<PAGE> 1
- ----------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio Highlights............................. 5
Portfolio Management Review...................... 6
Portfolio of Investments......................... 9
Statement of Assets and Liabilities.............. 15
Statement of Operations.......................... 16
Statement of Changes in Net Assets............... 17
Financial Highlights............................. 18
Notes to Financial Statements.................... 21
</TABLE>
PATF SAR 8/97
<PAGE> 2
LETTER TO SHAREHOLDERS
July 24, 1997
Dear Shareholder,
As you know, Van Kampen American
Capital was acquired by Morgan Stanley
Group Inc., a world leader in asset
management. Earlier this year, Morgan
Stanley Group Inc. and Dean Witter,
Discover & Co. agreed to merge. The
merger was completed on May 31, [PHOTO]
creating the combined company of
Morgan Stanley, Dean Witter, Discover DENNIS J. MCDONNELL AND DON G. POWELL
& Co. Additionally, we are very
pleased to announce that Philip N.
Duff, formerly the chief financial officer of Morgan Stanley Group Inc., has
joined Van Kampen American Capital as president and chief executive officer. I
will continue as chairman of the firm. We are confident that the partnership of
Van Kampen American Capital and Morgan Stanley will continue to work to the
benefit of our fund shareholders.
One of the immediate privileges that we can offer fund shareholders is the
ability to make exchanges between Van Kampen American Capital and Morgan Stanley
retail funds at no charge. In our view, the rapid appreciation of U.S. stock
prices in recent years has created a need for investors to examine their
portfolios carefully to ensure proper diversification among domestic and foreign
investments. The Morgan Stanley retail funds, with their emphasis on global
markets, can be valuable tools for accomplishing this diversification.
We also urge investors to consider how their fund holdings are currently
allocated among the three major asset classes of stocks, bonds, and cash
reserves. Uneven movements in the various markets can distort a carefully
planned investment program. And, with stock prices near record highs, it is
likely that some rebalancing of your portfolio allocations may be necessary.
Once again, the exchangeability feature with the Morgan Stanley retail funds
provides additional choices and opportunities to make the necessary adjustments
to your portfolio's asset allocation.
ECONOMIC OVERVIEW
Growth, stability, and confidence continued to characterize the U.S.
economic environment during the past six months. In the first quarter, the
economy grew at its fastest pace since 1987. Meanwhile, consumer confidence
soared to its highest reading in 27 years, while unemployment fell as low as 4.8
percent, the lowest level since 1973.
Despite the robust pace of economic activity, there was little evidence of
troublesome inflation. Wholesale prices actually fell during each of the first
five months of 1997, the longest stretch of consecutive monthly declines in 45
years. At the consumer level, prices
Continued on page two
1
<PAGE> 3
rose by a mere 2.2 percent during the 12 months through May. A strong rally in
the U.S. dollar helped dampen inflationary pressures resulting from the vigorous
domestic economy by making imported goods less expensive. At the same time,
continued moderation in the cost of employee benefit packages offset mild upward
pressure on wages.
In March, the inflationary implications of a tight labor market caused the
Federal Reserve Board to raise its target for a key lending rate by one-quarter
of a percentage point, the first hike in short-term interest rates in two years.
Signs that economic growth slowed markedly in the second quarter, however, led
Fed policymakers to leave rates unchanged at subsequent meetings.
MARKET OVERVIEW
The strong economy and tight labor market combined to put mild upward
pressure on bond yields during the first half of 1997. For several weeks during
the spring, it appeared that economic growth was too robust and that inflation
could reemerge. The Federal Reserve's quarter-point increase in short-term
interest rates, as well as worries about inflation, pushed yields on long-term
government bonds up to 7.17 percent in April. When subsequent data showed the
economy to be decelerating during the second quarter, bond yields gradually fell
back to 6.78 percent at the end of June, slightly above where they stood at the
beginning of the year.
Within the tax-exempt municipal market, long-term general obligation bonds
returned nearly four percent during the past six months. The supply of municipal
bonds remained tight, as a number of older bonds were called and new issuance
was less than anticipated. As of June 30, long-term AA-rated general obligation
bonds yielded 5.49 percent, which is equivalent to a 9.09 percent yield on
taxable securities for investors in the 39.6 percent federal income tax bracket.
OUTLOOK
We expect the pace of economic activity during the remainder of 1997 to
accelerate modestly from the sluggish rate that prevailed during the second
quarter. While we do not believe that economic growth will be rapid enough to
reignite inflation, some warning signs are present, including a tight labor
market and high consumer confidence. In this environment, at least one
additional Federal Reserve interest rate hike remains a possibility. We
anticipate that long-term interest rates will remain within a relatively narrow
range for the remainder of the year.
We are fortunate to be experiencing a rare combination of sustained economic
growth, low inflation, and highly favorable performance in the financial market.
Along with our shareholders, we celebrate the seemingly best of economic times.
Once again, we encourage you to review your portfolio with an eye toward
correcting allocation imbalances.
Continued on page three
2
<PAGE> 4
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. We appreciate
your continued confidence in your investment with Van Kampen American Capital.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
3
<PAGE> 5
PERFORMANCE RESULTS FOR THE PERIOD ENDED JUNE 30, 1997
VAN KAMPEN AMERICAN CAPITAL
PENNSYLVANIA TAX FREE INCOME FUND
<TABLE>
<CAPTION>
A B C
SHARES SHARES SHARES
<S> <C> <C> <C>
TOTAL RETURNS
Six-month total return based on
NAV(1)................................ 2.62% 2.29% 2.23%
Six-month total return(2)............... (2.24%) (1.71%) 1.23%
One-year total return(2)................ 2.77% 3.14% 6.08%
Five-year average annual total
return(2)............................. 5.74% N/A N/A
Ten-year average annual total
return(2)............................. 8.21% N/A N/A
Life-of-Fund average annual total
return(2)............................. 8.20% 4.58% 4.27%
Commencement date....................... 05/01/87 05/01/93 08/13/93
DISTRIBUTION RATES AND YIELD
Distribution rate(3).................... 4.97% 4.46% 4.46%
Taxable equivalent distribution
rate(4)............................... 7.99% 7.17% 7.17%
SEC Yield(5)............................ 4.54% 4.01% 3.99%
</TABLE>
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or contingent
deferred sales charge for early withdrawal (4% for B shares and 1% for C
shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) Taxable equivalent calculations reflect a combined federal and state income
tax rate of 37.8%, which takes into consideration the deductibility of
individual state taxes paid.
(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 June 30, 1997.
A portion of the interest income may be taxable for those investors subject to
the federal 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.
The types of securities the Fund invests in generally provide yields based upon
a higher degree of credit and market risk. An investment in medium- and
lower-rated securities involves the risk of potentially greater sensitivity to
an economic downturn which would affect the issuer's ability to make timely
payments of interest and principal.
Market forecasts provided in this report may not necessarily come to pass.
4
<PAGE> 6
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
TOP TEN HOLDINGS AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
Philadelphia, PA Authority Industrial
Development Lease Revenue ................. 4.1%
Pennsylvania State Higher Educational
Assistance Agency Student Loan Revenue .... 3.3%
Allegheny County, PA Hospital Development
Authority Revenue Hospital St. Francis
Medical Center Project .................... 2.9%
Berks County, PA ............................ 2.6%
Pennsylvania State Higher Educational
Facility Authority Health Services Revenue
Allegheny Delaware Valley ................. 2.5%
Philadelphia, PA Municipal Authority Revenue
Municipal Services Building Lease ......... 2.3%
Radnor Township, PA School District ......... 2.1%
Pennsylvania State Higher Educational
Facility Authority Revenue Drexel
University ................................ 2.0%
Delaware County, PA Authority Revenue First
Mortgage Riddle Village Project ........... 1.9%
Allegheny County, PA Hospital Development
Authority Revenue Health Center
Presbyterian University ................... 1.9%
</TABLE>
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF DECEMBER 31, 1996
<S> <C> <S> <C>
AAA............... 50.6% AAA............... 51.5%
AA................ 8.0% AA................ 6.5%
A................. 15.7% A................. 14.2%
BBB............... 12.8% BBB............... 15.6%
BB................ 1.4% BB................ 1.7%
Non-Rated......... 11.5% Non-Rated......... 10.5%
</TABLE>
Based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF DECEMBER 31, 1996
<S> <C> <S> <C>
Health Care........... 22.8% Health Care............ 24.7%
Industrial Revenue.... 13.3% Industrial Revenue..... 10.4%
Public Education...... 8.3% Public Building........ 9.0%
Other Care............ 7.3% Public Education....... 7.8%
Public Building....... 7.3% Other Care............. 7.5%
</TABLE>
DURATION
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF DECEMBER 31, 1996
<S> <C> <C>
Duration 8.00 years 8.04 years
</TABLE>
5
<PAGE> 7
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Pennsylvania Tax Free Income Fund about the key events and economic forces that
shaped the markets during the first half of the Fund's fiscal year. The team
includes Dennis S. Pietrzak, portfolio manager, and Peter W. Hegel, chief
investment officer for fixed-income investments. The following excerpts reflect
their views concerning the Fund's performance during the six-month period ended
June 30, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND HAS
OPERATED OVER THE PAST SIX MONTHS?
A Interest rate changes and the state of the economy have played the biggest
roles in the Fund these past six months. The national economy has been
expanding for several periods--with unemployment at a 27-year low and few
signs of inflation. While the rest of the United States thrives, however, the
economy in Pennsylvania has consistently lagged, due in large part to an aging
population and slow job creation.
In addition to the national and state economic issues, availability of
attractive bond yields still remains at low levels. Although overall issuance in
Pennsylvania is significantly higher than the same period of 1996 (33 percent
higher) the tight supply of higher-yielding bonds has proven to be an obstacle
in improving the yield and the Fund over the period.
Q HAS THE FUND'S PERFORMANCE SUFFERED DUE TO THE TIGHT SUPPLY?
A No, not at all, but it has forced us to work a little harder to achieve
our goals. In fact, we are pleased with the Fund's performance,
particularly over the longer term. The Fund has performed at or near the
top half of its peer group, as tracked by Lipper Analytical Services, Inc., for
both the three-year and five-year periods ended June 30, 1997.
Q HOW DID YOU MANAGE THE FUND IN LIGHT OF THESE INFLUENCES?
A In response to the economy, we adjusted the Fund's duration in March to
7.30 years, slightly shorter than the Lehman Brothers Municipal Bond Index
duration of 7.97 years, in anticipation that inflation would pick up and the
Federal Reserve Board would increase interest rates. Because of the longer-term
nature of the Fund, the calculation of this index's duration has been adjusted
to eliminate bonds with maturities of five years or less. Duration, expressed in
years, is a measurement of the Fund's sensitivity to interest rate movements.
The shorter its duration, the less sensitive the Fund is expected to be to
interest rate changes. This adjustment proved beneficial to the Fund following
the March increase. Unfortunately, when the market went down we left the
duration short of its benchmark which negatively affected the return during the
month of May.
6
<PAGE> 8
During the second quarter, when higher-yielding bond issuance increased, we
were able to add some attractive issues, bringing more diversity and better
coupon rates to the Fund. This enabled us to increase our dividends to
shareholders.
The Fund, however, has encountered some difficulties with some of its
current holdings. One position in the paper and pulp industry, representing
about one percent of the Fund's assets, has had a slightly negative impact on
the total return. In an effort to decrease the risks associated with this
holding, we have gradually reduced our position resulting in an improvement in
the Fund's total return. For additional Fund portfolio highlights, please refer
to page five.
Q FOCUSING ON THE PAST SIX MONTHS, HOW WOULD YOU EVALUATE THE FUND'S
PERFORMANCE?
A The Fund has performed well. For the six months ended June 30, 1997, it
generated a total return of 2.62 percent(1) (Class A shares at net asset
value). By comparison, the Lehman Brothers Municipal Bond Index produced a
total return of 3.20 percent over 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.
The Fund's net asset value closed the reporting period at $17.49 per Class A
share. The tax-exempt distribution rate as of June 30, was 4.97 percent(3),
representing a taxable-equivalent distribution rate of 7.99 percent(4) for an
investor in the 37.8 percent combined federal and state income tax bracket.
Please refer to the chart on page four for additional Fund performance results.
Q HOW WERE YOU ABLE TO ADD DIVERSITY AND YIELD TO THE FUND?
A Pennsylvania historically is a large issuer of health-care bonds,
continuing care retirement centers, nursing homes, and hospitals. In
addition to health care, we are investing in school and water districts,
some townships, and the transportation authority.
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We are relatively optimistic about the national economy and expect
continued growth, but at a slower rate than the two previous quarters.
Over the next six months, however, we will be watching the economy for
signs of inflation, which will likely result in increased interest rates.
7
<PAGE> 9
Regardless of economic factors, we feel confident that we are positioning
the Fund for solid, consistent performance. We will continue to manage the Fund
in a manner consistent with the philosophy we have applied since the Fund's
inception, as we seek to achieve our objective of providing shareholders with a
high level of current income, exempt from federal and state income taxes.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
Dennis S. Pietrzak
Portfolio Manager
Please see footnotes on page four
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS
PENNSYLVANIA 100.3%
$3,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser B (FSA Insd)........................... 6.625% 01/01/22 $ 3,741,115
500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser C (MBIA Insd).......................... 8.250 01/01/16 519,215
1,625 Allegheny Cnty, PA C-34 Conv Cap Apprec (a)..... 0/8.625 02/15/04 1,844,277
1,000 Allegheny Cnty, PA Higher Edl Bldg Auth Univ Rev
Duquesne Univ Proj (AMBAC Insd)................. 6.500 03/01/11 1,133,860
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent
Presbyterian Univ Ser A (MBIA Insd) (c)......... 6.000 11/01/12 2,568,525
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent
Presbyterian Univ Ser A (MBIA Insd)............. 6.250 11/01/23 2,594,225
2,140 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Fac
Allegheny Vly Sch............................... 7.750 02/01/15 2,276,339
845 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp St
Francis Med Cent Proj........................... 5.300 05/15/04 850,264
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp St
Francis Med Cent Proj........................... 5.400 05/15/05 1,008,230
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp St
Francis Med Cent Proj........................... 5.500 05/15/06 1,011,830
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp St
Francis Med Cent Proj........................... 5.500 05/15/07 1,009,030
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp St
Francis Med Cent Proj........................... 5.600 05/15/08 1,007,220
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp St
Francis Med Cent Proj........................... 5.750 05/15/09 1,011,940
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp St
Francis Med Cent Proj........................... 5.750 05/15/10 1,003,340
1,160 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp St
Francis Med Cent Proj........................... 5.750 05/15/17 1,144,375
955 Allegheny Cnty, PA Indl Dev Auth Med Cent Rev
Presbyterian Med Cent Rfdg (FHA Gtd)............ 6.750 02/01/26 1,016,445
2,500 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt Ser A Rfdg................... 6.700 12/01/20 2,645,525
1,350 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
1983 Ser B...................................... * 10/01/15 199,139
1,945 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
Single Family Ser Z (GNMA Collateralized)....... 6.875 05/01/26 2,043,806
5,000 Allegheny Cnty, PA San Auth Swr Rev (MBIA Insd)
(b)............................................. 5.375 12/01/24 4,832,850
2,000 Beaver Cnty, PA Hosp Auth Rev Med Cent Beaver,
PA Inc Ser A (AMBAC Insd)....................... 6.250 07/01/22 2,095,080
4,500 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Collateral Toledo Edison Co Proj Ser A Rfdg..... 7.750 09/01/24 4,749,120
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$6,000 Berks Cnty, PA (Inverse Fltg) (FGIC Insd)....... 8.620% 11/10/20 $ 7,200,000
2,000 Berks Cnty, PA Muni Auth Rev Highlands at
Wyomissing Proj B............................... 6.875 10/01/17 2,131,720
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.500 05/15/13 1,044,320
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.700 05/15/22 1,020,070
2,750 Bradford Cnty, PA Indl Dev Auth Solid Waste Disp
Rev Intl Paper Co Proj A........................ 6.600 03/01/19 2,913,515
1,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Bethlehem Steel Corp Proj Rfdg.................. 7.500 09/01/15 1,067,710
1,000 Cambria Cnty, PA Indl Dev Auth Res Recovery Rev
Cambria Cogen Proj Ser F........................ 7.750 09/01/19 1,027,150
1,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys
Rev (AMBAC Insd)................................ 5.650 05/15/20 976,110
1,880 Chester Cnty, PA Hlth & Edl The Chester Cnty
Hosp (MBIA Insd)................................ 5.625 07/01/08 1,970,127
90 Chester Cnty, PA Hosp Auth Rev Brandywine
Hosp............................................ 7.000 07/01/10 91,939
760 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/01 635,915
860 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/02 684,302
945 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj............................................ 8.500 07/01/13 1,041,324
1,000 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj............................................ 8.500 07/01/21 1,101,930
1,130 Clearfield Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg Kmart Corp Ser A Rfdg................. 7.200 07/01/07 1,192,421
2,230 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle
Hosp & Hlth..................................... 6.800 11/15/23 2,343,418
5,035 Dauphin Cnty, PA Genl Auth Hlth Sys Rev Pinnacle
Hlth Sys Proj Rfdg (MBIA Insd).................. 5.500 05/15/27 4,901,472
2,000 Delaware Cnty, PA Auth Hosp Rev Crozer Chester
Med Cent Ser A, B & C (Prerefunded @ 12/15/00)
(MBIA Insd)..................................... 7.500 12/15/20 2,237,760
2,475 Delaware Cnty, PA Auth Rev Elwyn Inc Proj
(Prerefunded @ 06/01/00)........................ 8.350 06/01/15 2,783,410
1,500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj (Prerefunded @ 06/01/02)................... 9.250 06/01/22 1,825,035
500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 6.200 06/01/05 504,890
3,000 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 7.000 06/01/26 3,018,690
2,000 Erie Cnty, PA Hosp Auth Rev Saint Vincent Hlth
Cent Proj Ser A (MBIA Insd)..................... 6.375 07/01/22 2,141,980
2,065 Greene Cnty, PA Unlimited Tax (Prerefunded @
08/01/00)....................................... 8.500 08/01/10 2,283,787
3,000 Harrisburg, PA Auth Rev Pooled Univ Pgm Ser 11
(MBIA Insd)..................................... 5.625 09/15/17 3,008,970
650 Hazleton, PA Hlth Svcs Auth Saint Joseph Med
Cent Rfdg....................................... 5.850 07/01/06 659,581
1,750 Indiana Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Metro Edison Co Proj A (AMBAC Insd)............. 5.950 05/01/27 1,768,357
1,800 Kiski, PA Area Sch Dist (FGIC Insd)............. 5.300 03/01/17 1,766,448
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res
Recovery Sys Rev Ser A.......................... 8.375% 12/15/04 $ 1,042,020
2,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res
Recovery Sys Rev Ser A.......................... 8.500 12/15/10 2,087,780
2,000 Lehigh Cnty, PA Genl Purp Auth Cedar Crest
College Rfdg.................................... 6.700 04/01/26 2,056,040
4,100 Lehigh Cnty, PA Genl Purp Auth Rev Muhlenberg
Hosp Ser A Rfdg................................. 8.100 07/15/10 4,432,469
1,000 Lehigh Cnty, PA Indl Dev Auth Pollutn Ctl Rev PA
Pwr & Lt Co Proj Ser A Rfdg (MBIA Insd)......... 6.400 11/01/21 1,083,820
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A........................ 6.500 07/01/22 2,122,560
2,500 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A (Prerefunded @
07/01/00) (c)................................... 7.750 07/01/16 2,775,925
1,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp
Proj (Crossover Rfdg @ 10/01/00)................ 8.875 10/01/20 1,143,280
750 McKeesport, PA Indl Dev Auth Rev The Kroger Corp
Allegheny Cnty Rfdg............................. 8.650 06/01/11 851,985
3,000 Monroeville, PA Hosp Auth Hosp Rev Forbes Hlth
Sys Rfdg........................................ 6.250 10/01/15 3,088,890
500 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Suburban Genl Hosp Bonds (AMBAC Insd)....... 7.250 05/01/16 511,390
410 Montgomery Cnty, PA Higher Edl & Hlth Auth
Nursing Home Rev Delco Sys Svcs Proj A.......... 9.875 11/01/18 423,452
2,250 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev Adult Cmntys Total Svcs Ser B......... 5.625 11/15/12 2,222,505
2,000 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev GDL Farms Corp Proj Rfdg.............. 6.300 01/01/13 1,954,420
2,500 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Philadelphia Elec Co Ser A Rfdg............. 7.600 04/01/21 2,704,350
3,000 Montgomery Cnty, PA Indl Dev Auth Rev Res
Recovery........................................ 7.500 01/01/12 3,264,240
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Wordsworth
Academy......................................... 7.750 09/01/24 1,012,480
1,415 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/17 1,415,439
3,300 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/26 3,241,194
1,500 North Penn, PA Wtr Auth Wtr Rev (FGIC Insd)..... 6.200 11/01/22 1,578,720
1,000 North Penn, PA Wtr Auth Wtr Rev (Prerefunded @
11/01/04) (FGIC Insd)........................... 6.875 11/01/19 1,145,030
2,500 Northampton Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Bethlehem Steel Rfdg........................ 7.550 06/01/17 2,674,325
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd
Luzerne Cnty Cmnty College (AMBAC Insd)......... 6.625 08/15/15 1,090,980
2,302 Oil City, PA Towne Tower Proj................... 6.750 05/01/20 2,414,233
1,335 Penn Hills, PA (FGIC Insd)...................... 5.800 12/01/13 1,380,176
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,600 Penn Hills, PA (FGIC Insd)...................... 5.850% 12/01/14 $ 1,653,760
1,335 Penn Hills, PA (FGIC Insd)...................... 5.900 12/01/17 1,376,318
3,000 Penn Manor Sch Dist PA (FGIC Insd).............. 5.200 06/01/16 2,899,980
2,000 Pennsylvania Econ Dev Fin Auth Exempt Fac Rev
MacMillan Ltd Partnership Proj.................. 7.600 12/01/20 2,278,280
2,400 Pennsylvania Econ Dev Fin Auth Recycling Rev
Ponderosa Fibres Proj Ser A..................... 9.250 01/01/22 1,747,032
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.050 12/01/10 3,242,340
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.125 12/01/15 1,618,455
5,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Northampton Generating Ser A.................... 6.600 01/01/19 5,087,700
4,000 Pennsylvania Hsg Fin Agy (Inverse Fltg)......... 9.914 10/03/23 4,385,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg Rfdg (FNMA
Collateralized)................................. 6.500 07/01/23 1,036,330
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
40.............................................. 6.900 04/01/25 1,063,970
2,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
42.............................................. 6.850 04/01/25 2,658,025
850 Pennsylvania Infrastructure Invt Auth Rev
Pennvest Subser B............................... 6.800 09/01/10 925,735
2,000 Pennsylvania Intergvtl Coop Auth Spl Tax Rev
City of Philadelphia Funding Pgm (MBIA Insd).... 5.600 06/15/15 2,014,620
4,000 Pennsylvania St Ctfs Partn (FSA Insd)........... 6.250 05/01/16 4,256,200
2,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Rfdg (Inverse Fltg) (AMBAC
Insd)........................................... 9.652 09/01/26 2,247,500
2,500 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser B (Inverse Fltg) (MBIA
Insd)........................................... 10.941 03/01/20 2,862,500
4,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser C (AMBAC Insd)............... 6.400 03/01/22 4,111,600
1,700 Pennsylvania St Higher Edl Fac Auth College &
Univ Rev Bryn Mawr College (MBIA Insd).......... 5.625 12/01/27 1,687,658
2,000 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Allegheny Delaware Vly Oblig A (MBIA
Insd)........................................... 5.000 11/15/06 2,007,320
4,595 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Allegheny Deleware Vly Oblig A (MBIA
Insd)........................................... 5.600 11/15/10 4,754,538
5,400 Pennsylvania St Higher Edl Fac Auth Rev Drexel
Univ Rfdg....................................... 6.375 05/01/17 5,635,926
1,590 Pennsylvania St Indl Dev Auth Rev Econ Dev
(AMBAC Insd).................................... 6.000 07/01/06 1,723,910
2,505 Philadelphia, PA Auth for Indl Dev Coml Dev
Philadelphia Arpt Rev Rfdg...................... 7.750 12/01/17 2,729,598
3,000 Philadelphia, PA Auth for Indl Dev Rev Long-Term
Care Maplewood.................................. 8.000 01/01/24 3,132,960
11,565 Philadelphia, PA Auth Indl Dev Lease Rev Ser A
(MBIA Insd)..................................... 5.375 02/15/27 11,181,852
3,000 Philadelphia, PA Gas Wks Rev Ser 14 (FSA
Insd)........................................... 6.250 07/01/08 3,263,940
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 250 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Albert Einstein Med Cent.................... 7.000% 10/01/21 $ 267,125
2,800 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Chestnut Hill Hosp.......................... 6.500 11/15/22 2,896,516
4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Temple Univ Hosp Ser A...................... 6.625 11/15/23 4,201,240
1,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/08 861,165
3,750 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/11 1,782,412
3,775 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/12 1,687,425
4,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/13 1,889,865
2,155 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded
@ 04/01/00) (FGIC Insd)......................... 7.800 04/01/18 2,351,040
3,100 Philadelphia, PA Sch Dist Ser B (AMBAC Insd).... 5.375 04/01/27 3,001,420
1,800 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.500 08/01/10 2,039,184
2,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (MBIA
Insd)........................................... 5.625 06/15/08 2,096,680
1,470 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser
C1.............................................. 6.800 10/01/25 1,540,942
1,475 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser D... 6.250 10/01/17 1,520,253
875 Pittsburgh, PA Urban Redev Auth Single Family
Mtg Rev Ser A (GNMA Collateralized)............. 8.000 12/01/20 916,475
3,850 Pottstown Boro, PA Auth Swr Rev Gtd Rfdg (AMBAC
Insd)........................................... 5.500 11/01/21 3,786,282
2,665 Radnor Twp, PA Sch Dist......................... 5.750 03/15/19 2,681,470
3,000 Randor Twp, PA Sch Dist......................... 5.750 03/15/26 3,005,220
250 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Cmnty Med Cent Proj (BIGI Insd)................. 7.875 07/01/10 263,408
1,000 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Marian Cmnty Hosp Proj Rfdg..................... 7.125 01/15/13 1,009,580
2,650 Sharon, PA Regl Hlth Sys Auth Hosp Rev Sharon
Regl Hlth Sys Proj A Rfdg....................... 6.875 12/01/09 2,807,198
355 Somerset Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg Kmart Corp Ser A Rfdg................. 7.200 04/01/07 374,000
2,180 State Pub Sch Bldg Auth PA Sch Rev Burgettstown
Sch Dist Ser D (MBIA Insd)...................... 6.500 02/01/14 2,377,770
1,500 Washington Cnty, PA Auth Lease Rev Muni Fac Pool
Cap Ser C Subser C-1D (Prerefunded @ 06/15/00)
(AMBAC Insd).................................... 7.450 12/15/18 1,669,365
2,935 West Shore, PA Area Auth Hlth Cent Rev United
Methodist Homes Aging Inc (Prerefunded @
06/01/01)....................................... 7.400 06/01/16 3,295,330
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,000 West Shore, PA Area Hosp Auth Hosp Rev Holy
Spirit Hosp Proj (MBIA Insd).................... 5.700% 01/01/22 $ 995,420
350 Westmoreland Cnty, PA Indl Dev Auth Rev Citizens
Genl Hosp Proj A Rfdg........................... 8.250 07/01/13 357,647
------------
272,623,283
------------
GUAM 1.0%
2,750 Guam Govt Ser A................................. 5.750 09/01/04 2,771,478
------------
PUERTO RICO 0.0%
45 Puerto Rico Comwlth Pub Impt Rfdg (Prerefunded @
07/01/97)....................................... 7.125 07/01/02 45,904
------------
TOTAL LONG-TERM INVESTMENTS 101.3%
(Cost $258,434,019) (a)...................................................... 275,440,665
SHORT-TERM INVESTMENTS AT AMORTIZED COST 1.7%................................. 4,700,000
------------
TOTAL INVESTMENTS 103.0%
(Cost $263,134,019).......................................................... 280,140,665
LIABILITIES IN EXCESS OF OTHER ASSETS (3.0%).................................. (8,248,589)
------------
NET ASSETS 100.0%............................................................. $271,892,076
============
</TABLE>
*Zero coupon bond
(a) Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
(b) Securities purchased on a when issued or delayed delivery basis.
(c) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
See Notes to Financial Statements
14
<PAGE> 16
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $263,134,019)....................... $280,140,665
Receivables:
Interest.................................................. 4,182,587
Fund Shares Sold.......................................... 867,265
Investments Sold.......................................... 196,702
Other....................................................... 4,296
------------
Total Assets.......................................... 285,391,515
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 9,544,155
Custodian Bank............................................ 2,007,098
Income Distributions...................................... 1,150,353
Distributor and Affiliates................................ 253,078
Fund Shares Repurchased................................... 182,526
Investment Advisory Fee................................... 134,235
Deferred Compensation and Retirement Plans.................. 122,853
Accrued Expenses............................................ 105,141
------------
Total Liabilities..................................... 13,499,439
------------
NET ASSETS.................................................. $271,892,076
============
NET ASSETS CONSIST OF:
Paid in Surplus............................................. $257,680,178
Net Unrealized Appreciation................................. 17,006,646
Accumulated Undistributed Net Investment Income............. 432,636
Accumulated Net Realized Loss............................... (3,227,384)
------------
NET ASSETS.................................................. $271,892,076
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $221,084,554 and 12,639,538 shares of
beneficial interest issued and outstanding)............. $ 17.49
Maximum sales charge (4.75%* of offering price)......... .87
------------
Maximum offering price to public........................ $ 18.36
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $48,060,655 and 2,748,408 shares of
beneficial interest issued and outstanding)............. $ 17.49
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $2,746,867 and 157,115 shares of
beneficial interest issued and outstanding)............. $ 17.48
============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 8,689,034
-----------
EXPENSES:
Investment Advisory Fee..................................... 812,591
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $273,014, $237,490 and $15,703,
respectively)............................................. 526,207
Shareholder Services........................................ 172,165
Trustees Fees and Expenses.................................. 22,984
Legal....................................................... 14,480
Custody..................................................... 6,365
Other....................................................... 136,873
-----------
Total Expenses.......................................... 1,691,665
Less Expenses Reimbursed................................ 4,740
-----------
Net Expenses............................................ 1,686,925
-----------
NET INVESTMENT INCOME....................................... $ 7,002,109
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 1,235,877
Futures................................................... (425,151)
-----------
Net Realized Gain........................................... 810,726
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 17,962,920
End of the Period:
Investments............................................. 17,006,646
-----------
Net Unrealized Depreciation During the Period............... (956,274)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $ (145,548)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 6,856,561
===========
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1997
and the Year Ended December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 7,002,109 $ 14,364,732
Net Realized Gain..................................... 810,726 1,606,502
Net Unrealized Depreciation........................... (956,274) (5,619,309)
------------ ------------
Change in Net Assets from Operations.................. 6,856,561 10,351,925
------------ ------------
Distributions from Net Investment Income:
Class A Shares...................................... (5,757,799) (11,821,553)
Class B Shares...................................... (1,059,419) (2,128,485)
Class C Shares...................................... (70,149) (151,397)
------------ ------------
Total Distributions............................... (6,887,367) (14,101,435)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... (30,806) (3,749,510)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................. 8,645,820 35,010,881
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................ 4,004,413 8,324,756
Cost of Shares Repurchased............................ (19,943,395) (37,239,983)
------------ ------------
CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS........ (7,293,162) 6,095,654
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS................. (7,323,968) 2,346,144
NET ASSETS:
Beginning of the Period............................... 279,216,044 276,869,900
------------ ------------
End of the Period (including accumulated undistributed
net investment income of $432,636 and $317,894,
respectively)....................................... $271,892,076 $279,216,044
============ ============
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended December 31
Ended ----------------------------------------
Class A Shares June 30, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................. $17.490 $17.737 $16.081 $18.062 $16.899
------- ------- ------- ------- -------
Net Investment Income......... .458 .919 .946 .965 1.027
Net Realized and Unrealized
Gain/Loss................... (.006) (.263) 1.660 (1.985) 1.164
------- ------- ------- ------- -------
Total from Investment
Operations.................. .452 .656 2.606 (1.020) 2.191
Less Distributions from and in
Excess of Net Investment
Income...................... .450 .903 .950 .961 1.028
------- ------- ------- ------- -------
Net Asset Value, End of the
Period...................... $17.492 $17.490 $17.737 $16.081 $18.062
======= ======= ======= ======= =======
Total Return* (a)............. 2.62%** 3.86% 16.62% (5.72%) 13.25%
Net Assets at End of the
Period (In millions)........ $221.1 $ 227.4 $226.7 $203.2 $ 221.7
Ratio of Expenses to Average
Net Assets*................. 1.10% 1.09% 1.00% .90% .71%
Ratio of Net Investment Income
to Average Net Assets*...... 5.31% 5.32% 5.57% 5.73% 5.80%
Portfolio Turnover............ 28%** 57% 28% 8% 1%
*If certain expenses had not been assumed by VKAC, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average
Net Assets.................. 1.11% 1.09% 1.14% 1.17% 1.09%
Ratio of Net Investment Income
to Average Net Assets....... 5.31% 5.31% 5.42% 5.46% 5.41%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
18
<PAGE> 20
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 1, 1993
Six Months Year Ended December 31, (Commencement of
Ended ----------------------------- Distribution) to
Class B Shares June 30, 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period........... $17.484 $17.731 $16.080 $18.055 $17.460
------- ------- ------- -------
Net Investment Income..... .392 .788 .819 .841 .586
Net Realized and
Unrealized Gain/Loss.... (.005) (.264) 1.659 (1.985) .603
------- ------- ------- ------- -------
Total from Investment
Operations.............. .387 .524 2.478 (1.144) 1.189
Less Distributions from
and in Excess of Net
Investment Income....... .384 .771 .827 .831 .594
------- ------- ------- ------- -------
Net Asset Value,
End of the Period....... $17.487 $17.484 $17.731 $16.080 $18.055
======= ======= ======= ======= =======
Total Return* (a)......... 2.29%** 3.07% 15.72% (6.39%) 6.81%**
Net Assets at End of the
Period (In millions).... $ 48.1 $ 48.4 $ 46.8 $ 37.6 $ 27.7
Ratio of Expenses to
Average Net Assets*..... 1.86% 1.85% 1.75% 1.64% 1.48%
Ratio of Net Investment
Income to Average Net
Assets*................. 4.55% 4.56% 4.81% 4.98% 4.47%
Portfolio Turnover........ 28%** 57% 28% 8% 1%**
* If certain expenses had not been assumed by VKAC, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to
Average Net Assets...... 1.86% 1.85% 1.89% 1.90% 1.82%
Ratio of Net Investment
Income to Average Net
Assets.................. 4.55% 4.55% 4.66% 4.71% 4.13%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
19
<PAGE> 21
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 13, 1993
Six Months Year Ended December 31, (Commencement of
Ended ----------------------------- Distribution) to
Class C Shares June 30, 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period.............. $17.482 $17.729 $16.079 $18.045 $ 17.850
------- ------- ------- ------- -----------
Net Investment
Income.............. .396 .788 .812 .850 .325
Net Realized and
Unrealized
Gain/Loss........... (.011) (.264) 1.665 (1.985) .208
------- ------- ------- ------- -----------
Total from Investment
Operations.......... .385 .524 2.477 (1.135) .533
Less Distributions
from and in Excess
of Net Investment
Income.............. .384 .771 .827 .831 .338
------- ------- ------- ------- -----------
Net Asset Value, End
of the Period....... $17.483 $17.482 $17.729 $16.079 $ 18.045
======= ======= ======= ======= ===========
Total Return* (a)..... 2.23%** 3.08% 15.72% (6.34%) 2.98%**
Net Assets at End of
the Period (In
millions)........... $ 2.7 $ 3.4 $ 3.4 $ 2.2 $ 2.1
Ratio of Expenses to
Average Net
Assets*............. 1.86% 1.85% 1.75% 1.63% 1.54%
Ratio of Net
Investment Income to
Average Net
Assets*............. 4.56% 4.56% 4.76% 4.97% 4.08%
Portfolio Turnover.... 28%** 57% 28% 8% 1%**
* If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net
Assets.............. 1.86% 1.85% 1.90% 1.90% 1.89%
Ratio of Net
Investment Income to
Average Net
Assets.............. 4.56% 4.55% 4.61% 4.70% 3.73%
</TABLE>
** Non-Annualized
(a) Total Return is based upon the net asset value which does not include
payment of the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Pennsylvania Tax Free Income Fund (the "Fund") is
organized as a Pennsylvania 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 Pennsylvania investors
a high level of current income exempt from federal and Pennsylvania state income
taxes and, where possible under local law, local income and personal property
taxes, through investment primarily in a varied portfolio of medium and lower
grade municipal securities. The Fund commenced investment operations on May 1,
1987. The distribution of the Fund's Class B and Class C shares commenced on May
1, 1993, and August 13, 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may 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.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, if any, to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such losses against any future realized capital gains.
At December 31, 1996, the Fund had an accumulated capital loss carryforward for
tax purposes of $4,038,110 which expires on December 31, 2003.
At June 30, 1997, for federal income tax purposes, the cost of long- and
short-term investments is $263,134,019; the aggregate gross unrealized
appreciation is $17,680,603 and the aggregate gross unrealized depreciation is
$673,957, resulting in net unrealized appreciation of $17,006,646.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Due to inherent differences in the recognition of certain
expenses under generally accepted accounting principles and for federal income
tax purposes, the amount of distributable net investment income may differ
between 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.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") will provide investment advice
and facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- -----------------------------------------------------------------------
<S> <C>
First $500 million...................................... .600 of 1%
Over $500 million....................................... .500 of 1%
</TABLE>
For the six months ended June 30, 1997, the Fund recognized expenses of
approximately $3,600 representing legal services provided by Skadden, Arps,
Slate, Meagher, & Flom (Illinois), counsel to the Fund, of which a trustee of
the Fund is an affiliated person.
For the six months ended June 30, 1997, the Fund recognized expenses of
approximately $56,800 representing Van Kampen American Capital Distributors,
Inc.'s or
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
its affiliates' (collectively "VKAC") cost of providing accounting, cash
management and legal services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the six months ended
June 30, 1997, the Fund recognized expenses of approximately $129,600,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C. There are an unlimited number of shares of each class without par
value authorized.
At June 30, 1997, paid in surplus aggregated $206,676,287, $48,214,506 and
$2,789,385 for Classes A, B and C, respectively. For the six months ended June
30, 1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 318,512 $ 5,531,839
Class B.......................................... 156,269 2,711,983
Class C.......................................... 23,181 401,998
---------- ------------
Total Sales........................................ 497,962 $ 8,645,820
========== ============
Dividend Reinvestment:
Class A.......................................... 192,725 $ 3,345,322
Class B.......................................... 35,189 610,638
Class C.......................................... 2,793 48,453
---------- ------------
Total Dividend Reinvestment........................ 230,707 $ 4,004,413
========== ============
Repurchases:
Class A.......................................... (875,904) $(15,206,927)
Class B.......................................... (211,717) (3,672,622)
Class C.......................................... (61,207) (1,063,846)
---------- ------------
Total Repurchases.................................. (1,148,828) $(19,943,395)
========== ============
</TABLE>
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
At December 31, 1996, paid in surplus aggregated $213,006,053, $48,564,507
and $3,402,780 for Classes A, B and C, respectively. For the year ended December
31, 1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 1,590,112 $ 27,397,512
Class B.......................................... 406,876 7,067,219
Class C.......................................... 31,825 546,150
---------- ------------
Total Sales........................................ 2,028,813 $ 35,010,881
========== ============
Dividend Reinvestment:
Class A.......................................... 402,847 $ 6,971,101
Class B.......................................... 72,020 1,245,925
Class C.......................................... 6,228 107,730
---------- ------------
Total Dividend Reinvestment........................ 481,095 $ 8,324,756
========== ============
Repurchases:
Class A.......................................... (1,768,713) $(30,558,627)
Class B.......................................... (349,466) (6,031,703)
Class C.......................................... (37,401) (649,653)
---------- ------------
Total Repurchases.................................. (2,155,580) $(37,239,983)
========== ============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- ------------------------------------------------------------------------------
<S> <C> <C>
First.............................................. 4.00% 1.00%
Second............................................. 3.75% None
Third.............................................. 3.50% None
Fourth............................................. 2.50% None
Fifth.............................................. 1.50% None
Sixth.............................................. 1.00% None
Seventh and Thereafter............................. None None
</TABLE>
For the six months ended June 30, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$22,600 and CDSC on redeemed shares of approximately $57,400. 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 $78,182,314 and $74,575,021, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on securities. Upon disposition, a realized gain or
loss is recognized accordingly, except when exercising an option contract or
taking delivery of a security underlying a futures contract. In these instances
the recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.
Summarized on the next page are the specific types of derivative financial
instruments used by the Fund.
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
A. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
Transactions in futures contracts, for the six months ended June 30, 1997,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996.......................... 0
Futures Opened............................................ 900
Futures Closed............................................ (900)
----
Outstanding at June 30, 1997.............................. 0
====
</TABLE>
B. INVERSE FLOATING SECURITY--These instruments, which are identified in the
portfolio of investments, have a coupon which is inversely indexed to a
short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed rate security. These instruments
are typically used by the Fund to enhance the yield of the portfolio.
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the six months ended June 30, 1997, are payments to VKAC of approximately
$176,900.
26
<PAGE> 28
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
GLOBAL AND
INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Intermediate Term Municipal Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
MORGAN STANLEY FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
U.S. Real Estate Fund
Value Fund
Worldwide High Income Fund
Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us weekdays from 7:00 a.m. to 7:00
p.m. Central time at 1-800-341-2911 for Van Kampen American Capital funds or
Morgan Stanley retail funds.
27
<PAGE> 29
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
JEROME L. ROBINSON
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1997 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After December 31, 1997, the report must be accompanied by
a quarterly performance update, if applicable.
28
<PAGE> 30
RESULTS OF SHAREHOLDER VOTES
A Special Meeting of Shareholders of the Fund was held on May 28, 1997 where
shareholders voted on a new investment advisory agreement, the election of
Trustees and the ratification of KPMG Peat Marwick LLP as independent public
accountants. With regard to the approval of a new investment advisory agreement
between Van Kampen American Capital Investment Advisory Corp. and the Fund,
10,156,040 shares voted for the proposal, 146,688 shares voted against and
387,720 shares abstained. With regard to the election of J. Miles Branagan as
elected trustee of the Fund, 10,548,711 shares voted in his favor and 141,737
shares withheld. With regard to the election of Richard M. DeMartini as elected
trustee of the Fund, 10,542,836 shares voted in his favor and 147,612 shares
withheld. With regard to the election of Linda Hutton Heagy as elected trustee
of the Fund, 10,533,319 shares voted in her favor and 157,130 shares withheld.
With regard to the election of R. Craig Kennedy as elected trustee of the Fund,
10,533,381 shares voted in his favor and 157,068 shares withheld. With regard to
the election of Jack E. Nelson as elected trustee of the Fund, 10,548,711 shares
voted in his favor and 141,737 shares withheld. With regard to the election of
Don G. Powell as elected trustee of the Fund, 10,546,190 shares voted in his
favor and 144,259 shares withheld. With regard to the election of Jerome L.
Robinson as elected trustee of the Fund, 10,545,647 shares voted in his favor
and 144,802 shares withheld. With regard to the election of Phillip B. Rooney as
elected trustee of the Fund, 10,548,814 shares voted in his favor and 141,634
shares withheld. With regard to the election of Fernando Sisto as elected
trustee of the Fund, 10,546,031 shares voted in his favor and 144,418 shares
withheld. With regard to the election of Wayne W. Whalen as elected trustee of
the Fund, 10,548,814 shares voted in his favor and 141,634 shares withheld. With
regard to the ratification of KPMG Peat Marwick LLP as independent public
accountants for the Fund, 10,358,793 shares voted for the proposal, 46,227
shares voted against and 285,428 shares abstained.
29
