<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Portfolio of Investments......................... 5
Statement of Assets and Liabilities.............. 16
Statement of Operations.......................... 17
Statement of Changes in Net Assets............... 18
Financial Highlights............................. 19
Notes to Financial Statements.................... 20
Independent Accountants' Report.................. 26
Dividend Reinvestment Plan....................... 27
</TABLE>
VKQ ANR 10/96
<PAGE> 2
LETTER TO SHAREHOLDERS
October 2, 1996
Dear Shareholder,
As you may be aware, an agreement
was reached in late June for VK/AC
Holding Inc., the parent company of Van Kampen [PHOTO]
American Capital, Inc., to be acquired
by Morgan Stanley Group Inc. While this
announcement may appear commonplace in
an ever-changing financial industry, we
believe it represents an exciting DENNIS J. MCDONNELL AND DON G. POWELL
opportunity for shareholders of our
investment products.
With Morgan Stanley's global
leadership in investment banking and asset management and Van Kampen American
Capital's reputation for competitive long-term performance and superior investor
services, together we will offer a broader range of investment opportunities and
expertise.
The new ownership will not affect our commitment to pursuing excellence in
all aspects of our business. We expect very little change in the way your mutual
fund account is maintained and serviced.
A proxy was mailed to you that explains the acquisition and asks for your
vote of approval. We value our relationship with you and look forward to
communicating more details of this transaction, which is anticipated to close in
October.
ECONOMIC REVIEW AND OUTLOOK
The economy demonstrated an acceleration in growth during the last half of
the 12-month reporting period. After a nominal 0.3 percent rise in the last
quarter of 1995, real GDP (the nation's gross domestic product, adjusted for
inflation) rose by 2.0 percent in this year's first quarter. And, as
anticipated, the economy grew by a much stronger 4.7 percent in the second
quarter, partly reflecting a rebound from the effects of labor strikes earlier
in the year and extreme weather conditions across the country. Upward momentum
has been assisted by consumer spending, as indicated by a 3.0 percent rise in
retail sales in the first eight months of this year (a 4.3 percent rise during
the reporting period).
In the manufacturing sector, economic reports, such as the National
Association of Purchasing Managers Index, suggest a continued rebound in
production from last winter's lower levels. In June, this index reached an
18-month high. Strong exports and a replenishing of inventories have helped
support this momentum.
Surprisingly healthy economic activity led to concerns that inflation may
rise and the Federal Reserve Board might tighten monetary policy. Inflation
remains modest, however, with consumer prices rising at about a 3 percent annual
rate over the past year. Meanwhile, the closely watched "core" Consumer Price
Index, which excludes volatile food and energy components, has risen year over
year at rates between 2.7 and 3.0 percent
Continued on page two
1
<PAGE> 3
per year. In general, recent reports have suggested an upward creep in
labor-related costs. The Producer Price Index, which measures prices paid by
wholesalers to producers, has indicated low wholesale prices in the past three
months, from June through August.
We anticipate that reasonably strong economic growth will continue during
the balance of 1996, albeit at more moderate rates than the second quarter's
swift pace. While we expect rates of inflation to remain near current levels,
the Fed may lean toward greater restraint in its monetary policy in the coming
months. That suggests an upward bias for short-term interest rates and a
continuation of the current trading range for yields on long-term bonds.
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality
as of August 31, 1996
<TABLE>
<S> <C>
AAA..............40.1%
AA............... 8.6%
A................10.9%
BBB..............23.2%
BB............... 7.3%
Non-Rated........ 9.9%
</TABLE>
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality
as of February 29, 1996
<TABLE>
<S> <C>
AAA..............34.7%
AA............... 8.9%
A................16.2%
BBB..............22.9%
BB............... 6.8%
Non-Rated........10.5%
</TABLE>
PERFORMANCE SUMMARY
For the 12-month period ended August 31, 1996, the Trust generated a total
return at market price of 8.98 percent(1), including reinvestment of income
dividends totaling $0.99 per share. Based on the current monthly dividend of
$0.08 per share and the closing common stock price of $14.50 on August 31, 1996,
the Trust offered a tax-exempt distribution rate of 6.62 percent(3). Because
income distributions from the Trust are exempt from federal income tax, this
distribution rate represents a yield equivalent to a taxable investment earning
10.34 percent(4) (for investors in the 36 percent federal income tax bracket).
MUNICIPAL MARKET REVIEW AND OUTLOOK
We witnessed significant movement in municipal bond yields during the first
six months of 1996. Early in the period, the Fed lowered rates in order to
energize the economy and bond prices increased. By late February, however, the
markets became concerned that the Fed would reverse its strategy and raise
rates. As a result, yields, as measured by the Bond Buyer 40 Municipal Bond
Index, rose from 5.6 percent to 6.0 percent during the first six months of 1996.
We believe market conditions for municipal bonds are poised for improvement
in the second half of 1996. Three major factors contribute to our optimism:
- - Near-term concerns about the implementation of major tax reform have faded.
In early 1996, the municipal market was wary of the growing political
sentiment for tax
Continued on page three
2
<PAGE> 4
reform, which could have eroded the value of the market's tax-exempt status.
However, the momentum slowed substantially and now appears to be on the back
burner until after the 1996 presidential election. This has added stability
to the municipal market.
- - For high-income households, tax-exempt bonds provide an attractive after-tax
alternative. Municipal bond yields have elevated to a point where taxable
equivalent yields range between 8.5 and 10 percent for investors in the 31
percent tax bracket or higher.
- - Recent volatility in the equity markets, coupled with higher interest rates,
are leading individual investors, as well as institutions, to reexamine
their allocation of assets. In general, this translates into an increased
emphasis on fixed-income investments, which should lend support to the
municipal market.
Looking ahead, inflation fears and concerns about economic growth may
continue to influence the municipal bond market and trust performance results.
Nevertheless, we are optimistic that tax-exempt securities will produce
attractive results for investors during the remainder of 1996.
We appreciate your continued confidence in your investment with Van Kampen
American Capital.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
3
<PAGE> 5
PERFORMANCE RESULTS FOR THE PERIOD ENDED AUGUST 31, 1996
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST
(NYSE TICKER SYMBOL -- VKQ)
<TABLE>
<S> <C>
COMMON SHARE TOTAL RETURNS
One-year total return based on market price/............... 8.98%
One-year total return based on NAV/........................ 7.09%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock price/.... 6.62%
Taxable-equivalent distribution rate as a % of closing
common stock price/........................................ 10.34%
SHARE VALUATIONS
Net asset value............................................ $15.84
Closing common stock price................................. $14.500
One-year high common stock price (02/01/96)................ $15.250
One-year low common stock price (05/21/96)................. $13.500
Preferred share (Series A) rate(5)......................... 3.400%
Preferred share (Series B) rate(5)......................... 3.420%
Preferred share (Series C) rate(5)......................... 3.420%
Preferred share (Series D) rate(5)......................... 3.414%
</TABLE>
(1)Total return based on market price assumes an investment at the market price
at the beginning of the period indicated, reinvestment of all distributions for
the period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing stock price at the end of the period indicated.
(2)Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(3)Distribution rate represents the monthly annualized distributions of the
Trust at the end of the period and not the earnings of the Trust.
(4)The taxable-equivalent distribution rate is calculated assuming a 36% federal
income tax bracket.
(5)See "Notes to Financial Statements" footnote #5, for more information
concerning Preferred Share reset periods.
A portion of the interest income may be taxable for those investors subject to
the federal alternative minimum tax (AMT).
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS
ALABAMA 0.2%
$ 1,640 Jasper, AL Wtrwks & Swr Brd Wtr & Swr Rev
(AMBAC Insd)................................... 5.850% 06/01/13 $ 1,675,211
------------
CALIFORNIA 7.6%
5,000 California Pollutn Ctl Fin Auth Pollutn Ctl San
Diego Gas & Elec Co Ser A...................... 5.900 06/01/14 5,091,150
8,500 Castaic Union Sch Dist, CA Cap Apprec Ser A
(FGIC Insd).................................... * 05/01/18 2,346,000
5,000 Contra Costa, CA Home Mtg Fin Auth Home Mtg Rev
(MBIA Insd).................................... * 09/01/17 1,350,600
1,145 Del Mar CA Race Track Auth Rev Rfdg............ 5.500 08/15/97 1,150,439
1,210 Del Mar CA Race Track Auth Rev Rfdg............ 5.500 08/15/98 1,209,963
2,000 Del Mar CA Race Track Auth Rev Rfdg............ 6.000 08/15/06 1,975,640
7,705 Delano, CA Ctfs Partn Ser A (c)................ 9.250 01/01/22 8,586,375
4,775 Los Angeles, CA Multi Family Rev Ser G Rfdg
(FSA Insd) (c)................................. 5.650 01/01/14 4,636,000
7,000 Orange Cnty, CA Recovery Ctfs Ser A (MBIA Insd)
(c)............................................ 6.000 07/01/07 7,473,830
10,000 Orange Cnty, CA Recovery Ser A Rfdg (MBIA Insd)
(c)............................................ 6.000 06/01/09 10,467,000
5,695 Sacramento, CA City Fin Auth Rev Comb Proj B
(MBIA Insd).................................... * 11/01/14 1,952,246
20,000 San Diego, CA Indl Dev Rev San Diego Gas & Elec
Ser A (Embedded Cap) (MBIA Insd) (c)........... 6.100 09/01/18 20,062,400
------------
66,301,643
------------
COLORADO 10.7%
19,500 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev
E-470 Proj Ser C............................... * 08/31/26 2,152,995
5,000 Boulder Cnty, CO Rev Natl Cent Atmosphere Rfdg
& Impt......................................... 6.900 12/01/07 5,408,450
8,500 Boulder Cnty, CO Rev Natl Cent Atmosphere Rfdg
& Impt......................................... 7.000 12/01/13 9,111,660
2,195 Colorado Hsg Fin Auth Single Family Pgm Sr Gtd
Mtg Ln D3 (FHA Gtd)............................ 7.200 08/01/23 2,267,040
10,000 Denver, CO City & Cnty Arpt Rev Ser A.......... 8.250 11/15/12 11,317,700
12,800 Denver, CO City & Cnty Arpt Rev Ser A.......... 8.500 11/15/23 14,580,224
8,535 Denver, CO City & Cnty Arpt Rev Ser A.......... 8.000 11/15/25 9,545,459
2,000 Denver, CO City & Cnty Arpt Rev Ser B (MBIA
Insd).......................................... 5.750 11/15/17 1,950,780
7,600 Denver, CO City & Cnty Arpt Rev Ser D.......... 7.000 11/15/25 7,762,944
27,000 Meridian Metro Dist CO Peninsular & Oriental
Steam Navig Co Rfdg (c)........................ 7.500 12/01/11 29,486,160
------------
93,583,412
------------
</TABLE>
See Notes to Financial Statements
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONNECTICUT 0.9 %
$ 7,140 Connecticut St Hith & Edl Fac Auth Rev Nursing
Home Proj AHF/Hartford......................... 7.125% 11/01/24 $ 7,978,736
------------
DELAWARE 0.5 %
2,000 Delaware St Econ Dev Auth Dev Exempt Fac
Delmarva Pwr & Lt Co........................... 7.500 10/01/17 2,138,940
2,460 Delaware St Hsg Auth Rev Sr Home Mtg Ser B
Subser B2...................................... 7.200 12/01/21 $ 2,533,652
------------
4,672,592
------------
DISTRICT OF COLUMBIA 0.4%
1,000 District of Columbia Hosp Rev Medlantic
Hlthcare Group A Rfdg (MBIA Insd).............. 5.875 08/15/19 979,010
1,000 District of Columbia Hosp Rev Medlantic
Hlthcare Group A Rfdg (MBIA Insd).............. 5.750 08/15/26 957,500
2,000 District of Columbia Rev Carnegie Endowment.... 5.750 11/15/26 1,931,780
------------
3,868,290
------------
FLORIDA 1.8%
2,600 Brevard Cnty, FL Sch Brd Ctfs Partn Ser A
(AMBAC Insd)................................... 5.400 07/01/10 2,566,668
1,260 Florida Hsg Fin Agy Hsg Turtle Creek Apt Proj C
(AMBAC Insd)................................... 6.150 05/01/96 1,260,907
1,000 Florida St Correctional Privatization Comm Ctfs
Partn (AMBAC Insd)............................. 5.000 08/01/17 905,410
1,000 Hillsborough Cnty, FL Indl Dev Auth Indl Dev
Rev Univ Cmnty Hosp (MBIA Insd)................ 5.750 08/15/14 968,980
7,760 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Park (Prerefunded @
07/01/02)...................................... 10.000 07/01/22 9,755,251
------------
15,457,216
------------
GEORGIA 1.1%
5,438 Cobb Cnty, GA Dev Auth Rev Grantor Trust Ctfs
Franklin Forest Ser A (c)...................... 8.000 06/01/22 5,519,062
4,000 Muni Elec Auth GA Proj One Subser A (AMBAC
Insd).......................................... 6.250 01/01/14 4,185,200
------------
9,704,262
------------
IDAHO 0.2%
1,600 Idaho Hsg Agy Single Family Mtg Mezz G2 (AMBAC
Insd).......................................... 6.125 07/01/12 1,592,624
------------
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS 12.6%
$ 5,000 Bedford Park, IL Tax Increment Rev Sr Lien
Bedford City Sq Proj (c)....................... 9.250% 02/01/12 $ 5,605,350
2,500 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
American Airls Inc Proj Rfdg................... 8.200 12/01/24 2,879,800
7,475 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Inc...................................... 8.400 05/01/04 8,088,697
10,600 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Inc...................................... 8.500 05/01/18 11,676,536
4,555 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Inc Ser A................................ 8.400 05/01/18 4,951,832
4,590 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United
Airls Inc Ser B................................ 8.950 05/01/18 5,212,817
10,200 Chicago, IL Proj Ser 1993 (FGIC Insd) (c)...... 5.500 01/01/24 9,537,408
1,200 Hodgkins, IL Tax Increment..................... 9.500 12/01/09 1,392,780
3,600 Hodgkins, IL Tax Increment (Prerefunded @
12/01/01)...................................... 9.500 12/01/09 4,442,724
4,000 Hodgkins, IL Tax Increment Rev Ser A Rfdg
(c)............................................ 7.625 12/01/13 4,067,240
2,500 Illinois Dev Fin Auth Rev Catholic Charities
Hsg Dev........................................ 6.350 01/01/25 2,405,525
2,500 Illinois Hlth Fac Auth Rev Evangelical Hosp Ser
C Rfdg (FSA Insd).............................. 6.750 04/15/12 2,708,225
7,750 Illinois Hlth Fac Auth Rev Fairview Oblig Group
Proj A (Prerefunded @ 10/01/02) (c)............ 9.500 10/01/22 9,621,547
4,760 Illinois Hlth Fac Auth Rev Hinsdale Hosp Ser B
Rfdg........................................... 9.000 11/15/15 5,328,011
1,500 Illinois Hlth Fac Auth Rev Sarah Bush Lincoln
Hlth Cent...................................... 7.250 05/15/12 1,558,695
10,000 Illinois Hlth Fac Auth Rev Servantcor Ser A
(Var Rate Cpn) (Prerefunded @ 08/15/01) (c).... 8.000 08/15/21 11,519,000
1,940 Illinois Hsg Dev Auth Rev Homeowner Mtg Subser
A2 (FHA Gtd)................................... 7.125 08/01/26 2,038,086
65 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/97 65,315
70 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/98 71,235
75 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/99 76,847
80 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/00 82,573
85 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/01 88,000
90 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/02 93,389
95 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/03 98,781
100 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/04 103,641
105 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 6.500 01/01/05 108,532
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 1,510 Roselle, IL Multi Family Hsg Rev Waterbury Apts
Ser A Rfdg (GNMA Collateralized)............... 7.000% 01/01/25 $ 1,602,186
2,000 Southern IL Univ Rev Cap Apprec Hsg & Aux Fac
Sys A (MBIA Insd).............................. * 04/01/18 542,100
3,800 Winnebago & Boone Cntys, IL Sch Dist No 205
(FSA Insd)..................................... 7.125 02/01/01 4,168,144
4,125 Winnebago & Boone Cntys, IL Sch Dist No 205
(FSA Insd) (c)................................. 7.200 02/01/02 4,597,478
4,475 Winnebago & Boone Cntys, IL Sch Dist No 205
(FSA Insd) (c)................................. 7.300 02/01/03 5,061,494
------------
109,793,988
------------
INDIANA 0.9%
2,500 Indiana Bond Bank Spl Pgm Ser F................ 7.150 08/01/15 2,704,725
3,000 Indiana St Dev Fin Auth Indl Dev Rev Unr Rohn
Inc Proj....................................... 7.500 03/01/11 2,988,720
2,000 Plymouth, IN Multi Sch Bldg Corp First Mtg
(Prerefunded @ 01/01/02) (AMBAC Insd).......... 6.750 01/01/13 2,216,060
------------
7,909,505
------------
KANSAS 2.5%
20,000 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co
Proj Rfdg (MBIA Insd) (c)...................... 7.000 06/01/31 21,858,800
------------
KENTUCKY 0.7%
2,000 Ashland, KY Solid Waste Rev Ashland Oil Inc
Proj........................................... 7.200 10/01/20 2,092,980
4,000 Elsmere, KY Indl Dev Rev Rfdg (c).............. 6.750 04/01/10 4,061,600
------------
6,154,580
------------
LOUISIANA 1.7%
825 East Baton Rouge, LA Mtg Fin Auth Single Family
Mtg Pur Ser A Rfdg (GNMA Collateralized)....... 7.100 10/01/24 860,722
7,840 East Baton Rouge, LA Mtg Fin Auth Single Family
Mtg Pur Ser C Rfdg............................. 7.000 04/01/32 8,101,072
2,000 New Orleans, LA Rfdg (AMBAC Insd).............. * 09/01/16 600,060
15,700 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd)
(c)............................................ * 02/01/15 5,137,197
------------
14,699,051
------------
MAINE 0.1%
1,000 Maine Vets Homes ME Rev........................ 7.750 10/01/20 1,029,870
------------
MARYLAND 2.1%
2,300 Baltimore, MD Cap Apprec Cons Pub Impt Rfdg
(FGIC Insd).................................... * 10/15/06 1,344,672
3,920 Baltimore, MD Cap Apprec Cons Pub Impt Rfdg
(FGIC Insd).................................... * 10/15/07 2,140,045
139,445 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty
Dev Single Family Rev Pgm 6.................... * 04/01/30 11,805,414
2,735 Northeast, MD Waste Disp Auth Solid Waste Rev
Montgomery Cnty Res Recovery Proj Ser A........ 6.200 07/01/10 2,778,377
------------
18,068,508
------------
</TABLE>
See Notes to Financial Statements
8
<PAGE> 10
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MASSACHUSETTS 1.0%
$ 1,000 Billerica, MA Indl Rev Cabot Corp.............. 7.750% 09/01/14 $ 1,012,790
2,600 Massachusetts St Hlth & Edl Fac Auth Rev Med
Cent of Central MA............................. 7.100 07/01/21 2,704,286
Massachusetts St Hlth & Edl Fac Auth Rev New England
3,000 Med Cent Hosp Ser G (Embedded Swap) (MBIA Insd)
(d)........................................3.100/5.000 07/01/13 2,529,750
1,375 Massachusetts St Hlth & Edl Fac Auth Rev
Winchester Hosp Ser D Rfdg (Connie Lee Insd)... 5.750 07/01/14 1,355,282
1,000 Massachusetts St Hsg Fin Agy Hsg Rev Rental Mtg
Ser E (AMBAC Insd)............................. 6.000 07/01/37 966,000
------------
8,568,108
------------
MICHIGAN 1.4%
2,000 Kalamazoo, Ml Hosp Fin Auth Hosp Fac Rev (MBIA
Insd).......................................... 5.875 05/15/26 1,961,240
2,000 Michigan Muni Bond Auth Rev Loc Govt Ln Ser C-A
(FSA Insd)..................................... * 06/15/13 746,020
1,900 Michigan St Hosp Fin Auth Rev Saratoga Comm
Hosp Rfdg...................................... 8.750 06/01/10 1,993,366
1,700 Paw Paw, MI Pub Sch Dist Bldg & Site (FGIC
Insd).......................................... 5.600 05/01/15 1,652,893
5,000 Portage Lake, MI Wtr & Swr Auth Ser II
(Prerefunded @ 10/01/02)....................... 7.625 10/01/20 5,736,650
------------
12,090,169
------------
MINNESOTA 0.7%
1,000 Western MN Muni Pwr Agy Supply Rev Ser A Rfdg
(AMBAC Insd) (b)............................... 6.250 01/01/06 1,078,720
2,000 Western MN Muni Pwr Agy Supply Rev Ser A Rfdg
(AMBAC Insd) (b)............................... 5.400 01/01/09 1,979,800
1,700 Western MN Muni Pwr Agy Supply Rev Ser A Rfdg
(AMBAC Insd) (b)............................... 5.500 01/01/11 1,675,843
1,800 Western MN Muni Pwr Agy Supply Rev Ser A Rfdg
(AMBAC Insd) (b)............................... 5.500 01/01/12 1,764,270
------------
6,498,633
------------
MISSISSIPPI 0.4%
1,000 Claiborne Cnty, MS Pollutn Ctl Rev Sys Energy
Res Inc Rfdg................................... 7.300 05/01/25 1,031,200
2,000 Mississippi Home Corp Single Family Rev Mtg Ser F
(GNMA Collateralized) (b) (d)..............6.000/7.550 12/01/27 2,148,000
------------
3,179,200
------------
MISSOURI 1.3%
1,740 Good Shepherd Nursing Home Dist MO Nursing Home
Fac Rev........................................ 7.625 08/15/15 1,750,545
2,730 Good Shepherd Nursing Home Dist MO Nursing Home
Fac Rev........................................ 7.750 08/15/25 2,756,508
3,750 Hannibal, MO Indl Dev Auth Hlth Fac Rev
Hannibal Regl Hlthcare Sys Inc (Prerefunded @
09/01/01)...................................... 9.500 03/01/22 4,668,750
2,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd)......... 5.000 06/01/11 1,881,360
------------
11,057,163
------------
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MONTANA 0.8%
$ 3,000 Montana St Brd Invt Res Recovery Rev
Yellowstone Energy L P Proj.................... 7.000% 12/31/19 $ 2,801,790
3,900 Montana St Coal Severance Tax Broadwater Pwr
Proj Ser A Rfdg................................ 6.875 12/01/17 4,122,222
------------
6,924,012
------------
NEVADA 0.7%
995 Henderson, NV Loc Impt Dist No T-4 Ser A....... 8.500 11/01/12 1,040,561
865 Nevada Hsg Division Multi Unit Hsg Saratoga
Palms (FNMA Collateralized).................... 6.250 10/01/16 857,137
2,910 Nevada Hsg Division Multi Unit Hsg Saratoga
Palms (FNMA Collateralized).................... 6.350 10/01/28 2,878,339
1,750 Nevada St Rfdg................................. 4.375 08/01/03 1,693,073
------------
6,469,110
------------
NEW JERSEY 4.4%
1,515 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/99 1,354,986
1,000 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/00 850,110
1,000 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/02 766,970
1,000 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/03 727,160
1,000 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/04 690,370
1,460 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/05 953,030
1,465 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/06 900,286
1,615 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/07 933,292
1,555 Eastern Camden Cnty, NJ Regl Sch Dist Rfdg
(FGIC Insd).................................... * 03/01/08 843,401
25,000 New Jersey Econ Dev Auth St Contract Econ
Recovery (Embedded Cap) (MBIA Insd)............ 5.900 03/15/21 25,564,000
5,000 Union Cnty, NJ Util Auth Solid Waste Rev Ser
A.............................................. 7.150 06/15/09 5,129,600
------------
38,713,205
------------
NEW MEXICO 1.1%
8,170 New Mexico Mtg Fin Auth Single Family Mtg Pgm
Ser A (GNMA Collateralized).................... 6.650 07/01/26 8,371,881
958 Santa Fe, NM Single Family Mtg Rev Rfdg........ 8.450 12/01/11 1,015,786
------------
9,387,667
------------
NEW YORK 16.2%
4,000 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev
Burrows Paper Corp Recycling (c)............... 8.000 01/01/09 3,865,960
5,550 Metropolitan Tran Auth NY Svcs Contract
Commuter Fac Ser N Rfdg........................ 6.000 07/01/11 5,377,450
4,000 Metropolitan Tran Auth NY Svcs Contract Tran
Fac............................................ 7.000 07/01/09 4,278,520
1,900 Metropolitan Tran Auth NY Svcs Contract Tran
Fac Ser N Rfdg................................. 6.000 07/01/11 1,840,929
2,000 New York City Hlth & Hosp Corp Rev Ser A Rfdg
(AMBAC Insd)................................... 5.750 02/15/22 1,936,360
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 1,500 New York City Ser A............................ 7.750% 08/15/12 $ 1,656,030
7,000 New York City Ser B............................ 7.500 02/01/05 7,731,430
6,000 New York City Ser B............................ 5.600 08/15/07 5,716,560
1,500 New York City Ser C............................ 7.100 08/15/10 1,575,375
13,950 New York City Ser D............................ 5.750 02/15/07 13,471,654
7,000 New York City Ser E Rfdg....................... 5.500 02/15/08 6,569,290
2,585 New York City Ser F............................ 8.250 11/15/02 2,903,317
2,000 New York City Ser J............................ 5.875 02/15/19 1,854,460
5,000 New York St Dorm Auth Rev City Univ Ser F...... 5.500 07/01/12 4,683,200
10,000 New York St Dorm Auth Rev City Univ Sys 3rd
Genl Res 2 (AMBAC Insd) (b).................... 5.500 07/01/16 9,675,000
2,970 New York St Dorm Auth Rev City Univ Sys Cons
2nd Gen A (AMBAC Insd)......................... 5.250 07/01/11 2,861,595
3,550 New York St Dorm Auth Rev Cons City Univ Sys
Ser A.......................................... 5.625 07/01/16 3,351,342
6,000 New York St Dorm Auth Rev Court Fac Lease Ser
A.............................................. 5.250 05/15/21 5,205,300
4,250 New York St Energy Resh & Dev Auth Fac Rev Cons
Edison Co Proj Ser B Rfdg (MBIA Insd) (c)...... 5.250 08/15/20 3,880,165
3,000 New York St Energy Resh & Dev Auth St Svc
Contract Rev Westn NY Nuclear Svc Cent Proj.... 5.400 04/01/98 3,038,940
7,375 New York St Environmental Fac Corp Pollutn Ctl
Rev St Wtr Revolving Fund Ser E................ 6.700 06/15/10 8,023,484
10,735 New York St Med Care Fac Fin Agy Rev Mental
Hlth Svcs Fac Ser D............................ 7.400 02/15/18 11,799,483
2,110 New York St Urban Dev Corp Rev Correctional Fac
Ser A Rfdg..................................... 5.400 01/01/06 2,039,610
19,000 New York St Urban Dev Corp Rev St Fac
(Prerefunded @ 04/01/01) (c)................... 7.500 04/01/11 21,591,030
3,000 Onondaga Cnty, NY Indl Dev Agy Swr Fac Rev
Bristol - Meyers Squibb Co Proj................ 5.750 03/01/24 2,970,150
3,375 Port Auth, NY & NJ Cons 102nd Ser (MBIA
Insd).......................................... 5.600 10/15/11 3,378,038
------------
141,274,672
------------
NORTH CAROLINA 2.7%
10,000 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev
Ser B Rfdg (Embedded Cap)...................... 6.000 01/01/14 9,788,300
13,300 North Carolina Muni Pwr Agy No 1 Catawba Elec
Rev (MBIA Insd)................................ 6.000 01/01/12 13,904,352
------------
23,692,652
------------
NORTH DAKOTA 0.4%
3,460 Ward Cnty, ND Hlthcare Fac Rev Saint Josephs
Hosp Corp Proj Ser A........................... 7.500 11/01/15 3,499,098
------------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OHIO 1.6%
$ 5,375 Franklin Cnty, OH Hosp Rev Holy Cross Hlth Sys
Ser B Rfdg (MBIA Insd) (c)..................... 5.250% 06/01/10 $ 5,208,267
250 Marion Cnty, OH Indl Dev Rev Kmart Corp Proj
Rfdg........................................... 6.375 02/01/02 237,110
2,000 Montgomery Cnty, OH Hosp Rev Dayton Osteopathic
Hosp Proj Rfdg................................. 6.000 12/01/12 1,840,680
2,270 Montgomery Cnty, OH Hosp Rev Kettering Med Cent
(MBIA Insd).................................... 6.250 04/01/20 2,406,291
3,000 Montgomery Cnty, OH Hosp Rev Kettering Med Cent
(MBIA Insd).................................... 5.500 04/01/26 2,811,000
1,000 Ohio St Air Quality Dev Auth Rev JMG Funding
Ltd Partnership Proj Rfdg (AMBAC Insd)......... 6.375 04/01/29 1,037,580
170 Portage Cnty, OH Indl Dev Rev Kmart Corp Proj
Rfdg........................................... 6.350 12/01/00 162,967
250 Washington Cnty, OH Indl Dev Rev Kmart Corp
Proj Rfdg...................................... 6.400 03/15/03 235,360
------------
13,939,255
------------
OKLAHOMA 2.4%
3,890 Cleveland Cnty, OK Home Ln Auth Single Family
Mtg Rev Rfdg................................... 8.000 08/01/12 4,134,058
1,240 Kay Cnty, OK Home Fin Auth Rev Single Family
Mtg Ser A Rfdg (AMBAC Insd).................... 7.000 11/01/11 1,363,529
9,340 Oklahoma Hsg Fin Agy Single Family Rev Mtg
Class B (GNMA Collateralized).................. 7.997 08/01/18 10,207,873
3,000 Tulsa, OK Indl Auth Hosp Rev Tulsa Regl Med
Cent (Prerefunded @ 06/01/03).................. 7.200 06/01/17 3,410,490
1,500 Tulsa, OK Muni Arpt Tran Rev American Airls
Inc............................................ 7.600 12/01/30 1,599,675
------------
20,715,625
------------
PENNSYLVANIA 2.4%
3,250 Butler Cnty, PA Hosp Auth Hosp Rev Butler Mem
Hosp Ser A (FSA Insd).......................... 5.250 07/01/12 3,050,158
2,165 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion
Hosp Proj...................................... 8.500 07/01/21 2,325,448
10,000 Geisinger Auth PA Hlth Sys Ser................. 6.400 07/01/22 10,161,900
5,000 Pennsylvania St Higher Edl Fac Allegheny DE Vly
Oblig Ser A (MBIA Insd) (c).................... 5.875 11/15/21 4,960,500
1,000 Ridley Park, PA Hosp Auth Rev Hosp Auth Rev Ser
1993 A......................................... 6.000 12/01/13 931,810
------------
21,429,816
------------
RHODE ISLAND 1.5%
2,450 Providence, RI Redev Agy Ctfs Partn Ser A...... 8.000 09/01/24 2,603,297
3,470 Rhode Island Hsg & Mtg Fin Corp Homeownership
Oppty Ser 3B................................... 8.050 04/01/22 3,629,585
4,750 Rhode Island Hsg & Mtg Fin Corp Ser 8 (Inverse
Fltg).......................................... 10.291 04/01/24 5,046,875
2,000 Rhode Island St Hlth & Edl Bldg Corp Rev Higher
Edl Fac Roger Williams (Connie Lee Insd)....... 7.250 11/15/24 2,205,820
------------
13,485,577
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TENNESSEE 0.6%
$ 1,010 Campbell Cnty, TN Indl Dev Brd Indl Dev Rev
Kmart Corp Rfdg................................ 6.400% 04/15/08 $ 925,423
4,243 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev
Multi Family Mtg Rock Creek Plaza Rfdg (GNMA
Collateralized)................................ 7.375 01/20/27 4,504,559
------------
5,429,982
------------
TEXAS 8.3%
4,500 Alliance Arpt Auth Inc TX Spl Fac Rev American
Airls Inc Proj................................. 7.500 12/01/29 4,763,746
6,000 Alliance Arpt Auth Inc TX Spl Fac Rev Fed
Express Corp Proj.............................. 6.375 04/01/21 5,911,740
4,155 Brazos Cnty, TX Hlth Fac Dev Corp Franciscan
Svcs Rev Saint Joseph Hosp & Hlth Cent Ser B
Rfdg........................................... 6.000 01/01/19 3,946,668
6,000 Brazos River Auth TX Pollutn Ctl Rev Coll TX
Util Elec Co Proj A (AMBAC Insd) (c)........... 6.750 04/01/22 6,328,500
555 Brazos, TX Higher Edl Auth Inc Student Ln Rev
Subser C2 Rfdg................................. 7.100 11/01/04 606,260
5,000 Coastal Bend Hlth Fac Dev (AMBAC Insd)......... 5.929 11/15/13 4,951,150
15,000 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp
Rev American Airls Inc......................... 7.500 11/01/25 15,867,750
3,600 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp
Rev Delta Airls Inc............................ 7.625 11/01/21 3,849,120
2,865 Fort Worth, TX Hsg Fin Corp Home Mtg Rev Ser A
Rfdg........................................... 8.500 10/01/11 3,091,937
1,905 Texas Genl Svcs Comm Partn Int Lease Pur
Ctfs........................................... 7.250 08/01/11 1,922,816
21,550 Texas St Pub Ppty Fin Corp Rev Mental Hlth &
Retardation Rfdg (FSA Insd) (c)................ 5.250 09/01/08 21,127,405
------------
72,367,092
------------
UTAH 1.2%
3,980 Bountiful, UT Hosp Rev South Davis Cmnty Hosp
Proj (c)....................................... 9.500 12/15/18 4,356,628
2,000 Murray City, UT Hosp Rev Inc Hlth Serv Inc Rfdg
(MBIA Insd).................................... 4.750 05/15/20 1,684,640
3,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg
(Embedded Cap)................................. 5.500 02/15/17 2,774,670
1,880 Utah St Hsg Fin Agy Single Family Mtg Insd Ser
E2 (FHA Gtd)................................... 7.150 07/01/24 1,950,180
------------
10,766,118
------------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- --------- ------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VIRGINIA 1.1%
$ 1,500 Henrico Cnty, VA Indl Dev Auth Pub Fac Lease
Rev Henrico Cnty Regl Jail Proj................ 6.500% 08/01/10 $ 1,602,135
1,500 Henrico Cnty, VA Indl Dev Auth Pub Fac Lease
Rev Henrico Cnty Regl Jail Proj................ 7.125 08/01/21 1,654,245
1,750 Loudoun Cnty, VA Indl Dev Auth Loudoun Hosp
Cent (FSA Insd)................................ 5.800 06/01/26 1,697,990
5,000 Roanoke, VA Indl Dev Auth Hosp Rev Roanoke Mem Hosp
Carilion Hlth Sys Ser B Rfdg (MBIA Insd) (c)
(d)........................................4.700/6.250 07/01/20 4,846,250
1,050 Virginia St Hsg Dev Auth Comwlth Mtg Ser A
Subser A1 (FHA Gtd)............................ * 07/01/29 89,092
------------
9,889,712
------------
WASHINGTON 0.1%
5,000 Bellevue, WA Convention Cent Auth Spl Oblig Rev
Rfdg (MBIA Insd)............................... * 02/01/24 939,800
------------
WEST VIRGINIA 0.8%
6,550 Harrison Cnty, WV Cnty Cmnty Solid Waste Disp
Rev Potomac Edison Co Ser A.................... 6.875 04/15/22 6,853,200
------------
WISCONSIN 1.8%
2,200 Janesville, WI Indl Dev Rev Simmons Mfg Co..... 7.000 10/15/17 2,200,022
1,000 Madison, WI Indl Dev Rev Madison Gas & Elec Co
Proj A......................................... 6.750 04/01/27 1,049,880
5,250 Wisconsin Hsg & Econ Dev Auth Hsg Rev Ser B.... 7.050 11/01/22 5,508,352
7,280 Wisconsin St Hlth & Edl Fac Auth Rev Children's
Hosp (Embedded Cap) (FGIC Insd)................ 5.000 08/15/10 6,878,217
------------
15,636,471
------------
WYOMING 1.0%
4,000 Wyoming Cmnty Dev Auth Single Family Ser G (FHA
Gtd)........................................... 7.250 06/01/21 4,174,480
4,000 Wyoming Cmnty Dev Auth Single Family Ser H..... 7.100 06/01/12 4,198,400
------------
8,372,880
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUERTO RICO 0.6%
$ 2,473 Puerto Rico Comwlth Dept of Hlth Lease Purchase
Ctfs........................................... 7.250% 04/07/01 $ 2,477,970
2,000 Puerto Rico Elec Pwr Auth Pwr Rev Ser P
(Prerefunded @ 07/01/01)....................... 7.000 07/01/21 2,239,340
1,000 Puerto Rico Elec Pwr Auth Pwr Rev Ser Z Rfdg... 5.500 07/01/12 958,120
------------
5,675,430
------------
TOTAL LONG-TERM INVESTMENTS 98.5%
(Cost $820,853,831) (a)....................................................... 861,202,935
SHORT-TERM INVESTMENTS AT AMORTIZED COST 2.2%.................................. 19,513,995
LIABILITIES IN EXCESS OF OTHER ASSETS (0.7%)................................... (6,131,069)
------------
NET ASSETS 100%................................................................ $874,585,861
============
</TABLE>
*Zero coupon bond
(a) At August 31, 1996, cost for federal income tax purposes is $820,853,831;
the aggregate gross unrealized appreciation is $43,304,385 and the
aggregate gross unrealized depreciation is $2,955,281, resulting in net
unrealized appreciation of $40,349,104.
(b) Securities purchased on a when issued or delayed delivery basis.
(c) Assets segregated as collateral for when issued or delayed delivery
purchase commitments and open option futures transactions.
(d) Security is a "Step-up" bond where the coupon increases or steps up at a
predetermined date.
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $820,853,831) (Note 1).............. $ 861,202,935
Short-Term Investments (Note 1)........................................ 19,513,995
Cash................................................................... 24,386
Receivables:
Interest............................................................. 13,512,877
Variation Margin on Futures (Note 4)................................. 169,505
Securities Sold...................................................... 15,007
Options at Market Value (Net premiums paid of $86,068) (Note 4)........ 74,220
Unamortized Organizational Expenses (Note 1)........................... 707
Other.................................................................. 16,752
------------
Total Assets..................................................... 894,530,384
------------
LIABILITIES:
Payables:
Securities Purchased................................................. 18,374,293
Income Distributions - Common and Preferred Shares................... 568,717
Investment Advisory Fee (Note 2)..................................... 522,403
Administrative Fee (Note 2).......................................... 149,258
Distributor and Affiliates (Note 2).................................. 38,091
Accrued Expenses....................................................... 247,137
Deferred Compensation and Retirement Plans (Note 2).................... 44,624
-------------
Total Liabilities................................................ 19,944,523
-------------
NET ASSETS............................................................. $ 874,585,861
=============
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, authorized 100,000,000 shares, 6,000
issued with liquidation preference of $50,000 per share) (Note 5).... $ 300,000,000
-------------
Common Shares ($.01 par value with an unlimited number of shares
authorized, 36,270,469 shares issued and outstanding)................ 362,705
Paid in Surplus........................................................ 536,860,572
Net Unrealized Appreciation on Securities.............................. 43,230,522
Accumulated Undistributed Net Investment Income........................ 2,705,542
Accumulated Net Realized Loss on Securities............................ (8,573,480)
-------------
Net Assets Applicable to Common Shares........................... 574,585,861
-------------
NET ASSETS............................................................. $ 874,585,861
=============
NET ASSET VALUE PER COMMON SHARE ($574,585,861 divided
by 36,270,469 shares outstanding).................................... $ 15.84
=============
</TABLE>
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF OPERATIONS
For the Year Ended August 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest................................................................ $56,314,042
-------------
EXPENSES:
Investment Advisory Fee (Note 2)........................................ 6,168,343
Administrative Fee (Note 2)............................................. 1,762,384
Preferred Share Maintenance (Note 5).................................... 801,135
Legal (Note 2).......................................................... 40,760
Trustees Fees and Expenses (Note 2)..................................... 29,828
Amortization of Organizational Expenses (Note 1)........................ 10,017
Other................................................................... 531,572
-------------
Total Expenses...................................................... 9,344,039
-------------
NET INVESTMENT INCOME................................................... $46,970,003
=============
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments........................................................... $ 4,368,520
Options............................................................... (618,389)
Futures............................................................... (4,516,329)
-------------
Net Realized Loss on Securities......................................... (766,198)
-------------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................... 38,675,491
-------------
End of the Period:
Investments......................................................... 40,349,104
Options............................................................. (11,848)
Futures............................................................. 2,893,266
-------------
43,230,522
-------------
Net Unrealized Appreciation on Securities During the Period............. 4,555,031
-------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.......................... $ 3,788,833
=============
NET INCREASE IN NET ASSETS FROM OPERATIONS.............................. $50,758,836
=============
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended August 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
August 31, 1996 August 31, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................... $ 46,970,003 $ 47,552,168
Net Realized Loss on Securities.......................... (766,198) (6,913,971)
Net Unrealized Appreciation on Securities During the
Period................................................. 4,555,031 16,548,238
------------ ------------
Change in Net Assets from Operations..................... 50,758,836 57,186,435
------------ ------------
Distributions from Net Investment Income:
Common Shares.......................................... (35,906,819) (39,316,420)
Preferred Shares....................................... (10,943,347) (11,636,297)
------------ ------------
Total Distributions.................................... (46,850,166) (50,952,717)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES...... 3,908,670 6,233,718
NET ASSETS:
Beginning of the Period.................................. 870,677,191 864,443,473
------------ ------------
End of the Period (Including undistributed net investment
income of $2,705,542 and $2,585,705, respectively)..... $874,585,861 $870,677,191
============ ============
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share
of the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 27, 1991
Year Ended August 31 (Commencement
of Investment
---------------------------- Operations) to
1996 1995 1994 1993 August 31, 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Period (a)......... $15.734 $15.562 $17.035 $16.328 $14.808
------- ------- ------- ------- -------
Net Investment Income............... 1.295 1.311 1.347 1.410 1.166
Net Realized and Unrealized
Gain/Loss on Securities........... .105 .266 (1.424) .780 1.370
------- ------- ------- ------- -------
Total from Investment Operations...... 1.400 1.577 (.077) 2.190 2.536
------- ------- ------- ------- -------
Less:
Distributions from Net
Investment Income:
Paid to Common Shareholders....... .990 1.084 1.116 1.100 .811
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders.................... .302 .321 .280 .246 .205
Distributions from Net Realized Gain
on Securities:
Paid to Common Shareholders....... -0- -0- -0- .111 -0-
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders.................... -0- -0- -0- .026 -0-
------- ------- ------- ------- -------
Total Distributions................... 1.292 1.405 1.396 1.483 1.016
------- ------- ------- ------- -------
Net Asset Value, End of the Period.... $15.842 $15.734 $15.562 $17.035 $16.328
======= ======= ======= ======= =======
Market Price Per Share at End of the
Period.............................. $14.500 $14.250 $15.000 $16.750 $16.125
Total Investment Return at Market
Price (b)........................... 8.98% 2.39% (3.94%) 11.90% 13.24%*
Total Return at Net Asset Value (c)... 7.09% 8.55% (2.22%) 12.31% 14.64%*
Net Assets at End of the Period
(In millions)....................... $874.6 $870.7 $864.4 $917.9 $891.7
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares.............................. 1.61% 1.65% 1.64% 1.59% 1.49%
Ratio of Expenses to Average
Net Assets.......................... 1.06% 1.07% 1.09% 1.06% 1.03%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares (d)................... 6.20% 6.48% 6.52% 7.08% 6.85%
Portfolio Turnover.................... 36% 49% 47% 48% 100%*
</TABLE>
(a) Net asset value at September 27, 1991, is adjusted for common and preferred
share offering costs of $.192 per common share.
(b) Total investment return at market price reflects the change in market value
of the common shares for the period indicated with reinvestment of dividends
in accordance with the Trust's dividend reinvestment plan.
(c) Total return at net asset value (NAV) reflects the change in value of the
Trust's assets with reinvestment of dividends based upon NAV.
(d) Net investment income is adjusted for common share equivalent of
distributions paid to preferred shareholders.
* Non-Annualized
See Notes to Financial Statements
19
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
August 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Municipal Trust (the "Trust") is registered as a
diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The Trust's investment objective is to provide
a high level of current income exempt from federal income tax, consistent with
preservation of capital. The Trust will invest in a portfolio consisting
substantially of municipal obligations rated investment grade at the time of
investment, but may invest up to 20% of its assets in unrated securities which
are believed to be of comparable quality to those rated investment grade. The
Trust commenced investment operations on September 27, 1991.
The following is a summary of significant accounting policies consistently
followed by the Trust 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
Trust 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 Trust will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
D. ORGANIZATIONAL EXPENSES--The Trust has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with the Trust's organization and initial registration in the amount
of $50,000. These costs are being amortized on a straight line basis over the 60
month period ending September 26, 1996. Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") has agreed that in the event any of the initial
shares of the Trust originally purchased by VKAC are redeemed during the
amortization period, the Trust will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
E. FEDERAL INCOME TAXES--It is the Trust'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 to its
shareholders. Therefore, no provision for federal income taxes is required.
The Trust 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 the loss and offset such losses against any future realized capital
gains. At August 31, 1996, the Trust had an accumulated capital loss
carryforward for tax purposes of $5,692,062 which will expire between 2001 and
2004. Net realized loss differs for financial and tax reporting purposes
primarily as a result of gains or losses recognized for tax purposes on open
option and futures positions.
F. DISTRIBUTION OF INCOME AND GAINS--The Trust declares and pays dividends from
net investment income to common shareholders monthly. Net realized gains, if
any, are distributed annually on a pro rata basis to common and preferred
shareholders. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.
For the year ended August 31, 1996, 99.6% of the income distributions made
by the Trust were exempt from federal income taxes. In January, 1997, the Trust
will provide tax information to shareholders for the 1996 calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly of .70% of the average net assets of the Trust. In addition, the Trust
will pay a monthly administrative
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
fee to VKAC, the Trust's Administrator, at an annual rate of .20% of the average
net assets of the Trust. The administrative services provided by the
Administrator include record keeping and reporting responsibilities with respect
to the Trust's portfolio and preferred shares and providing certain services to
shareholders.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Trust, of which a trustee of the Trust is an affiliated person.
For the year ended August 31, 1996, the Trust recognized expenses of
approximately $51,400 representing VKAC's cost of providing accounting and legal
services to the Trust.
Certain officers and trustees of the Trust are also officers and directors
of VKAC. The Trust does not compensate its officers or trustees who are officers
of VKAC.
The Trust has implemented deferred compensation and retirement plans for its
trustees. Under the deferred compensation plan, trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those trustees who are not officers of VKAC.
At August 31, 1996, VKAC owned 6,700 common shares of the Trust.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $309,172,004 and $329,106,998,
respectively.
4. 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 Trust has a variety of reasons to use derivative instruments, such as to
attempt to protect the Trust against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Trust'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 for exercised option contracts where the
recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.
Summarized below are the specific types of derivative financial instruments
used by the Trust.
A. OPTION CONTRACTS--An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
specified period. These contracts are generally used by the Trust to manage the
portfolio's effective maturity and duration.
Transactions in options for the year ended August 31, 1996, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at August 31, 1995................... 100 $ (58,620)
Options Written and Purchased (Net).............. 3,360 (816,949)
Options Terminated in Closing Transactions
(Net).......................................... (1,235) 181,788
Options Expired (Net)............................ (1,525) 467,153
Options Exercised (Net).......................... (200) 140,560
----- ---------
Outstanding at August 31, 1996................... 500 $ (86,068)
===== =========
</TABLE>
The related futures contracts of the outstanding option transactions as of
August 31, 1996, and the description and market value are as follows:
<TABLE>
<CAPTION>
MARKET
EXPIRATION MONTH/ VALUE OF
CONTRACTS EXERCISE PRICE OPTIONS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bond Future
Oct 1996 Purchased Call......... 250 Oct/110 $ 82,032
U.S. Treasury Bond Future
Oct 1996 Written Call........... 250 Oct/112 (7,812)
--- --------
500 $ 74,220
=== ========
</TABLE>
B. 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
Trust 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). The cost of securities acquired through
delivery under a contract is adjusted by the unrealized gain or loss on the
contract.
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended August 31, 1996, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at August 31, 1995............................. 1,450
Futures Opened............................................. 7,052
Futures Closed............................................. (6,502)
--------
Outstanding at August 31, 1996............................. 2,000
========
</TABLE>
The futures contracts outstanding as of August 31, 1996, and the
descriptions and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- ----------------------------------------------------------------------------
<S> <C> <C>
US Treasury Bond Futures
Sep 1996--Sells to Open...................... 200 $ 23,386
5-Year US Treasury Note Futures
Sep 1996--Sells to Open...................... 100 (17,995)
10-Year US Treasury Note Futures
Sep 1996--Sells to Open...................... 850 2,487,359
10 Year US Treasury Note Futures
Dec 1996--Buys to Open....................... 850 400,516
-------- ------------
2,000 $ 2,893,266
======== ============
</TABLE>
C. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon 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. These instruments are typically used by the
Trust to enhance the yield of the portfolio.
An Embedded Cap security includes a cap strike level such that the coupon
payment may be supplemented by cap payments if the floating rate index upon
which the cap is based rises above the strike level. The Trust invests in these
instruments as a hedge against a rise in the short-term interest rates which it
pays on its preferred shares.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the security's fixed swap rate and the floating swap index. As the floating rate
rises, the coupon is reduced. Conversely, as the floating rate declines, the
coupon is increased. The Trust
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1996
- --------------------------------------------------------------------------------
invests in these instruments as a hedge against a rise in the short-term
interest rates which it pays its preferred shares.
5. PREFERRED SHARES
The Trust has outstanding 6,000 Auction Preferred Shares ("APS") in four series
of 1,500 shares each. Dividends are cumulative and the dividend rate is
periodically reset through an auction process. The dividend periods for Series A
and Series C are 7 days, while Series B and Series D are 28 days. The average
rate in effect on August 31, 1996, was 3.41%. During the year ended August 31,
1996, the rates ranged from 3.30% to 4.79%.
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.
The APS are redeemable at the option of the Trust in whole or in part at the
liquidation value of $50,000 per share plus accumulated and unpaid dividends.
The Trust is subject to certain asset coverage tests, and the APS are subject to
mandatory redemption if the tests are not met.
25
<PAGE> 27
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Trustees and Shareholders of
Van Kampen American Capital Municipal Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Municipal Trust (the "Trust"), including the portfolio
of investments, as of August 31, 1996, 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 Trust'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
August 31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Municipal Trust as of August 31, 1996, 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
October 11, 1996
26
<PAGE> 28
DIVIDEND REINVESTMENT PLAN
The Trust offers a dividend reinvestment plan (the "Plan") pursuant to which
Common Shareholders may elect to have dividends and capital gains distributions
reinvested in Common Shares of the Trust. The Trust declares dividends out of
net investment income, and will distribute annually net realized capital gains,
if any. Common Shareholders may join or withdraw from the Plan at any time.
If you decide to participate in the Plan, State Street Bank and Trust
Company, as your Plan Agent, will automatically invest your dividends and
capital gains distributions in Common Shares of the Trust for your account.
HOW TO PARTICIPATE
If you wish to participate and your shares are held in your own name, call
1-800-341-2929 for more information and a Plan brochure. If your shares are held
in the name of a brokerage firm, bank, or other nominee, you should contact your
nominee to see if it would participate in the Plan on your behalf. If you wish
to participate in the Plan, but your brokerage firm, bank or nominee is unable
to participate on your behalf, you should request that your shares be re-
registered in your own name which will enable your participation in the Plan.
HOW THE PLAN WORKS
Participants in the Plan will receive the equivalent in Common Shares valued on
the valuation date, generally at the lower of market price or net asset value,
except as specified below. The valuation date will be the dividend or
distribution payment date or, if that date is not a trading day on the national
securities exchange or market system on which the Common Shares are listed for
trading, the next preceding trading day. If the market price per Common Share on
the valuation date equals or exceeds net asset value per Common Share on that
date, the Trust will issue new Common Shares to participants valued at the
higher of net asset value or 95% of the market price on the valuation date. In
the foregoing situation, the Trust will not issue Common Shares under the Plan
below net asset value. If net asset value per Common Share on the valuation date
exceeds the market price per Common Share on that date, of if the Board of
Trustees should declare a dividend or capital gains distribution payable to the
Common Shareholders only in cash, participants in the Plan will be deemed to
have elected to receive Common Shares from the Trust valued at the market price
on that date. Accordingly, in this circumstance, the Plan Agent will, as agent
for the participants, buy the Trust's Common Shares in the open market for the
participants' accounts on or shortly after the payment date. If, before the Plan
Agent has completed its purchases, the market price exceeds the net asset value
per share of the Common Shares, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Trust's Common Shares,
resulting in the acquisition of fewer Common Shares than if the dividend or
distribution had been paid in Common Shares issued by the Trust. All
reinvestments are in full and fractional Common Shares and are carried to three
decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
changes sent to all Common Shareholders of the Trust at least 90 days before the
record date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Trust.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to help
you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
Plan participants may withdraw at any time by calling 1-800-341-2929 or by
writing State Street Bank and Trust Company, P.O. Box 8200, Boston, MA 02266-
8200. If you withdraw, you will receive, without charge, a share certificate
issued in your name for all full Common Shares credited to your account under
the Plan and a cash payment will be made for any fractional Common Share
credited to your account under the Plan. You may again elect to participate in
the Plan at any time by calling 1-800-341-2929 or writing to the Trust at:
Van Kampen American Capital
Attn: Closed-End Funds
2800 Post Oak Blvd., Houston, TX 77056
27
<PAGE> 29
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL* - Chairman
THEODORE A. MYERS
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
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
WILLIAM N. BROWN*
PETER W. HEGEL*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
CUSTODIAN AND
TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in the
Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1996
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
28
