<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 5
Portfolio of Investments......................... 6
Statement of Assets and Liabilities.............. 9
Statement of Operations.......................... 10
Statement of Changes in Net Assets............... 11
Financial Highlights............................. 12
Notes to Financial Statements.................... 13
Report of Independent Accountants................ 17
Dividend Reinvestment Plan....................... 18
</TABLE>
VPQ ANR 10/97
<PAGE> 2
LETTER TO SHAREHOLDERS
September 25, 1997
Dear Shareholder,
As you know, Van Kampen American
Capital was acquired by Morgan Stanley
Group Inc., paving the way for the
development of a prominent global
financial services company. More
recently, Morgan Stanley Group Inc. and [PHOTO]
Dean Witter, Discover & Co. agreed to
merge. The merger was completed on May
31, 1997, creating the combined company
of Morgan Stanley, Dean Witter, DENNIS J. MCDONNELL AND DON G. POWELL
Discover & Co. This preeminent global
financial services firm boasts a market capitalization of approximately $34
billion and leading market positions in securities, asset management, and credit
services. Additionally, I am very pleased to announce that Philip N. Duff,
formerly the chief financial officer of Morgan Stanley Group Inc., has joined
Van Kampen American Capital as president and chief executive officer. I will
continue as chairman of the firm. We are confident that the partnership of Van
Kampen American Capital and Morgan Stanley, Dean Witter, Discover & Co. will
continue to work to the benefit of our fund shareholders as we move into the
next century.
ECONOMIC REVIEW
Stability and growth continued to characterize the U.S. economic environment
during the past 12 months. In the first quarter of 1997, the economy accelerated
at its fastest pace since 1987. Consumer confidence remained high, and
unemployment fell to 4.9 percent at the end of August, one of the lowest levels
since 1973.
Despite this vigorous pace of economic growth, there were few signs of
inflation. Wholesale prices fell during each of the first seven months of 1997,
while at the consumer level, prices rose by a mere 2.2 percent during the 12
months through August. The strength of the U.S. dollar also helped curb
inflation by making imported goods less costly.
Meanwhile, on the state level, the Pennsylvania Commonwealth was stable,
reflecting slow economic growth and low unemployment, and a general fund with
revenue surpluses in excess of those originally budgeted for 1997. From 1989 to
1995, the Commonwealth per capita income stood above the national average,
totaling $23,279 in 1995.
MARKET REVIEW
The bond market responded positively during most of the reporting period.
The rally that began in May of 1996 continued through year end. This situation,
however, reversed in early 1997. With the economy picking up speed and
cautionary remarks by Federal Reserve Chairman Alan Greenspan about tighter
monetary policy, inflationary fears were ignited and interest rates began to
rise. When the Fed raised short-term interest rates by
Continued on page two
1
<PAGE> 3
a modest 0.25 percent in March, interest rates peaked and then began to decline
in April as inflationary fears abated.
During the reporting period, tax-exempt interest rates declined overall. On
August 31, 1997, 30-year AAA-rated municipal securities offered a tax-exempt
yield of 5.30 percent, compared to 5.71 percent one year ago. In comparison, the
30-year Treasury bond yielded 6.61 percent as of August 31, 1997 versus 7.11
percent as of August 31, 1996. The ratio of municipal yields to Treasury yields
remained at an attractive level during the period despite a slight drop from
80.3 percent on August 31, 1996 to 80.2 percent on August 31, 1997.
The most significant trend in the municipal market has been the increasing
number of insured AAA-rated bonds that are coming to market. Credit spreads have
narrowed dramatically due to an 18.1 percent increase in new insured bond
issuance during the first eight months of 1997.
TRUST STRATEGY
We employed the following strategies to manage the portfolio during the 12-month
period:
- - As of August 31, 1997, approximately 56 percent of the Trust's long-term
investments were rated AAA. The high percentage of insured issuance coming
to market has compressed yield spreads, making the yields of AAA-rated bonds
more attractive. Approximately 21 percent of the Trust's long-term
investments are BBB-rated or non-rated (with an internal investment grade
rating, as rated by our analysts, at the time of purchase). Allocating
assets at both ends of the investment grade spectrum should help to reduce
the volatility caused by interest rate movements. Securities rated AAA
provide safety of principal and total return opportunities, while
lower-rated securities provide the potential for a higher degree of income
and generally exhibit less price movement when interest rates change.
[CREDIT QUALITY GRAPH]
Portfolio Composition by Credit Quality
as of August 31, 1997*
<TABLE>
<S> <C>
AAA............ 55.7%
AA............. 5.2%
A.............. 14.0%
BBB............ 17.5%
BB............. 4.5%
Non-Rated...... 3.1%
</TABLE>
*As a Percentage of Long-Term Investments
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's.
- - We continued to seek lower-rated and non-rated bonds that could enhance the
Trust's dividend-paying ability. While credits that meet our rigid research
criteria are often difficult to find, we were able to identify several
opportunities during the period. We purchased positions in Delaware County
First Revenue bonds for Riddle Village
Continued on page three
2
<PAGE> 4
(Non-Rated/Non-Rated), Pennsylvania Economic Development Financing
Authority (Non-Rated/BBB-), and Centro de Recaudaciones PR
(Non-Rated/Non-Rated). These securities, acquired at yields ranging from
6.33 percent to 6.88 percent, have performed well since our acquisition.
Keep in mind that not all issues have performed favorably, and there is no
guarantee that these issues will perform well in the future.
- - We adjusted the portfolio's duration to 5.38 years on August 31, 1997, based
on our interest rate outlook. Duration, expressed in years, is a measurement
of the Trust's volatility to interest rate movements. Portfolios with
shorter durations have tended to perform better when interest rates rise,
while funds with longer durations have tended to outperform when interest
rates decline. In anticipation that the Fed would raise rates in March, we
shortened the duration. When rates declined after the March up-tick, we
lengthened the duration. Our interest rate outlook at the end of the
reporting period moved to a more neutral stance.
The Trust also benefited from the refunding of two holdings that were
repurchased at a premium. Our $7.5 million holding in Allegheny County Hospital
Authority for St. Margaret Memorial Hospital was pre-refunded earlier this year.
Just recently, $4 million of Lehigh County General Purpose bonds for Good
Sheperd Rehabilitation Center were pre-refunded and the rating was upgraded.
Twelve-month Distribution History
For the Period Ended August 31, 1997
Distribution per Common Share
<TABLE>
<CAPTION>
Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
1996 1996 1996 1996 1997 1997 1997 1997 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Gains $.0305
Dividends $.0910 $.0910 $.0910 $.0910 $.0910 $.0910 $.0850 $.0850 $.0850 $.0850 $.0850 $.0850
</TABLE>
The dividend and capital gains history represents past performance of the Trust
and does not predict the Trust's future distributions.
PERFORMANCE SUMMARY
The Van Kampen American Capital Pennsylvania Quality Municipal Trust
continued its positive performance during the fiscal year. For the year ended
August 31, 1997, the Trust generated a total return at market price of 4.72
percent(1), including reinvestment of income dividends totaling $1.0560 per
common share and capital gains of $0.0305 per common share. The Trust offered a
tax-exempt distribution rate of 6.07 percent(3), based on the closing common
stock price of $16.8125 per share on August 31, 1997. Because income from the
Trust is exempt from federal and Pennsylvania state income tax, this
distribution
Continued on page four
3
<PAGE> 5
rate represents a yield equivalent to a taxable investment earning 9.76
percent(4) (for investors in the 37.8 percent combined federal and state income
tax bracket). At the end of the reporting period, the closing share price of the
Trust traded at a 1.45 percent discount to its net asset value of $17.06.
<TABLE>
TOP FIVE PORTFOLIO INDUSTRY HOLDINGS BY SECTOR*
AS OF
AUGUST 31, 1997
<S> <C>
Health Care............................................. 25.4%
General Purpose......................................... 21.1%
Water and Sewer......................................... 10.3%
Student Loan............................................ 9.0%
Retail Electric/Gas/Telephone........................... 5.7%
</TABLE>
*As a Percentage of Long-Term Investments
OUTLOOK
We expect the pace of economic activity for the remainder of 1997 to
accelerate modestly from the relatively pedestrian rate that prevailed during
the second quarter. While we do not believe that economic growth will be rapid
enough to reignite inflation, some warning signs are present, including a tight
labor market and high consumer confidence. However, our long-term interest rate
outlook remains bullish.
We believe the Trust is positioned to perform well and do not anticipate
making major changes to the structure of the portfolio. Our portfolio management
team continues to seek a balance between the Trust's total return and its
dividend income, as well as add value through security selection. The Trust
continues to benefit from its leveraged capital structure, which provides common
shareholders with above-market levels of dividend income. It should be noted,
however, that a significant rise in short-term interest rates would have an
unfavorable effect on the dividend-paying ability of the common shares, and
would also negatively impact the price.
We encourage investors to take this opportunity to consider how their
investments are currently divided among the three major asset classes of stocks,
bonds, and cash. Uneven moves in the various markets can distort a carefully
planned investment program. We encourage you to review your portfolio with an
eye toward correcting imbalances in the way assets have grown to be allocated.
Once again, we appreciate your continued confidence in your Van Kampen
American Capital investments and the team who manages your Trust.
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.
Please see footnotes on page five
4
<PAGE> 6
PERFORMANCE RESULTS FOR THE PERIOD ENDED AUGUST 31, 1997
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST
(NYSE TICKER SYMBOL-VPQ)
COMMON SHARE TOTAL RETURNS
<TABLE>
<S> <C>
One-year total return based on market price(1)............ 4.72%
One-year total return based on NAV(2)..................... 9.93%
</TABLE>
DISTRIBUTION RATES
<TABLE>
<S> <C>
Distribution rate as a % of closing common stock
price(3)................................................ 6.07%
Taxable-equivalent distribution rate as a % of closing
common stock price(4)................................... 9.76%
</TABLE>
SHARE VALUATIONS
<TABLE>
<S> <C>
Net asset value........................................... $ 17.06
Closing common stock price................................ $16.8125
One-year high common stock price (03/04/97)............... $17.6250
One-year low common stock price (04/28/97)................ $16.0000
Preferred share rate(5)................................... 3.514%
</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 common 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 37.8%
combined federal and state tax bracket, which takes into consideration the
deductibility of individual state taxes paid.
(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.
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS
August 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS
PENNSYLVANIA 90.0%
$ 6,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser B (FSA Insd)........................... 6.625% 01/01/22 $ 6,993,285
7,475 Allegheny Cnty, PA Hosp Dev Auth Rev Saint
Margaret Mem Hosp (Prerefunded @ 10/01/01)...... 7.125 10/01/21 8,221,977
2,575 Allegheny Cnty, PA San Auth Swr Rev Ser A (FGIC
Insd)........................................... * 12/01/08 1,467,261
2,580 Allegheny Cnty, PA San Auth Swr Rev Ser A (FGIC
Insd)........................................... * 06/01/09 1,417,504
1,645 Allegheny Cnty, PA San Auth Swr Rev Ser A (FGIC
Insd)........................................... * 12/01/09 881,062
2,475 Allentown, PA Area Hosp Auth Rev Sacred Heart
Hosp of Allentown............................... 7.500 07/01/06 2,703,046
2,690 Armstrong Cnty, PA Hosp Auth Hosp Rev Armstrong
Cnty Mem Hosp Ser A............................. 7.200 11/01/06 2,736,914
5,500 Armstrong Cnty, PA Hosp Auth Hosp Rev Armstrong
Cnty Mem Hosp Ser A............................. 7.500 11/01/16 5,545,980
1,000 Chester Cnty, PA Hlth & Edl Fac Auth Hosp Rev
Bryn Mawr Rehab Hosp Rfdg (Prerefunded @
07/01/02)....................................... 6.900 07/01/07 1,121,920
1,150 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/03 889,996
1,130 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/03 854,393
1,195 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/04 877,154
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/04 874,484
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/05 850,816
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/05 830,637
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/06 807,567
1,020 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/06 659,002
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/07 765,770
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/07 747,238
1,190 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/08 703,968
1,205 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/08 695,261
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/09 661,813
7,310 Dauphin Cnty, PA Hosp Auth Rev Cmnty Genl
Osteopathic Hosp Rfdg........................... 7.375 06/01/16 7,947,140
1,000 Delaware Cnty, PA Auth First Mtg Rev Riddle Vlg
Proj Rfdg....................................... 6.875 06/01/16 1,025,610
6,000 Delaware Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Philadelphia Elec Co Proj....................... 7.375 04/01/21 6,537,720
18,000 Emmaus, PA Genl Auth Rev Local Govt Pool G (FGIC
Insd)........................................... 7.000 05/15/18 19,584,180
4,000 Falls Twp, PA Hosp Auth Hosp Rev Delaware Vly
Med Rfdg (FHA Gtd).............................. 7.000 08/01/22 4,340,160
1,000 Kiski, PA Area Sch Dist (FGIC Insd)............. 5.300 03/01/17 985,180
780 Lancaster, PA Indl Dev Auth Coml Rev First Mtg
Kmart Corp Ser A Rfdg........................... 7.100 09/15/07 816,832
4,000 Lehigh Cnty, PA Genl Purp Auth Rev Good Shepherd
Rehab Hosp (Prerefunded @ 11/15/01)............. 7.500 11/15/21 4,542,280
5,500 Lehigh Cnty, PA Genl Purp Auth Rev Muhlenberg
Hosp Ser B (Prerefunded @ 07/15/99)............. 8.100 07/15/10 5,990,215
3,100 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Abington Hosp (AMBAC Insd).................. 6.000 06/01/16 3,218,265
950 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Pottstown Mem Med Cent Proj................. 7.000 11/15/99 993,462
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 1,250 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Pottstown Mem Med Cent Proj................. 7.350% 11/15/05 $ 1,352,087
2,345 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Pottstown Mem Med Cent Proj................. 6.875 11/15/20 2,477,750
6,000 Montgomery Cnty, PA Indl Dev Auth Rev Res
Recovery........................................ 7.500 01/01/12 6,577,920
2,000 Pennsylvania Econ Dev Fin Auth Exempt Fac Rev
MacMillan Ltd Partnership Proj.................. 7.600 12/01/20 2,306,060
1,000 Pennsylvania Econ Dev Fin Auth Res Recov Rev
Colver Proj Ser D............................... 7.150 12/01/18 1,092,920
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
54A Rfdg (FHA Gtd).............................. 6.050 10/01/16 1,024,290
1,565 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
54A Rfdg (FHA Gtd).............................. 6.150 10/01/22 1,609,242
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
34B (FHA Gtd)................................... 7.000 04/01/24 1,059,730
2,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
42.............................................. 6.850 04/01/25 2,161,760
3,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
52B (FHA Gtd)................................... 6.250 10/01/24 3,100,710
1,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
53A............................................. 6.050 04/01/18 1,536,435
7,000 Pennsylvania Intergvtl Coop Auth Spl Tax Rev
City of Philadelphia (Prerefunded @ 06/15/02)... 6.800 06/15/22 7,710,500
17,015 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser A (AMBAC Insd)............... 7.050 10/01/16 18,073,163
1,000 Pennsylvania St Higher Edl Fac Auth College &
Univ Rev Hahnemann Univ Proj (Prerefunded @
07/01/99) (MBIA Insd)........................... 7.200 07/01/19 1,073,880
2,200 Pennsylvania St Higher Edl Fac Auth Rev Med
College PA Ser A (Prerefunded @ 03/01/99)....... 8.375 03/01/11 2,379,960
4,250 Philadelphia, PA Arpt Rev Ser A (AMBAC Insd).... 6.100 06/15/25 4,411,372
3,000 Philadelphia, PA Gas Wks Rev Ser 14 (FSA
Insd)........................................... 6.250 07/01/08 3,269,280
2,000 Philadelphia, PA Gas Wks Rev Ser 14 (Cap Guar
Insd)........................................... 6.375 07/01/14 2,168,640
7,165 Philadelphia, PA Muni Auth Rev Justice Lease Ser
B (Prerefunded @ 11/15/01) (FGIC Insd).......... 7.125 11/15/18 8,048,874
5,000 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.500 08/01/10 5,651,400
5,500 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.000 08/01/18 6,025,305
3,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (MBIA
Insd)........................................... 5.625 06/15/08 3,188,160
------------
183,587,530
------------
PUERTO RICO 6.8%
943 Centro De Recaudaciones De Ingresos Muni Ctfs
Partn PR........................................ 6.850 10/17/03 978,347
14,000 Puerto Rico Comwlth Pub Impt Rfdg............... * 07/01/04 10,081,120
1,560 Puerto Rico Elec Pwr Auth Pwr Rev Ser U Rfdg.... 6.000 07/01/14 1,640,636
990 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth
Fac Ser K Rfdg.................................. 6.600 07/01/04 1,080,328
------------
13,780,431
------------
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U. S. VIRGIN ISLANDS 2.0%
$ 3,750 Virgin Islands Pub Fin Auth Rev Matching Fd Ln
Nts Ser A Rfdg.................................. 7.250% 10/01/18 $ 4,174,125
------------
TOTAL INVESTMENTS 98.8%
(Cost $184,186,714)....................................................... 201,542,086
OTHER ASSETS IN EXCESS OF LIABILITIES 1.2%................................. 2,540,872
------------
NET ASSETS 100.0%.......................................................... $204,082,958
============
</TABLE>
* Zero coupon bond
See Notes to Financial Statements
8
<PAGE> 10
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $184,186,714)....................... $201,542,086
Interest Receivable......................................... 3,488,987
Other....................................................... 1,423
------------
Total Assets.......................................... 205,032,496
------------
LIABILITIES:
Payables:
Custodian Bank............................................ 422,926
Income Distributions - Common and Preferred Shares........ 202,903
Investment Advisory Fee................................... 121,495
Administrative Fee........................................ 34,713
Affiliates................................................ 9,443
Accrued Expenses............................................ 87,345
Deferred Compensation and Retirement Plans.................. 70,713
------------
Total Liabilities..................................... 949,538
------------
NET ASSETS.................................................. $204,082,958
============
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, authorized 100,000,000
shares, 1,300 issued with liquidation preference of
$50,000 per share)........................................ $ 65,000,000
------------
Common Shares ($.01 par value with an unlimited number of
shares authorized, 8,153,254 shares issued and
outstanding).............................................. 81,533
Paid in Surplus............................................. 120,641,844
Net Unrealized Appreciation................................. 17,355,372
Accumulated Undistributed Net Investment Income............. 770,099
Accumulated Net Realized Gain............................... 234,110
------------
Net Assets Applicable to Common Shares................ 139,082,958
------------
NET ASSETS.................................................. $204,082,958
============
NET ASSET VALUE PER COMMON SHARE ($139,082,958 divided by
8,153,254 shares outstanding)............................. $ 17.06
============
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
STATEMENT OF OPERATIONS
For the Year Ended August 31, 1997
- -------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $12,834,242
-----------
EXPENSES:
Investment Advisory Fee..................................... 1,411,982
Administrative Fee.......................................... 403,424
Preferred Share Maintenance................................. 177,256
Trustees Fees and Expenses.................................. 27,003
Legal....................................................... 17,969
Custody..................................................... 12,347
Amortization of Organizational Costs........................ 428
Other....................................................... 218,560
-----------
Total Expenses.......................................... 2,268,969
-----------
NET INVESTMENT INCOME....................................... $10,565,273
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 234,110
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 12,808,670
End of the Period......................................... 17,355,372
-----------
Net Unrealized Appreciation During the Period............... 4,546,702
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 4,780,812
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $15,346,085
===========
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended August 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
August 31, 1997 August 31, 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income...................................... $ 10,565,273 $ 10,562,636
Net Realized Gain.......................................... 234,110 319,936
Net Unrealized Appreciation/Depreciation During the
Period................................................... 4,546,702 (851,139)
------------ ------------
Change in Net Assets from Operations....................... 15,346,085 10,031,433
------------ ------------
Distributions from Net Investment Income:
Common Shares............................................ (8,596,978) (8,851,145)
Preferred Shares......................................... (2,254,783) (2,392,144)
------------ ------------
(10,851,761) (11,243,289)
------------ ------------
Distributions from Net Realized Gain:
Common Shares............................................ (247,642) (64,224)
Preferred Shares......................................... (72,294) (19,611)
------------ ------------
(319,936) (83,835)
------------ ------------
Total Distributions........................................ (11,171,697) (11,327,124)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES........ 4,174,388 (1,295,691)
FROM CAPITAL TRANSACTIONS:
Value of Common Shares Issued Through Dividend
Reinvestment............................................. 424,967 521,036
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS...................... 4,599,355 (774,655)
NET ASSETS:
Beginning of the Period.................................... 199,483,603 200,258,258
------------ ------------
End of the Period (Including accumulated undistributed net
investment income of $770,099 and $1,056,223,
respectively)............................................ $204,082,958 $199,483,603
============ ============
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
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
(Commencement
Year Ended August 31 of Investment
----------------------------------------------- Operations) to
1997 1996 1995 1994 1993 August 31, 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Period (a)... $16.546 $16.705 $16.431 $17.987 $16.387 $14.788
------ ------ ------ ------ ------ --------
Net Investment Income......... 1.297 1.302 1.331 1.338 1.344 1.092
Net Realized and Unrealized
Gain/Loss................... .588 (.064) .349 (1.544) 1.685 1.460
------ ------ ------ ------ ------ --------
Total from Investment
Operations.................... 1.885 1.238 1.680 (.206) 3.029 2.552
------ ------ ------ ------ ------ --------
Less:
Distributions from Net
Investment Income:
Paid to Common
Shareholders.............. 1.056 1.092 1.092 1.092 1.042 .754
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders.... .277 .295 .312 .214 .186 .199
Distributions from Net
Realized Gain:
Paid to Common
Shareholders.............. .030 .008 .002 .039 .161 -0-
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders.... .009 .002 -0- .005 .040 -0-
------ ------ ------ ------ ------ --------
Total Distributions............. 1.372 1.397 1.406 1.350 1.429 .953
------ ------ ------ ------ ------ --------
Net Asset Value, End of the
Period........................ $17.059 $16.546 $16.705 $16.431 $17.987 $16.387
======= ======= ======= ======= ======= ========
Market Price Per Share at End
of the Period................. $16.813 $17.125 $16.250 $16.125 $17.625 $15.750
Total Investment Return at
Market Price (b).............. 4.72% 12.52% 8.02% (2.22%) 20.26% 10.22%*
Total Return at Net Asset Value
(c)........................... 9.93% 5.71% 8.90% (2.45%) 17.85% 14.65%*
Net Assets at End of the Period
(In millions)................. $ 204.1 $ 199.5 $ 200.3 $ 197.7 $ 210.0 $ 197.0
Ratio of Expenses to Average
Net Assets Applicable to
Common Shares................. 1.66% 1.67% 1.73% 1.64% 1.64% 1.58%
Ratio of Expenses to Average Net
Assets (d).................... 1.12% 1.13% 1.15% 1.12% 1.11% 1.11%
Ratio of Net Investment Income
to Average Net Assets
Applicable to Common Shares
(d)........................... 6.08% 5.99% 6.37% 6.54% 6.85% 6.28%
Portfolio Turnover.............. 6% 13% 15% 1% 4% 55%*
</TABLE>
(a) Net Asset Value at September 27, 1991, is adjusted for common and preferred
share offering costs of $.212 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
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
August 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Pennsylvania Quality Municipal Trust (the "Trust")
is registered as a non-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 and
Pennsylvania income taxes and, where possible under local law, local income and
personal property taxes, consistent with preservation of capital. The Trust will
invest in a portfolio consisting substantially of Pennsylvania 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. As of August 31, 1997, there were no
when issued or delayed delivery purchase commitments.
13
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1997
- --------------------------------------------------------------------------------
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.
D. ORGANIZATIONAL COSTS--The Trust 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 $30,000. These costs were amortized on a straight line basis over the 60
month period ended September 26, 1996.
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.
At August 31, 1997, for federal income tax purposes cost of long-term
investments is $184,186,714, the aggregate gross unrealized appreciation is
$17,355,372 and the aggregate gross unrealized depreciation is $0, resulting in
net unrealized appreciation of $17,355,372.
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. Permanent book and tax basis differences relating to the recognition
of certain expenses which are not deductible for tax purposes totaling $364 have
been reclassified from accumulated undistributed net investment income to paid
in surplus.
For the year ended August 31, 1997, 99.97% of the income distributions made
by the Trust were exempt from federal income taxes. In January, 1998, the Trust
will provide tax information to shareholders for the 1997 calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (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 fee to VKAC, the Trust's Administrator, at an annual
rate of .20% of the average net assets of the Trust.
14
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1997
- --------------------------------------------------------------------------------
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.
For the year ended August 31, 1997, the Trust recognized expenses of
approximately $8,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.
For the year ended August 31, 1997, the Trust recognized expenses of
approximately $68,100 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 who are not officers of VKAC. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year
period and are based upon each trustee's years of service of the Fund. The
maximum annual benefit per trustee under the plan is equal to the trustees'
annual retainer fee, which is currently $2,500.
3. CAPITAL TRANSACTIONS
At August 31, 1997 and 1996, paid in surplus related to common shares aggregated
$120,641,844 and $120,217,495, respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
AUGUST 31, 1997 AUGUST 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares......................... 8,127,899 8,096,647
Shares Issued Through Dividend
Reinvestment........................... 25,355 31,252
--------- ---------
Ending Shares............................ 8,153,254 8,127,899
========= =========
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $11,025,150 and $13,304,501
respectively.
15
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1997
- --------------------------------------------------------------------------------
5. PREFERRED SHARES
The Trust has outstanding 1,300 Auction Preferred Shares ("APS"). Dividends are
cumulative and the rate is currently reset through an auction process every 28
days. The rate in effect on August 31, 1997, was 3.514% and for the year ended
August 31, 1997, the rates ranged from 3.36% to 4.16%.
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.
16
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen American Capital Pennsylvania Quality Municipal Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Pennsylvania Quality Municipal Trust (the "Trust"),
including the portfolio of investments, as of August 31, 1997, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the 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, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Pennsylvania Quality Municipal Trust as of August 31,
1997, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
October 8, 1997
17
<PAGE> 19
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, or 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
18
<PAGE> 20
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
GLOBAL AND
INTERNATIONAL
Global Equity Fund
Global Government Securities Fund
Global Managed Assets Fund
Short-Term Global Income Fund
Strategic Income Fund
EQUITY
Growth
Aggressive Growth Fund
Emerging Growth Fund
Enterprise Fund
Growth Fund
Pace Fund
Growth & Income
Comstock Fund
Equity Income Fund
Growth and Income Fund
Harbor Fund
Real Estate Securities Fund
Utility Fund
FIXED INCOME
Corporate Bond Fund
Government Securities Fund
High Income Corporate Bond Fund
High Yield Fund
Limited Maturity Government Fund
Prime Rate Income Trust
Reserve Fund
U.S. Government Fund
U.S. Government Trust for Income
TAX-FREE
California Insured Tax Free Fund
Florida Insured Tax Free Income Fund
High Yield Municipal Fund
Insured Tax Free Income Fund
Intermediate Term Municipal Income Fund
Municipal Income Fund
New Jersey Tax Free Income Fund
New York Tax Free Income Fund
Pennsylvania Tax Free Income Fund
Tax Free High Income Fund
Tax Free Money Fund
MORGAN STANLEY
FUND, INC.
Aggressive Equity Fund
American Value Fund
Asian Growth Fund
Emerging Markets Fund
Global Equity Allocation Fund
Global Fixed Income Fund
High Yield Fund
International Magnum Fund
Latin American Fund
U.S. Real Estate Fund
Value Fund
Worldwide High Income Fund
Ask your investment representative for a prospectus containing more complete
information, including sales charges and expenses. Please read it carefully
before you invest or send money. Or call us weekdays from 7:00 a.m. to 7:00
p.m. Central time at 1-800-341-2911 for Van Kampen American Capital funds or
Morgan Stanley retail funds.
20
<PAGE> 21
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY 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
PETER W. HEGEL*
Vice President
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 (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Trust, as defined in
the Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1997
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
RESULTS OF SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on May 28, 1997, where
shareholders voted on a new investment advisory agreement, the election of
Trustees and the selection of independent public accountants. With regard to the
approval of a new investment advisory agreement between Van Kampen American
Capital Investment Advisory Corp. and the Trust, 6,547,814 shares voted for the
proposal, 139,372 shares voted against, 150,497 shares abstained and 0 shares
represented broker non-votes. With regard to the election of Rod Dammeyer as
elected trustee by the preferred shareholders of the Trust 928 shares voted in
his favor and 0 shares withheld. With regard to the election of Wayne W. Whalen
as elected trustee by the common shareholders of the Trust 6,657,316 shares
voted in his favor and 179,438 shares withheld. The other trustees of the Fund
whose terms did not expire in 1997 are Dennis J. McDonnell, Theodore A. Myers,
Hugo F. Sonnenschein, David C. Arch and Howard J Kerr. With regard to the
ratification of KPMG Peat Marwick LLP as independent public accountants for the
Trust, 6,674,834 shares voted in favor of the proposal, 61,884 shares voted
against, 100,965 shares abstained and 0 shares represented broker non-votes.
20