move cautiously before it continues to lower
short-term rates, waiting for further signs that the economy has settled into a
slow growth
A-9
<PAGE> 55
pattern. We expect moderate growth, as economic data continues to send mixed
signals. We anticipate the economy will grow at an annual rate of 3 percent in
the fourth quarter and inflation will continue to run under 3 percent, driven by
slowing population and labor force growth.
Based upon a generally modest growth and low inflation outlook, we believe the
outlook for fixed-income markets--including municipal bonds--is positive. In the
near term, we believe domestic markets will benefit from a stable U.S. dollar
and an increase in business activity driven in part by a number of recently
announced strategic reorganizations of some of the nation's blue chip industry
leaders.
On the following pages, you can read about your Fund's performance for the
period, as well as portfolio management's outlook for the Fund in the coming
months. We hope that you will find the information contained in the
question-and-answer section helpful.
CORPORATE NEWS
On October 6 all Van Kampen American Capital open-end mutual funds, currently
listed in newspapers nationwide, began appearing under one heading. The new
listing reflects our company name and is abbreviated as "Van Kamp Amer Cap."
Once again, thank you for your continued confidence in your investment with
Van Kampen American Capital and for the privilege of working with you in seeking
to reach your financial goals.
Sincerely,
/s/Don G. Powell /s/Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.
A-10
<PAGE> 56
PERFORMANCE RESULTS FOR THE PERIOD ENDED SEPTEMBER 30, 1995
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)....................... 10.05% 9.11% 9.11%
One-year total return(2)....... 4.83% 5.11% 8.11%
Three-year average annual total
return(2).................... 5.20% 5.16% N/A
Life-of-Fund average annual
total
return(2).................... 6.15% 4.76% 3.85%
Commencement Date.............. 03/02/92 07/27/92 08/30/93
Distribution Rates and Yield
Distribution rate(3)........... 5.12% 4.67% 4.66%
Taxable Equivalent Distribution
Rate(4)...................... 8.00% 7.30% 7.28%
SEC Yield(5)................... 4.96% 4.40% 4.40%
</TABLE>
- ---------------
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and
1% for C shares). The Adviser has subsidized a portion of the expenses.
Without this subsidy, the total returns would have been lower.
(2) Standardized total return for the period. Assumes reinvestment of all
distributions for the period ended and includes payment of the maximum sales
charge or contingent deferred sales charge for early withdrawal. The Adviser
has subsidized a portion of the expenses. Without this subsidy, the total
returns would have been lower.
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) Taxable equivalent calculations reflect federal income tax rate of 36%. A
portion of the interest income may be subject to the Federal alternative
minimum tax.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio
should theoretically generate for the 30-day period as shown above.
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
A-11
<PAGE> 57
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments
are being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
A-12
<PAGE> 58
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Texas Tax Free Income Fund vs. Lehman Brothers
Municipal Bond Index (March 1992 through September 1995)
<TABLE>
<CAPTION>
Lehman Bros.
Measurement Period VKAC Texas Tax Municipal Bond
(Fiscal Year Covered) Free Income - A Index
<S> <C> <C>
March 1992 9526 10000
Dec 1992 10329 10849
Dec 1993 11606 12182
Dec 1994 11188 11552
Sep 1995 12381 13031
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions for the period ended September 30,
1995, and includes payment of the maximum sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
A-13
<PAGE> 59
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
The following is an interview with the management team of Van Kampen American
Capital Texas Tax Free Income Fund. The team is led by Joseph A. Piraro,
portfolio manager, and Peter W. Hegel, executive vice president, fixed-income
investments.
Q WHAT MARKET CONDITIONS HAD THE GREATEST IMPACT ON THE FUND'S
PERFORMANCE DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1995.
A While 1994 was generally a down year for the bond markets, 1995
was characterized by a significant rally. The rally, which
began early in the year and remained strong through July, resulted as
the Federal Reserve Board notched interest rates down to spur economic growth.
Another market condition that has had a positive impact on the municipal bond
market (and on this Fund) has been the supply and demand ratio. The new issue
supply of the municipal market is about $140 billion, which is down
approximately $25 billion from last year. This lower supply, compounded with
continued demand from investors, has helped municipal bond prices to appreciate.
Q HOW DID YOU POSITION THE FUND IN RESPONSE TO THE EVENTS OF THE
PAST YEAR?
In seeking a combination of both yield and credit safety, the
A majority of the Fund's total assets are diversified among the
top four ratings categories by Standard & Poor's Ratings Group (AAA,
AA, A, BBB). For credit safety, the Fund continues to hold a majority weighting
in the AAA-rating category (the highest credit rating assigned to municipal
bonds by Standard & Poor's Ratings Group).
The top five sector holdings of this Fund's portfolio (as of September 30,
1995) are Water & Sewer, Health Care, Single Family Housing, Retail Utility, and
Multi-Family Housing. We feel those are the strongest sectors in Texas at the
present time.
A-14
<PAGE> 60
pie chart
HOW DID THE FUND PERFORM DURING THE FISCAL YEAR ENDED SEPTEMBER
Q 30, 1995?
The Fund continues to provide investors with an attractive
A level of tax-free income. At its current annualized dividend
level of $0.54 per share,
the Fund provides shareholders with a tax-free distribution rate of 5.12
percent(3) (Class A shares) as of September 30, 1995. At this
distribution rate, the Fund provides shareholders in the 36 percent
federal income bracket with a yield equivalent to a taxable investment
earning 8.00 percent(4).
Overall, for the twelve months ended September 30, 1995, the Fund's one-year
annual return was 10.05 percent(1) (for Class A shares based on net asset
value). By comparison, The Lehman Brothers Municipal Bond Index earned a total
return of 11.18 percent over the same period. The Index is a broad-based
unmanaged index of municipal bonds and does not reflect any commissions or fees
that would be paid by an investor purchasing the securities it represents.
During part of the reporting period, Van Kampen American Capital Asset
Management, Inc., the Adviser, subsidized a portion of the Fund's expenses.
Without this subsidy, the total returns would have been lower. (Please refer to
the chart on page three for additional Fund performance).
WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL MARKET IN GENERAL FOR
Q THE NEXT YEAR AND MORE SPECIFICALLY, FOR THE FUND?
We anticipate that the economy will grow modestly, and that
A inflation should stay low. As a result, we believe that
fixed-income markets-
including municipal bonds-will continue to make modest gains.
In the future, we may see interest rates drop slightly which, as we mentioned
previously, is good for investors already in the bond market because falling
interest rates cause the value of municipal bonds to rise.
A-15
<PAGE> 61
We see three key factors that may affect this market going forward. These are
the tax reform debates, the presidential election, and the strength of the
economy.
- Potential tax reform in some form is an issue we will watch in the
year ahead.
- With the presidential election in 1996, changes in the economic
climate may occur. We will continue to carefully monitor fixed-income
market conditions closely, and adjust the Fund's holdings accordingly.
- We feel that municipal bond supply may go down slightly, which would
be good news for investors because a decline in supply combined with
steady demand should help increase prices.
For now, we are comfortable with the Fund's positioning. However, we will pay
close attention to political and economic events and adjust the Fund's holdings
accordingly. We believe that the expertise of the Fund's management team,
combined with our extensive research capabilities enables us to seek the best
bond values for investors -- balancing attractive yields with a comfortable
level of risk.
<TABLE>
<S> <C>
/s/ Peter W. Hegel /s/ Joseph A. Piraro
Peter W. Hegel Joseph A. Piraro
Executive Vice President Portfolio Manager
Fixed Income Investments
</TABLE>
Please see footnotes on page A-11.
A-16
<PAGE> 62
EXHIBIT B
INVESTMENT ADVISORY SCHEDULE
The table below sets forth, for each investment company advised by the
Municipal Adviser and the Texas Adviser and having a similar investment
objective, such fund's net assets as of July 31, 1996 and the rate at which it
compensates the respective Adviser for investment advisory or subadvisory
services. Funds for which the Municipal Adviser or the Texas Adviser has waived
or reduced its compensation are marked by an "*". There can be no assurance that
the respective Adviser will continue such waiver or reduction.
<TABLE>
<CAPTION>
NET ASSETS AS OF ADVISORY FEE
FUNDS JULY 31, 1996 SCHEDULE
------------------------------ ---------------- -------------------------
<S> <C> <C> <C>
I. ADVISORY AGREEMENTS WITH VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
A. Van Kampen American Capital
California Insured Tax Free
Fund*....................... $ 172,208,260 First $100 Million .500%
Next $150 Million .450%
Next $250 Million .425%
Over $500 Million .400%
B. Van Kampen American Capital
Insured Tax Free Income
Fund........................ $ 1,361,820,375 First $500 Million .525%
Next $500 Million .500%
Next $500 Million .475%
Over $1.5 Billion .450%
C. Van Kampen American Capital
Tax Free High Income Fund... $ 818,302,714 First $500 Million .500%
Van Kampen American Capital
Municipal Income Fund*...... $ 988,726,229 Over $500 Million .450%
Van Kampen American Capital
Intermediate Term Municipal
Income Fund*................ $ 34,315,642
Van Kampen American Capital
Florida Insured Tax Free
Income Fund*................ $ 34,140,076
D. Van Kampen American Capital
New Jersey Tax Free Income
Fund*....................... $ 16,499,113 First $500 Million .600%
Van Kampen American Capital
New York Tax Free Income
Fund*....................... $ 17,478,900 Over $500 Million .500%
Van Kampen American Capital
Pennsylvania Tax Free Income
Fund........................ $ 279,315,783
E. Van Kampen American Capital
High Yield Fund*............ $ 372,959,292 First $500 Million .750%
Over $500 Million .650%
</TABLE>
B-1
<PAGE> 63
<TABLE>
<CAPTION>
NET ASSETS AS OF ADVISORY FEE
FUNDS JULY 31, 1996 SCHEDULE
------------------------------ ---------------- -------------------------
<S> <C> <C> <C>
F. Van Kampen American Capital
Tax Free Money Fund*........ $ 35,894,654 First $500 Million .500%
Next $500 Million .475%
Next $500 Million .425%
Over $1.5 Billion .375%
G. Van Kampen American Capital
Investment Grade Municipal
Trust....................... $ 75,232,936 .600%
Van Kampen American Capital
Trust for Insured
Municipals.................. $ 247,711,797
Van Kampen American Capital
Municipal Income Trust...... $ 440,770,594
Van Kampen American Capital
California Municipal
Trust....................... $ 53,356,308
H. Van Kampen American Capital
Trust for Investment Grade
Municipals.................. $ 704,112,619 .650%
Van Kampen American Capital
Trust for Investment Grade
California Municipals....... $ 119,794,853
Van Kampen American Capital
Trust for Investment Grade
New York Municipals......... $ 160,720,159
Van Kampen American Capital
Trust for Investment Grade
Pennsylvania Municipals..... $ 193,305,981
Van Kampen American Capital
Trust for Investment Grade
Florida Municipals.......... $ 110,568,663
Van Kampen American Capital
Trust for Investment Grade
New Jersey Municipals....... $ 105,026,001
Van Kampen American Capital
Municipal Opportunity
Trust....................... $ 392,949,720
Van Kampen American Capital
Advantage Municipal Income
Trust....................... $ 484,504,683
Van Kampen American Capital
Advantage Pennsylvania
Municipal Income Trust...... $ 111,545,122
Van Kampen American Capital
New Jersey Value Municipal
Income Trust................ $ 60,048,774
Van Kampen American Capital
Ohio Value Municipal Income
Trust....................... $ 38,820,487
Van Kampen American Capital
Massachusetts Value
Municipal Income Trust...... $ 62,749,174
Van Kampen American Capital
Strategic Sector Municipal
Trust....................... $ 239,652,735
Van Kampen American Capital
California Value Municipal
Income Trust................ $ 148,713,984
</TABLE>
B-2
<PAGE> 64
<TABLE>
<CAPTION>
NET ASSETS AS OF ADVISORY FEE
FUNDS JULY 31, 1996 SCHEDULE
------------------------------ ---------------- -------------------------
<S> <C> <C> <C>
Van Kampen American Capital
Pennsylvania Value Municipal
Income Trust................ $ 109,917,770
Van Kampen American Capital
Value Municipal Income
Trust....................... $ 559,240,127
Van Kampen American Capital
Florida Municipal
Opportunity Trust........... $ 39,287,323
Van Kampen American Capital
Municipal Opportunity Trust
II.......................... $ 273,409,154
Van Kampen American Capital
Advantage Municipal Income
Trust II.................... $ 187,792,307
I. Van Kampen American Capital
Municipal Trust............. $ 876,603,721 .700%
Van Kampen American Capital
California Quality Municipal
Trust....................... $ 232,181,870
Van Kampen American Capital
New York Quality Municipal
Trust....................... $ 137,117,423
Van Kampen American Capital
Pennsylvania Quality
Municipal Trust............. $ 200,116,595
Van Kampen American Capital
Florida Quality Municipal
Trust....................... $ 156,931,050
Van Kampen American Capital
Ohio Quality Municipal
Trust....................... $ 105,027,334
Van Kampen American Capital
Select Sector Municipal
Trust....................... $ 86,069,374(1)
<CAPTION>
II. ADVISORY AGREEMENTS WITH VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
<S> <C> <C> <C>
A. Van Kampen American Capital
High Yield Municipal Fund... $ 839,278,655 First $300 Million .600%
Van Kampen American Capital
Texas Tax Free Income
Fund........................ $ 16,967,037 Next $300 Million .550%
Over $600 Million .500%
B. Common Sense Municipal Bond
Fund........................ $ 120,154,003 First $1 Billion .600%
Next $1 Billion .550%
Next $1 Billion .500%
Over $3 Billion .450%
</TABLE>
- ---------------
(1)Advisory fee includes administrative services provided to the Trust.
B-3
<PAGE> 65
EXHIBIT C
FORM OF THE TEXAS FUND'S
NEW ADVISORY AGREEMENT
The following is the proposed form of New Advisory Agreement that will be in
effect between the Texas Fund and the Texas Adviser if approved by shareholders
of the Texas Fund and the Reorganization is not consummated. The form of New
Advisory Agreement has been marked to show changes from the form of Current
Advisory Agreement.
FORM OF THE TEXAS FUND'S NEW ADVISORY AGREEMENT
AGREEMENT (herein so called) made this day of November, 1996, by and
between VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND, a Delaware
business trust (hereinafter referred to as the "FUND"), and VAN KAMPEN AMERICAN
CAPITAL ASSET MANAGEMENT, INC., a Delaware corporation (hereinafter referred to
as the "ADVISER").
The FUND and the ADVISER agree as follows:
(1) Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the FUND's
Trustees and in conformity with applicable laws, the FUND's Agreement and
Declaration of Trust ("Declaration of Trust"), By-Laws, registration statements,
prospectus and statements, prospectus and stated investment objectives, policies
and restrictions, shall:
a. manage the investment and reinvestment of the FUND's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to
be represented in the FUND's portfolio, and formulation and implementation
of investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the FUND's account with brokers or dealers
selected by the ADVISER;
c. conduct and manage the day-to-day operations of the FUND including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the
furnishing of routine legal services except for services provided by
outside counsel to the FUND selected by the Trustees, and the supervision
of the FUND's Treasurer and the personnel working under his direction; and
d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c.
above and pay the compensation of each FUND trustee and FUND officer who is
C-1
<PAGE> 66
an affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the FUND the most favorable price and
execution available and shall maintain records adequate to demonstrate
compliance with this requirement. Subject to prior authorization by the FUND's
Trustees of appropriate policies and procedures, the ADVISER may, to the extent
authorized by law, cause the FUND to pay a broker or dealer that provides
brokerage and research services to the ADVISER an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction. In the event of such authorization and to the extent authorized by
law, the ADVISER shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of
such action.
Except as otherwise agreed, or as otherwise provided herein, the FUND shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
FUND shall include (i) interest and taxes; (ii) brokerage commissions and other
costs in connection with the purchase and sale of portfolio investments; (iii)
compensation of its trustees and officers other than those who are affiliated
persons of the ADVISER; (iv) compensation of its Treasurer, compensation of
personnel working under the Treasurer's direction, and expenses of office space,
facilities, and equipment used by the Treasurer and such personnel in the
performance of their normal duties for the FUND which consist of maintenance of
the accounts, books and other documents which constitute the record forming the
basis for the FUND's financial statements, preparation of such financial
statements and other FUND documents and reports of a financial nature required
by federal and state laws, and participation in the production of the FUND's
registration statement, prospectuses, proxy solicitation materials and reports
to shareholders; (v) fees of outside counsel to and of independent accountants
of the FUND selected by the Trustees, (vi) custodian, registrar and shareholder
service agent fees and expenses; (vii) expenses related to the repurchase or
redemption of its shares including expenses related to a program of periodic
repurchases or redemptions; (viii) expenses related to the issuance of its
shares against payment therefor by or on behalf of the subscribers thereto; (ix)
fees and related expenses of registering and qualifying the FUND and its shares
for distribution under state and federal securities laws; (x) expenses of
printing and mailing of registration statements, prospectuses, reports, notices
and proxy solicitation materials of the FUND; (xi) all other expenses incidental
to holding meetings of the FUND's shareholders including proxy solicitations
therefor; (xii) expenses for servicing shareholder accounts; (xiii) insurance
premiums for fidelity coverage and errors and omissions insurance; (xiv) dues
for the FUND's membership in trade associations approved by the Trustees; and
(xv) such nonrecurring expenses as may arise, including those associated with
actions, suits or proceedings to which the FUND is a party and the
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legal obligation which the FUND may have to indemnify its officers and trustees
with respect thereto. To the extent that any of the foregoing expenses are
allocated between the FUND and any other party, such allocations shall be
pursuant to methods approved by the Trustees.
(2) Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the FUND are not impaired.
Except as otherwise required by the Investment Company Act of 1940 (the "1940
Act"), any of the shareholders, trustees, officers and employees of the FUND may
be a shareholder, trustee, director, officer or employee of, or be otherwise
interested in, the ADVISER, and in any person controlled by or under common
control with the ADVISER, and the ADVISER, and any person controlled by or under
common control with the ADVISER, may have an interest in the FUND.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties hereunder on the part
of the ADVISER, the ADVISER shall not be subject to liability to the FUND, or to
any shareholder of the FUND, for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
(3) Compensation Payable to ADVISER
The FUND shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, a monthly fee computed at
the following annual rates:
.60% on the first $300 million of the FUND's average daily net assets; .55% on
the next $300 million of the FUND's average daily net assets; and .50% of any
excess over $600 million.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month calculated in the
manner provided in the FUND's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the FUND pursuant to this Section 3 shall
be reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the FUND, less any direct expenses
incurred by such person, in connection with obtaining such commissions, fees,
brokerage or similar payments. The ADVISER shall use its best efforts to
recapture all available tender offer solicitation fees and exchange offer fees
in connection with the FUND's portfolio transactions and shall advise the
Trustees of any other commissions, fees, brokerage or similar payments which may
be possible for the
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<PAGE> 68
ADVISER or any other direct or indirect majority owned subsidiary of VK/AC
Holding, Inc. to receive in connection with the FUND'S portfolio transactions or
other arrangements which may benefit the FUND.
In the event that the ordinary business expenses of the FUND for any fiscal
year should exceed the most restrictive expense limitation applicable in the
states where the Fund's shares are qualified for sale, the compensation due the
ADVISER for such fiscal year shall be reduced by the amount of such excess. The
ADVISER's compensation shall be so reduced by a reduction or a refund thereof,
at the time such compensation is payable after the end of each calendar month
during such fiscal year of the FUND, and if such amount should exceed such
monthly compensation, the ADVISER shall pay the FUND an amount sufficient to
make up the deficiency, subject to readjustment during the FUND's fiscal year.
For purposes of this paragraph, all ordinary business expenses of the FUND shall
include the investment advisory fee and other operating expenses paid by the
FUND except (i) for interest and taxes; (ii) brokerage commissions; (iii) as a
result of litigation in connection with a suit involving a claim for recovery by
the FUND; (iv) as a result of litigation involving a defense against a liability
asserted against the FUND, provided that, if the ADVISER made the decision or
took the actions which resulted in such claim, it acted in good faith without
negligence or misconduct; (v) any indemnification paid by the FUND to its
officers and trustees and the ADVISER in accordance with applicable state and
federal laws as a result of such litigation; and (vi) amounts paid to Van Kampen
American Capital Distributors, Inc., the distributor of the FUND's shares, in
connection with a distribution plan adopted by the FUND's Trustees pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
(4) Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the FUND are the
property of the FUND and further agrees to surrender promptly to the FUND any of
such records upon the FUND's request. The ADVISER further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act the records required to
be maintained by Rule 31a-1 under the Act.
(5) Duration of Agreement
This Agreement shall have an initial term from the date hereof until May 30,
1997, and shall continue in force from year to year thereafter, but only so long
as such continuance is approved at least annually by the vote of a majority of
the FUND's Trustees who are not parties to this Agreement or interested persons
of any such parties, cast in person at a meeting called for the purpose of
voting on such approval, and by a vote of a majority of the FUND's Trustees or a
majority of the FUND's outstanding voting securities.
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<PAGE> 69
This Agreement shall terminate automatically in the event of its assignment.
The Agreement may be terminated at any time by the FUND's Trustees, by vote of a
majority of the FUND's outstanding voting securities, or by the ADVISER, on 60
days' written notice, or upon such shorter notice as may be mutually agreed
upon. Such termination shall be without payment of any penalty.
(6) Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the 1940 Act and the
Rules and Regulations thereunder, subject, however, to such exemptions as may be
granted to either the ADVISER or the FUND by the Securities and Exchange
Commission (the "Commission"), or such interpretive positions as may be taken by
the Commission or its staff, under the 1940 Act, and the term "brokerage and
research services" shall have the meaning given in the Securities Exchange Act
of 1934 and the Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the FUND's Trustees and
by its shareholders. This Agreement is executed on behalf of the Fund or the
Trustees of the FUND as Trustees and not individually and that the obligations
of this Agreement are not binding upon any of the Trustees, officers or
shareholders of the FUND individually but are binding only upon the assets and
property of the FUND. A Certificate of Trust in respect of the Fund is on file
with the Secretary of State of Delaware.
The parties hereto each have caused this Agreement to be signed in duplicate
on its behalf by its duly authorized officer on the above date.
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
By:
-------------------------------------
Name:
----------------------------------
Its:
-------------------------------------
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By:
-------------------------------------
Name:
----------------------------------
Its:
-------------------------------------
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<PAGE> 70
TEXAS FUND SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE TEXAS FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
DEALERS--FOR INFORMATION
WITH RESPECT TO THE
REORGANIZATION CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser of the Municipal Fund
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor of the Municipal Fund
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent of the Municipal Fund
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Municipal Income Fund
Custodian of the Municipal Fund
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Municipal Income Fund
Legal Counsel of the Municipal Fund
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors of the Municipal Fund
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 71
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
SEPTEMBER 12, 1996
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TABLE OF CONTENTS
<TABLE>
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<S> <C> <C>
PROPOSAL 1: APPROVAL OF PROPOSED REORGANIZATION.......................... 3
A. SUMMARY........................................................... 3
The Reorganization.............................................. 3
Reasons for the Proposed Reorganization......................... 4
Comparison of the Municipal Fund and the Texas Fund............. 6
B. RISK FACTORS...................................................... 15
Similarity of Risks............................................. 15
Differences in Risks............................................ 16
C. THE PROPOSED REORGANIZATION....................................... 17
Terms of the Agreement.......................................... 17
Description of Securities to be Issued.......................... 19
Continuation of Shareholder Accounts and Plans; Share
Certificates.................................................... 19
Federal Income Tax Consequences................................. 20
Expenses........................................................ 21
Ratification of Investment Objective, Investment Policies and
Restrictions of the Municipal Fund............................ 23
Legal Matters................................................... 23
D. RECOMMENDATION OF THE TEXAS BOARD................................. 23
PROPOSAL 2: APPROVAL OF NEW ADVISORY AGREEMENT........................... 23
A. THE TEXAS ADVISER................................................. 24
B. INFORMATION CONCERNING MORGAN STANLEY............................. 25
C. THE ACQUISITION................................................... 25
D. THE ADVISORY AGREEMENTS........................................... 27
E. SHAREHOLDER APPROVAL AND BOARD RECOMMENDATION..................... 32
OTHER INFORMATION........................................................ 33
A. SHAREHOLDERS OF THE TEXAS FUND, THE MUNICIPAL FUND AND VKAC....... 33
B. SHAREHOLDER PROPOSALS............................................. 34
C. ADDITIONAL INFORMATION REGARDING THE ADVISERS..................... 34
D. THE NON-ADVISORY AGREEMENTS....................................... 37
VOTING INFORMATION AND REQUIREMENTS...................................... 37
EXHIBIT A: MANAGEMENT'S DISCUSSION OF MUNICIPAL FUND AND TEXAS FUND
PERFORMANCE............................................................ A-1
EXHIBIT B: INVESTMENT ADVISORY SCHEDULE.................................. B-1
EXHIBIT C: FORM OF THE TEXAS FUND'S NEW ADVISORY AGREEMENT...............
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-- A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH --
VAN KAMPEN AMERICAN CAPITAL
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