<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
A Farewell from the Chairman..................... 6
Glossary of Terms................................ 7
Performance Results.............................. 9
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 17
Statement of Operations.......................... 18
Statement of Changes in Net Assets............... 19
Financial Highlights............................. 20
Notes to Financial Statements.................... 21
Report of Independent Accountants................ 26
Dividend Reinvestment Plan....................... 27
</TABLE>
VMO ANR 12/98
<PAGE> 2
LETTER TO SHAREHOLDERS
November 20, 1998
Dear Shareholder,
The past decade has been a
remarkable time for investors.
Together, we've witnessed one of the
greatest bull markets in investment
history, unprecedented growth in mutual
fund investing, and a surge in personal
retirement planning. The coming
millennium promises to hold even more [PHOTO]
challenges and opportunities.
To lead us into this new era of DENNIS J. MCDONNELL AND DON G. POWELL
investing, we are proud to announce
that Richard F. Powers III has joined
Van Kampen as President and Chief Executive Officer, and will assume the
additional role of Chairman of Van Kampen in 1999. He comes to us from our
parent company, Morgan Stanley Dean Witter & Co., where he served as Executive
Vice President and Director of Marketing. Dick Powers brings 27 years of
experience in the financial services industry, including vast expertise in
product management, strategic planning and brand development. While at Morgan
Stanley Dean Witter, he developed many of the firm's core products and services.
You'll hear more from Dick Powers in the coming months as he becomes
increasingly involved in matters related to your Trust and joins Dennis
McDonnell in addressing shareholders in future reports. (See Don Powell's
farewell to shareholders on page 6.)
ECONOMIC REVIEW
After two years of solid gains, the U.S. economy began to lose some of its
luster during the reporting period. No longer immune to the global economic
turmoil, the economy retreated from a 5.5 percent annual growth rate in the
first quarter to a tepid 1.8 percent in the second quarter (as measured by gross
domestic product). By the third quarter, however, growth rebounded to a 3.3
percent annual rate.
A strong dollar was largely responsible for moderating economic growth. As
the Asian financial crisis worsened and spread to other regions, foreign
investors amassed dollar-denominated U.S. Treasury bonds. These purchases sent
the dollar sharply higher, which increased the price of U.S. exports and slashed
the price of imports--resulting in reduced demand for U.S. goods and services
abroad. In light of the reduced demand and global economic problems, corporate
earnings fell, business investment declined, and stock prices plummeted. By the
end of August, the Dow Jones Industrial Average was down 19 percent from its
record high, set in mid-July. Although the stock market has since recovered much
of its losses, consumer confidence has declined and growth in consumer spending
has slowed.
Concerns about further economic deterioration, weakness in the stock market,
and a potential credit crunch prompted the Federal Reserve Board to cut
short-term interest rates
Continued on page 2
1
<PAGE> 3
0.25 percent in late September. It was the first rate cut in almost three years
and was followed by additional cuts of 0.25 percent in October and November.
Despite these rate cuts, the Fed took care to note that inflation was well
contained.
MARKET OVERVIEW
The volatility in overseas markets and U.S. stocks was a boon to bonds.
Foreign investors bought U.S. Treasury bonds in an attempt to escape the global
turmoil, while domestic investors purchased them to avoid further losses in U.S.
stocks. Because these purchases occurred at a time when the supply of new
Treasury issues was declining, Treasury bond prices soared.
The Fed rate cuts propelled bond prices even higher. Following the Fed's
first rate cut, the yield on the 30-year Treasury bond, which moves in the
opposite direction of its price, dropped to a record low of 4.72 percent on
October 5. However, subsequent sales of Treasuries by Asian and institutional
investors dampened the rally. As of October 31, the 30-year Treasury bond had a
5.15 percent yield, down 1 percent from a year ago.
Municipal bond prices followed Treasuries higher, but, as usual, they didn't
gain nearly as much in price. The yield on a typical AAA-rated general
obligation municipal bond fell only 32 basis points to 4.80 percent as of
October 31, from 5.12 percent a year earlier. Earlier in October, municipal bond
yields topped comparable Treasury bond yields, which is a rare event. Municipal
bonds generally yield less than Treasury securities because their interest
payments are exempt from federal and sometimes state and local income taxes.
During the past year, municipal bonds were burdened by an excess of supply
relative to demand. State and local governments, taking advantage of the
market's low interest rates, issued $230.9 billion worth of long-term bonds
during the first 10 months of the year--34 percent more than they had issued
during the same period last year. Approximately 44 percent of the new issues
were refinancings of older, higher-yielding bonds. However, new issuance slowed
recently as the number of bonds eligible for refinancing shrank.
Despite an abundant supply, many investors were reluctant to purchase
municipal bonds because of their generally low yields. Compounding the situation
was the abundance of insured issues, which accounted for almost 60 percent of
the new supply. The dominance of insured bonds reduced the supply of
lower-rated, higher-yielding bonds and narrowed the yield spread between higher-
and lower-rated bonds. (The insurance relates to the timely payment of principal
and interest, when due, on the bonds. The insurance does not protect the bonds
from market risk.)
Continued on page 3
2
<PAGE> 4
[CREDIT QUALITY GRAPH]
Portfolio Composition By Credit Quality*
As Of October 31, 1998
<TABLE>
<CAPTION>
<S> <C>
AAA..................... 58.1%
AA...................... 14.0%
A....................... 13.4%
BBB..................... 14.1%
Non-Rated............... 0.4%
</TABLE>
*As a Percentage of Long-Term Investments
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's.
TRUST STRATEGY
We used the following strategies to manage the Trust during the period:
We replaced high-coupon bonds that had been called due to the decline in
interest rates, as well as some recent acquisitions that had appreciated in
price.
We purchased long-term discount bonds, including zero-coupon bonds, in order
to extend the call protection of the Trust. Long-term discount bonds tend to
appreciate faster than par or premium bonds during periods of falling interest
rates, such as the current reporting period. These bonds helped offset the
declining duration of the portfolio that occurred as low interest rates caused
some of our higher-coupon holdings to be prerefunded or priced to call dates. As
of October 31, the duration of the Trust stood at 7.42 years, compared with 7.72
years for the Lehman Brothers Municipal Bond Index (excluding bonds maturing in
five years or less).
Our purchases favored AAA-rated and insured bonds because under current
market conditions, the yield spread between higher- and lower-rated bonds is
modest, and we believe that investors are not adequately compensated for the
additional credit risk associated with lower-rated securities. As a result of
these purchases and credit upgrades of some Trust assets, the credit quality of
the Trust improved slightly.
Top Five Portfolio Sectors as of October 31, 1998*
General Purpose.........................16.7%
Wholesale Electric......................12.5%
Single-Family Housing...................12.2%
Airport.................................10.8%
Health Care.............................10.6%
*As a Percentage of Long-Term Investments
Continued on page 4
3
<PAGE> 5
PERFORMANCE SUMMARY
For the one-year period ended October 31, 1998, the Trust generated a total
return of 15.91 percent.(1) This reflects a gain in market price per common
share from $15.0625 on October 31, 1997, to $16.5000 on October 31, 1998, plus
reinvestment of all dividends. The Trust had a tax-exempt distribution rate of
5.45 percent,(3) based on the closing price of its common shares. Because income
from the Trust is exempt from federal income taxes, this distribution rate is
equivalent to a yield of 8.52 percent(4) on a taxable investment for investors
in the 36 percent federal income tax bracket. Please refer to the chart on page
9 for additional performance numbers.
[BAR GRAPH]
Twelve-Month Dividend History
For the Period Ended October 31, 1998
<TABLE>
<CAPTION>
Distribution per Common Stock
<S> <C>
Nov 1997......................................... $ .0750
Dec 1997......................................... $ .0750
Jan 1998......................................... $ .0750
Feb 1998......................................... $ .0750
Mar 1998......................................... $ .0750
Apr 1998......................................... $ .0750
May 1998......................................... $ .0750
Jun 1998......................................... $ .0750
Jul 1998......................................... $ .0750
Aug 1998......................................... $ .0750
Sep 1998........................................ $ .0750
Oct 1998........................................ $ .0750
</TABLE>
The dividend history represents past performance of the Trust and does not
predict the Trust's future distributions.
ECONOMIC OUTLOOK
We believe the economy will continue to grow at a moderate rate for the
remainder of the year, supported by low interest rates. The housing industry has
already benefited from the sharp decline in interest rates, and other sectors
could follow if consumer and business spending picks up.
Looking ahead into next year, we see the potential for stronger economic
growth as long as domestic interest rates remain low and the global financial
crisis stabilizes. We believe the current low inflationary environment in the
United States paves the way for further Fed rate cuts if the economy resumes its
slowdown.
Overseas, we see some promising signs of recovery, including Japan's new
bank reform package, which includes a willingness to let problem banks fail, and
approval of an International Monetary Fund rescue package for Brazil.
Continued on page 5
4
<PAGE> 6
We will closely monitor these global and domestic events and their effects
on the performance of the Trust, adjusting the portfolio when appropriate. We
remain committed to the goal of providing a high level of tax-exempt income
while preserving shareholders' capital. Thank you for your continued support and
confidence in Van Kampen and the management of your Trust.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen Investment Advisory Corp.
Please see footnotes on page 9
5
<PAGE> 7
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,
[SIG]
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.
6
<PAGE> 8
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting bond yields. One hundred basis points is
equal to 1 percent. For example, if a bond's yield changes from 7.00 to 6.65
percent, it is a 35 basis-point move.
CALL FEATURE: Allows the issuer to buy back a bond on specific dates at set
prices before maturity. These dates and prices are set when the bond is
issued. To compensate the bondholder for the potential loss of income and
ownership, a bond's call price is usually higher than the face value of the
bond. Bonds are usually called when interest rates drop so significantly
that the issuer can save money by issuing new bonds at lower rates.
COUPON RATE: The stated rate of interest the bond pays on an annual basis,
expressed as a percentage of the face value.
CREDIT RATING: An evaluation of an issuer's credit history and capability of
repaying obligations. Standard & Poor's and Moody's Investors Service are
two companies that assign bond ratings. Standard & Poor's ratings range from
a high of AAA to a low of D, while Moody's ratings range from a high of Aaa
to a low of C.
DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has
more potential to appreciate in price than a par bond does.
DURATION: A measure of the sensitivity of a bond's price to changes in interest
rates, expressed in years. Each year of duration represents an expected 1
percent change in the price of a bond for every 1 percent change in interest
rates. The longer a bond's duration, the greater the effect of interest rate
movements on net asset value. Typically, funds with shorter durations are
expected to perform better in rising rate environments, while funds with
longer durations are expected to perform better when rates decline.
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank system of the United States. Its
policy-making committee, called the Federal Open Market Committee, meets
eight times a year to establish monetary policy and monitor the economic
pulse of the United States.
INFLATION: A persistent and measurable rise in the general level of prices.
Inflation is widely measured by the Consumer Price Index, an economic
indicator that measures the change in the cost of purchased goods and
services.
INSURED BOND: A bond that is insured against default by the bond insurer. If the
issuer defaults, the insurance company will step in and take over payments
of interest and principal when due. Once a bond is insured, it typically
carries the rating of the insurer. Most insurers are rated AAA.
7
<PAGE> 9
MUNICIPAL BOND: A debt security issued by a state, municipality, or other
government entity to finance capital expenditures of public projects, such
as the construction of highways, public works, or school buildings. Interest
on public-purpose municipal bonds is exempt from federal income taxes and,
potentially, from state and local income taxes.
NET ASSET VALUE (NAV): The value of a trust share, calculated by deducting a
trust's liabilities from the total assets applicable to common shareholders
in its portfolio and dividing this amount by the number of common shares
outstanding.
PREREFUNDING: The process of issuing new bonds to refinance an outstanding
municipal bond issue prior to its maturity or call date. The proceeds from
the new bonds are generally invested in U.S. government securities.
Prerefunding typically occurs when interest rates decline and an issuer
replaces its higher-yielding bonds with current lower-yielding issues.
PREMIUM BOND: A bond whose market price is above its face value (or "par
value"). Because bonds usually mature at face value, a premium bond has less
potential to appreciate in price than a par bond does.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower ratings.
The spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and
lower-quality bonds.
ZERO COUPON BONDS: A corporate or municipal bond that is traded at a deep
discount to face value and pays no interest. It may be redeemed at maturity
for full face value.
8
<PAGE> 10
PERFORMANCE RESULTS FOR THE PERIOD ENDED OCTOBER 31, 1998
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
(NYSE TICKER SYMBOL--VMO)
<TABLE>
<CAPTION>
COMMON SHARE TOTAL RETURNS
<S> <C>
One-year total return based on market price(1)........... 15.91%
One-year total return based on NAV(2).................... 9.35%
DISTRIBUTION RATES
Distribution rate as a % of closing common stock
price(3)................................................. 5.45%
Taxable-equivalent distribution rate as a % of closing
common stock price(4).................................... 8.52%
SHARE VALUATIONS
Net asset value.......................................... $ 17.61
Closing common stock price............................... $ 16.500
One-year high common stock price (10/02/98).............. $ 16.750
One-year low common stock price (11/14/97)............... $ 15.000
Preferred share (Series A) rate(5)....................... 3.300%
Preferred share (Series B) rate(5)....................... 3.299%
</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 36% federal
income tax bracket.
(5)See "Notes to Financial Statements" footnote #5, for more information
concerning Preferred Share reset periods.
A portion of the interest income may be taxable for those investors subject to
the federal alternative minimum tax (AMT).
Past performance does not guarantee future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
9
<PAGE> 11
PORTFOLIO OF INVESTMENTS
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 102.2%
ALABAMA 0.0%
$ 400 Mobile, AL Indl Dev Brd Solid Waste Disp Rev
Mobile Energy Svcs Co Proj Rfdg................ 6.950% 01/01/20 $ 208,000
------------
CALIFORNIA 6.0%
1,455 California Hsg Fin Agy Rev Home Mtg Ser B1..... 6.300 08/01/08 1,562,743
2,000 California Pollutn Ctl Fin Auth Pollutn Ctl Rev
Southn CA Edison Co (AMBAC Insd)............... 6.000 07/01/27 2,151,600
1,110 California Rural Home Mtg Fin Auth Single
Family Mtg Rev Ser C (GNMA Collateralized)..... 7.800 02/01/28 1,309,189
5,000 Contra Costa, CA Home Mtg Fin Auth Home Mtg Rev
(MBIA Insd).................................... * 09/01/17 1,975,950
4,000 Foothill/Eastern Tran Agy Conv Cap Apprec Lien
Ser A (c)...................................... 0/7.050 01/01/10 3,306,000
5,000 Orange Cnty, CA Recovery Ctfs Ser A (MBIA
Insd).......................................... 6.000 07/01/06 5,684,600
5,000 Orange Cnty, CA Recovery Ctfs Ser A (MBIA
Insd).......................................... 6.000 07/01/08 5,749,600
3,000 Orange Cnty, CA Recovery Ser A Rfdg (MBIA
Insd).......................................... 6.000 06/01/08 3,446,670
------------
25,186,352
------------
COLORADO 6.4%
2,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev
E-470 Proj Ser B (Prerefunded @ 08/31/05)...... 7.000 08/31/26 2,405,980
1,000 Castle Rock, CO Multi-Family Rev Hsg Pines at
Castle Rock Ser A (FSA Insd)................... 6.100 12/01/16 1,063,720
1,500 Colorado Hsg Fin Auth Multi-Family Hsg Ins Mtg
Ser B2......................................... 5.800 10/01/28 1,585,800
1,500 Colorado Hsg Fin Auth Single Family Pgm Sr Ser
A2............................................. 7.250 05/01/27 1,709,085
1,205 Colorado Hsg Fin Auth Single Family Pgm Sr Ser
A3............................................. 7.000 11/01/24 1,297,435
1,500 Colorado Hsg Fin Auth Single Family Pgm Sr Ser
C1............................................. 7.550 11/01/27 1,713,840
3,200 Denver, CO City & Cnty Arpt Rev Ser A.......... 8.500 11/15/07 3,514,944
300 Denver, CO City & Cnty Arpt Rev Ser A
(Prerefunded @ 11/15/00)....................... 8.500 11/15/07 335,019
5,145 Denver, CO City & Cnty Arpt Rev Ser A 144A
Private Placement (d).......................... 8.875 11/15/12 5,890,922
1,855 Denver, CO City & Cnty Arpt Rev Ser A
(Prerefunded @ 11/15/01) 144A Private
Placement (d).................................. 8.875 11/15/12 2,164,247
1,750 Denver, CO City & Cnty Arpt Rev Ser B (MBIA
Insd).......................................... 6.250 11/15/06 1,993,285
1,000 Denver, CO City & Cnty Arpt Rev Ser B (MBIA
Insd).......................................... 6.250 11/15/07 1,147,610
1,005 Greeley, CO Multi-Family Rev Hsg Mtg Creek
Stone (FHA Gtd)................................ 5.950 07/01/28 1,056,567
1,000 Highlands Ranch Metro Dist No 2 CO Rfdg (FSA
Insd).......................................... 6.500 06/15/11 1,200,080
------------
27,078,534
------------
</TABLE>
See Notes to Financial Statements
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONNECTICUT 1.0%
$ 840 Mashantucket Western Pequot Tribe CT Spl Rev
Ser A, 144A Private Placement (Escrowed to
Maturity) (d).................................. 6.500% 09/01/06 $ 973,770
860 Mashantucket Western Pequot Tribe CT Spl Rev
Ser A, 144A Private Placement (d).............. 6.500 09/01/06 980,383
1,000 Mashantucket Western Pequot Tribe CT Spl Rev
Ser A, 144A Private Placement (d).............. 6.400 09/01/11 1,108,170
1,000 Mashantucket Western Pequot Tribe CT Spl Rev
Ser A, 144A Private Placement (Prerefunded @
09/01/07) (d).................................. 6.400 09/01/11 1,171,500
------------
4,233,823
------------
DISTRICT OF COLUMBIA 0.5%
2,000 Metropolitan Washington, DC Arpt Auth Genl Arpt
Rev Ser A (FGIC Insd).......................... 7.250 10/01/10 2,158,640
------------
FLORIDA 0.8%
3,000 Florida St Brd Edl Cap Outlay Pub Edl Ser A.... 5.875 06/01/16 3,244,320
------------
GEORGIA 3.3%
2,935 Fulton Cnty, GA Lease Rev, 144A Private
Placement (d).................................. 7.250 06/15/10 3,427,240
2,000 George L Smith II GA World Congress Cntr Auth
Rev (MBIA Insd) (a)............................ 6.000 07/01/09 2,156,960
7,000 Georgia Muni Elec Auth Pwr Rev Ser A Genl Ser A
(MBIA Insd).................................... 6.500 01/01/20 8,407,560
------------
13,991,760
------------
HAWAII 1.3%
5,000 Hawaii St Arpt Sys Rev Ser 2................... 7.000 07/01/18 5,388,350
------------
IDAHO 0.3%
1,075 Idaho Hsg & Fin Assn Single Family Mtg Mezz
Series E 2..................................... 5.950 07/01/14 1,139,704
------------
ILLINOIS 7.0%
1,090 Chicago, IL Midway Arpt Rev Ser A (MBIA Insd).. 5.000 01/01/18 1,077,345
3,500 Chicago, IL Midway Arpt Rev Ser B (MBIA Insd).. 5.000 01/01/35 3,422,440
5,000 Chicago, IL O'Hare Intl Arpt Rev Genl Arpt
Second Lien Ser A Rfdg (MBIA Insd) (b)......... 6.375 01/01/12 5,594,450
6,400 Chicago, IL Sch Fin Auth Ser A (MBIA Insd)..... 5.000 06/01/09 6,686,848
970 Chicago, IL Single Family Mtg Rev Ser A (GNMA
Collateralized)................................ 7.000 09/01/27 1,088,136
1,125 Chicago, IL Single Family Mtg Rev Ser B (GNMA
Collateralized)................................ 7.625 09/01/27 1,293,570
1,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co
Proj Ser A Rfdg (MBIA Insd).................... 5.400 03/01/28 1,020,390
3,285 Illinois Hlth Fac Auth Rev Midwest Physician
Group Ltd Proj (Prerefunded @ 11/15/04)........ 8.125 11/15/19 4,054,544
1,475 Regional Tran Auth IL Ser A (AMBAC Insd)....... 6.500 06/01/15 1,623,370
1,410 Sangamon Cnty, IL Cmnty Unit Sch Dist No 5
(FGIC Insd).................................... 6.400 12/01/03 1,574,519
1,865 Sangamon Cnty, IL Cmnty Unit Sch Dist No 5
(FGIC Insd).................................... 6.500 12/01/05 2,148,294
------------
29,583,906
------------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
INDIANA 0.7%
$ 2,500 Purdue Univ, IN Univ Rev Student Fee Ser B
(Prerefunded @ 01/01/05)....................... 6.750% 07/01/09 $ 2,930,400
------------
KENTUCKY 1.0%
1,475 Kenton Cnty, KY Arpt Brd Rev Cincinnati/Northn
KY Intl Arpt Ser A Rfdg (MBIA Insd)............ 6.200 03/01/08 1,678,196
1,000 Kentucky Econ Dev Fin Auth Hosp Sys Rev
Appalachian Regl Rfdg & Impt................... 5.600 10/01/08 1,060,080
1,350 Kentucky Hsg Corp Hsg Rev Ser B................ 6.250 07/01/28 1,453,950
------------
4,192,226
------------
MAINE 0.9%
2,190 Maine Edl Ln Auth Rev Supplemental Pgm Ser A1.. 7.000 12/01/16 2,342,468
1,200 Maine Edl Ln Auth Rev Supplemental Pgm Ser A2.. 7.150 12/01/16 1,287,756
------------
3,630,224
------------
MARYLAND 1.7%
3,500 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty
Dev Rev Single Family Pgm Ser 7................ 7.250 04/01/19 3,784,235
3,005 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty
Dev Rev Single Family Pgm Ser 7................ 7.300 04/01/25 3,241,373
------------
7,025,608
------------
MASSACHUSETTS 1.3%
2,000 Massachusetts St Hlth & Edl Fac Auth Rev New
England Med Cent Hosp Ser G (Embedded Swap)
(MBIA Insd) (c)................................ 3.10/5.00 07/01/13 1,982,960
3,000 Plymouth Cnty, MA Ctfs Partn Ser A............. 7.000 04/01/22 3,350,910
------------
5,333,870
------------
MICHIGAN 2.3%
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl
Med Rfdg (ACA Insd)............................ 5.500 10/01/18 1,017,620
3,500 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl
Med Rfdg (ACA Insd)............................ 5.500 10/01/27 3,550,050
4,500 Monroe Cnty, MI Pollutn Ctl Rev Coll Detroit
Edison Monroe Ser 1 (MBIA Insd)................ 6.875 09/01/22 5,001,345
------------
9,569,015
------------
MISSISSIPPI 1.5%
3,730 Mississippi Home Corp Single Family Rev Mtg Ser
C (GNMA Collateralized)........................ 7.600 06/01/29 4,261,450
1,985 Mississippi Home Corp Single Family Rev Mtg Ser
F (GNMA Collateralized)........................ 7.550 12/01/27 2,273,560
------------
6,535,010
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MISSOURI 2.0%
$ 2,500 Missouri St Hlth & Edl Fac Auth Rev BJC Hlth
Sys............................................ 5.000% 05/15/28 $ 2,430,400
1,485 Saint Charles Cnty, MO Indl Dev Auth Indl Rev
Dev Westchester Vlg Apts Ser A Rfdg............ 6.150 02/01/27 1,584,064
660 Saint Louis Cnty, MO Single Family Mtg Rev
(MBIA Insd).................................... 6.900 04/01/16 723,453
3,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd) (b)..... 6.200 06/01/10 3,514,230
------------
8,252,147
------------
NEVADA 1.0%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser
A (FGIC Insd).................................. 6.700 06/01/22 4,386,480
------------
NEW HAMPSHIRE 0.5%
2,000 New Hampshire St Hsg Fin Auth Single Family Rev
Mtg Acquisition Ser B Rfdg..................... 6.100 07/01/28 2,120,580
------------
NEW JERSEY 5.8%
20,000 New Jersey Econ Dev Auth St Contract Econ
Recovery (MBIA Insd)........................... 5.900 03/15/21 22,802,200
1,395 New Jersey Hlthcare Fac Fin Auth Rev Christ
Hosp Group Issue (Connie Lee Insd)............. 7.000 07/01/04 1,603,399
------------
24,405,599
------------
NEW MEXICO 2.5%
685 Hobbs, NM Single Family Mtg Rev Rfdg........... 8.750 07/01/11 762,261
5,090 New Mexico Mtg Fin Auth Single Family Mtg Pgm
Ser G (GNMA Collateralized).................... 7.250 07/01/26 5,476,891
2,000 New Mexico St Hosp Equip Loan Council Hosp Rev
Mem Med Ctr Inc Proj (a)....................... 5.500 06/01/28 1,957,080
2,000 University of NM Technology Dev Corp Lease Rev
Univ Cent Resh Pk Proj Ser A (Prerefunded @
08/15/04) (MBIA Insd).......................... 6.450 08/15/18 2,294,520
------------
10,490,752
------------
NEW YORK 20.2%
3,000 Long Island Pwr Auth NY Elec Genl (a).......... 4.000 04/01/05 2,990,670
3,000 Long Island Pwr Auth NY Elec Genl (MBIA Insd)
(a)............................................ 5.000 04/01/07 3,174,090
2,000 Metropolitan Tran Auth NY Commuter Facs Rev
Contract....................................... 5.500 07/01/14 2,119,000
3,000 Metropolitan Tran Auth NY Svcs Contract Tran
Fac Ser 5 Rfdg................................. 7.000 07/01/12 3,282,300
1,440 New York City Indl Dev Agy Spl Fac Rev Terminal
One Group Assn Proj............................ 6.100 01/01/09 1,558,613
3,000 New York City Indl Dev Agy Spl Fac Rev Terminal
One Group Assn Proj............................ 6.000 01/01/15 3,196,290
5,000 New York City Muni Wtr Fin Auth Ser B.......... 5.750 06/15/29 5,400,100
10,000 New York City Ser A............................ 7.000 08/01/07 11,831,000
5,000 New York City Ser A Rfdg....................... 7.000 08/01/05 5,807,350
40 New York City Ser D (b)........................ 7.500 02/01/19 44,643
7,960 New York City Ser D (Prerefunded @ 02/01/02)
(b)............................................ 7.500 02/01/19 8,987,477
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 1,500 New York St Dorm Auth Rev Mental Hlth Svcs Fac
Ser A.......................................... 5.750% 08/15/12 $ 1,636,635
2,070 New York St Dorm Auth Rev Mental Hlth Svcs Fac
Ser B.......................................... 5.750 08/15/10 2,273,626
6,060 New York St Dorm Auth Rev City Univ Ser F...... 5.500 07/01/12 6,350,274
1,500 New York St Dorm Auth Rev Dept Ed St of NY
Issue Ser A.................................... 5.800 07/01/22 1,589,895
1,365 New York St Dorm Auth Rev St Univ Edl Fac Ser B
Rfdg........................................... 5.250 05/15/09 1,463,785
1,890 New York St Mtg Agy Rev Homeowner Mtg Ser 58... 6.400 04/01/27 2,071,119
6,400 New York St Thruway Auth Svc Contract Rev Loc
Hwy & Brdg..................................... 5.750 04/01/09 7,010,816
1,100 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser 4...................................... 5.375 01/01/23 1,113,607
3,000 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser 7...................................... 5.700 01/01/27 3,159,480
3,500 Port Auth NY & NJ Cons 97th Ser (FGIC Insd).... 6.650 01/15/23 3,953,250
5,400 Port Auth NY & NJ Spl Oblig Rev Spl Proj JFK
Intl Arpt Terminal 6 (MBIA Insd)............... 5.750 12/01/22 5,743,602
------------
84,757,622
------------
NORTH CAROLINA 3.0%
11,000 North Carolina Muni Pwr Agy No 1 Catawba Elec
Rev (MBIA Insd)................................ 6.000 01/01/12 12,619,420
------------
OHIO 1.9%
1,000 Akron, OH Ctfs Partn Akron Muni Baseball
Stadium Proj (c)............................... 0/6.500 12/01/07 969,040
1,325 Lorain Cnty, OH Hosp Rev Catholic Hlthcare
Partners Rfdg Ser B (MBIA Insd)................ 5.625 09/01/15 1,429,808
3,000 Lucas Cnty, OH Hosp Rev Promedica Hlthcare
Oblig (MBIA Insd).............................. 6.000 11/15/07 3,408,750
1,000 Ohio Hsg Fin Agy Mtg Rev Residential Ser A1
(GNMA Collateralized).......................... 6.150 03/01/29 1,071,860
1,000 Ohio St Air Quality Dev Auth Rev JMG Funding
Ltd Partn Proj Rfdg (AMBAC Insd)............... 6.375 04/01/29 1,113,750
------------
7,993,208
------------
OKLAHOMA 2.2%
2,000 Tulsa, OK Indl Auth Hosp Rev Hillcrest Med Cent
Proj Rfdg (Connie Lee Insd).................... 6.125 06/01/05 2,226,120
3,140 Tulsa, OK Indl Auth Hosp Rev Hillcrest Med Cent
Proj Rfdg (Connie Lee Insd).................... 6.250 06/01/08 3,594,170
3,000 Tulsa, OK Muni Arpt Tran Rev American Airls
Inc............................................ 7.600 12/01/30 3,254,130
------------
9,074,420
------------
OREGON 0.5%
2,000 Oregon St Econ Dev Rev Georgia Pacific Corp.... 6.350 08/01/25 2,134,700
------------
PENNSYLVANIA 6.2%
2,000 Allegheny Cnty, PA Arpt Rev Rfdg Pittsburgh
Intl Arpt A (MBIA Insd)........................ 5.750 01/01/10 2,229,560
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 6,655 Berks Cnty, PA Muni Auth Rev Highlands at
Wyomissing Proj Ser B.......................... 6.875% 10/01/17 $ 7,215,617
8,500 Geisinger Auth PA Hlth Sys Ser A (Prerefunded @
07/01/02)...................................... 6.400 07/01/22 9,418,255
1,440 Harrisburg, PA Cap Apprec Rfdg Nts Ser F (AMBAC
Insd).......................................... * 03/15/15 641,434
1,865 Harrisburg, PA Cap Apprec Rfdg Ser D (AMBAC
Insd).......................................... * 09/15/15 810,492
1,865 Harrisburg, PA Cap Apprec Rfdg Ser D (AMBAC
Insd).......................................... * 03/15/16 784,046
1,000 Indiana Cnty, PA Indl Dev Auth Pollutn Ctl Rev
Metro Edison Co Proj A (AMBAC Insd)............ 5.950 05/01/27 1,083,270
2,500 Pennsylvania Hsg Fin Agy Single Family Mtg Ser
60A Rfdg....................................... 5.850 10/01/27 2,602,775
1,000 Pennsylvania Intergvtl Co-op Auth Spl Tax Rev
City of Philadelphia (Prerefunded @
06/15/02)...................................... 6.800 06/15/22 1,105,100
------------
25,890,549
------------
SOUTH DAKOTA 0.3%
1,285 South Dakota St Hlth & Edl Fac Auth Vocational
Ed Pgm Ser A (AMBAC Insd)...................... 5.400 08/01/13 1,383,906
------------
TEXAS 5.7%
1,000 Austin, TX Util Sys Rev Rfdg (AMBAC Insd)...... 6.500 11/15/05 1,152,420
3,000 Brazos River Auth TX Rev Houston Inds Inc Proj
Ser D Rfdg (MBIA Insd)......................... 4.900 10/01/15 3,039,600
4,500 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp
Rev Delta Airls Inc............................ 7.000 11/01/01 4,809,465
2,525 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp
Rev Delta Airls Inc............................ 7.625 11/01/21 2,768,309
5,000 Ector Cnty, TX Hosp Dist Hosp Rev Med Cent Hosp
(Prerefunded @ 04/15/02)....................... 7.300 04/15/12 5,664,650
5,000 Houston, TX Arpt Sys Rev Sub Lien Ser B (FGIC
Insd) (a)...................................... 5.000 07/01/25 4,838,750
1,740 Texas Genl Svcs Comm Partn Int Lease Purch
Ctfs, 144A Private Placement (d)............... 7.250 08/01/11 1,779,291
------------
24,052,485
------------
UTAH 1.8%
1,500 Intermountain Pwr Agy UT Pwr Supply Rev Ser B
Rfdg (MBIA Insd)............................... 5.750 07/01/19 1,626,270
1,500 Intermountain Pwr Agy UT Rev Ser E Rfdg (FSA
Insd).......................................... 6.000 07/01/06 1,690,560
2,205 Utah St Hsg Fin Agy Single Family Ser C 2...... 6.000 07/01/15 2,324,952
1,715 Utah St Hsg Fin Agy Single Family Mtg Sr Issue
B3............................................. 7.100 07/01/24 1,817,111
------------
7,458,893
------------
VIRGINIA 2.1%
8,200 Roanoke, VA Indl Dev Auth Hosp Rev Roanoke Mem
Hosp Carilion Hlth Sys Ser B Rfdg (MBIA Insd)
(c)............................................ 4.70/6.25 07/01/20 8,676,010
------------
</TABLE>
See Notes to Financial Statements
15
<PAGE> 17
PORTFOLIO OF INVESTMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WASHINGTON 6.9%
$ 9,850 Bellevue, WA Convention Cent Comp Int Rfdg
(MBIA Insd).................................... * 02/01/25 $ 2,573,805
10,975 Washington St Pub Pwr Supply Sys Nuclear Proj
No 1 Rev Ser A Rfdg (MBIA Insd)................ 5.700% 07/01/17 11,445,169
10,000 Washington St Pub Pwr Supply Sys Nuclear Proj
No 1 Rev Ser B Rfdg (MBIA Insd)................ 5.600 07/01/15 10,464,600
2,000 Washington St Pub Pwr Supply Sys Nuclear Proj
No 2 Rev Ser A Rfdg (AMBAC Insd)............... 6.000 07/01/08 2,260,620
5,125 Washington St Pub Pwr Supply Sys Nuclear Proj
No 3 Rev Ser C Rfdg (MBIA Insd)................ * 07/01/14 2,367,442
------------
29,111,636
------------
WEST VIRGINIA 2.1%
8,000 Harrison Cnty, WV Cmnty Solid Waste Disp Rev
West Penn Pwr Co Proj Ser A (b)................ 6.875 04/15/22 8,666,800
------------
WISCONSIN 1.1%
1,000 Madison, WI Indl Dev Rev Madison Gas & Elec Co
Proj Ser A..................................... 6.750 04/01/27 1,084,880
3,500 Wisconsin Hsg & Econ Dev Auth Homeownership Rev
Ser C.......................................... 6.250 09/01/17 3,757,565
------------
4,842,445
------------
WYOMING 0.4%
1,485 Wyoming Cmnty Dev Auth Hsg Rev Ser 2........... 6.350 06/01/29 1,600,028
------------
TOTAL LONG-TERM INVESTMENTS 102.2%
(Cost $385,499,855).......................................................... 429,347,422
LIABILITIES IN EXCESS OF OTHER ASSETS (2.2%).................................. (9,052,629)
------------
NET ASSETS 100.0%............................................................. $420,294,793
============
</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.
(c) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(d) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $385,499,855)....................... $429,347,422
Receivables:
Interest.................................................. 6,725,267
Investments Sold.......................................... 2,244,760
Other....................................................... 7,085
------------
Total Assets.......................................... 438,324,534
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 17,192,561
Investment Advisory Fee................................... 233,187
Income Distributions--Common and Preferred Shares......... 171,753
Administrative Fee........................................ 71,750
Custodian Bank............................................ 43,722
Affiliates................................................ 16,825
Accrued Expenses............................................ 205,605
Trustees' Deferred Compensation and Retirement Plans........ 94,338
------------
Total Liabilities..................................... 18,029,741
------------
NET ASSETS.................................................. $420,294,793
============
NET ASSETS CONSIST OF:
Preferred Shares ($.01 par value, authorized 100,000,000
shares, 3,000 issued with liquidation preference of
$50,000 per share)........................................ $150,000,000
------------
Common Shares ($.01 par value with an unlimited number of
shares authorized, 15,352,891 shares issued and
outstanding).............................................. 153,529
Paid in Surplus............................................. 226,719,758
Net Unrealized Appreciation................................. 43,847,567
Accumulated Undistributed Net Investment Income............. 1,425,622
Accumulated Net Realized Loss............................... (1,851,683)
------------
Net Assets Applicable to Common Shares................ 270,294,793
------------
NET ASSETS.................................................. $420,294,793
============
NET ASSET VALUE PER COMMON SHARE ($270,294,793 divided
by 15,352,891 shares outstanding)......................... $ 17.61
============
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $23,559,416
-----------
EXPENSES:
Investment Advisory Fee..................................... 2,703,320
Administrative Fee.......................................... 831,791
Preferred Share Maintenance................................. 375,041
Trustees' Fees and Expenses................................. 31,384
Custody..................................................... 28,773
Legal....................................................... 17,388
Other....................................................... 299,387
-----------
Total Expenses.......................................... 4,287,084
-----------
NET INVESTMENT INCOME....................................... $19,272,332
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 580,096
Futures................................................... (489,921)
-----------
Net Realized Gain........................................... 90,175
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period..................................... 34,074,139
End of the Period........................................... 43,847,567
-----------
Net Unrealized Appreciation During the Period............... 9,773,428
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 9,863,603
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $29,135,935
===========
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended October 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1998 October 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................... $ 19,272,332 $ 19,243,057
Net Realized Gain/Loss.................................. 90,175 (571,232)
Net Unrealized Appreciation During the Period........... 9,773,428 13,312,439
------------ ------------
Change in Net Assets from Operations.................... 29,135,935 31,984,264
------------ ------------
Distributions from Net Investment Income:
Common Shares......................................... (13,817,036) (13,817,017)
Preferred Shares...................................... (5,336,712) (5,359,157)
------------ ------------
Total Distributions..................................... (19,153,748) (19,176,174)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..... 9,982,187 12,808,090
NET ASSETS:
Beginning of the Period................................. 410,312,606 397,504,516
------------ ------------
End of the Period (Including accumulated undistributed
net investment income of $1,425,622 and $1,307,038,
respectively)......................................... $420,294,793 $410,312,606
============ ============
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 24, 1992
(Commencement
Year Ended October 31, of Investment
----------------------------------------------------------- Operations) to
1998 1997 1996 1995 1994 1993 October 31, 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the Period
(a)........................ $ 16.955 $ 16.121 $15.846 $14.389 $17.297 $14.990 $14.771
-------- -------- ------- ------- ------- ------- -------
Net Investment Income...... 1.255 1.253 1.271 1.275 1.303 1.354 .611
Net Realized and Unrealized
Gain/Loss................ .643 .830 .266 1.584 (2.918) 2.332 .083
-------- -------- ------- ------- ------- ------- -------
Total from Investment
Operations................. 1.898 2.083 1.537 2.859 (1.615) 3.686 .694
-------- -------- ------- ------- ------- ------- -------
Less:
Distributions from Net
Investment Income:
Paid to Common
Shareholders........... .900 .900 .906 1.012 1.020 1.020 .340
Common Share Equivalent
of Distributions Paid
to Preferred
Shareholders........... .348 .349 .356 .390 .273 .282 .135
Distributions from Net
Realized Gains:
Paid to Common
Shareholders........... -0- -0- -0- -0- -0- .057 -0-
Common Share Equivalent
of Distributions Paid
to Preferred
Shareholders........... -0- -0- -0- -0- -0- .020 -0-
-------- -------- ------- ------- ------- ------- -------
Total Distributions......... 1.248 1.249 1.262 1.402 1.293 1.379 .475
-------- -------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period..................... $ 17.605 $ 16.955 $16.121 $15.846 $14.389 $17.297 $14.990
======== ======== ======= ======= ======= ======= =======
Market Price Per Share at
End of the Period.......... $ 16.500 $15.0625 $13.750 $13.625 $13.000 $16.375 $14.500
Total Investment Return at
Market Price (b)........... 15.91% 16.54% 7.72% 12.70% (14.96%) 20.85% (1.16%)*
Total Return at Net Asset
Value (c).................. 9.35% 11.11% 7.61% 17.74% (11.30%) 23.17% 2.10%*
Net Assets at End of the
Period (In millions)....... $ 420.3 $ 410.3 $ 397.5 $ 393.3 $ 370.9 $ 415.6 $ 380.1
Ratio of Expenses to Average
Net Assets Applicable to
Common Shares**............ 1.61% 1.64% 1.66% 1.75% 1.69% 1.62% 1.54%
Ratio of Net Investment
Income to Average Net
Assets Applicable to Common
Shares (d)................. 5.24% 5.51% 5.73% 5.87% 6.43% 6.51% 5.82%
Portfolio Turnover.......... 29% 49% 85% 70% 76% 52% 53%*
*Non-Annualized
**Ratio of Expenses to
Average Net Assets
Including Preferred
Shares..................... 1.03% 1.03% 1.03% 1.06% 1.05% 1.02% 1.04%
</TABLE>
(a) Net Asset Value at April 24, 1992, is adjusted for common and preferred
share offering costs of $.229 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 the common share equivalent of
distributions paid to preferred shareholders.
See Notes to Financial Statements
20
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Municipal Opportunity Trust, formerly known as Van Kampen American
Capital Municipal Opportunity Trust, (the "Trust") is registered as a
diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The Trust's investment objective is to provide
a high level of current income exempt from federal income tax, consistent with
preservation of capital. The Trust will invest in a portfolio consisting
substantially of municipal obligations rated investment grade at the time of
investment. The Trust commenced investment operations on April 24, 1992.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Trust will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.
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
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is required.
The Trust intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At October 31, 1998, the Trust had an accumulated capital loss
carryforward for tax purposes of $1,851,683 which will expire between October
31, 2003 and October 31, 2005.
At October 31, 1998, for federal income tax purposes, cost of long-term
investments is $385,499,855; the aggregate gross unrealized appreciation is
$44,044,972 and the aggregate gross unrealized depreciation is $197,405
resulting in net unrealized appreciation on long-term investments of
$43,847,567.
E. DISTRIBUTION OF INCOME AND GAINS--The Trust declares and pays monthly
dividends from net investment income to common shareholders. Net realized gains,
if any, are distributed annually on a pro rata basis to common and preferred
shareholders. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.
For the year ended October 31, 1998, 100.0% 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 .65% 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 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 October 31, 1998, the Trust recognized expenses of
approximately $9,700 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.
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
For the year ended October 31, 1998, the Trust recognized expenses of
approximately $126,600 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 provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Trust. The maximum
annual benefit per trustee under the plan is $2,500.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $119,866,097 and $122,159,796,
respectively.
4. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Trust has a variety of reasons to use derivative instruments, such as to
attempt to protect the Trust against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Trust's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when taking delivery of a security underlying a
futures contract. In this instance, the recognition of gain or loss is postponed
until the disposal of the security underlying the futures contract.
Summarized below are the types of derivative financial instruments used by
the Trust.
A. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Trust generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index, and typically closes the contracts prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration. Upon entering into futures contracts, the Trust maintains, in a
segregated account with its custodian, securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
open, payments are received from or made to the broker based upon changes in the
value of the contract (the variation margin).
Transactions in futures contracts, each with a par value of $100,000, for
the year ended October 31, 1998, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- --------------------------------------------------------------------
<S> <C>
Outstanding at October 31, 1997.......................... 150
Futures Opened........................................... -0-
Futures Closed........................................... (150)
------
Outstanding at October 31, 1998.......................... -0-
======
</TABLE>
B. INDEXED SECURITIES--These instruments are identified in the portfolio of
investments. Their price may be more volatile than the price of a comparable
fixed rate security.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. The Trust invests in
these instruments as a hedge against a rise in the short-term interest rates
which it pays on its preferred shares.
5. PREFERRED SHARES
The Trust has outstanding 3,000 Auction Preferred Shares ("APS") in two series
of 1,500 shares each. Dividends are cumulative and the dividend rate on each
series is currently reset every 28 days through an auction process. The average
rate in effect on October 31, 1998 was 3.300%. During the year ended October 31,
1998, the rates ranged from 3.299% to 3.900%.
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. 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
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 1998
- --------------------------------------------------------------------------------
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.
25
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Municipal Opportunity Trust:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Municipal Opportunity Trust (the "Trust"), including the portfolio of
investments, as of October 31, 1998, 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
October 31, 1998 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Municipal Opportunity Trust as of October 31, 1998, 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
December 1, 1998
26
<PAGE> 28
DIVIDEND REINVESTMENT PLAN
The Trust offers a dividend reinvestment plan (the "Plan") pursuant to which
Common Shareholders may elect to have dividends and capital gains distributions
reinvested in Common Shares of the Trust. The Trust declares dividends out of
net investment income, and will distribute annually net realized capital gains,
if any. Common Shareholders may join or withdraw from the Plan at any time.
If you decide to participate in the Plan, State Street Bank and Trust
Company, as your Plan Agent, will automatically invest your dividends and
capital gains distributions in Common Shares of the Trust for your account.
HOW TO PARTICIPATE
If you wish to participate and your shares are held in your own name, call
1-800-341-2929 for more information and a Plan brochure. If your shares are held
in the name of a brokerage firm, bank, or other nominee, you should contact your
nominee to see if it would participate in the Plan on your behalf. If you wish
to participate in the Plan, but your brokerage firm, bank or nominee is unable
to participate on your behalf, you should request that your shares be re-
registered in your own name which will enable your participation in the Plan.
HOW THE PLAN WORKS
Participants in the Plan will receive the equivalent in Common Shares valued on
the valuation date, generally at the lower of market price or net asset value,
except as specified below. The valuation date will be the dividend or
distribution payment date or, if that date is not a trading day on the national
securities exchange or market system on which the Common Shares are listed for
trading, the next preceding trading day. If the market price per Common Share on
the valuation date equals or exceeds net asset value per Common Share on that
date, the Trust will issue new Common Shares to participants valued at the
higher of net asset value or 95% of the market price on the valuation date. In
the foregoing situation, the Trust will not issue Common Shares under the Plan
below net asset value. If net asset value per Common Share on the valuation date
exceeds the market price per Common Share on that date, of if the Board of
Trustees should declare a dividend or capital gains distribution payable to the
Common Shareholders only in cash, participants in the Plan will be deemed to
have elected to receive Common Shares from the Trust valued at the market price
on that date. Accordingly, in this circumstance, the Plan Agent will, as agent
for the participants, buy the Trust's Common Shares in the open market for the
participants' accounts on or shortly after the payment date. If, before the Plan
Agent has completed its purchases, the market price exceeds the net asset value
per share of the Common Shares, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Trust's Common Shares,
resulting in the acquisition of fewer Common Shares than if the dividend or
distribution had been paid in Common Shares issued by the Trust. All
reinvestments are in full and fractional Common Shares and are carried to three
decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
changes sent to all Common Shareholders of the Trust at least 90 days before the
record date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Trust.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to help
you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
Plan participants may withdraw at any time by calling 1-800-341-2929 or by
writing State Street Bank and Trust Company, P.O. Box 8200, Boston, MA 02266-
8200. If you withdraw, you will receive, without charge, a share certificate
issued in your name for all full Common Shares credited to your account under
the Plan and a cash payment will be made for any fractional Common Share
credited to your account under the Plan. You may again elect to participate in
the Plan at any time by calling 1-800-341-2929 or writing to the Trust at:
Van Kampen Funds Inc.
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
27
<PAGE> 29
VAN KAMPEN MUNICIPAL OPPORTUNITY 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, Illinois 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.
28
<PAGE> 30
RESULTS OF SHAREHOLDER VOTES
The Annual Meeting of Shareholders of the Trust was held on July 28, 1998,
where shareholders voted on the election of trustees and the selection of
independent public accountants.
1) With regard to the election of the following trustees by the preferred
shareholders of the Trust:
<TABLE>
<CAPTION>
# OF SHARES
-------------------
IN FAVOR WITHHELD
- ------------------------------------------------------------------------
<S> <C> <C>
Theodore A. Myers................................... 2,706 1
</TABLE>
2) With regard to the election of the following trustees by the common
shareholders of the Trust:
<TABLE>
<CAPTION>
# OF SHARES
---------------------
IN FAVOR WITHHELD
- -----------------------------------------------------------------------
<S> <C> <C>
Don G. Powell.................................... 14,169,865 198,968
Hugo F. Sonnenschein............................. 14,157,507 211,326
</TABLE>
The other trustees of the Trust whose terms did not expire in 1998 are David C.
Arch, Rod Dammeyer, Howard J Kerr, Dennis J. McDonnell, Steven Muller and Wayne
W. Whalen.
3) With regard to the ratification of KPMG Peat Marwick LLP as independent
public accountants for the Trust, 14,146,867 shares voted in favor of the
proposal, 54,067 shares voted against and 170,606 shares abstained.
29
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> MUNICIPAL OPPORTUNITY TRUST
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 385,499,855
<INVESTMENTS-AT-VALUE> 429,347,422
<RECEIVABLES> 8,970,027
<ASSETS-OTHER> 7,085
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 438,324,534
<PAYABLE-FOR-SECURITIES> 17,192,561
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 837,180
<TOTAL-LIABILITIES> 18,029,741
<SENIOR-EQUITY> 150,000,000
<PAID-IN-CAPITAL-COMMON> 226,873,287
<SHARES-COMMON-STOCK> 15,352,891
<SHARES-COMMON-PRIOR> 15,352,891
<ACCUMULATED-NII-CURRENT> 1,425,622
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,851,683)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 43,847,567
<NET-ASSETS> 420,294,793
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 23,559,416
<OTHER-INCOME> 0
<EXPENSES-NET> (4,287,084)
<NET-INVESTMENT-INCOME> 19,272,332
<REALIZED-GAINS-CURRENT> 90,175
<APPREC-INCREASE-CURRENT> 9,773,428
<NET-CHANGE-FROM-OPS> 29,135,935
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,153,748)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 9,982,187
<ACCUMULATED-NII-PRIOR> 1,307,038
<ACCUMULATED-GAINS-PRIOR> (1,941,858)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,703,320
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,287,084
<AVERAGE-NET-ASSETS> 265,980,637
<PER-SHARE-NAV-BEGIN> 16.955
<PER-SHARE-NII> 1.255
<PER-SHARE-GAIN-APPREC> 0.643
<PER-SHARE-DIVIDEND> (1.248)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 17.605
<EXPENSE-RATIO> 1.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
