<PAGE> 1
- ---------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Performance in Perspective....................... 4
Glossary of Terms................................ 5
Portfolio Management Review...................... 7
Portfolio Highlights............................. 9
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 16
Statement of Operations.......................... 17
Statement of Changes in Net Assets............... 18
Financial Highlights............................. 19
Notes to Financial Statements.................... 22
Report of Independent Accountants................ 31
</TABLE>
PATF ANR 11/98
<PAGE> 2
LETTER TO SHAREHOLDERS
October 22, 1998
Dear Shareholder,
These continue to be dramatic and
highly unusual times for global
financial markets. However, the United
States has been relatively unscathed by [PHOTO]
the turmoil in many overseas markets.
In fact, the U.S. fixed-income markets
benefited as many investors moved
assets from stocks into more
conservative fixed-income investments. DENNIS J. MCDONNELL AND DON G. POWELL
The volatility also forced yield
spreads to widen between Treasuries and
high-yield securities, corporate bonds, and mortgage-backed securities.
We expect that volatility will remain high until the situation overseas
stabilizes. In this environment, it is important to stay focused on long-term
investment goals. As we explain elsewhere in this letter, the U.S. economy
remains among the healthiest in the world, and Federal Reserve policymakers have
demonstrated an ability to make prudent decisions with regard to monetary
policy. These factors bode well for investors during the months ahead.
ECONOMIC OVERVIEW
Growth in the U.S. economy moderated during the reporting period as fallout
from the global financial crisis finally began to hit home. Weak demand for
American goods in Asia and Latin America caused the U.S. trade deficit to hit a
record $56.5 billion during the second quarter, undermining corporate profits.
Weak earnings, in turn, caused job growth to slow and unemployment to increase
modestly from the 28-year low set earlier this year. Manufacturing activity fell
in September for the fourth consecutive month.
Psychological factors played a role in the deceleration of U.S. economic
growth. In a recent speech, Federal Reserve Chairman Alan Greenspan noted that
Americans suddenly have acquired a strong aversion to risk that had been notably
absent in recent years. This risk-averse attitude manifested itself in slower
retail sales growth and a mild drop in housing activity. Also, the clear
preference among investors for safety and liquidity caused interest rates on
lower-quality debt to balloon, leading to fears of a credit crunch for U.S.
businesses. Such concerns were at least partially responsible for the Fed's
decision to cut short-term interest rates by 0.25 percent on September 29 and
again on October 15.
Despite the slowdown, we believe that the American economy remains
fundamentally sound. Inflation at the consumer level increased by just 1.3
percent during the nine months through September, while wholesale prices
actually fell during the same period.
MARKET OVERVIEW
The deepening global economic crisis helped unleash a furious flight to
quality in the domestic fixed-income market. As the reporting period ended, the
yield on long-term
Continued on page 2
1
<PAGE> 3
Treasury bonds had fallen below 5 percent for the first time since 1977. Total
returns in the U.S. bond market were uneven, however, as investors displayed a
preference for quality amid the raging global economic storm.
In the tax-exempt market, the supply of municipal bonds surged as
municipalities rushed to take advantage of lower interest rates. Through the
first nine months of the year, municipal bond issuance was on pace to eclipse
the previous record of $293 billion, set in 1993. During the nine months through
September, the Bond Buyer Municipal Index gained 3.18 percent, with strength
concentrated among longer-term, higher-quality issues. As a result of the uneven
drop in rates, yields on long-term tax-exempt bonds climbed to roughly 95
percent of those for similarly dated Treasury bonds, the most attractive
relative valuation since 1986. The 5.09 percent yield on the Bond Buyer
municipal index at the end of the reporting period was equivalent to a 7.95
percent taxable yield for an investor in the 36 percent federal income tax
bracket.
OUTLOOK
We expect that global economic fundamentals will remain favorable for
domestic fixed-income investments. The impact of slower economic growth abroad
should help to offset the inflationary implications of a relatively tight labor
market in the United States. Additionally, the recent deceleration in U.S.
economic growth is likely to lead to somewhat higher unemployment in coming
months. However, while the possibility of a recession can no longer be ruled
out, we believe that the U.S. economy will grow at a moderate pace into next
year.
The Federal Reserve has already begun to loosen monetary policy, and we
expect that global overcapacity will continue to exert downward pressure on
commodity prices. Both factors are positive for bonds. We caution, however, that
yields have fallen considerably in recent months, and a mild increase in
long-term interest rates is possible. Also, a weakening dollar or a worsening of
economic conditions overseas could lead to reduced foreign demand for U.S.
financial assets. Finally, credit quality will remain under intense scrutiny,
especially given the risk-averse mindset of global investors and the advanced
stage of the domestic business cycle.
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to share with you the progress of your
investment.
Sincerely,
[sig]
Don G. Powell
Chairman
Van Kampen Investment Advisory Corp.
[sig]
Dennis J. McDonnell
President
Van Kampen Investment Advisory Corp.
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998
VAN KAMPEN PENNSYLVANIA
TAX FREE INCOME FUND
<TABLE>
<CAPTION>
A B C
SHARES SHARES SHARES
<S> <C> <C> <C>
TOTAL RETURNS
Nine-month total return based on
NAV(1)................................ 5.08% 4.51% 4.51%
Nine-month total return(2).............. .09% .51% 3.51%
One-year total return(2)................ 2.79% 3.15% 6.15%
Five-year average annual total
return(2)............................. 4.64% 4.63% 4.89%
Ten-year average annual total
return(2)............................. 7.83% N/A N/A
Life-of-Fund average annual total
return(2)............................. 8.27% 5.46% 5.18%
Commencement date....................... 05/01/87 05/01/93 08/13/93
DISTRIBUTION RATES AND YIELD
Distribution rate(3).................... 4.86% 4.38% 4.38%
Taxable equivalent distribution
rate(4)............................... 7.81% 7.04% 7.04%
SEC Yield(5)............................ 3.74% 3.18% 3.22%
</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 September 30, 1998.
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.
On July 31, 1998, the Fund's Board of Trustees voted to change the Fund's fiscal
year end from December 31 to September 30. As a result, this financial report
reflects the nine-month transition period commencing on January 1, 1998, and
ending on September 30, 1998.
3
<PAGE> 5
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment performance at regular intervals. A
comparison of your Fund's performance to an applicable benchmark can:
- Illustrate the market environment in which your Fund is being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate how your Fund's management team has responded to
opportunities and challenges.
The following graph compares your Fund's performance to that of the Lehman
Brothers Municipal Bond Index over time. The index is a broad-based, statistical
composite that does not include any commissions or sales charges that would be
paid by an investor purchasing the securities it represents.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen Pennsylvania Tax Free Income Fund vs. the Lehman Brothers
Municipal Bond Index (September 30, 1988 through September 30, 1998)
[GRAPH]
<TABLE>
<CAPTION>
Van Kampen
Measurement Period Lehman Brothers Pennsylvania Tax
(Fiscal Year Covered) Municipal Bond Index Free Income Fund
<S> <C> <C>
Sep-88 10000.00 9526.00
10176.00 9697.00
10082.40 9613.00
10185.20 9853.00
10396.10 9996.00
10277.50 9943.00
10252.90 9910.00
10495.90 10101.00
10714.20 10367.00
10859.90 10513.00
11007.60 10627.00
10899.70 10552.00
Sep-89 10867.00 10511.00
10999.60 10620.00
11192.10 10771.00
11283.90 10920.00
11230.80 10900.00
11330.80 11011.00
11334.20 11047.00
11252.60 10912.00
11497.90 11090.00
11599.10 11169.00
11769.60 11356.00
11598.90 11175.00
Sep-90 11605.90 11204.00
11815.90 11329.00
12053.40 11565.00
12106.50 11720.00
12268.70 11847.00
12375.40 12005.00
12380.40 11989.00
12545.00 12126.00
12656.70 12286.00
12644.00 12202.00
12798.30 12348.00
12967.20 12558.00
Sep-91 13135.80 12722.00
13254.00 12824.00
13291.10 12887.00
13576.90 13085.00
13608.10 13221.00
13612.20 13261.00
13617.70 13293.00
13738.90 13415.00
13901.00 13587.00
14134.50 13776.00
14558.50 14255.00
14415.90 14022.00
Sep-92 14509.60 14106.00
14367.40 13904.00
14624.60 14197.00
14773.70 14406.00
14945.10 14590.00
15486.10 15213.00
15322.00 14960.00
15476.70 15182.00
15563.40 15283.00
15823.30 15595.00
15843.90 15539.00
16173.40 15924.00
Sep-93 16357.80 16140.00
16388.90 16162.00
16244.60 15951.00
16587.40 16314.00
16776.50 16523.00
16342.00 16070.00
15676.90 15314.00
15810.10 15407.00
15947.70 15582.00
15850.40 15491.00
16140.50 15788.00
16197.00 15833.00
Sep-94 15958.90 15608.00
15674.80 15305.00
15391.10 14982.00
15729.70 15381.00
16179.50 15830.00
16650.40 16310.00
16841.90 16445.00
16862.10 16405.00
17400.00 16843.00
17248.60 16617.00
17412.40 16744.00
17633.60 16980.00
Sep-95 17744.70 17029.00
18002.00 17338.00
18300.80 17738.00
18476.50 17938.00
18616.90 18005.00
18490.30 17879.00
18253.60 17630.00
18202.50 17554.00
18195.30 17591.00
18393.60 17722.00
18561.00 17924.00
18557.20 17918.00
Sep-96 18817.00 18184.00
19029.70 18368.00
19377.90 18690.00
19296.50 18631.00
19333.20 18593.00
19511.10 18737.00
19251.60 18559.00
19413.30 18682.00
19704.50 18938.00
19915.30 19119.00
20467.00 19650.00
20274.60 19481.00
Sep-97 20515.90 19697.00
20647.20 19826.00
20769.00 19932.00
21072.20 20231.00
21289.20 20408.00
21295.60 20439.00
21314.80 20458.00
21218.90 20353.00
21554.10 20670.00
21638.20 20747.00
21692.30 20756.00
22028.50 21030.00
Sep-98 22303.90 21260.00
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
4
<PAGE> 6
GLOSSARY OF TERMS
BOND: A debt security issued by a government or corporation that pays a
bondholder a stated rate of interest and repays the principal at the
maturity date.
CALL FEATURE: Allows the issuer to buy back a bond on specific dates at set
prices before maturity. These dates and prices are set when the bond is
issued. To compensate the bondholder for the potential loss of income and
ownership, a bond's call price is usually higher than the face value of the
bond. Bonds are usually called when interest rates drop so significantly
that the issuer can save money by issuing new bonds at lower rates.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load").
Generally, there is no redemption fee (Contingent Deferred Sales Charge).
CREDIT RATING: An evaluation of an issuer's credit history and capability of
repaying obligations. Standard & Poor's and Moody's Investors Service are
two companies that assign bond ratings. Standard & Poor's ratings range from
a high of AAA to a low of D, while Moody's ratings range from a high of Aaa
to a low of C.
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank system of the United States. Its
policy-making committee, called the Federal Open Market Committee, meets
eight times a year to establish monetary policy and monitor the economic
pulse of the United States.
INFLATION: A persistent and measurable rise in the general level of prices.
Inflation is widely measured by the Consumer Price Index, an economic
indicator that measures the change in the cost of purchased goods and
services.
INSURED BOND: A bond that is insured against default by the municipal bond
insurer. If the issuer defaults, the insurance company will step in and take
over payments of interest and principal when due. As a result of this
protection against credit risk, most insured bonds are AAA-rated. Recently,
an A-rated insurer has started to insure lower-quality municipal bonds, and
those bonds are A-rated. Insurance on the bonds does not relate to mutual
fund shares, which will fluctuate in price.
INVESTMENT GRADE BONDS: Securities rated BBB and above by Standard & Poor's or
Baa and above by Moody's Investor Services. Bonds rated below BBB or Baa are
noninvestment grade.
MUNICIPAL BOND: A debt security issued by a state, municipality, or other
government entity to finance capital expenditures such as the construction
of highways, public works, or school buildings. Interest on municipal bonds
is exempt from federal taxation and, potentially, from state and local
taxation.
REFUNDING: Retiring an outstanding bond issue at maturity using money from the
sale of a new offering.
5
<PAGE> 7
VOLATILITY: A measure of the fluctuation in the market price of a security. A
security that is volatile has frequent and large swings in price.
YIELD: The annual rate of return on an investment, expressed as a percentage.
For bonds and notes, the yield is the annual interest divided by the market
price.
YIELD SPREAD: The difference between the yields of different bonds, due to their
different credit ratings or maturities. When yield spreads between bonds of
different credit quality are narrow, there is less incentive to own the
lower-quality bond. When yield spreads between bonds of different maturities
are narrow, there is less incentive to own the bond with the longer
maturity. In both cases, the investor is not being compensated for the
additional risk.
6
<PAGE> 8
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
We recently spoke with the management team of the Van Kampen Pennsylvania Tax
Free Income Fund about the key events and economic forces that shaped the
markets during the reporting period. The team includes Dennis S. Pietrzak,
portfolio manager, and Peter W. Hegel, chief investment officer for fixed-income
investments.
The Fund's fiscal year end was recently changed from December 31 to
September 30. Going forward, your semiannual reports will be dated March 31, and
your annual reports will be dated September 30. The following interview
discusses the Fund's performance during the nine-month period since your last
annual report, from December 31, 1997, to September 30, 1998.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT DURING THE PAST NINE MONTHS?
A While diminishing supply and strong demand fueled the Treasury market,
conditions weren't quite as favorable in the municipal bond market. Supply
has been very heavy this year, as state and local governments have taken
advantage of low interest rates to refinance old debt and issue new bonds.
Demand for municipal bonds, however, has been weaker, as domestic and foreign
investors displayed a preference for the safety of government securities. Some
of the municipal supply was absorbed by institutions that typically purchase
taxable securities, given the attractive relative yields offered by municipal
bonds. Despite these crossover buyers, demand for municipal bonds was outmatched
by the demand for Treasuries, so municipal bond prices did not rally to the same
extent as Treasuries.
At the end of the reporting period, the yield on AAA-rated 30-year general
obligation municipal bonds was just slightly less than the yield on long-term
Treasuries--even before considering municipals' tax-free advantage. These narrow
yield spreads presented an attractive buying opportunity for municipal bonds,
relative to Treasuries.
Through the first half of the year, about 75 percent of Pennsylvania's 1998
issues were insured. Because so much of the new issuance in the state came to
market insured, the yield spread between higher-quality securities and
lower-rated bonds remained extremely narrow.
Q HOW HAS THE PORTFOLIO CHANGED OVER THE PAST NINE MONTHS?
A Pennsylvania has historically been an active issuer of health care debt.
As a result, the portfolio continued to have a significant allocation in
the health care sector, although we've decreased that allocation slightly
in recent months. Aging state demographics, dependence on Medicare
reimbursement, transition to managed care, and overbedded markets are pressuring
health care providers. We see the possibility of some credit rating downgrades
during the months ahead. Much of our exposure, however, is insured, although
this insurance does not protect against changes in the market value of Fund
shares.
7
<PAGE> 9
Our allocation to AAA-rated securities declined slightly from 49 to 44
percent of the portfolio. The portion of assets allocated to higher-yielding,
nonrated issues was 15 percent of the portfolio, up slightly from the beginning
of the period. To help protect the portfolio from call risk, we replaced a
handful of prerefunded bonds as well as a few higher-yielding bonds. Because of
the narrowness of yield spreads, we were very selective in our purchases of
higher-yielding bonds. The narrow spreads also contributed to the Fund's
relatively low portfolio turnover, as new bonds generally had less attractive
coupon rates than did older bonds.
The Fund's portfolio was widely varied, with holdings in 14 different
sectors. Some of the largest sector exposures were in health care (24 percent),
industrial revenue (13 percent), and public building (9 percent). For additional
Fund portfolio highlights, please refer to page 9.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund's year-to-date total return is 5.08 percent(1) (Class A shares at
net asset value), while its distribution rate was 4.86 percent(3) as of
September 30, 1998. By comparison, the Lehman Brothers Municipal Bond Index
produced a total return of 5.84 percent for the same period. This index is a
broad-based index of municipal bonds and does not reflect any commissions that
would be paid by an investor purchasing the securities it represents. The Fund's
distribution rate translates into a taxable-equivalent rate of 7.81 percent(4)
for an investor in the 37.8 percent combined federal and state income tax
bracket. The Fund's dividend remained unchanged at $0.0775 per share during the
period. Please refer to the chart on page 3 for additional Fund performance
results.
Q WHAT DO YOU SEE ON THE HORIZON FOR THE MARKETS AND THE FUND?
A The Fed's recent interest-rate cut and the apparent slowdown of the U.S.
economy are likely to sustain lower interest rates--a favorable environment for
bonds. (Editor's note: After the reporting period ended, the Fed reduced
interest rates again by 0.25 percent.) The supply of municipal bond issues looks
like it will remain strong, as low interest rates spark further refunding of
outstanding bond issues and bring new municipal bonds into the marketplace. As
more investors recognize the value available in the municipal market, demand is
likely to increase and municipal bonds could see favorable returns in coming
months.
Because of the low-interest rate environment that we anticipate will
continue for the foreseeable future, many of the higher-yielding holdings in the
Fund are potential candidates for refunding. To minimize the impact of
investment risk on the Fund, we will continue to focus on acquiring noncallable
bonds or securities with longer calls.
[SIG]
Dennis S. Pietrzak
Portfolio Manager
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
Please see footnotes on page 3
8
<PAGE> 10
PORTFOLIO HIGHLIGHTS
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
TOP TEN HOLDINGS AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
Philadelphia, PA Authority Industrial
Development Lease Revenue ................... 4.5%
Saint Mary Hospital Authority Bucks PA Catholic
Health Initiative ........................... 3.1%
Philadelphia, PA Municipal Authority Revenue
Municipal Services Building Lease Capital
Appreciation ................................ 2.8%
Berks County, PA .............................. 2.7%
Allegheny County, PA Hospital Development
Authority Revenue Hospital Saint Francis
Medical Center Project ...................... 2.5%
Radnor Township, PA School District ........... 2.2%
Pennsylvania State Higher Education Facility
Authority Revenue Drexel University ......... 2.2%
Delaware County, PA Authority Revenue First
Mortgage Riddle Village Project ............. 2.0%
Pennsylvania Economic Development Financing
Authority Recovery Revenue Northampton
Generating .................................. 2.0%
Pennsylvania Economic Development Financing
Authority Recovery Revenue Colver Project ... 1.9%
</TABLE>
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
<S> <C>
[] AAA............43.6%
[] AA.............14.0% [Pie Chart]
[] A..............13.1%
[] BBB............12.2%
[] BB............. 2.5%
[] Non-Rated......14.6%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
<S> <C>
[] AAA...........49.0%
[] AA............ 9.2% [Pie Chart]
[] A.............14.3%
[] BBB...........12.6%
[] BB............ 1.4%
[] Non-Rated.....13.5%
</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 SEPTEMBER 30, 1998
<S> <C>
Health Care............ 24.2%
Industrial Revenue..... 13.2%
Other Care............. 9.7%
Public Building........ 9.3%
Public Education....... 8.8%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
<S> <C>
Health Care............ 21.2%
Industrial Revenue..... 13.8%
Public Education....... 11.1%
Other Care............. 8.3%
Public Building........ 7.5%
</TABLE>
DURATION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 (1) As of December 31, 1997 (1)
<S> <C> <C>
Duration 6.80 years 7.00 years
</TABLE>
(1) Unaudited
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 98.1%
PENNSYLVANIA 97.7%
$3,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser B (FSA Insd)........................... 6.625% 01/01/22 $ 3,811,360
1,625 Allegheny Cnty, PA C-34 Conv Cap Apprec......... 8.625 02/15/04 1,989,991
1,000 Allegheny Cnty, PA Higher Edl Bldg Auth Univ Rev
Duquesne Univ Proj (AMBAC Insd)................. 6.500 03/01/11 1,206,190
2,140 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Fac
Allegheny Vly Sch............................... 7.750 02/01/15 2,395,452
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.500 05/15/06 1,076,920
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.500 05/15/07 1,080,050
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.600 05/15/08 1,089,590
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/09 1,098,710
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/10 1,092,690
1,160 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/17 1,233,428
925 Allegheny Cnty, PA Indl Dev Auth Med Cent Rev
Presbyterian Med Cent Rfdg (FHA Gtd)............ 6.750 02/01/26 1,033,475
2,500 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt Ser A Rfdg................... 6.700 12/01/20 2,766,075
315 Allegheny Cnty, PA Res Fin Auth Mtg Rev 1983 Ser
B............................................... * 10/01/15 53,317
1,945 Allegheny Cnty, PA Res Mtg Comp Int Single
Family Ser Z (GNMA Collateralized).............. 6.875 05/01/26 2,095,951
2,000 Beaver Cnty, PA Hosp Auth Rev Med Cent Beaver PA
Inc Ser A (Prerefunded @ 07/01/02) (AMBAC
Insd)........................................... 6.250 07/01/22 2,210,040
4,500 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Collateral Toledo Edison Co Proj Ser A Rfdg..... 7.750 09/01/24 4,713,300
6,000 Berks Cnty, PA (Inverse Fltg) (FGIC Insd)....... 8.672 11/10/20 7,305,000
2,000 Berks Cnty, PA Muni Auth Rev Highlands at
Wyomissing Proj B............................... 6.875 10/01/17 2,184,840
3,000 Berks Cnty, PA Muni Auth Rev Hlth Care Pooled
Fin Proj........................................ 5.000 03/01/28 2,970,210
965 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.500 05/15/13 1,082,730
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.700 05/15/22 1,129,910
2,750 Bradford Cnty, PA Indl Dev Auth Solid Waste Disp
Rev Intl Paper Co Proj A........................ 6.600 03/01/19 3,053,847
1,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Bethlehem Steel Corp Proj Rfdg.................. 7.500 09/01/15 1,120,530
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys
Rev (AMBAC Insd)................................ 5.650% 05/15/20 $ 1,052,300
1,880 Chester Cnty, PA Hlth & Edl The Chester Cnty
Hosp (MBIA Insd)................................ 5.625 07/01/08 2,075,106
760 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/01 687,162
860 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/02 746,626
915 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj (Prerefunded @ 07/01/01)................... 8.500 07/01/13 1,032,989
1,000 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj (Prerefunded @ 07/01/01)................... 8.500 07/01/21 1,140,960
1,130 Clearfield Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg K Mart Corp Ser A Rfdg................ 7.200 07/01/07 1,217,033
2,230 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle Hosp & Hlth............................ 6.800 11/15/23 2,456,167
2,000 Dauphin Cnty, PA Genl Auth Rev Hotel & Conf Cent
Hyatt Regency................................... 6.200 01/01/29 2,019,000
1,000 Dauphin Cnty, PA Genl Auth Rev Office & Pkg
Riverfront Office............................... 6.000 01/01/25 1,013,520
2,475 Delaware Cnty, PA Auth Rev Elwyn Inc Proj
(Prerefunded @ 06/01/00)........................ 8.350 06/01/15 2,707,378
1,500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj (Prerefunded @ 06/01/02)................... 9.250 06/01/22 1,799,580
500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 6.200 06/01/05 529,015
3,000 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 7.000 06/01/26 3,187,590
2,000 Erie Cnty, PA Hosp Auth Rev Saint Vincent Hlth
Cent Proj Ser A (MBIA Insd)..................... 6.375 07/01/22 2,191,340
4,780 Erie, PA Sch Dist Cap Apprec Rfdg (FSA Insd).... * 09/01/24 1,351,019
3,500 Geisinger, PA Auth Hlth Sys Rev PA St Geisinger
Hlth Sys Ser A.................................. 5.000 08/15/28 3,480,960
1,985 Greene Cnty, PA Unlimited Tax (Prerefunded @
08/01/00)....................................... 8.500 08/01/10 2,135,165
1,000 Harrisburg, PA Auth Office & Pkg Rev Ser A...... 6.000 05/01/19 1,017,060
3,000 Harrisburg, PA Auth Rev Pooled Univ Pgm Ser 11
(MBIA Insd)..................................... 5.625 09/15/17 3,236,190
900 Hazleton, PA Hlth Svcs Auth Hosp Rev............ 5.500 07/01/07 968,499
650 Hazleton, PA Hlth Svcs Auth Saint Joseph Med
Cent Rfdg....................................... 5.850 07/01/06 701,766
1,750 Indiana Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Metro Edison Co Proj A (AMBAC Insd)............. 5.950 05/01/27 1,920,607
570 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/13 281,985
570 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/14 266,606
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 500 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/15 $ 221,220
490 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/16 204,511
500 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/17 197,735
500 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/18 187,620
560 Indiana Cnty, PA Indl Dev Auth Rev Cap Apprec
Student Coop Assn B (AMBAC Insd)................ * 11/01/19 199,713
2,500 Jim Thorpe, PA Area Sch Dist Ser A (MBIA
Insd)........................................... 5.375% 03/15/22 2,604,525
1,800 Kiski, PA Area Sch Dist (FGIC Insd)............. 5.300 03/01/17 1,881,306
2,000 Lehigh Cnty, PA Genl Purp Auth Cedar Crest
College Rfdg.................................... 6.700 04/01/26 2,205,700
1,760 Lehigh Cnty, PA Genl Purp Auth Rev Kidspeace
Oblig Group..................................... 6.000 11/01/23 1,779,501
1,085 Lehigh Cnty, PA Indl Dev Auth Hlth Fac Rev
Lifepath Inc Proj............................... 6.300 06/01/28 1,071,958
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 1,106,820
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A........................ 6.500 07/01/22 2,184,020
2,500 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A (Prerefunded @
07/01/00)....................................... 7.750 07/01/16 2,716,300
1,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp
Proj (Crossover Rfdg @ 10/01/00)................ 8.875 10/01/20 1,113,980
750 McKeesport, PA Indl Dev Auth Rev The Kroger Corp
Allegheny Cnty Rfdg............................. 8.650 06/01/11 842,190
3,000 Monroeville, PA Hosp Auth Hosp Rev Forbes Hlth
Sys Rfdg........................................ 6.250 10/01/15 2,820,000
500 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Suburban Genl Hosp Bonds (AMBAC Insd)....... 7.250 05/01/16 506,445
2,000 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev....................................... 6.300 01/01/13 2,047,620
2,250 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev Adult Cmntys Total Svcs Ser B......... 5.625 11/15/12 2,381,602
2,500 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Philadelphia Elec Co Ser A Rfdg............. 7.600 04/01/21 2,708,575
3,000 Montgomery Cnty, PA Indl Dev Auth Rev Res Recov
(LOC -- Banque Paribas)......................... 7.500 01/01/12 3,294,270
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Wordsworth
Academy (LOC -- Summit Bank).................... 7.750 09/01/24 1,125,320
1,415 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/17 1,508,376
3,300 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/26 3,488,826
1,500 North Penn, PA Wtr Auth Wtr Rev (FGIC Insd)..... 6.200 11/01/22 1,635,660
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,000 North Penn, PA Wtr Auth Wtr Rev (Prerefunded @
11/01/04) (FGIC Insd)........................... 6.875% 11/01/19 $ 1,170,620
2,500 Northampton Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Bethlehem Steel Rfdg........................ 7.550 06/01/17 2,798,150
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd
Luzerne Cnty Cmnty College (Prerefunded @
02/15/05) (AMBAC Insd).......................... 6.625 08/15/15 1,150,920
2,247 Oil City, PA Towne Tower Proj................... 6.750 05/01/20 2,499,049
1,335 Penn Hills, PA (FGIC Insd)...................... 5.800 12/01/13 1,481,490
1,600 Penn Hills, PA (FGIC Insd)...................... 5.850 12/01/14 1,774,800
1,335 Penn Hills, PA (FGIC Insd)...................... 5.900 12/01/17 1,475,642
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.050 12/01/10 3,361,890
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.125 12/01/15 1,684,290
5,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Northampton Generating Ser A.................... 6.600 01/01/19 5,386,800
4,000 Pennsylvania Hsg Fin Agy (Inverse Fltg)......... 9.914 10/03/23 4,565,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg Rfdg (FNMA
Collateralized)................................. 6.500 07/01/23 1,073,680
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
40.............................................. 6.900 04/01/25 1,090,500
2,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
42.............................................. 6.850 04/01/25 2,733,550
850 Pennsylvania Infrastructure Invt Auth Rev
Pennvest Subser B (Prerefunded @ 09/01/02)...... 6.800 09/01/10 943,738
2,000 Pennsylvania Intergvtl Coop Auth Spl Tax Rev
City of Philadelphia (MBIA Insd)................ 5.600 06/15/15 2,111,800
4,000 Pennsylvania St Ctfs Partn (FSA Insd)........... 6.250 05/01/16 4,330,080
2,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Rfdg (Inverse Fltg) (AMBAC
Insd)........................................... 9.672 09/01/26 2,337,500
2,500 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser B (Inverse Fltg) (MBIA
Insd)........................................... 10.941 03/01/20 2,815,625
4,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser C (AMBAC Insd)............... 6.400 03/01/22 4,207,360
1,200 Pennsylvania St Higher Edl Fac Auth College &
Univ Rev Bryn Mawr College (MBIA Insd).......... 5.625 12/01/27 1,301,136
5,400 Pennsylvania St Higher Edl Fac Auth Rev Drexel
Univ Rfdg....................................... 6.375 05/01/17 5,909,058
1,000 Philadelphia, PA Auth For Indl Dev Hlth Care Fac
Rev............................................. 5.750 05/15/18 1,010,150
2,505 Philadelphia, PA Auth For Indl Dev Rev Coml Dev
RMK Rfdg........................................ 7.750 12/01/17 2,846,181
3,000 Philadelphia, PA Auth For Indl Dev Rev Long-Term
Care Maplewood.................................. 8.000 01/01/24 3,354,240
11,565 Philadelphia, PA Auth Indl Dev Lease Rev Ser A
(MBIA Insd)..................................... 5.375 02/15/27 12,117,229
3,000 Philadelphia, PA Gas Wks Rev Ser 14 Rfdg (FSA
Insd)........................................... 6.250 07/01/08 3,337,620
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<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 (Prerefunded @
10/01/01)....................................... 7.000% 10/01/21 $ 277,913
2,800 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Chestnut Hill Hosp.......................... 6.500 11/15/22 3,021,536
4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Temple Univ Hosp Ser A...................... 6.625 11/15/23 4,328,840
760 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev............................................. 6.300 07/01/14 776,158
985 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev............................................. 6.400 07/01/17 1,005,892
450 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev............................................. 6.500 07/01/21 460,282
1,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/08 1,003,065
3,750 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/11 2,127,975
3,775 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/12 2,033,479
4,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/13 2,292,345
2,155 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded
@ 04/01/00) (FGIC Insd)......................... 7.800 04/01/18 2,287,058
1,800 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.500 08/01/10 2,018,088
2,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (MBIA
Insd) (b)....................................... 5.625 06/15/08 2,217,600
1,470 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser
C1.............................................. 6.800 10/01/25 1,573,209
1,475 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser D... 6.250 10/01/17 1,587,690
795 Pittsburgh, PA Urban Redev Auth Single Family
Mtg Rev Ser A (GNMA Collateralized)............. 8.000 12/01/20 821,124
4,500 Pottsville, PA Hosp Auth Rev Pottsville Hosp
(ACA CBI Insd).................................. 5.500 07/01/18 4,620,915
2,665 Radnor Twp, PA Sch Dist......................... 5.750 03/15/19 2,868,979
3,000 Radnor Twp, PA Sch Dist......................... 5.750 03/15/26 3,218,790
8,500 Saint Mary Hosp Auth Bucks PA Catholic Hlth Init
A............................................... 5.000 12/01/28 8,453,505
1,000 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Marian Cmnty Hosp Proj Rfdg..................... 7.125 01/15/13 1,096,840
2,000 Shaler, PA Area Sch Dist Cap Apprec Ser A (FGIC
Insd)........................................... * 11/15/22 618,120
2,650 Sharon, PA Regl Hlth Sys Auth Hosp Rev Sharon
Regl Hlth Sys Proj A Rfdg (Prerefunded @
12/01/02)....................................... 6.875 12/01/09 3,013,447
355 Somerset Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg K Mart Corp Ser A Rfdg................ 7.200 04/01/07 380,958
650 Springfield Twp, PA Swr Auth Gtd................ 5.800 10/15/18 666,529
1,000 Springfield Twp, PA Swr Auth Gtd................ 6.000 10/15/27 1,028,980
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$2,180 State Pub Sch Bldg Auth PA Sch Rev Burgettstown
Sch Dist Ser D (Prerefunded @ 02/01/05) (MBIA
Insd)........................................... 6.500% 02/01/14 $ 2,496,013
1,300 State Pub Sch Bldg Auth PA Sch Rev Pittson Area
Sch Dist Ser P (FSA Insd) (a)................... 5.000 07/15/21 1,303,393
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 1,637,100
2,935 West Shore, PA Area Auth Hlth Cent Rev United
Methodist Homes Aging Inc (Prerefunded @
06/01/01) (LOC -- Bank of Scotland)............. 7.400 06/01/16 3,263,397
1,000 West Shore, PA Area Hosp Auth Hosp Rev Holy
Spirit Hosp Proj (MBIA Insd).................... 5.700 01/01/22 1,066,940
350 Westmoreland Cnty, PA Indl Dev Auth Rev Citizens
Genl Hosp Proj A Rfdg........................... 8.250 07/01/13 355,380
------------
269,832,660
------------
GUAM 0.4%
1,000 Guam Arpt Auth Rev Ser B........................ 6.700 10/01/23 1,104,800
------------
TOTAL LONG-TERM INVESTMENTS 98.1%
(Cost $244,880,737)........................................................ 270,937,460
SHORT-TERM INVESTMENTS 0.2%
(Cost $400,000)............................................................ 400,000
------------
TOTAL INVESTMENTS 98.3%
(Cost $245,280,737)........................................................ 271,337,460
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%.................................. 4,724,851
------------
NET ASSETS 100.0%........................................................... $276,062,311
============
</TABLE>
* Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery
purchase commitments.
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $245,280,737)....................... $271,337,460
Cash........................................................ 277,202
Receivables:
Interest.................................................. 4,178,992
Investments Sold.......................................... 2,561,263
Fund Shares Sold.......................................... 122,038
Other....................................................... 18,800
------------
Total Assets.......................................... 278,495,755
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 1,280,155
Income Distributions...................................... 478,378
Distributor and Affiliates................................ 174,123
Investment Advisory Fee................................... 134,912
Fund Shares Repurchased................................... 109,183
Trustees' Deferred Compensation and Retirement Plans........ 149,560
Accrued Expenses............................................ 107,133
------------
Total Liabilities..................................... 2,433,444
------------
NET ASSETS.................................................. $276,062,311
============
NET ASSETS CONSIST OF:
Capital..................................................... $250,373,504
Net Unrealized Appreciation................................. 26,056,723
Accumulated Undistributed Net Investment Income............. 358,014
Accumulated Net Realized Loss............................... (725,930)
------------
NET ASSETS.................................................. $276,062,311
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $219,282,152 and 12,021,762 shares of
beneficial interest issued and outstanding)............. $ 18.24
Maximum sales charge (4.75%* of offering price)......... .91
------------
Maximum offering price to public........................ $ 19.15
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $53,497,854 and 2,934,927 shares of
beneficial interest issued and outstanding)............. $ 18.23
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,282,305 and 180,058 shares of
beneficial interest issued and outstanding)............. $ 18.23
============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998 and the
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest........................................ $12,528,072 $17,301,880
----------- -----------
EXPENSES:
Investment Advisory Fee......................... 1,234,844 1,645,589
Distribution (12b-1) and Service Fees
(Attributed to Classes A, B and C of $407,027,
$392,267 and $24,549, respectively, for the
nine months ended 9/30/98 and $551,201,
$490,120 and $30,079, respectively, for the
year ended 12/31/97).......................... 823,843 1,071,400
Shareholder Services............................ 149,608 266,800
Trustees' Fees and Expenses..................... 29,487 36,431
Legal........................................... 5,707 27,200
Custody......................................... 1,209 8,362
Other........................................... 194,460 183,017
----------- -----------
Total Expenses.............................. 2,439,158 3,238,799
----------- -----------
NET INVESTMENT INCOME........................... $10,088,914 $14,063,081
=========== ===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments................................... $ 2,314,845 $ 1,516,339
Futures....................................... (51,614) (467,390)
----------- -----------
Net Realized Gain............................... 2,263,231 1,048,949
----------- -----------
Unrealized Appreciation/Depreciation:
Beginning of the Period....................... 25,057,255 17,962,920
End of the Period:
Investments................................. 26,056,723 25,057,255
----------- -----------
Net Unrealized Appreciation During the Period... 999,468 7,094,335
----------- -----------
NET REALIZED AND UNREALIZED GAIN................ $ 3,262,699 $ 8,143,284
=========== ===========
NET INCREASE IN NET ASSETS FROM OPERATIONS...... $13,351,613 $22,206,365
=========== ===========
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998 and the
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............. $10,088,914 $ 14,063,081 $ 14,364,732
Net Realized Gain................. 2,263,231 1,048,949 1,606,502
Net Unrealized
Appreciation/Depreciation....... 999,468 7,094,335 (5,619,309)
------------ ------------ ------------
Change in Net Assets from
Operations...................... 13,351,613 22,206,365 10,351,925
------------ ------------ ------------
Distributions from Net Investment
Income:
Class A Shares.................. (8,483,120) (11,483,502) (11,821,553)
Class B Shares.................. (1,740,891) (2,162,615) (2,128,485)
Class C Shares.................. (108,827) (132,920) (151,397)
------------ ------------ ------------
Total Distributions........... (10,332,838) (13,779,037) (14,101,435)
------------ ------------ ------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES........... 3,018,775 8,427,328 (3,749,510)
------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold......... 14,901,436 20,080,197 35,010,881
Net Asset Value of Shares Issued
Through Dividend Reinvestment... 5,939,810 7,972,553 8,324,756
Cost of Shares Repurchased........ (26,619,385) (36,874,447) (37,239,983)
------------ ------------ ------------
CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................... (5,778,139) (8,821,697) 6,095,654
------------ ------------ ------------
TOTAL INCREASE/DECREASE IN NET
ASSETS.......................... (2,759,364) (394,369) 2,346,144
NET ASSETS:
Beginning of the Period........... 278,821,675 279,216,044 276,869,900
------------ ------------ ------------
End of the Period (including
accumulated undistributed net
investment income of $358,014,
$601,938 and $317,894,
respectively)................... $276,062,311 $278,821,675 $279,216,044
============ ============ ============
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
Nine Months Ended -----------------------------------------------
Class A Shares September 30, 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............. $18.038 $17.490 $17.737 $16.081 $18.062 $16.899
------- ------- ------- ------- ------- -------
Net Investment
Income............. .684 .928 .919 .946 .965 1.027
Net Realized and
Unrealized
Gain/Loss.......... .216 .528 (.263) 1.660 (1.985) 1.164
------- ------- ------- ------- ------- -------
Total from Investment
Operations......... .900 1.456 .656 2.606 (1.020) 2.191
Less Distributions
from and in Excess
of Net Investment
Income............. .698 .908 .903 .950 .961 1.028
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period...... $18.240 $18.038 $17.490 $17.737 $16.081 $18.062
======= ======= ======= ======= ======= =======
Total Return* (a).... 5.08%** 8.59% 3.86% 16.62% (5.72%) 13.25%
Net Assets at End of
the Period (In
millions).......... $ 219.3 $ 223.9 $ 227.4 $ 226.7 $ 203.2 $ 221.7
Ratio of Expenses to
Average Net
Assets*............ 1.03% 1.04% 1.09% 1.00% .90% .71%
Ratio of Net
Investment Income
to Average Net
Assets*............ 5.06% 5.27% 5.32% 5.57% 5.73% 5.80%
Portfolio Turnover... 29%** 46% 57% 28% 8% 1%
*If certain expenses had not been assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net
Assets............. N/A N/A 1.09% 1.14% 1.17% 1.09%
Ratio of Net
Investment Income
to Average Net
Assets............. N/A N/A 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.
N/A = Not applicable
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.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months May 1, 1993
Ended Year Ended December 31 (Commencement
September 30, ------------------------------------- of Distributions) to
Class B Shares 1998 1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period............ $18.031 $17.484 $17.731 $16.080 $18.055 $17.460
------- ------- ------- ------- ------- -------
Net Investment Income...... .579 .791 .788 .819 .841 .586
Net Realized and Unrealized
Gain/Loss................ .217 .531 (.264) 1.659 (1.985) .603
------- ------- ------- ------- ------- -------
Total from Investment
Operations............... .796 1.322 .524 2.478 (1.144) 1.189
Less Distributions from and
in Excess of Net
Investment Income........ .599 .775 .771 .827 .831 .594
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period................... $18.228 $18.031 $17.484 $17.731 $16.080 $18.055
======= ======= ======= ======= ======= =======
Total Return* (a).......... 4.51%** 7.78% 3.07% 15.72% (6.39%) 6.81%**
Net Assets at End of the
Period (In millions)..... $ 53.5 $ 51.9 $ 48.4 $ 46.8 $ 37.6 $ 27.7
Ratio of Expenses to
Average Net Assets*...... 1.79% 1.79% 1.85% 1.75% 1.64% 1.48%
Ratio of Net Investment
Income to Average Net
Assets*.................. 4.29% 4.51% 4.56% 4.81% 4.98% 4.47%
Portfolio Turnover......... 29%** 46% 57% 28% 8% 1%**
* If certain expenses had not been assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net Assets....... N/A N/A 1.85% 1.89% 1.90% 1.82%
Ratio of Net Investment
Income to Average Net
Assets................... N/A N/A 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.
N/A = Not Applicable
See Notes to Financial Statements
20
<PAGE> 22
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 13, 1993
Year Ended December 31 (Commencement
Nine Months Ended ------------------------------------- of Distributions) to
Class C Shares September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............. $18.031 $17.482 $17.729 $16.079 $18.045 $ 17.850
------- ------- ------- ------- ------- -----------
Net Investment
Income............. .576 .795 .788 .812 .850 .325
Net Realized and
Unrealized
Gain/Loss.......... .221 .529 (.264) 1.665 (1.985) .208
------- ------- ------- ------- ------- -----------
Total from Investment
Operations......... .797 1.324 .524 2.477 (1.135) .533
Less Distributions
from and in Excess
of Net Investment
Income............. .599 .775 .771 .827 .831 .338
------- ------- ------- ------- ------- -----------
Net Asset Value, End
of the Period...... $18.229 $18.031 $17.482 $17.729 $16.079 $ 18.045
======= ======= ======= ======= ======= ===========
Total Return* (a).... 4.51%** 7.78% 3.08% 15.72% (6.34%) 2.98%**
Net Assets at End of
the Period (In
millions).......... $ 3.3 $ 3.0 $ 3.4 $ 3.4 $ 2.2 $ 2.1
Ratio of Expenses to
Average Net
Assets*............ 1.79% 1.79% 1.85% 1.75% 1.63% 1.54%
Ratio of Net
Investment Income
to Average Net
Assets*............ 4.29% 4.52% 4.56% 4.76% 4.97% 4.08%
Portfolio Turnover... 29%** 46% 57% 28% 8% 1%**
*If certain expenses had not been assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net
Assets............. N/A N/A 1.85% 1.90% 1.90% 1.89%
Ratio of Net
Investment Income
to Average Net
Assets............. N/A N/A 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.
N/A = Not Applicable
See Notes to Financial Statements
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen 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. In July, 1998, the Fund's Board of
Trustees approved a change in the Fund's fiscal year end from December 31 to
September 30. As a result, this financial report reflects the nine-month period
commencing on January 1, 1998, and ending on September 30, 1998.
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. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security. Expenses of the Fund are allocated on a pro rata basis to
each class
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
of shares, except for distribution and service fees and transfer agency costs
which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, 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 September 30, 1998, the Fund had an accumulated capital loss carryforward for
tax purposes of $725,930 which expires on September 30, 2003.
At September 30, 1998, for federal income tax purposes, the cost of long-
and short-term investments is $245,280,737; the aggregate gross unrealized
appreciation is $26,134,852 and the aggregate gross unrealized depreciation is
$78,129, resulting in net unrealized appreciation of $26,056,723.
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.
For the nine months ended September 30, 1998, 100% of the income
distributions made by the Fund were exempt from federal income taxes. In
January, 1999 the Fund will provide tax information to shareholders for the 1998
calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $5,600 and $15,000,
respectively, 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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $75,300 and $92,600,
respectively,
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
representing Van Kampen Funds Inc.'s or its affiliates' (collectively "Van
Kampen") cost of providing accounting and legal services to the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the nine months
ended September 30, 1998 and the year ended December 31, 1997, the Fund
recognized expenses of approximately $102,500 and $171,000, respectively.
Beginning in 1998, the transfer agency fees are determined through negotiations
with the Fund's Board of Trustees and are based on competitive market
benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 September 30, 1998, capital aggregated $195,613,792, $51,557,103 and
$3,202,609 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 520,818 $ 9,392,200
Class B.......................................... 265,723 4,794,537
Class C.......................................... 39,580 714,699
---------- ------------
Total Sales........................................ 826,121 $ 14,901,436
========== ============
Dividend Reinvestment:
Class A.......................................... 268,259 $ 4,841,424
Class B.......................................... 56,752 1,023,605
Class C.......................................... 4,146 74,781
---------- ------------
Total Dividend Reinvestment........................ 329,157 $ 5,939,810
========== ============
Repurchases:
Class A.......................................... (1,181,685) $(21,304,126)
Class B.......................................... (266,552) (4,793,744)
Class C.......................................... (28,889) (521,515)
---------- ------------
Total Repurchases.................................. (1,477,126) $(26,619,385)
========== ============
</TABLE>
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $202,684,294, $50,532,705 and
$2,934,644 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 692,357 $ 12,191,057
Class B.......................................... 417,052 7,341,964
Class C.......................................... 31,224 547,176
---------- ------------
Total Sales........................................ 1,140,633 $ 20,080,197
========== ============
Dividend Reinvestment:
Class A.......................................... 377,505 $ 6,642,967
Class B.......................................... 70,331 1,237,722
Class C.......................................... 5,226 91,864
---------- ------------
Total Dividend Reinvestment........................ 453,062 $ 7,972,553
========== ============
Repurchases:
Class A.......................................... (1,659,697) $(29,155,783)
Class B.......................................... (377,046) (6,611,488)
Class C.......................................... (63,577) (1,107,176)
---------- ------------
Total Repurchases.................................. (2,100,320) $(36,874,447)
========== ============
</TABLE>
26
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
At December 31, 1996, capital 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). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. The CDSC will be imposed on most redemptions made within six years of
the purchase for Class B and one year of the purchase for Class C as detailed in
the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
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>
27
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
For the nine months ended September 30, 1998 and the year ended December 31,
1997, Van Kampen as Distributor for the Fund, received commissions on sales of
the Fund's Class A shares of approximately $33,100 and $50,300, respectively and
CDSC on redeemed shares of approximately $46,900 and $99,300, respectively.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the nine month period ending September 30, 1998, the cost of purchases
and proceeds from sales of investments, excluding short-term investments were
$80,333,053 and $89,194,145, respectively. For the year ended December 31, 1997,
the cost of purchases and proceeds from sales of investments, excluding
short-term investments were $124,610,146 and $129,034,925, 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 a call 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 below are the specific types of derivative financial instruments
used by the Fund.
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
28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
made to the broker based upon changes in the value of the contract (the
variation margin).
Transactions in futures contracts, for the nine months ended September 30,
1998 and the year ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996.......................... -0-
Futures Opened............................................ 900
Futures Closed............................................ (900)
----
Outstanding at December 31, 1997.......................... -0-
Futures Opened............................................ 100
Futures Closed............................................ (100)
----
Outstanding at September 30, 1998......................... -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 nine months ended September 30, 1998 and the year ended December 31,
1997, are payments retained by Van Kampen of approximately $280,778 and
$353,100, respectively.
7. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire
operation relying on both internal software systems as well as external software
systems provided by third parties. In 1996 Van Kampen initiated a CountDown 2000
Project to review both the
29
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
internal systems and external vendor connections. The goal of this project is to
position its business to continue unaffected as a result of the century change.
At this time, there can be no assurance that the steps taken will be sufficient
to avoid any adverse impact to the Fund, but Van Kampen does not anticipate that
the move to Year 2000 will have a material impact on its ability to continue to
provide the Fund with service at current levels. In addition, it is possible
that the securities markets in which the Fund invests may be detrimentally
affected by computer failures throughout the financial services industry
beginning January 1, 2000. Improperly functioning trading systems may result in
settlement problems and liquidity issues.
30
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Pennsylvania Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Pennsylvania Tax Free Income Fund (the "Fund"), including the portfolio
of investments, as of September 30, 1998, and the related statement of
operations for the nine-month period ended September 30, 1998 and the year ended
December 31, 1997, the statement of changes in net assets for the nine-month
period ended September 30, 1998 and for each of the two years in the period
ended December 31, 1997, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Pennsylvania Tax Free Income Fund as of September 30, 1998, the results
of its operations for the nine-month period ended September 30, 1998 and the
year ended December 31, 1997, the changes in its net assets for the nine-month
period ended September 30, 1998 and for each of the two years in the period
ended December 31, 1997, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
November 6, 1998
31
<PAGE> 33
VAN KAMPEN FUNDS
EQUITY FUNDS
Domestic
Aggressive Equity
Aggressive Growth
American Value
Comstock
Emerging Growth
Enterprise
Equity Growth
Equity Income
Growth
Growth and Income
Harbor
Pace
Real Estate Securities
U.S. Real Estate
Utility
Value
International/Global
Asian Growth
Emerging Markets
European Equity
Global Equity
Global Equity Allocation
Global Franchise
Global Managed Assets
International Magnum
Latin American
FIXED-INCOME FUNDS
Income
Corporate Bond
Global Fixed Income
Global Government Securities
Government Securities
High Income Corporate Bond
High Yield
High Yield & Total Return
Limited Maturity Government
Short-Term Global Income
Strategic Income
U.S. Government
U.S. Government Trust for Income
Worldwide High Income
Tax Exempt Income
California Insured Tax Free
Florida Insured Tax Free Income
High Yield Municipal
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Tax Free High Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Prime Rate Income Trust
Senior Floating Rate
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales charges,
risks, and expenses. Please read it carefully before you invest or send money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- - visit our web site at
WWW.VANKAMPEN.COM -- to view a prospectus, select Download Prospectus
- - call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
- - e-mail us by visiting
WWW.VANKAMPEN.COM and selecting Contact Us
32
<PAGE> 34
VAN KAMPEN 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*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
PAUL G. YOVOVICH
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and Chief
Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
PAUL R. WOLKENBERG*
EDWARD C. WOOD, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN
INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN 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 Funds Inc., 1998 All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After March 31, 1999, the report, if used with prospective
investors, must be accompanied by a quarterly performance update.
33
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> PA TAX FREE CLASS A
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998<F1>
<PERIOD-START> JAN-01-1998<F1>
<PERIOD-END> SEP-30-1998<F1>
<INVESTMENTS-AT-COST> 245,280,737<F1>
<INVESTMENTS-AT-VALUE> 271,337,460<F1>
<RECEIVABLES> 6,862,293<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 296,002<F1>
<TOTAL-ASSETS> 278,495,755<F1>
<PAYABLE-FOR-SECURITIES> 1,280,155<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,153,289<F1>
<TOTAL-LIABILITIES> 2,433,444<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 195,613,792
<SHARES-COMMON-STOCK> 12,021,762
<SHARES-COMMON-PRIOR> 12,414,370
<ACCUMULATED-NII-CURRENT> 358,014<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (725,930)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 26,056,723<F1>
<NET-ASSETS> 219,282,152
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 12,528,072<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (2,439,158)<F1>
<NET-INVESTMENT-INCOME> 10,088,914<F1>
<REALIZED-GAINS-CURRENT> 2,263,231<F1>
<APPREC-INCREASE-CURRENT> 999,468<F1>
<NET-CHANGE-FROM-OPS> 13,351,613<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (8,483,120)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 520,818
<NUMBER-OF-SHARES-REDEEMED> (1,181,685)
<SHARES-REINVESTED> 268,259
<NET-CHANGE-IN-ASSETS> (4,650,328)
<ACCUMULATED-NII-PRIOR> 601,938<F1>
<ACCUMULATED-GAINS-PRIOR> (2,989,161)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,234,844<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 2,439,158<F1>
<AVERAGE-NET-ASSETS> 219,460,847
<PER-SHARE-NAV-BEGIN> 18.038
<PER-SHARE-NII> 0.684
<PER-SHARE-GAIN-APPREC> 0.216
<PER-SHARE-DIVIDEND> (0.698)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.240
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> PA TAX FREE CLASS B
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998<F1>
<PERIOD-START> JAN-01-1998<F1>
<PERIOD-END> SEP-30-1998<F1>
<INVESTMENTS-AT-COST> 245,280,737<F1>
<INVESTMENTS-AT-VALUE> 271,337,460<F1>
<RECEIVABLES> 6,862,293<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 296,002<F1>
<TOTAL-ASSETS> 278,495,755<F1>
<PAYABLE-FOR-SECURITIES> 1,280,155<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,153,289<F1>
<TOTAL-LIABILITIES> 2,433,444<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,557,103
<SHARES-COMMON-STOCK> 2,934,927
<SHARES-COMMON-PRIOR> 2,879,004
<ACCUMULATED-NII-CURRENT> 358,014<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (725,930)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 26,056,723<F1>
<NET-ASSETS> 53,497,854
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 12,528,072<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (2,439,158)<F1>
<NET-INVESTMENT-INCOME> 10,088,914<F1>
<REALIZED-GAINS-CURRENT> 2,263,231<F1>
<APPREC-INCREASE-CURRENT> 999,468<F1>
<NET-CHANGE-FROM-OPS> 13,351,613<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,740,891)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 265,723
<NUMBER-OF-SHARES-REDEEMED> (266,552)
<SHARES-REINVESTED> 56,752
<NET-CHANGE-IN-ASSETS> 1,587,828
<ACCUMULATED-NII-PRIOR> 601,938<F1>
<ACCUMULATED-GAINS-PRIOR> (2,989,161)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,234,844<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 2,439,158<F1>
<AVERAGE-NET-ASSETS> 52,455,867
<PER-SHARE-NAV-BEGIN> 18.031
<PER-SHARE-NII> 0.579
<PER-SHARE-GAIN-APPREC> 0.217
<PER-SHARE-DIVIDEND> (0.599)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.228
<EXPENSE-RATIO> 1.79
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not a class basis
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> PA TAX FREE CLASS C
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998<F1>
<PERIOD-START> JAN-01-1998<F1>
<PERIOD-END> SEP-30-1998<F1>
<INVESTMENTS-AT-COST> 245,280,737<F1>
<INVESTMENTS-AT-VALUE> 271,337,460<F1>
<RECEIVABLES> 6,862,293<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 296,002<F1>
<TOTAL-ASSETS> 278,495,755<F1>
<PAYABLE-FOR-SECURITIES> 1,280,155<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,153,289<F1>
<TOTAL-LIABILITIES> 2,433,444<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,202,609
<SHARES-COMMON-STOCK> 180,058
<SHARES-COMMON-PRIOR> 165,221
<ACCUMULATED-NII-CURRENT> 358,014<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (725,930)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 26,056,723<F1>
<NET-ASSETS> 3,282,305
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 12,528,072<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (2,439,158)<F1>
<NET-INVESTMENT-INCOME> 10,088,914<F1>
<REALIZED-GAINS-CURRENT> 2,263,231<F1>
<APPREC-INCREASE-CURRENT> 999,468<F1>
<NET-CHANGE-FROM-OPS> 13,351,613<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (108,827)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39,580
<NUMBER-OF-SHARES-REDEEMED> (28,889)
<SHARES-REINVESTED> 4,146
<NET-CHANGE-IN-ASSETS> 303,136
<ACCUMULATED-NII-PRIOR> 601,938<F1>
<ACCUMULATED-GAINS-PRIOR> (2,989,161)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,234,844<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 2,439,158<F1>
<AVERAGE-NET-ASSETS> 3,282,656
<PER-SHARE-NAV-BEGIN> 18.031
<PER-SHARE-NII> 0.576
<PER-SHARE-GAIN-APPREC> 0.221
<PER-SHARE-DIVIDEND> (0.599)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.229
<EXPENSE-RATIO> 1.79
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
