<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
A Farewell from the Chairman..................... 1
Portfolio of Investments......................... 2
Statement of Assets and Liabilities.............. 5
Statement of Operations.......................... 6
Statement of Changes in Net Assets............... 7
Financial Highlights............................. 8
Notes to Financial Statements.................... 10
Report of Independent Accountants................ 14
Dividend Reinvestment Plan....................... 15
</TABLE>
VPQ ANR 12/98
<PAGE> 2
A FAREWELL FROM THE CHAIRMAN
------------------------ - ------------------------
Dear Shareholder,
Since I became president and chief executive officer in 1987, much has
changed in our business. However, one thing has remained constant through these
years--my commitment to you, the trust shareholder. Through the many events at
Van Kampen that have marked the passage of time--including several mergers,
company name changes, and leadership changes--we have always focused on
providing superior investments and the highest level of customer service to help
you meet your investment objectives. I'm proud to say that during my tenure, Van
Kampen won eight consecutive awards for high-quality customer service--more
consecutive service awards than any other firm in the financial services
industry.(1) My successor, Dick Powers, shares this commitment to meeting your
needs and providing innovative and efficient ways to help you work with your
investment adviser to reach your financial goals.
Although my official retirement begins on January 1, 1999, I will remain
active in the industry and the community. I plan to continue my service as a
member of the board of directors of the Investment Company Institute, the
leading mutual fund industry association, and I will remain a trustee of your
Trust.
In closing, I want to say farewell to all of you. Thank you for your support
of Van Kampen over the years and for giving me the opportunity to serve you.
Best wishes,
Don G. Powell
Don G. Powell
------------------------ - ------------------------
(1)American Capital, which merged with Van Kampen in 1995, received the DALBAR
Service Award annually from 1990 to 1994. The award was called the Quality
Tested Service Seal until 1997.
1
<PAGE> 3
PORTFOLIO OF INVESTMENTS
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 99.1%
PENNSYLVANIA 89.9%
$ 6,500 Allegheny Cnty, PA Arpt Rev Gtr Pittsburgh Intl
Arpt Ser B (FSA Insd)........................... 6.625% 01/01/22 $ 7,079,735
7,475 Allegheny Cnty, PA Hosp Dev Auth Rev Saint
Margaret Mem Hosp (Prerefunded @ 10/01/01)...... 7.125 10/01/21 8,177,052
2,575 Allegheny Cnty, PA San Auth Swr Rev Ser A (FGIC
Insd)........................................... * 12/01/08 1,661,725
2,580 Allegheny Cnty, PA San Auth Swr Rev Ser A (FGIC
Insd)........................................... * 06/01/09 1,612,423
1,645 Allegheny Cnty, PA San Auth Swr Rev Ser A (FGIC
Insd)........................................... * 12/01/09 1,005,490
2,475 Allentown, PA Area Hosp Auth Rev Sacred Heart
Hosp of Allentown............................... 7.500 07/01/06 2,687,850
2,690 Armstrong Cnty, PA Hosp Auth Hosp Rev Armstrong
Cnty Mem Hosp Ser A............................. 7.200 11/01/06 2,835,825
5,500 Armstrong Cnty, PA Hosp Auth Hosp Rev Armstrong
Cnty Mem Hosp Ser A............................. 7.500 11/01/16 5,824,280
1,800 Berks Cnty, PA Muni Auth Rev Phoebe Devitt Homes
Proj A1 Rfdg.................................... 5.750 05/15/22 1,786,176
4,000 Berks Cnty, PA Muni Auth Rev Hlth Care Pooled
Fin Proj........................................ 5.000 03/01/28 3,877,080
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 1,126,240
1,150 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/03 968,944
1,130 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/03 933,470
1,195 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/04 962,811
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/04 963,251
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/05 938,107
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/05 918,855
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/06 896,773
1,020 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/06 734,196
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/07 856,428
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/07 838,445
1,190 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 03/01/08 793,373
1,205 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/08 786,118
1,220 Chichester Sch Dist PA Ser B (FGIC Insd)........ * 09/01/09 754,045
7,310 Dauphin Cnty, PA Hosp Auth Rev Cmnty Genl
Osteopathic Hosp Rfdg........................... 7.375 06/01/16 7,982,959
1,000 Delaware Cnty, PA Auth First Mtg Rev Riddle Vlg
Proj Rfdg....................................... 6.875 06/01/16 1,052,010
6,000 Delaware Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Philadelphia Elec Co Proj....................... 7.375 04/01/21 6,458,460
1,000 Delaware Cnty, PA Indl Dev Auth Rev Res Recovery
Fac Ser A Rfdg.................................. 6.200 07/01/19 1,074,610
18,000 Emmaus, PA Genl Auth Rev Local Govt Pool G (FGIC
Insd)........................................... 7.000 05/15/18 19,522,980
4,000 Falls Twp, PA Hosp Auth Hosp Rev Delaware Vly
Med Rfdg (FHA Gtd).............................. 7.000 08/01/22 4,448,040
</TABLE>
See Notes to Financial Statements
2
<PAGE> 4
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 780 Lancaster, PA Indl Dev Auth Coml Rev First Mtg
Kmart Corp Ser A Rfdg........................... 7.100% 09/15/07 $ 830,138
4,000 Lehigh Cnty, PA Genl Purp Auth Rev Good Shepherd
Rehab Hosp (Prerefunded @ 11/15/01)............. 7.500 11/15/21 4,508,640
1,000 Mars, PA Area Sch Dist (AMBAC Insd)............. 5.000 09/01/27 987,140
1,200 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Abington Mem Hosp Ser A (AMBAC Insd)........ 6.000 06/01/16 1,301,280
1,900 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Abington Mem Hosp Ser A (Prerefunded @
06/01/03) (AMBAC Insd).......................... 6.000 06/01/16 2,105,960
655 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Pottstown Mem Med Cent Proj................. 7.000 11/15/99 670,058
1,250 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Pottstown Mem Med Cent Proj (Prerefunded @
11/15/01)....................................... 7.350 11/15/05 1,403,600
2,345 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp
Rev Pottstown Mem Med Cent Proj (Prerefunded @
11/15/01)....................................... 6.875 11/15/20 2,605,342
6,000 Montgomery Cnty, PA Indl Dev Auth Rev Res
Recovery (LOC: Banque Paribas).................. 7.500 01/01/12 6,355,440
1,395 North East, PA Sch Dist (FGIC Insd)............. 5.250 09/01/28 1,417,948
1,085 Northampton Cnty, PA Indl Dev Auth Rev Rfdg
First Mtg Kirkland Vlg.......................... 5.625 12/15/19 1,065,199
1,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev
Colver Proj Ser D............................... 7.150 12/01/18 1,116,310
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
34B (FHA Gtd)................................... 7.000 04/01/24 1,047,780
2,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
42 Rfdg......................................... 6.850 04/01/25 2,179,640
3,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
52B (FHA Gtd)................................... 6.250 10/01/24 3,197,580
1,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
53A............................................. 6.050 04/01/18 1,591,785
1,000 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
54A Rfdg (FHA Gtd).............................. 6.050 10/01/16 1,061,190
1,565 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
54A Rfdg (FHA Gtd).............................. 6.150 10/01/22 1,660,324
7,000 Pennsylvania Intergvtl Coop Auth Spl Tax Rev
City of Philadelphia (Prerefunded @ 06/15/02)... 6.800 06/15/22 7,735,700
17,015 Pennsylvania St Higher Edl Assistance Agy
Student Ln Rev Ser A (AMBAC Insd) (b)........... 7.050 10/01/16 18,066,017
4,250 Philadelphia, PA Arpt Rev Ser A (AMBAC Insd).... 6.100 06/15/25 4,646,312
1,250 Philadelphia, PA Auth Indl Dev Hlth Care Fac Rev
Baptist Home of Philadelphia Ser A.............. 5.600 11/15/28 1,231,200
2,000 Philadelphia, PA Gas Wks Rev Ser 14 Rfdg (FSA
Insd)........................................... 6.375 07/01/14 2,225,900
3,000 Philadelphia, PA Gas Wks Rev Ser 14 Rfdg (FSA
Insd)........................................... 6.250 07/01/08 3,337,290
7,165 Philadelphia, PA Muni Auth Rev Justice Lease Ser
B (Prerefunded @ 11/15/01) (FGIC Insd).......... 7.125 11/15/18 8,013,838
</TABLE>
See Notes to Financial Statements
3
<PAGE> 5
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 5,000 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.500% 08/01/10 $ 5,597,250
5,500 Philadelphia, PA Wtr & Swr Rev Ser 16
(Prerefunded @ 08/01/01)........................ 7.000 08/01/18 5,987,300
3,000 Philadelphia, PA Wtr & Wastewtr Rev Rfdg (MBIA
Insd)........................................... 5.625 06/15/08 3,311,700
1,000 State Public School Bldg Auth PA College Rev
Rfdg Community College Proj Ser Q (MBIA Insd)
(a)............................................. 5.250 10/15/14 1,053,750
235 State Public School Bldg Auth PA College Rev
Rfdg Community College Proj Ser Q (MBIA Insd)
(a)............................................. 5.250 10/15/15 246,473
------------
186,115,835
------------
PUERTO RICO 7.1%
761 Centro de Recaudaciones de Ingresos Muni Ctfs
Partn PR........................................ 6.850 10/17/03 795,470
14,000 Puerto Rico Comwlth Pub Impt Rfdg............... * 07/01/04 11,184,320
1,560 Puerto Rico Elec Pwr Auth Pwr Rev Ser U Rfdg.... 6.000 07/01/14 1,713,675
990 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth
Fac Ser K Rfdg.................................. 6.600 07/01/04 1,089,772
------------
14,783,237
------------
U.S. VIRGIN ISLANDS 2.1%
3,750.. Virgin Islands Pub Fin Auth Rev Matching Fd Ln
Nts Ser A Rfdg (Prerefunded @ 10/01/02)......... 7.250 10/01/18 4,300,838
------------
TOTAL LONG-TERM INVESTMENTS 99.1%
(Cost $186,165,390)....................................................... 205,199,910
------------
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9%................................. 1,895,696
------------
NET ASSETS 100.0%.......................................................... $207,095,606
------------
</TABLE>
* Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
PORTFOLIO COMPOSITION BY CREDIT QUALITY*
The following table summarizes the portfolio composition at October 31,
1998, based upon the highest credit quality ratings as determined by Standard &
Poor's or Moody's.
<TABLE>
<S> <C>
AAA................................. 57.8%
AA.................................. 7.1
A................................... 11.8
BBB................................. 13.7
BB.................................. 4.6
NR.................................. 5.0
------
100.0%
------
</TABLE>
* As a Percentage of Long-Term Investments.
See Notes to Financial Statements
4
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $186,165,390)....................... $205,199,910
Cash........................................................ 789,727
Interest Receivable......................................... 2,890,254
Other....................................................... 2,529
------------
Total Assets.......................................... 208,882,420
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 1,309,566
Income Distributions - Preferred Shares................... 146,172
Investment Advisory Fee................................... 123,421
Administrative Fee........................................ 35,263
Affiliates................................................ 9,540
Trustees' Deferred Compensation and Retirement Plans........ 90,928
Accrued Expenses............................................ 71,924
------------
Total Liabilities..................................... 1,786,814
------------
NET ASSETS.................................................. $207,095,606
============
NET ASSETS CONSIST OF:
Preferred Shares ($.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, 8,202,775 shares issued and
outstanding).............................................. 82,028
Paid in Surplus............................................. 121,495,325
Net Unrealized Appreciation................................. 19,034,520
Accumulated Net Realized Gain............................... 813,735
Accumulated Undistributed Net Investment Income............. 669,998
------------
Net Assets Applicable to Common Shares................ 142,095,606
------------
NET ASSETS.................................................. $207,095,606
============
NET ASSET VALUE PER COMMON SHARE ($142,095,606 divided by
8,202,775 shares outstanding)............................. $ 17.32
============
</TABLE>
See Notes to Financial Statements
5
<PAGE> 7
STATEMENT OF OPERATIONS
For the Two Months Ended October 31, 1998 and
the Year Ended August 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Two Months Ended Year Ended
October 31, 1998 August 31, 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest.............................................. $ 2,115,544 $12,869,325
----------- -----------
EXPENSES:
Investment Advisory Fee............................... 242,367 1,439,012
Administrative Fee.................................... 69,248 411,146
Preferred Share Maintenance........................... 28,380 169,816
Legal................................................. 3,186 8,698
Custody............................................... 2,283 14,558
Trustees' Fees and Expenses........................... 703 26,572
Other................................................. 51,340 202,463
----------- -----------
Total Expenses.................................... 397,507 2,272,265
----------- -----------
NET INVESTMENT INCOME................................. $ 1,718,037 $10,597,060
=========== ===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain..................................... $ 645,164 $ 168,571
----------- -----------
Unrealized Appreciation/Depreciation:
Beginning of the Period............................. 19,484,475 17,355,372
End of the Period................................... 19,034,520 19,484,475
----------- -----------
Net Unrealized Appreciation/Depreciation During the
Period.............................................. (449,955) 2,129,103
----------- -----------
NET REALIZED AND UNREALIZED GAIN...................... $ 195,209 $ 2,297,674
=========== ===========
NET INCREASE IN NET ASSETS FROM OPERATIONS............ $ 1,913,246 $12,894,734
=========== ===========
</TABLE>
See Notes to Financial Statements
6
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
For the Two Months Ended October 31, 1998 and
the Years Ended August 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Two Months Ended Year Ended Year Ended
October 31, 1998 August 31, 1998 August 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income...................... $ 1,718,037 $ 10,597,060 $ 10,565,273
Net Realized Gain.......................... 645,164 168,571 234,110
Net Unrealized Appreciation/Depreciation
During the Period........................ (449,955) 2,129,103 4,546,702
------------ ------------ ------------
Change in Net Assets from Operations....... 1,913,246 12,894,734 15,346,085
------------ ------------ ------------
Distributions from Net Investment Income:
Common Shares............................ (1,393,143) (8,329,449) (8,596,978)
Preferred Shares......................... (379,966) (2,314,304) (2,254,783)
------------ ------------ ------------
(1,773,109) (10,643,753) (10,851,761)
------------ ------------ ------------
Distributions from Net Realized Gain:
Common Shares............................ -0- (184,268) (247,642)
Preferred Shares......................... -0- (49,842) (72,294)
------------ ------------ ------------
-0- (234,110) (319,936)
------------ ------------ ------------
Total Distributions (1,773,109). (10,877,863) (11,171,697)
------------ ------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... 140,137 2,016,871 4,174,388
------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Value of Common Shares Issued Through
Dividend Reinvestment.................... 165,788 689,852 424,967
------------ ------------ ------------
TOTAL INCREASE IN NET ASSETS............... 305,925 2,706,723 4,599,355
NET ASSETS:
Beginning of the Period.................... 206,789,681 204,082,958 199,483,603
------------ ------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$669,998, $725,070 and $770,099,
respectively)............................ $207,095,606 $206,789,681 $204,082,958
============ ============ ============
</TABLE>
See Notes to Financial Statements
7
<PAGE> 9
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share
of the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Two Months Ended ------------------------------
October 31, 1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period (a).................................. $17.306 $ 17.059 $16.546 $16.705
------- -------- ------- -------
Net Investment Income....................... .210 1.296 1.297 1.302
Net Realized and Unrealized Gain/Loss....... .023 .282 .588 (.064)
------- -------- ------- -------
Total from Investment Operations............. .233 1.578 1.885 1.238
------- -------- ------- -------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders............... .170 1.020 1.056 1.092
Common Share Equivalent of Distributions
Paid to Preferred Shareholders.......... .046 .282 .277 .295
Distributions from Net Realized Gain:
Paid to Common Shareholders............... -0- .023 .030 .008
Common Share Equivalent of Distributions
Paid to Preferred Shareholders.......... -0- .006 .009 .002
------- -------- ------- -------
Total Distributions.......................... .216 1.331 1.372 1.397
------- -------- ------- -------
Net Asset Value, End of the Period........... $17.323 $ 17.306 $17.059 $16.546
------- -------- ------- -------
Market Price Per Share at End of the
Period...................................... $17.875 $ 18.000 $16.813 $17.125
Total Investment Return at Market Price
(b)......................................... .28%* 13.71% 4.72% 12.52%
Total Return at Net Asset Value (c).......... 1.04%* 7.77% 9.93% 5.71%
Net Assets at End of the Period
(In millions)............................... $ 207.1 $ 206.8 $ 204.1 $ 199.5
Ratio of Expenses to Average Net Assets
Applicable to Common Shares**............... 1.67% 1.62% 1.66% 1.67%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d)...... 5.63% 5.89% 6.08% 5.99%
Portfolio Turnover........................... 4%* 4% 6% 13%
* Non-Annualized
** Ratio of Expenses to Average Net Assets
Including Preferred Shares............... 1.15% 1.11% 1.12% 1.13%
</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.
8
<PAGE> 10
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 27, 1991
(Commencement
August 31, of Investment
---------------------------------------- Operations) to
1995 1994 1993 August 31, 1992
-------------------------------------------------------------
<S> <C> <C> <C> <C>
$16.431 $17.987 $16.387 $14.766
------- ------- ------- -------
1.331 1.338 1.344 1.092
.349 (1.544) 1.685 1.460
------- ------- ------- -------
1.680 (.206) 3.029 2.552
------- ------- ------- -------
1.092 1.092 1.042 .754
.312 .214 .186 .199
.002 .039 .161 -0-
-0- .005 .040 -0-
------- ------- ------- -------
1.406 1.350 1.429 .953
------- ------- ------- -------
$16.705 $16.431 $17.987 $16.387
------- ------- ------- -------
$16.250 $16.125 $17.625 $15.750
8.02% (2.22%) 20.26% 10.22%*
8.90% (2.45%) 17.85% 14.65%*
$ 200.3 $ 197.7 $ 210.0 $ 197.0
1.73% 1.64% 1.64% 1.58%
6.37% 6.54% 6.85% 6.28%
15% 1% 4% 55%*
1.15% 1.12% 1.11% 1.11%
</TABLE>
See Notes to Financial Statements
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen 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. In July 1998, the Fund's Board of Trustees approved a change in the Fund's
fiscal year end from August 31 to October 31. As a result, this financial report
reflects the two-month period commencing on September 1, 1998, and ending on
October 31, 1998.
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.
10
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
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. 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 October 31, 1998, for federal income tax purposes cost of long-term
investments is $186,165,390, the aggregate gross unrealized appreciation is
$19,046,595 and the aggregate gross unrealized depreciation is $12,075,
resulting in net unrealized appreciation on long-term investments of
$19,034,520.
E. 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.
Due to the inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between financial and tax basis
reporting for the year ended August 31, 1998 have been identified and
appropriately reclassified. Permanent book and tax basis differences relating to
expenses which are not deductible for tax purposes totaling $1,664 were
reclassified from accumulated undistributed net investment income to capital.
For the two months ended October 31, 1998, 100% of the income distributions
made by the Trust were exempt from federal income taxes. In January, 1999 the
Trust will provide tax information to shareholders for the 1998 calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
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 Van Kampen Funds Inc. or its affiliates (collectively "Van
Kampen"), 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
11
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
include record keeping and reporting responsibilities with respect to the
Trust's portfolio and preferred shares and providing certain services to
shareholders.
For the two months ended October 31, 1998 and the year ended August 31,
1998, the Trust recognized expenses of approximately $1,900 and $3,700,
respectively, 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 two months ended October 31, 1998 and the year ended August 31,
1998, the Trust recognized expenses of approximately $11,900 and $74,000,
respectively, representing Van Kampen's cost of providing accounting and legal
services to the Trust.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust has implemented deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service of the Trust. The maximum
annual benefit per trustee under the plan is $2,500.
3. CAPITAL TRANSACTIONS
At October 31, 1998, August 31, 1998 and August 31, 1997, paid in surplus
related to common shares aggregated $121,495,325, $121,329,633 and $120,641,844,
respectively.
Transactions in common shares were as follows:
<TABLE>
<CAPTION>
TWO MONTHS ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 AUGUST 31, 1998 AUGUST 31, 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning Shares............. 8,193,233 8,153,254 8,127,899
Shares Issued Through
Dividend Reinvestment...... 9,542 39,979 25,355
--------- --------- ---------
Ending Shares................ 8,202,775 8,193,233 8,153,254
========= ========= =========
</TABLE>
4. INVESTMENT TRANSACTIONS
For the two months ended October 31, 1998, the cost of purchases and proceeds
from sales of investments, excluding short-term investments, were $8,016,981 and
$7,802,535 respectively. For the year ended August 31, 1998, the cost of
purchases and proceeds
12
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
from sales of investments, excluding short-term investments, were $7,552,555 and
$8,247,756 respectively.
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 October 31, 1998, was 3.420% and for the two months
ended October 31, 1998, the rates ranged from 3.420% to 3.580%.
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.
6. CAPITAL GAIN DISTRIBUTION
On December 3, 1998, the Trust declared a capital gain distribution of $0.0773
per common share, of which $0.0728 is long-term and $0.0045 is short term, to
common shareholders of record on December 15, 1998. The gain will be payable on
December 31, 1998.
7. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position its business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Trust, but Van Kampen does
not anticipate that the move to Year 2000 will have a material impact on its
ability to continue to provide the Trust with service at current levels. In
addition, it is possible that the securities markets in which the Trust invests
may be detrimentally affected by computer failures throughout the financial
services industry beginning January 1, 2000. Improperly functioning trading
systems may result in settlement problems and liquidity issues.
13
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Pennsylvania Quality Municipal Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Pennsylvania Quality Municipal Trust (the "Trust"), including the
portfolio of investments, as of October 31, 1998, and the related statement of
operations for the two-month period ended October 31, 1998 and the year ended
August 31, 1998, the statement of changes in net assets for the two-month period
ended October 31, 1998 and for each of the two years in the period ended August
31, 1998, 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
October 31, 1998, by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Pennsylvania Quality Municipal Trust as of October 31, 1998 the results
of its operations for the two-month period ended October 31, 1998 and the year
ended August 31, 1998, the changes in its net assets for the two-month period
ended October 31, 1998 and for each of the two years in the period ended August
31, 1998, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
December 15, 1998
14
<PAGE> 16
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
change 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 Funds Inc.
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
15
<PAGE> 17
VAN KAMPEN PENNSYLVANIA QUALITY MUNICIPAL TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL* - Chairman
STEVEN MULLER
THEODORE A. MYERS
DON G. POWELL*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
EDWARD C. WOOD, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN
INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
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 Funds Inc., 1998 All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
16
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> PENN QUALITY
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> SEP-01-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 186,165,390
<INVESTMENTS-AT-VALUE> 205,199,910
<RECEIVABLES> 2,890,254
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 792,256
<TOTAL-ASSETS> 208,882,420
<PAYABLE-FOR-SECURITIES> 1,309,566
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 477,248
<TOTAL-LIABILITIES> 1,786,814
<SENIOR-EQUITY> 65,000,000
<PAID-IN-CAPITAL-COMMON> 121,577,353
<SHARES-COMMON-STOCK> 8,202,775
<SHARES-COMMON-PRIOR> 8,193,233
<ACCUMULATED-NII-CURRENT> 669,998
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 813,735
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,034,520
<NET-ASSETS> 207,095,606
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,115,544
<OTHER-INCOME> 0
<EXPENSES-NET> (397,507)
<NET-INVESTMENT-INCOME> 1,718,037
<REALIZED-GAINS-CURRENT> 645,164
<APPREC-INCREASE-CURRENT> (449,955)
<NET-CHANGE-FROM-OPS> 1,913,246
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,773,109)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 9,542
<NET-CHANGE-IN-ASSETS> 305,925
<ACCUMULATED-NII-PRIOR> 725,070
<ACCUMULATED-GAINS-PRIOR> 168,571
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 242,367
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 397,507
<AVERAGE-NET-ASSETS> 207,156,879
<PER-SHARE-NAV-BEGIN> 17.306
<PER-SHARE-NII> 0.210
<PER-SHARE-GAIN-APPREC> 0.023
<PER-SHARE-DIVIDEND> (0.170)
<PER-SHARE-DISTRIBUTIONS> (0.046)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 17.323
<EXPENSE-RATIO> 1.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
