Van Kampen American Capital
Texas Tax Free
Income Fund
Annual Report
September 30, 1996
- ----A Wealth of Knowledge * A Knowledge of Wealth----
- -----------------
Table of Contents
- -----------------
Letter to Shareholders 1
Performance Results 3
Performance in Perspective 4
Portfolio Management Review 5
Portfolio of Investments 8
Statement of Assets and Liabilities 9
Statement of Operations 10
Statement of Changes in Net Assets 11
Financial Highlights 12
Notes to Financial Statements 15
Report of Independent Accountants 18
TXM ANR 11/96
- ----------------------
Letter to Shareholders
- ----------------------
November 4,1996
Dear Shareholder,
As you may already be aware, an agreement was reached in late June for
VK/AC Holding Inc., the parent company of Van Kampen American Capital, Inc.,
to be acquired by the Morgan Stanley Group Inc. While this announcement may
appear commonplace in an ever-changing financial industry, we believe it
represents an exciting opportunity for shareholders of our investment
products.
With Morgan Stanley's global leadership in investment banking
and asset management and Van Kampen American Capital's reputation for
competitive long-term performance and superior investor services, together we
will offer a broader range of investment opportunities and expertise.
The new ownership will not affect our commitment to pursuing excellence
in all aspects of our business. And we expect very little change in the way
your mutual fund account is maintained and serviced. We value our relationship
with you and look forward to communicating more details of this transaction,
which was completed October 31, 1996.
Regarding the Texas Tax Free Income Fund,
you will find in this report performance results for the 12-month period ended
September 30,1996, along with an interview with your fund's portfolio
management team.
Fund Update
On October 15, shareholders of the Texas Tax Free Income Fund approved its
reorganization into the Van Kampen American Capital Municipal Income Fund. On
October 25, your investment in the Texas Tax Free Income Fund was converted to
shares of the Municipal Income Fund.
Similar to the Texas Tax Free Income Fund, the Municipal Income Fund seeks
to provide a high level of current income exempt from federal income tax,
consistent with preservation of capital. Moreover, because the Municipal Income
Fund invests in municipal bonds from across the country and in various levels
of credit ratings, it offers investors a higher level of diversification and
income potential than a single-state fund.
Throughout the history of the Texas Tax Free Income Fund, the support of
our shareholders and our commitment to a disciplined investment approach have
been important to our long-term performance record. Thank you for your
continued confidence in Van Kampen American Capital and in your fund's
management team.
Economic Review
The economy demonstrated an acceleration in growth during the last half
of the 12-month reporting period. After a nominal 0.3 percent rise in the
last quarter of 1996-due in part to weak construction activity, two
government shutdowns, and a strike at Boeing-real GDP (the nation's gross
domestic product, adjusted for inflation) rose by 2.0 percent in this year's
first quarter. And, as anticipated, the economy grew by a much stronger 4.7
percent in the second quarter, partly reflecting a rebound from the aftermath
of the General Motors strike earlier in the year, an end to the budget
stalemate between the White House and Congress, and extreme weather conditions
in many parts of the country. Upward momentum has been assisted by consumer
spending, as indicated by a 3 percent rise in retail sales in the first nine
months of this calendar year (a 5 percent rise during the Fund's fiscal year).
1 Continued on page two
In the manufacturing sector, economic reports, such as the National
Association of Purchasing Managers Index, suggested a continued rebound in
production from last winter's lower levels. In June, this index reached an
18-month high. Strong exports and a replenishing of inventories have helped
support this momentum.
Surprisingly healthy economic activity led to concerns that inflation
may rise and the Federal Reserve Board might tighten monetary policy.
Inflation remains modest, however, with consumer prices rising at about a
3 percent annual rate over the past year, and the closely watched "core"
Consumer Price Index, which excludes volatile food and energy components,
has risen year over year at rates between 2.7 and 3.0 percent per year.
In general, recent reports have suggested an upward creep in labor-related
costs. The Producer Price Index, which measures prices paid by wholesalers
to producers, has indicated low wholesale prices in each of the past four
months, from June through September.
Municipal Market Review and Outlook
We witnessed significant movement in municipal bond yields during the
first six months of 1996. Early in the period, the Fed lowered rates in
order to energize the economy and bond prices increased. By late February,
however, the markets became concerned that the Fed would reverse its
strategy and raise rates. As a result, yields, as measured by the Bond
Buyer 40 Municipal Bond Index, rose from 5.6 percent to 6.0 percent
during the first six months of 1996.
We believe market conditions for municipal bonds are poised for
improvement for the remainder of 1996. Three major factors contribute to
our optimism:
* Near-term concerns about the implementation of major tax reform have
faded. In early 1996, the municipal market was wary of the growing
political sentiment for tax reform, which could have eroded the value of
the market's tax-exempt status. However, the momentum slowed substantially
and now appears to be on the back burner until after the 1996 presidential
election. This has added stability to the municipal market.
* For high-income households, tax-exempt bonds provide an attractive
after-tax alternative. Municipal bond yields have elevated to a point where
taxable equivalent yields range between 8.5 and 10 percent for investors in
the 31 percent federal income tax bracket or higher.
Economic Outlook
We anticipate that the economy will continue to grow during the
balance of 1996, albeit at more moderate rates than the second quarter's
swift pace. We expect rates of inflation to remain near current levels and
the Fed to maintain a steady monetary policy in the coming months. That
suggests little movement in short-term interest rates and a continuation
of the current trading range for yields on long-term bonds.
Inflation fears and concerns about economic growth may continue to
influence the municipal bond market and fund performance results.
Nevertheless, we are optimistic that tax-exempt securities will produce
attractive results for investors during the remainder of 1996.
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.
2
- -----------------------------------------------------------
Performance Results for the Period Ended September 30, 1996
- -----------------------------------------------------------
<TABLE>
Van Kampen American Capital Texas Tax Free Income Fund
<CAPTION>
A Shares B Shares C Shares
Total Returns
- -------------
<S> <C> <C> <C>
One-year total return based on NAV <F1> 6.33% 5.69% 5.68%
One-year total return <F2> 1.29% 1.69% 4.68%
Three-year average annual total return <F2> 3.11% 3.13% 4.03%
Life-of-Fund average annual total return <F2> 6.19% 5.21% 4.44%
Commencement date 03/02/92 07/27/92 08/30/93
Distribution Rates and Yield
- ----------------------------
Distribution rate <F3> 5.09% 4.63% 4.62%
Taxable-equivalent distribution rate <F4> 7.95% 7.23% 7.22%
SEC yield <F5> 5.56% 5.36% 5.32%
<FN>
<F1> Assumes reinvestment of all distributions for the period and does not include payment of the
maximum sales charge (4.75% for A shares) or contingent deferred sales charge for early
withdrawal (4.00% for B and 1.00% for C shares).
<F2> Standardized total return. Assumes reinvestment of all distributions for the period and includes
payment of the maximum sales charge (A shares) or contingent deferred sales charge for early
withdrawal (B and C shares).
<F3> Distribution rate represents the monthly annualized distributions at the end of the period and
not the earnings of the Fund.
<F4> The taxable-equivalent distribution rate is calculated assuming a federal income tax rate of 36%.
<F5> 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 September 30, 1996. Had certain expenses of the Fund not been assumed by VKAC, total
returns would have been lower and the SEC yield would have been 3.91%, 3.62% and 3.59% for classes
A, B and C, respectively.
A portion of the interest income may be taxable for those investors subject to the federal alternative
minimum tax (AMT).
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.
</TABLE>
3
- ----------------------------------------------
Putting Your Fund's Performance in Perspective
- ----------------------------------------------
As you evaluate your progress toward achieving your financial goals, it
is important to track your investment portfolio's performance at regular
intervals. A good starting point is a comparison of your investment holdings
to an applicable benchmark, such as a broad-based market index. Such a
comparison can:
* Illustrate the general market environment in which your investments
are being managed
* Reflect the impact of favorable market trends or difficult market
conditions
* Help you evaluate the extent to which your fund's management team
has responded to the opportunities and challenges presented to
them over the period measured
For these reasons, you may find it helpful to review the chart below,
which compares your fund's performance to that of the Lehman Brothers
Municipal Bond Index over time. This index is an unmanaged statistical
composite and does not reflect any commissions or fees which would be
incurred by an investor purchasing the securities it represents. Similarly,
its performance does not reflect any sales charges or other costs which
would be applicable to an actively managed portfolio, such as that of the
Fund.
[GRAPH]
<TABLE>
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 1996)
Fund's Total Return
1 Year Avg. Annual = 1.29%
3 Year Avg. Annual = 3.11%
Inception Avg. Annual = 6.19
<CAPTION>
Lehman Brothers Municipal VKAC Texas Tax Free
Bond Index Income Fund
<S> <C> <C> <C>
March 1992 $10,000 $ 9,526
December 1992 10,853 10,329
December 1993 12,186 11,606
December 1994 11,556 11,188
December 1995 13,574 12,874
September 1996 13,822 13,165
</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, 1996, and includes payment of the maximum sales charge (4.75%
for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
4
- ---------------------------
Portfolio Management Review
- ---------------------------
Van Kampen American Capital Texas Tax Free Income Fund
We recently spoke with the management team of The Van Kampen American Capital
Texas Tax Free Income Fund about the key events and economic forces that
shaped the markets during the Fund's fiscal year. The team is led by Joseph
A. Piraro, portfolio manager, and Peter W. Hegel, executive vice president
for fixed-income investments. The following excerpts reflect their views on
the Fund is performance during the 12-month period ended September 30, 1996.
Q What market conditions had the greatest impact on the Fund's performance
during the 12-month period ended September 30, 1996?
A During the past 12 months, the municipal bond market experienced two
distinct investment environments. First, the bond rally that characterized
much of 1995 was sustained by a weak economy and low inflation. In an effort
to spur the lackluster economy, the Federal Reserve Board lowered its key
lending rate twice between December 1995 and January 1996, for a total
decrease of one-half percentage point. This helped to create a positive
municipal market environment, because as interest rates were lowered, bond
prices and the net asset value of bond funds increased.
Then, in early 1996, the positive investment environment for municipal
bonds began to shift. Instead of anticipating further interest rate
reductions, the bond market became concerned that the Federal Reserve's
monetary policy might be to tighten (raise) interest rates. This concern
was triggered by two main factors:
The federal government was shut down twice, which indicated that
balanced budget legislation was not imminent.
Several economic indicators (including consecutive monthly reports
showing significant increases in employment) pointed to accelerating
economic growth.
These factors led to fears that inflation, which had been holding
steady at around 3 percent, might increase. These fears heightened when
agricultural commodity and oil prices rose to their highest levels in two
years. Such factors prompted the Fed to shift its policy in January from
an accommodative mode (lowering interest rates) to a stable, or neutral,
mode in February, a position that has been consistent through the
remainder of the reporting period. Consequently, the municipal bond
market reacted negatively, and bond prices began to decline.
Q How did you position the Fund in response to the events of the past
12 months?
A Throughout the 12-month period, we weathered significant market
fluctuations by maintaining a long-term perspective. The Fund continued
to be structured defensively with a relatively short duration, currently
in the 7- to 8-year range. Duration is a measurement of a bond's
sensitivity to changes in interest rates and is expressed in years-the
shorter the duration, the less sensitive the bond is expected to be to
interest rate movements. The Fund's average weighted maturity remained
in the 15- to 20-year range, because we feel this maturity range
offered the best overall performance.
We continued to seek issues that offer high yields without exposing
the Fund to excessive levels of credit risk. As a result, the majority
of the Fund's portfolio was diversified among the top four ratings
categories of Standard & Poor's (ratings of AAA, AA, A, and BBB).
5
[PIE CHART]
Portfolio composition by Credit Quality
as of September 30, 1996 as of March 31, 1996
AAA 19% AAA 29%
AA 14% AA 9%
A 9% A 20%
BBB 33% BBB 18%
BB 2% Non-Rated 24%
Non-Rated 23%
Although new investment-grade municipal bond issues continue to
come to market, the demand for these securities is currently greater
than supply-a condition that has helped bond prices to appreciate.
In terms of sector allocations, we continue to rely on our
strong internal credit research team to identify municipal securities
that may offer an appropriate balance of yield and credit quality. We
currently favor bonds associated with school financing and have
reduced our exposure to healthcare and water/sewer issues.
Q How did the Fund perform during the fiscal year ended September
30, 1996?
A Based on the Fund's current annualized dividend level of $0.54
per share, the Fund provided shareholders with a tax-free distribution
rate of 5.09 percent(3) (Class A shares) as of September 30,1996. At
this distribution rate, the Fund provided shareholders in the 36
percent federal income tax bracket with a yield equivalent to taxable
investments earning 7.95 percent.
For the 12 months ended September 30,1996, the Fund's annual
return was 6.33 percent(1) (Class A shares at net asset value). By
comparison, the Lehman Brothers Municipal Bond Index earned a total
return of 6.04 percent for the same period. Keep in mind that this
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 Fund's
Adviser, subsidized a portion of the Fund's expenses. Without this
subsidy, the total returns would have been lower.
6
Q Now that the Texas Tax Free Income Fund has been reorganized into
the Municipal Income Fund, what is your outlook for the municipal
market in general?
A We believe the environment for fixed-income investments is
generally positive. Low inflation and a modestly expanding economy are
fundamental for positive performance by tax-exempt securities. The Fed
appears to be in a neutral mode regarding interest rates and should
remain so if these strong market fundamentals remain in place.
In any event, we believe the Municipal Income Fund is positioned
to take advantage of these potential opportunities as we move into the
next reporting period. Moreover, because the Fund invests in municipal
bonds from across the country and in various levels of credit ratings,
it offers investors a higher level of diversification and income
potential than a single-state fund.
/s/ Peter W. Hegel /s/ Joseph A. Piraro
Peter W. Hegel Joseph A. Piraro
Executive Vice President Portfolio Manager
Fixed Income Investments
7
3
<TABLE>
Van Kampen American Capital Texas Tax Free Income Fund
Portfolio of Investments
September 30, 1996
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Texas Municipal Bonds 94.3%
$1,000 Austin, TX Arpt Sys Rev Ser A (MBIA Insd) 6.125% 11/15/25 $1,025,880
500 Austin, TX Hsg Fin Corp Multi-Family Hsg Rev 6.500 10/01/10 506,710
500 Baytown, TX Prop Mgmt & Dev Corp Baytown Terr Proj Ser A (FNMA
Collateralized) 6.100 08/15/21 511,490
160 Bell Cnty, TX Hlth Fac Dev Corp King's Daughter Hosp 9.250 07/01/08 174,288
270 Bexar Cnty, TX Hsg Fin Corp Rev Ser B (GNMA Collateralized) 9.250 04/01/16 277,741
1,000 Bexar, TX Metro Wtr Dist Wtrwks Sys Rev (MBIA Insd) 5.875 05/01/22 1,012,520
250 Brazoria Cnty, TX Muni Util Dist No 2 Rfdg 7.000 09/01/08 266,842
1,675 Cedar Hill, TX Indpt Sch Dist Cap Apprec Rfdg * 08/15/15 528,094
250 Coastal Wtr Auth TX Wtr Rev (AMBAC Insd) 6.250 12/15/17 256,547
250 El Paso, TX Hsg Auth Multi-Family Mtg Rev Ser A 6.250 12/01/09 252,972
115 Galveston, TX Prop Fin Auth Inc Single Family Mtg Rev Ser A 8.500 09/01/11 130,508
250 Garland, TX Econ Dev Auth Yellow Freight Sys Inc Proj 8.000 12/01/16 251,583
250 Guadalupe Blanco River Auth TX 6.350 07/01/22 261,050
375 Harris Cnty, TX Hlth Fac Dev Corp Hlth Care Sys Rev Sisters of
Charity 7.100 07/01/21 404,077
250 Harris Cnty, TX Hlth Fac Dev Corp Memorial Hosp Sys Proj 7.125 06/01/15 268,962
100 Harris Cnty, TX Hsg Fin Corp Single Family Mtg Rev Ser 1983A 10.375 07/15/14 99,989
1,000 Harris Cnty, TX Muni Util Dist No 120 Rfdg 6.100 08/01/14 989,190
250 Harris Cnty, TX Muni Util Dist No 120 Rfdg 8.000 08/01/14 275,863
100 Harris Cnty, TX Wtr Ctl & Impt Dist No 75 7.000 03/01/14 105,127
1,000 Hidalgo Cnty, TX Hlth Svcs Mission Hosp 7.000 08/15/08 1,035,800
500 Houston, TX Higher Ed Fin Corp Rev Univ of Saint Thomas Proj 7.250 12/01/07 526,255
360 Houston, TX Hsg Fin Corp Single Family Mtg Rev 10.375 12/15/13 361,670
250 Lockhart, TX Correctional Fac Rev Fin Corp (MBIA Insd) 6.625 04/01/12 262,250
145 Montgomery Cnty, TX Hlth Fac Dev Corp Hosp Mtg Rev Woodlands
Med Cent Proj 8.850 08/15/14 156,358
500 Richardson, TX Hosp Auth Impt Rev Richardson Med Cent Rfdg 6.750 12/01/23 521,445
300 Rusk Cnty, TX Hlth Fac Corp Hosp Rev Henderson Mem Hosp Proj 7.750 04/01/13 317,580
220 San Antonio, TX Elec & Gas Rev Ser A 6.500 02/01/12 228,875
250 San Antonio, TX Hlth Fac Dev Corp Rev Encore Nursing Cent
Partner 8.250 12/01/19 276,425
500 Tarrant Cnty, TX Hlth Fac Dev Corp Hosp Rev Impt Fort Worth
Osteopathic Hosp Rfdg 7.000 05/15/28 526,020
271 Texas Genl Services Cmnty Partner Interests Office Bldg & Land
Acquisition Proj 7.000 08/01/09 279,102
130 Texas Hsg Agy Single Family Mtg Ser A Rfdg 7.150 09/01/12 133,621
325 Texas St Higher Ed Coord 7.700 10/01/25 333,278
250 Texas St Tpk Auth Dallas North Toll Rd Tlwy Rev 6.000 01/01/20 250,450
1,000 Texas St Veterans Hsg Assist Fd II Ser A 6.800 12/01/10 1,040,820
250 Texas St Veterans Land Rfdg 6.500 12/01/21 265,080
250 Tomball, TX Hosp Auth Rev Rfdg 6.125 07/01/23 239,213
180 Travis Cnty, TX Hsg Fin Corp Single Family Mtg Rev (GNMA
Collateralized 8.200 04/01/22 183,652
500 Tyler, TX Hlth Fac Dev Corp Rev East TX Medical Cent Regl Cent
Ser B Rfdg 6.750 11/01/25 508,780
100 West Harris Cnty, TX Muni Util Dist No 1 Rfdg 7.000 04/01/05 104,054
500 Willow Fork, TX Drain Dist 7.000 03/01/11 523,045
-----------
Total Long-Term Investments 94.3%
(Cost $15,083,282) <F1> 15,673,206
Other Assets and Liabilities 5.7% 955,889
-----------
Net Assets 100.0% $16,629,095
===========
* Zero coupon bond
<FN>
<F1> At September 30, 1996, for federal income tax purposes, cost is $15,083,311, the aggregate gross
unrealized appreciation is $613,938, and the aggregate gross unrealized depreciation is $24,043,
resulting in net unrealized appreciation of $589,895.
</TABLE>
8
<TABLE>
Van Kampen American Capital Texas Tax Free Income Fund
Statement of Assets and Liabilities
September 30, 1996
<CAPTION>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $15,083,282) (Note 1) $ 15,673,206
Receivables:
Securities Sold 1,233,285
Interest 304,325
Fund Shares Sold 30,336
Unamortized Organizational Expenses (Note 1) 1,250
Other 1,027
-------------
Total Assets 17,243,429
-------------
LIABILITIES:
Payables:
Bank Overdraft 500,619
Income Distributions 41,059
Distributor and Affiliates (Notes 2 and 5) 32,408
Fund Shares Repurchased 11,149
Accrued Expenses 19,532
Deferred Compensation and Retirement Plans (Note 2) 9,567
-------------
Total Liabilities 614,334
-------------
NET ASSETS $ 16,629,095
=============
NET ASSETS CONSIST OF:
Capital (Note 3) $ 15,786,373
Net Unrealized Appreciation on Securities 589,924
Accumulated Net Realized Gain on Securities 251,328
Accumulated Undistributed Net Investment Income 1,470
-------------
NET ASSETS $ 16,629,095
=============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets
of $9,307,454 and 919,727 shares of beneficial interest issued and
outstanding) (Note 3) $ 10.12
Maximum sales charge (4.75%* of offering price) 0.50
-------------
Maximum offering price to public $ 10.62
=============
Class B Shares:
Net asset value and offering price per share (Based on net assets
of $6,496,572 and 642,386 shares of beneficial interest issued and
outstanding) (Note 3) $ 10.11
=============
Class C Shares:
Net asset value and offering price per share (Based on net assets
of $825,069 and 81,492 shares of beneficial interest issued and
outstanding) (Note 3) $ 10.12
=============
* On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
9
<TABLE>
Van Kampen American Capital Texas Tax Free Income Fund
Statement of Operations
For the Year Ended September 30, 1996
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest $ 1,211,444
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 109,383
Distribution (12b-1) and Service Fees (Attributed to Classes A, B and
C of $25,740, $69,839 and $9,507, respectively) (Note 5) 105,086
Accounting (Note 2) 69,991
Audit 29,903
Shareholder Services (Note 2) 21,603
Trustees Fees and Expenses (Note 2) 11,314
Legal (Note 2) 9,098
Amortization of Organizational Expenses (Note 1) 3,000
Other 25,745
-------------
Total Expenses 385,123
Less Fees Waived (Note 2) 97,000
-------------
Net Expenses 288,123
-------------
NET INVESTMENT INCOME $ 923,321
=============
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments $ 251,661
-------------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period 665,333
End of the Period:
Investments 589,924
-------------
Net Unrealized Depreciation on Securities During the Period (75,409)
-------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES $ 176,252
=============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 1,099,573
=============
</TABLE>
10
<TABLE>
Van Kampen American Capital Texas Tax Free Income Fund
Statement of Changes in Net Assets
For the Years Ended September 30, 1996 and 1995
<CAPTION>
Year Ended Year Ended
September 30, 1996 September 30, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 923,321 $ 1,066,119
Net Realized Gain on Securities 251,661 65,437
Net Unrealized Appreciation/Depreciation on Securities During
the Period (75,409) 739,651
-------------- --------------
Change in Net Assets from Operations 1,099,573 1,871,207
-------------- --------------
Distributions from Net Investment Income (916,491) (1,066,119)
Distributions in Excess of Net Investment Income (Note 1) 0 (6,193)
-------------- --------------
Distributions from and in Excess of Net Investment Income * (916,491) (1,072,312)
Distributions from Net Realized Gains on Securities (Note 1) * (24,934) 0
-------------- --------------
Total Distributions (941,425) (1,072,312)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT TRANSACTIONS 158,148 798,895
-------------- --------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 1,352,956 1,180,104
Net Asset Value of Shares Issued Through Dividend Reinvestment 442,458 488,056
Cost of Shares Repurchased (4,855,542) (5,552,574)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS (3,060,128) (3,884,414)
-------------- --------------
TOTAL DECREASE IN NET ASSETS (2,901,980) (3,085,519)
NET ASSETS:
Beginning of the Period 19,531,075 22,616,594
-------------- --------------
End of the Period (Including undistributed net investment
income of $1,470 and ($5,360), respectively) $ 16,629,095 $ 19,531,075
============== ==============
</TABLE>
<TABLE>
Year Ended Year Ended
* Distributions by Class September 30, 1996 September 30, 1995
- -----------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares $ (549,238) $ (653,415)
Class B Shares (323,292) (363,880)
Class C Shares (43,961) (55,017)
--------------- ---------------
$ (916,491) $ (1,072,312)
=============== ===============
Distributions from Net Realized Gains
on Securities:
Class A Shares $ (14,428) $ 0
Class B Shares (8,986) 0
Class C Shares (1,520) 0
--------------- ---------------
$ (24,934) $ 0
=============== ===============
</TABLE>
11
<TABLE>
Van Kampen American Capital Texas Tax Free Income Fund
Financial Highlights
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
<CAPTION>
From March 2, 1992
(Commencement
Year Ended September 30, of Investment
Operations) to
Class A Shares 1996 1995 1994 1993<F1> September 30, 1992<F1>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $ 10.03 $ 9.64 $ 10.36 $ 9.74 $ 9.45
-------- -------- -------- ---------- --------------
Net Investment Income 0.544 0.54 0.54 0.57 0.36
Net Realized and Unrealized Gain/Loss on Securities 0.099 0.39 (0.7025) 0.65 0.23
-------- -------- -------- ---------- --------------
Total from Investment Operations 0.643 0.93 (0.1625) 1.22 0.59
-------- -------- -------- ---------- --------------
Less:
Distributions from and in Excess of Net Income 0.540 0.54 0.545 0.5875 0.30
Distributions from Net Realized Gains on Securities 0.013 0.00 0.0125 0.0125 0.00
-------- -------- -------- ---------- --------------
Total Distributions 0.553 0.54 0.5575 0.60 0.30
-------- -------- -------- ---------- --------------
Net Asset Value, End of the Period $ 10.120 $ 10.03 $ 9.64 $ 10.36 $ 9.74
======== ======== ======== ========== ==============
Total Return * <F2> 6.33% 10.05% (1.62%) 12.94% 6.30% **
Net Assets at End of the Period (In millions) $ 9.3 $ 11.1 $ 12.8 $ 18.0 $14.1
Ratio of Expenses to Average Net Assets * 1.26% 1.36% 1.03% 0.61% 0.93%
Ratio of Net Investment Income to Average Net Assets * 5.39% 5.51% 5.41% 5.74% 5.94%
Portfolio Turnover 31% 15% 10% 5% 4% **
*If certain expenses had not been waived or reimbursed
by VKAC, total return would have been lower and the
ratios would have been as follows (Note 2):
Ratio of Expenses to Average Net Assets 1.79% 1.66% 1.70% 1.86% 1.41%
Ratio of Net Investment Income to Average Net Assets 4.85% 5.21% 4.74% 4.49% 5.45%
** Non-Annualized
<FN>
<F1> Based on average shares outstanding.
<F2> Total return is based upon net asset value which does not include payment of the maximum sales charge or contingent
deferred sales charge.
</TABLE>
12
<TABLE>
Van Kampen American Capital Texas Tax Free Income Fund
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
<CAPTION>
From July 27, 1992
Year Ended September 30, (Commencement
of Distribution
Class B Shares 1996 1995 1994 1993<F1> September 30, 1992<F1>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $ 10.03 $ 9.64 $ 10.35 $ 9.74 $ 9.91
-------- -------- -------- -------- --------------
Net Investment Income 0.470 0.46 0.47 0.50 0.065
Net Realized and Unrealized Gain/Loss on Securities 0.094 0.396 (0.7065) 0.633 (0.103)
-------- -------- -------- -------- --------------
Total from Investment Operations 0.564 0.856 (0.2365) 1.133 (0.038)
-------- -------- -------- -------- --------------
Less:
Distributions from and in Excess of Net Income 0.468 0.466 0.461 0.5105 0.132
Distributions from Net Realized Gains on Securities 0.013 0.000 0.0125 0.0125 0.000
-------- -------- -------- -------- --------------
Total Distributions 0.481 0.466 0.4735 0.523 0.132
-------- -------- -------- -------- --------------
Net Asset Value, End of the Period $ 10.113 $ 10.03 $ 9.64 $ 10.35 $ 9.74
======== ======== ======== ======== ==============
Total Return * <F2> 5.69% 9.11% (2.35%) 11.97% (.73%) **
Net Assets at End of the Period (In millions) $ 6.5 $ 7.3 $ 8.6 $ 7.1 $ 0.9
Ratio of Expenses to Average Net Assets * 2.00% 2.14% 1.80% 1.30% 1.41%
Ratio of Net Investment Income to Average Net Assets * 4.65% 4.74% 4.66% 4.92% 3.83%
Portfolio Turnover 31% 15% 10% 5% 4% **
*If certain expenses had not been waived or reimbursed
by VKAC, total return would have been lower and the
ratios would have been as follows (Note 2):
Ratio of Expenses to Average Net Assets 2.53% 2.44% 2.47% 2.55% 2.15%
Ratio of Net Investment Income to Average Net Assets 4.12% 4.44% 3.99% 3.67% 3.07%
** Non-Annualized
<FN>
<F1> Based on average shares outstanding.
<F2> Total return is based upon net asset value which does not include payment of the maximum sales charge or contingent
deferred sales charge.
</TABLE>
13
<TABLE>
Van Kampen American Capital Texas Tax Free Income Fund
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
<CAPTION>
From August 30, 1993
Year Ended September 30, (Commencement
of Distribution) to
Class C Shares 1996 1995 1994<F1> September 30, 1993<F1>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period $ 10.04 $ 9.65 $ 10.36 $ 10.28
-------- -------- -------- --------------
Net Investment Income 0.467 0.46 0.46 0.04
Net Realized and Unrealized Gain/Loss on Securities 0.098 0.396 (0.6965) 0.121
-------- -------- -------- --------------
Total from Investment Operations 0.565 0.856 (0.2365) 0.161
-------- -------- -------- --------------
Less:
Distributions from and in Excess of Net Income 0.468 0.466 0.461 0.081
Distributions from Net Realized Gains on Securities 0.013 0.000 0.0125 0.000
-------- -------- -------- --------------
Total Distributions 0.481 0.466 0.4735 0.081
-------- -------- -------- --------------
Net Asset Value, End of the Period $ 10.124 $ 10.04 $ 9.65 $ 10.36
======== ======== ======== ==============
Total Return * <F2> 5.68% 9.11% (2.35%) 1.57% **
Net Assets at End of the Period (In millions) $ 0.8 $ 1.1 $ 1.2 $ 0.1
Ratio of Expenses to Average Net Assets * 2.02% 2.14% 1.79% 0.66%
Ratio of Net Investment Income to Average Net Assets * 4.61% 4.73% 4.59% 4.17%
Portfolio Turnover 31% 15% 10% 5%
*If certain expenses had not been waived or reimbursed
by VKAC, total return would have been lower and the
ratios would have been as follows (Note 2):
Ratio of Expenses to Average Net Assets 2.55% 2.44% 2.46% 1.89%
Ratio of Net Investment Income to Average Net Assets 4.08% 4.43% 3.92% 2.92%
** Non-Annualized
<FN>
<F1> Based on average shares outstanding.
<F2> Total return is based upon net asset value which does not include payment of the maximum sales charge or contingent
deferred sales charge.
</TABLE>
14
Van Kampen American Capital Texas Tax Free Income Fund
Notes to Financial Statements
September 30, 1996
1. Significant Accounting Policies
Van Kampen American Capital Texas Tax Free Income Fund (the
"Fund") is organized as a Delaware business trust, and is
registered as a non-diversified, open-end management investment
company under the Investment Company Act of 1940, as amended.
The Fund's investment objective is to provide a high level of
interest income exempt from federal income tax by primarily
investing in Texas municipal and government obligations which
are tax-exempt. The Fund commenced investment operations on
March 2, 1992. The distribution of the Fund's Class B and Class
C shares commenced on July 27, 1992 and August 30, 1993,
respectively.
The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could
differ from the estimates.
A. Security Valuation - Investments are stated at value using
market quotations or, if such valuations are not available,
estimates obtained from yield data relating to instruments or
securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of 60 days or
less are valued at amortized cost.
B. Security Transactions - Security transactions are recorded
on a trade date basis. Realized gains and losses are determined
on an identified cost basis. The Fund may purchase and sell
securities on a "when issued" or "delayed delivery" basis, with
settlement to occur at a later date. The value of the security
so purchased is subject to market fluctuations during this
period. The Fund will maintain, in a segregated account with
its custodian, assets having an aggregate value at least equal
to the amount of the when issued or delayed delivery purchase
commitments until payment is made. At September 30, 1996, there
were no when issued or delayed delivery purchase commitments.
C. Investment Income - Interest income is recorded on an
accrual basis. Bond premium and original issue discount is
amortized over the life of each applicable security. Market
discounts are recognized at the time of the sale as realized
gains for book purpose and ordinary income for tax purposes.
D. Organizational Expenses - The Fund has reimbursed Van
Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC") for costs incurred in connection with
the Fund's organization in the amount of $15,000. These costs
are being amortized on a straight line basis over a 60-month
period. Van Kampen American Capital Asset Management, Inc.
(the "Adviser") will reimburse the Fund for any unamortized
organizational costs at the merger date (Note 3).
E. Federal Income Taxes - It is the Fund's policy to comply
with the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially
all of its taxable income and gains to its shareholders.
Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial and
tax reporting purposes as a result of the deferral for tax
purposes of losses resulting from wash sales.
F. Distribution of Income and Gains - The Fund declares daily
and pays monthly dividends from net investment income. Net
realized gains, if any, are paid annually and may include
short-term capital gains, which are included in ordinary income
for tax purposes.
Due to inherent differences between generally accepted
accounting principles and federal income tax regulations
concerning the recognition of certain expenses, the amount of
distributable net investment income may be different for book
and federal income tax purposes for a particular period. These
differences are temporary in nature, but may result in book
basis distribution in excess of net investment income for
certain periods.
For the year ended September 30, 1996, 99.98% of the income
distributions made by the Fund were exempt from federal income
taxes. Additionally, during the period, the Fund paid long-term
capital gains of $24,934. In January, 1997, the Fund will
provide tax information to shareholders for the 1996 calendar
year.
2. Investment Advisory Agreement and Other Transactions with
Affiliates
Under the terms of the Fund's Investment Advisory Agreement,
the Adviser will provide investment advice and facilities to the
Fund for an annual fee payable monthly as follows:
Average Net Assets % Per Annum
- ------------------ -----------
First $300 million .60 of 1%
Next $300 million .55 of 1%
Over $600 million .50 of 1%
15
The Adviser may voluntarily elect to reimburse the Fund
for a portion of the Fund's expenses. This reimbursement may
be discontinued at any time without prior notice. For the year
ended September 30, 1996, the Adviser agreed to waive fees of
$97,000.
Certain legal expenses are paid to Skadden, Arps, Slate,
Meagher & Flom, counsel to the Funds, of which a trustee of the
Fund is an affiliated person.
For the year ended September 30, 1996, the Fund recognized
expenses of approximately $70,000 representing VKAC's cost of
providing accounting services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate
of the Adviser, serves as the shareholder servicing agent for
the Fund. For the year ended September 30, 1996, the Fund
recognized expenses of approximately $13,900, representing
ACCESS' cost of providing transfer agency and shareholder
services plus a profit.
Additionally, for the year ended September 30, 1996, the
Fund paid VKAC approximately $2,100 related to the direct cost of
consolidating the VKAC open-end fund complex. Payment was
contingent upon the realization by the Fund of cost efficiencies
resulting from the consolidation.
Certain officers and trustees of the Fund are also
officers and directors of VKAC. The Fund does not compensate
its officers or trustees who are officers of VKAC.
The Fund has implemented deferred compensation and
retirement plans for its trustees. Under the deferred
compensation plan, trustees may elect to defer all or a portion
of their compensation to a later date. The retirement plan
covers those trustees who are not officers of VKAC.
At September 30, 1996, VKAC owned 10,605 Class A
shares, 51 Class B shares and 49 Class C shares.
3. Capital Transactions
The Fund is authorized to issue an unlimited number of shares of
beneficial interest with a par value of $.01 per share.
At September 30, 1996, capital aggregated $8,517,465,
$6,428,046 and $840,862 for Classes A, B and C, respectively.
For the year ended September 30, 1996, transactions were as
follows:
Shares Value
- ------------------------------------------------------------
Sales:
Class A 84,932 $ 860,729
Class B 31,008 315,269
Class C 17,414 176,958
---------- -------------
Total Sales 133,354 $ 1,352,956
========== =============
Dividend Reinvestment:
Class A 25,776 $ 261,340
Class B 17,054 172,775
Class C 822 8,343
---------- -------------
Total Dividend Reinvestment 43,652 $ 442,458
========== =============
Repurchases:
Class A (301,667) $ (3,038,975)
Class B (134,727) (1,367,034)
Class C (43,985) (449,533)
---------- -------------
Total Repurchases (480,379) $ (4,855,542)
========== =============
At September 30, 1995, capital aggregated $10,434,371,
$7,307,036 and $1,105,094 for Classes A, B and C, respectively.
For the year ended September 30, 1995, transactions were as
follows:
Shares Value
- ------------------------------------------------------------
Sales:
Class A 52,801 $ 517,409
Class B 37,593 362,817
Class C 30,198 299,878
---------- -------------
Total Sales 120,592 $ 1,180,104
========== =============
Dividend Reinvestment:
Class A 30,626 $ 299,151
Class B 18,363 179,325
Class C 981 9,580
---------- -------------
Total Dividend Reinvestment 49,970 $ 488,056
========== =============
16
Shares Value
- ------------------------------------------------------------
Repurchases:
Class A (304,310) $ (2,969,102)
Class B (215,721) (2,085,815)
Class C (50,161) (497,657)
----------- --------------
Total Repurchases (570,192) $ (5,552,574)
=========== ==============
Class B and C Shares are offered without a front-end sales
charge, but are subject to a contingent deferred sales charge
(CDSC). The CDSC for Class B and C shares will be imposed on
most redemptions made within six years of the purchase for Class
B and one year of the purchase for Class C as detailed below in
the following schedule. The Class B and C shares bear the
expense of their respective deferred sales arrangements,
including higher distribution and service fees and incremental
transfer agency costs.
Year of Redemption Class B Class C
- --------------------------------------------------------------
First 4.00% 1.00%
Second 4.00% None
Third 3.00% None
Fourth 2.50% None
Fifth 1.50% None
Sixth and Thereafter None None
For the year ended September 30, 1996, VKAC, as Distributor
for the Fund, received net commissions on sales of the Fund's
Class A shares of approximately $3,000 and CDSC on the redeemed
shares of Classes B and C of approximately $19,200. Sales
charges do not represent expenses of the Fund.
4. Investment Transactions
During the period, the cost of purchases and proceeds from sales
of investments, excluding short-term investments, were
$5,511,388 and $9,150,065, respectively.
5. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940
and a service plan (collectively the "Plans"). The Plans govern
payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A and
1.00% of each of Class B and Class C net assets are accrued
daily. Included in these fees for the year ended September 30,
1996, are payments to VKAC of approximately $61,900.
6. Subsequent Events
On October 25, 1996, the Fund merged into the Van Kampen
American Capital Municipal Income Fund (the "Muni Fund") through
a tax free reorganization approved by the Fund's shareholders on
October 15, 1996. Prior to the merger, the Fund incurred
$100,000 of merger related expenses. Net assets of the Fund on
the date of the transfer were $16,369,599, with 605,902 Class A
shares, 421,195 Class B shares and 53,444 Class C shares of the
Muni Fund issued in consideration for these assets.
On October 23, 1996, the Fund distributed income of $.0363,
$.0315 and $.0315 per share for Classes A, B and C,
respectively. The Fund also paid on this date long-term capital
gains of $.2075 per share for each of Classes A, B and C.
For the fiscal period from October 1, 1996 through October 25,
1996, 100.00% of the income distributions made by the Fund were
exempt from federal income taxes. In January, 1997, the Fund
will provide tax information to shareholders for the 1996
calendar year.
17
Price Waterhouse LLP
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Van Kampen American Capital Texas Tax Free Income Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets
and the financial highlights present fairly, in all material
respects, the financial position of Van Kampen American Capital
Texas Tax Free Income Fund (the "Fund") at September 30, 1996,
the results of its operations, the changes in its net assets and
the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance
with generally accepted accounting standards which require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principals used and
significant estimates made by management, and evaluating the
overall financial presentations. We believe that our audits,
which included confirmation of securities at September 30, 1996
by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Houston, Texas
November 11, 1996
Van Kampen American Capital
Texas Tax Free Income Fund
Board of Trustees
J. Miles Branagan
Linda Hutton Heagy
Roger Hilsman
R. Craig Kennedy
Dennis J. McDonnell*
Donald C. Miller - Co-Chairman
Jack E. Nelson
Jerome L. Robinson
Fernando Sisto - Co-Chairman
Wayne W. Whalen*
William S. Woodside
Officers
Dennis J. McDonnell*
President
Ronald A. Nyberg*
Vice President and Secretary
Edward C. Wood, III*
Vice President and Chief Financial Officer
Curtis W. Morell*
Vice President and Chief Accounting Officer
John L. Sullivan*
Treasurer
Tanya M. Loden*
Controller
Peter W. Hegel*
Alan T. Sachtleben*
Paul R. Wolkenberg*
Vice Presidents
Investment Adviser
Van Kampen American
Capital Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Distributor
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Shareholder Servicing Agent
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
Custodian
State Street Bank and Trust Company
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive
Chicago, Illinois 60606
Independent Accountants
Price Waterhouse LLP
1201 Louisiana
Houston, Texas 77002
*"Interested" persons of the Fund as defined in the Investment
Company Act of 1940
