<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Performance in Perspective....................... 5
Glossary of Terms................................ 6
Portfolio Management Review...................... 8
Portfolio Highlights............................. 11
Portfolio of Investments......................... 12
Statement of Assets and Liabilities.............. 18
Statement of Operations.......................... 19
Statement of Changes in Net Assets............... 20
Financial Highlights............................. 21
Notes to Financial Statements.................... 24
Report of Independent Accountants................ 30
</TABLE>
PATF ANR 2/98
<PAGE> 2
LETTER TO SHAREHOLDERS
February 3, 1998
Dear Shareholder,
The new year ushers in what
promises to be an exciting and
challenging time for investors. The
Taxpayer Relief Act of 1997 signed [PHOTO]
into law by President Clinton in
August creates many new opportunities
for you and your family to take a
more active role in achieving your
long-term financial goals.
Most Americans will benefit from DENNIS J. MCDONNELL AND DON G. POWELL
the bill's $95 billion in tax cuts
over five years. The so-called Kiddie Credit gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses through the new Education IRA. The bill
also cuts capital gains tax rates for the first time in over a decade and
loosens restrictions on tax-deductible IRA contributions. Perhaps the most
exciting feature of all is the new Roth IRA, which allows investment earnings to
grow tax free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
surplus, and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar, and significant
productivity gains helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
Continued on page two
1
<PAGE> 3
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
MARKET OVERVIEW
Low inflation and steady Federal Reserve policy contributed to solid gains
for fixed-income investments over the reporting period. The yield on the
Treasury's benchmark 30-year bond began the year at 6.64 percent and climbed to
7.17 percent in April amid fears that strong economic growth would reignite
inflation. When subsequent data showed the economy to be slowing, bond yields
gradually drifted lower. By the end of the reporting period, long-term
Treasury-bond yields had fallen to 5.92 percent, the lowest level in more than
four years.
During the 12 months through December, long-term general obligation bonds
returned more than 11 percent, compared to just under 9 percent for
intermediate-term bonds. Total volume of municipal debt rose to over $200
billion, the highest level since 1993. Close to 50 percent of issuance was
enhanced by insurance. This increase in AAA-rated volume caused spreads between
high quality and lower-rated paper to compress, making quality offerings
attractive during the period. At the same time, however, it was difficult to
build the income component of the portfolio due to the scarcity of higher
yielding securities.
OUTLOOK
We believe that reduced demand for American exports to Asia will exert a
mild drag on the U.S. economy in coming months. But while corporate profits
could suffer, slower economic growth will help mitigate the inflationary
pressures caused by the tight domestic labor market. That scenario is typically
good for fixed-income investments.
However, if bond yields continue to drift lower, economic growth in the U.S.
could accelerate later in 1998. In recent years, each significant decline in
long-term interest rates has ignited economic growth by making housing, autos,
and other big-ticket consumer goods more affordable. We also expect the healthy
economy to keep credit spreads relatively tight in coming months.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
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. As always, we
are pleased to have the opportunity to serve you through our diverse menu of
quality investments.
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 DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL
PENNSYLVANIA TAX FREE INCOME FUND
<TABLE>
<CAPTION>
A B C
SHARES SHARES SHARES
TOTAL RETURNS
<S> <C> <C> <C>
One-year total return based on NAV(1)... 8.59% 7.78% 7.78%
One-year total return(2)................ 3.45% 3.78% 6.78%
Five-year average annual total
return(2)............................. 6.00% N/A N/A
Ten-year average annual total
return(2)............................. 8.40% N/A N/A
Life-of-Fund average annual total
return(2)............................. 8.37% 5.26% 5.02%
Commencement date....................... 05/01/87 05/01/93 08/13/93
DISTRIBUTION RATES AND YIELD
Distribution rate(3).................... 4.91% 4.43% 4.43%
Taxable equivalent distribution
rate(4)............................... 7.89% 7.12% 7.12%
SEC Yield(5)............................ 4.22% 3.65% 3.67%
</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 December 31, 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.
4
<PAGE> 6
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments are
being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Pennsylvania Tax Free Income Fund vs. Lehman
Brothers Municipal Bond Index
(December 31, 1987 through December 31, 1997)
[GRAPH]
<TABLE>
<CAPTION>
VKAC Lehman Brothers
Value at Pennsylvania Tax Free Municipal Bond
December 31, Income Fund Index
<S> <C> <C>
1987 9,527.00 10,000.00
1988 10,912.00 11,015.20
1989 12,095.00 12,203.30
1990 12,981.00 13,093.00
1991 14,492.00 14,683.20
1992 15,955.00 15,977.60
1993 18,068.00 17,939.00
1994 17,036.00 17,011.40
1995 19,867.00 19,982.00
1996 20,634.00 20,868.90
1997 22,407.00 22,789.30
- --------------------------------
Fund's Total Return
1 Year Avg. Annual = 3.45%
5 Year Avg. Annual = 6.00%
10 Year Avg. Annual = 8.40%
Inception Avg. Annual = 8.37%
- --------------------------------
</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.
5
<PAGE> 7
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting yields on bonds. One hundred basis points
is equal to one percent. For example, if a bond's yield changes from 7.00 to
6.65 percent, it would be considered a 35 basis point move.
CALL FEATURE: Allows the issuer to buy back the bond before the date of
maturity. When the bond is called, the issuer repurchases it at or above its
face value, and stops paying interest on that loan.
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"). There is
no redemption fee (Contingent Deferred Sales Charge).
COUPON RATE: The stated rate of interest the bond pays until maturity, expressed
as a percentage of the face value.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as AAA-rated municipal bonds) and lower-quality
issues (such as BBB- and non-rated municipal bonds). Under normal circumstances,
lower-quality issues provide higher yields in order to compensate investors for
the additional credit risk.
DURATION: A measure of a bond's sensitivity to changes in interest rates,
expressed in years. The longer a fund's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates decline.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal
funds to another. This overnight rate is used to meet banks' daily reserve
requirements. The Federal Reserve Board uses the federal funds rate to affect
the direction of interest rates.
FEDERAL RESERVE BOARD (THE FED): A seven-member group that directs the
operations of the Federal Reserve System, the central bank system of the United
States. Currently led by Chairman Alan Greenspan, the Fed meets eight times a
year to establish monetary policy and monitor the country's economic pulse.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. General
obligation bonds are issued to finance essential government projects, such as
highways and schools.
6
<PAGE> 8
GLOSSARY OF TERMS (CONTINUED)
INFLATION: An economic state in which the amount of money supply and business
activity dramatically increases, accompanied by sharply rising prices. Inflation
is widely measured by the Consumer Price Index, a leading economic indicator
that measures the change in the cost of purchased goods and services.
MUNICIPAL BOND: A debt security issued by a state, municipality or other
governmental entity to finance capital expenditures such as the construction of
highways, public works, or school buildings.
MUNICIPAL REVENUE BONDS: Bonds that are payable only from the revenues the
project will generate and are not backed by any taxing authority of the issuer.
Revenue bonds are issued to finance the building of hospitals, toll bridges,
electric dams, airports, and college dormitories.
MUNICIPAL YIELD CURVE: A representation of the actual or projected yields of
municipal bond securities in relationship to their maturities.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from its total assets and dividing this amount by the
number of shares outstanding. The NAV does not include any initial or contingent
deferred sales charges.
PUT BOND: A long-term bond that the bondholder can "put" back to the issuer for
redemption at a specified price on a specified future date prior to maturity.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This typically occurs when interest rates decline and an issuer
wishes to replace higher-yielding bonds with current lower-yielding issues.
YIELD CURVE: A result of viewing the yields of U.S. Treasury securities maturing
in 1, 5, 10, and 30 years, grouped together, will often reflect a pattern of
increasing yield as maturity extends. This pattern creates an upward sloping
"curve." A "flat" yield curve represents little difference between short- and
long-term interest rates. An "inverted" yield curve indicates that short-term
rates are higher than long-term rates.
ZERO COUPON BONDS: A corporate or municipal debt security traded at a deep
discount from face value that pays no interest and it may be redeemed at
maturity for full face value.
7
<PAGE> 9
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 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 on the
Fund's performance during the 12-month period ended December 31, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND HAS
OPERATED DURING THE PAST 12 MONTHS?
A The bond market saw healthy price advances during 1997, but this ascension
was not a smooth ride. Early in the year, bond prices began to fall when
economic indicators caused concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed raised interest
rates by a modest 0.25 percent in late March, bond prices fell even further. By
mid-April, however, the market's mood reversed, giving little indication of
price pressures despite the economy's strength. Bond prices also benefited from
heavy purchases by foreign investors and concerns that the stock market rally
was nearing an end.
While the economy showed few, if any, signs of inflation, bond prices
continued their climb, and long-term interest rates declined further. This
caused credit spreads between investment-grade and lower- or non-rated bonds to
contract significantly. Also, an unprecedented amount of insured bond
issuance--49 percent of total volume--reduced the supply of higher-yielding,
lower- and non-rated bonds available in the market.
Pennsylvania's economy continued to lag the nation, which can be
attributed largely to the aging population and limited industry growth
throughout the state. Bond issuance was modest during the first quarter but
rebounded to higher levels later in the second quarter as interest rates
declined. Currently, more than 70 percent of the state's bonds come to market
insured, which is considerably higher than the national average of 49 percent.
As interest rates declined during the last six months of the year,
Pennsylvania, like many states, encountered a considerable amount of
prerefundings--issuers refunded their higher-yielding municipal bonds and
replaced them with bonds at prevailing lower rates.
Q HAVE THESE CONDITIONS AFFECTED THE MANAGEMENT OF THE FUND?
A Our overall strategy did not change based on market conditions, although
lower yields made it more difficult to add significant value over our
existing holdings. We evaluated bond issues on an individual basis and
made purchases where we found the most appropriate opportunities.
The narrowing of credit spreads, while limiting the attractiveness of the
high-yielding, high-risk securities offered at the current market levels,
actually increased the value of the lower- and non-rated bonds held in the
Fund's portfolio. By relying heavily on our research
8
<PAGE> 10
and analysis to find attractive issues, we are able to consistently provide
shareholders with a higher level of potential income.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO?
A Turnover in the Fund remained relatively low during the period. Our sector
weightings were a reflection of where we found opportunities on a
bond-by-bond basis. Health care and housing bonds represent two areas of
interest for the portfolio. Some of our holdings in the health sector included
continuing care retirement centers or CCRCs, which provide housing and nursing
services for elderly and retired individuals. Our health care holdings included
several hospitals and long-term care centers. These bonds served the portfolio
well during the reporting period.
Early in the reporting period, one of our holdings in the paper industry
encountered a credit problem that had a slight negative impact on the Fund's
return. We were able to liquidate the credit during the year.
In an effort to manage the Fund's volatility, we adjusted the duration of
the portfolio when necessary. Mid-year, the duration of the Fund was 7.20 years,
which was slightly shorter than the Lehman Brothers Pennsylvania Municipal Bond
Index's duration of 7.53 years. We concentrated on maintaining a balanced
portfolio that we felt would perform well during both upward and downward swings
in interest rates. For additional Fund portfolio highlights, please refer to
page eleven.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted positive results for the fiscal year. Total return for the
12 months ended December 31, 1997 was 8.59 percent(1) (Class A shares at
net asset value). By comparison, the Lehman Brothers Municipal Bond Index
produced a total return of 9.19 percent for the same period. Keep in mind that
this index is a broad-based, unmanaged index of municipal bonds and does not
reflect any commissions or fees that would be paid by an investor purchasing the
securities it represents.
The Fund continued to meet its goal of providing a competitive level of
tax-exempt current income. At year-end, its tax-exempt distribution rate (Class
A shares) was 4.91 percent(3), based on a monthly dividend of $.9075 and a
maximum public offering price of $18.94. For investors in the 37.8 percent
combined federal and state income tax bracket, the Fund's taxable-equivalent
distribution rate was 7.89 percent(4). Please refer to the chart on page four
for additional Fund performance.
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We expect the U.S. economy to remain strong going into 1998, although the
growth rate could slow from its current level. The expediency with which
the crisis in Southeast Asia is resolved will play a key role in how the
Fed will manage the U.S. interest rate environment in the coming year. We are
cautiously optimistic that interest rates will remain fairly stable, if not move
slightly lower in 1998. In the event that conditions in Southeast Asia stabilize
and the U.S. economy shows increased signs of
9
<PAGE> 11
price appreciation and wage pressures, the Fed might take preemptive measures to
keep inflation in check.
On a national level, we believe long-term municipal bond yields should
remain stable and the tax-exempt bond market should continue to track
Treasuries. Bond issuance in Pennsylvania should be strong, especially in the
health-care sector as hospitals and health-care providers continue to grow and
form larger networks. We expect fewer refundings in the coming year than we saw
in 1997 due to the large volume that have already come to market.
We believe the Fund is well positioned to weather any changes in market
conditions in the coming year. We feel the Fund's stable duration and sector
diversification should enable the Fund to be less volatile to interest rate
changes.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
Dennis S. Pietrzak
Portfolio Manager
Please see footnotes on page four
10
<PAGE> 12
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
TOP TEN HOLDINGS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
Philadelphia, PA Authority Industrial
Development Lease Revenue ................. 4.3%
Pennsylvania State Higher Educational
Assistance Agency Student Loan ............ 3.4%
Berks County, PA ............................ 2.6%
Pennsylvania State Higher Educational
Facility Authority Health Services Revenue
Allegheny Delaware Valley ................. 2.6%
Philadelphia, PA Municipal Authority Revenue
Municipal Services Building Lease Capital
Appreciation .............................. 2.5%
Allegheny County, PA Hospital Development
Authority Revenue Hospital St. Francis
Medical Center Project .................... 2.3%
Radnor Township, PA School District ......... 2.2%
Pennsylvania State Higher Educational
Facility Authority Revenue Drexel
University ................................ 2.1%
Delaware County, PA Authority Revenue First
Mortgage Riddle Village Project ........... 2.0%
Hampton Township, PA School District ........ 1.9%
</TABLE>
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <S> <C>
AAA........... 49.0% AAA.............. 50.6%
AA............ 9.2% AA............... 8.0%
A............. 14.3% [PIE CHART] A................ 15.7% [PIE CHART]
BBB........... 12.6% BBB.............. 12.8%
BB............ 1.4% BB............... 1.4%
Non-Rated..... 13.5% Non-Rated........ 11.5%
</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 DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <S> <C>
Health Care........... 21.2% Health Care........... 22.8%
Industrial Revenue.... 13.8% Industrial Revenue.... 13.3%
Public Education...... 11.1% Public Education...... 8.3%
Other Care............ 8.3% Other Care............ 7.3%
Public Building....... 7.5% Public Building....... 7.3%
</TABLE>
DURATION
<TABLE>
<CAPTION>
As of December 31, 1997(1) As of June 30, 1997(1)
<S> <C> <C>
Duration 7.00 years 8.00 years
</TABLE>
(1)Unaudited
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 99.0%
PENNSYLVANIA 99.0%
$3,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser B (FSA Insd)........................... 6.625% 01/01/22 $ 3,818,675
1,625 Allegheny Cnty, PA C-34 Conv Cap Apprec (a)..... 0/8.625 02/15/04 1,949,854
1,000 Allegheny Cnty, PA Higher Edl Bldg Auth Univ Rev
Duquesne Univ Proj (AMBAC Insd)................. 6.500 03/01/11 1,175,690
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent
Presbyterian Univ Ser A (MBIA Insd) (c)......... 6.000 11/01/12 2,637,775
2,500 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent
Presbyterian Univ Ser A (MBIA Insd)............. 6.250 11/01/23 2,679,000
2,140 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Fac
Allegheny Vly Sch............................... 7.750 02/01/15 2,355,434
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.500 05/15/06 1,050,900
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.500 05/15/07 1,048,810
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.600 05/15/08 1,052,590
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/09 1,061,270
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/10 1,055,940
1,160 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp Saint
Francis Med Cent Proj........................... 5.750 05/15/17 1,201,064
945 Allegheny Cnty, PA Indl Dev Auth Med Cent Rev
Presbyterian Med Cent Rfdg (FHA Gtd)............ 6.750 02/01/26 1,037,298
2,500 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt Ser A Rfdg................... 6.700 12/01/20 2,720,325
950 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
1983 Ser B...................................... * 10/01/15 149,977
1,945 Allegheny Cnty, PA Residential Fin Auth Mtg Rev
Single Family Ser Z (GNMA Collateralized)....... 6.875 05/01/26 2,080,800
2,000 Beaver Cnty, PA Hosp Auth Rev Med Cent Beaver,
PA Inc Ser A (AMBAC Insd)....................... 6.250 07/01/22 2,167,060
4,500 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Collateral Toledo Edison Co Proj Ser A Rfdg..... 7.750 09/01/24 4,754,025
6,000 Berks Cnty, PA (Inverse Fltg) (FGIC Insd)....... 8.170 11/10/20 7,275,000
2,000 Berks Cnty, PA Muni Auth Rev Highlands at
Wyomissing Proj B............................... 6.875 10/01/17 2,167,140
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.500 05/15/13 1,106,200
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg
Inc Proj Rfdg................................... 7.700 05/15/22 1,115,680
2,750 Bradford Cnty, PA Indl Dev Auth Solid Waste Disp
Rev Intl Paper Co Proj A........................ 6.600 03/01/19 3,030,500
5,650 Butler, PA Area Sch Dist Cap Apprec (FGIC
Insd)........................................... * 11/15/25 1,173,448
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Bethlehem Steel Corp Proj Rfdg.................. 7.500% 09/01/15 $ 1,115,390
1,000 Cambria Cnty, PA Indl Dev Auth Res Recovery Rev
Cambria Cogen Proj Ser F........................ 7.750 09/01/19 1,019,160
1,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys
Rev (AMBAC Insd)................................ 5.650 05/15/20 1,030,130
1,880 Chester Cnty, PA Hlth & Edl The Chester Cnty
Hosp (MBIA Insd)................................ 5.625 07/01/08 2,035,363
760 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/01 660,486
860 Chichester Sch Dist PA Ser 1989 (MBIA Insd)..... * 06/01/02 714,221
1,000 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj (Prerefunded @ 07/01/01)................... 8.500 07/01/21 1,154,670
945 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp
Proj (Prerefunded @ 07/01/01)................... 8.500 07/01/13 1,083,424
1,130 Clearfield Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg Kmart Corp Ser A Rfdg................. 7.200 07/01/07 1,213,191
2,230 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle Hosp & Hlth............................ 6.800 11/15/23 2,435,316
2,500 Deer Lakes Sch Dist PA Ser A (FSA Insd)......... 5.000 01/15/23 2,447,500
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 2,224,560
2,475 Delaware Cnty, PA Auth Rev Elwyn Inc Proj
(Prerefunded @ 06/01/00)........................ 8.350 06/01/15 2,759,526
1,500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj (Prerefunded @ 06/01/02)................... 9.250 06/01/22 1,818,930
500 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 6.200 06/01/05 522,595
3,000 Delaware Cnty, PA Auth Rev First Mtg Riddle Vlg
Proj Rfdg....................................... 7.000 06/01/26 3,135,330
2,000 Erie Cnty, PA Hosp Auth Rev Saint Vincent Hlth
Cent Proj Ser A (MBIA Insd)..................... 6.375 07/01/22 2,177,140
1,985 Greene Cnty, PA Unlimited Tax (Prerefunded @
08/01/00)....................................... 8.500 08/01/10 2,174,806
5,500 Hampton Twp, PA Sch Dist (FGIC Insd)............ 5.000 09/01/27 5,374,875
3,000 Harrisburg, PA Auth Rev Pooled Univ Pgm Ser II
(MBIA Insd)..................................... 5.625 09/15/17 3,142,530
900 Hazleton, PA Hlth Svcs Auth Hosp Rev............ 5.500 07/01/07 939,240
650 Hazleton, PA Hlth Svcs Auth Saint Joseph Med
Cent Rfdg....................................... 5.850 07/01/06 677,190
1,750 Indiana Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Metro Edison Co Proj A (AMBAC Insd)............. 5.950 05/01/27 1,870,470
2,500 Jim Thorpe, PA Area Sch Dist Ser A (MBIA
Insd)........................................... 5.375 03/15/22 2,534,700
1,800 Kiski, PA Area Sch Dist (FGIC Insd)............. 5.300 03/01/17 1,827,018
1,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res
Recovery Sys Rev Ser A.......................... 8.375 12/15/04 1,032,880
2,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res
Recovery Sys Rev Ser A.......................... 8.500 12/15/10 2,068,400
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$2,000 Lehigh Cnty, PA Genl Purp Auth Cedar Crest
College Rfdg.................................... 6.700% 04/01/26 $ 2,158,260
4,100 Lehigh Cnty, PA Genl Purp Auth Rev Muhlenberg
Hosp Ser A Rfdg................................. 8.100 07/15/10 4,394,831
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 1,098,680
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A........................ 6.500 07/01/22 2,166,660
2,500 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A (Prerefunded @
07/01/00)....................................... 7.750 07/01/16 2,756,450
1,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp
Proj (Crossover Rfdg @ 10/01/00)................ 8.875 10/01/20 1,134,310
750 McKeesport, PA Indl Dev Auth Rev The Kroger Corp
Allegheny Cnty Rfdg............................. 8.650 06/01/11 854,565
3,000 Monroeville, PA Hosp Auth Hosp Rev Forbes Hlth
Sys Rfdg........................................ 6.250 10/01/15 3,182,850
500 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Suburban Genl Hosp Bonds (AMBAC Insd)....... 7.250 05/01/16 511,270
405 Montgomery Cnty, PA Higher Edl & Hlth Auth
Nursing Home Rev Delco Sys Svcs Proj A.......... 9.875 11/01/18 423,824
2,250 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev Adult Cmntys Total Svcs Ser B......... 5.625 11/15/12 2,317,185
2,000 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev GDL Farms Corp Proj Rfdg.............. 6.300 01/01/13 2,014,980
2,500 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Philadelphia Elec Co Ser A Rfdg............. 7.600 04/01/21 2,730,325
3,000 Montgomery Cnty, PA Indl Dev Auth Rev Res
Recovery........................................ 7.500 01/01/12 3,318,150
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Wordsworth
Academy......................................... 7.750 09/01/24 1,106,950
1,415 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/17 1,461,992
3,300 New Kensington Arnold, PA Sch Dist (FGIC
Insd)........................................... 5.500 05/15/26 3,394,677
1,500 North Penn, PA Wtr Auth Wtr Rev (FGIC Insd)..... 6.200 11/01/22 1,623,015
1,000 North Penn, PA Wtr Auth Wtr Rev (Prerefunded @
11/01/04) (FGIC Insd)........................... 6.875 11/01/19 1,159,560
2,500 Northampton Cnty, PA Indl Dev Auth Rev Pollutn
Ctl Bethlehem Steel Rfdg........................ 7.550 06/01/17 2,787,775
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 1,136,940
2,281 Oil City, PA Towne Tower Proj................... 6.750 05/01/20 2,477,298
1,335 Penn Hills, PA (FGIC Insd)...................... 5.800 12/01/13 1,449,943
1,600 Penn Hills, PA (FGIC Insd)...................... 5.850 12/01/14 1,738,224
1,335 Penn Hills, PA (FGIC Insd)...................... 5.900 12/01/17 1,439,237
2,000 Pennsylvania Econ Dev Fin Auth Exempt Fac Rev
MacMillan Ltd Partnership Proj.................. 7.600 12/01/20 2,369,260
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.050% 12/01/10 $ 3,322,950
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.125 12/01/15 1,667,895
5,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Northampton Generating Ser A.................... 6.600 01/01/19 5,253,800
2,500 Pennsylvania Hsg Fin Agy Amt Single Family Mtg
Ser 61A (b)..................................... 5.500 04/01/29 2,512,675
4,000 Pennsylvania Hsg Fin Agy (Inverse Fltg)......... 9.447 10/03/23 4,600,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg Rfdg (FNMA
Collateralized)................................. 6.500 07/01/23 1,058,750
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
40.............................................. 6.900 04/01/25 1,086,230
2,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
42.............................................. 6.850 04/01/25 2,719,600
850 Pennsylvania Infrastructure Invt Auth Rev
Pennvest Subser B............................... 6.800 09/01/10 941,035
2,000 Pennsylvania Intergvtl Co-op Auth Spl Tax Rev
City of Philadelphia (MBIA Insd)................ 5.600 06/15/15 2,065,000
4,000 Pennsylvania St Ctfs Partn (FSA Insd)........... 6.250 05/01/16 4,321,400
2,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Rfdg (Inverse Fltg) (AMBAC
Insd)........................................... 9.368 09/01/26 2,317,500
2,500 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser B (Inverse Fltg) (MBIA
Insd)........................................... 10.433 03/01/20 2,840,625
4,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser C (AMBAC Insd)............... 6.400 03/01/22 4,175,600
1,200 Pennsylvania St Higher Edl Fac Auth College &
Univ Rev Bryn Mawr College (MBIA Insd).......... 5.625 12/01/27 1,256,076
2,000 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Allegheny Delaware Vly Oblig A (MBIA
Insd)........................................... 5.000 11/15/06 2,074,320
4,595 Pennsylvania St Higher Edl Fac Auth Hlth Svcs
Rev Allegheny Delaware Vly Oblig A (MBIA
Insd)........................................... 5.600 11/15/10 5,016,316
5,400 Pennsylvania St Higher Edl Fac Auth Rev Drexel
Univ Rfdg....................................... 6.375 05/01/17 5,818,446
1,590 Pennsylvania St Indl Dev Auth Rev Econ Dev
(AMBAC Insd).................................... 6.000 07/01/06 1,775,950
2,505 Philadelphia, PA Auth for Indl Dev Rev Coml Dev
RMK Rfdg........................................ 7.750 12/01/17 2,833,556
3,000 Philadelphia, PA Auth for Indl Dev Rev Long-Term
Care Maplewood.................................. 8.000 01/01/24 3,308,370
11,565 Philadelphia, PA Auth Indl Dev Lease Rev Ser A
(MBIA Insd)..................................... 5.375 02/15/27 11,743,332
3,000 Philadelphia, PA Gas Wks Rev Ser 14 Rfdg (FSA
Insd)........................................... 6.250 07/01/08 3,311,100
250 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Albert Einstein Med Cent.................... 7.000 10/01/21 271,123
2,800 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Chestnut Hill Hosp.......................... 6.500 11/15/22 2,998,296
4,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Temple Univ Hosp Ser A...................... 6.625 11/15/23 4,369,680
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 760 Philadelphia, PA Hosps And Higher Ed Facs Auth
Rev The Phil Protestant Home Ser B.............. 6.300% 07/01/14 $ 770,366
985 Philadelphia, PA Hosps And Higher Ed Facs Auth
Rev The Phil Protestant Home Ser B.............. 6.400 07/01/17 998,406
450 Philadelphia, PA Hosps And Higher Ed Facs Auth
Rev The Phil Protestant Home Ser B.............. 6.500 07/01/21 456,993
1,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/08 934,590
3,750 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/11 1,955,962
3,775 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/12 1,861,377
4,500 Philadelphia, PA Muni Auth Rev Muni Svcs Bldg
Lease Cap Apprec (FSA Insd)..................... * 03/15/13 2,089,305
2,155 Philadelphia, PA Muni Auth Rev Rfdg (Prerefunded
@ 04/01/00) (FGIC Insd)......................... 7.800 04/01/18 2,330,051
1,800 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.500 08/01/10 2,034,036
2,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (MBIA
Insd)........................................... 5.625 06/15/08 2,190,520
1,470 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser
C1.............................................. 6.800 10/01/25 1,567,652
1,475 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser D... 6.250 10/01/17 1,566,583
835 Pittsburgh, PA Urban Redev Auth Single Family
Mtg Rev Ser A (GNMA Collateralized)............. 8.000 12/01/20 871,523
2,665 Radnor Twp, PA Sch Dist......................... 5.750 03/15/19 2,798,756
3,000 Randor Twp, PA Sch Dist......................... 5.750 03/15/26 3,139,350
250 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Cmnty Med Cent Proj (BIGI Insd)................. 7.875 07/01/10 259,550
1,000 Scranton-Lackawanna, PA Hlth & Welfare Auth Rev
Marian Cmnty Hosp Proj Rfdg..................... 7.125 01/15/13 1,062,430
2,400 Shaler, PA Area Sch Dist Cap Apprec Ser A (FGIC
Insd)........................................... * 11/15/16 914,232
2,245 Shaler, PA Area Sch Dist Cap Apprec Ser A (FGIC
Insd)........................................... * 11/15/22 620,136
2,650 Sharon, PA Regl Hlth Sys Auth Hosp Rev Sharon
Regl Hlth Sys Proj A Rfdg....................... 6.875 12/01/09 2,880,232
355 Somerset Cnty, PA Indl Dev Auth Coml Dev Rev
First Mtg Kmart Corp Ser A Rfdg................. 7.200 04/01/07 380,081
650 Springfield Twp, PA Swr Auth (Mun Govt Gtd)..... 5.800 10/15/18 653,705
1,000 Springfield Twp, PA Swr Auth (Mun Govt Gtd)..... 6.000 10/15/27 1,009,820
2,180 St Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch
Dist Ser D (MBIA Insd).......................... 6.500 02/01/14 2,418,143
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 1,659,150
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$2,935 West Shore, PA Area Auth Hlth Cent Rev United
Methodist Homes Aging Inc (Prerefunded @
06/01/01)....................................... 7.400% 06/01/16 $ 3,287,317
1,000 West Shore, PA Area Hosp Auth Hosp Rev Holy
Spirit Hosp Proj (MBIA Insd).................... 5.700 01/01/22 1,046,270
350 Westmoreland Cnty, PA Indl Dev Auth Rev Citizens
Genl Hosp Proj A Rfdg........................... 8.250 07/01/13 358,785
------------
276,035,653
------------
TOTAL LONG-TERM INVESTMENTS 99.0%
(Cost $250,978,398)......................................................... 276,035,653
------------
SHORT-TERM INVESTMENTS AT AMORTIZED COST 0.8%................................ 2,200,000
------------
TOTAL INVESTMENTS 99.8%
(Cost $253,178,398)......................................................... 278,235,653
OTHER ASSETS IN EXCESS OF LIABILITIES 0.2%................................... 586,022
------------
NET ASSETS 100.0%............................................................ $278,821,675
============
</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
17
<PAGE> 19
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $253,178,398)....................... $278,235,653
Cash........................................................ 139,627
Receivables:
Interest.................................................. 4,035,446
Fund Shares Sold.......................................... 206,418
Investments Sold.......................................... 3,622
Other....................................................... 16,890
------------
Total Assets.......................................... 282,637,656
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,511,076
Income Distributions...................................... 493,151
Fund Shares Repurchased................................... 248,974
Distributor and Affiliates................................ 205,962
Investment Advisory Fee................................... 141,382
Trustees' Deferred Compensation and Retirement Plans........ 122,611
Accrued Expenses............................................ 92,825
------------
Total Liabilities..................................... 3,815,981
------------
NET ASSETS.................................................. $278,821,675
============
NET ASSETS CONSIST OF:
Paid in Surplus............................................. $256,151,643
Net Unrealized Appreciation................................. 25,057,255
Accumulated Undistributed Net Investment Income............. 601,938
Accumulated Net Realized Loss............................... (2,989,161)
------------
NET ASSETS.................................................. $278,821,675
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $223,932,480 and 12,414,370 shares of
beneficial interest issued and outstanding)............. $ 18.04
Maximum sales charge (4.75%* of offering price)......... .90
------------
Maximum offering price to public........................ $ 18.94
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $51,910,026 and 2,879,004 shares of
beneficial interest issued and outstanding)............. $ 18.03
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $2,979,169 and 165,221 shares of
beneficial interest issued and outstanding)............. $ 18.03
============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
18
<PAGE> 20
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $17,301,880
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,645,589
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $551,201, $490,120 and $30,079,
respectively)............................................. 1,071,400
Shareholder Services........................................ 266,800
Trustees' Fees and Expenses................................. 36,431
Legal....................................................... 27,200
Custody..................................................... 8,362
Other....................................................... 183,017
-----------
Total Expenses.......................................... 3,238,799
-----------
NET INVESTMENT INCOME....................................... $14,063,081
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 1,516,339
Futures................................................... (467,390)
-----------
Net Realized Gain........................................... 1,048,949
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 17,962,920
End of the Period:
Investments............................................. 25,057,255
-----------
Net Unrealized Appreciation During the Period............... 7,094,335
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 8,143,284
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $22,206,365
===========
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................ $ 14,063,081 $ 14,364,732
Net Realized Gain.................................... 1,048,949 1,606,502
Net Unrealized Appreciation/Depreciation............. 7,094,335 (5,619,309)
------------ ------------
Change in Net Assets from Operations................. 22,206,365 10,351,925
------------ ------------
Distributions from Net Investment Income:
Class A Shares..................................... (11,483,502) (11,821,553)
Class B Shares..................................... (2,162,615) (2,128,485)
Class C Shares..................................... (132,920) (151,397)
------------ ------------
Total Distributions.............................. (13,779,037) (14,101,435)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES......................................... 8,427,328 (3,749,510)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................ 20,080,197 35,010,881
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 7,972,553 8,324,756
Cost of Shares Repurchased........................... (36,874,447) (37,239,983)
------------ ------------
CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS....... (8,821,697) 6,095,654
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS................ (394,369) 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 $601,938 and
$317,894, respectively)............................ $278,821,675 $279,216,044
============ ============
</TABLE>
See Notes to Financial Statements
20
<PAGE> 22
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
---------------------------------------------------
Class A Shares 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.............. .928 .919 .946 .965 1.027
Net Realized and Unrealized
Gain/Loss........................ .528 (.263) 1.660 (1.985) 1.164
------- ------- ------- ------- -------
Total from Investment Operations... 1.456 .656 2.606 (1.020) 2.191
Less Distributions from and in
Excess of Net Investment
Income........................... .908 .903 .950 .961 1.028
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $18.038 $17.490 $17.737 $16.081 $18.062
======= ======= ======= ======= =======
Total Return* (a).................. 8.59% 3.86% 16.62% (5.72%) 13.25%
Net Assets at End of the Period (In
millions)........................ $223.9 $227.4 $226.7 $203.2 $221.7
Ratio of Expenses to Average Net
Assets*.......................... 1.04% 1.09% 1.00% .90% .71%
Ratio of Net Investment Income to
Average Net Assets*.............. 5.27% 5.32% 5.57% 5.73% 5.80%
Portfolio Turnover................. 46% 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........................... N/A 1.09% 1.14% 1.17% 1.09%
Ratio of Net Investment Income to
Average Net Assets............... N/A 5.31% 5.42% 5.46% 5.41%
</TABLE>
(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
21
<PAGE> 23
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 1, 1993
Year Ended December 31, (Commencement of
---------------------------------------- Distribution) to
Class B Shares 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........ .791 .788 .819 .841 .586
Net Realized and Unrealized
Gain/Loss.................. .531 (.264) 1.659 (1.985) .603
------- ------- ------- ------- -------
Total from Investment
Operations................. 1.322 .524 2.478 (1.144) 1.189
Less Distributions from and
in Excess of Net Investment
Income..................... .775 .771 .827 .831 .594
------- ------- ------- ------- -------
Net Asset Value,
End of the Period.......... $18.031 $17.484 $17.731 $16.080 $18.055
======= ======= ======= ======= =======
Total Return* (a)............ 7.78% 3.07% 15.72% (6.39%) 6.81%**
Net Assets at End of the
Period (In millions)....... $51.9 $48.4 $46.8 $37.6 $ 27.7
Ratio of Expenses to Average
Net Assets*................ 1.79% 1.85% 1.75% 1.64% 1.48%
Ratio of Net Investment
Income to Average Net
Assets*.................... 4.51% 4.56% 4.81% 4.98% 4.47%
Portfolio Turnover........... 46% 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................. N/A 1.85% 1.89% 1.90% 1.82%
Ratio of Net Investment
Income to Average Net
Assets..................... 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
22
<PAGE> 24
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 of
---------------------------------------- Distribution) to
Class C Shares 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....... .795 .788 .812 .850 .325
Net Realized and Unrealized
Gain/Loss................. .529 (.264) 1.665 (1.985) .208
------- ------- ------- ------- -------
Total from Investment
Operations................ 1.324 .524 2.477 (1.135) .533
Less Distributions from and
in Excess of Net
Investment Income......... .775 .771 .827 .831 .338
------- ------- ------ ------- -------
Net Asset Value, End of the
Period.................... $18.031 $17.482 $17.729 $16.079 $18.045
======= ======= ======= ======= =======
Total Return* (a)........... 7.78% 3.08% 15.72% (6.34%) 2.98%**
Net Assets at End of the
Period (In millions)...... $ 3.0 $ 3.4 $ 3.4 $ 2.2 $ 2.1
Ratio of Expenses to Average
Net Assets*............... 1.79% 1.85% 1.75% 1.63% 1.54%
Ratio of Net Investment
Income to Average Net
Assets*................... 4.52% 4.56% 4.76% 4.97% 4.08%
Portfolio Turnover.......... 46% 57% 28% 8% 1%**
</TABLE>
* If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of Expenses to Average
Net Assets................ N/A 1.85% 1.90% 1.90% 1.89%
Ratio of Net Investment
Income to Average Net
Assets.................... 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
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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. 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
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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 December 31, 1997, the Fund had an accumulated capital loss carryforward for
tax purposes of $2,989,161 which expires on December 31, 2003.
At December 31, 1997, for federal income tax purposes, the cost of long- and
short-term investments is $253,178,398; the aggregate gross unrealized
appreciation is $25,069,697 and the aggregate gross unrealized depreciation is
$12,442, resulting in net unrealized appreciation of $25,057,255.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays dividends
monthly from net investment income. Net realized gains, if any, are distributed
annually. The Fund designated 99.87% of the income distributions as tax-exempt
income distributions.
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 year ended December 31, 1997, the Fund recognized expenses of
approximately $15,000 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 year ended December 31, 1997, the Fund recognized expenses of
approximately $92,600 representing Van Kampen American Capital Distributors,
Inc.'s or
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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 year ended
December 31, 1997, the Fund recognized expenses of approximately $171,000,
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 December 31, 1997, paid in surplus 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)
December 31, 1997
- --------------------------------------------------------------------------------
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.
<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)
December 31, 1997
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$50,300 and CDSC on redeemed shares of approximately $99,300. 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 $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 on the next page 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 made to the broker based upon changes in the value
of the contract (the variation margin).
28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
Transactions in futures contracts, for 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
====
</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 year ended December 31, 1997, are payments retained by VKAC of
approximately $353,100.
29
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen American Capital Pennsylvania Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Pennsylvania Tax Free Income Fund (the "Fund"),
including the portfolio of investments, as of December 31, 1997, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, 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
December 31, 1997, by correspondence with the custodian, a broker. 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 American Capital Pennsylvania Tax Free Income Fund as of December 31,
1997, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 3, 1998
30
<PAGE> 32
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International/Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
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 American Capital or Morgan Stanley fund
prospectus or to receive additional fund information, choose from one of the
following:
- visit our web site at WWW.VKAC.COM -- to view prospectuses, select
Investors' Place, then Download a 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.VKAC.COM and selecting Investors' Place
31
<PAGE> 33
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*
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., 1998 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 June 30, 1998, the report, if used with prospective
investors, must be accompanied by a quarterly performance update.
32
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> PA TAX FREE CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS <F1>
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997<F1>
<PERIOD-END> DEC-31-1997<F1>
<INVESTMENTS-AT-COST> 253,178,398<F1>
<INVESTMENTS-AT-VALUE> 278,235,653<F1>
<RECEIVABLES> 4,245,486<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 156,517<F1>
<TOTAL-ASSETS> 282,637,656<F1>
<PAYABLE-FOR-SECURITIES> 2,511,076<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,304,905<F1>
<TOTAL-LIABILITIES> 3,815,981<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 202,684,294
<SHARES-COMMON-STOCK> 12,414,370
<SHARES-COMMON-PRIOR> 13,004,205
<ACCUMULATED-NII-CURRENT> 601,938<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (2,989,161)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 25,057,255<F1>
<NET-ASSETS> 223,932,480
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 17,301,880<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (3,238,799)<F1>
<NET-INVESTMENT-INCOME> 14,063,081<F1>
<REALIZED-GAINS-CURRENT> 1,048,949<F1>
<APPREC-INCREASE-CURRENT> 7,094,335<F1>
<NET-CHANGE-FROM-OPS> 22,206,365<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (11,483,502)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 692,357
<NUMBER-OF-SHARES-REDEEMED> (1,659,697)
<SHARES-REINVESTED> 377,505
<NET-CHANGE-IN-ASSETS> (3,512,357)
<ACCUMULATED-NII-PRIOR> 317,894<F1>
<ACCUMULATED-GAINS-PRIOR> (4,038,110)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,645,589<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3,238,799<F1>
<AVERAGE-NET-ASSETS> 222,290,558
<PER-SHARE-NAV-BEGIN> 17.490
<PER-SHARE-NII> 0.928
<PER-SHARE-GAIN-APPREC> 0.528
<PER-SHARE-DIVIDEND> (0.908)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.038
<EXPENSE-RATIO> 1.04
<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
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS <F1>
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997<F1>
<PERIOD-END> DEC-31-1997<F1>
<INVESTMENTS-AT-COST> 253,178,398<F1>
<INVESTMENTS-AT-VALUE> 278,235,653<F1>
<RECEIVABLES> 4,245,486<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 156,517<F1>
<TOTAL-ASSETS> 282,637,656<F1>
<PAYABLE-FOR-SECURITIES> 2,511,076<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,304,905<F1>
<TOTAL-LIABILITIES> 3,815,981<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 50,532,705
<SHARES-COMMON-STOCK> 2,879,004
<SHARES-COMMON-PRIOR> 2,768,667
<ACCUMULATED-NII-CURRENT> 601,938<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (2,989,161)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 25,057,255<F1>
<NET-ASSETS> 51,910,026
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 17,301,880<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (3,238,799)<F1>
<NET-INVESTMENT-INCOME> 14,063,081<F1>
<REALIZED-GAINS-CURRENT> 1,048,949<F1>
<APPREC-INCREASE-CURRENT> 7,094,335<F1>
<NET-CHANGE-FROM-OPS> 22,206,365<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2,162,615)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 417,052
<NUMBER-OF-SHARES-REDEEMED> (377,046)
<SHARES-REINVESTED> 70,331
<NET-CHANGE-IN-ASSETS> (3,501,392)
<ACCUMULATED-NII-PRIOR> 317,894<F1>
<ACCUMULATED-GAINS-PRIOR> (4,038,110)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,645,589<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3,238,799<F1>
<AVERAGE-NET-ASSETS> 49,008,901
<PER-SHARE-NAV-BEGIN> 17.484
<PER-SHARE-NII> 0.791
<PER-SHARE-GAIN-APPREC> 0.531
<PER-SHARE-DIVIDEND> (0.775)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.031
<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>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> PA TAX FREE CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS <F1>
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997<F1>
<PERIOD-END> DEC-31-1997<F1>
<INVESTMENTS-AT-COST> 253,178,398<F1>
<INVESTMENTS-AT-VALUE> 278,235,653<F1>
<RECEIVABLES> 4,245,486<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 156,517<F1>
<TOTAL-ASSETS> 282,637,656<F1>
<PAYABLE-FOR-SECURITIES> 2,511,076<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,304,905<F1>
<TOTAL-LIABILITIES> 3,815,981<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,934,644
<SHARES-COMMON-STOCK> 165,221
<SHARES-COMMON-PRIOR> 192,348
<ACCUMULATED-NII-CURRENT> 601,938<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (2,989,161)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 25,057,255<F1>
<NET-ASSETS> 2,979,169
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 17,301,880<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (3,238,799)<F1>
<NET-INVESTMENT-INCOME> 14,063,081<F1>
<REALIZED-GAINS-CURRENT> 1,048,949<F1>
<APPREC-INCREASE-CURRENT> 7,094,335<F1>
<NET-CHANGE-FROM-OPS> 22,206,365<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (132,920)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 31,224
<NUMBER-OF-SHARES-REDEEMED> (63,577)
<SHARES-REINVESTED> 5,226
<NET-CHANGE-IN-ASSETS> (383,404)
<ACCUMULATED-NII-PRIOR> 317,894<F1>
<ACCUMULATED-GAINS-PRIOR> (4,038,110)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,645,589<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3,238,799<F1>
<AVERAGE-NET-ASSETS> 3,010,513
<PER-SHARE-NAV-BEGIN> 17.482
<PER-SHARE-NII> 0.795
<PER-SHARE-GAIN-APPREC> 0.529
<PER-SHARE-DIVIDEND> (0.775)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.031
<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>
