<PAGE> 1
<TABLE>
<S> <C>
Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 4
GROWTH OF A $10,000 INVESTMENT 6
PORTFOLIO AT A GLANCE
CREDIT QUALITY 7
TWELVE-MONTH DIVIDEND HISTORY 7
TOP FIVE HOLDINGS 8
TOP FIVE SECTORS 8
Q&A WITH YOUR PORTFOLIO MANAGERS 9
GLOSSARY OF TERMS 12
BY THE NUMBERS
YOUR FUND'S INVESTMENTS 13
FINANCIAL STATEMENTS 20
NOTES TO FINANCIAL STATEMENTS 26
REPORT OF INDEPENDENT AUDITORS 34
VAN KAMPEN FUNDS
THE VAN KAMPEN FAMILY OF FUNDS 35
FUND OFFICERS AND IMPORTANT ADDRESSES 36
</TABLE>
Apply our generations
of money-
management
experience
to help you
pursue life's
true wealth.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE> 2
OVERVIEW
LETTER TO SHAREHOLDERS
October 20, 2000
Dear Shareholder,
The first three quarters of 2000 proved to be especially volatile, with all of
the major markets declining in the spring and spending the following months
trying to recover. To manage one's portfolio during such unpredictable times
requires investment-management experience, and the following pages should give
you some insight into how we have performed in this difficult environment.
In this report, the portfolio managers will explain how your investment
performed during the reporting period and describe the strategies they used to
manage your fund during that span. The report will also show you how your
investment has performed over time. Helpful charts summarize the fund's largest
investments, and you can examine the complete portfolio to see all of your
fund's holdings as of the end of your fund's reporting period.
At Van Kampen, we place a high priority on providing you and
your financial advisor with the information you need to help
you monitor your investments during all types of markets. With
nearly four generations of investment-management experience,
we've been around long enough to understand that by investing
with Van Kampen you're entrusting us with much more than your money. Your
investments may help make it possible to afford your next house, keep up with
rising college costs, or enjoy a comfortable retirement.
No matter what your reasons for investing, we're thankful that you've chosen to
place your investments with Van Kampen. We will continue to apply our
generations of money-management experience to helping you pursue life's true
wealth.
Sincerely,
[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investments
1
<PAGE> 3
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
ECONOMIC GROWTH WAS STRONG DURING THE REPORTING PERIOD, UNDERPINNED BY LOW
UNEMPLOYMENT AND RISING PRODUCTIVITY, YET THERE WERE SIGNS THAT A HEALTHY
SLOWDOWN WAS UNDERWAY. GROSS DOMESTIC PRODUCT, THE PRIMARY MEASURE OF ECONOMIC
GROWTH, INCREASED AT A 2.7 PERCENT ANNUALIZED RATE FOR THE THIRD QUARTER OF
2000. FOLLOWING MILD FIRST- AND SECOND-QUARTER DATA, THIS THIRD-QUARTER FIGURE
OFFERS FURTHER EVIDENCE THAT GROWTH MIGHT BE SETTLING BACK TO A MORE MODERATE
AND SUSTAINABLE PACE THAN ITS RAPID RATE IN LATE 1999.
CONSUMER SPENDING AND EMPLOYMENT
CONCERNS ABOUT INFLATION REMAINED AT BAY DUE IN PART TO A GRADUAL SLOWDOWN IN
CONSUMER SPENDING. RISING INTEREST RATES, HIGHER ENERGY COSTS, AND A
DISAPPOINTING STOCK MARKET BEGAN TO TEMPER RETAIL SALES, WHICH LEVELED OFF FROM
THE BLISTERING PACE OF LATE 1999 AND EARLY 2000. AND WHILE CONSUMER SPENDING WAS
BRISK, THE OVERALL TREND HAS BEEN DOWNWARD THIS YEAR.
THE JOBLESS RATE CONTINUED TO BE EXTREMELY LOW BY HISTORICAL STANDARDS, BUT
RECENT CUTS IN MANUFACTURING PAYROLLS SUPPORT THE POPULAR BELIEF THAT THE
ECONOMY IS MODERATING. ALTHOUGH EMPLOYER COSTS SUCH AS WAGES AND BENEFITS WERE
RISING AT THE END OF 1999 AND IN THE BEGINNING OF 2000, OVER THE PAST SIX MONTHS
THE EMPLOYMENT COST INDEX HAS SHOWN MARKED DECELERATION, WHICH SHOULD HELP EASE
INFLATION CONCERNS.
INTEREST RATES AND INFLATION
THE FEDERAL RESERVE BOARD (THE FED) RAISED INTEREST RATES FOUR TIMES DURING THE
LAST 12 MONTHS IN AN EFFORT TO WARD OFF INFLATION BY CURBING ECONOMIC GROWTH.
OVER THE SAME PERIOD, THE CONSUMER PRICE INDEX ROSE 3.5 PERCENT, WHICH INDICATED
THAT INFLATION GENERALLY REMAINS UNDER CONTROL.
THE FED HAS ACKNOWLEDGED THE RISK OF RISING INFLATION AND WILL STAY ON GUARD, AS
RISING ENERGY COSTS AND LOW UNEMPLOYMENT THREATEN TO PROPEL THIS FIGURE UPWARD
IN THE COMING MONTHS. AS LONG AS INFLATION IS CONTAINED AND THE PACE OF ECONOMIC
GROWTH REMAINS FAVORABLE, THE FED IS LIKELY TO HOLD INTEREST RATES STEADY IN THE
SHORT TERM, WHICH COULD HELP STABILIZE THE STOCK AND BOND MARKETS.
2
<PAGE> 4
U.S. GROSS DOMESTIC PRODUCT
SEASONALLY ADJUSTED ANNUALIZED RATES
(September 30, 1998--September 30, 2000)
[BAR GRAPH]
<TABLE>
<CAPTION>
U.S. GROSS DOMESTIC PRODUCT
---------------------------
<S> <C>
Sep 98 3.80
Dec 98 5.90
Mar 99 3.50
Jun 99 2.50
Sep 99 5.70
Dec 99 8.30
Mar 00 4.80
Jun 00 5.60
Sep 00 2.70
</TABLE>
Source: Bureau of Economic Analysis
INTEREST RATES AND INFLATION
(September 30, 1998--September 30, 2000)
[LINE GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Sep 98 5.25 1.50
5.00 1.50
4.75 1.50
Dec 98 4.75 1.60
4.75 1.70
4.75 1.60
Mar 99 4.75 1.70
4.75 2.30
4.75 2.10
Jun 99 5.00 2.00
5.00 2.10
5.25 2.30
Sep 99 5.25 2.60
5.25 2.60
5.50 2.60
Dec 99 5.50 2.70
5.50 2.70
5.75 3.20
Mar 00 6.00 3.70
6.00 3.00
6.50 3.10
Jun 00 6.50 3.70
6.50 3.70
6.50 3.30
Sep 00 6.50 3.50
</TABLE>
Interest rates are represented by the closing midline federal funds target rate
on the last day of each month. Inflation is indicated by the annual percent
change of the Consumer Price Index for all urban consumers at the end of each
month.
3
<PAGE> 5
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of September 30, 2000)
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------------------------------------------------------------------------
<S> <C> <C> <C>
One-year total return based on
NAV(1) 4.12% 3.26% 3.26%
-------------------------------------------------------------------------
One-year total return(2) -.83% -.69% 2.27%
-------------------------------------------------------------------------
Five-year average annual total
return(2) 3.81% 3.77% 4.02%
-------------------------------------------------------------------------
Ten-year average annual total
return(2) 6.24% N/A N/A
-------------------------------------------------------------------------
Life-of-Fund average annual total
return(2) 7.11% 4.08%(6) 3.67%
-------------------------------------------------------------------------
Commencement date 05/01/87 05/03/93 08/13/93
-------------------------------------------------------------------------
Distribution rate(3) 4.70% 4.19% 4.19%
-------------------------------------------------------------------------
Taxable-equivalent distribution
rate(4) 7.56% 6.74% 6.74%
-------------------------------------------------------------------------
SEC Yield(5) 4.54% 4.04% 4.04%
-------------------------------------------------------------------------
</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 Class A Shares) or
contingent deferred sales charge ("CDSC"). On purchases of Class A Shares of
$1 million or more, a CDSC of 1% may be imposed on certain redemptions made
within one year of purchase. Returns for Class B Shares are calculated
without the effect of the maximum 4% CDSC charged on certain redemptions
made within one year of purchase and declining thereafter to 0% after the
sixth year. Returns for Class C Shares are calculated without the effect of
the maximum 1% CDSC, charged on certain redemptions made within one year of
purchase. If the sales charge was included, total returns would be lower.
These returns do include Rule 12b-1 fees of up to .25% for Class A Shares
and 1% for Class B and Class C Shares.
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (4.75% for Class A
Shares) or contingent deferred sales charge ("CDSC") for Class B and C
Shares and Rule 12b-1 fee. On purchases of Class A Shares of $1 million or
more, a CDSC of 1% may be imposed on certain redemptions made within one
year of purchase. Returns for Class B Shares are calculated with the effect
of the maximum 4% CDSC charged on certain redemptions made within one year
of purchase and declining thereafter to 0% after the sixth year. Returns for
Class C Shares are calculated with the effect of the maximum 1% CDSC,
charged on certain redemptions made within one year of purchase. The Rule
12b-1 fee for Class A Shares is up to .25% and for Class B and Class C
Shares is 1%.
(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
<PAGE> 6
(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 ended September 30,
2000.
(6) The total return reflects the conversion of Class B Shares into Class A
Shares seven years after the end of the calendar month in which the shares
were purchased. See Footnote 3 in the Notes to Financial Statements for
additional information.
A portion of the interest income may be taxable for those investors subject
to the federal alternative minimum tax (AMT).
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. Please review the Risk/Return Summary
of the Prospectus for further details on investment risks. Fund shares, when
redeemed, may be worth more or less than their original cost. Past
performance is no guarantee of future results. Investment return and net
asset value will fluctuate with market conditions.
The types of securities in which the Fund invests 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.
5
<PAGE> 7
GROWTH OF A $10,000 INVESTMENT
(September 30, 1990--September 30, 2000)
[INVESTMENT PERFORMANCE LINE GRAPH]
<TABLE>
<CAPTION>
PENNSYLVANIA TAX FREE INCOME LEHMAN BROTHERS MUNICIPAL BOND
FUND* INDEX IS AN UNMANAGED,
BROAD-BASED STATISTICAL COMPOSITE
OF MUNICIPAL BONDS.+
---------------------------- ---------------------------------
<S> <C> <C>
9/90 9526 10000
9965 10431
10194 10667
10375 10895
9/91 10817 11318
11125 11698
11303 11733
11713 12179
9/92 11993 12502
12249 12730
12720 13202
13260 13634
9/93 13724 14094
13871 14292
13021 13508
13171 13657
9/94 13271 13751
13078 13553
13982 14511
14129 14862
9/95 14479 15289
15252 15920
14990 15728
15062 15849
9/96 15461 16213
15841 16627
15780 16588
16256 17160
9/97 16748 17677
17202 18157
17395 18366
17641 18644
9/98 18076 19218
18109 19333
18252 19504
17937 19160
9/99 17597 19083
17291 18934
17761 19489
17936 19784
9/00 18322 20262
</TABLE>
Funds's Total Return
1 Year Total Return -0.83%
5 Year Avg. Annual 3.81%
10 Year Avg. Annual 6.24%
Inception Avg. Annual 7.11%
This chart compares your fund's performance to that of the Lehman Brothers
Municipal Bond Index over time.
This index is an unmanaged broad-based, statistical composite that does
not include any commissions or fees that would be paid by an investor
purchasing the securities it represents. Such costs would lower the
performance of this index. The historical performance of the index is
shown for illustrative purposes only; it is not meant to forecast, imply,
or guarantee the future performance of any investment vehicle. It is not
possible to invest directly in an index.
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 Class A shares) and an annual 12b-1 fee of up to 0.25
percent.
While past performance is no guarantee of future results, the above information
provides a broader vantage point from which to evaluate the discussion of the
fund's performance found in the following pages. As a result of recent market
activity, current performance may vary from the figures shown.
Source:
* Hypo(R) Provided by Towers Data, Bethesda, MD
(+) Lehman Brothers
6
<PAGE> 8
PORTFOLIO AT A GLANCE
CREDIT QUALITY
(as a percentage of long-term investments)
<TABLE>
<CAPTION>
As of September 30, 2000
<S> <C> <C>
- AAA/Aaa............ 53.8%
- AA/Aa.............. 8.5%
- A/A................ 7.5%
- BBB/Baa............ 9.7%
- BB/Ba.............. 3.3%
- Non-Rated.......... 17.2%
[PIE CHART]
<CAPTION>
As of September 30, 1999
<S> <C> <C>
- AAA/Aaa............ 50.2%
- AA/Aa.............. 12.2%
- A/A................ 9.6%
- BBB/Baa............ 10.2%
- BB/Ba.............. 1.4%
- Non-Rated.......... 16.4%
[PIE CHART]
</TABLE>
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.
TWELVE-MONTH DIVIDEND HISTORY
(for the period ended September 30, 2000)
[BAR GRAPH]
<TABLE>
<CAPTION>
DIVIDENDS
---------
<S> <C>
10/99 0.0775
11/99 0.0775
12/99 0.0730
1/00 0.0730
2/00 0.0730
3/00 0.0730
4/00 0.0730
5/00 0.0685
6/00 0.0685
7/00 0.0685
8/00 0.0685
9/00 0.0685
</TABLE>
The dividend history represents past performance of the fund's Class A shares
and is no guarantee of the fund's future dividends.
7
<PAGE> 9
TOP FIVE HOLDINGS
(as a percentage of long-term investments--September 30, 2000)
<TABLE>
<S> <C> <C>
Philadelphia, PA Authority Industrial Development Lease
Revenue 4.9%
---------------------------------------------------------------------
Philadelphia, PA 3.0%
---------------------------------------------------------------------
Berks County, PA 3.0%
---------------------------------------------------------------------
Pennsylvania State Higher Education Assistance Agency
Student Loan Revenue 2.5%
---------------------------------------------------------------------
Pennsylvania State Higher Education Facility Authority
Revenue Drexel University 2.5%
---------------------------------------------------------------------
</TABLE>
TOP FIVE SECTORS
(as a percentage of long-term investments)
[BAR GRAPH]
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Public Building 13.8 11.6
Health Care 12.6 14.5
Industrial Revenue 12.6 12.1
Other Care 11.0 11.9
Higher Education 8.6 6.0
</TABLE>
8
<PAGE> 10
[PHOTO]
Q&A WITH YOUR PORTFOLIO MANAGERS
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 AND INFLUENCED THE FUND'S RETURN DURING THE 12 MONTHS ENDED SEPTEMBER
30, 2000. THE TEAM IS LED BY DENNIS PIETRZAK, SENIOR PORTFOLIO MANAGER, WHO HAS
MANAGED THE FUND SINCE 1995 AND HAS WORKED IN THE INVESTMENT INDUSTRY SINCE
1968. THE FOLLOWING DISCUSSION REFLECTS HIS VIEWS ON THE FUND'S PERFORMANCE.
Q HOW WOULD YOU CHARACTERIZE THE
MARKET ENVIRONMENT YOU FACED IN MANAGING THE FUND DURING THE PAST 12 MONTHS,
AND HOW DID THE FUND PERFORM IN THAT ENVIRONMENT?
A The market had its share of
volatility over the past year. The much-dreaded year 2000 transition came and
went without making a significant impact on the markets, other than a bit of
overcautious defensive selling in late 1999 and early 2000.
Short-term interest rates climbed steadily as the Federal Reserve Board
increased key short-term lending rates four times over the past 12 months,
reacting to strong economic growth, rising commodities prices, and a tight labor
market. Rising yields at the short end of the maturity spectrum caused increased
volatility, affecting long-term rates as well as credit spreads across all
fixed-income products.
Long-term municipal bonds were on a bit of a roller-coaster ride, declining
and then rallying twice during the 12-month period, with yields finally settling
at virtually the same level as they began the period. Prices climbed strongly
going into September 2000 but eased off by month's end, as the yield on the
30-year insured municipal bond rose to about 5.85 percent.
One effect of these trading patterns was the widening of the yield spread
between high-rated municipals and lower-rated, higher-yielding municipals. As
investors sensed the market's uncertainty, municipal-bond mutual funds
experienced outflows of investor assets. This meant that demand for
higher-yielding municipal bonds in general was somewhat reduced, so prices in
this segment of the market fell sharply. The fund--which placed more emphasis on
yield compared to similar funds--was hurt by its relatively high concentration
of nonrated and lower-rated bonds.
Supply in the Pennsylvania municipal market has been sharply lower, which
provided some support for prices but made it more challenging to find suitable
investment opportunities for the fund. Issuance of new municipal
9
<PAGE> 11
debt has gone down because the strong economy has allowed municipalities such as
state governments to accumulate sizable budget surpluses, which has reduced the
need to raise money through debt offerings. Also, higher interest rates made it
less attractive for municipalities to refund existing bond issues; instead, they
have been more likely to buy back outstanding debt and retire it from the
marketplace.
For the reporting period, the fund underperformed the benchmark, primarily
because the portfolio had a higher allocation of nonrated or lower-rated
securities than similar funds. While these securities provided a higher yield,
they were also more vulnerable to price declines during market volatility.
As of September 30, 2000, the fund achieved a 12-month total return of 4.12
percent (Class A shares at net asset value; if the maximum sales charge of 4.75
percent were included, the return would be lower). Of course, past performance
is no guarantee of future results. As a result of recent market activity,
current performance may vary from the figures shown. By comparison, the Lehman
Brothers Municipal Bond Index produced a total return of 6.17 percent for the
same period. Another commonly used index, the Lehman Brothers Pennsylvania
Municipal Bond Index (maturities greater than 5 years), produced a total return
of 5.45 percent for the same period. These indexes are unmanaged, broad-based
statistical composites of municipal bonds that do not include any commissions or
sales charges that would be paid by an investor purchasing the securities they
represent. Such costs would lower the performance of the indexes. It is not
possible to invest directly in an index. Please refer to the footnotes and chart
on page 4 for additional fund performance results.
The fund's dividend was reduced twice during the period. Even though the
fund's monthly tax exempt dividend was decreased to $.0685 from $.0775 per Class
A share over the past 12 months, its distribution rate stood at 4.70 percent at
the end of the reporting period. With this in mind, we'd like to point out that
investors would have to earn a distribution rate of 7.56 percent on a taxable
investment (for an investor in the 37.8 percent combined federal and state
income tax bracket) to match the tax-exempt yield provided by the fund.
Q HOW DID THESE FACTORS AFFECT THE
WAY YOU MANAGED THE PORTFOLIO?
A Because of the low supply of bonds
entering the primary market, we were more active in the secondary market. For
example, early in 2000 the market's pessimistic tone created opportunities to
buy deeply discounted bonds that had become oversold. We were able to pick up
some good values in this segment of the market.
In response to widening credit spreads, we reduced the fund's exposure to
nonrated securities to less than 18 percent of the portfolio, and increased its
allocation to higher-grade municipal bonds, improving the overall credit quality
of the portfolio. The prices of high-quality bonds are typically less vulnerable
to market volatility than those of lower-rated bonds. As of September 30, 2000,
we
10
<PAGE> 12
had increased the fund's high-quality, AAA rated holdings to roughly 54 percent
of the portfolio, up from 50 percent at the start of the 12-month reporting
period.
Other changes revolved around our decision to align the portfolio's duration
more closely with another industry benchmark, the Lehman Brothers Pennsylvania
Municipal Bond Index. Consequently, the fund's average adjusted duration was
reduced to 7.96 years, down from its duration of 8.36 years as of September 30,
1999, which should help make the fund less sensitive to interest-rate changes.
Q WHICH SECTORS OF THE
MARKET WERE YOU MOST CONCERNED ABOUT?
A There was no particular concern
about specific market sectors, but we did keep our eye on the health-care
sector. This market segment has struggled, which is reflected in declining
prices, so we were careful to protect the portfolio from excessive exposure to
this sector. By the end of the reporting period, we had reduced the fund's
holdings in health care to approximately 12 percent of the portfolio, down from
roughly 14 percent at the start of the period.
Q WHAT IS YOUR OUTLOOK FOR THE
MUNICIPAL MARKET?
A Because the level of interest rates
has such an influence on the value of municipal bonds, the market will be
carefully watching the actions of the Federal Reserve Board. It appears that
economic growth may be moderating, making it less likely that the Fed will
increase rates again in the very near future. In fact, some market-watchers are
expecting the Fed to decrease rates by the end of the year. In light of the
current market conditions, we will remain neutral with respect to our
interest-rate outlook.
It appears that the Pennsylvania economy will continue to be robust in
select areas, keeping state finances solid. Demand for the state's municipal
bonds should remain stable, as Pennsylvania is a high-tax state. We anticipate
that total bond issuance may pick up toward year-end. We will continue to look
for opportunities to increase the credit quality of the portfolio, possibly
allocating more assets to the higher-grade sector of the market.
Going forward, we will continue to rely on our strong research capabilities,
seeking to achieve the fund's investment objective over the long term.
11
<PAGE> 13
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as Treasury securities) and lower-quality issues.
Normally, lower-quality issues provide higher yields to compensate investors for
the additional credit risk.
DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has more
potential to appreciate in price than a par bond does.
DURATION: A measure of the sensitivity of a bond's price to changes in interest
rates, expressed in years. Each year of duration represents an expected 1
percent change in the price of a bond for every 1 percent change in interest
rates. The longer a bond's duration, the greater the effect of interest-rate
movements on its price. Typically, funds with shorter durations perform better
in rising-rate environments, while funds with longer durations perform better
when rates decline.
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank of the United States. Its policy-making
committee, called the Federal Open Market Committee, meets at least eight times
a year to establish monetary policy and monitor the economic pulse of the United
States.
MUNICIPAL BOND: A debt security issued by a state, municipality, or other state
or local government entity to finance capital expenditures of public projects,
such as the construction of highways, public works, or school buildings.
Interest on public-purpose municipal bonds is exempt from federal income taxes
and, in some states, from state and local income taxes.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from the total assets in its portfolio and dividing this
amount by the number of shares outstanding. The NAV does not include any initial
or contingent deferred sales charge.
SECONDARY MARKET: A market where securities are traded after they are initially
offered.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower credit ratings.
The spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and
lower-quality bonds.
12
<PAGE> 14
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
September 30, 2000
THE FOLLOWING PAGES DETAIL YOUR FUND'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 97.8%
PENNSYLVANIA 97.3%
$1,260 Allegheny Cnty, PA Arpt Auth Pittsburgh Intl
Arpt Rfdg (FGIC Insd)....................... 5.625% 01/01/10 $ 1,306,796
3,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh
Intl Arpt Ser B (FSA Insd).................. 6.625 01/01/22 3,616,690
1,625 Allegheny Cnty, PA C-34 Conv Cap Apprec..... 8.625 02/15/04 1,825,655
5,000 Allegheny Cnty, PA Ctfs Partn (AMBAC
Insd)....................................... 5.000 12/01/24 4,486,100
1,750 Allegheny Cnty, PA Higher Ed Bldg Auth Univ
Rev (AMBAC Insd)............................ 5.500 03/01/20 1,746,815
1,000 Allegheny Cnty, PA Higher Edl Bldg Auth Univ
Rev Duquesne Univ Proj (AMBAC Insd)......... 6.500 03/01/11 1,121,940
1,000 Allegheny Cnty, PA Hosp Dev Hlthcare Fac
Villa St Joseph............................. 5.875 08/15/18 838,310
2,140 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth
Fac Allegheny Vly Sch....................... 7.750 02/01/15 2,415,225
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp
Saint Francis Med Cent Proj................. 5.500 05/15/06 889,610
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp
Saint Francis Med Cent Proj................. 5.500 05/15/07 869,940
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp
Saint Francis Med Cent Proj................. 5.600 05/15/08 856,110
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp
Saint Francis Med Cent Proj................. 5.750 05/15/09 846,620
1,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hosp
Saint Francis Med Cent Proj................. 5.750 05/15/10 829,010
2,000 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth
Sys Ser A (MBIA Insd)....................... 6.500 11/15/30 2,110,720
875 Allegheny Cnty, PA Indl Dev Auth Med Cent
Rev Presbyterian Med Cent Rfdg (FHA Gtd).... 6.750 02/01/26 923,283
2,500 Allegheny Cnty, PA Indl Dev Auth Rev
Environmental Impt Ser A Rfdg............... 6.700 12/01/20 2,546,775
1,000 Allegheny Cnty, PA Industrial Dev Auth Lease
Rev......................................... 6.625 09/01/24 911,530
1,945 Allegheny Cnty, PA Res Mtg Fin Auth Rev
Single Family Ser Z (GNMA Collateralized)... 6.875 05/01/26 1,994,773
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
YOUR FUND'S INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$6,000 Berks Cnty, PA (Inverse Fltg) (FGIC Insd)... 8.382% 11/10/20 $ 6,630,000
2,000 Berks Cnty, PA Muni Auth Rev Highlands at
Wyomissing Proj B........................... 6.875 10/01/17 2,025,840
885 Berks Cnty, PA Muni Auth Rev Phoebe Berks
Vlg Inc Proj Rfdg (Prerefunded @
05/15/06)................................... 7.500 05/15/13 1,024,600
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks
Vlg Inc Proj Rfdg (Prerefunded @
05/15/06)................................... 7.700 05/15/22 1,152,810
2,000 Berks Cnty, PA Muni Auth Rev Phoebe Devitt
Homes Proj A1 Rfdg.......................... 5.500 05/15/15 1,739,480
2,750 Bradford Cnty, PA Indl Dev Auth Solid Waste
Disp Rev Intl Paper Co Proj A............... 6.600 03/01/19 2,791,387
1,100 Bucks Cnty, PA Indl Dev Auth Rev First Mtg
Hlth Care Fac Chandler...................... 6.100 05/01/14 990,143
1,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl
Rev Bethlehem Steel Corp Proj Rfdg.......... 7.500 09/01/15 1,008,680
1,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth
Sys Rev (AMBAC Insd)........................ 5.650 05/15/20 979,040
1,880 Chester Cnty, PA Hlth & Edl The Chester Cnty
Hosp (MBIA Insd)............................ 5.625 07/01/08 1,962,194
760 Chichester Sch Dist PA Ser 1989 (MBIA
Insd)....................................... * 06/01/01 737,033
860 Chichester Sch Dist PA Ser 1989 (MBIA
Insd)....................................... * 06/01/02 795,328
1,250 Crawford Cnty, PA Hosp Auth Sr Living Fac
Rev......................................... 6.125 08/15/19 1,137,475
2,000 Dauphin Cnty, PA Genl Auth Rev Hotel & Conf
Cent Hyatt Regency.......................... 6.200 01/01/29 1,797,120
1,500 Dauphin Cnty, PA Genl Auth Rev Office & Pkg
Riverfront Office........................... 6.000 01/01/25 1,411,500
2,110 Delaware Cnty, PA Auth Univ Rev Villanova
Univ Ser A (MBIA Insd)...................... 5.500 12/01/11 2,203,916
1,240 Delaware Cnty, PA Auth College Cabrini
College..................................... 5.750 07/01/23 1,225,145
500 Delaware Cnty, PA Auth Rev First Mtg Riddle
Vlg Proj Rfdg............................... 6.200 06/01/05 501,260
3,000 Delaware Cnty, PA Auth Rev First Mtg Riddle
Vlg Proj Rfdg............................... 7.000 06/01/26 2,916,150
1,500 East Whiteland Twp, PA Ser A (FSA Insd)..... 5.250 09/01/25 1,413,540
2,000 Erie Cnty, PA Hosp Auth Rev Saint Vincent
Hlth Cent Proj Ser A (MBIA Insd)............ 6.375 07/01/22 2,046,540
3,000 Geisinger, PA Auth Hlth Sys PA St Geisinger
Hlth Sys Ser A.............................. 5.000 08/15/28 2,566,890
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
YOUR FUND'S INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 790 Grove City, PA Area Hosp Auth Hlth Fac Rev
Grove Manor Proj............................ 6.625% 08/15/29 $ 705,352
1,000 Harrisburg, PA Auth Office & Pkg Rev Ser
A........................................... 6.000 05/01/19 929,140
3,000 Harrisburg, PA Auth Rev Pooled Univ Pgm Ser
11 (MBIA Insd).............................. 5.625 09/15/17 3,022,230
1,865 Harveys Lake Gen Muni Auth PA College Rev
College Misericordia Proj (ACA Insd)........ 5.750 05/01/14 1,870,781
740 Hazleton, PA Hlth Svcs Auth Hosp Rev........ 5.500 07/01/07 716,749
650 Hazleton, PA Hlth Svcs Auth Saint Joseph Med
Cent Rfdg................................... 5.850 07/01/06 644,436
1,000 Lancaster Cnty, PA Hosp Auth Rev Hlth Cent
Saint Annes Home............................ 6.600 04/01/24 895,700
2,000 Lehigh Cnty, PA Genl Purp Auth Cedar Crest
College Rfdg................................ 6.700 04/01/26 2,037,340
1,000 Lehigh Cnty, PA Genl Purp Auth Rev First Mtg
Bible Fellowship Proj A..................... 6.000 12/15/23 837,990
1,760 Lehigh Cnty, PA Genl Purp Auth Rev Kidspeace
Oblig Group................................. 6.000 11/01/23 1,448,955
1,085 Lehigh Cnty, PA Indl Dev Auth Hlth Fac Rev
Lifepath Inc Proj........................... 6.300 06/01/28 895,017
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 1,044,010
2,000 Lycoming Cnty, PA Auth Hosp Lease Rev Divine
Providence Sisters Ser A.................... 6.500 07/01/22 2,042,340
2,000 McGuffey Sch Dist PA Ser B (AMBAC Insd)..... 4.750 08/01/28 1,691,340
2,000 McKeesport, PA Area Sch Dist Cap Apprec..... * 10/01/15 870,640
1,250 McKeesport, PA Area Sch Dist Cap Apprec Ser
A........................................... * 10/01/13 621,150
3,630 McKeesport, PA Area Sch Dist Cap Apprec Ser
C........................................... * 10/01/22 1,001,154
750 McKeesport, PA Indl Dev Auth Rev The Kroger
Corp Allegheny Cnty Rfdg.................... 8.650 06/01/11 779,700
795 Middletown Borough Auth PA Swr & Wtr Rev Cap
Apprec Ser B (FSA Gtd)...................... * 01/01/18 296,909
1,000 Montgomery Cnty, PA Higher Edl & Hlth Auth
Rev......................................... 6.625 07/01/19 890,010
2,000 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev................................... 6.300 01/01/13 1,856,320
2,250 Montgomery Cnty, PA Indl Dev Auth Retirement
Cmnty Rev Adult Cmntys Total Svcs Ser B..... 5.625 11/15/12 2,167,537
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
YOUR FUND'S INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$3,000 Montgomery Cnty, PA Indl Dev Auth Rev Res
Recov (LOC -Banque Paribas)................. 7.500% 01/01/12 $ 3,082,080
975 Montgomery Cnty, PA Indl Dev Auth Rev
Wordsworth Academy.......................... 7.750 09/01/24 993,408
800 North Penn, PA Wtr Auth Rev (FGIC Insd)..... 6.200 11/01/22 815,552
1,000 North Penn, PA Wtr Auth Rev (Prerefunded @
11/01/04) (FGIC Insd)....................... 6.875 11/01/19 1,093,730
2,500 Northampton Cnty, PA Indl Dev Auth Rev
Pollutn Ctl Bethlehem Steel Rfdg............ 7.550 06/01/17 2,523,400
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 1,078,790
2,149 Oil City, PA Towne Tower Proj (FHA Gtd)..... 6.750 05/01/20 2,175,887
1,500 Penn Cambria Sch Dist PA Cap Apprec......... * 08/15/21 444,615
1,500 Penn Cambria Sch Dist PA Cap Apprec......... * 08/15/22 416,805
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery
Rev Colver Proj Ser D....................... 7.050 12/01/10 3,071,730
1,500 Pennsylvania Econ Dev Fin Auth Res Recovery
Rev Colver Proj Ser D....................... 7.125 12/01/15 1,539,120
5,000 Pennsylvania Econ Dev Fin Auth Res Recovery
Rev Northampton Generating Ser A............ 6.600 01/01/19 4,875,250
4,000 Pennsylvania Hsg Fin Agy (Inverse Fltg)..... 9.305 10/03/23 4,245,000
1,000 Pennsylvania Hsg Fin Agy Rental Hsg Rfdg
(FNMA Collateralized)....................... 6.500 07/01/23 1,034,430
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg
Ser 40...................................... 6.900 04/01/25 1,047,380
2,455 Pennsylvania Hsg Fin Agy Single Family Mtg
Ser 42...................................... 6.850 04/01/25 2,560,418
850 Pennsylvania Infrastructure Invt Auth Rev
Pennvest Subser B (Prerefunded @
09/01/02)................................... 6.800 09/01/10 901,714
1,150 Pennsylvania St Second Ser.................. 5.000 08/01/18 1,070,857
4,000 Pennsylvania St Ctfs Partn (FSA Insd)....... 6.250 05/01/16 4,140,280
4,700 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Rfdg (Inverse Fltg) (AMBAC
Insd)....................................... 8.963 09/01/26 5,604,750
2,500 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser B (Inverse Fltg) (MBIA
Insd)....................................... 10.341 03/01/20 2,968,750
4,000 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser C (AMBAC Insd)........... 6.400 03/01/22 4,103,000
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
YOUR FUND'S INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,200 Pennsylvania St Higher Edl Fac Auth College
& Univ Rev Bryn Mawr College (MBIA Insd).... 5.625% 12/01/27 $ 1,187,532
5,400 Pennsylvania St Higher Edl Fac Auth Rev
Drexel Univ Rfdg............................ 6.375 05/01/17 5,574,690
1,200 Pennsylvania St Tpk Commn Oil Franchise Tax
Rev (AMBAC Insd)............................ 4.750 12/01/27 1,017,048
7,500 Philadelphia, PA (FSA Insd)................. 5.000 03/15/28 6,670,200
2,505 Philadelphia, PA Auth for Indl Dev Rev Coml
Dev RMK Rfdg................................ 7.750 12/01/17 2,642,224
600 Philadelphia, PA Auth for Indl Dev Rev First
Mtg Crime Prevention Assn................... 6.125 04/01/19 550,350
1,000 Philadelphia, PA Auth Indl Dev Hlthcare Fac
Rev Baptist Home of Philadelphia Ser A...... 5.600 11/15/28 789,140
11,565 Philadelphia, PA Auth Indl Dev Lease Rev Ser
A (MBIA Insd)............................... 5.375 02/15/27 10,955,062
4,760 Philadelphia, PA Gas Wks Rev Second Ser (FSA
Insd)....................................... 5.000 07/01/29 4,220,787
3,000 Philadelphia, PA Gas Wks Rev Ser 14 Rfdg
(FSA Insd).................................. 6.250 07/01/08 3,166,590
760 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev......................................... 6.300 07/01/14 714,035
985 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev......................................... 6.400 07/01/17 896,409
450 Philadelphia, PA Hosps & Higher Edl Fac Auth
Rev......................................... 6.500 07/01/21 405,563
2,000 Philadelphia, PA Hosps & Higher Edl Fac Auth
Hosp Rev Chestnut Hill Hosp................. 6.500 11/15/22 2,510,620
1,500 Philadelphia, PA Muni Auth Rev Muni Svcs
Bldg Lease Cap Apprec (FSA Insd)............ * 03/15/08 1,034,670
3,750 Philadelphia, PA Muni Auth Rev Muni Svcs
Bldg Lease Cap Apprec (FSA Insd)............ * 03/15/11 2,180,662
3,775 Philadelphia, PA Muni Auth Rev Muni Svcs
Bldg Lease Cap Apprec (FSA Insd)............ * 03/15/12 2,061,188
4,500 Philadelphia, PA Muni Auth Rev Muni Svcs
Bldg Lease Cap Apprec (FSA Insd)............ * 03/15/13 2,302,605
2,000 Philadelphia, PA Parking Auth Rev Arpt...... 5.250 09/01/22 1,891,640
2,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg
(MBIA Insd)................................. 5.625 06/15/08 2,097,920
3,500 Philadelphia, PA Wtr & Wastewtr Rev Ser A... 5.125 08/01/27 3,182,830
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
YOUR FUND'S INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$1,500 Pittsburgh & Allegheny Cnty, PA Pub
Auditorium Auth Reg Asset Dist Sales Tax Rev
(AMBAC Insd)................................ 5.250% 02/01/31 $ 1,393,815
1,470 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser
C1.......................................... 6.800 10/01/25 1,501,311
1,475 Pittsburgh, PA Urban Redev Auth Mtg Rev Ser
D........................................... 6.250 10/01/17 1,494,352
2,825 Pittsburgh, PA Wtr & Swr Auth Wtr & Swr Sys
Rev (FGIC Insd)............................. * 09/01/28 545,112
4,250 Pottsville, PA Hosps Auth Rev Pottsville
Hosp (ACA Insd)............................. 5.500 07/01/18 3,921,262
1,000 Scranton-Lackawanna, PA Hlth & Welfare Auth
Rev Marian Cmnty Hosp Proj Rfdg............. 7.125 01/15/13 941,440
1,750 Southeastern PA Transn Auth PA Spl Rev Ser A
(FGIC Insd)................................. 4.750 03/01/29 1,477,333
1,210 State Pub Sch Bldg Auth PA College Rev
Montgomery Cnty Cmnty College Rfdg.......... 5.500 05/01/13 1,252,786
1,275 State Pub Sch Bldg Auth PA College Rev
Montgomery Cnty Cmnty College Rfdg.......... 5.500 05/01/14 1,315,022
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 2,341,516
2,000 Sto-Rox Sch Dist PA (MBIA Insd)............. 5.800 06/15/30 2,015,900
1,750 West Mifflin, PA San Sewer Muni Auth Sewer
Rev (MBIA Insd)............................. 5.000 08/01/28 1,563,590
3,000 Westmoreland Cnty, PA Muni Auth Muni Svc Rev
Ser A (MBIA Insd)........................... * 08/15/22 833,610
------------
222,892,533
------------
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
YOUR FUND'S INVESTMENTS
September 30, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
GUAM 0.5%
$1,000 Guam Arpt Auth Rev Ser B.................... 6.700% 10/01/23 $ 1,036,290
------------
TOTAL LONG-TERM INVESTMENTS 97.8%
(Cost $218,815,229).................................................... 223,928,823
SHORT-TERM INVESTMENTS 0.8%
(Cost $1,850,000)...................................................... 1,850,000
------------
TOTAL INVESTMENTS 98.6%
(Cost $220,665,229).................................................... 225,778,823
OTHER ASSETS IN EXCESS OF LIABILITIES 1.4%.............................. 3,214,749
------------
NET ASSETS 100.0%....................................................... $228,993,572
============
</TABLE>
* Zero coupon bond
ACA--American Capital Access
AMBAC--AMBAC Indemnity Corporation
FGIC--Financial Guaranty Insurance Company
FHA--Federal Housing Administration
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
LOC--Letter of Credit
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
19
<PAGE> 21
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
September 30, 2000
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $220,665,229)....................... $225,778,823
Cash........................................................ 56,523
Receivables:
Interest.................................................. 3,275,616
Investments Sold.......................................... 1,045,000
Fund Shares Sold.......................................... 150,913
Other....................................................... 21,771
------------
Total Assets............................................ 230,328,646
------------
LIABILITIES:
Payables:
Income Distributions...................................... 401,360
Fund Shares Repurchased................................... 283,157
Distributor and Affiliates................................ 130,379
Investment Advisory Fee................................... 113,870
Shareholders Reports...................................... 94,700
Trustees' Deferred Compensation and Retirement Plans........ 243,166
Accrued Expenses............................................ 68,442
------------
Total Liabilities....................................... 1,335,074
------------
NET ASSETS.................................................. $228,993,572
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $228,116,212
Net Unrealized Appreciation................................. 5,113,594
Accumulated Distributions in Excess of Net Investment
Income.................................................... (324,045)
Accumulated Net Realized Loss............................... (3,912,189)
------------
NET ASSETS.................................................. $228,993,572
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $200,491,696 and 12,041,676 shares of
beneficial interest issued and outstanding)............. $ 16.65
Maximum sales charge (4.75%* of offering price)......... .83
------------
Maximum offering price to public........................ $ 17.48
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $25,346,723 and 1,523,901 shares of
beneficial interest issued and outstanding)............. $ 16.63
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,155,153 and 189,730 shares of
beneficial interest issued and outstanding)............. $ 16.63
============
</TABLE>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
20
<PAGE> 22
Statement of Operations
For the Year Ended September 30, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $15,131,167
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,436,605
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $487,814, $400,703, and $37,113,
respectively)............................................. 925,630
Shareholder Services........................................ 185,127
Trustees' Fees and Related Expenses......................... 90,514
Custody..................................................... 45,578
Legal....................................................... 33,764
Other....................................................... 265,549
-----------
Total Expenses............................................ 2,982,767
Less Credits Earned on Cash Balances...................... 28,358
-----------
Net Expenses.............................................. 2,954,409
-----------
NET INVESTMENT INCOME....................................... $12,176,758
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $(2,115,039)
Futures................................................... (532,565)
-----------
Net Realized Loss........................................... (2,647,604)
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 5,946,903
End of the Period:
Investments............................................. 5,113,594
-----------
Net Unrealized Depreciation During the Period............... (833,309)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(3,480,913)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 8,695,845
===========
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
Statement of Changes in Net Assets
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
---------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................ $ 12,176,758 $ 13,273,667
Net Realized Loss................................ (2,647,604) (541,106)
Net Unrealized Depreciation...................... (833,309) (20,109,820)
------------ ------------
Change in Net Assets from Operations............. 8,695,845 (7,377,259)
------------ ------------
Distributions from Net Investment Income......... (12,176,758) (13,631,681)
Distribution in Excess of Net Investment
Income......................................... (111,745) (209,849)
------------ ------------
Distributions from and in Excess of Net
Investment Income*............................. (12,288,503) (13,841,530)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES..................................... (3,592,658) (21,218,789)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................ 28,762,933 28,127,546
Net Asset Value of Shares Issued Through Dividend
Reinvestment................................... 6,887,936 8,024,149
Cost of Shares Repurchased....................... (63,758,778) (30,301,078)
------------ ------------
CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS... (28,107,909) 5,850,617
------------ ------------
TOTAL DECREASE IN NET ASSETS..................... (31,700,567) (15,368,172)
NET ASSETS:
Beginning of the Period.......................... 260,694,139 276,062,311
------------ ------------
End of the Period (Including accumulated
distributions in excess of net investment
income of $324,045 and $209,849,
respectively).................................. $228,993,572 $260,694,139
============ ============
* Distributions by Class:
-------------------------------------------------
Distributions from and in Excess of Net
Investment Income:
Class A Shares................................. $(10,298,067) $(11,244,939)
Class B Shares................................. (1,822,457) (2,416,231)
Class C Shares................................. (167,979) (180,360)
------------ ------------
$(12,288,503) $(13,841,530)
============ ============
</TABLE>
See Notes to Financial Statements
22
<PAGE> 24
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
NINE
CLASS A SHARES YEAR ENDED MONTHS
SEPT. 30, ENDED YEAR ENDED DECEMBER 31,
--------------- SEPT. 30, ------------------------
2000 1999 1998 1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF THE
PERIOD......................... $16.86 $18.24 $18.04 $17.49 $17.74 $16.08
------ ------ ------ ------ ------ ------
Net Investment Income.......... .85 .89 .68 .93 .92 .95
Net Realized and Unrealized
Gain/Loss.................... (.20) (1.34) .22 .53 (.26) 1.66
------ ------ ------ ------ ------ ------
Total from Investment
Operations..................... .65 (.45) .90 1.46 .66 2.61
Less Distributions from and in
Excess of Net Investment
Income......................... .86 .93 .70 .91 .90 .95
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE
PERIOD......................... $16.65 $16.86 $18.24 $18.04 $17.49 $17.74
====== ====== ====== ====== ====== ======
Total Return* (a)................ 4.12% -2.65% 5.08%** 8.59% 3.86% 16.62%
Net Assets at End of the Period
(In millions).................. $200.5 $205.4 $219.3 $223.9 $227.4 $226.7
Ratio of Expenses to Average Net
Assets* (b).................... 1.09% 1.04% 1.03% 1.04% 1.09% 1.00%
Ratio of Net Investment Income to
Average Net Assets* (b)........ 5.19% 5.03% 5.06% 5.27% 5.32% 5.57%
Portfolio Turnover............... 18% 53% 29%** 46% 57% 28%
* 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 N/A N/A 1.09% 1.14%
Ratio of Net Investment Income to
Average Net Assets............. N/A N/A N/A N/A 5.31% 5.42%
</TABLE>
** Non-Annualized
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge ("CDSC"). On purchases of $1 million or more, a CDSC of 1% may
be imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on overnight cash balances. If these credits were reflected as a reduction
of expenses, the ratios would decrease by .01% for the year ended September
30, 2000 and 1999.
N/A = Not Applicable
See Notes to Financial Statements
23
<PAGE> 25
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
NINE
CLASS B SHARES YEAR ENDED MONTHS
SEPT. 30, ENDED YEAR ENDED DECEMBER 31,
--------------- SEPT. 30, -------------------------
2000 1999 1998 1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
THE PERIOD.................... $16.85 $18.23 $18.03 $17.48 $17.73 $ 16.08
------ ------ ------ ------ ------ -------
Net Investment Income......... .70 .76 .58 .79 .79 .82
Net Realized and Unrealized
Gain/Loss................... (.18) (1.34) .22 .53 (.26) 1.66
------ ------ ------ ------ ------ -------
Total from Investment
Operations.................... .52 (.58) .80 1.32 .52 2.48
Less Distributions from and in
Excess of Net Investment
Income........................ .74 .80 .60 .78 .77 .83
------ ------ ------ ------ ------ -------
NET ASSET VALUE, END OF THE
PERIOD........................ $16.63 $16.85 $18.23 $18.03 $17.48 $ 17.73
====== ====== ====== ====== ====== =======
Total Return* (a)............... 3.26% -3.37% 4.51%** 7.78% 3.07% 15.72%
Net Assets at End of the Period
(In millions)................. $ 25.3 $ 50.9 $ 53.5 $ 51.9 $ 48.4 $ 46.8
Ratio of Expenses to Average Net
Assets* (b)................... 1.83% 1.80% 1.79% 1.79% 1.85% 1.75%
Ratio of Net Investment Income
to Average Net Assets* (b).... 4.46% 4.28% 4.28% 4.51% 4.56% 4.81%
Portfolio Turnover.............. 18% 53% 29%** 46% 57% 28%
* 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 N/A N/A 1.85% 1.89%
Ratio of Net Investment Income
to Average Net Assets......... N/A N/A N/A N/A 4.55% 4.66%
</TABLE>
** Non-Annualized
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 4%, charged on certain redemptions
made within one year of purchase and declining to 0% after the sixth year.
If the sales charge was included, total returns would be lower.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on overnight cash balances. If these credits were reflected as a reduction
of expenses, the ratios would decrease by .01% for the year ended September
30, 2000 and 1999.
N/A = Not Applicable
See Notes to Financial Statements
24
<PAGE> 26
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
NINE
CLASS C SHARES YEAR ENDED MONTHS
SEPT. 30, ENDED YEAR ENDED DECEMBER 31,
--------------- SEPT. 30, ------------------------
2000 1999 1998 1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
THE PERIOD................... $16.85 $18.23 $18.03 $17.48 $17.73 $16.08
------ ------ ------ ------ ------ ------
Net Investment Income........ .72 .76 .58 .80 .79 .81
Net Realized and Unrealized
Gain/Loss.................. (.20) (1.34) .22 .53 (.26) 1.67
------ ------ ------ ------ ------ ------
Total from Investment
Operations................... .052 (.58) .80 1.32 .52 2.48
Less Distributions from and in
Excess of Net Investment
Income....................... .74 .80 .60 .78 .77 .83
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE
PERIOD....................... $16.63 $16.85 $18.23 $18.03 $17.48 $17.73
====== ====== ====== ====== ====== ======
Total Return* (a).............. 3.26% -3.37% 4.51%** 7.78% 3.08% 5.72%
Net Assets at End of the Period
(In millions)................ $ 3.2 $ 4.3 $ 3.3 $ 3.0 $ 3.4 $ 3.4
Ratio of Expenses to Average
Net Assets* (b).............. 1.84% 1.79% 1.79% 1.79% 1.85% 1.75%
Ratio of Net Investment Income
to Average Net Assets* (b)... 4.45% 4.27% 4.29% 4.52% 4.56% 4.76%
Portfolio Turnover............. 18% 53% 29%** 46% 57% 2.8%
* 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 N/A N/A 1.85% 1.90%
Ratio of Net Investment Income
to Average Net Assets........ N/A N/A N/A N/A 4.55% 4.61%
</TABLE>
** Non-Annualized
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower.
(b) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on overnight cash balances. If these credits were reflected as a reduction
of expenses, the ratios would decrease by .01% for the year ended September
30, 2000 and 1999.
N/A = Not Applicable
See Notes to Financial Statements
25
<PAGE> 27
NOTES TO
FINANCIAL STATEMENTS
September 30, 2000
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 only 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 3,
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 accounting principles
generally accepted in the United States of America 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 Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services are valued at fair value
using 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, which approximates market value.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when-issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when-issued or delayed delivery
purchase commitments until payment is made. At September 30, 2000, there were no
when-issued or delayed delivery purchase commitments.
26
<PAGE> 28
NOTES TO
FINANCIAL STATEMENTS
September 30, 2000
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis. Bond
premiums are amortized and original issue discounts are accreted over the
expected life of each applicable security. Income and expenses of the Fund are
allocated on a pro rata basis to each class 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, 2000, the Fund had an accumulated capital loss carryforward for
tax purposes of $1,353,745 which will expire between September 30, 2003 and
September 30, 2008. Net realized gains or losses may differ for financial
reporting and tax purposes primarily as a result of post October losses which
may not be recognized for tax purposes until the first day of the following
fiscal year.
At September 30, 2000, for federal income tax purposes, the cost of long-
and short-term investments is $220,665,229; the aggregate gross unrealized
appreciation is $8,842,511 and the aggregate gross unrealized depreciation is
$3,728,917, resulting in net unrealized appreciation on long- and short-term
investments of $5,113,594.
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
Due to inherent differences in the recognition of certain expenses under
generally accepted accounting principles and federal income tax purposes, the
amount of distributed net investment income may differ for a particular period.
These differences are temporary in nature, but may result in book basis
distribution in excess of net investment income for certain periods. Permanent
differences between financial and tax basis reporting for the 2000 fiscal year
have been identified and appropriately reclassified. A permanent difference
relating to market discount totaling $2,451 has been reclassified from
accumulated net realized gain to accumulated net investment income.
F. EXPENSE REDUCTIONS During the year ended September 30, 2000, the Fund's
custody fee was reduced by $28,358 as a result of credits earned on overnight
cash balances.
27
<PAGE> 29
NOTES TO
FINANCIAL STATEMENTS
September 30, 2000
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 DAILY NET ASSETS % PER ANNUM
<S> <C>
First $500 million.......................................... .600 of 1%
Over $500 million........................................... .500 of 1%
</TABLE>
For the year ended September 30, 2000, the Fund recognized expenses of
approximately $9,700 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 September 30, 2000, the Fund recognized expenses of
approximately $55,000 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., an affiliate of the Adviser, serves as
the shareholder servicing agent for the Fund. For the year ended September 30,
2000, the Fund recognized expenses of approximately $129,600. 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.
28
<PAGE> 30
NOTES TO
FINANCIAL STATEMENTS
September 30, 2000
3. CAPITAL TRANSACTIONS
At September 30, 2000, capital aggregated $195,716,772, $28,906,353 and
$3,493,087 for Classes A, B and C, respectively. For the year ended September
30, 2000, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Sales:
Class A................................................. 1,524,573 $ 24,763,709
Class B................................................. 201,099 3,312,729
Class C................................................. 41,610 686,495
---------- ------------
Total Sales............................................... 1,767,282 $ 28,762,933
========== ============
Dividend Reinvestment:
Class A................................................. 349,015 $ 5,745,371
Class B................................................. 63,137 1,036,649
Class C................................................. 6,445 105,916
---------- ------------
Total Dividend Reinvestment............................... 418,597 $ 6,887,936
========== ============
Repurchases:
Class A................................................. (2,018,717) $(33,249,107)
Class B................................................. (1,764,054) (28,669,511)
Class C................................................. (112,446) (1,840,160)
---------- ------------
Total Repurchases......................................... (3,895,217) $(63,758,778)
========== ============
</TABLE>
29
<PAGE> 31
NOTES TO
FINANCIAL STATEMENTS
September 30, 2000
At September 30, 1999, capital aggregated $198,456,799, $53,226,486 and
$4,540,836 for Classes A, B and C, respectively. For the year ended September
30, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Sales:
Class A................................................. 1,013,797 $ 17,885,630
Class B................................................. 442,312 7,880,964
Class C................................................. 132,516 2,360,952
---------- ------------
Total Sales............................................... 1,588,625 $ 28,127,546
========== ============
Dividend Reinvestment:
Class A................................................. 366,668 $ 6,492,879
Class B................................................. 80,232 1,419,058
Class C................................................. 6,374 112,212
---------- ------------
Total Dividend Reinvestment............................... 453,274 $ 8,024,149
========== ============
Repurchases:
Class A................................................. (1,215,422) $(21,535,502)
Class B................................................. (433,752) (7,630,639)
Class C................................................. (64,827) (1,134,937)
---------- ------------
Total Repurchases......................................... (1,714,001) $ 30,301,078
========== ============
</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 purchased
on or after June 1, 1996 and any dividend reinvestment plan Class B Shares
received on such shares, automatically convert to Class A Shares eight years
after the end of the calendar month in which the shares were purchased. Class B
Shares purchased before June 1, 1996, and any dividend reinvestment plan Class B
Shares received on such shares, automatically convert to Class A Shares seven
years after the end of the calendar month in which the shares were purchased.
For the year ended September 30, 2000 and the year ended September 30, 1999,
1,106,976 and 12,450 Class B Shares automatically converted to Class A Shares,
respectively, and are shown in the above tables as sales of Class A Shares and
repurchases of Class B Shares. Class C Shares purchased before January 1, 1997,
and any dividend reinvestment plan C Shares received thereon, automatically
convert to Class A Shares ten years after the end of the calendar month in which
the shares are purchased. Class C Shares purchased on or after January 1, 1997
do not possess a conversion feature. For the year ended September 30, 2000 and
the year ended September 30, 1999, no Class C Shares converted to Class A
Shares. The CDSC
30
<PAGE> 32
NOTES TO
FINANCIAL STATEMENTS
September 30, 2000
will be imposed on most redemptions made within six years of the purchase for
Class B Shares and one year of the purchase for Class C Shares 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>
For the year ended September 30, 2000, Van Kampen as Distributor for the
Fund, received commissions on sales of the Fund's Class A Shares of
approximately $17,700 and CDSC on redeemed shares of approximately $102,500.
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 $41,966,857 and $80,590,585,
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.
31
<PAGE> 33
NOTES TO
FINANCIAL STATEMENTS
September 30, 2000
Summarized below are the specific types of derivative financial instruments
that may be 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, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin).
Transactions in futures contracts for the year ended September 30, 2000,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
<S> <C>
Outstanding at September 30, 1999........................... -0-
Futures Opened.............................................. 400
Futures Closed.............................................. (400)
----
Outstanding at September 30, 2000........................... -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, as amended, 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 September 30, 2000, are payments retained by Van Kampen of
approximately $352,500.
32
<PAGE> 34
NOTES TO
FINANCIAL STATEMENTS
September 30, 2000
7. BORROWINGS
In accordance with its investment policies, the Fund may borrow from banks for
temporary purposes and is subject to certain other customary restrictions.
Effective November 30, 1999, the Fund, in conjunction with certain other funds
of Van Kampen, entered into a $650,000,000 committed line of credit facility
with a group of banks which expires on November 28, 2000, but is renewable with
the consent of the participating banks. Each fund is permitted to utilize the
facility in accordance with the restrictions of its prospectus. In the event the
demand for the credit facility meets or exceeds $650 million on a complex-wide
basis, each fund will be limited to its pro-rata percentage based on the net
assets of each participating fund. Interest on borrowings is charged under the
agreement at a rate of 0.50% above the federal funds rate per annum. An annual
commitment fee of 0.09% per annum is charged on the unused portion of the credit
facility, which each fund incurs based on its pro-rata percentage of quarterly
net assets. The Fund has not borrowed against the credit facility during the
period.
33
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Van Kampen Pennsylvania Tax Free
Income Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments of Van Kampen Pennsylvania Tax Free Income Fund
(the "Fund"), as of September 30, 2000, and the related statements of
operations, changes in net assets and financial highlights for the year then
ended. 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 based on our audit. The statement of
changes in net assets of the Fund for the year ended September 30, 1999, and the
financial highlights for each of the five years in the period then ended were
audited by other auditors whose report dated November 11, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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, 2000 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 2000 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund at September 30, 2000, the results of its operations,
changes in net assets and financial highlights for the year then ended, in
conformity with accounting principles generally accepted in the United States.
SIG
Chicago, Illinois
November 8, 2000
34
<PAGE> 36
VAN KAMPEN FUNDS
THE VAN KAMPEN
FAMILY OF FUNDS
Growth
Aggressive Growth
American Value*
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Select Growth
Small Cap Value
Tax Managed Equity Growth
Technology
Growth and Income
Comstock
Equity Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
Global/International
Asian Growth
Emerging Markets
European Equity
Global Equity
Global Equity Allocation
International Magnum
Latin American
Strategic Income*
Tax Managed Global Franchise
Worldwide High Income
Income
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
Limited Maturity Government
U.S. Government
U.S. Government Trust for Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan
Prime Rate Income Trust
Senior Floating Rate
Tax Free
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
To find out more about any of these funds, ask your financial advisor for a
prospectus, which contains more complete information, including sales charges,
risks, and ongoing 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 [COMPUTER ICON]
- 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.
[PHONE ICON]
- e-mail us by visiting
WWW.VANKAMPEN.COM and
selecting Contact Us
[MAIL ICON]
* Closed to new investors
** Open to new investors for a limited time
35
<PAGE> 37
FUND OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN PENNSYLVANIA TAX FREE
INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
JERRY D. CHOATE
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
OFFICERS
RICHARD F. POWERS, III*
President
STEPHEN L. BOYD*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, 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 218256
Kansas City, Missouri 64121-8256
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 AUDITORS(1)
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
(1) Independent auditors for the Fund perform an annual audit of the Fund's
financial statements. The Board of Trustees has engaged Ernst & Young LLP
to be the Fund's independent auditors. PricewaterhouseCoopers LLP ceased
being the Fund's independent auditors effective May 18, 2000. The cessation
of the client-auditor relationship between the Fund and
PricewaterhouseCoopers was based solely on a possible future business
relationship by PricewaterhouseCoopers with an affiliate of the Fund's
Investment Adviser.
* "Interested persons" of the Fund, as defined in the Investment Company Act of
1940, as amended.
(C) Van Kampen Funds Inc., 2000. 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 charges on
shares of the Fund, and other pertinent data. After February 28, 2001, the
report, if used with prospective investors, must be accompanied by a quarterly
performance update.
For Federal Income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
September 30, 2000. The Fund designated 99.6% of the
Income distributions as a tax-exempt income distribution. In January, 2001, the
Fund will provide tax information to shareholders for the 2000 calendar year.
36
